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Business Watch: November 5, 2003

5 November 2003, Volume 3, Number 41
Oil major Sibneft announced financial results for the first half of 2003 in a 30 October press release. Net profit for the period was $1.38 billion, a 189 percent improvement over last year's first-half result of $476 million. Revenues rose 73 percent year on year, from $1.984 billion to $3.438 billion. EBITDA (earnings before interest, taxes, depreciation, and amortization) jumped 139 percent year on year, from $743.8 million to $1.776 billion. "Kommersant-Daily" lauded the "virtuosity" of the company's accountants, who used various strategems to achieve an effective taxation level of 5 percent. Sibneft managers explained to the newspaper that the company reaped windfall profits earlier in the year from the sale of assets held in untaxed offshore jurisdictions; nevertheless, the overall effective rate of taxation for the year would come out to "12-13 percent." A 31 October analytical note by RosBusinessConsulting noted Sibneft's success in minimizing costs -- the company's EBITDA per barrel ratio of $9.50 compared favorably to Yukos ($9.21), TNK-BP ($7.76), and LUKoil ($7.20). The results could be the last that Sibneft announces, since the company is formally merging operations with Yukos on 1 January and the two companies plan to integrate their fourth-quarter results. The merger, and Yukos's deepening problems with law-enforcement authorities (see In Focus below), overshadowed the current results. Reuters quoted an MDM Group research note as saying, "We do not expect these results to have any significant impact on shares. The main driving factor is the Prosecutor General's Office." DK

Unified Energy Systems (EES) CEO Anatolii Chubais signed an agreement with Nizhegorodskaya Oblast Governor Gennadii Khodyrev on 29 October to lower electricity rates for residential customers by 20 percent starting on 1 November, "Vedomosti" reported on 30 October. The lower rates will stay in effect through 1 May 2004. The region is one of four -- the other three are St. Petersburg, Sverdlovsk, and Perm -- slated for rate reductions. According to Chubais, the regions were selected because they are neither wealthy, like Moscow, nor impoverished, "Kommersant-Daily" reported on 28 October. As a result, they will be ideal candidates to benefit from a wholesale electricity market that is supposed to begin operating on 1 November. That market, which must still clear several administrative hurdles if it is to start up on time, will allow up to 15 percent of the country's electrical energy to be bought and sold freely. Observers have criticized the rate-reduction initiative as a pre-election stunt by Chubais, who doubles as co-chairman of the Union of Rightist Forces. UBS Brunswick analyst Fedor Tregubenko told "Izvestiya" on 30 October: "This initiative goes entirely against economic logic.... Electrical energy reform is aimed at increasing rates for the population and reducing the burden on industry." Analysts queried by "Izvestiya" estimated that the reduced rates could cost EES subsidiaries as much as 400 million rubles ($13.3 million) in lost revenues. DK

For an eight-hour period beginning at 8 a.m. on 27 October, Sberbank's ATM network experienced a system-wide failure, "Kommersant-Daily" reported the next day. Holders of many Sberbank-issued cards also had difficulty obtaining authorization for purchases in stores. The failure is the second this fall for Sberbank, which faced frozen ATMs and disgruntled cardholders on 16 September. Sberbank explained in an ex post facto press release on 27 October that the introduction of a new processing system caused a "technical hiatus in Sberbank's servicing of international bank cards." Observers were skeptical. The director of a processing center at a large bank told "Vedomosti" on 28 October: "They usually use reserve channels when they're modernizing the processing system...and they always tell customers about it beforehand. Sberbank's system probably just overloaded." Igor Chuchkin, head of the processing center at the Bank of Moscow, agreed, telling "Gazeta" of 28 October, "It looks like the capacity of Sberbank's processing center is really overburdened and needs to be refurbished." Sberbank is Russia's largest issuer of debit cards. According to mid-2003 data cited by "Gazeta," Sberbank has issued 5.6 million of the 18.6 million cards issued throughout Russia. DK

Russian steel producer Severstal has made a bid to buy bankrupt U.S. steelmaker Rouge Industries, Inc., "The Moscow Times" reported on 27 October. Dearborn, Michigan-based Rouge recently filed for bankruptcy, listing $558.1 million in assets and an equal amount in debts. Rouge is the fifth-largest steelmaker in the United States; Severstal is Russia's second largest. Severstal has signed a nonbinding letter of intent with Rouge and offered the beleaguered company $30 million in financing at 15 percent interest. The size of the potential deal was not disclosed. Russian analysts saw the move as a way for Severstal to break into the lucrative U.S. steel market while avoiding high import tariffs. As Vasilii Nikolaev of Troika Dialog explained to "Vedomosti" on 27 October, Severstal could import Russian steel slabs, which are not subject to tariffs, and roll them at Rouge. The resultant rolled steel would be considered American-made. Such an approach would allow Severstal to make up lost ground. As Alfa-Bank analyst Maksim Matveev told "Vremya novostei" on 27 October, "Severstal's share of the U.S. market for rolled steel was 15 percent in 2000; its market share now is no more than 5 percent." Severstal could face competition, however. US Steel CEO Thomas J. Usher said that his company might challenge Severstal, noting, "We have had interest in Rouge for some time," AP reported on 28 October. DK

Mastercroft Ltd., the company that controls the three chief production facilities of metals giant EvrazHolding, has announced its financial results to International Accounting Standards for the first half of 2003, AK&M reported on 30 October. Net profit was $258 million, revenues from sales and services $1.37 billion, and EBITDA $400 million. The Cyprus-registered Mastercroft also made public pro forma 2002 results (i.e., based on the assumption that the group existed in the same form in the past), reporting net profit of $235 million, revenues of $2.02 billion, and EBITDA of $394 million. EvrazHolding Vice President Pavel Tatyanin told "Vedomosti" on 31 October that rising metal prices fueled revenue growth, while cost controls boosted profits. According to Tatyanin, the group expects strong year-end results, with 2003 net profit of no less than $450 million. DK

U.S.-Russian joint venture GM-AvtoVAZ will begin producing the Opel Astra in Russia in 2005, "Vremya novostei" reported on 29 October. GM Europe President Mike Burns and AvtoVAZ Director Vladimir Kadannikov explained at a 28 October news conference that they will start out with 17,000 Opels in 2005. GM-AvtoVAZ Director John Milonas told reporters that 43 percent of the car's components will be locally produced and the chassis will be adapted to Russian conditions, "Kommersant-Daily" reported on 29 October. The Russian-made Astra will be marketed as a Chevrolet with a Russian model name. Milonas told journalists that the new model name, which has yet to be determined, "will please the ear of the Russian buyer," "Gazeta" reported. United Financial Group analyst Yelena Sakhnova told "Vremya novostei" that the project represents a significant step forward for AvtoVAZ, which needs to grow by copying, since proprietary development is too costly and time-consuming. A source at GM told "Vedomosti" on 28 October that the Chevrolet Astra will sell for less than the basic Opel Astra, which currently costs $13,300. Aton analyst Aleksandr Agibalov explained to the newspaper that this is a good price segment to target -- the Russian market for new foreign cars that cost more than $10,000 is experiencing rapid growth, with 280,000 such cars expected to be sold by year's end. DK

Stories that pose questions exert an enduring fascination, and the best stories pose the biggest question. When clouds began to gather over Russia's premier oil company earlier this summer, the question was "Why Yukos?" Now, with Mikhail Khodorkovskii -- already the former CEO of Yukos -- in jail on charges of fraud and tax evasion, a substantial chunk of the company's shares frozen, and Kremlin chief of staff Aleksandr Voloshin gone in an apparently Yukos-related departure, the questions have swelled to "Whither Russia?" magnitude.

The events that spark these questions have been coming thick and fast. The week began with Khodorkovskii in jail on six counts of fraud and tax evasion. The Prosecutor-General's Office made public a full list of charges on 28 October, identifying Khodorkovskii as part of a "group" that includes the oil tycoon's long-time business partner Platon Lebedev, who has been in jail since 2 July on similar charges. On 30 October, Russian prosecutors upped the anted, announcing that they had frozen 44 percent of Yukos shares. Prosecutors claim that the actions of Khodorkovskii, Lebedev, and former Yukos Moscow President Vasilii Shakhnovskii inflicted material damages on the state in excess of $1 billion. The shares, which are worth far more than $1 billion, were frozen, prosecutors argued, "with a single goal -- to prevent the transfer of shares," "Vedomosti" reported on 31 October. (Prosecutors later reduced the amount, freeing a 4.5 percent stake.)

Change was afoot at the Kremlin as well. On 30 October, President Vladimir Putin formally accepted the resignation of his chief of staff, Aleksandr Voloshin, a wily insider who is seen as one of the key behind-the-scenes figures in Putin's rapid ascent to the presidency. Voloshin's resignation, which had been widely rumored and lavishly reported before it actually happened, came as no surprise -- Voloshin apparently decided to go after he was left out of the loop on the decision to arrest Khodorkovskii. He was replaced by St. Petersburg native Dmitrii Medvedev, one of Putin's colleagues in the Petersburg city government in the 1990s and a relatively neutral, and perhaps temporary, figure.

Finally, Khodorkovskii announced in a 3 November statement posted on Yukos's website ( that he is giving up his position at the helm of the oil company. "As a manager," Khodorkovskii said in the press release, "I have to do all I can to pull our workforce safely out from under the blows that are being directed at me and my partners." He went on to note that he will be staying on as the head of the Open Russia charity to "support the education and upbringing of young people and civic initiatives to build an open and truly democratic society in Russia." Khodorkovskii did not name a replacement, but the "Financial Times" reported on 3 November that Simon Kukes was expected to be announced as the head of the company. A source at Yukos told the newspaper that the Russian-born Kukes boasts U.S. citizenship, making him harder for Russian prosecutors to target, and valuable experience thanks to his role in Tyumen Oil Company's merger with BP. [Yukos confirmed the Kukes appointment on 4 November.]

Other events bubbling slightly below the surface underscored a general backlash against oligarchic capitalism in general, and Yukos's interests in particular:

* Pro-Kremlin party Unified Russia removed State Duma deputy and core Yukos shareholder Vladimir Dubov from its slate of candidates in the upcoming December parliamentary elections, "Vedomosti" reported on 28 October. A highly placed source in Unified Russia told the newspaper that the party wanted to "avoid a risk to its reputation."

* State Duma Deputy Vladimir Yudin, whose inquiry led to the arrest of Lebedev in July, asked the Prosecutor-General's Office to examine the privatization of oil company Sibneft, "Vedomosti" reported on 29 October. (Sibneft is currently merging with Yukos to form YukosSibneft; the merged company is set to commence operations on 1 January.) According to the deputy, "Fifty-one percent of the company's shares were taken away from the state virtually for free."

* Union leader Valerii Melnikov was elected mayor of Norilsk on a platform of promises to make metals giant Norilsk Nickel cough up more of its profits for local social programs. "The Moscow Times" quoted Melnikov as delivering the following message to Vladimir Potanin, who controls Norilsk Nickel: "Potanin should not wage war against [me], in light of what has happened to [Vladimir Gusinskii, Boris Berezovskii, and Khodorkovskii] as a result of their attempts to gain political power."

* Finally, the Natural Resources Ministry announced on 31 October that it transferred temporary development rights to the Talakan oil field to Surgutneftegaz, "Kommersant-Daily" reported on 3 November. The license had previously belonged to a company controlled by Yukos, and the ministerial decision -- the first such decision to affect Yukos's production capacity -- was widely interpreted as a sign that Surgutneftegaz is the favorite to garner permanent rights to the field when a tender is held in 2004.

Financial markets reacted nervously to this plethora of news. Yukos shares had been making a bit of a comeback on the benchmark RTS after plunging in the wake of Khodorkovskii's arrest. Though the 30 October announcement of a stock freeze came close to the end of trading, it was enough to send Yukos shares into a 14.05 percent tailspin. They began to creep up again the next day, however, and Khodorkovskii's decision to step down triggered a rally on 3 November, with Yukos shares jumping 12.95 percent to $12.65 a share (the stock had closed at $14.42 on 24 October, the day before Khodorkovskii's arrest). The RTS itself mirrored Yukos, plummeting on the news of the share freeze and recovering on the news of Khodorkovskii's departure from Yukos.

Against this backdrop, President Putin has adopted a variety of positions. After refusing to meet with business leaders over the Yukos affair and insisting that there would be no "haggling," Putin drove home his support for law-enforcement authorities in 3 November remarks to Italian journalists. "As concerns the actions of law enforcement authorities, they've acted correctly until now and stayed within the law," he said, RIA-Novosti reported the same day. At a 30 October meeting with international investors, however, Putin was careful to strike notes appropriate to his audience. Morgan Stanley International Chairman Stephan Newhouse told the "Financial Times" on 31 October, "With regard to the recent Yukos events, he assured us that this does not represent a campaign against business nor any change in the government's commitment to the market economy and to support the property rights of individuals."

The editors of "Vedomosti," Russia's leading business daily, do not appear to have found the president's assurances particularly calming. In a widely noted 31 October editorial entitled "Good Morning, Venezuela," they argued that the decision by the Prosecutor-General's Office to freeze a substantial amount of Yukos shares represented a dangerous turning point. Their gloomy conclusion: "After yesterday's events, it would be more correct to compare us with Venezuela, the country of [President] Hugo Chavez, who bested the Venezuelan oligarcos. Everything that is happening to Yukos was tried long ago in Venezuela, where there's plenty of oil and its production has been entirely nationalized. They have months-long strikes and el presidente sings and reads poetry on television. His country is Russia's neighbor in the corruption rankings and slightly below us in the competitiveness rankings. But not for long."

According to this view, the latest developments in the Yukos affair testify to a power and property grab by the so-called Petersburg chekists -- veterans of the KGB and security services who arrived in Moscow with Vladimir Putin. (The Cheka was the revolution-era precursor of the KGB.) They are now champing at the bit to take on the Yeltsin-era oligarchs and take away their toys. As the fattest of the fatted calves, Khodorkovskii is merely the first on the list.

Alternately, Khodorkovskii has only himself to blame for playing politics. Reuters presented the short version of this theory in a 3 November news report: "Most political commentators say [Khodorkovskii] has been targeted by hawks in the Kremlin for backing political opponents of Putin in December parliamentary elections." In this reading of the tea leaves, which has proved especially popular among Western observers, the Yukos affair is an isolated case and not indicative of a havoc-wreaking trend toward property redistribution.

While events thus far have not provided convincing evidence for any single theory, they have driven home two practical lessons that might prove more important than the theorizing about politicking oligarchs and Petersburg chekists. First, the bellows of outrage about due process, property rights, and dangerous precedents emanating from the highbrow Russian press have fallen on deaf ears. A day before "Vedomosti" was welcoming its readers to Venezuela, "Komsomolskaya pravda" -- one of the country's highest-circulation dailies -- ran a sarcastic article titled "Naive Questions about the 'Yukos Affair.'" Why are they "nailing" Khodorkovskii? He "thought he was tougher than Putin" and "acted as a fifth column" in his support for the U.S. position on Iraq. Worse yet, Khodorkovskii's desire to form an "alliance" with "MobilExxon" could "pose a threat to national security, leaving Russia's energy sector deeply dependent on American partners." Does Russia have anything to fear from a campaign against the oligarchs? Nothing at all -- "even if the oligarchs end up in jail or flee the country, and their companies' stocks go bust, Russia's economy won't collapse. Siberia will keep pumping oil, Magadan will keep mining gold, and the fields on the banks of the Volga will keep growing wheat."

The second lesson of the Yukos affair concerns the mechanism for dispossessing a progressive Russian oligarch. A progressive oligarch doesn't hide his assets; he lists them proudly on a bilingual website. But if those assets were acquired in the course of 1990s privatization, legal ambiguities are almost certainly lurking in the wings. Once charges are filed and assets frozen, all that's needed for confiscation is a conviction. The mechanism itself is hardly a revelation. The revelation is that it has gone as far as it has in the case of Khodorkovskii and Yukos, and with so little apparent resistance.

Though it might be some time before we learn exactly why Mikhail Khodorkovskii's problems began, we already know that the lessons of the Yukos affair have been a cautionary tale for some. What we may learn soon enough is whether those lessons prove to be an infectious example for others. DK

The following timeline is based on chronologies that appeared in "Gazeta" on 27 October and "Izvestiya" on 26 October, as well as past issues of "RFE/RL Business Watch."

2 July: Platon Lebedev is arrested. A longtime business partner of Mikhail Khodorkovskii, Lebedev is the head of Group Menatep, which controls 61.01 percent of Yukos. Lebedev is charged with theft in connection with the 1994 privatization of fertilizer producer Apatit.

4 July: Mikhail Khodorkovskii answers questions at the Prosecutor-General's Office in connection with the Apatit case.

22 August: The Prosecutor-General's Office completes its investigation of Platon Lebedev and presents a 146-volume case against him.

20 September: President Vladimir Putin tells American journalists that the case against Yukos is not about privatization, but about criminal violations and "murders in the course of this company's merger and expansion."

3 October: Searches are conducted at a Yukos-financed school and the offices of State Duma deputy and core Yukos shareholder Vladimir Dubov. Investigators confiscate a server with Menatep and Yukos archives.

6 October: Khodorkovskii gives a combative press conference blasting the tactics of the Prosecutor-General's Office as "over the line." He also says, "If the purpose is to boot me out of the country or put me in jail, then they should put me in jail. I'm not going to be a political emigre."

17 October: Vasilii Shakhnovskii, the president of Yukos Moscow, is charged with tax evasion.

20 October: The Natural Resources Ministry states that it will conduct on-site checks of Yukos drilling sites to ensure full compliance with licensing agreements.

23 October: Representatives of the Prosecutor-General's Office search a PR firm involved in the election campaign of political party Yabloko, confiscating documents and $700,000. Law-enforcement authorities claim that the search is linked to tax evasion charges against Yukos.

25 October: Khodorkovskii is arrested in Novosibirsk.

30 October: The Prosecutor-General's Office freezes 44 percent of Yukos shares.

3 November: Khodorkovskii steps down as the CEO of Yukos.

The following is based on information from,, "The Moscow Times," and "Gazeta."

Group Menatep controls 60.01 percent of Yukos shares. Former CEO Mikhail Khodorkovskii owns 9.65 percent of Menatep; he is also the sole beneficiary of a trust fund that controls 50 percent of Menatep, giving him a 35.8 percent stake in Yukos. The remaining Menatep shareholders are Leonid Nevzlin, with 8 percent (4.8 percent of Yukos); and Menatep Director Platon Lebedev, State Duma Deputy Vladimir Dubov, Yukos PM President Mikhail Brudno, and Vasilii Shakhnovskii, each with 7 percent (4.2 percent of Yukos).

Yukos is in the final stages of a merger with Sibneft. Ownership of YukosSibneft breaks down as follows:

Group Menatep owns 44.5 percent of YukosSibneft, Yukos-controlled Veteran Petroleum 7.35 percent, Roman Abramovich's Millhouse Capital 26 percent, and Sibneft's minority shareholders 2.89 percent. Another 17.6 percent of shares are in free float.

Core individual shareholders in YukosSibneft are Khodorkovskii with 26.48 percent, Abramovich with 26.01 percent, Nevzlin with 3.56 percent, and Brudno, Dubov, Lebedev, and Shakhnovskii, each with 3.11 percent. DK