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Business Watch: October 29, 2003

29 October 2003, Volume 3, Number 40
Nationwide utility RAO EES plans to lower the price of electricity by 20 percent on 1 November for residential customers in a number of key regions, "Vremya novostei" reported on 22 October. According to internal company documents obtained by the newspaper, the 1 November debut of a competitive market to trade 5-15 percent of the country's wholesale electricity will make the rate reduction possible. The target regions for the program are Moscow, St. Petersburg, Nizhnii Novgorod, and Perm. News of the experimental directive, which RAO EES head Anatolii Chubais does not appear to have signed yet, confounded observers used to the utility's persistent pleas for rate hikes. Analysts saw the plan as a thinly veiled attempt by Chubais to help the Union of Rightist Forces (SPS) in upcoming parliamentary elections. (Chubais is co-chairman of SPS.) Dmitrii Orlov, deputy director of the Center for Political Technologies, told "Gazeta" on 24 October, "If a decision is made to reduce will be nothing other than a pre-election move by Chubais." "Vedomosti" lambasted the plan in a 24 October editorial, calling the idea of relying on an as-yet untested electricity market "premature." The editors went on to note, "This economic decision was likely dictated by the political interests of Chubais, who is the co-chairperson of SPS. It is difficult to imagine that the head of RAO EES does not know how harmful political adventures can be for the economy." DK

Chubais and Armenian Prime Minister Andranik Markaryan signed an agreement on 22 October to deepen energy cooperation, "Nezavisimaya gazeta" reported the next day. The agreement comes at a time when RAO EES wields commanding influence in Armenia's energy sector and harbors far-reaching plans for the region. According to various reports, RAO EES controls 50-80 percent of Armenia's generating capacity. RAO EES also acquired substantial generating assets in neighboring Georgia from U.S.-based AES earlier this year. RAO EES spokesman Andrei Egorov told "Izvestiya" on 23 October that the utility plans to take part in the upcoming privatization of Turkey's electricity grid. According to RAO EES Deputy Chairman Andrei Rappoport, Armenia produces 500 million more kilowatt-hours of power than it needs, and RAO EES is eager to begin exporting that power to Turkey, where electricity rates are far higher, "Nezavisimaya gazeta" reported on 23 October. DK

The Natural Resources Ministry announced in a 20 October press release that it is creating a special body to ensure that oil companies fulfill the conditions imposed by the development licenses they hold. The ministry also revealed that the first companies slated for intense scrutiny are Yukos, Royal Dutch/Shell, and ExxonMobil. Natural Resources Minister Vitalii Artyukhov went so far as to raise the possibility of a new tender for the license to ExxonMobil's Sakhalin-3 project, "Nefte Compass" reported on 22 October. The list of companies immediately sparked speculation: Yukos is at the center of a deepening conflict with law-enforcement authorities, Shell recently sparred with the ministry over the pace of development at its Salym project, and ExxonMobil is widely rumored to be considering an equity stake in Yukos. Yukos CEO Mikhail Khodorkovskii shrugged off the news, telling "Vremya novostei" on 21 October that his company accepts inspections as a matter of course. John Barry, who heads Shell's Russian operations, told "Kommersant-Daily" on 21 October that he expects to resolve any difficulties with the Natural Resources Ministry "in the near future." Meanwhile, RosBusinessConsulting criticized the decision in a 22 October analysis, noting, "The Russian government's attacks on foreign business partners can deal a painful blow to the country's attractiveness to investors." DK

Sibneft's board of directors has recommended an interim dividend payment of $230.6 million, the company announced in a 21 October press release. The payment will be the last of its kind for the oil company, which is merging into YukosSibneft by year-end. The payment, which shareholders will have to approve at a 20 November meeting, will bring Sibneft's total dividend payout for the year to $1.24 billion, a Russian record. Aton analyst Timerbulat Karimov told "Vedomosti" on 22 October: "Sibneft will cease to exist at the end of the year when it merges with Yukos. That's why the owners are removing unclaimed funds from it as the deal is about to close." Dividends on 20 percent of Sibneft's shares, some $46 million, will go to Yukos, which paid $3 billion for the 20 percent stake as part of the two companies' merger. Chukotka Governor and Chelsea owner Roman Abramovich still controls at least 25 percent of the company, however, guaranteeing him a minimum payment of $57.5 million. Market scuttlebutt has it that Abramovich could use the money to add Wayne Rooney to Chelsea's lineup, "Izvestiya" reported on 22 October, noting that some have estimated the 17-year-old English forward's contractual worth at $58.5 million. DK

Embattled oil company Yukos announced its second-quarter earnings to U.S. Generally Accepted Accounting Principles (GAAP) in a 20 October press release. Net profit for the period jumped 25 percent year on year to $955 million, outdoing a Reuters consensus forecast of $871 million. Second-quarter revenues stood at $3.825 billion, a 49.3 percent year-on-year rise. First-half 2003 net profit of $2.222 billion represented an 82.1 percent year-on-year increase. The company also paid more in taxes. Taxes, excluding tax on profits, came to $2.179 billion in the first half of 2003, as compared to $1.169 billion for the same period in 2002. Analysts queried by "Kommersant-Daily" and RosBusinessConsulting were unanimous in terming the results better than expected. Analysts were equally united in the view that the company's fundamentals are taking a back seat, for now, to the ongoing standoff with the Prosecutor-General's Office. DK

Gazprom announced its first-quarter financial results to international accounting standards in a 17 October press release. It is the first time the gas giant has made its interim results public. Net profit for the period was 55.972 billion rubles ($1.86 billion), an improvement on the 4.33 billion-ruble loss the company posted for the first quarter of 2002. First-quarter revenues from sales rose 32 percent year on year to 195.03 billion rubles, and operating expenses jumped 25.8 percent to 157.472 billion rubles. The results drew favorable reviews. Aton analyst Temirbulat Karimov told Reuters, "Results are very good. Revenues are higher than our forecast by 14 percent." Troika Dialog analyst Kakha Kiknavelidze told "Vedomosti" on 20 October that the debt-strapped monopolist earned high marks for paying down short-term debt by 13.5 billion rubles. DK

Gazprom signed an agreement with LUKoil on 22 October to begin buying gas from the oil company in 2005, "Izvestiya" reported on 23 October. Gazprom will buy 750 million cubic meters of gas from LUKoil's Nakhodka field in Siberia in the fourth quarter of 2005, and 8 billion cubic meters in 2006. The agreement's pricing formula provides for a base price of $22.50 per 1,000 cubic meters of gas. With oil companies burning off approximately 40 percent of the gas that comes with the oil they extract, the agreement marks a step toward greater cooperation and reduced waste, Bloomberg reported on 23 October. LUKoil Vice President Yurii Storozhev told "Nefte Compass" on 22 October that his company is pleased with the pricing formula, which will help to make the Nakhodka profitable within seven years. Trust Bank analyst Vladislav Metnev chimed in with a skeptical note, telling "Vedomosti" on 22 October that the absence of a "take or pay" clause in the contract renders the accord of dubious worth. (Under a "take-or-pay" contract, the purchaser is obligated to pay for the contracted amounts of oil or gas; the clause acts as insurance for the seller.) "Without a 'take-or-pay' clause," Metnev told the newspaper, "this piece of paper doesn't obligate Gazprom to anything." DK

Antimonopoly Minister Ilya Yuzhanov aired an array of complaints about Russian financial markets at a 22 October news conference, "Kommersant-Daily" reported the next day. Targets of the minister's ire included state-owned savings bank Sberbank, Western Union, and the state pension fund. Yuzhanov criticized Sberbank for high fees, Western Union for anticompetitive contracts, and the Russian Pension Fund for unfair advertising. Sberbank imposes a 4 percent surcharge on wire transfers to other financial institutions, while commercial banks generally charge 1-1.5 percent; the Antimonopoly Ministry plans to ask the prime minister for a review of Sberbank's fees, "Vremya novostei" reported on 23 October. Western Union includes a clause in its agreements with banks that prevents those banks from concluding similar agreements with other money-transfer systems. According to Yuzhanov, his ministry will soon send materials questioning the legality of this practice to the European Union's competition department, the U.S. Federal Reserve System, and the U.S. Department of Justice, "Gazeta" reported on 23 October. Finally, the Russian Pension Fund (PFR) has been ballyhooing the profitability of state-run pension funds even as pension reform is trying to create a level competitive playing field for private funds (which have no prior profitability to play up). The Antimonopoly Ministry has sent a letter to PFR Chairman Mikhail Zurabov asking him to halt the practice, "Russkii kurer" reported on 23 October. DK

NIKoil Financial Corporation announced in a 23 October press release that it had completed the acquisition of a 50 percent stake in the Kopeika retail chain from oil company Yukos. Yukos announced on 16 October that it had sold 50.5 percent of Kopeika for $60 million; the remaining 0.5 percent was distributed among Kopeika's top managers. The Kopeika retail chain consists of 40 stores (four of which are franchises), with four more under construction. According to Kopeika President Aleksandr Samonov, the company is currently developing a five-year business plan that envisages a stock offering in under three years and revenues of $1.5 billion by 2009, "Vremya novostei" reported on 24 October. (The chain's 2003 revenues are set to reach $270 million, according to the newspaper.) NIKoil and Kopeika management each control 50 percent of the retailer, "Vedomosti" reported on 24 October. NIKoil plans to play an active role in running the business, and will occupy four of seven seats on Kopeika's board of directors. Anna Belyakova, an analyst at consulting company BKG, told "Kommersant-Daily" on 24 October that Kopeika is an "advantageous acquisition for NIKoil." According to Belyakova, NIKoil's planned involvement in day-to-day operations means that "NIKoil is interested in pumping up the company's value with an eye to a subsequent resale." DK

South Korea's Kia Motors announced on 17 October that on 14 October it signed an agreement with Izhmash-Avto for the latter to assemble Kia's Spectra sedan, RBC reported on 20 October. Under the agreement, Izhevsk-based Izhmash will put together 1,000 Spectras in 2004 and 40,000 in 2005, upping production to 120,000 a year by 2007. Kia began assembling cars in Russia in 1997 at the Avtotor plant in Kaliningrad; 5,270 Kias of various models had rolled off the assembly line by 1 October, "Izvestiya" reported on 20 October. A Kia spokesperson told "Vedomosti" on 20 October that the company will sell the equipment to assemble its cars to Izhmash-Avto and pay to train workers; United Financial Group analyst Yelena Sakhnova told the newspaper that an assembly line capable of producing 120,000 cars a year would cost about $120 million. The Korean carmaker's Spectra sedan will retail for a little more than $10,000, positioning it in a fast-growing market segment. Recently released car sales results for the first nine months of 2003 show that foreign cars priced between $7,000 and $15,000 are top sellers on the Russian market, "Gazeta" reported on 16 October. Leading the list of foreign performers in Russia was Hyundai -- Kia Motors is part of the Hyundai-Kia Automotive Group -- with a whopping 220 percent increase over last year's sales. DK

Key MegaFon shareholders voted against consolidating the cellular operator's subsidiaries onto a single share in move seen as an attempt to block Alfa Group from gaining additional influence over the company. St. Petersburg-based Telecominvest (31.3 percent) and IPOC International Growth Fund (6.5 percent) both voted against consolidation at a 20 October shareholders' meeting, "Kommersant-Daily" reported the next day. MegaFon currently functions as a head office with one affiliate and seven fully owned subsidiaries that each hold licenses to work in Russia's seven super-regions; the proposed consolidation, which Telecominvest initially supported, would have integrated the head office and subsidiaries into a single legal entity. Relations between MegaFon shareholders have been strained since Alfa Group, which holds a blocking stake in MegaFon competitor VimpelCom, augmented its portfolio with a blocking stake in MegaFon in early August. (IPOC is currently disputing Alfa's acquisition in a variety of offshore jurisdictions.) Deutsche Bank analyst Yulii Matevossov told "Kommersant-Daily," "In a choice between giving Alfa the chance to control business decisions for a united MegaFon or leaving the current structure in which Alfa can only influence decisions that affect the head office, Telecominvest chose the lesser of two evils." An IPOC spokesman painted a different picture, telling "Vedomosti" on 21 October that a more diffuse corporate structure would reduce the danger of financial sabotage. The spokesman noted darkly, "We have information that Alfa Group has tried several times to prevent MegaFon from obtaining funds." DK

The U.S. Embassy secretary in Kyiv, Ukraine, was quoted by Prime-TASS on 22 October as saying that U.S.-based ChevronTexaco is ready to ship 14 million tons of oil from the Caspian to Europe through Ukraine's Odesa-Brody pipeline. Steve Colville, a ChevronTexaco spokesman in Kazakhstan, told Bloomberg on 24 October that the oil company would not comment on the report. Ukrainian officials queried by "Vedomosti" on 23 October were skeptical, telling the newspaper they knew nothing of any such proposal. Completed in 2001, the 674-kilometer Odesa-Brody pipeline was intended to carry Caspian oil from Odesa in Ukraine to Europe. It has remained idle since then, however. Russian oil companies would like to put the pipeline to work in the opposite direction -- from Brody to Odesa -- to add export capacity to Russia's aging, overburdened pipeline system. Russian-British TNK-BP recently offered to provide the oil to reverse the pipeline's project direction. Meanwhile, Ravil Cherdabaev, Kazakhstan's ambassador to Ukraine, told journalists on 23 October that Kazakhstan would like to see Odesa-Brody begin working -- in its original direction to Brody -- as soon as possible, reported the same day. Against this confusing backdrop, the Ukrainian Energy Ministry selected U.S.-based consultancy Energy Solution on 20 October to conduct a feasibility study on the direction oil should flow through the pipeline, "International Oil Daily" reported the next day. DK

Russia's richest man is suddenly Russia's richest prisoner. The series of events that landed the country's highest roller behind bars began nearly four months ago, and continues to defy easy explanation. Now, an unsolved economic mystery shows every sign of metastasizing into a full-blown political scandal.

Technically speaking, Mikhail Khodorkovskii, the head of Russia's largest private company and the closest thing the country has produced to an international business superstar, is in jail as a flight risk on charges of tax evasion and fraud. He was nabbed in a neatly orchestrated bust on 25 October -- when Khodorkovskii's chartered jet arrived in Novosibirsk for a refueling stop on its way to Irkutsk, armed men in camouflage stormed the plane, announced themselves as members of the Federal Security Service (FSB), and spirited the tycoon away for subsequent transfer to Moscow, "Kommersant-Daily" reported on 27 October.

The formal reason for Khodorkovskii's arrest was his alleged failure to appear before the Prosecutor-General's Office in Moscow to answer questions. After the arrest, however, the prosecutor-general charged him with seven violations of the Criminal Code. The charges focus on the 1994 privatization of a fertilizer manufacturer, tax evasion by Khodorkovskii's oil company, and tax evasion by Khodorkovskii himself. According to a spokeswoman for the Prosecutor-General's Office, losses incurred by the state as a result of Khodorkovskii's alleged crimes total $1 billion. On the evening of 25 October, a Moscow court satisfied the prosecutor's request to keep Khodorkovskii in jail until 30 December, "Vedomosti" reported on 27 October.

The troubles with Yukos, set to become the world's fourth-largest oil company once it merges with Sibneft by the end of the year, began over the summer. On 2 August, Platon Lebedev, a core Yukos shareholder and longtime Khodorkovskii business partner, was arrested on fraud charges in connection with the 1994 privatization that would later produce accusations against Khodorkovskii himself. Lebedev remains in jail, where he is currently familiarizing himself with the state's 146-volume case against him, one of a welter of investigations that involve Yukos. The messy affair puttered on through the summer and into the fall, with the prosecutor-general gradually nudging tax evasion at Yukos to center stage against a backdrop of probes that run the gamut from embezzlement to murder.

Even as these problems mounted, Yukos did its best to keep on with business as usual. The oil company pressed ahead with its Sibneft merger, clearing the legal niceties out of the way in timely fashion to start operating as a single legal entity on 1 January 2004. At the same time, persistent rumors, many of them leaked through Britain's "Financial Times," claimed that U.S.-based ChevronTexaco or ExxonMobil was on the verge of acquiring a hefty equity stake in Yukos. As time passed and the market adjusted to the ongoing soap opera of "Yukos vs. the Prosecutor-General's Office," the company's capitalization recovered from the initial hit it had taken in August. Finally, Yukos reminded everyone of its status as Russia's flagship oil company with a 20 October announcement of better-than-expected second-quarter 2003 earnings.

Meanwhile, various theories emerged to explain why Russian law-enforcement authorities were suddenly busying themselves with a company that had generally been viewed as leading the transition from the era of bandit capitalism to what optimists promised would be a new age of sound corporate governance. One theory focused on the tacit agreement between President Vladimir Putin and the so-called oligarchs who control the most lucrative swaths of the Russian economy -- the oligarchs were supposed to make money and stay out of politics. Khodorkovskii's financial support for opposition political parties, penchant for speaking out on policy matters, and rumored presidential ambitions violated this pact. Another theory posited the beginnings of a struggle between the Yeltsin-era oligarchs, like Khodorkovskii, and the KGB-connected up-and-comers who arrived in Moscow from St. Petersburg with President Putin. The newcomers missed out on the financial feast of 1990s privatizations and were ready to start using their newfound Kremlin ties and long-standing law-enforcement connections in a fight for power and wealth. Yet another theory saw the key factor as the possibility that a U.S. oil major might buy into a significant chunk of Russian oil, with the investigations and criminal cases an attempt to scare off the foreigners (or, alternately, an effort to drive down Yukos's market capitalization, bring foreigners into the company's equity, and reduce Khodorkovskii's influence). In general, Western observers favored the "political ambitions" theory, while their Russian counterparts appeared more taken with the "ascendant Petersburg Putinists."

Khodorkovskii's arrest set off a media firestorm in both Russia and the West, reigniting theoretical speculation along all the lines sketched above. But not everyone was overcome with excitement. Interestingly, the most dismissive voices rang out from the Western business community. For example, Fadel Gheit, a New York-based analyst at Fahnestock & Co, which owns shares in Exxon Mobil, told Reuters on 25 October, "The sooner these characters [i.e., Khodorkovsky] are out of the picture,... the better it is going to be for Russia." When the "Financial Times" reported on 26 October that ExxonMobil and ChevronTexaco had temporarily halted their merger talks with Yukos after the Khodorkovskii arrest, the newspaper quoted a "person familiar with the deal" as saying, "This deal will happen, the only question is when." Finally, a "Western fund manager" told "The Moscow Times" on 27 October, "Everyone is going to forget about [Khodorkovskii] in two months' time, just like they did about Platon Lebedev."

At the other end of the spectrum, the word "coup" was much in vogue among certain segments of the Russian media elite, with coup d'etat references gracing headlines in at least three national newspapers ("Nezavisimaya gazeta," "Kommersant-Daily," and "Novaya gazeta"). Talk of political crisis gained ground after President Putin made it clear on 27 October that he had no plans to intervene on anyone's behalf, as rumors flew that Aleksandr Voloshin, the oligarch-friendly chief of staff Putin inherited from Boris Yeltsin, had tendered his resignation. When leading political analysts, politicians, and journalists met on 28 October for an extraordinary session of the Open Forum club, the mood was one of less-than-restrained gloom and doom. As reported the same day, "The majority of political analysts predicted a new 'time of troubles' and the collapse of the country."

Whatever future awaits him, Khodorkovskii can take some pride in the fact that his arrest did not cause a wave of panic for the fate of the oil company he built up into Russia's largest private corporation. With or without him, Yukos seems set to soldier on. In fact, Russian business as a whole is likely to hunker down and weather Khodorkovskii's arrest without immediate ill effect. The action -- for now, at least -- is elsewhere.

Putin boosters have pointed to "political stability" as one of the president's key achievements. Detractors have dismissed the calm as torpor. But things may be about to change. Political PR guru Gleb Pavlovskii, a key figure in Putin's rise to power and an increasingly vocal critic of late, weighed in at the Open Forum session with a simple, yet sweeping, prediction: "Politics is coming back..." DK