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Business Watch: January 7, 2004

7 January 2004, Volume 4, Number 1
Russia's Tax Ministry has accused embattled oil company Yukos of underpaying its 2000 taxes by a whopping 98 billion rubles ($3.3 billion), "Gazeta" reported on 30 December. The ministry presented the oil company with the bill on 29 December after conducting a two-week investigation. The ministry charged that Yukos engaged in "premeditated actions to conduct artificial transactions with oil and petroleum products through specially created organizations" registered to take advantage of regional tax breaks, reported on 30 December. Yukos denied the charges in a 30 December press release, noting that the additional 98 billion rubles would have raised the company's 2000 tax bill to some 84 percent of its revenues, and significantly more than the company's $3.1 billion net profit for the year. Troika Dialog analyst Valerii Nesterov told the "Financial Times" on 31 December, "A withdrawal of this amount of cash from the company would push it to the brink of bankruptcy, dealing a blow not only to its shareholders but to the whole of the Russian economy, given that Yukos is responsible for 20 percent of the total oil production in the country." DK

An extraordinary meeting of Sibneft shareholders scheduled for 30 December did not take place because it failed to produce a quorum, the company announced in a press release the same day. The meeting had originally been intended to put the final touches on the Yukos-Sibneft merger, and the no-show came as further evidence that the two companies are now in divorce proceedings. Yukos has already received 92 percent of Sibneft shares in exchange for $3 billion and a 26 percent stake in YukosSibneft. Yukos representatives did not show up for the 30 December Sibneft shareholders' meeting, however, because they felt that Sibneft had failed to fulfill certain obligations, RIA-Novosti reported on 30 December. An earlier 16 December Sibneft shareholders' meeting was supposed to liquidate the company's board and approve a new charter -- neither event took place. The original merger agreement was reached in April 2003. With Yukos facing a swarm of legal problems, Sibneft decided it wanted out in November, even though the merger was already a legal fait accompli. The two companies then agreed in principle to go through with a new deal that would "mirror" the original and undo it. In keeping with the "mirror" concept, Yukos had wanted to carry out the original agreement in full before reversing it; recent developments would seem to indicate that Sibneft prefers a different approach. suggested as much on 30 December, commenting, "The merger contract has not been annulled, but the merger process has, for all practical purposes, been stopped. Anonymous Yukos representatives accused Sibneft of this on 17 December. Interestingly, anonymous Sibneft representatives have confirmed these accusations, announcing that Yukos and Sibneft will remain independent companies in 2004." DK

State-controlled Gazprom, state-owned Rosneft, and private Surgutneftegaz signed an agreement on 24 December to form a consortium for developing hydrocarbon resources in Eastern Siberia and Yakutia, "Vremya novostei" reported the next day. The consortium, which declares Eastern Siberia a "territory of mutual interests," will not take the form of a legal entity; instead, the companies will create special structures for individual projects, "Kommersant-Daily" reported on 25 December. The region boasts rich reserves, with some 6 trillion cubic meters of natural gas and 1.7 billion tons of oil, "Vedomosti" reported on 25 December. The development rights to the main oil and gas fields present a complex situation, however. According to information provided by "Kommersant-Daily," Gazprom holds the license to the Sobinsko-Payginskoe field, Surgutneftegaz appears to have wrested the license to Talakan from Yukos, Russian-British TNK-BP holds the rights to Kovykta, Yukos owns the rights to a number of poorly explored smaller fields, and the rights to at least two major fields -- Chayandinskoe and Yurubcheno-Tokhomskoe -- have yet to be auctioned. Analysts saw the consortium as a timely creation. Objectively, it combines the influence of state-run, yet cash-strapped, Gazprom and Rosneft with the deep pockets of Surgutneftegaz. It also sends a signal that the Kremlin intends to keep a close watch on the region's future development. A source in the Natural Resources Ministry told "Vedomosti," "This is a signal that oil and gas reserves, including those that they will take away from the 'wrong' companies, will end up in the hands of resource developers who ally themselves with the authorities." An industry source confirmed the new approach, telling "Gazeta" on 25 December, "We go along with the Kremlin these days, and we're not going to get involved in projects once we know that our participation is not desirable." DK

Gazprom entered the new year without an official budget after the state-run gas monopolist's final board meeting of 2003 failed to approve financial plans for 2004, the company announced in a 25 December press release. Company management sent the budget, investment program, and cost-cutting plan back for revisions. The original budget, with its gaping 43.2 billion-ruble ($1.47 billion) deficit, had drawn the ire of some officials, especially reformers in the Trade and Economic Development Ministry who would like to see the gas giant produce a balanced budget, "Vremya novostei" reported on 26 December. Last-minute efforts by Gazprom pared the deficit to 17.5 billion rubles, "Vedomosti" reported on 26 December; even so, Prime Minister Mikhail Kasyanov ordered board members representing the state to vote against the budget. The board was also unhappy with the company's sluggish efforts to divest itself of noncore assets, "Kommersant-Daily" reported on 26 December. The end of the year has traditionally witnessed budget battles at Gazprom. NIKoil analyst Lev Snykov told "Vedomosti" that this year's delay was "hardly surprising" and said that state officials were correct to insist on more stringent cost-cutting measures at the company. The board of directors will meet again in January to discuss the issue. DK

Negotiations have failed to end a corporate war between Ilim Pulp Enterprises and Continental Management, "Vedomosti" reported on 30 December. Continental Management, controlled by aluminum tycoon Oleg Deripaska and St. Petersburg banker Vladimir Kogan, has been trying for more than a year to wrest control of pulp and paper mills in Bratsk, Ust-Ilimsk, and Kotlas from Ilim Pulp. While both companies claim legal right to the enterprises, Ilim Pulp has maintained physical control and generally fared better in the courts than Continental Management. According to a 22 December report in "Ekspert" (No. 048), the companies had discussed four possible resolutions to the conflict: 1) Ilim Pulp retains control of the plants and Continental Management receives $100 million to end its legal challenges; 2) Continental Management sells all of its timber assets to Ilim Pulp for $300 million; 3) the two sides merge their assets to create a new company in which each will hold a 50 percent stake, with Continental Management receiving $150 million from Ilim Pulp; and 4) Continental Management buys all of Ilim Pulp's business for $450 million. The battle between Ilim Pulp and Continental Management has brought negative publicity to the industry and possibly scared off strategic investors. Bumprom analyst Anna Kurbatova told "Vedomosti" that Ilim Pulp is unlikely to give up its business; instead, the two groups will keep sparring until they agree on a mutually acceptable figure for Continental Management to withdraw its claims. DK

Russian negotiators are holding firm in the face of Belarusian attempts to win concessions and ensure a steady supply of cheap Russian natural gas, "Vedomosti" reported on 29 December. An April 2002 agreement between the two countries allowed Minsk to purchase Russian gas at domestic prices. In 2003, Belarus paid Gazprom $28 per 1,000 cubic meters -- Ukraine pays $50, the Baltic countries $70-80, and other European countries more than $100. The agreement stipulated, however, that Russia's Gazprom would receive at least a 50 percent stake in a joint venture with Beltransgaz, Belarus's gas-transport system, by 1 July 2003. The joint venture has been mired in a squabble over money, however -- Gazprom assesses Beltransgaz at $580 million, while Belarus values it at around $5 billion and wants Gazprom to shell out $2.4 billion for less than 50 percent of the company. Belarusian Prime Minister Sergei Sidorskii met with Russian Prime Minister Mikhail Kasyanov on 25 December, and Belarusian Deputy Prime Minister Vladimir Simashko met with Gazprom CEO Aleksei Miller on 26 December. Gazprom spokesman Sergei Kupriyanov told "Belorusskaya gazeta" on 29 December that no agreements were reached, adding that Gazprom would insist on a short-term contract at $50 per 1,000 cubic meters until the formation of a joint venture with Beltransgaz. Observers offered varying forecasts, agreeing only that political and economic interests run counter to each other. "Izvestiya" summed up the central contradiction on 29 December, noting that the Kremlin would like to ease its ally's ruffled feathers, yet it would also like to boost Gazprom's revenues as much as possible in order to eliminate the company's troubling budget deficit. DK

Since police seized Russia's richest man on 25 October, the question that has kept the country's business elite awake at night is less "Why?" than "Who's next?" Will the charges of fraud and tax evasion against oil tycoon Mikhail Khodorkovskii mushroom into a concerted campaign to topple other heavyweights and reapportion the spoils of the 1990s? In remarks to the board of Russia's Chamber of Commerce on 23 December, President Vladimir Putin hinted at an answer.

The current catchphrase for Russia's increasingly wary business community is "social responsibility." President Putin and Chamber of Commerce President Yevgenii Primakov duly stressed the theme in their official addresses, RBK reported on 23 December. In keeping with the rising tide of anti-oligarchic sentiment, Primakov went out of his way to explain that entrepreneurs should not be confused with oligarchs. As defined by Primakov, an oligarch is a "major capitalist who is profoundly indifferent to the real needs of the country and the people, someone who long ago forgot about his patriotic duty," "Kommersant-Daily" reported on 24 December.

Primakov noted, however, that the business elite remains concerned about the possibility that the results of 1990s privatizations could be subject to review, and perhaps even revocation. Putin was quick to respond. "Rossiiskaya gazeta" quoted the president as saying, "I hear all the time that the laws were complicated and that it was impossible to obey them. Yes, the laws were confused, but it was entirely possible to obey them." Putin even went so far as to estimate that "five or seven" people played fast and loose with the law. "The rest," he continued, "may not have made as much money, but today they sleep soundly."

Having clarified the number of lawbreakers, the president was silent on their identities. Observers tried to fill in the gaps. Arkadii Volskii, head of the Russian Union of Industrialists and Entrepreneurs, told "Vedomosti" on 24 December that the "ambiguous" comment could refer to oil tycoons: "There are many more oligarchs, but there are really only five to seven oil tycoons." Meanwhile, Yevgenii Gavrilenkov of Troikia Dialog brokerage told the newspaper that the president may have had the mid-1990s "loans for shares" privatizations in mind, which would include not only such oil companies as Sibneft, Surgutneftegaz, LUKoil, and Yukos, but metals giant Norilsk Nickel as well.

Even as analysts pondered the significance of the president's comments, official mechanisms began to creak into action. Russia's Audit Chamber will take time in 2004 to review the legality of the previous decade's privatization deals, "Vedomosti" reported on 29 December. Auditor Vladislav Ignatov will supervise the review. Ignatov was unable to clarify for the newspaper which of the 5,475 federal privatization deals that took place in 1994-2002 will occupy center stage in the Audit Chamber's review, but he promised results by summer 2004. DK