Business Watch: December 23, 2003

NOTE TO READERS:
The next issue of "RFE/RL Business Watch" will appear on 6 January 2004.
Natural-gas monopolist Gazprom will reduce its 2003 dividend payment from 31 billion rubles ($1.06 billion) to 16 billion rubles ($550 million), "Gazeta" reported on 17 December. The state-controlled company decided to halve its dividend payment under pressure from government officials worried about the company's 43 billion-ruble budget deficit. Reactions to the news varied, with some analysts calling it a sensible move and others expressing disappointment. Aton chief analyst Steven Dashevskii told "Vedomosti" on 17 December that the decision, though expected, was "still unpleasant." The analyst went on to explain that "the cost of developing [Gazprom's] gas fields is so high that it will eat up all of the company's free funds. Investors shouldn't count on high dividends, although they're buying Gazprom shares because of the company's resources." Despite the reduced dividends, 2003 could still prove to be a record-breaking year for the company. Preliminary results to Russian accounting standards indicate that Gazprom is heading toward a 2003 net profit of 208.3 billion rubles, a record profit for a Russian company and a 71 percent improvement on 2002 results, "Financial Times Deutschland" reported on 22 December. Gazprom paid out 9.3 billion rubles in 2002 dividends. DK

LUKoil has reached an agreement to sell its filling stations in the Czech Republic to Royal Dutch/Shell, RBC reported on 12 December. The sale of the three filling stations ends LUKoil�s involvement in the Czech market (and brings the number of Shell stations in the country to 144). The two companies did not disclose the selling price, but Prospect Investment analyst Dmitrii Tsaregorodtsev told "Kommersant-Daily" they likely went for "around $3 million." Though the deal represents a drop in the bucket for the multibillion-dollar oil company, it could be the harbinger of things to come. Gennadii Krasovskii, who heads LUKoil�s investor-relations department, told "Vedomosti" on 16 December that the company plans to rid itself of unprofitable assets while increasing its presence on markets where it is doing well. Aton analyst Timerbulat Karimov told "Kommersant-Daily" that LUKoil's filling stations throughout Eastern Europe, the Baltics, and the former USSR could go on the block. Observers queried by the newspaper fingered stations in Bulgaria, Poland, and the Baltics -- LUKoil owns more than 100 stations in each location -- as likely candidates for sale. DK

The Federal Securities Commission (FKTsB) is considering new regulations that could force the closure of Russia's benchmark RTS stock exchange, "Kommersant-Daily" reported on 18 December. The new rules would forbid non-anonymous trading, dealing a potentially crippling blow to the RTS, where brokers negotiate transactions with each other by phone, "The Moscow Times" reported on 19 December. The proposed rules would also require exchanges to conduct exhaustive checks on the information provided by the securities issuers they list. The draft regulations were first presented on 12 December; numerous objections led the FKTsB to send them back for reconsideration by a specially created working group. The working group met for the first time on 17 December, but FKTsB member Sergei Profatilov told "Kommersant-Daily" subsequently that the commission has no plans to back down on the proposed changes. Oleg Panshin, head of the analysis department at Olma Investment Company, told Open Economy (http://www.opec.ru) on 19 December that he expects further negotiations before the new rules assume their final form. Panshin summed up the situation: "It would be wonderful if all of the FKTsB's requirements were implemented. Unfortunately, neither our market participants nor our issuers are ready for this." DK

Manufacturing heavyweights United Heavy Machinery (OMZ) and Power Machines announced in a joint 18 December press release that the two companies have decided to merge. OMZ posted revenues of $435 million and a net profit of $39 million in 2002; Power Machines, a part of the Interros financial-industrial group, pulled in $276 million and a net profit of $1.5 million. As "Kommersant-Daily" reported on 19 December, OMZ will conduct an additional share issue in January equal to 100 percent of the company's charter capital. OMZ will then exchange the shares for 50 percent of Power Machines. According to the newspaper, Interros will hold a 35 percent stake in the newly formed OMZ-SM -- from the two companies' Russian acronyms -- while OMZ Director Kakha Bendukidze and board member Alan Kazbekov will control a combined 17.5 percent of OMZ-SM. Current Power Machines Director Yevgenii Yakovlev will head the company; Bendukidze will be its CEO. Some analysts expressed surprise at the decision to value the two companies equally. Metropol analyst Denis Nushtaev told "Vedomosti" on 19 December that Power Machines is worth $321 million and OMZ $258 million. Bendukidze explained to "Kommersant-Daily," however, "We could have spent a half a year and a ton of money calculating a share exchange coefficient, but we decided to play fair, relying on 2003 forecasts and real-life accounting." Other analysts saw a political motivation behind the deal. OMZ recently acquired control of Atomstroiexport, which builds nuclear-power plants abroad, and Russia's Atomic Energy Ministry has been clamoring to bring the enterprise back under state control. Prospect Investment analyst Nikolai Ivanov told RBC on 19 December that the brouhaha over Atomstroiexport "could wreck Kakha Bendukidze's relations with state officials, and they hinted to him that he could lose his entire business." Interros head Vladimir Potanin has maintained excellent relations with the Kremlin, and Bendukidze may have reasoned that a partnership with Potanin is the best insurance against official displeasure. DK

Guta Group announced on 15 December that it has completed the first phase in the formation of its United Confectioners holding, "Izvestiya" reported the next day. According to Guta Group President Artem Kuznetsov, the new holding company, which brings together 15 of Russia's largest confectionery producers, will boast consolidated revenues of $600 million-700 million by the end of the year. The city of Moscow, which ceded stakes in a number of Moscow production facilities to United Confectioners, will hold a blocking 25 percent stake in the new holding company, "Kommersant-Daily" reported on 16 December. Kuznetsov hopes that cooperation between United Confectioners, Russia's largest confectionery holding, and the city of Moscow will prove fruitful. He told journalists at a 15 December news conference, "We are counting on help from our new shareholder -- the city of Moscow -- in our expansion into the provinces, Belarus, Kazakhstan, and Ukraine," "Vedomosti" reported the next day. Analysts predicted that United Confectioners will face a difficult task in harmonizing its varied production assets into a smoothly functioning whole. Georgii Tvalchrelidze, a specialist with consulting firm Business Analysis, told "Izvestiya" that United Confectioners will also have to make a concerted effort to develop the strong, well-defined brands that are the forte of such competitors as Nestle, Mars, and Kraft Foods. DK

East Line, the company that manages Moscow's Domodedovo Airport, plans to issue a $200 million Eurobond to turn the airport into the country's premier air hub, "Vedomosti" reported on 16 December. The money will fund the construction of two new terminals. East Line chairman Dmitrii Kamenshchik told reporters at a 15 December press conference that Domodedovo hopes to service approximately 12 million passengers in 2004, a significant increase on the 9.45 million passengers the airport processed in 2003. (Moscow's Sheremetevo is currently Russia's leading airport; according to "Vedomosti," 11.3 million passengers have passed through it in 2003 and a similar number is forecast for 2004.) Competitors were skeptical about East Line's bold plans for Domodedovo. Sheremetevo's press service told "Izvestiya" on 17 December, "Domodedovo's plans are overly ambitious. They can only achieve 34 percent growth if Moscow's other airports don't develop. Recent developments show that this isn't the case." DK

Bankrupt U.S. steel maker Rouge Industries Inc. announced on 21 December that its board will ask a judge to approve the sale of the company's assets to Russia's Severstal for $285.5 million, AP reported the same day. The news indicates that Severstal outbid the auction's only other participant, US Steel. According to RBC, Rouge, which filed for bankruptcy protection in October, posted a 2002 loss of $52.3 million with revenues of $1.1 billion. The company's main clients are automakers Ford, General Motors, and DaimlerChrysler. Analysts saw the deal as an important victory for the Russian steel maker. United Financial Group's Aleksandr Pukhaev told "Izvestiya" on 22 December that Severstal "will now have an opportunity to import semi-processed raw materials to America and finish processing them on site." Yelena Shashkina, an analyst with investment company AVK, told RBC that Severstal will not only be able to increase production and profits, but also boost its visibility through ties to American automakers. Even before the auction, Severstal had reached an agreement with the United Auto Workers, which represents 1,900 of Rouge's 2,600 employees, guaranteeing workers their jobs, "Kommersant-Daily" reported on 22 December. Jerry Sullivan, president of UAW Local 600, told the newspaper, "The Russians are interested in supplying steel to Rouge for the U.S. auto industry so it's unlikely that they're planning any job cuts at the plant." If, as is expected, the judge approves the sale, Severstal will become the third Russian company to acquire a major U.S. asset. LUKoil paid $71 million in 2000 for Getty's network of filling stations, and Norilsk Nickel paid $341 million in 2003 for Montana's Stillwater Mining Company. DK

As December's last days slipped away, the biggest event to shake the Russian business world in 2003 was in the final stages of turning into an event that never actually took place. When the news broke in April, the merger of oil companies Yukos and Sibneft was immediately interpreted as a sign that homegrown Russian wealth was ready to break free of its rough-hewn beginnings and go global. Yukos, run by bad-boy-oligarch-turned-corporate-governance-maven Mikhail Khodorkovskii, and Sibneft, run by bad-boy-oligarch-turned-Chukotka Governor Roman Abramovich, would come together to form YukosSibneft, heir to the fourth-largest reserves of any oil company in the world. The dithyrambs rang in from near and far.

The deal of the century took half a year to unravel. In early July, the arrest of Yukos core shareholder Platon Lebedev signaled the start of an unexpected assault on the oil company by law-enforcement authorities. Even as legal difficulties continued to beset Yukos, the merger was officially completed on 2 October, with the two companies set to begin functioning as a single entity on 1 January. On 24 October, Yukos CEO Khodorkovskii was arrested on charges of fraud and tax evasion. Finally, in late November, Sibneft's core shareholders got cold feet and threw the merger into limbo.

On 17 December, Yukos Deputy Chairman Yurii Beilin gave a press conference to tell his company's side of the story. As reported by "Izvestiya" the next day, the gist of Beilin's account is that the two companies will now do a "mirror" deal to undo the merger. Under the terms of the merger, Yukos paid $3 billion for 20 percent of Sibneft. Yukos also swapped 26 percent of its own shares for 72 percent of Sibneft. According to Beilin, the new deal will reverse everything, restoring a state of pristine, stand-alone equilibrium. And since the demerger is technically a new deal, no one will have to pay the $1 billion penalty stipulated by the original deal.

Ample room for conflict remains, however. For starters, Yukos would like to receive interest on the $3 billion it paid Sibneft, money that Sibneft will now have to return. In what could prove a greater bone of contention, Yukos will consider Sibneft its "subsidiary" while the details of the "mirror" deal are being ironed out, "Gazeta" reported on 18 December. Sibneft has other ideas, and if Yukos tries to take control of its "subsidiary's" operations on 1 January, the mood could sour quickly. Finally, Beilin made it clear that Yukos has an independent board of directors that will "evaluate objectively whether or not this deal [to undo the merger] satisfies all of the company's shareholders, including minority shareholders," "Russkii kurer" reported on 18 December.

More intriguing than the mechanics of the demerger is the logic behind it. Beilin confirmed at his press conference that the impetus to undo the deal came from Sibneft. Why? Seasoned business-watcher Yuliya Latynina provided an overview of the main theories in "Yezhenedelny zhurnal," No. 100. Version one is that Abramovich and Khodorkovskii cooked up the merger in order to sell the resulting company to a foreign buyer. When Khodorkovskii got into trouble with the law and Yukos's capitalization plummeted, Abramovich decided to opt out. Version two is that Abramovich was acting in concert with the same forces in the Kremlin that stand behind the prosecutor-general's legal attack on Yukos. Abramovich's role was to undercut Khodorkovskii's economic muscle. Version three is that Abramovich is orchestrating events, with the tacit consent of President Vladimir Putin, in an effort to seize control of Yukos. Latynina rejects all three versions as far-fetched, concluding -- somewhat weakly -- that "American judges" might get a chance to sort out the mess if Yukos decides to sue.

The essential lesson of the Yukos-Sibneft non-merger is the same as the lesson of Yukos' troubles with the law: Many of the most basic motives, mechanisms, and maneuvers in the Russian business world remain hidden from view. The openness and transparency that are supposed to go hand in hand with international accounting standards, independent boards, and integration into the global economy can still give way to sudden sleight of hand. That, for now, is the real bottom line. DK