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Business Watch: November 20, 2001


20 November 2001, Volume 1, Number 19
OIL & GAS
RUSSIA AGREES ON SYMBOLIC CUT IN OIL OUTPUT (12 November)
Russian oil companies and the government agreed to make a symbolic gesture in support of OPEC efforts to boost world crude prices by agreeing to cut output by 30,000 barrels per day (bpd), Reuters reported. The cut, announced as Saudi Oil Minister Ali al-Naimi held talks in Moscow, would be made in the fourth quarter of 2001 and the start of next year, a government spokesman said after a meeting between the firms and Prime Minister Mikhail Kasyanov. "The decision is firm. We do not increase our oil production and we freeze exports at current levels," an industry source stated. The freeze would apply until "a final recovery" of world oil markets, but no precise period was set. Saudi Arabia has said OPEC's cut could be as much as 1.5 million barrels a day. But the cartel wants non-OPEC producers such as Russia to remove volumes and help support prices, which have fallen by 30 percent since the 11 September attacks on New York and Washington. "The gesture is purely symbolic and is also a very short-term measure," said Valerii Nesterov, an oil analyst from Troika Dialog brokerage. Russia, the world's second-largest oil exporter, produces almost 7 million bpd and exports 3 million bpd. Russia is very sensitive to oil exports and pricing. If the price per barrel drops below $18, officials have expressed concern that the government budget would have to be restructured, the "Financial Times" reported. (TSK)

JANUARY-OCTOBER OIL PRODUCTION STATISTICS (13 November)
Oil production from January to October increased by 7.6 percent to 287.9 million tons, Interfax reported. Russian vertically integrated oil companies produced 250.01 million tons of oil in the first 10 months of 2001, according to the Fuel and Energy Complex Department. The main producers were LUKoil (52.475 million tons), Yukos (47.854 million tons), Surgutneftegaz (36.336 million tons), Tyumen Oil Company (27.286 million tons) and Tatneft (20.5 million tons). Gazprom produced 8.448 million tons of oil from January to October, including 878,300 tons in October. (TSK)

BUSINESS ALERT
BOTAS TO RESTRICT CONTRACTS WITH GAZPROM (12 November)
Turkey's gas and pipeline monopoly, Botas, may transfer a number of its long-term gas contracts with Gazprom to other gas companies in May 2002, RosBusiness Consulting reported. The unbundling process, Turkey's first step to liberalize its gas market, could put the Russian gas giant against major international companies eager to renegotiate Gazprom's contracts with Turkey. "We are conducting a study on which contracts will be handed over first [to private companies]," said Botas CEO Gokhan Bildaci. "This will be done by tender, and in May we aim to pass on the first 10 percent." According to a new gas law, Botas is required to sell at least 10 percent of its current import contracts to private companies annually. By 2009, the state-owned company must reduce its share of import contracts to 20 percent. Russia currently supplies the lion's share of Turkey's gas imports. Two trans-Balkan pipelines shipped nearly 10 billion cubic meters of gas to Turkey in 2000, providing about 70 percent of the country's needs. A third pipeline to Turkey, the Blue Stream, will come online in the first quarter of 2002. Bildaci said Gazprom will not be happy at the negotiation table. "I am not so sure it will accept new proposals," he said. (TSK)

EBRD TO BUY A STAKE IN VNESHTORGBANK (13 November)
The Russian Finance Ministry approved the European Bank for Reconstruction and Development's (EBRD) offer to buy a stake in Vneshtorgbank (VTB), Prime-TASS reported. The offer must be approved by the cabinet. The ministry discussed the EBRD's offer to buy a 10 percent to 20 percent stake in VTB, said Anton Siluanov, a ministry official. The final decision has yet to be reached. (TSK)

ALROSA TO DECIDE ON AN AGREEMENT WITH DE BEERS (13 November)
Diamond monopoly Alrosa will decide on 30 November whether to sign a trade agreement with the DeBeers diamond corporation, Interfax reported. The draft agreement, prepared in October, does not oblige the Russian government and its subjects to sell diamonds through DeBeers, which was the previous arrangement. If approved by the board, the agreement is to be signed at the beginning of December, Alrosa officials said. (TSK)

RUSSIAN BUSINESS ABROAD
RUSSIA PROPOSES SATELLITE LAUNCH PAD IN VENEZUELA (9 November)
Venezuelan President Hugo Chavez said that Russian entrepreneurs proposed building a satellite launch pad in his South American nation. According to Reuters, since taking office in 1999, Chavez has distanced Venezuela from traditionally close ties with the U.S. and courted other states, such as Cuba, China, and Russia. "Businessmen from Russia want to come here. Do you know why? Together with Venezuela, they wish to build a satellite launch station, and they left me a model, which I will show to you soon," Chavez said in a televised speech. (TSK)

KHRISTENKO TO MEET WITH AZERI OFFICIALS (13 November)
Russian Deputy Prime Minister Viktor Khristenko will make a working trip to Azerbaijan on 14 and 15 November, press secretary Stanislav Naumov told RosBusiness Consulting. Khristenko is scheduled to meet with Azeri President Heidar Aliev, Prime Minister Artur Rasi-Zade, and Deputy Prime Minister Abbas Abbasov. The talks will be focused on joint projects in the fuel and energy industry, transportation, regional cooperation, and other issues. Joint projects in the oil industry will be given special attention. According to a Russian-Azeri government commission decision, Azerbaijan will transport 2.5 million tons of oil to the Russian port in Novorossiisk in 2001 and 5 million tons in 2002. Khristenko is also expected to discuss the possibility of Russian oil giant LUKoil joining the Baku-Tbilisi-Ceyhan pipeline project. (TSK)

ECONOMIC NEWS & BUSINESS STATISTICS
JANUARY-SEPTEMBER ECONOMIC STATISTICS (13 November)
According to the date of the Russian State Customs Committee released on 12 November, from January to September, Russia's oil exports, excluding to Belarus, rose by 12.3 percent to 111.2 million tons. Primary aluminum exports to countries outside the Commonwealth of Independent States (CIS) fell by 4.9 percent to 2.3 million tons. Natural gas exports fell by 8.5 percent to 119.4 billion cubic meters. (TSK)

SPIC IMPLEMENTS NICE CEM (13 November)
NICE Systems, a world leader of multimedia recording solutions, applications, and related professional services for business-interaction management, announced the St. Petersburg Information Company (SPIC) has implemented NICE's Customer Experience Management (CEM) solutions to increase its agents' effectiveness and productivity. According to Business Wire, SPIC provides inbound and outbound call handling for customer service, ticket purchasing, voting, public surveys, transportation schedules, weather information, directory services, marketing campaigns, and other e-business applications. NICE's solution includes total recording and real-time monitoring and is integrated with Avaya's DEFINITY switch. "SPIC is a pioneering contact center that is setting standards for customer service in this region. We are proud to be a contributor to their success by helping them build lasting customer loyalty and brand recognition," Yoav Zaltzman, vice president of business operations for NICE Systems, was quoted as saying. (TSK)

RUSSIAN FEDERAL REVENUES (14 November)
In the first nine months, the Russian Federal Tax Service has collected 83 billion rubles (about $2.8 billion) for the state budget, Federal Tax Police Service Director Mikhail Fradkov said at a news conference in Vladivostok. He noted that approximately 40 percent of the Russian economy operates on an unregistered basis. He added that the volume of capital flight from Russia totals $20 billion a year, RosBusiness Consulting reported. Fradkov said, "Our legislation is underdeveloped, and accordingly, capital flight has become commonplace." The fuel and energy industries, the construction industry, trade, and the defense industry are the main sources of negative statistical data. The tax police service director remarked, "[W]ell-known oil companies pay taxes differently, and accordingly, additional efforts by the tax police are required." According to him, the strength of the tax police will increase from 40,000 to 53,000 people in 2002 to fight tax evaders. (JMR)

RTS REACHES NEW 2001 HIGH (13 November)
The benchmark Russian Trading System (RTS) index jumped 5.61 percent to a new 2001 closing high of 236.53 on 13 November. Dealers told a Reuters reporter that the jump was due to an increasing confidence in the nation's economic development. The previous 2001 closing high of 227.87 was reached on 22 June. The market is up more than 80 percent since the start of the year. Turnover on the RTS was $24.7 million. The broader Reuters Russian composite also surged, closing up 8.08 percent at 1,556.83, while the Moscow Interbank Currency Exchange (MICEX), dominated by local investors, closed 9.3 percent higher at 1,115.80. Unified Energy Systems (UES) gained 9.96 percent to $0.1380. Surgutneftegas was up 9.51 percent to $0.2902, and Rostelecom rose 9.61 percent to $0.7870. (JMR)

POLITICAL ECONOMY
PORT PRIVATIZATION TO BE IMPLEMENTED (13 November)
Russia's government plans to sell stakes in the Murmansk, Tuapse, and Taganrog ports at auctions to be held next September, "Vedomosti" reported. Twenty-four percent out of the government's 49 percent stake in the Tuapse port will have a minimum bid of $28 million, a Property Ministry source said, while 34.5 percent of the government's 60 percent stake in the Taganrog port will be offered at about $2.5 million. The proposed sale of 22 percent in the Murmansk port could fetch $10 million, analysts said. (TSK)

KASYANOV AND DEPUTIES AGREE ON 2002 BUDGET (13 November)
Russian Prime Minister Mikhail Kasyanov and the leaders of the Russian State Duma agreed on 13 November that all 2002 spending should be cut across the board if oil prices fall, Reuters reported. However, deputies and Kasyanov failed to find a concrete way of making the cuts, Motherland-All Russia leader Vyacheslav Volodin said. The government has proposed amending the budget to withhold spending of 37 billion rubles ($1.25 billion) from the whole budget until the fourth quarter -- but only then if this money was actually earned. According to the government's previous proposals, the 37 billion rubles should be saved for the fourth quarter only after 110 billion rubles had been set aside for servicing and repayment of foreign debt in 2003. But Duma deputies said all spending should be cut equally. Volodin said, "Kasyanov agreed with us that the problem should not be solved [the way the government wanted]." Deputies will later discuss the problem with Finance Minister Aleksei Kudrin. Deputies and Kasyanov also discussed the situation on the oil market and agreed that, so far, prices were not dangerously low for Russia, said Unity faction leader Vladimir Pekhtin. He added, "We agreed that oil price fluctuations are not critical for the 2002 budget." The draft document, Russia's first budget with a surplus, has so far been passed in two of four necessary readings. It provides for revenues of 2.13 trillion rubles with spending of 1.95 trillion rubles, leaving a surplus of 1.63 percent of gross domestic product. A third reading is scheduled for 30 November. (JMR)

RUSSIA -- BELIEVE IT OR NOT
RUSSIAN ATHLETE 'BITES AND MOVES' HEAVY OBJECTS (14 November)
A thirty-year-old athlete from Daghestan, Omar Khanapiev, has set a new record and realized his dream to be entered in the "Guinness Book of World Records." Holding a rope in his mouth, Khanapiev first moved and then drew for seven meters a TU-134 airliner, lenta.ru reported. Khanapiev discovered his talent 20 years ago when he was able to pull the nails out of wooden objects and bend horseshoes with his teeth. Earlier this month, in the port of Makhachkala, Khanapiev moved and drew for 15 meters an oil tanker of 567 tons displacement. Two days before, he moved and drew for 10 to 12 meters two locomotives, weighing 136 and 140 tons each. (TSK)

WHO IS IN? WHO IS OUT?
DORENKO GIVEN FOUR-YEAR SUSPENDED SENTENCE (9 November)
Top Russian television anchorman Sergei Dorenko was convicted of "aggravated hooliganism" by a Moscow court on 9 November and given a four-year suspended jail term, Reuters reported. A municipal court found Dorenko guilty of hitting naval Captain Valerii Nikitin in April with his Honda sports motorcycle. The court ordered Dorenko, who until last year fronted one of the most influential news programs on Russian television, to pay 10,400 rubles in ($350) compensation and confiscated his motorcycle. Dorenko, who denied the charges, has seven days to appeal. He said little after the court decision but suggested the decision to prosecute him could have been linked to his ambition to run for election to Moscow's city council. It remains to be seen whether the case will make him ineligible. Dorenko's lawyer, Yelena Kutina, said the sentence he received was as "prejudiced" as the police investigation into the incident. (TSK)

WHAT�S UP? WHAT�S DOWN?
RUSSIA ACCOUNTS FOR 0.3 PERCENT OF WORLD SCIENTIFIC DEVELOPMENT (12 November)
Russia accounts for only 0.3 percent of scientific developments on the world market, ITAR-TASS quoted Russian Deputy Prime Minister Ilya Klebanov as saying. Addressing a meeting of the Russian Academy of Sciences, Klebanov said this proportion was "humiliatingly small" and inconsistent with the potential of Russian scientists. This figure is a result of a "strategic mistake" of officials who underestimated the role of science in the recent decade. Nevertheless, according to Klebanov, the situation has been gradually improving. "Eight [to] 10 priorities should be determined in which Russia should invest money in the first place," Klebanov stated. He cited an increase in budget and extra budgetary allocations to research as priority. Extra budgetary funding of science has increased from 5 percent to 50 percent in recent years, and the government expects a more serious investment by businesses. Klebanov described the drain of young cadre from science as one of the country's most acute problems. "If the situation does not change fundamentally in the next five to 10 years, Russia could lose [its] scientific potential," Klebanov said. He added that a presidential decree concerning grants for young scientists is underway. (TSK)

PROFILE
SERGEI PUGACHEV: A NEW FAVORITE?
Favoritism has always been "institutionalized" in Russia. This has been true during the Tsarist, Soviet, and the new Russian periods. The influence of "favorites" in setting government policies has been tremendous. With titles changing from "favorites" and companions to oligarchs and entrepreneurs, the essence of their relations with the supreme power in Russia has remained the same. The ideas of these people find warm support in the hearts, words, and deeds of those who actually rule the state.

Russian President Vladimir Putin's pledge to curb the power of the oligarchs and subsequently get rid of them gained him respect and popularity among the people partly because the results of his promise are often visible. However, there are no rules without exceptions, especially in today's Russia.

According to "Nezavisimaya Gazeta," one such exception is Sergei Pugachev, head of Mezhprombank (International Industrial Bank). Website Flb.ru called him simply "an oligarch of the new wave." Until summer 2000, Pugachev kept a low profile -- sometimes described as "a mere shadow" of Pavel Borodin, then head of the Kremlin property department. According to the Agency of Economic News, Pugachev currently holds the third spot among the most influential Russian businessmen. According to "Nezavisimaya Gazeta," he is Russia's second most-powerful lobbyist.

After graduating from Leningrad State University with a technical degree, Pugachev worked for Promstroibank in the Soviet Union. Since 1992, he has headed Mezhprombank. Pugachev has known Putin since 1990 and is also a close friend of Putin's deputy chief of staff, Igor Sechin, who has been faithfully following the president since the rise of his political career. According to "Kompania" magazine, Pugachev's business success came partly through good connections with Borodin. The mechanism for this "mutually beneficial cooperation" was simple: Mezhprombank provided credits to Borodin's Kremlin property department. The amount of those credits at times reached into the hundreds of millions of dollars. As a grateful bank customer, Borodin transferred the accounts of Russia's leading companies to be serviced at Mezhprombank.

Pugachev's right hand, Sergei Veremeenko, was also instrumental in increasing the power of Mezhprombank. Because of Veremeenko, Mezhprombank firmly established itself on the Bashkir market. According to "Nezavisimaya Gazeta," Veremeenko was recently offered a seat on the board of Yakutia-based Alrosa, a diamond company. "Nezavisimaya Gazeta" reported that Pugachev played a decisive role in the NTV scandal, urging on Gazprom and the Kremlin against the television network. Some rumors include stories of how Pugachev and Sechin were both behind the recent investigations launched by the Prosecutor-General's Office against some top governmental officials.

One of the most recent Pugachev dramas is currently unfolding. This time, the diamond-rich Yakutia region and its upcoming 23 December presidential elections are the focus of Pugachev's attention. The political intrigue over the next Yakutia president is also being widely covered by the Russian media. In the midst of the intrigue is the republic's incumbent president, Mikhail Nikolaev. He is finishing his second presidential term and is seeking legislative support for a third term. With 40 percent of Yakutia's population behind him, Nikolaev has a serious chance of winning. According to the republic's constitution, Nikolaev is not allowed to run for a third term. However, in light of the recent campaign to ensure that regional legislation is in line with federal laws, Nikolaev is theoretically eligible to run again. Federal law does not restrict the number of terms executive officials may serve. According to a source in "Nezavisimaya Gazeta," the Kremlin has its own candidate for the Yakutia president: Vasilii Kolmogorov, the first deputy to the state prosecutor-general. According to "Nezavisimaya Gazeta," the mastermind of the Kremlin campaign is Pugachev and the sponsor of the campaign is Pugachev's Mezhprombank.

The Kremlin campaign is aimed at removing Nikolaev from the political arena and the current head of Alrosa from his post. With its own man as president of the republic, Moscow could take possession of Alrosa. According to flb.ru, Borodin is the Kremlin's candidate to head Alrosa. With his bank accounts seized and his other assets confiscated, Borodin needs this position "to sew up the holes in his pockets" and to pay off his debts. As Pugachev's scenario unfolds, he ensures support from the presidential administration and introduces his candidate, Kolmogorov. At the same time, parliamentary deputies in Yakutia will refuse to support Nikolaev in exchange for pledges of lucrative benefits once Kolmogorov wins. Moreover, Nikolaev will not be allowed to run for a third term.

If the scheme works, the key positions in the republic will be conveniently handed to Kremlin officials. Borodin will receive Alrosa, and a sky full of diamonds will become a reality for Moscow-based bureaucrats. Yakutia is a large slice in the Russian pie, flb.ru argued. Apart from diamonds, the region is rich in oil, gas, and other natural resources -- making it a potential testing ground for the new Russian oligarchs to assert their power. It appears that the "first violin" in this overture for the Yakutia presidential elections is being played by "the new wave oligarch," Sergei Pugachev. (TSK)

IN FOCUS
RUSAL EXPANDS ON MOSCOW MARKET
Shareholders of aluminum company Russian Aluminum (RusAl) have announced that they acquired control of Russia's largest aluminum construction company, Mosmetallokonstruktsia (Mosmek). With Mosmek in its possession, RusAl plans to gradually take over half of Russia's metal construction market, "Vedomosti" reported.

However, the details of the RusAl-Mosmek deal are not clear, nor is the size of RusAl's stake in a Moscow-based aluminum construction company.

On 12 November, RusAl's press service announced that the holding company "took control over a major share package in Mosmek." According to the RusAl press release, "The deal was a natural result of cooperation between the administration in the nation's capital and the aluminum holding company." A partnership agreement between the Moscow government and RusAl was signed a year ago. In compliance with the agreement, RusAl was to provide raw materials to Mosmek and aluminum products to the Moscow market.

Mosmek operates a full range of services �- from processing aluminum alloys to assembling aluminum structures and components. The company's capacity allows production of up to 1,000 tons of aluminum constructions per year. In 2000, Mosmek's turnover exceeded 680 million rubles ($23.5 million) and its net profit reached 20.5 million rubles ($700,000). Mosmek was originally built to meet the needs of the Moscow construction sector. It became the first company specializing in the production of aluminum constructions. Mosmek-produced aluminum constructions were used for the Zvezdny Movie Theater, Russia's Flight Control Center, the Russian State Duma, and the Poklonnaya Hill World War II Memorial, to name a few. Only recently, Mosmek began to face serious competition from Gazprom subsidiary Agrisovgaz. Far better equipped than Mosmek, Agrisovgaz has been actively invading the construction market of Moscow. Gazprom has already participated in a number of big projects, including the reconstruction of Lokomotiv stadium.

RusAl officials believe that Mosmek has great potential in the Russian market. According to Konstantin Popov, general director of Rosalumstroi, a RusAl trade operator, demand in central Russia is estimated at $120 million to $140 million in aluminum products per year. He told "Vedomosti" that RusAl shareholders plan to increase their Mosmek shares from the current 27 percent to 50 percent. "Our goal is increase sales by reducing and substituting imports," Popov stated. He said the price for imported aluminum structures is approximately 25 percent to 30 percent higher than for Mosmek's. An official from Agrisovgaz noted that in 2001, the demand for aluminum constructions has grown by 150 percent compared to 2000.

The details of the RusAl-Mosmek deal are closed to the public. As of May 2001, Mosmek had 2,000 shareholders. The list of major shareholders included: Mosmontazhspetsstroi (14.9 percent); the company's general director, Lev Kharlanov (24.3 percent); and its former head, Viktor Astaulov (5.4 percent). As of October 2001, more shareholders were added, including three offshore companies -- Rokot Trading, Odessa Industring, and Irwin Financial -- as well as the Akstin and Razvitie construction-industrial corporation. All attempts of "Vedomosti" journalists to get any comments from the above-stated companies failed. RusAl also declined to comment on the deal.

RusAl began its expansion into the Moscow market in 2000. RusAl had earlier begun to express interest in aluminum processing companies, including those specializing in metal construction. Currently, the holding company has only one metal construction producer -- Samara Metallurgical Plant, which has a very low capacity. Two years ago, RusAl tried to purchase during privatization the Voronezh Plant of Aluminum Construction but did not succeed. The plant was instead bought by BAMO, a major Moscow-based producer of construction materials. The acquisition of Mosmek by RusAL appears to be more than a successful territorial expansion by the holding company -- it also marks its integration into other industry-related sectors that should increase its profitability and influence. (TSK)

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