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Business Watch: January 28, 2003

28 January 2003, Volume 3, Number 3
Federation Council member and former Finance Minister Andrei Vavilov announced on 20 January that he is selling oil company Severnaya Neft, RIA-Novosti reported the same day. Vavilov's company first gained fame in 1999, infuriating LUKoil with an additional stock issue that reduced the oil major's 25 percent stake in Severnaya Neft to insignificance. In March 2001, Severnaya Neft bested a bevy of Russian oil heavyweights in a questionable tender for rights to the 65 million-ton Val Gamburtsev oil field, provoking howls of outrage in the industry. Severenya Neft is still mired in litigation on both issues. Estimates of the company's worth varied widely, with Troika Dialog analyst Valerii Nesterov telling "Izvestiya" on 21 January it should go for $200 million-$330 million and "Vedomosti" writing on 23 January that it could fetch as much as $600 million. Most observers fingered state-owned Rosneft as the likely buyer; "Vremya novostei" registered a dissenting vote, citing industry sources and naming Sibneft as the probable suitor on 21 January. A 22 January editorial in "Vedomosti" noted that the sale means the "disappearance of yet another good company that is independent of the oligarchs." For his part, Vavilov told "Kommersant" in a 21 January interview that he will announce the buyer and the price on 1 February, bragging in the meantime that proceeds from the sale will enable him to set a Russian record with his income-tax payments in 2003. DK

Gazprom's board of directors met on 21 January to approve a $1 billion Eurobond issue in the first quarter of 2003, "Izvestiya" reported on 22 January. The decision comes amid growing attention to the gas monopolist's dependence on borrowing -- Gazprom's debts now stand at $15.5 billion, with short-term obligations making up half the tally. "Kommersant" reported on 22 January that the $1 billion bond issue, the largest in Gazprom's history, will be aimed at the U.S. market. Troika Dialog analyst Valerii Nesterov told "Izvestiya" that the planned 10-year issue will "aid the company's financial recovery and raise investors' interest in Gazprom." The board will meet again on 4 February to discuss how the company will spend the money and to approve a borrowing plan for the year. DK

Oil majors Sibneft and Tyumen Oil Company (TNK) officially transacted their purchase of Slavneft on 20 January, throwing currency trading into temporary chaos in the process, "Kommersant" reported on 22 January. The two oil companies together converted $1.86 billion to make a corresponding payment in rubles to the budget. Coming at the same time as tax payments, the cash drain left banks with a shortage of rubles. "Banks were literally bled dry," Nikolai Ermolaev, director of treasury transactions at Rosbank, told "Vedomosti" on 22 January. The situation was resolved with a combination of timely Russian Central Bank intervention and natural market resilience. Meanwhile, Slavneft began life as a private company, "Kommersant" reported on 27 January, with a 25 January shareholders' meeting that decided to free Sibneft and TNK from the onerous obligation of spending an additional $25 million to buy out Slavneft's remaining minority shareholders at market price. Shareholders argued that pre-auction excitement drove the price to an unreasonable high. The next issue will be how Sibneft and TNK divide Slavneft between them. Most industry observers feel that either Sibneft will acquire TNK's share or the two companies will divide Slavneft's assets between them. DK

The heads of four Russian oil majors addressed Prime Minister Mikhail Kasyanov in a letter offering a compromise over the Murmansk pipeline project they hope will buoy exports in years to come, "Energy Intelligence Group" reported on 23 January. LUKoil, Yukos, TNK, and Sibneft formed a consortium in November to build a $3.4 billion-$4.5 billion pipeline from western Siberia to Murmansk, Russia's only ice-free, supertanker-friendly port. From there, long-haul shipments to the United States would be economically viable. Kasyanov threw cold water on the plans with a remark earlier this month that pipelines on Russian territory will remain state property. Consortium members have now responded with an offer to fork over money for the project in exchange for fixed tariffs and priority access. While no public reaction followed, a government official commented sharply to "Vedomosti" on 23 January that the oil companies should first present their technical and economic assessment: "That will tell us about the tariffs and capacity. For now, [these letters] look like a lot of hot air and artificial politicization of the issue." DK

Russia's Federal Securities Commission registered the country's first indexed mutual fund on 22 January, "Kommersant" reported the next day. PioGlobal Asset Management will offer its clients a chance to take their chances with the Moscow Interbank Currency Exchange (MICEX) Composite Index Interval Fund. The fund's portfolio will consist of the 12 stocks that make up the MICEX Composite Index. Investors will be required to make an initial investment of at least $10,000; the investment interval will be quarterly. Aton Vice President Vadim Soskov told "Kommersant" that the opening of Russia's first index fund is a "very interesting and important event." Index funds are not a complete novelty in Russia, "Vedomosti" reported on 23 January. In March 2000, Troika Dialog launched the Troika S&P/IFCG Russia Index Fund, based on the Russian stocks in Standard & Poor's S&P/IFCG emerging-markets index. Troika Dialog had hoped to pump the fund up to some $500 million from an initial $1 million, but investors showed little interest. Today the fund's managers juggle a portfolio of some $3 million. Index funds, which mirror the composition of major stock indices, feature lower fees than actively managed funds. While they have frequently outperformed specialized funds, recent drops in world markets have dented their popularity. DK

Pharmacy chain 36.6 called off its 23 January initial public offering (IPO) on the Moscow Interbank Currency Exchange on the eve of the event, citing the "instability of financial markets in recent days," AK&M reported on 23 January. The company, which includes 52 drugstores and three production facilities, had intended to raise $17.6 million-$25.6 million with a 20 percent-share offering. The IPO would have been the second such capital-raising affair on the Russian market; RosBusinessConsulting led the way, going public on the Russian market in April. Analysts tied the announcement to low demand. "I'm willing to bet that everyone offered them [36.6 shareholders] $11 per share and they refused," United Financial Group analyst Aleksei Krivoshapko told "Vedomosti" on 24 January. (At $11 per share, the IPO would have brought in $17.6 million.) The drugstore chain's announcement that it planned to use IPO proceeds to pay off debts might also have cooled investors' ardor, observers noted. Even so, Brunswick UBS Warburg analyst Vladimir Savov told "Kommersant" on 24 January that he expects the IPO to take place sooner or later. When it does, he said, "it will be a positive signal for the market. It's always good when a new company hits the market." DK

State-owned Sberbank celebrated a banner year on 20 January, announcing a $1 billion net profit for 2002 by Russian accounting standards, Interfax reported the same day. Deputy CEO Gennadii Melikyan promised that profits would be even higher by international accounting standards (IAS) when they are officially announced later in the year. Analysts attributed the impressive results, which significantly exceeded expectations, to rapidly rising Eurobonds and a burgeoning domestic securities market, "Vedomosti" reported on 21 January. Net profit in 2001 was 27.4 billion rubles ($861 million) to IAS and 17.5 billion rubles to Russian accounting standards. Some felt that Sberbank could do even better, however. Hermitage Capital Management Limited corporate research head Vadim Kleiner told "Vremya novostei" on 21 January that while the results "look impressive, an analysis shows that if you get rid of some weak spots in financial policy, Sber's profit could be almost double." DK

Pipe Metallurgical Company (TMK) General Director Dmitrii Pumpyanskii announced on 23 January the completion of a deal that saw him acquire a 33 percent stake in TMK from MDM Group for $300 million, "Izvestiya" reported on 24 January. The deal leaves Pumpyanskii with a controlling 67 percent stake in TMK, while MDM retains a 33 percent stake. TMK controls five pipe factories that are responsible for 41 percent of Russia's pipe production, "Vedomosti" reported on 24 January. Pumpyanskii told journalists at a 23 January press conference that TMK plans to boost production by 10 percent and sales by 25 percent to $1.5 billion, with long-range plans for further consolidation and an eventual stock issue. The deal is in keeping with a general trend toward consolidation in Russian industry and means that 60 percent of domestic pipe production is now split between two groups, TMK and Unified Metallurgical Company (OMK), "Finansovye izvestiya" reported on 23 January. Prospect investment analyst Nikolai Ivanov told "Kommersant" on 24 January that TMK will have to coordinate its assets into a genuinely integrated holding company to begin attracting outside investors. DK

SUAL-Holding announced in a 22 January press release that South African Chris Norval will replace Viktor Vekselberg as president of the aluminum group. Until 2001, Norval was in charge of strategic planning at international metals group BHP Billiton, overseeing the company's $1.5 billion 1997 IPO on the London Stock Exchange, "Izvestiya" reported on 23 January. The 43-year-old executive will be playing a similar role at SUAL, which recently joined its 21 companies to the assets of Britain's Fleming Family and Partners to create a new international mining company that intends to go public on a Western capital market by 2004. Sergei Martyanov of executive placement firm Rosexpert told "Vedomosti" on 23 January that SUAL's choice of a foreign specialist to head its drive to go global made good practical sense: "He won't just know the same language as [strategic investors], he'll have the same mentality." Other high-level foreign executives in Russia are Vimpelcom CEO Jo Lunder, Sidanco President Lawrence Smyth, and Yukos CFO and Deputy Chairman Bruce Misamore. DK

Rumors of a pilfered database with information on subscribers to cellular operator Mobile TeleSystems (MTS) turned out to be true, reported on 21 January, with the disk going for as little as 250-300 rubles ($7.86-$9.43). MTS representatives confirmed the database leak, although they provided no additional information. The searchable MTS database now offered by sidewalk vendors contains name, date of birth, passport information, address, taxpayer-identification number, contact telephone, and payment information. The file, which sources described as containing 3 million-5.5 million names, represents the largest such theft in Russian corporate history. Five years ago, a database with information on 100,000 Vimpelcom subscribers made its way to the streets, "Vedomosti" reported on 21 January. According to "Vedomosti," the confidential information might have been "leaked" through security forces, who received carte blanche access to cellular operators' records and technical facilities during the October hostage crisis in Moscow. CD-ROM databases with information of dubious provenance, including law-enforcement records, are a common offering at Russian kiosks. Combating the practice is difficult because the Criminal Code ignores the release of corporate data unless it is classified as a state secret, "The Moscow Times" reported on 22 January. With credit cards far less widespread in the Russia than the West and identity theft not yet a serious problem, the database theft is more likely to cause personal annoyance than economic harm. DK

Vladimir Yevtushenkov, head of Moscow-based Sistema, told Reuters on 17 January that the holding company had managed to resolve its differences with state-owned Svyazinvest over the future of the Moscow City Telephone Network (MGTS). Sistema owns a 55.6 percent stake in MGTS and wants to conduct an initial public offering on the New York Stock Exchange; Svyazinvest, which owns a 28 percent blocking stake, had opposed the plans for fear of losing influence over MGTS. Sistema and MGTS are now in talks over a fair price for Svyazinvest's stake, "The Moscow Times" reported on 20 January. United Financial Group analyst Aleksei Yakovitskii told "Vremya novostei" on 20 January that the 28 percent stake could fetch Svyazinvest up to $155 million, although the company's shares are undervalued by some 50 percent and illiquid. Yevtushenkov said in his 17 January Reuters interview that Sistema could hold its MGTS IPO by year's end. He stated in the same interview that Sistema intends to increase its 40 percent stake in cellular operator Mobile TeleSystems by acquiring a "significant" additional stake in the company. DK

Direct-marketing cosmetics giant Avon plans to begin building its own factory in the Moscow area in 2003, Interfax reported on 21 January. The Moscow Oblast government will discuss the construction of an Avon factory in the Naro-Fominsk region at a 28 January meeting, Moscow-based "Kuranty" reported on 22 January. Victor Beaudet, Avon's executive director of communications, confirmed the company's interest in building a production facility near Moscow to "Vedomosti" on 21 January. According to the newspaper, Avon's decorative cosmetics occupy second place among Russian consumers' preferences, while the company's skin-care products come in fourth. Industry reaction to the news was mixed, with some feeling that the construction of an Avon manufacturing facility might lead to a sharp increase in competition while others downplayed the possibility. DK

Moscow-based cellular operator MTS has put a deal to acquire Ukrainian Mobile Communications (UMS) on hold in the face of a legal challenge from a minority shareholder. The trouble began when Kharkov-based Elmaks, a shareholder in Ukrainian national operator Ukrtelecom, disputed the legality of the Ukrainian government's decision to sell Ukrtelecom's share in UMS to MTS, "Vremya novostei" reported on 22 January. MTS arranged a multistage deal that would have allowed it eventually to acquire 100 percent of UMS for some $337 million. Kyiv's "Ukrayinskaya pravda" wrote on 22 January that Elmaks might be acting on behalf of influential Ukrainian figures who want to prevent their "northern neighbors" from biting off a tasty chunk of local business. On 24 January, a Kyiv commercial court ruled that the MTS acquisition was legal, but Elmaks representatives announced that they will continue to appeal to the highest level, "Kommersant" reported on 25 January. DK

South Korea's bankrupt Daewoo Corporation has sold its 49 percent stake in Ukrainian cellular operator Ukrainian Radiosystems (URS), as well as its 50 percent stake in joint venture AvtoZAZ-Daewoo, "Kommersant" reported on 23 January. URS operates a GSM-900 network with 37,000 subscribers under the brand name WellCOM; Daewoo is selling its stake to the Ukrainian companies Ukrfondinvest and Interinvest. Daewoo sold its stake in AvtoZAZ-Daewoo to Swiss investment firm Hirsch & Cie, Prime-TASS reported on 21 January. "Ukrayinskaya pravda" speculated on 20 January that the mysterious Swiss investors might represent the interests of "certain Ukrainian or Russian companies." "Kommersant" wrote on 21 January that Ukravto, Daewoo's partner in the joint venture, might stand behind Hirsch & Cie. Daewoo entered the Ukrainian auto business in 1997 but was hit hard by the 1998 world financial crisis and declared bankruptcy in 2000. It has been looking for a buyer for its half of the joint venture since May. There was no initial word on how much money changed hands in the sale of Daewoo's Ukrainian assets. DK

Yegor Gaidar, who stood at the tumultuous center of Russian economic reform in 1992-94, recently noted a curious feature of the economy he helped to create: "We've hardly had any strikes since 2000. The number of striking workers isn't in the millions or the thousands, but in the hundreds. That's why everyone thought the air-traffic controllers were a sensation. They went on strike! But it's the elite that went on strike. They understand that the airlines earn good money on their work. It was ordinary bargaining," he said, according to "Konservator" of 24 January.

Ordinary as the bargaining might have been, the strike tended more toward the original. After failing to reach a compromise on a pay rise with their employer -- the State Corporation for the Organization of Air Traffic -- the Federation of Air-Traffic Controllers Unions (FPAD) opted to strike on 30 November. Their employers promptly obtained a court ruling forbidding the strike on the basis of Russia's Aviation Code. Undeterred, air-traffic controllers switched tactics -- they stopped eating. By 1 January, the union had inked an agreement that included provisions for gradual pay increases.

Despite a clause in the agreement intended to protect protestors from sanctions, local prosecutors are still pressing for disciplinary measures, "Kommersant" reported on 18 January. With air-traffic controllers alleging that reprisal firings have taken place in Omsk and Novosibirsk, more strife could be in the offing.

Air-traffic controllers are not the only restive members of the Russian "elite." Aeroflot employees reached a collective-bargaining agreement with management on 29 November that left the hot-button issues of salary increases and overtime pay to a conciliation commission, reported on 21 January. The conciliation commission ended its work on 28 December amid charges from some union representatives that management had aborted the process. By late January, the dispute had bogged down, with technicians' and flight attendants' unions holding out the possibility of a strike, "The Moscow Times" reported on 22 January. For its part, management claimed a strike would be illegal. Article 410 of the Russian Labor Code requires that, for a strike to be legal, two-thirds of an enterprise's employees must meet, and half of those present must vote in favor of a strike. Viktor Kleshchenkov, who heads an association of three Aeroflot unions representing 5,000 of the airline's staff of 15,000, gave management until the end of January to come up with new proposals to avert a strike, RIA-Novosti reported on 22 January.

The mere threat of a strike at Norilsk Nickel's arctic division, which accounts for 20 percent of world nickel production, was enough to affect world markets. The conflict began in late December when unions asked to have workers' monthly pay raised from 24,000 ($755) to 28,000 rubles. With the conflict still unresolved on 24 January, nickel prices surged to a two-year high of $8,550 per ton, "Kommersant" reported on 25 January. A conciliation commission began meeting on 27 Monday, RIA-Novosti reported the same day, for what could be a week's worth of talks to keep the division's 60,000 workers on the job.

These recent flare-ups garner attention against a backdrop of startlingly placid labor relations. The picture that emerges is richer in irony than protest: Despite pervasive dissatisfaction over low wages among Russian workers and frequent wage arrears throughout much of the 1990s, the country was remarkably calm. Oberlin College's Stephen Crowley examines this baffling quiescence in a spring 2002 article in "Demokratizatsiya" titled "Comprehending the Weakness of Russia's Unions." For the period from 1992 to 1999, he writes, "Even by generous estimates the number of strikers and protestors represents only 1 or 2 percent of all Russian workers, and also an extraordinarily small percentage of workers owed wages." A common joke in the 1990s had a presidential adviser rushing in to ask the chief executive about a group of unpaid workers: "What should we do? They haven't been paid in months and they keep coming to work." The president shakes his head and muses aloud, "Maybe we should charge them admission."

Strikes broke out, of course. The most famous protests of the 1990s featured teachers and miners trying desperately to collect unpaid back wages. Crowley notes, however, that both groups are part of the so-called "budget" sector -- workers who receive their salaries from the state budget. Since strikes involving "budget" workers represent an attempt to wrest extra resources from Moscow, they often enjoyed the support and encouragement of management and the local authorities. The privatized sector has seen far less activity.

The dominance of the Federation of Independent Trade Unions (FNPR), Russia's largest labor federation, is one reason for the eerie quiet. While the FNPR claims 38 million members on its website (, making it the largest nongovernmental organization in Russia, it remains beholden to the legacy of the Soviet unions from which it emerged. Under the Soviet system, unions functioned as a division of management and acted primarily to organize the distribution of such social benefits as vacation tours and children's summer camps. Strikes were for the decadent West -- when workers had the bourgeois effrontery to strike in the city of Novocherkassk in 1962 over wage cuts and price increases, the state moved brutally to suppress them with soldiers and tanks, killing at least 20 people.

The FNPR is today deeply enmeshed in power politics at the highest level. For example, FNPR Deputy Chairman Andrei Isaev is also the head of pro-government party Unity's General Council, as well as a deputy in the State Duma. The result is timidity. "The FNPR is pathologically afraid of nationwide strikes, as this would mean a clash not only with employers, but with the authorities," a 19 January article in "Novoe vremya" remarked. At enterprises where independent unions have arisen to challenge the FNPR, representational quotas in the Labor Code make it even more difficult to conduct a legal strike.

The ongoing disputes noted here confirm that strikes are still a weapon, no matter how rarely used, when management and labor lock horns. With wages drifting upward in a period of relative stability, air-traffic controllers, Aeroflot, and Norilsk Nickel might provide some indication of whether a whiff of prosperity in the air serves more to whet workers' appetite for conflict or to stimulate their desire for conciliation. DK