25 November 2003, Volume 3, Number 44
GAZPROM ANNOUNCES RESULTS...Natural-gas monopoly Gazprom announced the release of consolidated financial results to International Accounting Standards for the first half of 2003 in a 21 November press release. Net profit for the first half of 2003 soared nearly 1,000 percent to 103.76 billion rubles ($3.48 billion) from 10.38 billion rubles in 2002. Revenues rose from 306.54 billion rubles to 421.83 billion rubles. Gas sales increased 33 percent year on year to 346.4 billion rubles. The company also succeeded in paying down 3 percent of its debt, reducing the total to 389.5 billion rubles ($13 billion) as of 30 June. Analysts were impressed. Paul Collison, chief energy analyst at Brunswick UBS in Moscow, told the "Financial Times" on 21 November: "These are some of the best results we have seen from Gazprom in recent years. The management deserves a lot of credit for it." RosBusinessConsulting noted on 21 November that "Gazprom's results significantly exceeded market expectations," adding that the company's American Depositary Receipts (ADRs) on the London Stock Exchange rose more than 6 percent on the news. The company itself chalked up the improved numbers to "higher prices for gas and an increase in the amount of deliveries to customers in both Europe and Russia." DK
...AS CABINET CUTS DIVIDENDS...A 20 November cabinet meeting produced an apparent consensus that Gazprom will have to reduce planned 2003 dividends of 31 billion rubles ($1.04 billion), "Kommersant-Daily" reported the next day. Investment programs for the so-called natural monopolies -- Gazprom, national utility Unified Energy Systems (EES), nuclear-power company Rusenergoatom, and Russian Railways -- formed the crux of the meeting's agenda; the cabinet approved 2004 investment programs of 232 billion rubles for Gazprom, 134 billion rubles for Russian Railways, 115.5 billion rubles for EES, and 27.3 billion rubles for Rusenergoatom. Gazprom drew criticism for proposing a record dividend payment of 31 billion rubles while running a 43 billion-ruble deficit. "Gazeta" quoted Prime Minister Mikhail Kasyanov as saying: "The fact that these two figures coexist in a single document -- 31 billion rubles in dividends and a 43 billion ruble deficit -- is odd. It looks like an attempt to funnel money out of the company." Gazprom CEO Aleksei Miller agreed that dividends would likely shrink even as Energy Minister Igor Yusufov recommended cutting them to 15 billion-17 billion rubles, "The Moscow Times" reported on 21 November. According to "Kommersant-Daily," the cabinet will discuss Gazprom's dividend policy when it meets next week. The state owns 38 percent of Gazprom, and for all practical purposes controls the natural-gas monopoly. DK
...AND TALKS RESOLVE BLUE STREAM DISPUTEGazprom announced in a 20 November press release that it had reached an agreement with Turkish state pipeline operator Botas to end a long-running dispute over gas shipments to Turkey through the Blue Stream pipeline beneath the Black Sea. Faced with declining domestic demand, Turkey halted shipments through the $3.2 billion pipeline in March, partially restoring them in August. The two companies have now unified earlier agreements into a single contract and come to a mutually acceptable agreement on price, "Kommersant-Daily" reported on 21 November. "International Oil Daily" quoted a Botas official as saying that the new price "lies midway between the old rate of $115 per thousand cubic meters and Botas' request for a hugely reduced rate of $75 per thousand cubic meters." A source told "Gazeta" that the new price, set to take effect on 1 February, is $104 per 1,000 cubic meters. According to Botas head Mehmet Bilgic, the new contract retains the "take or pay" condition, meaning that Turkey will have to pay for the contractually stipulated amounts of gas whether it "takes" them or not, "Kommersant-Daily" reported. The original contract provided for shipments of 4 billion cubic meters in 2004, rising to 16 billion cubic meters by 2010. With domestic demand flat as a result of a depressed economy, Turkey may be tempted to re-export some of the gas to Europe, potentially eating into Gazprom's market share. Queried about this possibility, a source in Gazprom export wing Gazexport told "Gazeta," "Who knows what these Turks are going to do." Some observers saw Gazprom's difficulties with Blue Stream as an object lesson in the dangers of building a pipeline to a single customer. Trust Bank analyst Vladislav Metnev told "Vedomosti" on 21 November that the planners of the Angarsk-Daqing project, a planned oil pipeline from Siberia to China that would also depend on a single customer, should take heed. DK
UNCERTAIN FATE FOR TNK MINORITY SHAREHOLDERSA court in the British Virgin Islands has dismissed a $380 million claim by Astian Group and Indian Ocean Petroleum Services Limited against Russian-British oil company TNK-BP, "Vedomosti" reported on 20 November. The two companies, both minority shareholders in TNK before its merger with BP, charged that they suffered the material damages as a result of transfer-pricing mechanisms employed by TNK. (Transfer pricing is the practice of selling a commodity, such as oil, to a subsidiary at a reduced price; the subsidiary then sells the commodity at market price and reaps the profits. Transfer pricing is used primarily to reduce a company's tax burden, with the profit-reaping subsidiary registered in a tax-friendly location.) The court ruled that it did not have jurisdiction over the case. Aton analyst Steven Dashevskii told the newspaper the ruling, which he said dooms the plaintiffs to almost certain defeat in the Russian court system, comes as a disappointment to other minority shareholders, who are still waiting to receive an offer from TNK-BP. TNK-BP CEO Robert Dudley said that the company's board of directors plans to decide what to do about minority shareholders in the first quarter of 2004, "The Moscow Times" reported on 17 November. DK
GOVERNMENT, TOTAL END KHARYAGA RIFTFrance's TotalFinaElf has made peace with the Russian government over the Kharyaga oil field, agreeing to withdraw its lawsuit from an international arbitration court in Stockholm if tax authorities retract a demand for $48.5 million, "Vedomosti" reported on 18 November. Total is developing Kharyaga under a 1995 production-sharing agreement that provides tax breaks to compensate the oil company's expenditures, but Russian authorities refused to approve the $340 million Total said it spent in 2001 and 2002. (Russia has largely phased out production-sharing agreements in recent years.) The resolution appears to represent a victory for Total. A former official explained to "Vedomosti" that the Russian government had a weak case and "negligible" chances of winning in arbitration. With high-level agreement achieved, all that remains is the assent of Nenets Autonomous Okrug Governor Vladimir Butov, who was instrumental in starting the original brouhaha over the project's budget. Still, Total upstream head Christophe de Margerie told "International Oil Daily" on 18 November that "the company remains committed to developing its Russian business, despite the current controversy over Russian major Yukos." According to "International Oil Daily," Total is the operator on the Kharyaga project, with a 50 percent stake; Norway's Norsk Hydro holds a 40 percent stake, and the local Nenets Oil Co. owns 10 percent. Kharyaga's estimated reserves stand at 400 million barrels, with development costs pegged at $2 billion. DK
BUYERS ABOUND FOR INTERROS RUSIA STAKEAs industrial group Interros prepares to sell its 25.8 percent stake in Rusia Petroleum, no fewer than 15 companies are looking to buy, "Vedomosti" reported on 17 November. Rusia holds the license to develop the Kovykta gas field, with more than 1 trillion cubic meters of reserves. A source close to the negotiations told the newspaper that 10 companies have already signed confidentiality agreements with Interros: U.S.-based heavyweights ConocoPhillips and ChevronTexaco, France's Total, Australia's BHP Billiton, China's CNOOC and Sinochem, India's ONGC, and Russia's Yukos. Another five companies are in talks with Interros: U.S. ExxonMobil, U.K.-Dutch Royal Dutch/Shell, Malaysia's Petronas, China's CNODC, and Kuwait's KUFPEC. Conspicuous by their absence were Russia's Gazprom, China National Petroleum Corporation (CNPC), and Korea Gas Corporation (Kogas), all three of which are part of a $17 billion project to deliver gas from Kovykta to China and South Korea. United Financial Group remarked in a research note that Gazprom might attempt to use its leverage as a state-run company to muscle in on the stake, AFP reported on 17 November. With so much interest, analysts said that 25.8 percent of Rusia could fetch as much as $500 million, "The Moscow Times" reported on 18 November. Interros is slated to unload the stake before 2004. DK
JITTERY MARKET SLIPS BELOW 500Dogged by rumors of further attacks on embattled oil company Yukos, Russia's benchmark RTS stock exchange sank below the 500 mark on 18 November, according to the RTS news service. The exchange had scaled the 500 barrier on 25 June, going on to shatter a pre-1998 high of 571. It then notched an absolute record of 650 on 20 October before plunging on the news of then-Yukos CEO Mikhail Khodorkovskii's arrest on 25 October. Amid news reports that Yukos could face more tax- and tariff-related troubles, a rumor claimed that Russian authorities were about to hit the troubled company with a $10 billion bill for back taxes, "The Washington Post" reported on 19 November. Mark Temkin, director of the sales department at NIKoil Financial Corporation, told "Vedomosti" on 20 November that the mood ranged from "pessimistic to panic-stricken." But the thunder never struck, and a minor correction ensued. The RTS ended the week at 505.29, a 4.02 percent decline from the previous week's close of 526.46 on 14 November. Yukos closed at $11.38 on 21 November, within easy striking distance of its 14 November closing price of $11.65. DK
MOSCOW TAKES OVER VNUKOVO AIRPORTPresident Vladimir Putin signed a decree on 18 November giving the city of Moscow a controlling 61 percent stake in Vnukovo Airport, the smallest of the capital's three airports, "Gazeta" reported the next day. The city received the shares, valued at 1.7 billion rubles ($57 million), as part of a 6 billion-ruble subsidies package the federal center gave the city in 2002 for "fulfilling the functions of the capital." A 36.5 percent stake in the airport belongs to the private company Vnukovo Invest, which has close ties to Vnukovo management. Vnukovo Invest Director Vitalii Vantsev told "Vedomosti" on 19 November that his company and the city government will decide whether or not to join forces to run the airport by the end of the year. According to Vantsev, if the city and the company work together, they could double the airport's passenger capacity to 6 million passengers a year by 2006. In a controversial move, the city decided to appoint Arslan Ruzmetov director of Vnukovo International Airport, which is building Vnukovo's new international terminal, "Vremya novostei" reported. Ruzmetov's name has been linked to airline-related corruption scandals in Uzbekistan in the late 1980s and in the post-Soviet period. According to Interfax, Ruzmetov will supervise the investment of $350 million to develop Vnukovo in 2004-2007. Vnukovo serviced 3 million passengers in 2002, generating $26 million in revenue. DK
US STEEL CHALLENGES SEVERSTALUS Steel has mounted a legal challenge to prevent Russia's Severstal from buying bankrupt U.S. steelmaker Rouge Industries, AP reported on 17 November. US Steel filed suit with a Delaware bankruptcy court, citing concerns over Double Eagle Steel Coating Co., a joint venture between US Steel and Rouge Industries. The fifth-largest steelmaker in the United States, Rouge Industries filed for bankruptcy protection in late October, announcing at the same time a preliminary agreement with steelmaker Severstal for the Russian company to buy Rouge Industries. The acquisition could give Severstal access to U.S. markets by allowing it to ship raw materials to Rouge Industries facilities for further processing, thus avoiding protective tariffs on imported steel products. Severstal spokeswoman Olga Yezhova told "Vedomosti" on 20 November that the company is unsurprised at the US Steel move and never expected to acquire Rouge without competition. Aleksandr Pukhaev of United Financial Group told the newspaper that if US Steel decides to make a serious play for Rouge, it could up the bidding to $500 million, which Severstal would likely consider "too expensive" for a company worth closer to $300 million. DK
MTS BOOSTS SISTEMA REVENUEFinancial-industrial group Sistema announced the publication of financial results for the first half of 2003 in an 18 November press release. The results were the first to consolidate figures from leading cellular operator Mobile TeleSystems (MTS); Sistema upped its stake in MTS to a controlling stake when it bought an additional 10 percent of the company from a Deutsche Telekom subsidiary in April for $367 million. Revenues shot up 284 percent year on year to $1.572 billion, with net profit rising 83 percent to $92.4 million. Revenues from telecommunications are an increasingly important part of Sistema's financial success, comprising 87.1 percent of the group's first-half 2003 revenues as compared to 56.3 percent in 2002. Zenit Bank analyst Yakov Yakovlev told "Vedomosti" on 19 November: "The fact that they couldn't consolidate their key asset distorted investors' perceptions of the company. The new financial statement will help the company to improve terms for borrowing in the future." Other analysts queried by the newspaper agreed, saying that Sistema is likely preparing for a new round of Eurobond offerings to take advantage of reduced rates. DK
VIMPELCOM REPORTS RISING PROFITCellular operator VimpelCom announced its third-quarter financial results in a 20 November press release. Revenues for the quarter rose 71.4 percent year on year to $379 million, and net profit jumped 78.3 percent to $72.2 million. The company noted that its subscriber base increased by 130 percent over the past year to reach 9.26 million on 30 September. Analysts welcomed the results. Aton senior analyst Nadezhda Golubeva told "Vedomosti" on 21 November: "It's nice to see that VimpelCom's results didn't disappoint even though the forecasts were quite aggressive. But the company's profitability turned out to be even higher than the market expected." DK
DANONE, WIMM-BILL-DANN END TALKSFrench food group Danone is no longer in talks to buy Russian juice and dairy producer Wimm-Bill-Dann (WBD), the "Financial Times" reported on 21 November. According to the newspaper, WBD shareholders were the ones who made the decision to end the negotiations over the rumored $1 billion buyout. The news was confirmed by matching 21 November press releases from both Danone and WBD; the Danone press release read: "Groupe Danone and the controlling shareholders of Wimm-Bill-Dann communicate to the stock exchange authorities that they have amicably terminated their discussions." According to the "Financial Times," the situation surrounding Yukos did not play a role in the decision to halt talks. With profits falling on its traditional markets, Danone, which already owns a 7 percent stake in WBD, took an interest in the Russian company as a means of catapulting itself into a leading position on a promising new market. RosBusinessConsulting noted in a 21 November comment that WBD produces more than a 1,000 types of dairy products with market shares ranging from 30 percent to 50 percent. Aton analyst Timothy McCutcheon told gazeta.ru on 21 November that the talks could start up just as easily as they trailed off. "Danone will always be interested in WBD," he said. "Just as they ended the negotiations, they can start them back up again. Danone has set itself the task of buying the Russian company for less money, so they'll have to do a bit more talking." DK
THE MONEYRussia's flagship private oil company gradually metamorphosed over the summer from an oft-cited example of born-again faith in corporate governance to a somewhat puzzling symbol of conflict between the state and big business. The explanations analysts offered up -- that the Yeltsin-era oligarchs were losing ground in the push-and-pull of warring Kremlin clans, or that Yukos CEO Mikhail Khodorkovskii had bought off more of the State Duma than he could chew -- tended to focus on the state rather than on business. Now, with Khodorkovskii behind bars awaiting trial on charges of fraud and tax evasion, the state is moving to confront Yukos's business practices. And some analyses are duly reflecting the paradigm shift.
Yukos is in the final stages of a merger with oil company Sibneft that will, on 1 January 2004, officially create YukosSibneft, Russia's biggest oil company and the world's fourth-largest private oil producer. Even before their decision to wed, however, the two companies had one thing in common -- an affinity for aggressive tax-minimization strategies using "internal" offshore zones. These zones initially took the form of "closed administrative-territorial formations" with reduced tax rates. After 2001, three impoverished Russian regions -- Mordovia, Kalmykia, and Chukotka -- became internal offshore zones offering significant tax breaks for business. Yukos and Sibneft were among their best-known clients. In fact, Roman Abramovich, who controlled Sibneft before the merger, liked Chukotka so much that he ran for governor, and won.
How advantageous are the internal offshores? Under Russian law, corporate profits are taxed at a rate of 24 percent, with the federal center taking some 6 percent and the regions taking 18 percent. Regional authorities could waive their share in return for investment commitments, leading to a hefty reduction in a company's effective tax rate. According to the Finance Ministry, internal offshores cost the Russian budget $1.5 billion in lost tax revenue in 2002, "Vremya novostei" reported on 21 November.
The agreement that created the internal offshores was set to run out in mid-2004. First Deputy Finance Minister Sergei Shatalov stopped by the State Duma Budget Committee on 17 November to ask deputies to approve a legislative measure to eliminate internal offshores by 1 January, "Kommersant-Daily" reported the next day. Legislators were only too happy to comply.
Suddenly, Western news sources that had been wading bravely back into the swamps of Kremlinology paused to consider the inevitability of taxes. "The Washington Post" noted on 20 November, "Now many analysts say they believe that resentment over the low tax bills paid by Yukos and Sibneft may have helped fuel the legal attack on the father of the YukosSibneft merger, billionaire Mikhail [Khodorkovskii]." The headline of a 19 November story in the "Financial Times" proclaimed: "By focusing on exploiting existing oil supplies and minimizing Yukos' tax bill, [Khodorkovskii] tripped himself up." Finally, a 23 November analysis by AFP commented: "But quite apart from infuriating President Vladimir Putin with his political ambitions, the billionaire magnate made enemies in the government by aggressively minimizing taxes and maximizing short-term profits through exploiting only known oil fields."
The move to eliminate internal offshores was not the week's only business-related legislative action. The State Duma voted on 18 November to restore the government's right to set arbitrary oil-export duties, in a prompt response to a request from President Putin the previous day. Yukos had lobbied for earlier legislation that limited the state's license to set duties, "The Moscow Times" noted on 19 November.
Whether by accident or design, recent developments on the legislative front underscore the reduced lobbying capacity of the oil industry, and big business in general, in the wake of the Yukos affair. The reaction of the Western press also shows that the Russian state can expect substantially more favorable coverage if it chooses to pursue matters of general business practice rather than assault an individual company. Finally, the turn to nuts and bolts suggests that recrudescent Kremlinology and nascent Yukosology may eventually prove to be less important than the old science that asks one question: Who controls the money? DK