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Business Watch: February 5, 2002

5 February 2002, Volume 2, Number 5
Russia's second-largest oil company, Yukos, and French oil giant TotalFinaElf on 25 January announced plans to form a joint venture to develop and explore the Shatsky area of the Black Sea. According to a TotalFinaElf statement, "Entry into the Shatsky zone is in line with TotalFinaElf's strategy of expanding its deep offshore operations, bringing the group's expertise to a region where no exploration drilling has ever been conducted." A senior executive confirmed in January that TotalFinaElf was in talks with Russian oil companies and was prepared to increase its investment (see "RFE/RL Business Watch," 29 January 2002). The first phase of the new work, in Russian federal waters at depths between 1,500 and 2,500 meters, involves the interpretation of seismic data already acquired by Yukos and the launch of an additional 2D seismic survey, TotalFinaElf said. Reuters reported that TotalFinaElf produces 12,000 barrels per day (bpd) in Russia under a production-sharing agreement for the Khariaga field in the Timan Petchora region, but a second development phase will boost this to 30,000 bpd before the end of the year. (JMR)

Russia's third-largest oil producer, Tyumen Oil Co. (TNK), and Slovenian Petrol have signed an agreement to cooperate in marketing oil products in the countries of former Yugoslavia, Reuters reported. TNK said it will cooperate with Petrol in oil processing and marketing in Croatia, Bosnia-Herzegovina, Yugoslavia, and Macedonia. The Russian company will provide crude oil for processing and also manage the processing of oil products. No details were released on planned volumes. Meanwhile, Petrol will manage logistics, marketing, and sales. Slovenian Petrol President Janez Lotric said the cooperation with Tyumen "will provide Petrol with new opportunities for expansion in the region." Trading sources said that under the agreement, TNK will only supply oil products since Petrol, which has already shut down its sole refinery, does not need crude oil volumes. According to "Vedomosti," TNK exported 5.8 million tons of light oil products such as gas oil, gasoline, and jet kerosene in 2001. (JMR)

Rolls-Royce will supply the Azerbaijan International Operating Company (AIOC) with over $50 million worth of equipment for the oil and gas sector. It will supply five RB211-powered Coberra 6562 generator sets and allied equipment, including Rolls-Royce En-Tronic control equipment, for the first phase in a major development of three offshore oil and gas fields in the Caspian Sea. According to a company press release, the equipment will be delivered during the fourth quarter of 2002 and the first quarter of 2003. The order is the first within the framework of an agreement that Rolls-Royce and BP, the designated operator of the development, signed in 2000. BP is the operator in the international consortium of oil companies that comprise AIOC. The president of the Rolls-Royce Energy business, Tom Curley, said, "Winning the first phase of this project provides us with a significant springboard into the oil-rich and strategically important Caspian region." The Phase 1 project is a $3.4 billion development plan. It is the first major step after the Early Oil Project in the implementation of the Azeri Chirag Gunashli (ACG) Production-Sharing Agreement and the first step toward achievement of the ACG Full-Field Development. (JMR)

Russia's oil output in 2001, including 10 million tons of gas condensate, amounted to 348 million tons, or about 6.99 million barrels per day, Deputy Prime Minister Viktor Khristenko was quoted by news agencies as saying on 30 January. The State Statistics Committee said earlier in January that oil output in 2001 rose by 7.7 percent to 337 million tons. Khristenko also said that Russia's gas output fell by 10 billion cubic meters (bcm) in 2001. However, he added, oil companies increased gas production by 6 bcm in 2001, Prime-TASS reported. (TSK)

Aleksei Mishchenko, general director of regional telecoms unit Vimpelcom-R, told a news conference that the company is considering a loan from the European Bank for Reconstruction and Development (EBRD) to finance rollout plans for networks outside Moscow. Russian cellular operator Vimpelcom "is working on a Eurobond," he said, adding, "Another way is the EBRD, and another way is direct investment." Mishchenko said a decision on how to raise money is expected by March. Plans could be influenced by potential developments such as additions to the firm's license portfolio. Earlier in January, investors told Reuters that Vimpelcom gave a mandate to UBS Warburg and J.P. Morgan for a new dollar-denominated bond issue of up to $250 million. Vimpelcom-R got its first capital injection last year when the Russian Alfa group, which currently has a 25 percent-plus-one-share voting stake, paid the first $103 million tranche of a $337 million, three-year investment deal. As part of the same deal, Vimpelcom, which owns the rest of Vimpelcom-R, and its longtime strategic partner Telenor also have options to buy shares in Vimpelcom-R. (JMR)

Following two months of talks, the Armenian government and Greek-owned telecommunications monopoly Armentel finally reached a solution to the dispute that erupted last year over Armentel's plans to introduce per-minute telephone charges, RFE/RL's Yerevan bureau reported. Under the new agreement, which was mediated by Justice Minister David Harutiunian, Armentel is allowed to charge 4 drams (less than $0.01) for each minute of local calls over and above a six-hour monthly limit covered by the current flat fee of 900 drams (about $2) for private households and 2,700 drams for registered businesses. (JMR)

Kutaisi Car Building Works will begin producing Georgian jeeps. A $20 million production agreement was signed last year, "Georgian Business Week" reported. An experimental batch of joint-made Bolero jeeps was assembled with the assistance of Indian Mahindra. The major market for the cars, aside from Georgia, will be the South Caucasus, neighboring regions of Russia, the Near East, and Turkey. According to preliminary reports, a Georgian Jeep will cost $10,000-12,000 and a pickup $7,000-8,000. Production of 2,000 Jeeps per year is planned in the first phase. Tbilisi Mayor Vano Zodelava bought the first car assembled and presented it to the city's Union of Theater Workers. (JMR)

Russia's biggest car manufacturer, AvtoVAZ, is seeking hundreds of millions of dollars in cash and investors or creditors to help it develop a new line of cars. AvtoVAZ Chairman Vladimir Kadannikov told Reuters in an interview that the company also wants to raise its share price and capitalization, after an eighteenfold rise in the last two years, as a base on which to attract funds. He also backed paying dividends on 2001 earnings, for the first time in five years, and predicted sales this year will rise to 95 billion rubles (around $300 million) from 92 billion rubles in 2001. The company dominates the Russian market, producing 70 percent of the 1 million new cars sold last year. AvtoVAZ, which produces the Zhiguli and Lada cars and the Niva off-road vehicle, is already working with General Motors. The two are to build an off-road variant called the Chevy Niva, and both have indicated cooperation could become closer. "If all goes normally with our project with GM, we have said that we will try to extend this project or strategic partnership," Kaddanikov said. Officials from the European Bank for Reconstruction and Development (EBRD) visited AvtoVAZ's huge plant in central Russia with a view to possibly lending funds. Kaddanikov said the company's project to develop a new line of Kalina cars, on which it should start working this year, will require around $800 million. (JMR)

Russian oil major Tatneft said it will create its own gas holding by the end of March, Prime-TASS reported on 30 January. The holding will unite Tatneft subsidiaries, including Tatneftegaz oil and gas company, Minnibaevskii gas processing plant, and the Transugolvodorod gas transporter. In 2001, Tatneft's subsidiaries produced 750 million cubic meters of natural gas. (TSK)

Moroccan Foreign Minister Mohamed Benaissa and Russian Foreign Minister Igor Ivanov discussed ways to boost mutual trade, "The Moscow Times" reported. Morocco is one of Russia's largest trading partners in Africa, and considers the littoral state a potential partner on that continent and in the Islamic world. Moscow has thus sought to foster relations with the kingdom. Bilateral trade totaled $360 million in 2001, and both countries have expressed interest in developing closer economic relations. Two areas of particular interest are reportedly the construction of power-generation facilities and high technology. (TSK)

Aluminum giant RusAl pledged to triple exports to the United States in 2002, "The Moscow Times" reported. "In the second half of 2002, U.S. consumers will have a problem with insufficient supplies. They are currently working from inventories,... whereas Europe has hidden stocks," said RusAl operations chief Aleksandr Bulygin. He said RusAl plans to direct 30 percent of its exports to the U.S., up from 11 percent last year. RusAl expects that exports to Southeast Asia will account for 39 percent of total exports this year, while another 30 percent will go to Europe. According to Bulygin, RusAl plans to export 82 percent of its total production in 2002, down slightly from the 2001 figure of 83 percent. Bulygin said total production will be increased by 5,000 tons in 2002 from 2.459 million tons in 2001 and 2.415 million tons in 2000. Overseas expansion continues to be RusAl's top priority. Within days, Guinea's parliament should decide on a deal to grant RusAl management rights to the Dian-Dian bauxite mine, one of the world's largest, Bulygin said. The project has been estimated at costing close to $1.75 billion. RusAl is also eyeing Brazil, having signed a memorandum to provide and to help producing high-tension power lines. (TSK)

Lithuania's Finance Ministry said it will issue 40 million euros ($35.09 million) worth of six-month notes, with the funds to be used to finance the budget deficit and service foreign debts. Daiva Kamarauskiene, director of the ministry's public debt management department, told Reuters, "It will be a private placement of 40 million euros [in] discount notes arranged by BNP Paribas." She added, "The bills will have a maturity of up to six months at 45 basis points above the six-month EURIBOR." Kamarauskiene said the ministry will use the funds to finance the budget deficit, which is planned at 1.1 billion litas ($275 million) in 2002, and to cover expenses related to servicing the country's foreign debt. (JMR)

Russia's federal budget received 21.3 billion rubles ($698 million) in excise revenues from the sale and production of alcohol products in 2001, "The Moscow Times" reported. The figure is 40.9 percent more than in the previous year. About 131 million decaliters of vodka and spirits were produced in Russia in 2001, which is 8.4 percent higher than the 2000 figure, the State Statistics Committee said in a statement. (TSK)

Russia's Unified Energy Systems (EES) and regional electricity companies connected to the national power gird last week cut power to military units in the Russian Far East that have not paid their electricity bills, ITAR-TASS reported. Some navy and air force units experienced blackouts, and communication reportedly was lost at the Russian Space Control Center, which liaises with spy satellites and the International Space Station. Several military facilities in and around Russia's Pacific port of Vladivostok were temporarily cut off from power supplies because of debts to the local power company on 24 January. In central Siberia, the Chitaenergo power company on 25 January cut off supplies to various military facilities, including eight army garrisons, two air force bases, and an air-defense unit. Air force commander Vladimir Mikhailov and navy chief Vladimir Kuroyedov were rushed to the region to assess and resolve the situation. Officials in charge of Russia's military space operations accused EES of endangering a multimillion-dollar spy satellite and temporarily severing communications with astronauts on the space station. But space officials in Moscow told Reuters they had not experienced any problems communicating with the station. They declined to comment on possible risks to satellites. RIA-Novosti reported on 26 January that the cost of losing one satellite could be 10 times as high as the amount of the Space Center's debt to EES. EES dismissed the accusations, saying the power cuts were agreed with the military and were implemented at a time when they could not have caused any damage. A spokesman for local EES outlet Dalenergo, Mikhail Zedrik, told Reuters in Vladivostok, "Power supplies to air force bases in the Primorskii Region have been reduced by half." But he insisted that no strategic military sites were affected. Power companies are allowed to cut supplies to secondary army units for debts but not to "strategic sites."

EES head Anatolii Chubais noted that Kamchatenergo has resumed electricity supplies to the Space Control Center in Kamchatka and other strategic entities. He said power will not resume to lesser military facilities until their debts are paid by the state. The Russian Defense Ministry owes EES a total of 2.8 billion rubles ($93 million). Two years ago, power was cut off at a strategic missile base about 60 miles northeast of Moscow. The base retaliated by sending troops to seize a switching station and turn the lights back on. (JMR)

Russian President Vladimir Putin, who often appears on TV skiing or practicing judo, on 30 January urged Russian citizens to improve their health by getting more involved in sport activities. The statement appears aimed at drinkers and smokers in Russia, where it is not unusual to see employees drinking beer on the way to work in the metro. The president told a Kremlin meeting of the State Council presidential advisory body that physical exercise was vital to the health of the nation. He expressed concern that only 10 percent of the population is involved in sports activities and that the average life expectancy in Russia is 65.5 years, compared with 76 years in the U.S. "It's not a secret that for many years our athletes have gone to train abroad," he said, adding that child illness has risen by more than 24 percent in the last two years. Putin said the Kremlin will promote physical activity in Russia. He has also called for a study "to examine the opportunities for creating a federal television sports channel," Deputy Prime Minister Valentina Matvienko told reporters. At the same time, the president of the Russian Olympic Committee, Leonid Tyachagov, declared that his committee needs its own sports channel. The last attempt to raise awareness of the nation's physical and psychological health occurred in 1980, when Mikhail Gorbachev introduced a largely unsuccessful campaign to combat alcohol. (JMR)

Nearly one year after its acquisition of the country's largest Internet provider, Cityline, in spring 2001, Golden Telecom Holding has decided to pull the plug on the outfit, reported on 31 January. On 25 January, Golden Telecom announced that it had stopped accepting payments for Cityline services and suggested that Cityline customers switch to Internet service provider Russia-On-Line (ROL). With over 40,000 customers in Moscow, Cityline also enjoyed popularity in St. Petersburg, Nizhnii Novgorod, Novosibirsk, Krasnodar, Tyumen, and Kaliningrad. A gradual transfer of customers from Cityline to ROL began last summer and is expected to end by March. (TSK)

Foreign car sales in Russia are rising. Approximately 80,000 foreign cars were sold in Russia in 2001, compared with just 47,800 the previous year. Czech Skoda Auto, a Volkswagen subsidiary, nearly tripled sales to 8,391 vehicles, along with French Peugeot and Citroen, Interfax reported. The agency reported a doubling of sales at: Volkswagen (to 7,254); General Motors (to 2,141); Ford (4,124); and Nissan (5,286). Mitsubishi Motors sold 6,004 cars against 3,836 in 2000 (an increase of 56.5 percent), and Toyota sold 4,461 cars against 2,307 in 2000 (up 93 percent). (JMR)

Lithuania's Statistics Department released preliminary gross domestic product (GDP) figures on 29 January. Reuters reported that GDP grew 5.7 percent, or 47.8 billion litas ($11.95 billion), in 2001. Growth was boosted by industry, construction, and trade in the fourth quarter. The department added in a statement that preliminary calculations showed GDP rose an annual 7.9 percent in the fourth quarter, versus a 3.9 percent rise in the same period a year ago. Veikko Maripuu, head of research at Suprema, said, "First of all, we see a gradual improvement of domestic demand [and] the export sector despite cooling European markets," Reuters reported. "These are the main factors why we saw very good development through 2001." If the figures are confirmed, it would be the largest quarterly growth since the second quarter of 1998, when GDP rose 10 percent, and the biggest annual rise since 1997, when the economy grew 7.3 percent. The department's official data for fourth-quarter GDP and full-year 2001 are scheduled for release on 29 March. (JMR)

The decision to dismiss Railways Minister Nikolai Aksenenko did not come overnight. Russian media had been speculating on the issue for several months before President Vladimir Putin sacked the embattled minister by decree on 3 January.

What was less widely expected, however, was the appointment of Moscow Railways head Gennadii Fadeev to the post. There were over a dozen potential candidates for the highest post in a key ministry, reported, and Fadeev held the position from 1992 to 1996. A source at the ministry described him as an extremely agreeable and peaceful man and, at 65 years old, past his retirement age. Prime Minister Mikhail Kasyanov characterized Fadeev as "an experienced professional who knows the [railroad] industry well."

Following the collapse of the Soviet Union, Fadeev became Russia's first railways minister when he was appointed by President Boris Yeltsin on 20 January 1992 -- the same day the Railways Ministry was established. Some believe that Fadeev was fired in 1996 for his close friendship with First Deputy Prime Minister Oleg Soskovets, according to on 6 January. Soskovets was considered a "spiritual father" of opposition to the president and his cabinet. In 1999, Fadeev became the head of Moscow Railways.

In June 1999, "Moskovskie Novosti" published an investigative report alleging financial misdeeds by Transrail Group leading directly to the Railways Ministry and Minister Aksenenko. The report described Transrail activities that were potentially damaging to the state budget. As it turns out, Transrail was registered in Switzerland as a non-profit organization in 1997. According to its founding documents, Fadeev was one of the board members. "Moskovskie Novosti" speculated that even if Fadeev was not directly involved in the commercial transactions of Transrail, he was a key figure in the firm's activities. As a non-profit organization, Transrail was not supposed to perform any commercial activities. However, the firm was not prohibited from establishing branch companies and affiliates that performed commercial activities -- apparently using ministry funds. Fadeev is also Aksenenko's brother-in-law and was instrumental in building Aksenenko's career. speculated that the appointment of a person close to Aksenenko signals that the team of Aksenenko supporters, including Kasyanov, was actually able to maintain control over one of Russia's key ministries.

The victory may be fleeting, however. According to, the Railways Ministry's influence and financial inflows will be dramatically reduced. The ministry is on the verge of restructuring and indeed, by the end of 2002, it may be irrelevant who heads it: Its key functions will be transferred to a joint-stock company called Russian Railways that is being established under the aegis of the Railways Ministry. Once that happens, Putin will appoint a loyal official to the leading position at the company. The president has plenty of time to choose this candidate.

Following his reappointment on 5 January, Fadeev pulled out of the Railways Ministry's most ambitious projects. According to "Izvestia," Fadeev declined offers of credit from international financial institutions. Fadeev also agreed with Minister of Economic Development and Trade German Gref to slash the Railways Ministry's budget from 158 billion rubles ($5.1 billion) to 93.7 billion rubles ($3.1 billion), "Vedomosti" reported on 14 January. For Aksenenko, this would have been unthinkable: In 2001, he invested 112 billion rubles ($3.6 billion) in ministry projects and still reported a loss of 8 billion rubles. When criticized for excessive investment policies, Aksenenko would refer to reports from Arthur Andersen and McKinsey that recommended railways investment of no less than 160 billion rubles per year.

One project for which Aksenenko lobbied that was subsequently dropped by Fadeev was the construction of a bridge to Sakhalin Island. The project's cost was initially estimated at 126 billion rubles ($4.1 billion). According to "Vedomosti," Aksenenko justified the cost by citing the geopolitical necessity of the bridge. Fadeev, on the other hand, stated that his ministry lacks the money even for the project's feasibility studies, let alone its realization. According to a source at the ministry, the project has the full support of President Putin. That could explain why a skeptical Fadeev said the project might be implemented, if the government finds the funds. Another project abandoned by Fadeev was the development of the Elginsky coal reserve. If implemented, "Izvestia" reported on 11 January, the project would resolve energy problems throughout the entire region of the Russian Far East.

With some changes underway, the Railways Ministry is still sticking to some of the practices that have earned widespread criticism in the press. The ministry is maintaining huge tariff discounts for some companies, sometimes amounting to 70 percent of the full tariff. According to "Vedomosti," independent experts have estimated the financial damage from those discounted tariffs at $1 billion annually. (TSK)

Russian banks have experienced heavy demand for euro banknotes and coins since their release on 1 January, ringing up exchange volumes that are far higher than expected. They have exchanged a higher volume of euros than the combined figure for the 12 European currencies that were replaced.

Alfa Bank, the country's largest commercial bank, imported more than $16.2 million from 25 December to 11January, about 40 percent of the trade in U.S. dollars. AP reported that Sberbank, the largest state-run bank, claimed to have sold more than $11.2 million in the first half of January. That represents almost 12 percent of the foreign currency sold in that period, up from about 3 percent last year for all European currencies combined. Alfa Bank spokeswoman Svetlana Smirnova said early euro buyers were likely changing money for European travel and not for savings.

But Peter Westin, senior economist with Aton Capital Group in Moscow, believes euro notes will not replace the dollar in the hearts of Russians. "For the majority, it's 'dollar rules.' They're not even going to think about the euro," he said.

Most Russians hold their savings at home in what are dubbed "mattress dollars" due to the economic turmoil that has racked the country since the 1991 Soviet collapse and the 1998 financial crisis. Those mattress dollars are estimated to amount to as much as $40 billion.

Russian Finance Minister Aleksei Kudrin said recently that the euro could bring the Russian and European economies closer together and should decrease the cost of foreign-trade transactions. But Kudrin said the euro still would not replace the dollar. Most of Russia's foreign-currency reserves also are in dollars: The Russian Central Bank said its euro reserves were so small it would not even provide a figure. The ruble-euro exchange rate on 28 January was 26.50 rubles per euro. The ruble-dollar exchange rate on the same day was 30.61 rubles to the dollar.

Kudrin noted that the euro could make inroads in Russia for reasons of trade -- the same reason prices at landmark department store GUM have been changed from markings in "conditional units" equivalent to the dollar to ones equal to the euro. Russian clothing and cosmetics retailer Bosco di Ciliegi, which runs several shops at the GUM, has created prices in "Boscars," a unit tied to the euro. Bosco spokeswoman Olga Yudkis said the company decided to implement euro pricing because it deals mainly with European suppliers for its imported clothes, perfumes, and cosmetics. (JMR)