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Business Watch: November 11, 2003

11 November 2003, Volume 3, Number 42
Gloom-ridden volatility gave way to an uneasy calm as Russia's benchmark RTS stock exchange opened on 3 November on a positive note and managed to hold on for a week of modest gains. News of Yukos CEO Mikhail Khodorkovskii's arrest on 25 October sent the RTS into a downward spiral, but Khodorkovskii's decision to hand the reins to U.S. citizen Semen Kukes cheered the market, sending the RTS up 6.33 percent on 3 November to close at 538.14 points. Yukos shares shot up 12 percent the same day to close at $12.65. The RTS went on to close out the holiday-shortened week on 6 November at 536.36, a mere shade below its Monday close. Yukos shares retained most of their value as well, ending the week at $11.65. A NIKoil analyst told on 6 November, "The market is just doing what it does. It's tired of reacting to every single bit of news." DK

NIKoil Financial Corporation President Nikolai Tsvetkov announced at a 31 October press conference that his company has acquired a 14 percent stake in Ural-Siberian Bank (UralSib) and plans to work toward an eventual merger of NIKoil's Avtobank and UralSib, "Kommersant-Daily" reported on 3 November. According to Tsvetkov, who was seconded at the press conference by UralSib President Azat Kurmanaev, the two banks will "integrate" over a 12-14 month period before merging. NIKoil purchased the 14 percent stake in UralSib last week from the Bashkir government for $40 million, "Gazeta" reported on 3 November. The Bashkir government retains a 22.5 percent stake in UralSib. The air is not entirely clear, however. "The Moscow Times" reported on 3 November that analysts are calling the Bashkir government's sale "rigged," with the actual value of the shares between $55 million and $58 million. The newspaper added that Richard Hainsworth, a banking analyst at Renaissance Capital, wrote in a research note, "No matter how profitable this latest deal was for UralSib and NIKoil, they have traded short-term gains for reputation." If the merger succeeds, however, it could produce a major player. Andrei Ivanov, senior banking analyst at Troika Dialog, told "Vedomosti" that the resultant bank could be Russia's seventh-largest in terms of assets and fourth-largest in private deposits. DK

Well-known industrialist and United Heavy Machinery (OMZ) head Kakha Bendukidze became the president of AtomStroyExport (ASE) on 1 November, confirming that OMZ has acquired control of ASE, "Nezavisimaya gazeta" reported on 4 November. ASE has a monopoly on Russian projects to build nuclear reactors abroad, including the controversial Bushehr reactor in Iran. OMZ gained control of ASE when Atomenergoexport, which OMZ is able to control through a 20 percent stake thanks a diffuse shareholder structure, increased its stake in ASE from 49 percent to a controlling 53.8 percent, "Kommersant-Daily" reported on 5 November. Russia's Atomic Energy Ministry has taken a dim view of OMZ's increased clout, however, both because foreign customers allegedly feel more comfortable with state control over reactor construction and because OMZ is itself one of ASE's main subcontractors. Bendukidze told "Vedomosti" of 3 November that OMZ does not intend to make ASE a subsidiary and is ready to discuss the possibility of ceding control to the state. OMZ also released financial results for the first half of 2003 on 3 November, posting revenues of $215.7 million, net profit of $14.1 million, and operating profit of $10.45 million. (Results for the same period last year were, respectively: $202.9 million, $4.6 million, and $24.8 million.) ASE expects that its sales abroad will total some $800 million in 2003, RosBusinessConsulting reported on 3 November. DK

Russian Aluminum (Rusal), the country's largest producer of the metal and the world's largest exporter, is officially changing its brand name to Rusal, the "Financial Times" reported on 5 November. The move is meant as a break with the past. Steve Hodgson, Rusal's director of sales at market, told the newspaper, "We felt it important to rebrand with the Rusal name, because the old brands still have connotations of cheap metal." Until now, Rusal's products have sported cryptic brand names such as KPA3 derived from the Cyrillic initials of the factories that produce them. Meanwhile, "Vedomosti" reported on 6 November that Sual, Russia's second-largest aluminum producer, is contemplating a similar move. Brunswick UBS analyst Fedor Tregubenko told the newspaper that rebranding may make buyers feel better about the aluminum maker's products, but it is unlikely to increases sales volume. DK

Sheremetevo International Airport's board of directors met on 31 October and approved the terms for an upcoming tender to manage the airport, the company announced in a press release the same day. As reported by "Gazeta" on 3 November, tender participants must be Russian companies with charter capital of no less than 55 million rubles ($1.84 million), $2 billion in consolidated assets, and no less than 15 billion rubles ($1 billion) in cash. Thus far, Alfa Group, AFK Sistema, and National Reserve Bank (NRB), which holds a controlling stake in Aeroflot, have said they plan to compete; analysts agree that the tender conditions appear to favor Alfa Group, which packs the biggest financial punch. Once the conditions are officially made public, the tender is supposed to be held within 30 days. As a result, organizers are unlikely to meet the 1 December deadline originally set by Prime Minister Mikhail Kasyanov. "Vedomosti" cited a ministerial source on 3 November as saying that the Sheremetevo board actually sent the tender conditions back for a minor tweaking, delaying their publication until at least 17 November. In a curious side note, state-owned "Rossiiskaya gazeta" published a derisive article about Sheremetevo-related shenanigans on 5 November, closing with a blistering attack on Alfa Group. A brief run-through of Alfa's scandals concluded with the nugget that the oil tanker Prestige, which sank off the Spanish coast in a miasma of spills in November 2002, allegedly belonged to structures controlled by Alfa, "which has now decided to break into civil aviation." DK

Independent fixed-line operator Golden Telecom, Inc. reported third-quarter 2003 financial results in a 5 November press release. Revenues rose 95 percent year on year to $90.1 million, operating income rose 173 percent to $18.3 million, and net income 60 percent to $12.5 million. The company noted that its recent acquisition of Krasnoyarsk operator Sibchallenge helped to boost its business clientele to 68,549, up from 38,111 at the end of the second quarter. And the company's expansion continues. Golden Telecom has reached an agreement to purchase alternative fixed-line operator Digital Telephone Networks (TsTS), "Kommersant-Daily" reported on 4 November. According to the newspaper, Golden Telecom bought 100 percent of TsTS from private shareholders for $40 million. With 80,000 subscribers, TsTS controls nearly a quarter of the fixed-line telephone market in Rostov-on-Don. Aton analyst Nadezhda Golubeva commented that the acquisition allows Golden Telecom to break into a promising regional market at a reasonable price. Gold Telecom is controlled by Alfa Group, which holds a 39 percent share in the company. DK

An order from a St. Petersburg arbitration court prevented MegaFon shareholders from voting to change the cellular operator's board of directors at a 5 November meeting, "Izvestiya" reported the next day. The court's decision came in response to a request by minority shareholder IPOC International Growth Fund (6.5 percent) and blocked a vote on an initiative proposed by representatives of Alfa Group (25.1 percent). Shareholder relations have been strained since Alfa, which also holds a blocking stake in MegaFon competitor VimpelCom, bought into MegaFon in August. Alfa reacted angrily to the move. Igor Baranovskii, vice president of Alfa Group communications wing Alfa Echo, told "Kommersant-Daily" on 6 November, "We consider this IPOC initiative a clumsy attempt at a minor annoyance and an illegitimate way to do business." For their part, IPOC representatives expressed satisfaction with the court's decision, claiming that it enforces a prior shareholder agreement to keep competitors off MegaFon's board. Observers foresaw an increasingly messy conflict. Albert Eganyan, a managing partner at law firm Vegas-Lex, told "Vedomosti" on 6 November, "A typical corporate war can begin now...[and it] could lead to unfortunate economic consequences for the company as a whole." DK

Germany's Deutsche Bank announced in a 3 November press release that it has reached an agreement in principle with United Financial Group (UFG) to acquire a 40 percent stake in the Russian financial services company. The two sides were silent on the size of the deal, although the "Financial Times" reported that the stake in Russia's fifth-largest brokerage by volume cost Deutsche Bank $70 million. The deal gives Deutsche Bank a head start on the inside track to Russia's fast-growing financial services market. Ilya Shcherbovich, UFG's president and the head of its investment-banking department, told "Vedomosti" on 3 November, "For all practical purposes, Deutsche Bank is outsourcing its business on the Russian stock market." Observers cautioned against viewing the deal in the context of the current Yukos-related unease on and about Russian markets, noting that the two sides had been in talks for an entire year. Brunswick UBS analyst Dmitrii Vinogradov told "Nezavisimaya gazeta" on 4 November: "Deutsche Bank's purchase was a long time in the making. That's why you can't view this deal as proof that investors have a lot of faith in Russia." Alfa Bank chief economist Natalya Orlova saw the deal as a value-setting benchmark, telling "Vremya novostei" on 6 November, "This deal sets a precedent. Until now, it was difficult to figure out how much an investment bank costs in Russia. Now the market has something to go on." According to information on the company's website (, UFG -- which includes brokerage, investment banking, and asset-management wings -- notched a net profit of $11 million in 2002 with assets of $127 million. DK

One of Russian liberalism's most enduring reflexes is to cast anxious glances westward when scandals spring up at home. Even today, with state-centered insularity and a longing for the great-power past making a strong bid to coalesce into a unifying post-Soviet ideology, reactions to the Yukos scandal have shown that the reflex is alive and well.

When the affair began with the 2 July arrest of Yukos core shareholder and Group Menatep head Platon Lebedev, dire warnings rang out in the Russian press that a concerted assault on Russian business could ruin the investment climate and generally sour Western attitudes toward Russia. (Initial Western reaction was largely limited to concerned op-eds, while the business community adopted a wait-and-see approach focused on the question, "Will this spread beyond Yukos?") The 25 October arrest of Mikhail Khodorkovskii, then the CEO of Russia's flagship private oil company and the country's richest man, and the state's subsequent move to freeze some 40 percent of the oil company's shares sparked a fresh chorus of "What will they say in the West?" President Vladimir Putin's visits to Italy and France last week provided some instructive answers.

Putin was in Rome for the 12th Russia-European Union summit. But a funny thing happened at the closing press conference on 6 November. When a journalist asked Putin a thorny question about Chechnya, Yukos, and the rule of law in Russia, Italian Prime Minister Silvio Berlusconi, whose country currently holds the rotating EU Presidency, volunteered to answer on his colleague's behalf. Berlusconi launched into a spirited defense of Putin's policies. On the subject of Yukos, "Kommersant-Daily" quoted Berlusconi as saying, "I have direct information from Italians who live in Russia that Russian firms that sell oil are breaking the law." The prime minister went on to tell reporters that "President Putin draws a distinction between the executive and the legislative branch," closing his remarks by joking that he would send Putin a bill as his lawyer. A beaming Putin responded that he would gladly pay for Berlusconi's legal services.

Disdain for diplomatic nicety is Berlusconi's calling card. (He kicked off his tenure as EU Council president in July by telling a German socialist member of the European Parliament that he would be perfect for a part in a movie about Nazi concentration camps.) This time, his brief stint as the self-appointed head of Putin's defense team drew a quick, and unusual, rebuke from the European Commission. Commission spokesman Reijo Kemppinen told reporters at a 7 November news conference, "We do not share the view of Prime Minister Berlusconi when it comes to the situation of Yukos," Reuters reported. Unofficial reactions were more pointed. An 8 November editorial in France's "Le Monde" stated, "The positions [Berlusconi] defends make us feel ashamed." Placing the affair squarely in the context of vision and values, the editors concluded bluntly, "The Europe of Mr. Putin is not ours."

Berlusconi cuts a rather odd figure as the defender of a crusade against a Russian oligarch, of course. A billionaire media mogul who has sparred repeatedly, and successfully, with Italian prosecutors on charges of mixing of business and politics, Berlusconi is perhaps the nearest Western equivalent of a Russian oligarch. As "Vedomosti" noted in a 10 November editorial pointedly titled "The Wrong Lawyer," Berlusconi's fortune grew by some $8 billion between 1997 and 2000. With a nod to il Cavaliere's comfy ties with the state, the editors remarked that the particulars of his enrichment "make sense to any Russian."

For all their extravagance, Berlusconi's comments are not as unrepresentative as the European Commission's disavowal might make them seem. After the Russia-EU summit, Putin paid a quick visit to France before returning home. The Russian president's time with French President Jacques Chirac exuded sufficient bonhomie to inspire a sour editorial in France's left-leaning "Liberation" on 8 November titled "Putin and the European Hypocrites." The editors noted: "While some countries, notably the Scandinavians, are giving voice to their unease at the drift of Putin's policies, the great powers remain remarkably silent. Though they do not like the form it takes, they are not so far from Berlusconi's easygoing attitude toward Putin in the name of a partnership with Russia deemed indispensable. Putin's brief visit to Paris on Friday [7 November] confirmed this inglorious turn of events."

Curiously, Russia's "Izvestiya" chose to put a very different spin on "this inglorious turn of events" in a 9 November reaction to the Russia-EU summit headlined "Waitlisted" (in reference to Russia's status vis-a-vis the EU). Stressing that "Europe is anxiously waiting to see how the Russian economy will fare in the wake of the events around Yukos," the article cited Russian participants in talks with the EU and paints a picture of unease: The Europeans "will hold back big investments while they wait and see how the situation develops; they will put off geopolitical rapprochement."

These contradictory evaluations point to a curious aspect of how the Russian liberal press has covered the situation around Yukos. In general, the level of indignation has been remarkably high, with the campaign against Yukos, and especially the arrest of Khodorkovskii, seen as steps toward a restoration of Russian authoritarianism. (Visitors to the website of "Novaya gazeta" [] after Khodorkovskii's arrest encountered a black page with white letters reading: A Coup Has Taken Place in Russia.) Similar notes have sounded in Western coverage, of course, but with rather more stress on the ambiguities of the standoff between Putin and Khodorkovskii. (An article in the 17 November issue of the "New Republic," for instance, compared Khodorkovskii unfavorably to American robber baron John D. Rockefeller.)

Russia's liberal press remains both outraged and intently focused on Western reactions to the Yukos scandal. Meanwhile, fatigue and ambivalence are conspiring to make the West increasingly indifferent to the fate of one oligarch caught in a web of unanswered questions. Sooner or later, this perception gap is bound to trigger a reappraisal in the Russian press. Some are sure to ask, "Why doesn't the West care?" Others, however, may wonder, "Why did we care so much?" DK

Ever since Yukos's woes began in July, the market's real worry has been that the standoff with the Prosecutor-General's Office would affect the company's core business -- drilling for oil. Recent moves by the Natural Resources Ministry provide the first indication that this nightmare scenario may be more than just dark speculation.

A 30 October Natural Resources Ministry press release announced that Surgutneftegaz had received a yearlong license to develop the Talakan oil and gas field in Eastern Siberia. The press release ended, "We note that until 10 October 2003 the operating license for the development of the Central block of the Talakan field belonged to Lenaneftegaz."

Talakan boasts oil reserves of 124 million metric tons and 47 billion cubic meters of natural gas, "Vremya novostei" reported on 3 November. The rights to the field were originally auctioned in March 2001. Yukos-controlled Sakhaneftegaz won the tender by offering a bonus of $501 million. Sakhaneftegaz failed to come up with the cash, however, and the state annulled the results of the auction. As plans for a new licensing auction bogged down in disputes over the asking price, Sakhaneftegaz subsidiary Lenaneftegaz conducted exploratory drilling under a temporary license. Yukos was considered the favorite to nail down the rights to the field -- through its subsidiaries -- when the time came for an auction.

Natural Resources Ministry spokeswoman Nedezhda Kleimenova refused to comment on the ministry's reasons for yanking Lenaneftegaz's license and awarding it to Surguneftegaz, "Kommersant-Daily" reported on 3 November. Meanwhile, the newspaper reported that the $30 million drilling infrastructure at the site belongs to Lenaneftegaz, which has no plans to lend or lease it. Yukos spokesman Aleksandr Shadrin called the ministry's action "baffling" but confirmed that the oil company still intends to take part in an auction expected to take place in the first quarter of 2004.

Analysts saw the pulled license as an ill omen. Aton analyst Steven Dashevskii told "Vedomosti" on 3 November, "We always said that Yukos's conflict with the state would spread to the company's entire business." Troika Dialog analyst Valerii Nesterov was equally downbeat, telling the newspaper, "Storm clouds are gathering over Yukos."

A few days later, the clouds seemed to be darkening. Natural Resources Minister Vitalii Artyukhov told official "Rossiiskaya gazeta" in a 5 November interview that Yukos could be vulnerable to the "preventive" revocation of its licenses. According to the minister, "a company that has had a controlling stake of its shares sequestered is hardly an appropriate partner for a federal licensing agency." The comments sounded especially menacing in light of instructions the Natural Resources Ministry received from Deputy Prosecutor-General Yurii Biryukov on 30 October to check Yukos's observance of licensing conditions at its oil fields.

Against this grim backdrop, an unlikely savior appeared in the form of Russian President Vladimir Putin. Speaking in Italy the same day Artyukhov's interview appeared, Putin said, "I trust that the government will refrain from such measures," RosBusinessConsulting reported on 6 November.

For now, the president's comments serve as notice that licensing authorities will remain in a holding pattern. But the threat of lost licenses shows just how high the stakes are getting. As Alfa-Bank analyst Konstantin Reznikov told "Vedomosti" on 6 November, "If they start to take Yukos's licenses away, it means that the state has set itself the goal of totally destroying the company." DK