Business Watch: January 29, 2002

European oil major TotalFinaElf executive Menno Grouvel said the company is prepared to invest more in Russia, Reuters reported. He said TotalFinaElf is in talks with Russian oil companies and may team up with one to run a new project. "We have very good contacts with Russian companies and we discuss topics of common interest on a regular basis. But, to date, these discussions have not yet led to any concrete plans," he said. "In Russia, we are keen to carry out industrial projects with local partners. We are made to feel welcome there, and we feel we are talking to people who want us to invest in their country." Grouvel added, "Being Europe's primary refiner, TotalFinaElf is one of the main buyers of Russian crude. We are open to investment opportunities in the upstream area. Discussions are going on." News of the discussions became public following Russian President Vladimir Putin's visit to Paris. TotalFinaElf currently operates the Khariaga oil field, which delivers 10,000 barrels per day, an amount that will be increased to 30,000 barrels by the end of the year following a $250 million investment. Grouvel also noted the group's presence in the Chtokman project, still in the study stage, which contains reserves estimated at 100 trillion cubic feet (2.832 trillion cubic meters) of gas. (JMR)

Vietnam's Petrovietnam, Russia's Zarubezhneft, and Japan's Idemitsu Oil and Gas Co. signed a production-sharing agreement (PSA) to export and tap crude oil and gas off Vietnam's southern coast, in block 09-3 of the Cuu Long basin, Reuters reported. Petrovietnam General Director Nguyen Xuan Nham said the contract would set up a joint operating company. A Petrovietnam official told Reuters that Zarubezhneft has a 50 percent interest in the deal, followed by the 35 percent stake of Petrovietnam and Idemitsu's 15 percent. The PSA could last 25 years if the contractors discover crude, and 30 years if they find gas. At the ceremony, Zarubezhneft's general director, Nikolai Tokarev, pledged further development with the Asia-Pacific region. Zarubezhneft has already formed an oil and gas joint venture with Petrovietnam called Vietsovpetro, which produces the bulk of crude oil for Vietnam. (JMR)

Two subsidiaries of China National Petroleum Corp. (CNPC) have purchased the 30 percent stake formerly owned by the European Bank for Reconstruction and Development (EBRD) in two oil fields in Azerbaijan, Kursangi and Karabagli, for $52 million, Reuters reported. The deal represents an exit for the EBRD after a loan of up to $60 million to U.S. company Frontera Resources went sour. That failure led to the EBRD's acquisition of Frontera's stake. The EBRD said it was happy with the transaction. China National Oil and Gas Exploration and Development Corp (CNODC) and CNPC signed two separate agreements to buy the stakes. Zhou Jiping, president of CNODC, said, "The investment in the largest existing onshore oil operation in Azerbaijan is a major step in establishing CNODC's presence in the high-profile Caspian region." It is estimated that the oil fields hold 600 million barrels of crude oil and current output is 5,500-6,000 barrels per day. The two other partners are the State Oil Company of Azerbaijan (Socar) and Delta Hess, an alliance between Saudi Arabian Delta Oil and oil company Amerada Hess Corp. (JMR)

The chairman of Central Asia's largest airline, Uzbekistan Airways, said the carrier doubled profits in 2001 to $52 million. Chairman Arslan Ruzmetov added that the airline is interested in purchasing three, instead of the originally planned two, Boeing 767-300s for a total of $246 million, Reuters reported. He said that profits rose despite a 13 percent fall in passenger numbers. Last year, the company carried 1.55 million passengers, compared with 1.79 million in 2000. Ruzmetov said the decline in passenger traffic had been largely due to the general slump in market demand throughout the world. "In the last quarter of 2001 we lost around $18.5 million due to the decreasing number of passengers," he said. "We had to cancel around 440 flights serving international routes. Naturally, we had to compensate for this somehow, so we increased flights to the [Commonwealth of Independent States]." (JMR)

"The Georgian Business Week" reported that German bank Kreditanstalt fur Wiederaufbau (KfW) plans to open its regional representation in Baku during the first quarter of the year. Azerbaijan's Economic Development Ministry noted that the opening of a bank office is important for the relationship between Germany and Azerbaijan. KfW is expected to form a microfinancial bank in Azebaijan, with investment capital of DM 3 million. The International Finance Corporation, the EBRD, and the Black Sea Trade & Development Bank will also participate in the founding of the institution, alongside KfW. (JMR)

Russian financial analysts have speculated that a partial privatization of Vneshtorgbank could be completed within the year. The EBRD is believed to be interested in taking a 20 percent stake for $300 million, but representatives at the EBRD insist no formal negotiations have started, the "Financial Times" reported. Vneshtorgbank's good name and strong corporate client base could also attract a big foreign commercial bank as an investor. Vneshtorgbank has $4.5 billion in assets and specializes in trade operations. A row over the fate of Vneshtorgbank has been going on between the government and the Russian Central Bank over managing the sale of the bank. The government wants the proceeds from the sale to go to the federal budget, while the Central Bank hopes the proceeds will boost its own coffers. (JMR)

Federal Tax Police chief Mikhail Fradkov has estimated that illegal capital flight from Russia totals $1-1.5 billion per month. "In our country, laundering of illegal income is closely tied to illegal capital flight abroad," he said in an Internet conference. Not a single security agency is capable of handling this problem on its own, so the Tax Police are improving cooperation with other relevant agencies, he noted. "Right now, we are shifting contacts with our foreign colleagues onto a course of concrete informational and rapid-reaction cooperation. It think that the more active our cooperation is, the more effectively we'll be able to fight transnational criminal groups, money laundering, and capital flight," Fradkov said. Interfax reported that 20 Moscow banks inspected by the Tax Police alone transferred about $5 billion abroad through fly-by-night firms. Fictitious firms participating in foreign economic operations often commit major fraud, undermining the country's reputation, Fradkov said. (JMR)

Russian Aluminum (RusAl) has teamed up with Brazilian and American partners in a memorandum of intent to produce aluminum cable for Brazil's electricity grid. Partners include Brazil's Luminar and the State of Santa Catarina Industrial Federation, along with ITS, which represents the interests of General Electric Company (GE) in Brazil. RusAl Deputy Chief Executive Aleksandr Livshits and representatives from the Brazilian parties signed the memorandum in Moscow, in the presence of visiting Brazilian President Fernando Henrique Cardoso. Representatives of ITS parent GE confirmed their interest in cooperation with RusAl to implement a 10-year development plan for Brazil's electrical transmission. During the talks the possible production of power cables in the Santa Catarina industrial zone was explored. RusAl is the second-largest primary aluminum producer in the world, formed in March 2000 from the merger of a number of major smelters and other aluminum producers located in the Commonwealth of Independent States (CIS). The company accounts for 70 percent of Russia's primary aluminum output and 10 percent of global primary aluminum output. (JMR)

Russia's second-largest car maker, GAZ, has said that its planned joint venture with Fiat to produce Italian cars in Russia has failed. Russian news agencies quoted the head of GAZ, Dmitrii Strezhnev, as saying conditions had changed in Russia since the project was first announced in 1997 and that the plan was no longer economically feasible. Fiat and GAZ were to control 40 percent stakes and the European Bank for Reconstruction and Development (EBRD) another 20 percent in the venture. The project's fate was made more uncertain by the 1998 Russian crisis, which sent the economy into a nosedive and slashed Russians' incomes. The EBRD said it had been waiting for Fiat, the lead in the venture, to commit itself and invest the necessary capital, Reuters reported. The venture was also caught up in a change in ownership at GAZ, which became part of the auto division of the Sibal industrial holding company in 2000. Strezhnev said he still sees Fiat as a possible partner in building new D-class cars. (JMR)

Russian Prime Minister Mikhail Kasyanov is to submit a new macro-economic plan to President Vladimir Putin by 15 February, mapping out government activities for the period of 2002-04. Kasyanov's cabinet must first approve the plan. The main task of the new program will be to ensure economic stability. Timely payments to workers of budget-financed organizations and to the military will be among priorities in the program, ITAR-TASS reported. Another important guideline in the government's activities will be "consistent integration into the international community," including the World Trade Organization (WTO). Moscow will continue active negotiations this year to coordinate conditions for Russia entering the WTO. Plans include completing the creation of a committee on financial monitoring, aimed at combating money laundering, as part of international efforts to fight terrorism. (JMR)

Bulgarian Deputy Prime Minister and Economy Minister Nikolai Vassilev said he hopes to revive economic ties with Russia, which have been almost nonexistent for the last decade, Reuters reported. "It is important for us to manifest at a top government level our wish to boost economic ties [with Russia]," he said. President Georgi Parvanov declared that boosting relations with Russia and joining the European Union and NATO to be the nation's top foreign-policy priorities ahead of his 22 January inauguration. Russia remains Bulgaria's only supplier of oil and gas. Vassilev was scheduled to visit Russia the week of 21 January. The completion of an overland pipeline to carry Russian oil from the Bulgarian Black Sea port of Bourgas to Alexandroupolis in Greece will be the focus of talks. Settling Russia's debt to Bulgaria, which stands at some $100 million, would also be on the agenda, along with annual trade, which stood at some $1.3 billion in January-October 2001, when Bulgaria ran a deficit of some $1 billion with Russia. Traditional exports to Russia include cosmetics, cigarettes, medicines, canned food, wine, tourism, and construction services; but volumes have dwindled in the past decade. (JMR)

The Russian State Statistics Committee reported that the production of goods and services in the five core sectors of the Russian economy (industry, construction, agriculture, transport, and retail trade) grew 5.7 percent in 2001, compared to growth of 10.2 percent in 2000. Interfax reported that in December, production in the core sectors was up 5.1 percent year-on-year and 2 percent from the previous month. Industrial production in 2001 rose 4.9 percent to 5.881 trillion rubles; agricultural output grew 6.8 percent to 1.001 trillion rubles; capital investment was up by an estimated 8.7 percent to 1.6 trillion rubles; freight turnover increased by 3.1 percent (including 4.9 percent by rail); and retail sales rose 10.8 percent. The visible foreign-trade turnover in the first 11 months of 2001 grew 5.4 percent year-on-year, as exports slipped 0.5 percent while imports rose 19.5 percent. Real disposable incomes rose by an estimated 5.9 percent in 2001, while real wages grew by 19.8 percent (45.5 percent in unadjusted terms). Consumer price inflation was 18.6 percent in 2001, and producer price inflation was 10.7 percent. In December, industrial output rose 2.6 percent year-on-year, agricultural production grew 4.7 percent, and capital investment was up by an estimated 11.5 percent. Freight turnover grew 1.8 percent. Retail sales in December were up 11.4 percent year-on-year. (JMR)

In the week ending 14 January, Russian inflation was running at 0.6 percent, Reuters reported. According to the State Statistics Committee, the figure was 1.2 percent from the start of the month. Inflation for the whole of December was 1.6 percent month-on-month and 2.8 percent in January. The Statistics Committee said in a statement that average daily inflation in January has been 0.083 percent so far, compared with 0.051 percent in December and 0.088 percent in January 2001. The government has an inflation target of 11-13 percent for this year; prices rose 18.6 percent last year, above government targets. (JMR)

The president of Rosbank, which controls Russia's key platinum group metals producer Norilsk Nickel, said Russia might delay palladium exports until mid-2002. Last year, the statement would have sent palladium prices soaring, but analysts speculate that an oversupply of palladium is keeping consumers satisfied and prices low. Ross Norman, analyst at TheBullionDesk.com, said, "Industrials, especially car makers, are very well-stocked. Disruptions from Russia could now affect only small players who have to enter the spot market due to lack of contracts with producers." Since their peak, prices have fallen 60 percent to $400/410 a troy ounce, with spot palladium quoted on 21 January at $403 per ounce. However, senior officials said that export quotas of palladium from Russia might be approved this month. Russia produces two-thirds of all palladium and one-fifth of the world's platinum. (JMR)

Mikhail Fridman, chairman of Alfa Group Consortium and vice president of the Russian Jewish Congress, is clearly one of the richest and most politically influential people in Russia. Last summer, "Forbes" magazine estimated Fridman's assets at $1.3 billion. Some media picture him as an extremely modest person. "Novaya Gazeta," for its part, argued that the secret of Fridman's success lies in his close ties with those who control Russia's financial flows and natural resources, or possess classified information.

According to "Stringer," Fridman was born to a practicing Jewish family in the Ukrainian city of Lvyiv in 1964. Both his parents, who recently moved to Cologne, Germany, were members of the Communist Party. Although politically active, they strictly adhered to Jewish traditions, which had to be observed secretly for fear of reprisal. Fridman has claimed his Jewish origin prevented him from entering the Moscow Institute of Physics and Technology, still one of the most prestigious educational institutions in Russia. Instead, he was admitted to the Institute of Steel and Alloys. As a student, Fridman began his "business career" by scalping theater tickets, "Stringer" reported. Moscow theaters were always popular with the public, but tickets were hard to come by. So the enterprising Fridman earned a living by scalping tickets -- just like another oligarch, Vladimir Gusinsky did.

"Novaya Gazeta" reported that Alfa Group's roots date back to the perestroika boom in 1989. First, Fridman created a small company named Alfa Photo, and then a joint-stock company, Alfa Echo, together with ADP Trading of Switzerland. According to "Stringer," Alfa Echo traded sugar, tea, and cigarettes on the domestic market. In 1992, Alfa Echo participated in a federal oil-export program. By 1994, Echo's oil sales had reached 10 million tons per year. Fridman's Alfa entered the vanguard of Russian business in early 1990s when Peter Aven, Fridman's business partner, served as minister of external economic relations. Today, Aven serves as president of Alfa Bank, the largest private bank in Russia, according to the "Financial Times." Aven's "insider" sources at the Kremlin have greatly benefited Alfa throughout its history. Alfa remained intact following the default in 1998. Alfa's leaders believe that the success of their business requires control of just three things: the executive, legislative, and judicial branches of power.

Fridman's acquisition of Tyumen Oil Company (TNK) vividly illustrates his business style. According to "Novaya Gazeta," Alfa bought 40 percent of state-owned TNK for $810 million through its affiliated structures in 1997. In 1999, the government decided to get rid of its 50 percent stake in TNK. And while it had paid $810 million for 40 percent of TNK, Alfa was able to acquire the state's 50 percent stake for a mere $270 million. The Russian state treasury, however, did not receive $1.08 billion for the combined 90 percent stake it had sold in the oil company: Fridman's Alfa paid $170 million of the $810 million price tag on the initial 40 percent stake, and $90 million of the $270 million sale price on the 50 percent stake.

Fridman rarely appears before the press. However, he recently gave an interview to "Vedomosti" on the current developments within Alfa Group. According to Fridman, Alfa has a streamlined management system. The group does not specialize in banking, petrochemicals, or telecommunications, as it might seem: Its business is investing. "This is our mission. Having bought a company, we establish those rules, which are [strict] and understandable for potential investors, primarily Western businessmen. Then we sell the company, because we cannot do anything else for it." Fridman said he believes the majority of Russian corporations function on a principal of monarchy -- "all decisions are made by one person. Our system is different, it is based on a collegial approach."

Fridman did not comment much on future Alfa Group strategy for development. But at least two scenarios have been offered in the media: one pessimistic and the other optimistic. The pessimistic scenario, closely linked with the economic situation in 2002-03, was offered by "Novye Izvestiya" on DATE. The year 2003 will be crucial to paying off $19 billion in Russian external debt. In 2002, Russia will have to pay $14 billion -- which is only partly covered within this year's budget. The shortfall is over $2 billion. According to the Finance Ministry, default is out of question and Russia will comply with its obligations. But it will need extra revenues.

According to "Novye Izvestiya," the government can receive extra revenues by "persuading" wealthy businessmen to pay their taxes, resorting to the threat of tax inspection, and relying on coercive measures. Alfa Group, through TNK, has borrowed an estimated $1.5-4 billion. The newspaper speculated that Fridman will effectively sell his assets in Russia and the former Soviet Union by drowning himself in massive debts. TNK will then face overwhelming foreign debt, and will be left explaining to foreign investors where their money went and how it will be repaid. Such an outcome could place the entire Russian market at risk, "Novye Izvestiya" concluded.

"Corriere della Sera" made a more optimistic prognosis. The Milan-based newspaper said that, these days, Russian oligarchs play by the Kremlin rules by investing internally. Otherwise, Russian President Vladimir Putin made himself clear, they will face "serious troubles." With this in mind, "Corriere della Sera" speculated, Russian oligarchs took interest in "local shopping," creating three major corporations that account for 15 percent of the country's gross domestic product. These corporations are: Millhouse Capital, led by Roman Abramovich; Interros, led by Vladimir Potanin; and Alfa Group, led by Fridman. The latter was defined by "Corriere della Sera" as the most influential consortium and valued at $16 billion. With the expansion of these corporations into the most profitable sectors of business, analysts unanimously agree, "Millhouse, Interros, and Alfa will be the benchmarks of Russia's economic rise within the next 10 years." (TSK)

Russian President Vladimir Putin proposed forming a Eurasian natural gas alliance during a meeting with Turkmen President Saparmurat Niyazov on 21 January. The alliance would unite Russia and the three big gas-producing countries of Central Asia -- Kazakhstan, Uzbekistan, and Turkmenistan -- allowing them to control the volume and export routes of gas supplies in the region. "The alliance would make it possible to exert effective control over the volumes and directions of Central Asia's gas exports, would create a unified balance of production and consumption of gas, and would ensure its export through a single export channel," Putin said. He added that the alliance would "bring an element of stability into the transportation of gas on a long-term basis," the "Financial Times" reported. Russia hopes the alliance strengthens economic ties with its neighbors at a time when U.S. military influence is on the rise.

Putin's proposal appears to run counter to Central Asian nations' desire to diversify their export routes and markets away from their dependence on Soviet-era pipelines that run through Russia. Kazakhstan, Uzbekistan, and Turkmenistan have focused their searches on routes through China, Turkey, Iran, and even war-torn Afghanistan to Pakistan. These projects have been held up due to difficulties in attracting investors to cover the huge financial costs and because of delays in feasibility studies. Russia hopes to persuade the gas-producing nations of Central Asia that it is more commercially viable to stick with Russian routes to reach European markets, which have a high demand for gas. Russia's pitch is likely to include a pledge by Russian gas monopoly Gazprom to treat each nation in the alliance fairly. Gazprom has expressed an interest in signing a long-term agreement with Turkmenistan for the purchase of 2 billion cubic meters (bcm) of gas in 2003, rising to 20 bcm over the next 10 years, Reuters reported. Disagreement over the price of gas has stalled negotiations.

The "Financial Times" reported that Russia produces 585 bcm of gas; Uzbekistan some 50 bcm; Turkmenistan 45 bcm; and Kazakhstan about 10 bcm. Central Asian nations, however, have pledged to increase production and output dramatically. This new volume of gas could significantly affect prices. ITAR-TASS reported that the deputy chairman of the Russian State Duma's Committee for Economic Policy and Entrepreneurship, Sergei Glazyev, believes the Eurasian gas alliance could become an equivalent of the Organization for Petroleum Exporting Countries (OPEC) in the gas sector. Glazyev insists that producers must coordinate their price policy, since gas exporters face a consolidated consumer position regarding the prices of gas, at least in Europe. He also believes the structure of the alliance would make it easier to agree on the development of Caspian Sea gas fields. Liberal Democratic Party leader Vladimir Zhirinovsky said the alliance "may become a far-reaching geopolitical project that meets the challenges of our time." He noted that Putin's initiative acquires special significance, as oil and gas will be the weightiest factors in international politics in the next 20 years.

Russian State Duma Speaker Gennadii Seleznyov and Russian Border Guard Commander Colonel General Konstantin Totskii have both expressed concern over Western forces based in Central Asia and their growing influence in the region. Totskii has said the troops of the U.S.-led antiterror campaign will not be needed once the operation in Afghanistan is completed. Kazakhstan and Uzbekistan have cooperated with the U.S.-led operation by providing bases and permission to use their airspace. Turkmenistan, on the other hand, has insisted on its neutrality and only permitted humanitarian missions to use its roads or airspace. The "Financial Times" speculated that Niyazov could be hoping that Turkmenistan's "good behavior" could reap rewards with Russia on the division of the disputed Caspian Sea, which holds offshore reserves. Meanwhile, Putin is testing his influence over Central Asian nations by first asking Niyazov for his blessing to form the alliance.

Putin appears to be positioning Russia to control Central Asian gas through the alliance. Control over these volumes also implies control over Central Asian exports and therefore control over supplies to European gas markets. Furthermore, Putin plans to transit the gas through state-owned monopoly Gazprom's pipeline. It is likely that Russia will use domination and intimidation against the alliance members to achieve Russian interests. Russia could also take its power role one step further by employing gas supplies as political levers over European nations. In January 2001, Russia authorities ordered energy companies to cut supplies to Georgia strategically in the coldest month of winter in order to pressure the Caucasus nation during negotiations over the withdrawal of Russian bases in Georgia and other disputes. The Russian Economic Ministry ordered those gas supplies to be halted despite an advance payment by U.S.-based AES. European nations should heed Georgia's chilling experience, prompted by its dependence on Russian gas supplies. (JMR)