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Business Watch: November 18, 2003

18 November 2003, Volume 3, Number 43
U.S.-based ConocoPhillips is in talks to obtain a 10-15 percent stake in Russia's LUKoil for $1.7 billion-2.5 billion, Britain's "Financial Times" reported on 10 November. No confirmation was forthcoming, however. LUKoil spokesman Dmitrii Dolgov told "Kommersant-Daily" on 11 November that the report was "nonsense." Dolgov would only confirm that the two companies are conducting negotiations on a joint venture to explore oil fields in Russia's northern territories. A ConocoPhillips spokesperson told the newspaper that the company does not comment on rumors. The report comes on the heels of persistent rumors that ConocoPhillips was looking to acquire an equity stake in Yukos, with those talks now frozen as a result of the Russian company's legal difficulties. Although LUKoil has the largest free float of any Russian oil company, with 61 percent of its shares traded on the open market, observers were skeptical about the latest word on the street. Some noted that even a 15 percent stake in the company would not give an investor sufficient control to justify the cost. "Joint exploration and production efforts are a more likely scenario than ConocoPhillips buying a minority stake," Bloomberg quoted Troika Dialog brokerage as commenting. Still, Aton analyst Steven Dashevskii told "Vedomosti" on 11 November that, with 11 percent of LUKoil already owned by U.S.-based Capital Group, ConocoPhillips might be able to work out a deal to put a blocking stake in U.S. hands. DK

Russia's Rusia Petroleum, China National Petroleum Company (CNPC), and South Korea's Korean Gas Corporation presented a $17 billion pipeline project on 14 November for natural-gas deliveries from Siberia to Asian markets, AFP reported the same day. Set to become operational in 2008, the 4,887-kilometer pipeline will eventually carry 20 billion cubic meters of gas a year from the Kovykta gas field in eastern Siberia to China and another 10 billion cubic meters of gas to South Korea. The pipeline's projected cost has risen from an $11 billion estimate in 1995; "International Oil Daily" reported on 13 November that "some analysts said the higher cost estimate might raise questions about the viability of the project." Russian-British joint venture TNK-BP controls Rusia Petroleum, and TNK-BP spokesman Vladimir Bobylev explained to "The Moscow Times" on 14 November that the next step will be for the firms to "submit a feasibility study to the governments of Russia, China and South Korea." DK

CNPC Vice President Su Shulin told reporters at an 11 November press conference in Peking that his company is in talks to purchase a 25 percent stake in Rusia Petroleum, "Kommersant-Daily" reported the next day. Rusia is the operator of the Kovykta gas field, Russia's largest with an estimated 1.8 trillion cubic meters of gas reserves. TNK-BP controls 62.42 percent of Rusia; Russian industrial holding Interros is preparing to sell its 25 percent stake in Rusia. CNPC is not the only contender, however. "Vedomosti" reported on 12 November that gas monopolist Gazprom is mulling an offer from Interros to purchase the stake. Aton analyst Steven Dashevskii told the newspaper that the situation is a difficult one, with both companies a potential boon to the project and neither likely to settle for anything less than a 25 percent stake. "It would be ideal for the project to have both Gazprom and CNPC involved, guaranteeing support from both Russia and China," the analyst said. Shulin also cited the Chayanda gas field, located in eastern Siberia, as another possible area of interest. Russia's Natural Resources Ministry plans to auction the rights to Chayanda in 2004; potential bidders include Gazprom, Yukos, and Surgutneftegaz. Finally, Shulin discussed the possibility of developing oil fields in Russia, and perhaps Kazakhstan, with Russia's LUKoil on a shared risk basis. LUKoil responded cautiously to the idea. A company spokesman told "Izvestiya" on 12 November, "We hold talks with many companies, but there are no agreements with the Chinese yet and I can't name any concrete projects under discussion." DK

Gazprom head Aleksei Miller met on 12 November with Itera chief Igor Makarov amid a flurry of reports that the state-controlled monopolist was preparing to buy the U.S.-registered gas trader. Makarov, who owns 46 percent of Itera, announced on 10 November that three companies -- two Russian and one foreign -- are in talks to buy out Itera's owners, Interfax reported the same day. The "Financial Times" had reported earlier that Gazprom offered Itera's owners $500 million to buy the company. Sources told "Vedomosti" on 11 November that other potential buyers included TNK-BP and Yukos. Itera and Gazprom both denied the report. Itera emerged in the 1990s as the largest supplier of gas to markets in the CIS, though critics charged that the company was little more than a front for Gazprom insiders. As "Nezavisimaya gazeta" described the company in an 11 November article: "Itera is an epic, symbolic phenomenon in the pre-Putin economy. An unknown company registered in a Florida offshore zone by a Turkmen cyclist, a Greek sailor, and a group of other people, sprang up literally overnight to be nearly as big as Gazprom." Investigations failed to discover evidence of wrongdoing, however. When Gazprom's management changed in 2001, Itera's fortunes waned as the gas giant began reclaiming markets it had ceded to Itera. Prospect Investment analyst Dmitrii Tsaregorodtsev told "Gazeta" on 13 November that the sale of Itera to Gazprom is likely a done deal with price the only remaining question: "Negotiations will be long and hard. Itera will insist on $2 billion, and Gazprom will knock down the price. The two sides will probably agree on $700 million-$800 million." DK

Gazprom's board met on 13 November to review the state-controlled gas monopolist's 2004 budget and investment program, the company announced in a press release the same day. The financial plan posits revenues of 1.164 trillion rubles ($39 billion), expenses of 1.397 trillion rubles ($46.9 billion), borrowing of 150 billion rubles ($5 billion), an investment program of 232 billion rubles ($7.8 billion), and a deficit of 43 billion rubles ($1.44 billion). The company will borrow an additional 67 billion rubles for debt restructuring, Reuters reported, bringing total borrowing in 2004 to 217 billion rubles ($7.3 billion). Observers queried by "Vedomosti" on 13 November said that the key task for debt-strapped Gazprom is to pay down the total amount it owes, noting that the company achieved some success in 2003 by reducing overall debt from $15.9 billion to $13.7 billion. The cabinet will review the investment program next week before sending it to the company's board of directors, a process that will likely involve substantial debate. As "Vremya novostei" reported on 14 November, "One can confidently predict now that [the documents] will be sent back for revision." DK

An 11 November cabinet meeting on financial markets laid the groundwork for the eventual creation of a financial "megaregulator" to bring together regulatory functions currently shared by a variety of agencies. The ministries of Economic Development and Trade and of Finance, the Russian Central Bank, and the Federal Securities Commission will have until 1 February 2004 to hammer out the details of the planned megaregulator, "Nezavisimaya gazeta" reported on 12 November. With so many cooks charged with making the stew, some doubted the outcome. Vladimir Tarachev, deputy chairman of the State Duma committee on financial markets, told "Vedomosti" on 12 November that the real fighting will start "when they get to the 'hot' spots -- who will create the new agencies and who will lose authority." Still, Economic Development Minister German Gref, whose ministry initially proposed the megaregulator, did his best to present the idea as a logical step on the road to mature markets, telling journalists, "Enough walking around in shorts; it's time to come out in a suit like a respectable gentleman," "Vremya novostei" reported. DK

Central Bank Deputy Chairman Oleg Vyugin told the "Financial Times" in an 8 November interview that net private-capital flight will likely reach $13 billion in the second half of 2003. The first half of the year witnessed capital inflow of $4.6 billion, the first such influx in post-Soviet history. The eventual total will probably match last year's outflow of $8.2 billion. Meanwhile, the numbers are attracting careful scrutiny. "Vedomosti" quoted experts from ratings agency Standard & Poor's on 10 November as saying, "If the Yukos affair leads to significant capital flight and the further deterioration of economic conditions, we will review the possibility of changing the sovereign rating or forecast." S&P competitor Moody's Investor Services, which recently bumped up Russia's rating two notches to investment grade, remains unconcerned. Moody's Vice President Jonathan Schiffer told reporters on 12 November that the agency would only consider a rating reduction if capital flight reached $20 billion-25 billion annually, "Novye izvestiya" reported the next day. Experts queried by "Vedomosti" on 12 November were guardedly optimistic, noting that the Russian economy currently has a substantial "reserve of stability" and that seasonal factors generally cause capital flight to rise toward the end of the year. DK

Federal Securities Commission Director Igor Kostikov told Bloomberg TV that he plans to broaden an investigation into insider trading that may have taken place when Moody's Investors Services announced on 8 October that it had raised Russia's sovereign debt rating, "The Moscow Times" reported on 10 November. Kostikov will ask the U.S. Securities and Exchange Commission and Britain's Financial Services to assist in the probe. Moody's broke the news officially at 11:24 a.m. London time; but Russia's benchmark Eurobonds notched more than half of the day's $0.035 gain in the 35 minutes before the announcement, suggesting a leak of insider information. "Kommersant-Daily" quoted Kostikov as saying: "This happened in the West, not in Russia. We're going to speak to our colleagues in the United States and Great Britain. We're working with them." Moody's has a policy of informing issuers before an upgrade, meaning that Russia's Finance Ministry, as the issuer of Russia's sovereign Eurobonds, would have known in advance. Andrei Lusnikov, head analyst at financial news agency Finmarket, told "Nezavisimaya gazeta" on 11 November that the insider information likely leaked from Russian officials. Finance Ministry spokesman Yurii Zubarev downplayed that possibility in comments to "Kommersant-Daily," and several traders told the newspaper that a Western bank was involved. Observers noted that even if the probe identifies the culprit, Russian law does not classify insider trading as a criminal offense and limits fines to $2,000. DK

Auto industry holding Ruspromavto (RPA) has appointed a new general director, "Kommersant-Daily" reported on 12 November. The move was seen as further evidence that erstwhile oil tycoon Roman Abramovich is continuing to sell off his Russian assets. Aleksandr Yushkevich, managing director of Basic Element, replaced Petr Sinshinov at the helm of RPA, which brings together more than 20 companies in the auto industry. Numerous reports indicate that Basic Element, the investment vehicle of aluminum tycoon Oleg Deripaska, has recently doubled its stake in RPA to 75 percent by buying out the 37.5 percent stake owned by Abramovich-controlled Millhouse Capital. Both Basic Element and Millhouse Capital refused comment on the deal. Prospect Investment analyst Nikolai Ivanov told "Gazeta" on 12 November that 37.5 percent of RPA, which includes a number of troubled enterprises, was probably worth $300 million-400 million. "Vedomosti" reported on 12 November that the new director would likely try to find a foreign partner. Aton analyst Aleksandr Agibalov told the newspaper, "Attracting a strategic investor is vitally important for all Russian enterprises in the automotive industry." DK

Aluminum giant Russian Aluminum (Rusal) announced the election of a new board of directors in an 11 November press release. The new board, which consists entirely of Basic Element representatives, is "the result of changes in the shareholder structure," according to the press release. Abramovich's Millhouse Capital sold Oleg Deripaska's Basic Element a 25 percent stake in Rusal in early October for an estimated $2 billion; Basic Element now owns 75 percent of the aluminum producer, while Millhouse Capital retains 25 percent. In a further changing of the guard, Aleksandr Bulygin replaced Deripaska as the director of Rusal on 14 November, while Deripaska took over the position of CEO from Millhouse Capital representative Yevgenii Shvidler, "Kommersant-Daily" reported on 15 November. Abramovich has been divesting himself of his Russian assets in a series of moves some see evasive action to avoid the fate of imprisoned oligarch Mikhail Khodorkovskii. Abramovich sold a blocking stake in national air carrier Aeroflot in late 2002, agreed to merge his oil company Sibneft with Yukos in 2003, and has most recently sold stakes in Rusal and Ruspromavto. He has also acquired the British premier-league football team Chelsea. DK

Norilsk Nickel will team up with the Russian Academy of Sciences, investing up to $40 million a year into research on palladium fuel cells, Bloomberg reported on 11 November. NorNickel is the world's largest producer of palladium. Fuel cells that use palladium and platinum are seen as a technology that could one day be used to power low-pollution cars, but several observers told "Vedomosti" on 11 November that NorNickel may have been looking at more than mere money-making opportunities. Dmitrii Orlov of the Center for Political Technologies told the newspaper that conflict between Yukos and the authorities has spurred big business to seek out projects that prove a commitment to "social responsibility." DK

U.S.-based VeriSign has begun registering web addresses containing Cyrillic characters in the .com and .net domains, reported on 14 November. Bart McKay, VeriSign vice president for international relations, told "Vedomosti" on 14 November, "Russian will become the fourth non-English language after Chinese, Korean, and Japanese that can be used in Internet addresses in the .com and .net domains." Observers were split on the commercial benefits, with some seeing a boon for Russian companies with names that do not lend themselves to obvious Latin transcriptions and others seeing a gimmick. Aleksei Lesnikov, deputy director of the Russian Institute for Public Networks, which registers Internet addresses in the .ru domain, told "Kommersant-Daily" on 13 November that he expects Russified domains to account for up to 25 percent of addresses within the .ru zone. But Elena Kolmanovskaya of Yandex, the leading Russian-language search engine, was skeptical, telling the newspaper: "It's impossible that it would be easier for someone to type 'yandex' in Cyrillic and then switch back to Latin characters to keep working in the Internet. This is probably just another way to make money and provide opportunities for cybersquatting and trademark disputes." DK

The European Bank for Reconstruction and Development (EBRD) announced in an 11 November press release that it has approved financing of $125 million for the $3.6 billion Baku-Tbilisi-Ceyhan (BTC) oil pipeline with an additional $125 million in financing to be raised through syndication to commercial banks. One week earlier, the International Finance Corporation (IFC), the investment arm of the World Bank, approved a $310 million loan for the BTC. According to BP, which heads the 11-member consortium that is building the pipeline, the BTC pipeline is 40 percent complete, "International Oil Daily" reported on 13 November. Representatives of CanArgo, a U.S.-registered oil company active in Georgia, assured the industry publication that work in the country is proceeding apace despite election-related unrest in the capital. Meanwhile, environmentalists reacted to the EBRD and World Bank financing decisions with disappointment, claiming the pipeline project poses environmental risks and shortchanges local communities, the "Financial Times" reported on 12 November. The 1,767-kilometer pipeline is slated for completion in late 2004. According to figures cited by RosBusinessConsulting, corporate investors are putting up 30 percent of the money, while international credit organizations are providing the remaining 70 percent. Azerbaijan's "Ekho" reported on 12 November that the first BTC-delivered oil exports are expected to depart from the Turkish port of Ceyhanin 2005. DK

International ratings agency Moody's Investor Services upgraded Ukraine's foreign- and local-currency bonds from B2 to B1 with a stable outlook on 10 November, the "Financial Times" reported the next day. The rating is still four rungs below investment grade. Moody's noted that "the Ukrainian economy has benefited from its trade, service, and investment links with the rapidly growing economy of the Russian Federation," "The Moscow Times" reported on 11 November. Standard & Poor's currently rates Ukraine a B (the equivalent of B2 on the Moody's scale), while Fitch rates it a B+ (B1 on the Moody's scale). Moody's recently raised Russia's rating two notches to investment grade. Ukraine's economy, though still plagued by corruption, has posted three straight years of growth and is expected to expand by 5.5 percent in 2003. DK


11 November: A Moscow city court reviewed an appeal by Mikhail Khodorkovskii's lawyers to release the former Yukos CEO on bail. Forty State Duma deputies and 300 Yukos employees vouched for the oil tycoon, who faces charges of fraud and tax evasion that could bring him a 10-year jail term, "Kommersant-Daily" reported on 12 November. Nonetheless, presiding Judge Marina Selina declined the appeal and ruled that Khodorkovskii will remain in jail to await trial until at least the end of the year. Khodorkovskii's lawyers say that they are ready to take their appeal to Russia's Supreme Court and, if that fails, to the European Court of Human Rights.

12 November: Deputy Prosecutor-General Vladimir Kolesnikov participated in a roundtable titled "Security Above All" sponsored by Vladimir Zhirinovskii's Liberal Democratic Party of Russia. Kolesnikov took the opportunity to make extensive comments on Yukos and Khodorkovskii. "Vedomosti" quoted Kolesnikov as saying that Khodorkovskii could be jailed for up to two years while the investigation of his alleged crimes continues. In what appeared to be a menacing reference to other high-profile businessmen, Kolesnikov advised those who are "not in jail yet" to "do some thinking." An Interior Ministry source told the newspaper that the deputy prosecutor-general was likely acting as the "mouthpiece for certain ideas circulating in the corridors of power" that were being aired to gauge public reaction.

12 November: Simon Kukes, who replaced Khodorkovskii as Yukos CEO last week, outlined the company's business plans in an interview with Bloomberg TV in London. Calling the conflict between Khodorkovskii and Russian law-enforcement officials "overblown," Kukes said that Yukos plans to increase output by 12 percent in 2004. Kukes attempted to reassure nervous investors, who have sent Yukos shares down 21 percent since Khodorkovskii was arrested on 25 October. As he explained the situation, "Within a few months, it will be business as usual."

12-14 November: The Seventh Annual U.S.-Russian Investment Symposium was held in Boston, Massachusetts. Financier George Soros was the chief naysayer, urging Russia's expulsion from the G-8 for the "political persecution" of Khodorkovskii and suggesting that U.S. President George Bush "disembrace Putin and put him on notice that he is taking the country in the wrong direction," "The Moscow Times" reported on 14 November. Others focused on the positive. Delta Capital Management CEO Patricia Cloherty, who oversees Russia investments of $260 million, spoke of an improving legal culture and an up-and-coming managerial class, "Vedomosti" reported on 14 November. "Kommersant-Daily" summed up the ambiguity in a 15 November comment: "Investors can't quite figure out the signals, the authorities are trying to decide how to overcome corruption, and oil is the only reliable source of money."

14 November: Briton Stephen Curtis took over as managing director of Group Menatep, the Gibraltar-registered holding company that owns 44.1 percent of Yukos, the company announced in a press release. Curtis replaced Platon Lebedev, currently in jail awaiting trial on fraud charges over a 1994 privatization. The appointment fits in with a "crisis policy" that has moved foreign citizens into key positions in Yukos: Russian-born U.S. citizen Simon Kukes holds the post of CEO and American Steven Theede heads Yukos Moscow. They complement American Bruce Misamore, who has been Yukos's financial director for several years.

14 November: President Putin spoke at a meeting of the Russian Union of Industrialists and Entrepreneurs (RSPP). He did not mention Yukos or Khodorkovskii in his main address, focusing instead on administrative reforms and the general business climate. When RSPP President Arkadii Volskii alluded to the issue, Putin responded that everyone needs to "get used to a certain legal norms" but promised that there would be "no return to the past," "Gazeta" reported on 17 November. The president then voiced his opposition to the idea that companies should be forced to pay for the land beneath already privatized enterprises, eliciting an ovation. "Izvestiya" opined on 17 November that the meeting marked the "end of the oligarchy"; "Vremya novostei" concurred, commenting that "the Russian business community has swallowed its pride." Interros head Vladimir Potanin summed up the event's import to "Gazeta," saying, "The president clearly indicated today that there should be a boundary between business and government. I and many of my colleagues understand this and are not going to cross that line."