24 June 2003, Volume
TNK GAINS GROUND AGAINST MINORITY SHAREHOLDERS...
The High Court of the British Virgin Islands has granted a 12 June petition by Tyumen Oil Company (TNK) to lift an injunction order freezing $380 million of the company's assets, AK&M reported on 17 June. The injunction had been obtained by Seychelles-based Indian Ocean Petroleum Services and British Virgin Islands-based Astian Group, minority shareholders in TNK who allege that the company used transfer-pricing mechanisms to minimize tax payments and shortchange minority shareholders. TNK has derided the claims as "opportunistic, speculative, and without merit," "Nefte Compass" reported on 18 June. While TNK must still keep $380 million worth of assets in the British Virgin Islands, the new ruling removes any obstacles to the $6.75 billion TNK-BP merger expected to be ratified in the near future, the "Financial Times" reported on 18 June. Aton analyst Steven Dashevskii told "Vedomosti" on 18 June that the court ruling, while generally favorable to TNK, leaves the larger problem of minority shareholder relations unresolved: "However the case ends, TNK and its partners will have to resolve the minority shareholder problem and offer them fair terms of exchange [in the TNK-BP merger] or a buyout." According to the "Financial Times," another hearing on the claims by Indian Ocean Petroleum Services and Astian Group is scheduled for next month. DK
...AS PRESIDENT DEPARTS FOR YUKOS
TNK President Semen Kukes will leave the company to chair the board of directors at rival oil major Yukos, TNK announced in a 18 June press release. The press release quotes Kukes as saying, "I've achieved the goals that were set for myself and the company." Kukes, who did a brief stint at Yukos in 1998, returns to head a board that will soon be reformed in the course of Yukos's merger with Sibneft. Troika Dialog analyst Valerii Nesterov told "Vedomosti" on 19 June that Kukes is likely to be offered a top executive post in the resultant YukosSibneft. "It's not likely he would come to the company for only half a year," the analyst added. Russian Funds analyst Aleksandr Baranov noted to "Izvestiya" on 19 June that Kukes is the common element in a network that connects several industry players. Kukes worked for a decade in the United States at Amoco, which was later acquired by BP, and BP is now in the process of acquiring half of TNK, which Kukes has just departed. A further link exists in the form of oil company Slavneft, jointly owned by Sibneft and TNK. Also leaving TNK is Vice President Iosif Bakaleinik, who will join aluminum producer SUAL, Interfax reported on 18 June. SUAL is controlled by Renova, a co-owner of TNK. DK
SIBNEFT GENEROSITY (TO SELF) RAISES EYEBROWS
Sibneft majority shareholders received a $904 million "advance" on 2002 dividends that minority shareholders will not see until the end of this year, the "Financial Times" reported on 18 June. A report by brokerage Brunswick UBS Warburg described the payments as an interest-free loan and said that they raised "an important corporate governance concern." The recipient of the company's largesse was Millhouse Capital, which represents the interests of Chukotka Governor Roman Abramovich and Sibneft management. Millhouse Capital controls 92 percent of Sibneft. Aton analyst Dashevskii told "Vedomosti" on 19 June, "This practice in no way corresponds to the international standards of corporate governance to which Sibneft has always declared its commitment." The dividend prepayment was not announced at the time it took place. It came to light when the company announced its 2002 financial results to U.S. Generally Accepted Accounting Practices (GAAP) standards. DK
BELARUS RUBLE RUMBLE
Russian Finance Minister and Deputy Premier Aleksei Kudrin assured listeners to radio station Ekho Moskvy on 20 June that Russia and Belarus are moving ahead with plans to introduce a single currency by 1 January 2005. Kudrin's remarks came on the heels of ambiguous statements by Belarus President Alyaksandr Lukashenka, who wants a joint council with equal Russian and Belarusian representation to oversee emissions of the shared currency, AP reported on 19 June. Such a council would give diminutive Belarus outsize influence over Russian fiscal policy. The request set off alarm bells for some specialists. Andrei Cherepanov, chairman of the board of the Moscow Interbank Currency Association, told "Izvestiya" on 18 June, "The Belarusians want the right to conduct an unsecured emission, which is a direct path to inflation, destabilization of the economic situation, and support for unneeded economic projects that harm their own state." Stanislau Bogdankevich, former head of the Belarus National Bank and a leader in the oppositional United Civil Party, told "Nezavisimaya gazeta" on 19 June that participants in a recent round table at the National Bank came out against the very idea of currency integration: "We were unanimous in the view that the very idea of switching to the Russian ruble and giving up the national currency is unacceptable." DK
RTS MAKES PEACE WITH REGULATORS
The Federal Securities Commission (FKTsB) ended a long-running conflict with the benchmark Russian Trading System (RTS) stock exchange with the 11 June acceptance of new rules for dividing trades into on-market and off-market, ABN reported the same day. The conflict started in early 2003 when the FKTsB accused the RTS of potentially misleading investors by failing to divide trades into on-market (where aggregate supply and demand determine price) and off-market (where individual buyers and sellers agree on a price). The height of the six-month conflict saw the departure of RTS head Ivan Tyryshkin. The new rules specify that only electronic transactions will be classified as on-market. Exchange participants greeted the changes with a shrug, however. Igor Losavio, managing director of Prospect Investment, told "Vedomosti" on 16 June: "The main thing is that there's one less problem at the RTS. Neither the exchange nor the brokers who work there needed the tension." RTS spokeswoman Zoya Konovkova told "Kommersant-Daily" on 16 June, however, that with 80 percent of the exchange's volume consisting of off-market transactions, exchange indexes will now be calculated on the basis of reduced volumes to prevent stocks from being delisted. DK
RUSSIA BECOMES FULL-FLEDGED FATF MEMBER
The Financial Action Task Force (FATF) welcomed Russia and South Africa as members on 19 June, AFP reported the same day. The two countries stiffened legislative controls to move from observer status to full-fledged membership in the international anti-money-laundering body. German FATF President Jochen Sanio termed Russia, which was on a blacklist of uncooperative states as recently as last October, a "great success story," Reuters reported on 19 June. Though FATF membership brings with it a raft of potential benefits -- from a cleaner overall image to an improved national credit rating -- some observers noted that the organization's requirements could redound to the detriment of privacy. "Citizens should get ready for total surveillance of their wallets," wrote "Kommersant-Daily" on 20 June, noting that Russia's Committee for Financial Monitoring will "receive access to a huge amount of information about the financial transactions of individuals and organizations." "Vremya MN" commented in the same vein on 18 June that "FATF members are already prepared for an aggressive asault on banking secrets." DK
AVTOVAZ TO PROMOTE BRAND RECOGNITION
Automaker AvtoVAZ is taking steps to promote its brand names and logos, internet news site Ladaonline (http://www.ladaonline.ru) reported on 18 June. To that end, AvtoVAZ is banding together with Vneshtorgbank (VTB) to found Lada Image, which will control the rights to the brand names "Lada" and "Avtovaz," as well as the "Lada" logo, "Kommerant-Daily" reported on 20 June. AvtoVAZ will own 51 percent of Lada Image; 49 percent will belong to VTB. AvtoVAZ PR Director Petr Nakhmanovich told Ladaonline that Lada Image will soon launch a large-scale brand awareness campaign called "Lifestyle by Lada." In addition to selling the firm's names and logo, Lada Image will market brand-name accessories to increase AvtoVAZ's visibility. Meanwhile, a new report forecasts a rosy future for the giant carmaker, which battled a persistent overproduction crisis in 2002. A recent report by British consulting company Autopolis on growth perspectives for the world auto industry predicts that small carmakers will leapfrog their cumbersome, consolidated competitors to become growth leaders, "Vedomosti" reported on 18 June. According to the newspaper, the Autopolis report envisions AvtoVAZ sales climbing 62.5 percent by 2010. DK
TROIKA RIDES OFF WITH ROSGOSSTRAKH
Investment company Troika Dialog came away from a 18 June privatization auction with a 26 percent-plus-one-share stake in insurer Rosgosstrakh, ABN reported the next day. The winning, 661 ruble ($21 million) bid came in at a mere 1.536 percent over the starting price. The acquisition gives Troika Dialog a controlling 75 percent-minus-one-share stake in Rosgosstrakh; the state retains a blocking stake. Troika Dialog purchased 49 percent of Rosgosstrakh in 2001 for $41 million, and the company's president, Ruben Vardnyan, does double duty as the insurer's general director. The auction took 3 minutes, "Vedomosti" reported on 19 June, and left Kirill Tomashchuk, first deputy chairman of the Federal Property Fund, nonplussed. "We expected the competition to be much stronger and the difference between the starting price to be bigger," he told the post-auction press conference. Queried for an explanation, Tomashchuk was laconic: "Well, for example, [the auction participants] made a deal." According to press accounts, spectator-cum-participants at the auction included representatives of Abramovich's Millhouse Capital and Oleg Deripaska's Basic Element. Vardanyan told "The Moscow Times" on 19 June that Troika Dialog plans to invest $162 million over the next four years into Rosgosstrakh, which is one of the four largest Russian domestic insurers. DK
NORILSK NICKEL POISED TO PURCHASE STILLWATER
American stockholders and regulators in Moscow and Washington all gave their blessing to the acquisition of a controlling stake in U.S.-based Stillwater Mining by Russia's Norilsk Nickel, "Vedomosti" reported on 18 June. Stillwater stockholders voted for the deal, the U.S. Federal Trade Commission approved it, and the Russian Central Bank gave Norilsk Nickel permission to transfer out of Russia the funds needed for the acquisition. Norilsk Nickel will pay $100 million in cash and 877,000 ounces of palladium (worth approximately $160 million) for a 51 percent stake in the debt-strapped U.S. mining firm. As stipulated by the sale agreement, Norilsk Nickel has set aside another $33 million to buy an additional 5 percent of Stillwater if the concern's share price, currently at $4.83, fails to top $7.50 by the end of June, "Gazeta" reported on 18 June. Russian Prime Minister Mikhail Kasyanov hailed the deal, which gives Norilsk Nickel a solid point of entry to U.S. markets and access to Stillwater's lucrative long-term contracts. Kasyanov told reporters on 19 June, "When Russian companies grow and enter the world market, it heartens the government and should hearten the entire country," regnum.ru reported the same day. Peter Boone, head of research at Brunswick UBS Warburg in Moscow, saw a harbinger of things to come, telling the "Financial Times" on 18 June, "Russian companies are cash rich and will continue to be a force to be reckoned with." Norilsk Nickel could complete the actual purchase by the end of the month. DK
BANKRUPTCY PROCEEDINGS START AT MOSKVICH
The Moscow Arbitrage Court kicked off bankruptcy proceedings at automaker Moskvich on 18 June with the introduction of a five-month observation period at the factory, ABN reported on 20 June. The city of Moscow, which is seeking to gain control of a debt-frozen 60.36 percent stake in the factory currently held by the Property Relations Ministry, got the bankruptcy ball rolling with a 7 May suit. The five-month observation period will give Moskvich, which owes state-owned Vneshekonombank $730 million, temporary relief from its creditors. Sergei Mitin, deputy minister of industry, told "Kommersant-Daily" on 19 June that the government has a plan to restore the enterprise, which has idled since 2001, to financial health -- provided it finds an outside investor. Troika Dialog analyst Andrei Kormilitsyn was less optimistic in comments to "Vedomosti" on 19 June: "The city will use the time [until November] to make attempts to revive Moskvich. But it's hard to believe that this is possible without support from a strategic investor, and there's no such investor in sight." A final decision on bankruptcy, possibly opening the door to liquidation, is due on 27 November. DK
SAKHALIN-1 CONTRACTS GO TO RUSSIAN SHIPPERS
Neil Duffin, head of ExxonMobil's Russian operations, told reporters in Moscow on 17 June that the company has awarded contracts worth up to $600 million to two Russian companies to ship oil from the Sakhalin-1 project, AP reported the same day. Primorsk Shipping Lines and Sovkomflot will operate five tankers -- to be built in Korea by Hyundai -- to transport oil to Asian markets beginning in 2005, "Vremya novostei" reported on 18 June. A Russian government source expressed satisfaction with the contract decision in 17 June comments to "Vedomosti": "This means that government and business, which have insisted on the need to make more efforts to engage Russian companies in the Sakhalin projects, have had an effect." Sakhalin-1's 1996 production-sharing agreement requires that 70 percent of the project's contracts go to Russian subcontractors, who have thus far complained of insufficient involvement. Sakhalin-1 is operated by ExxonMobil subsidiary Exxon Neftegas, which holds a 30 percent stake in the project. Other members of the consortium are Japan's Sodeco (30 percent), India's Oil and Natural Gas Company (20 percent), and two subsidiaries of Russia's state-owned Rosneft (20 percent). DK
BAKU GETS HELP ON BTC
Natig Aliev, president of Azerbaijani state oil company Socar, told journalists on 19 June that the company's partners on the $3 billion Baku-Tbilisi-Ceyhan (BTC) pipeline will provide $180 million-200 million in stopgap credit until international organizations come up with further financing in the fall, AP reported the same day. While SOCAR has enough money to last through mid-July, Aliyev said, "We will need another $180 million-200 million to tide us over and keep the construction going until November," Interfax reported on 19 June. The nine-member BTC consortium is led by Britain's BP, which holds a 30.1 percent stake in the project. DK
CREDIT OR DETRIMENT?
From the admittedly blinkered perspective of financial professionals, one of the biggest problems with Russians is that they just don't borrow enough. If Westerners (and especially Americans) feel perhaps too comfortable fulfilling their hearts' desires on someone else's conditionally provided dime, most Russians are still more likely to turn to family and friends for financing.
But first-time car buyers in Moscow now have many more options than an awkward conversation with the in-laws. In fact, Ernst & Young's April "An EYe on Russia" monthly report boldly proclaims that "the consumer financing boom is nigh." The report estimates that "in a fairly optimistic scenario about 20 percent of all purchases in the home appliances sector and the domestic automotive sector, and 30 percent of purchases of expensive foreign cars will be made on credit by 2006." This rosy future would be financed by $2 billion in consumer loans, a vast increase over current levels. The report goes on to predict that if mortgage rates come down from today's 12 percent-15 percent to an annual 10 percent, "the market can easily accommodate $2 billion-$3 billion in new money each year only for new home mortgages."
A 17 June roundtable in Moscow on auto financing reached similar, if slightly less ebullient, conclusions. "Vremya MN" reported on 18 June that 25 percent of all cars sold in Russia today are bought on credit; moreover, car financing has risen over the past two years from 1.9 percent to 3.4 percent of banks' loan portfolios. Still, Aleksandr Koloshenko of Raiffeisenbank told RBK on 17 June that most ordinary Russians simply do not earn enough to buy a car on credit: "Today's minimum loan amounts presume income of no less than $700 a month above and beyond expenses for others, such as children." Even so, experts queried by RBK felt that Russia's auto financing market could easily grow from its current level of $200 million to $1 billion in 2-3 years.
Skeptics abound as well. A 17 June article in "The Moscow Times" warned that "outside of a handful of large cities, usury is still considered an alien activity tantamount to sin." The article also cautioned that suspicious provincials might find their fears confirmed by a nascent consumer-credit market rife with sinfully usurious interest rates and service charges. Ekaterina Demygina, vice president of Moscow Credit Bank, highlighted another difficulty in 16 June remarks to "Vedomosti," explaining that she does not see interest rates dropping below 10 percent in the foreseeable future. "Such cheap [financial] resources don't exist in Russia," she grumbled, "and mortgages won't solve the problem of a shortage of big money in the immediate future."
For every prediction of a boom, of course, there is an equal and opposite prediction of a crash. In a 18 June op-ed in "Vedomosti," Boris Safronov saw storm clouds springing from Ernst & Young's silver lining. He argued that bankers overeager to extend credit are "planting a time bomb." When the bomb goes off, the victims could well be the bankers themselves. "In the absence of credit bureaus, the institution of individual bankruptcy, and legal mechanisms for the payment of salaries," Safronov warned, "an attempt to loan money to as many people as possible could wind up hurting creditors."
A 23 June press release by the International Finance Corporation (IFC), the World Bank's private-sector financing arm, that it will provide $66 million in -- what else -- loans to "help expand Russia's fledgling mortgage industry" is merely further confirmation that formalized borrowing is about to become a bigger part of everyday Russian life. But will it make life better? The first answers to that question will start coming in, of course, when all the loans start coming due. DK
The history of taxation has witnessed its share of close-fought, push-and-pull conflict between the powers-that-be and their subjects. A 19 June decision by Russia's Constitutional Court, the highest in the land, nudged one conflict -- between small business owners and the state -- toward a rare resolution in favor of the subjects over the powers-that-be. The court ruled that a group of businessmen were unfairly subjected to double taxation and may now set about recovering the lucre they needlessly rendered unto Caesar.
As is often the case, the problem began when legislators attempted to ease the plight of the little guy. The December 1995 law "On a Simplified System of Taxation" gave small businesses the option of replacing a cornucopia of taxes with a single annual patent fee. Unfortunately, while the law expressly exempted small businesses from the value-added tax (VAT), it failed to do the same for individual entrepreneurs. Acting on the age-old official principle that those not expressly exempted are liable, tax inspectors set about collecting the VAT from individual entrepreneurs on 1 January 2001. In regions with a sales taxes, taxmen displayed equal enthusiasm for imposing it on individual entrepreneurs.
Yet another law should have prevented the problem. The law "On State Support for Small Business in the Russian Federation" imposes a four-year moratorium on the implementation of new tax laws that create a less favorable climate for doing business. Tax officials argued that because indirect taxes are passed on the to the consumer, they do not worsen the business environment. Individual entrepreneurs, who were compelled to keep their own books and could not always pass the tax burden on to consumers while remaining competitive, thought otherwise.
The added tax burden was enough to sink some small ventures. Aleksandr Shvedov's lawyer recounted his client's story to "Gazeta" on 20 June: "He took loans to open up his business. All he had was one gas station, but the arbitration court ruined it when it froze the property. And Shvedov could have become a full-fledged member of the middle class!"
According to state-owned "Rossisskaya gazeta," the Constitutional Court's decision found that the actions of tax authorities "contradict the constitutional principle of fair competition and hinder the freedom to exercise the constitutional right to engage in entrepreneurial activity." The businesspeople who filed suit -- whose numbers ranged from 38 to 49 in various press reports -- are now free to seek redress within the bounds of the Tax Code's three-year statute of limitations.
The State Statistics Committee listed 4.6 million individual entrepreneurs at the beginning of 2003, "Vedomosti" reported on 20 June. How many of them will be able to get back at the taxman by getting back their back taxes? Opinions differ. Denis Shchekin is a partner in the law firm Pepelyaev, Goltsblat & Partners, which represented entrepreneur Vladimir Konovalov before the Constitutional Court. He told "Gazeta" on 20 June that, while he advises businesspeople to turn to the legal system for justice, "arbitration courts may turn them down because Constitutional Court resolutions do not have retroactive force: what was paid was paid." "Vremya novostei" noted on 20 June, however, that "the Constitutional Court has indicated before that when a norm is recognized as unconstitutional, this gives grounds for reviewing all decisions handed down on the basis [of that norm]." In a despondent footnote to the ruling, Dina Krylova, analytical center director at the Opora Rossii small business association, told "Vedomosti" on 20 June that even if entrepreneurs win their cases, tax officials will stymie the overcharged businessmen "99 percent of the time" by claiming -- irony of ironies -- that they just do not have the money to pay them back. DK