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Business Watch: September 16, 2003

16 September 2003, Volume 3, Number 35
Gazprom CEO Aleksei Miller visited Houston and Washington last week to discuss the future of Russian natural-gas exports to the United States with U.S. executives and officials. Miller met with ConocoPhillips CEO James J. Mulva and Syntroleum President John G. Holmes, as well as U.S. Commerce Secretary Donald Evans and Energy Secretary Spencer Abraham, "Vremya novostei" reported on 11 September. The centerpiece issue was America's growing thirst for imported liquefied natural gas (LNG). According to PACE Global Energy Services, U.S. imports of LNG, currently at 6.5 billion cubic meters (bcm) a year, will rise to at least 40 bcm by 2010, and could top 100 bcm by 2020. Gazprom hopes to build a gas-to-liquid plant to produce LNG on the Shtokman gas field on the Barents Sea, possibly in cooperation with ConocoPhillips, "Kommersant-Daily" reported on 11 September. Russia's first gas-to-liquid plant is currently under construction for the Shell-led Sakhalin-2 project at a cost of some $2 billion. Still, it will take time to get LNG exports to the United States up and running. Troika Dialog analyst Oleg Maksimov told "Izvestiya" on 11 September: "At best, LNG shipments to the United States will start no earlier than 2010. But I think that they'll actually get going only in 2015."

International Monetary Fund (IMF) representative Goohoon Kwon told a banking conference in Moscow on 9 September that high oil prices are causing the Russian economy to "overheat," "The Moscow Times" reported the next day. Kwon's remarks, which echoed a 1 September article he published in "Ekspert," No. 32, prompted widespread comment. In his article, Kwon noted, "The impressive growth in revenues to the Russian budget in recent years has resulted primarily from high prices for oil, not political stability, economic growth, and tax reforms." The analyst concluded that 80 percent of the increase in federal budget revenues could be traced back to the oil industry. The resultant dependence on petroleum revenues leaves the budget at the mercy of future price fluctuations. Robert Skidelsky, chairman of the Centre for Global Studies, concluded in a 11 September reaction in "Vedomosti," "It is important to understand that an economy as one-sided as the Russian economy will inevitably experience either fever or chills, so that in the end it may not achieve its growth potential." In another response to Kwon, also published in "Ekspert," No. 32, Sergei Guriev suggested that a stabilization fund and structural reforms could help to curb the budget's destructive addiction to oil revenues.

Vladimir Yevtushenkov, who heads the powerful Sistema financial-industrial group, said on 9 September that the bulk of the Russian business community supports the authorities in the standoff between law enforcement and oil major Yukos, RosBalt reported the same day. Speaking about business and government at the International University, Yevtushenkov told listeners: "If many people in our business community feel that [Yukos CEO Mikhail] Khodorkovskii made mistakes, he made them. We have a better view from the inside." Arkadii Volskii, the president of the Russian Union of Industrialists and Entrepreneurs, echoed Yevtushenkov in comments to "Vedomosti" on 10 September, saying: "I've always been against businessmen having political ambitions. That's an oligarchy -- when money tries to get into power." Meanwhile, the newspaper's editors linked Yevtushenkov's remarks with upcoming parliamentary and presidential elections and the impending formation of a new cabinet: "Yevtushenkov's statement is probably just the beginning. In accordance with the constitution, a new government (and likely a new prime minister) will be appointed in six months, and big business is entering the fray for the right to influence the decisions new ministers will make." In a parallel development, "The Moscow Times" reported on 10 September that Khodorkovskii is set to receive some $1.3 billion in cash in the course of the Yukos-Sibneft merger. The embattled oil tycoon may well use the money to support various political parties -- from liberal warhorse Yabloko to the quasi-oppositional Communist Party -- in December elections to the State Duma.

IST Group has acquired a 17.36 percent stake in shipbuilder Baltiiskii zavod from Karavan zvyozd, raising its total stake in Baltiiskii zavod to 88.2 percent, ABN reported on 11 September. The move marks a step forward in IST Group's plan to create the Baltic United Shipbuilding Corporation (BOSK) and gives it an edge over long-time rival shipbuilder Severnaya verf. (Severnaya verf is controlled by the New Programs and Concepts [NPK] holding company.) The sides did not disclose the amount of the deal, although a 16 percent stake in Baltic zavod was sold for $6 million in 1998, reported on 11 September. Ruslan Pukhov, director of the Center for the Analysis of Strategies and Technologies, told "Vedomosti" on 12 September: "Now two players [IST Group and Severnaya verf] hold all the cards. In order to create the first private Russian-shipbuilding holding company, IST Group either has to buy out Severnaya verf from [Severnaya verf owner] NPK or sell NPK its shipbuilding assets." IST Group already has a foothold in Severnaya veft in the form of an 18.8 percent stake in the company. According to "Vedomosti," Baltiiskii zavod's 2002 revenues totaled $30 million; the shipbuilder is currently finishing up a $1 billion contract to build three frigates for the Indian Navy.

As the tender to manage Moscow's Sheremetevo International Airport nears, the speculation and jockeying for position have already begun. The National Reserve Bank (NRB), which owns a blocking stake in Aeroflot, officially requested on 8 September that the tender be pushed back to the spring, "Gazeta" reported the next day. NRB head Aleksandr Lebedev explained that the very idea of holding a tender to manage a profitable airport seemed dubious. "I think that it doesn't make sense to transfer companies as profitable as Sheremetevo and Aeroflot to private hands," Lebedev told "Izvestiya" on 9 September. The tender idea belongs to Alfa Group President Mikhail Fridman, who offered Alfa Group's services to manage the airport and finance the construction of a badly needed third terminal. Meanwhile, a third contender seemed ready to throw its hat in the ring. Sistema Chairman Vladimir Yevtushenkov announced on 9 September that the holding company, legendary for its close ties with the Moscow city government, intends to take part in the tender, "Vremya novostei" reported the next day. United Financial Group analyst Yelena Sakhnova told "Vedomosti" on 10 September that Sistema could give other competitors a serious run for their money: "For now, we can say that Alfa Group's and NRB's chances for victory have been seriously reduced." Final conditions for the tender are set to be announced on 22 September, with the actual tender to take place by year's end.

Squabbling between the owners of MegaFon scuttled a 10 September shareholders' meeting, sparking rumors of more conflict to come at Russia's third-largest cellular operator. MegaFon's core shareholders are Finnish-Swedish TeliaSonera (35.6 percent), Russia's Telecominvest (31.3 percent), and CT-Mobile (25.1 percent). CT-Mobile was acquired on 5 August by Alfa Group, which owns a blocking stake in MegaFon competitor VimpelCom. On 3 September, CT-Mobile informed other MegaFon shareholders that it intended to reshuffle the company's board of directors at the 10 September shareholders' meeting, "Vedomosti" reported on 12 September. Those shareholders, who have not welcomed Alfa Group into their ranks, responded by ignoring the meeting. Without a quorum, no meeting could take place. "Kommersant-Daily" wrote on 11 September that Alfa Group may be trying to push up the value of its blocking stake in the hopes of selling it, possibly to TeliaSonera. (Widely reported rumors have suggested that Alfa Group could swap its 25 percent stake in MegaFon for TeliaSonera's controlling stake in Fintur Holdings BV, which holds controlling stakes in leading cellular operators in Moldova, Azerbaijan, and Georgia.) Alternately, Alfa Group could be gearing up for a VimpelCom-MegaFon merger attempt.

Unified Energy Systems (EES) CEO Anatolii Chubais announced on 7 September that the Russian utility's recent foray into the Georgian energy market is only the beginning of a broader effort, Interfax reported the next day. "We have very aggressive plans," Chubais said, "And those plans concern the majority of countries in the CIS." Chubais also stressed that EES has restored compatibility to the 14 countries' energy grids. "All the CIS energy systems run on the same frequency. Every light bulb in Moscow runs at the same electrical frequency as the light bulbs in Tbilisi," he said. EES purchased the power plants and grid that keep Georgian light bulbs lit from U.S.-based AES Corp. in August. The deal was estimated to be worth approximately $150 million, "The Moscow Times" reported on 9 September. Though EES was coy about the specific nature of its aggressive plans, "Nezavisimaya gazeta" enumerated on 9 September various power morsels that might interest the huge Russian utility: power grids in Moldova, generating assets in Armenia, local utilities in Ukraine, and hydrogenation assets in Kazakhstan and Tajikistan.

The international consortium developing Kazakhstan's giant Kashagan oil field is boosting investment in order to pump more oil, "The Wall Street Journal" reported on 5 September. The consortium had initially planned to invest $7 billion in Kashagan, with production kicking off at 100,000 barrels a day in late 2005. The new plan calls for $10 billion in investments, production of 450,000 barrels by late 2006 at the earliest, and eventual production of up to 1.2 million barrels a day, "Vedomosti" reported on 9 September (in an expanded version of "The Wall Street Journal" article of 5 September). The only oil field in the world that produces more than 1.2 million barrels a day is Saudi Arabia's Al-Ghawar. Kazakh officials, who had previously insisted on a 2005 start date, agreed to the postponement "grudgingly," "Nefte Compass" reported on 10 September. According to the industry newsletter, project participants Total and ENI pegged 2007 as the most likely production kick-off date. Italy's ENI is the operator for the Agip KCO international consortium, which includes Exxon Mobil, Royal Dutch/Shell, Total, Phillips, and Inpex.

The Cold War ended not with a bang, or even a whimper, but a murky, messy series of events that sounds somehow tidy in a history-book retelling -- the decisive defeat of an entire political and economic system. As change remade whole societies, the two sides that had officially glowered at each other across barbed wire for decades were already settling on the shorthand they would use to reduce history's murk and mess to simple, vivid images. For the West, those images would be the fall of the Berlin Wall and the disappearance of the "Soviet threat" -- the East's stifled masses rushing toward freedom, missiles vanished from Red Square, Gorbymania. For the East, the image would be shock therapy and privatization, at once more material and more abstract -- the sudden squall of market forces and the great redistribution of property in societies where no one had really owned anything.

In Russia, shock therapy and privatization call to mind two names: Yegor Gaidar and Anatolii Chubais. Gaidar's career as a political figure was short: minister of finance and the economy from November 1991 to April 1992; first deputy prime minister, and then acting prime minister, until December 1992. Working in conditions of chaos and crisis, Gaidar implemented a policy of "shock therapy" that aimed to wrench Russia into capitalism, most famously through the 2 January 1992 elimination of Soviet price controls. Though the policy eased goods shortages, it unleashed skyrocketing inflation that soon rendered Russians' savings worthless. Specialists continue to mull the minutiae of Gaidar's decision, but the vast majority of Russians returned their judgment long ago -- Gaidar impoverished them.

Though he was involved in parliamentary politics and pro-market party building, Gaidar faded from the front ranks of the public political elite in the 1990s. Today, as director of the Institute for the Economy in Transition, Gaidar has settled into the role of expert elder statesman on transitions to capitalism (at the ripe old age of 48).

And Gaidar's expertise on transition is once again in demand. Russia's chattering classes were abuzz last week with the news that the U.S. Coalition Provisional Authority has invited Gaidar to participate in a three-day conference in Iraq on 19-21 September. An official at the U.S. Embassy in Moscow told "The Moscow Times" on 9 September that experts from nine Central and Eastern European countries would speak to 50 Iraqi leaders "with a view to explaining how European experience with economic reform might help Iraq manage its transition." According to "Izvestiya," other invitees include former Bulgarian President Petar Stoyanov and former Estonian Prime Minister Mart Laar.

For his part, Gaidar told a 8 September press conference, "Many of the problems they are encountering in Iraq stem from the collapse of a totalitarian regime with heavy state involvement in the economy," "Vedomosti" reported the next day. Gaidar continued, "[The Americans] want to figure out how to minimize the risks and privatize the economy as quickly as possible." Beyond that, he would only say that he needed to study the situation.

Gaidar left an ambiguous legacy, and many of the reactions to his upcoming Baghdad engagement were flush with faint praise. Sergei Aleksashenko, former Central Bank deputy chairman and current deputy director of the Interros holding company, told "Vedomosti" on 9 September: "Gaidar is one of the few people who knows how to reform an economy in a crisis situation. It's better to learn from other people's mistakes, and no one knows better than Gaidar the mistakes that can be made here." Marshall Goldman, associate director of Harvard University's Davis Center for Russian and Eurasian Studies, echoed the sentiment, telling "The Moscow Times": "Maybe this is not such a bad idea. Having seen what happened to Russia, he will be aware of the pitfalls. He can help Iraq avoid making the same mistakes."

Others were considerably less enthusiastic. A 9 September article in the London-based, Saudi-owned Arab daily "Al-Hayat" pilloried Gaidar, describing him as "one of the heroes of the 'reform' process that led to the collapse of the Russian economy and paved the way for the theft of the country's wealth." Evoking the Russian "national-patriotic press," "Al-Hayat" called Gaidar "one of Russia's most disreputable politicians, accused by nationalist parties of 'systematically destroying' the Russian economy. They charge that his policies were directly responsible for what they describe as the 'genocide of the Russian people'...." As if all this were not bad enough, "Gaidar has, in past years, remained a faithful ally of the West, and especially the United States; he is also considered close to extremely influential Jewish circles in Russia...."

Russian business daily "Vedomosti" voiced a different variety of gloom in an editorial the same day. The editors concluded: "Gaidar...has suggested that privatization would be beneficial. If we recall that, aside from the oil business, there is nothing to privatize in Iraq, certain questions immediately present themselves: The United States would manage the transfer of oil fields to foreign companies on its own, and former Ba'ath Party members can't be allowed to have them. That leaves those who made money during the anarchy of recent months. These 'new Iraqis' are unlikely to be more popular with their fellow countrymen than the oligarchs are with Russians."

In point of fact, Gaidar is unlikely to have any decisive influence over the future course of the Iraqi economy. But the furor over his possible involvement in Iraq's transition -- which drew coverage and comment from virtually every Russian newspaper of note -- shows how many passions still stem from the period when Gaidar made the fateful decision to free prices and release the genie of market forces from its Soviet bottle.

The focus in Iraq today is mainly on political passions, the same passions that blazed so brightly in the early days of change in Russia and Eastern Europe. But the reaction to Gaidar's invitation illustrates one lesson from earlier transitions that could prove instructive in Iraq -- long after the political fires burn out, the economic embers smolder.

Belarusian President Aleksandr Lukashenka is a man of ambiguous achievement. Though his pugnacious rhetoric and paternalistic strongman socialism have made him Europe's odd man out, they have not quite managed to bestow the cachet of real rogue status on the nation he rules. Instead, rascally Belarus meanders in the shadows, shunned and ignored.

The brightest ray of light to pierce the gloom comes from Vladimir Putin's Russia. The European Union may have turned its back on Lukashenka, but Moscow still welcomes him as a legitimate world leader and valued friend. Lately, however, the friendship has been a little strained. And as is so often the case when friends have a falling-out, money is involved.

For some years now, Russia and Belarus have been churning out a steady stream of paperwork on a union between the two countries. Like communism under the Soviets, Russian-Belarusian union is a piously proclaimed goal, beckoning bright on the horizon. And, like communism, it recedes with the horizon as one approaches.

One of the concrete measures looming on the horizon is the planned move to a single currency -- the Russian ruble -- on 1 January 2005. The mechanics of the switch have proved troublesome, however, with Moscow loathe to wade into the morass of Belarus's state-subsidized economy and Minsk unwilling to surrender fiscal sovereignty. Over the last two weeks, the troubles began to multiply.

On 3 September, a Belarusian court froze a 15 percent stake in the Mozyr oil refinery over alleged violations in the enterprise's 1997 privatization. The refinery belongs to Russia's Slavneft, which in turn belongs to oil companies Sibneft and Tyumen Oil Company (TNK). The two companies are currently splitting up Slavneft's assets, and TNK is in the process of merging with Anglo-American BP in a deal that is bringing billions of dollars in foreign direct investment to Russia. No one in Russia wants a legal wrangle over Slavneft's assets, and TNK Chairman Mikhail Fridman was sufficiently irked to announce on 12 September that he is counting on Russian officials to help with the problem, Prime-TASS reported the same day.

At roughly the same time, Russian gas monopolist Gazprom was grumbling about the steep discounts it is obligated to offer Minsk. Russian Prime Minister Mikhail Kasyanov was listening, and on 6 September he ordered various ministries to review the sweetheart deal that allows Belarus to buy Russian natural gas at $30 per 1,000 cubic meters (tcm), about a third of the market price.

Lukashenka responded to the threat of higher gas prices with his customary bluster. He told Minsk residents on 13 September: "They're scaring us and saying that Russia will raise the price for gas. This will cost us about $120 million [a year]. Basically, it's not a lot of money, but we'll have to cut back," Interfax reported the same day. "Kommersant-Daily" checked the math on 15 September and came to a somewhat more expensive conclusion: At $46/tcm, Belarus will have to cough up an extra $220 million a year; at $50/tcm (the price Ukraine pays), $300 million; at $77/tcm (the price Latvia pays), more than $700 million. With all these figures hanging in the air, Russian oil companies Slavneft and Sibneft received notice from Minsk on 11 September that Belarus would divert oil the Russians were pumping through Belarus for export to feed an underutilized Belarusian refinery, "Kommersant-Daily" reported on 15 September.

Meanwhile, Gazprom set about tying up some loose ends. Minsk's discount gas is the result of an agreement that was supposed to let Gazprom buy into Belarusian pipeline monopolist Beltranshaz by 1 July 2003 (preferably to the tune of a controlling stake, if Gazprom had its druthers). The agreement had been foundering, with the deadline elapsed, Minsk valuing the company at $5 billion, and Gazprom pegging its worth at a mere $600 million. Finally, Gazprom CEO Aleksei Miller decided enough was enough and officially informed the Belarusian government that the joint-venture plan was a dead letter. On 13 September RIA-Novosti quoted Miller as telling Russian television viewers: "We have fundamentally different visions of the principles of working in the gas business. The differences between these approaches are irreconcilable." The same day, 13 September, the Russian government officially nixed Minsk's cheap gas privileges, paving the way for a price hike on 1 January 2004.

Against this bellicose backdrop, Russian President Vladimir Putin received his Belarusian counterpart in Sochi on 15 September. The two leaders emerged from several hours of talks with one concrete result: Russia and Belarus will embrace "market relations" in the gas sphere. Other issues will have to wait, including the currency unification that served as the flash point for the latest round of bickering. But one thing seems clear: The salad days of dirt-cheap gas are over.

It remains unclear exactly how much ill this bodes for Belarus. "Izvestiya" reported on 16 September that Gazprom representatives had already scaled back their aspirations from the $80/tcm they had threatened earlier to a mere $40-$45/tcm. Sergei Chizhov, head of the Russian Gas Union, confirmed this, telling "Vedomosti" the same day that while Russia undoubtedly stands to gain, Belarus will likely see its bills increase by no more than $100 million-$200 million.

The real issue, however, is not how much more Belarus will pay for gas. Now that the cat is out of the bag, the question is whether the market is really coming to Minsk, and how much will be left of Russian-Belarusian bonhomie when it arrives.