Business Watch: October 8, 2003

Rumors swirling around Yukos intensified with a 25 September report in the "Financial Times" that the Russian oil powerhouse may possibly "relocate its headquarters outside Russia." The news, which Yukos spokesmen described as an "exotic rumor" in comments to several media outlets, comes amid heightened speculation that U.S.-based ExxonMobil or ChevronTexaco may be about to acquire equity stakes in Yukos. The speculation comes at a delicate time for the oil company. Yukos is set to merge with Sibneft by year's end to create a $40 billion behemoth that will be Russia's largest oil company. Moreover, the company remains at the center of a several ongoing criminal probes that some see as a politically motivated attack. Russian reactions to the latest rumor were quick to focus on ulterior motives. "Gazeta.ru" opined on 25 September that "the 'Financial Times' publication aimed not to report new information, but to influence market players." The website went on to imply that the article -- which itself implies that Yukos's rising market capitalization could eventually make the company too pricey to buy -- was possibly inspired by Yukos's potential buyers. Meanwhile, a 26 September article in "Gazeta" suggested that Yukos itself may have been putting out feelers: "Leaking information through the Western media is the simplest means of testing the Russian market's reaction; if it's negative, you can always say, 'That's not what I meant.'"

LUKoil representatives announced on 22 September that the company is reconsidering involvement in the development of the Kharyaga oil field because the project's operator, Total, is inflating the costs, "Kommersant-Daily" reported the next day. According to LUKoil, Total's excessive expense estimates undermine the project's profitability. The rights to develop Kharyaga's estimated 97 million tons of oil are currently held by France's Total (50 percent), Norway's Norsk Hydro (40 percent), and the Nenetsk Oil Company (10 percent). Total and Norsk Hydro each agreed to sell LUKoil a 10 percent stake in the project, but the Russian company has not yet bought in. Denis Nushtaev, a specialist at the Metropol investment company, told "Vedomosti" on 24 September that LUKoil's doubts are well founded. He noted, "LUKoil's possible exit from the Kharyaga project is in line with the company's policy of eliminating projects with profitability below 15 percent." Other industry analysts told "Vremya novostei" on 24 September that LUKoil's alleged desire to abandon the project may be more of a bargaining pose than a firm decision.

LUKoil President Vagit Alekperov and Ross Connelly, vice president of the U.S.-based Overseas Private Investment Corporation (OPIC), signed a credit agreement on 23 September for LUKoil to borrow $225 million, "Delovoi peterburg" reported the next day. The 12-year loan will go to construct a terminal in Vysotsk near St. Petersburg for shipping petroleum products. Designed to move 10.7 million tons of petroleum products annually when completed, port facilities will start to come on line by late 2003. HBK Fund LP of Dallas, Texas will pony up the funds for the project, with OPIC guaranteeing $130 million of the loan amount, according to a 22 September OPIC press release. CS First Boston will guarantee the remaining $95 million, ABN reported on 26 September. Troika Dialog Analyst Valerii Nesterov told "Vedomosti" on 22 September that the project will be a boon to both LUKoil and the oil business in general: "This is an extremely important project for LUKoil, since it's been lagging behind Yukos and Sibneft in exports recently. Moreover, the company plans to use the Vysotsk terminal primarily for exporting crude oil. Taking into account that Russia exports 80 million to 90 million tons of petroleum products [annually], with tankers accounting for 60 million tons of that, a 10.2-million-ton terminal is a significant addition for the country and the company."

The benchmark Russian Trading System (RTS) stock exchange smashed a six-year-old record last week to soar to new highs, briefly rising to a historic summit of 607.31 before closing on 3 October at 594.26, according to the exchange's news service. The RTS began the year at 360.79 and since then has gained 233.47 points, a 64.7 percent increase. The previous record of 575.31 was set on 6 October 1997 after Russia signed an agreement with the London Club of creditors, "Kommersant-Daily" reported on 2 October, and reaction to the latest record focused on the validity of historical parallels. (After shattering records in 1997, the RTS soon fell victim to the Asian financial crisis and then Russia's own economic crisis in 1998.) "Vedomosti" reported on 2 October that "not one of the analysts and brokers surveyed by [the newspaper] said that the situation on the market reminded him of events six years ago." Pavel Naumov, head of equity trading at Renaissance Capital, joined the chorus in comments to "The Moscow Times" the same day, saying, "Companies in the index have changed, investors have changed, the world situation has changed." But as the market continued to rise toward the end of the week, some doubters emerged. Roland Nash, chief strategist at Renaissance Capital, told "The Moscow Times" on 3 October, "We're now in territory that stretches fundamental valuations." Mikhail Sukhobok, deputy director of brokerage VEO-Otkrytie, echoed the anxiety, telling "Kommersant-Daily" on 4 October, "I'm very glad we're seeing this growth. But personally, I can't get the parallels with 1997 out of my head."

St. Petersburg's third-largest bank has struck out on its own with new ownership. Sergei Bazhanov, president of the International Bank of St. Petersburg (MBSP), raised his stake in the bank from 24.72 percent to a controlling 73.34 percent, ABN reported on 2 October. A 2 October extraordinary shareholders meeting formalized changes to the board, with well-known financier Vladimir Kogan giving up his seat. Previously, MBSP had been part of Kogan's Bankirskii Dom banking group. Though the amount of the deal was not made public, the shareholders' meeting approved a 124.2 million ruble ($4 million) dividend payment for the first half of 2003. An "informed source in St. Petersburg banking circles" told "Vedomosti" on 2 October that the divided payment was "to settle up with the shareholders who are leaving." Industry observers told the newspaper that the amicable "divorce" will likely benefit all players, leaving Kogan free to develop the two banks that remain in his group -- the St. Petersburg Bank of Industry and Construction and the St. Petersburg Bank -- and satisfying Bazhanov's desire for independence. Kogan is known for his far-ranging business and political connections; most recently, he has been associated with aluminum tycoon Oleg Deripaska.

The Federal Securities Commission (FKTsB) has released new rules obligating companies that issue stock to disclose information about themselves to news agencies, in print, and on the Internet. The resolution on disclosure appeared in the official "Rossiiskaya gazeta" on 2 October; it goes into effect on 13 October. FKTsB head Igor Kostikov explained that the measure is aimed at combating insider trading, Interfax reported on 2 October. "This regulation creates equal conditions for market participants to receive information, which will significantly reduce the possibility of using insider information in securities trading," the top regulator said. Under the new rules, companies will have to make financial results and analytical information available to news agencies the day after they release an issue prospectus. News agencies Interfax and AK&M will distribute the information free of charge. Issuers queried by "Vremya novostei" on 3 October said that they plan to comply with the new regulations. One company representative told the newspaper, "Just try not to do what they say -- they'll eat you alive!"

The Russian Funds investment group announced in a 24 September press release that the company has bought 100 percent of the Prospect Investment brokerage. According to the press release, the acquisition leaves Russian Funds with $20 million in capital, $60 million in assets, $200 million in managed client assets, and combined turnover of some $2 billion a year, making Russian Funds one of the top 10 players on the Russian stock market. Though the two sides did not disclose the amount of the deal, sources told "Kommersant-Daily" that Prospect was offered "up to $15 million." Russian Funds chairman Sergei Vasilev told "Vedomosti" on 24 September that the deal doubles the size of his business, but "we hope that the synergies will be even bigger." The two companies seem well-suited to an "opposites attract" union. Russian Funds has traditionally focused on bond offerings, corporate financing, and fixed-income investments, while Prospect Investment is stronger on the stock market. Anatolii Gavrilenko, director of Alor-Invest, told "Kommersant-Daily" that the deal could be a harbinger of things to come. "A process of consolidating Russian brokers is underway," Gavrilenko explained, "and it's a benefit to everyone. I know that a lot of people have been thinking along those lines for a while now."

President Vladimir Putin set the reform of the Russian rails rolling with two decrees, creating Russian Railways on 18 September and appointing Railways Minister Gennadii Fadeev to head the new company on 22 September, "Vremya novostei" reported on 23 September. Russian Railways, which will assume the bulk of the commercial functions currently performed by the Railways Ministry, starts out as a business with 987 enterprises worth 1.735 trillion rubles ($58 billion). Though the move is part of a reform program intended to streamline railway operations, some observers had their doubts about the reform's efficacy. For starters, not all of the 987 enterprises that Russian Railways controls are part of its core business. "The Moscow Times" reported on 23 September that they include "schools, hospitals, hotels, stadiums, and other 'social assets' used by [Russian Railways'] 1.5 million employees." Andrei Belousov, director of the Center for Macroeconomic Analysis and Short-Term Forecasting, expressed skepticism over the general thrust of reform, telling RBC on 23 September, "I have the impression that the main motive for creating [Russian Railways] was a desire not to lower costs, but to reconfigure the natural monopoly's cash flows."

United Heavy Machinery (OMZ) announced in a 30 September press release that the company's depositary receipts have been added to the official list for trading on the London Stock Exchange. In order to obtain the listing, OMZ disclosed its ownership structure, revealing that General Director Kakha Bendukidze owns 25.93 percent of the company and Executive Director Alan Kazbekov 9.07 percent, "Russkii kurer" reported on 1 October. At current share prices, Bendukidze's fortune would total $73 million. More interestingly, the disclosure indicates that OMZ management controls 37 percent of the company, foreign institutional investors 38 percent, Russian institutional investors 13 percent, Russian private investors 2 percent, and the company itself 10 percent, "Vedomosti" reported on 29 September. Analysts told the newspaper that the figures are probably somewhat deceptive, since management almost certainly has a controlling stake in the company even if some of the nominal holders are "foreign investors." OMZ produces equipment for the atomic power, oil, gas, and shipbuilding industries. The firm has a $56 million contract to do work on Iran's controversial Bushehr nuclear reactor, and Bendukidze used the occasion of OMZ's London listing to take a swipe at U.S. criticism of the project. "The Moscow Times" reported him as saying on 1 October, "Iran is better than North Korea. At least in Iran they have elections...and student uprisings."

Steel group Mechel appears to have emerged as the winner from the long-running struggle for control of the Korshunovskii Mining and Enrichment Plant (GOK) in Siberia. An arbitration court in Irkutsk on 29 September approved a final settlement between the GOK and the Federal Financial Recovery Service (FSFO), "Kommersant-Daily" reported the next day. Under the agreement, Mechel will pay off 1.2 billion rubles ($39 million) that the GOK owes the federal budget by April 2004; the steel group's press service told the newspaper that they have already paid off roughly the same amount. Mechel, which holds a controlling stake in the plant, has locked horns with the FSFO for months, with financial regulators trying to take over the GOK for debts. Throughout, Mechel alleged that the FSFO was acting in the interest of rival metals holding and Mechel competitor EvrazHolding. In a sign that EvrazHolding has not given up entirely, West Siberian Steel Corp. -- a part of EvrazHolding -- is still suing to gain recognition of a 95 million ruble debt it claims the GOK owes it, "Vedomosti" reported on 30 September. A favorable decision could, in theory, invalidate the settlement between the GOK and its creditors, but FSFO representative Aleksandr Plytkevich told the newspaper that officials would not support such an outcome.

Bauxite miners at a mine owned by aluminum powerhouse SUAL went on strike on 2 October, Reuters reported. Accounts differ on the details, however. Aleksandr Anisimov, head of the Independent Miners' Union local, told ITAR-TASS that 6,000 miners were striking for higher pay and reduced production targets; a SUAL spokesperson claimed that strikers numbered only 480. Citing union sources, Rosbalt reported on 4 October that 800 miners at the North Urals Bauxite Mine (SUBR) were refusing to abandon a mine shaft. ORT television reported on 3 October that the miners want their pay tripled to approximately $1,000 a month. For their part, SUAL representatives are calling the strike illegal because the union failed to give them 10 days' notice of the action as required by law. Though the strike marks the first significant outburst of labor unrest in some time, observers were skeptical about the miners' chances. Roland Nash, chief strategist for Renaissance Capital, told "The Moscow Times" on 3 October, "The history of strikes has shown that unions and workers are very weak in Russia. Working conditions at SUAL are generally better than at their competitors, so workers have a weak bargaining position." Alfa Bank analyst Maksim Mateev agreed, telling "Vedomosti" the same day that workers would likely win a modest raise, as was the case after similar strikes at Norilsk Nickel in January 2003 and at Russian Aluminum two years ago. Should the strike continue, however, it may soon garner additional publicity -- Russian President Vladimir Putin and German Chancellor Gerhard Schroeder arrived in the Urals region on 8 October for an official visit.

A 26 September report in the "Financial Times" fueled speculation that steel giants EvrazHolding and Severstal are gearing up to form an alliance. EvrazHolding head Aleksandr Abramov told the newspaper that Russia's two biggest steel producers are conducting "consultations" with an eye to future consolidation, but without involving bankers or lawyers yet. The two companies are already involved in a joint venture to produce pipes; together, they would churn out 22 million tons of steel per year, "The Moscow Times" reported on 29 September. Vadim Makhov, Severstal Group's first deputy director for strategy, told "Vedomosti" on 29 September that steel industry consolidation, and even a merger, could be in the offing after the state privatizes the last bit of the Magnitogorsk Iron & Steel Works in late 2003. "Vremya novostei" noted on 29 September, "Experts feel that any merger...will produce one or two huge companies with revenues of some $4 billion a year and production of some 20 million tons, comparable to indicators for the biggest world leaders." Analysts were inclined to take a wait-and-see approach on the specifics, however. A 30 September editorial in "Vedomosti" by industry observer Maksim Kashulinskii argued that the preconditions for real consolidation do not exist yet and suggested that the latest alliance action was "just another tactical move."

Power Machines, Russia's largest producer of equipment for the power industry, announced its international accounting standards financial results for 2002 in a 1 October press release. Earnings rose 13 percent year-on-year to $276 million, but net profit dropped from $7 million in 2001 to $2 million in 2002. Analysts queried by "The Moscow Times" and "Vedomosti" described the results as somewhat disappointing. The news came as Power Machines, which is part of Vladimir Potanin's Interros holding, is gearing up to offer a 20 percent stake in the company to foreign investors.

A spokesman for Aeropuertos Argentina 2000 told Regnum on 2 October that the Argentine company "is examining the possibility of taking part in the tender to manage Russia's Sheremetevo airport," the news agency reported the same day. Aeropuertos Argentina manages 33 airports in Argentina, handling 96 percent of the country's passenger traffic, as well as airports in Uruguay, Montenegro, and Zvartnots International Airport in Armenia. The company has posted less than stellar results of late, however, losing $737,000 in the first half of 2003 and $19.5 million in 2002. Aeropuertos Argentina is the first foreign company to express an interest in managing state-owned Sheremetevo, which notched a 689 million ruble ($16 million) net profit in 2002. The other likely contenders are Alfa Group, AFK Sistema, and the National Reserve Bank. The tender proposal itself is currently awaiting final government approval, prompting some to glance nervously at their watches. Yurii Isaev, deputy minister of economic development, told journalists on 3 October that the tender is "critically important for Sheremetevo's development" and needs to be resolved by the end of the year, RAI Novosti reported the same day. National Reserve Bank head Aleksandr Lebedev drew a similar conclusion from the Argentine announcement, telling "Vedomosti" on 2 October, "It's high time for the government to make a final decision, or else investors will be coming in from Cape Verde next year."

Aluminum mogul Oleg Deripaska confirmed to the "Financial Times" on 2 October that Roman Abramovich has sold him a 25 percent stake in Russian Aluminum, increasing Deripaska's stake in the company to 75 percent. Abramovich retains a 25 percent stake in the aluminum maker; earlier reports indicated that Abramovich unloaded his entire 50 percent stake. RusAl CEO Deripaska paid approximately $2 billion for the 25 percent stake, or a premium of 30 percent, according to the "Financial Times." He told the newspaper that the transaction was "a fair deal." Troika Dialog analyst Vasilii Nikolaev and NIKoil analyst Vyacheslav Smolyaninov disagreed, telling "Kommersant-Daily" on 4 October that $2 billion for 25 percent of RusAl was too much. Smolyaninov called $1.3 billion to $1.7 billion a "realistic price." Eva Prokofev, spokeswoman for Deripaska's Basic Element finance company, told "Gazeta.ru" on 3 October that RusAl plans to embark on a transparent future of improved corporate governance, Eurobonds, and an IPO. Abramovich, who recently bought the Chelsea soccer team in England, remains the governor of Russia's Chukotka province; he has said he will not stand for reelection, however. With the RusAl sale, he gives up part of his last large Russian asset, and lends further credence to rumors that he is looking for a new place to hang his financial hat.

Second-place Russian aluminum producer SUAL is in talks with U.S.-based Alcoa about collaboration on SUAL's planned $2 billion aluminum production facility in the northern Komi Republic, the "Financial Times" reported on 26 September. A SUAL representative confirmed to "The Wall Street Journal" the same day that Alcoa CEO Alan Belda recently met with his Russian aluminum colleagues to discuss Alcoa's possible purchase of a 50 percent stake in the Komi plant. SUAL had reached an agreement in April with France's Pechiney to build the plant as a joint venture, but SUAL Chairman Viktor Vekselberg said that the deal is on ice as Canada's Alcan moves to take over Pechiney, "The Moscow Times" reported on 24 September. Pechiney spokesperson Chrystele Ivins told "Vedomosti" on 24 September that the French aluminum maker does not consider SUAL's talks with Alcoa a violation of the April agreement and that it continues to conduct negotiations "in the same constructive spirit." The feasibility study for the Komi Aluminum project is expected in mid-2004, with completion of the actual facility slated for 2007.

Cellular operator MegaFon's board of directors agreed on 30 September to hold an extraordinary shareholders' meeting on 5 November to elect a new board for the company, "Vedomosti" reported on 1 October. The decision is a victory for Alfa Echo, Alfa Group's communications subsidiary, which recently acquired a 25.1 percent stake in MegaFon. Other shareholders reacted angrily and ignored an Alfa request for a shareholders' meeting in early September. Alfa already holds a blocking stake in VimpelCom, a MegaFon competitor. (The two companies are, respectively, Russia's second- and third-largest cellular operators.) Alfa Echo had more good news to report on 30 September, announcing in a press release that the Bahamian Supreme Court on 29 September unfroze Alfa's MegaFon stake after having frozen it in response to a protest from MegaFon shareholder IPOC International Growth Fund Limited. Legal challenges to Alfa's MegaFon purchase are likely to continue, however, as IPOC announced on 30 September that it is "resolved" to keep on with the fight, "Kommersant-Daily" reported. Though Alfa's first order of business is clearly to smooth the ruffled feathers of fellow MegaFon shareholders and take its place on the company's board, the group has larger plans. Alfa Bank President Petr Aven hinted at those plans on 30 September, saying, "It would be rational and reasonable to merge VimpelCom and MegaFon," "The Moscow Times" reported the next day.

National fixed-line telecom holding Svyazinvest announced on 19 September that it intends to sell off its stakes in NMT-450 cellular operators, ComNews.ru reported the same day. The decision means that Svyazinvest is taking itself out of the running to develop next-generation digital CDMA-450 networks. (The Communications Ministry has mandated that CDMA-450 networks be set up on the basis of existing NMT-450 networks.) Six Svyazinvest subsidiaries offer NMT-450 cellular services, and two of Svyazinvest's regional telecoms are shareholders in 25 NMT operators. Reactions to the decision were mixed. ACM Consulting partner Mikhail Alekseev told "Kommersant-Daily" on 22 September, "Svyainvest's decision to sell its NMT assets makes sense. Investing in the construction of CDMA-450 networks is too big a risk for the holding, which can spend its money more effectively on expanding its GSM networks." But Konstantin Chernyshev, head of the Analytical Department at NIKoil, told "Vedomosti" the same day that Svyazinvest shouldn't expect to reap a windfall from the sale: "The companies are unprofitable and have big debts. They also have a motley assortment of shareholders which could create problems during the sale." At least one potential buyer is ready to test the waters, however. Alfa Group wrote to Svyazinvest Director Valerii Yashin on 22 September to express an interest in the company's NMT-450 operators, Rosbalt reported the next day.

Templeton Asset Management announced on 17 September that the fund would like to see 20 percent of the $8 billion it has invested in emerging markets go to Russia, Reuters reported on 19 September. Mark Mobius, Templeton's emerging markets fund manager, told a press conference in Moscow that he would like to see a more transparent stock market and less dependence on oil before upping the fund's Russian investments, which now stand at $300 million. The wait could be long one, however. "Ekspert" magazine's most recent ratings of Russia's top 200 companies revealed that the oil industry accounts for more than half of the top 200's earnings, "Vedomosti" reported on 26 September. Templeton's Russian investments include milk and juice producer Vimm-Bill-Dann, the Perekryostok retail chain, and Efes Breweries. The fund's most recent Russian acquisition was a stake in tire manufacturer Amtel, also announced at the 17 September press conference. Amtel, which is Russia's third-largest tire maker, revealed that Templeton paid $10 million for a 4 percent stake with an option to buy another 2 percent of the company within six months for an additional $5 million, "Kommersant-Daily" reported on 22 September.

Scandal has a short shelf life. Issues go stale, predictions go wrong, the action goes south, and readers and viewers go elsewhere for entertainment and edification. When Russia's premier oil company suddenly found itself in a widening gyre of criminal investigations in July, the press was agog -- money! power! politics! The squall kicked up for reasons sufficiently murky to permit almost endless speculation, giving analysts a golden opportunity to trot out their pet theories on the inner workings of new Russia. But by September, the yammers had turned to yawns. The defendants were still awaiting trial, the investigations were advancing slowly, Yukos was still pumping oil, and nothing much else seemed to be afoot.

Last week changed all that. Yukos wrapped up its merger with Sibneft to cement its standing as Russia's largest private company, rumors intensified about an American suitor waiting in the wings, and masked men toting machine guns reminded everyone why the story made headlines in the first place. The only thing missing, then and now, is anything resembling a convincing explanation of what is going on.

Yukos has been in the process of merging with Sibneft for months, but a 3 October press release announced that the union is a done deal. The two companies will begin functioning as YukosSibneft on 1 January 2004, and shareholders in the newly minted oil monster will meet on 28 November 2003 to elect a new board of directors. Finally, a few technical matters remain, as "Vedomosti" reported on 3 October: the two companies need to align their debt rations (to which end Yukos has borrowed $2.6 billion over the last two weeks, a record for a Russian company), pay dividends for the first nine months of 2003, and divvy up the assets of oil company Slavneft with TNK-BP.

With a market capitalization of some $45 billion, YukosSibneft will be a force to be reckoned with. The new gorilla on the block will produce 2.2 million barrels of oil per day, only slightly less than ExxonMobil (2.5 million) and Royal Dutch/Shell (2.4 million), according to "Nefte Compass." In fact, YukosSibneft will by itself account for 29 percent of all Russian oil production, "Vedomosti" reported on 6 October. And CEO Mikhail Khodorkovskii has ambitious plans for his brainchild. On 27 September, he told journalists that he would like to see YukosSibneft begin producing oil outside of Russia, "Kommersant-Daily" reported on 29 September. Khodorkovskii plans to surrender the helm in 2007, when he will be 45 years old, but before he does, he wants to turn YukosSibneft into Russia's first international oil major. "Nefte Compass" quoted him as saying, "All our activities are directed towards this goal."

Of course, the easiest way to become an international oil major is to join forces with one. Rumors have been rife that a Western oil major -- probably U.S.-based ExxonMobil or ChevronTexaco -- is in talks to acquire an equity stake in YukosSibneft. Those rumors gained significant ground last week. First, London-based business intelligence site mergermarket.com cited an anonymous government source -- presumably Russian -- on 1 October as saying that ExxonMobil was going to pay $17.5 billion for a 25 percent stake in YukosSibneft. Then the "Financial Times" upped the ante with a 2 October report claiming that ExxonMobil was in talks to shell out $25 billion for 40 percent, or even 50 percent or more, of YukosSibneft. Riding the rising tide of rumor, Yukos shares rose 3.65 percent on 2 October to close at $15.60 on the benchmark RTS exchange. Adding fuel to the fire, Exxon CEO Lee Raymond arrived in Moscow on the night of 2 October to take part in the World Economic Forum, where he was scheduled to speak on the same panel as Khodorkovskii the next day.

But Khodorkovskii was forced to cut short his attendance at the World Economic Forum on 3 October. As he recounted at a 6 October news conference reported by Gazeta.ru, Khodorkovskii received a phone call from his wife, who told him that their house was surrounded by men with machine guns. Understandably, he quit the forum immediately. As it turned out, however, the Khodorkovskii residence was not the focus of the action. The oil magnate lives in an affluent Moscow suburb called Zhukovka, and investigators conducted searches there at the home of jailed Yukos shareholder Platon Lebedev, the Menatep business center, and the office of Yukos shareholder and State Duma Deputy Vladimir Dubov, "Vedomosti" reported on 6 October. (Lebedev has been in jail since 2 July on charges of defrauding the state out of more than $280 million in a 1994 privatization deal; Group Menatep, headed by Lebedev, controls 61 percent of Yukos; Dubov, who himself owns 7 percent of Group Menatep, sits on the Duma's Budget and Tax Committee.) A separate search took place the same day at the Yukos-funded Koralovo boarding school for children, many of them orphans.

"Kommersant-Daily" reported on 6 October that the Prosecutor-General's Office conducted the searches to substantiate tax evasion charges that the investigators consider their main case against Yukos. The newspaper quoted from an order apparently signed by investigator Salavat Karimov: "...an organized criminal group of as yet unidentified Yukos managers, acting in concert with Platon Lebedev, evaded taxes from 1999 to 2002, using to this end offshore firms and organizing the transfer of funds abroad, as well as organizing illegal shipments of oil and petroleum products abroad." The Prosecutor-General's Office later announced that it would use materials confiscated in the searches to "conduct accounting and financial analyses to confirm the evasion of taxes estimated at millions of U.S. dollars," "Gazeta" reported on 7 October.

Khodorkovskii responded to the searches with fury at a 6 October press conference. "Gazeta.ru" quoted him: "If anyone thinks that they can turn me into a political exile, they're wrong. I won't be an emigrant. They can put me in jail, but they can't force me to leave the country. The people in charge at the Prosecutor-General's Office can think it over until Saturday [when Khodorkovskii is to return to Russia from a previously scheduled business trip]. If they decide, from Saturday on I'm at their disposal."

Did the prosecutor-general's latest exertions carry a not so subtle message for foreigners looking to buy into Yukos? An unnamed security services source "close to the upper levels of the Prosecutor-General's Office" told "Vedomosti" on 6 October that "it's no accident that the searches coincided with the completion of the Yukos-Sibneft merger and the visit to Moscow by ExxonMobil CEO Lee Raymond.... The Prosecutor-General's Office is reminding investors that Yukos has unfinished business with law enforcement authorities."

The first wave of the Yukos scandal crested and broke without washing many convincing conclusions up on the beach. Analysts theorized that Yukos had fallen victim either to warring Kremlin clans -- Petersburg ex-spooks vs. Yeltsin-era oligarchs & company -- or to Khodorkovskii's overgenerous funding of the wrong political parties -- from Yabloko to the communists. Neither theory has done much to explain subsequent events. As the situation heats up once again, it serves to remind analysts that the oilmen and lawmen are not the only ones with unfinished business.

Russia's oil industry has generally presented observers with an entertaining spectacle -- oligarchs, intrigue, infighting, and incredible profits. It has not, however, offered up much action on the environmental front. Recent rumblings from the Ministry of Natural Resources over a proposed pipeline from Siberia to China have thus come as something of a surprise.

The pipeline in question has a convoluted history. The idea has been around for almost a decade. Oil major Yukos concretized it in 1999, proposing a $2.5 billion, 2,400-kilometer pipeline to link the Angarsk oil fields in eastern Siberia to Daqing in China. State-owned pipeline monopolist Transneft came out with an alternate, and significantly more expensive, project in 2001 to connect Angarsk with Russia's Pacific port of Nakhodka, and from there to markets in Japan, Korea, and even the United States. After much hemming and hawing, the Russian cabinet decided in March 2003 that it would prefer to have its cake and eat it, too, by backing the construction of a pipeline to Nakhodka with a spur to Daqing. Prime Minister Mikhail Kasyanov announced a month later that the route to China would be the first order of business. President Vladimir Putin subsequently muddied the already turbid waters with comments favoring a link to the Pacific coast and Japan.

Each of the routes has its pluses and minuses. The pipeline to China is cheaper and easier to build, and China's dwindling oil supplies and burgeoning economy ensure future demand. The agreement Yukos signed with China National Petroleum Corp. (CNPC) during Chinese President Hu Jintao's May visit to Moscow would see the middle kingdom buy 700 million tons of oil between 2005 and 2030 to the tune of a cool $150 billion, Reuters reported. Still, the pipeline would represent a risky commitment to one market, and Gazprom's troubling experience with its Blue Stream pipeline, where Turkey has dug in its heels on a pricing dispute, illustrates the danger of depending on a single customer. Meanwhile, the pipeline to Nakhodka, which the Japanese have offered to fund, offers the alluring prospect of an outlet to numerous world markets. Observers agree on one thing, however -- Russia's Siberian oil fields don't produce enough to fill both pipelines.

As things stand, Yukos ships approximately 3 million tons of oil per year (60,000 barrels per day) to China by rail, "Izvestiya" reported on 25 September. The figure is set to rise to 5 million tons per year (100,000 bpd) by 2005. A pipeline would provide far greater capacity, however. The original agreement between Yukos and CNPC called for pumping 20 million tons a year (400,000 bpd) by 2006 with an eventual increase to 30 million tons a year (600,000 bpd).

With both Japan and China making increasing efforts to lobby "their" respective projects, two possible paths have emerged -- a southern route proposed by Yukos directly from Angarsk to Daqing; and a northern route proposed by Transneft to Nakhodka with a spur to Daqing. Over the last two months, however, Russia's Natural Resources Ministry has delivered negative verdicts on both routes. As "Vremya novostei" reported on 25 September, the southern route cuts through the Tunkinskii National Park, while the northern route skirts the shore of Lake Baikal.

Against this indecisive backdrop, Prime Minister Mikhail Kasyanov arrived in China on 20 September for an official visit in which the Angarsk-Daqing pipeline was expected to take center stage during talks on 24-25 September. With the Natural Resources Ministry effectively stonewalling both projects for the moment, expectations were low from the start. "Kommersant-Daily" wrote on 25 September that Kasyanov "arrived empty-handed." A 24 September op-ed in "Vedomosti" noted that "a reluctance to make a final decision is benefiting Russia for now." After all, Japan and China are competing for Russian oil. Moreover, Chinese negotiators have floated the possibility of financing the entire length of the pipeline, including the Russian section up through Angarsk, "Vedomosti" reported on 24 September.

A meeting between Chinese Premier Wen Jiabao and Kasyanov on 24 September fully justified the sluggish expectations. After the talks, Reuters quoted Kasyanov as telling journalists, "I personally believe that in order to better improve the basic technical plan and meet the environmental needs we still need three or four months of time. After this, we need to modify technical materials and submit it to environmental authorities." To avoid any possible misunderstanding, the prime minister added, "Can you say that this is a postponement? Yes, you can."

Meanwhile, signs of impatience were beginning to crop up in Beijing. "Kommersant-Daily" wrote on 25 September that the Chinese "unambiguously conveyed to the Russian prime minister that they are unhappy with the strange games surrounding the pipeline. After all, the agreement to build it was signed in 2000 during Mikhail Kasyanov's first trip to China." "Izvestiya" reported the same day that Chinese frustrations took more prosaic forms as well: "The reception accorded Russian delegates was so unfriendly and disorganized that our embassy is preparing an official note [of protest]. The hosts used various pretexts to deny Russian journalists access to planned events, and toward the end kicked them out of a meeting between business circles as the shocked prime minister looked on."

A 26 September editorial in the official English-language "China Daily" put progress on the pipeline in the explicit context of "bilateral economic ties." The article noted that Kasyanov's "stopping short of giving a hoped-for nod to the proposed route indicates that bilateral economic ties might have to stand tests before bearing generous fruits." It continued, "[A] conspicuous lack of an explicit go-ahead for the Angarsk-Daqing pipeline from the Russian side bears testimony to the problems yet to be ironed out in the way of broader bilateral economic ties." Finally, in a transparent reference to Chinese support for Russia's bid to joint the World Trade Organization (WTO), the editorial concluded, "With Russia standing on the threshold of the WTO, both countries should make the most of their bilateral ties to serve each other's interests."

Some Russian observers are keen on seeing an eventual end to the waiting game as well. "Vedomosti" wrote on 24 September, "The procrastinating cannot go on indefinitely, if only because the constant delays could lead both potential buyers to give up on our oil." "Nezavisimaya gazeta" wrote the same day, "It is obvious that the longer Russia waits to resolve the issue, the more difficult it will be to negotiate advantageous terms. It is quite possible that as a result there will be neither a Chinese nor a Nakhodka pipeline, and our place on Asian markets will be taken by better organized Central Asian and Near Eastern states."

Still, an off-the-record official implied that Russia is better off biding its time. On 26 September, "Kommersant-Daily" quoted a source close to the prime minister as saying, "For now, we don't really have anything to ship either to China or to Japan. That will be possible only after we really start to develop Eastern Siberia.... The Chinese are willing to wait, especially since we've invited their companies to take part in surveying Eastern Siberia."

Whatever route the pipeline eventually takes, however, no one expects environmental concerns to play much of a role in the final decision. Grigorii Vygon, an analyst at the Institute for Financial Studies, told "Nezavisimaya gazeta" on 25 September, "The fact that nothing is being built is not the result of an environmental problem. It's just that officials haven't decided yet which route to pick and how to do it."

The Natural Resources Ministry itself has hinted that its recommendations are eminently negotiable. The ministry objected to Yukos' "southern" pipeline route because it intruded on the Tunkinskii National Park. But a ministry representative told "Vedomosti" on 24 September that the problem could be solved by "adjusting" the park's borders to remove the offending pipeline beyond those borders. What better indication could there be that, when it comes to oil, the decisive factors remain what they always have been -- oligarchs, intrigue, infighting, and incredible profits.