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Business Watch: January 21, 2003

21 January 2003, Volume 3, Number 2
The city of St. Petersburg is suing to reverse the 10-year-old partial privatization of utility Lenenergo and bring the company back into the municipal fold, "Vedomosti" reported on 13 January. Lenenergo supplies all of the electricity and 60 percent of the heating for residents of St. Petersburg and the surrounding Leningrad Oblast. It is currently controlled by state-owned power monopoly Unified Energy Systems, or EES (49 percent), with additional stakes belonging to Germany's E.ON Energie (8 percent), Finland's Fortum (6 percent), The Bank of New York International Nominees (4 percent), and Prosperity Capital Management (5 percent), according to "Gazeta" on 14 January, noting that some 38 percent of the utility belongs to foreign investors. A total of three lawsuits allege violations of law in the course of the utility's privatization. St. Petersburg Deputy Governor Anna Markova explained, "The entire [power] industry is being reformed right now, and as a result [Lenenergo's] assets could be lost forever. This cannot happen," Reuters reported on 14 January. On the other side of the barricades, Lenenergo board member Aleksandr Branis told "Gazeta" on 14 January that the suits are simply an attempt by the city to gain control of Lenenergo's assets and "create its own company to manage the energy network." Others saw a political subtext in the move -- Lenenergo Director Andrei Likhachev is a longtime rival of St. Petersburg Governor Vladimir Yakovlev. According to "Vedomosti," the first hearing on the case is set for 12 February. DK

Investment house Troika Dialog has obtained permission from the Russian Central Bank to offer customers eurobonds and dollar-denominated debt issues through a new mutual fund, "The Moscow Times" reported on 17 January. The Sadko mutual fund will be the first to make this class of financial instruments more readily available to individual investors since the Central Bank banned the practice in the wake of the 1998 financial crisis, forcing Russians bent on hard-currency investments to open special accounts with a steep $100,000 minimum. The Central Bank's first deputy chairman, Oleg Vyugin, is Troika Dialog's former chief economist, prompting knowing nods among the investment house's competitors and industry observers, "The Moscow Times" noted. The minimum investment in the new fund, which is aimed at insurance funds, pension funds, and well-heeled individual investors, will be 250,000 rubles ($7,860). While all agreed that the fund's appearance marks a step forward for Russian investing in general, opinions varied on the its prospects. Igor Ignatev of insurer Rosgosstrakh told "Vedomosti" on 17 January that Sadko is a "profitable, interesting, and attractive investment product for us"; Vadim Soskov, vice president of the Aton investment group, told the newspaper that "while this instrument makes it possible to diversity one's assets, it's of little interest to the market with Russian eurobonds down to 9 percent and no rapid growth in the offing." DK

The Central Bank announced in a 17 January press release the revocation of SBS-Agro's banking license, ending with a whimper the saga of what was once one of Russia's largest private banks. Founded in 1989 by Aleksandr Smolenskii, SBS-Agro was ranked by "The Banker" on 1 July 1998 the third-strongest bank in Russia -- after state-owned Sberbank and Vneshtorgbank -- in terms of "strength, jobs, and employee performance." At the time, the bank had $466 million in core equity, according to "The Banker." The August 1998 financial crisis dealt SBS-Agro a devastating blow, however, and by September 1998 the Central Bank had stepped in to manage the downward spiral of the bank's affairs, eventually entrusting them to the Agency for Restructuring Credit Organizations (ARKO). As of 10 January, ARKO announced that SBS-Agro had settled accounts with 99.5 percent of the bank's depositors, "Gazeta" reported on 15 January. The bank still owes outstanding obligations of 477.6 million rubles ($15 million) to 5,000 depositors who have not yet contacted the bank, "Vedomosti" reported on 17 January. With the bank's resources at an end, "Kommersant" added the same day, shareholders decided to let the Central Bank revoke SBS-Agro's license and begin bankruptcy proceedings. The bank will settle its remaining obligations, to the extent possible, with proceeds from its final liquidation of assets. DK

The European Commission (EC) voiced its formal objections to a five-year, $4 billion agreement between Russia's Alrosa and South Africa's De Beers, Prime-TASS reported on 16 January. The December 2001 agreement between the two diamond monopolists stipulates that Alrosa will sell half its total output of uncut diamonds each year -- roughly $800 million worth -- to De Beers, raising fears that the deal limits competition and eliciting a "statement of objections" from the EC. Alrosa intends to use the contract to finance future growth. "We plan to use the guarantees in this agreement to obtain cheap long-term credit to finance production increases and develop our own diamond-cutting facilities," an Alrosa representative told "Vedomosti" on 17 January. "Kommersant" wrote the same day that a failure to comply with European antimonopoly legislation could mean "the end of [Alrosa's] plans to obtain western loans against its contract." Derzhava Bank Vice President Andrei Makogon told "Vedomosti," however, that even if Alrosa is forced to limit its sales through De Beers, it will still be able to obtain the credit it needs for future development. The companies have two months to allay the commission's worries with a formal response. DK

Aluminum powerhouse SUAL announced in a 15 January press release that it is forming an "international industrial company" with England's Fleming Family & Partners (FF&P). The sixth-largest producer of aluminum in the world, SUAL is also linked through its president, Viktor Vekselberg, to Tyumen Oil Company. According to its website (, FF&P is an independently run investment company with assets of 1.5 billion pounds ($2.42 billion) under management; its holdings include mining projects in Cuba and Mozambique, "The Moscow Times" reported on 16 January. The holding company, tentatively named SUAL International, will bring together SUAL's 21 bauxite, alumina, and aluminum companies, affiliated coal company Access Industries, and unspecified assets of FF&P. An anonymous source told "Kommersant" on 16 January that FF&P has already acquired a 15 stake in SUAL. SUAL will hold a 77 percent stake in the resulting entity; 23 percent will belong to FF&P. Analysts cited by the "Financial Times" on 16 January viewed the deal as a "pioneering step towards tapping international capital markets." SUAL President Vekselberg was more direct at a 15 January press conference, telling reporters the alliance with FF&P will give SUAL access to "cheap big money," "Vedomosti" reported on 16 January. A 16 January editorial in "Vedomosti" noted that the deal could signify a move toward "turning Russian companies into transnational entities registered where their capital is, i.e., in Europe or the U.S." DK

Sergei Kirienko, presidential envoy to the Volga Federal District, was elected CEO of Aviastar-SP at a 15 January extraordinary meeting of shareholders in the Ulyanovsk aircraft manufacturer, "Kommersant" reported on 16 January. Several representatives of Sirocco Aerospace International, an Egyptian concern that acquired a 25 percent-minus-one-share stake in Aviastar-SP last year in exchange for a commitment to invest $280 million in the factory, were also elected to the board. The remaining three-quarters of Aviastar belong to Tupelov, itself owned in part by Sirocco (25 percent minus one share). In accepting his new position, Kirienko stressed his confidence that foreign investment will ensure Aviastar's successful future development: "If I weren't sure of this, I wouldn't have agreed to chair the board," "Kommersant" quoted him saying. While Kirienko is the first of the seven presidential envoys to become the nominal head of an enterprise, "Izvestiya" reported on 16 January, he is hardly breaking new ground for the executive branch. According to "Izvestiya" Aleksandr Voloshin, head of the presidential administration, served as CEO of Unified Energy Systems; Minister of Economic Development German Gref currently sits on the boards of Gazprom, Aeroflot, and Sheremetevo Airport. DK

Drugstore chain 36.6 plans an initial public offering (IPO) on the Moscow Interbank Currency Exchange (MICEX) on 23 January, "Izvestiya" reported on 14 January. According to General Director Artem Bektemirov, the Moscow-based retailer will offer 1.6 million of its 8 million shares and expects to raise between $17.6 million and $25.6 million for debt repayment and future expansion. The company consists of 52 retail outlets and three production facilities. The IPO will mark the second time a Russian company has raised funds with a public offering on the generally undercapitalized domestic capital market. RosBusinessConsulting blazed the trail on 18 April, raising $13.3 million with a 16 percent float, "Finansovaya Rossiya" reported on 16 January. RosBusinessConsulting analysts were nonplussed by the show of solidarity from 36.6, describing the planned IPO in a 16 January analytical editorial as a potential "utter fiasco" and blasting 36.6 for a lack of transparency, confusing prospectus, and unbalanced revenue structure. Other analysts were more restrained, if still critical. Nikita Ryauzov, director of Zenit Bank's investment department, and Andrei Zubkov, a specialist with investment company SARS Capital, both told "Vedomosti" on 13 January that potential investors are likely to be cautious, given the small size of the offering and the shares' relatively low liquidity. DK

Moscow-based cellular operator Mobile TeleSystems (MTS) plans to raise up to $400 million with a five-year Eurobond issue, AK&M reported on 15 January. The company will decide on the exact size and time of the offering after a road show for investors slated to begin next week. The Eurobonds will be offered on the Luxembourg Stock Exchange through Credit Swiss First Boston and are aimed primarily at American and European institutional investors. If it takes place as planned, the $400 million issue will be the largest yet by a Russian cellular operator, "Vedomosti" noted on 16 January. MTS needs the funds to pay for recent acquisitions, most notably a controlling stake in Ukrainian cellular operator UMC that cost it $194.2 million. DK

The Antimonopoly Ministry (MAP) announced on 15 January that it is withdrawing its demand that state-run telecommunications holding Svyazinvest divest its affiliates of noncore business as it consolidates them, "Vremya novostei" reported on 16 January. Svyazinvest spent much of 2002 consolidating 72 regional affiliates into seven companies that conform to the geography of Russia's seven federal districts, "Kommersant" reported on 16 January. MAP had stipulated that affiliates rid themselves of "services not regulated by the state," which include such promising and profitable areas as cellular communications and Internet access. Svyazinvest voiced strenuous objections, explaining that the loss of its affiliates' "noncore businesses" could have a negative affect on the holding company's capitalization and ability to attract investments. "Vedomosti" reported on 16 January that analysts reacted positively to the MAP decision. Meanwhile, Svyazinvest General Director Valerii Yashin announced on 17 January that the holding company's total revenues for 2002 came to $3.6 billion, Interfax reported the same day. DK

State-controlled Gazprom dismissed American Boris Jordan on 17 January as general director of Gazprom-Media, paving the way for his removal from the directorship of disputed, and disputatious, television station NTV, Interfax reported the same day. A U.S. citizen of Russian descent, Jordan arrived at NTV in the wake of a highly publicized battle between independent media mogul Vladimir Gusinskii and Gazprom for control of the television channel, which gained fame for its critical coverage of the war in Chechnya and skeptical take on Kremlin policy. Gusinskii lost and went abroad; Gazprom brought in Jordan, an investment banker by trade, to restructure the debt-ridden network, which grew tamer in Gusinskii's absence. Aleksandr Dybal, chairman of Gazprom-Media's board, told "Vedomosti" on 20 January that Jordan was fired over "differing views on corporate governance and the holding's development strategy." Jordan told "The Washington Post" on 18 January, "This came as a bit of a surprise." Many observers saw a political subtext in the dismissal. In November, President Vladimir Putin lambasted NTV's round-the-clock coverage of the October hostage crisis in Moscow, caustically referring to "making money on the blood of [their] fellow citizens...if, that is, they consider them their fellow citizens." "The Moscow Times" quoted RFE/RL media analyst Anna Kachkaeva on 20 January as saying that Jordan remained a "foreign body" in the heavily politicized Russian business world and that "the hostage drama expedited this process." While Jordan formally remains the director of NTV, he plans to step down voluntarily for $10 million compensation, "Izvestiya" reported on 21 January. One of NTV's leading personalities, Leonid Parfenov, described the atmosphere at the network in a 20 January interview with "Kommersant" as "tired and irritated." DK

German retail giant AVA plans to open up to 10 stores in the Moscow region over the next few years, starting with a Marktkauf hypermarket on the outskirts of the city on 6 February, AFX News reported on 14 January. With market conditions less than inspiring in Germany, spokesman Helmut Metje explained that the company would be concentrating its resources on Russia, "where there are limitless opportunities." The 18,000-square-meter space that will house the first store cost 40 million euros ($42.48 million), "The Moscow Times" reported on 17 January. France's Saint-Gobain also plans to take advantage of Moscow's expanding retail market, opening several cash-and-carry Platform Building Materials hypermarkets in the region, "Vedomosti" reported on 16 January. A company source told the newspaper that Saint-Gobain is currently studying the market; the board of directors will make a final decision in March. With 70 percent of household goods still purchased at sprawling, chaotic markets, retail chains are eager to bring their organizational experience to bear on commerce in the capital. Igor Sosin, co-owner of a company that collaborated with Germany's Obi on a do-it-yourself (DIY) hypermarket project, told "Vedomosti," "You'll have to open dozens of DIY hypermarkets before we start competing with each other." DK

The Republic of Tatarstan government and its Tatneft oil company celebrated a victory over Ukraine's State Property Fund (FGI) with personnel changes at the country's largest oil refinery, "Kommersant" reported on 17 January. The FGI had disputed an 18.3 percent stake in the Ukrtatnafta refinery held by two offshore companies allied with Tatneft. Tatneft itself owns an 8.6 percent stake in Ukrtatnafta, while the Republic of Tatarstan controls 28.78 percent of the refinery. (According to an 8 October article on, the Republic of Tatarstan is the largest shareholder in Tatneft with a 31.3 percent stake.) A final court victory in December cleared the way for Tatneft and the Tatarstan government to establish operational control over the enterprise, "Vedomosti" reported on 17 January. They lost little time in doing so -- a 15 January shareholders' meeting elected Tatneft ally Vladimir Fedotov CEO to replace Sergei Pereloma. An 18 November headline in Tatarstan newspaper "Vechernyaya Kazan" read "Friendship Triumphs in the Battle of Poltava" (Ukrtatnafta is located in the Poltava region of Ukraine), but the subtitle was considerably less equivocal, crowing, "We won!" DK

While that part of Christendom that follows the Gregorian calendar focused on mangers and myrrh, Gazprom CEO Aleksei Miller had a different tale to recount on 24 December. In a letter to President Vladimir Putin festively titled "The Conception for Developing the Gas Market in the Russian Federation," Miller explained that the natural-gas monopoly he heads and the Economic Development and Trade Ministry stand so far apart in their views on reforming Gazprom that a planned discussion of the issue at a 26 December cabinet meeting would have to be postponed. The letter even hinted darkly that whatever conception of reform emerged, it "should not contain provisions that could potentially threaten reliable gas deliveries and the country's energy security," "Vremya novostei" reported on 15 January. Miller's advice: Give the ministry time to reconsider its plans, which "require substantial reworking and coordination."

The president jotted "agreed" on the letter and the cabinet passed over Gazprom in silence on 26 December. Another scheduled high-level chat -- this time between Putin, Miller, Prime Minister Kasyanov, and Economic Development and Trade Minister German Gref -- apparently failed to occur on 16 January, "Vremya novostei" reported the next day. Further talks are slated for February, but the pattern of delay that has plagued gas-sector reform for years shows no signs of abating.

Reform is supposed to remedy a situation in which a state-run monopoly sells gas within Russia at artificially low prices and abroad at market prices. Inside Russia, the Federal Energy Commission sets the price of gas. With 1,000 cubic meters of gas commanding $100 to $110 on world markets, Gazprom executive Aleksandr Ananenkov said in October that the average price of the same 1,000 cubic meters inside Russia was $16.40, RFE/RL reported on 17 October. A 20 percent domestic rate hike planned for 2003 will do little to bridge the gap.

Gref's Economic Development Ministry would like to begin reforming Gazprom by slicing off the monopoly's transport infrastructure and central distribution-control unit, eventually depriving Gazprom of the right to set transport rates and moving from there to price liberalization and a freer market. With Gazprom hell-bent on retaining what it calls the Unified Gas Supply System, the result thus far has been stalemate. Or, as Aleksandr Dybal, head of Gazprom's information-policy department, explained to "Vedomosti" on 15 January, "It's not a question of compromise."

Gazprom is hardly incapable of change. At present, the company is consolidating its control over Mezhregiongaz, an affiliate that had handled transactions with the regional companies that actually deliver gas to end users. The reshuffling is no simple task -- one facet involves rewriting more than 60,000 contracts in a single month, "Vremya novostei" reported on 9 January. In the words of Deputy CEO Aleksandr Ryazanov, the reorganization is intended to "minimize expenses, increase payment discipline, and get rid of offset and promissory payment schemes," "Vedomosti" reported on 15 January. The newspaper went on to comment, "It was precisely to resolve the aforementioned problems that then-head of Gazprom Rem Vyakhirev created Mezhregiongaz in 1997."

Left to its own devices, Gazprom is more likely to demonstrate further creativity in the creation and subsequent dissolution of a new Mezhregiongaz than to embark on any real reform. And without a strong political will backing reform, more Christmas Eve-style postponements are sure to be in the offing. Russia needs gas, however, and Gazprom has stressed that production will take a tumble without extensive investment in exploration and development over the next five years, "Vedomosti" reported on 17 January. With Gazprom shouldering more than $14 billion in debt and Russia's currently cash-rich oil companies sniffing about the gas sector, changes may be forthcoming at the hands of the very market forces that government officials seem so reluctant to unleash. DK

A Russian delegation returned from Iraq last week with a sheaf of new contracts and a boatload of confusion over the real import of Russian-Iraqi oil cooperation. Oil-and-gas construction firm Stroitransgaz and the Iraqi Oil Ministry inked a contract to develop the Block Four oil field in the West Desert, "Vedomosti" reported on 20 January. Similarly, Soyuzneftegaz initialed a deal to develop the al-Rafidayn field in the south, Tatneft signed on the dotted line for Block Nine in the West Desert, and Zarubezhneft held talks on developing the vast Bin 'Umar field. The real intrigue was elsewhere, however.

Speculation swirled around the fate of LUKoil's multibillion-dollar West Qurna contract. The Iraqis canceled the agreement on 9 December in a fit of pique over LUKoil's alleged chats with the U.S. over possible deal-saving arrangements in a post-Saddam Iraq. The Russian delegation to Iraq last week included LUKoil Vice President Anatolii Novikov and LUKoil Overseas President Andrei Kuzyaev, presumably to engage in a bit of fence-mending, "Energy Intelligence Briefing" reported on 14 January. As the Russians left Iraq on 17 January after two days of talks, LUKoil representatives went on a PR offensive, telling AFP by phone from Moscow that Iraq had "dropped all complaints" against the company and, yes, that meant that LUKoil's West Qurna contract was once again good to go. The story quickly made the rounds.

The waters grew considerably muddier over the weekend, with reports wafting in that LUKoil's optimism on West Qurna might have been a tad premature. By 20 January, Interfax was quoting Abbas Khallaf, Iraqi ambassador to Russia, as saying that while Iraq "preferred and prefers to work with Russian companies" on West Qurna, LUKoil's contract claims were "on their conscience." Warming to the general theme of Russian-Iraqi collaboration, and muddying the waters still further, Khallaf reiterated to Interfax that Baghdad is "waiting for a signal from Moscow" to sign a $40 billion cooperation agreement that has haunted the margins of news accounts for several months.

The reappearance of the fabled $40 billion would seem to indicate that Iraq is eager to squeeze whatever is left out of the "promises for rhetoric" program that has been so central to its relations with Russia of late. With chief UN weapons inspector Hans Blix set to deliver a crucial report on 27 January, Baghdad might need every bit of rhetorical support it can muster within the Security Council. The question is how much Russia is prepared to provide in return for what has thus far been a purely virtual payoff. DK