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Business Watch: February 19, 2002

19 February 2002, Volume 2, Number 7
A top executive at Russia's second-biggest oil company, Yukos, predicted the country's major oil companies will continue to merge until only one or two world-scale companies remain, AP reported. "I'm hoping that one of those will be ours,'' said Yukos Chairman Mikhail Khodorkovskii. At the annual Cambridge Energy Research Associates (CERA) conference in Houston, Khodorkovskii said he expects acquisitions to continue as Russian oil companies seek new markets. Yukos recently tried to increase its stake in another Russian concern, Eastern Oil Co., but was blocked by the government. Another Russian oil company, Tyumen Oil Company (TNK), has been courting Western companies, especially BP, to form a strategic partnership. The two companies hold stakes in Eastern Siberia's Rusiya Petroleum. There continues to be a role for Western companies in Russia, Khodorkovskii said, noting that New York-based Schlumberger and Dallas-based Halliburton are the only such enterprises offering a full range of services working in Russia.

Russia's oil industry is struggling with low prices due to a glutted domestic market, which is driving takeovers. Mergers are seen as a way to become stronger and increase the chances of survival. As Russia's oil companies grow, they are assuming a larger role in world oil markets. Russian Energy Minister Igor Yusufov was quoted by ITAR-TASS as saying, "Russian oil companies should strengthen their positions in international markets and not give them up to anyone." In December, Russia promised Organization of the Petroleum Exporting Countries (OPEC) that it would reduce its oil exports by 150,000 barrels per day (bpd) in the first quarter of 2002 as part of a coordinated move by OPEC and non-OPEC nations to prop up oil prices in the face of falling demand. Russia's pledge was instrumental to OPEC's own agreement on cutting exports. Despite the pledge, Russia's oil production rose by 60,000 bpd in January from December to an average of 7.26 million bpd, according to the International Energy Agency. The issue is likely to come to a head at next month's OPEC meeting in Vienna, "The Wall Street Journal" reported. Adnan A. Shihab-Eldin, OPEC's chief economist, said organization officials will be paying close attention to Russia's oil-export numbers in hopes that they will be nearer the target by March. (TSK)

Interfax reported on 6 February that Japan's Marubeni Corporation will help Kazakhstan's state oil company KazakhOil fund the reconstruction of the Atyrau oil refinery. Japanese Bank for International Cooperation (JBIC) will provide $200 million and Marubeni $35 million. The total cost of the refinery is estimated at $308 million. (JMR)

The secretary of Russia's National Security Council, Vladimir Rushailo, and Georgian International Oil Corporation head Giorgi Chanturia held talks behind closed doors on 31 January. "Georgian Business Weekly" reported that unofficial information suggested that Russia could provide security to oil and gas pipelines laid through Georgian territory. (JMR)

Kuwaiti Defense Minister Sheikh Jaber al-Hamad al-Sabah met with visiting Russian Deputy Foreign Minister Aleksandr Saltanov to discuss organizing a new series of arms deals, Reuters reported. He will soon visit Russia to continue talks. Since assuming the post a year ago this week, Sheikh Jaber has revived several arms deals in the pipeline since the U.S.-led Gulf War ended. Kuwait has since signed defense and security pacts with all five permanent members of the UN Security Council, spreading arms purchases among its main allies the United States and Britain, France, China, and Russia. Kuwait bought armored vehicles from Moscow and Soviet-designed tanks from Yugoslavia prior to the Iraqi invasion. (JMR)

Western Union Financial Services, Inc., a subsidiary of First Data Corp., has opened a Western Union Money Transfer service in Uzbekistan. Western Union has established eight agent locations in the capital city of Tashkent and surrounding areas. By the end of first quarter, Western Union will add additional agent locations in the cities of Bukhara, Samarkand, Ferghana, and Kokand. By the end of 2002, the company anticipates having up to 20 active locations across Uzbekistan. Western Union's new Uzbekistan agents -- Business Bank, Bank Khamkor, and National Banks of Uzbekistan -- have a combined 42 locations throughout the country. Ziyodilla Khodjimedov, consul general for the Republic of Uzbekistan in New York, said, "Thanks to Western Union, thousands of Uzbek emigres in the U.S. will now be able to send money legally, quickly, and safely to their loved ones in Uzbekistan. Western Union money transfers are going to make life better for our relatives and friends in need." (JMR)

Colombian state oil company Ecopetrol is in preliminary talks with LUKoil for exploration contracts in central Colombia, Reuters reported. "One of the purposes of the contract is to target a potential 400-million-barrel structure," said an Ecopetrol official who asked not to be named. Ecopetrol expects to reach an agreement with LUKoil within a month, he added. (TSK)

The International Monetary Fund (IMF) hinted that it may release funds to Georgia earlier than the planned date of 2003, if the nation pushes through economic and energy reforms. IMF support for Georgia was suspended at the end of 1999, but in January 2001 the board decided to start a new, three-year program of over $140 million, about $36 million of which has already been distributed. The southern division chief for the IMF's Second European Department, David Owen, told Reuters, "If Georgia is able to implement the strong measures we discussed with the government, we would be able to recommend an increase for 2002. We discussed the possibility of issuing $60 million this year and $48 million in 2003." The IMF is urging Georgia to increase revenues, improve fiscal management, tighten banking supervision, and revise legislation to combat money laundering. Other key concerns are tax administration and customs mismanagement. An IMF monitoring mission will return to Tbilisi in April to review any newly implemented measures.

Owen praised 2001 economic growth of 4.5 percent and inflation of 3.5 percent. "Despite political instability towards the end of the last year, the government did a very good job in maintaining generally stable conditions and in particular maintaining a reasonable level of tax revenues," he said. The budget forecasts inflation at 5 percent and GDP growth of 3.5 percent this year. (JMR)

LPG EXPORTS DIVE (11 February)
Russia boosted the output of liquefied petroleum gas (LPG) in 2001 but slashed exports by almost half because of growing domestic consumption, Fuel and Energy Ministry data showed on 8 February. Russian refineries produced 6.85 million tons of LPG in 2001, or 4 percent more than in 2000, but exported only 930,000 tons. The ministry said it expected LPG production to rise this year to 6.98 million tons, only 900,000 tons of which would go abroad. According to Reuters, Russian petrochemical plants consumed a record 3.72 million tons of LPG last year, while 2.20 million tons were used in other industries. (TSK)

Brillianty Alrosa, a subsidiary of the Alrosa holding, reported sales of $130.7 million in diamonds in 2001, Director General Aleksandr Novosyolov was quoted by Interfax as saying. The figure represents a 46 percent jump over 2002 sales of $89 million, Novosyolov said. He added that the total value of the Alrosa group's diamond sales for 2001 was about $300 million, with about 90 percent of production bound for export, Interfax reported. He also said Brillianty Alrosa's orders for 2002 already total $150 million, the "St. Petersburg Times" reported. (TSK)

The European Union (EU) urged Russia to make deeper economic reforms. It noted "remarkable progress" toward restoring economic stability. Pedro Robles, the European commissioner for Economic Affairs, called for the adoption of transparent corporate legislation and banking reforms to attract foreign investors, Reuters reported. "We consider that corporate legislation is not sufficiently transparent, and the business environment is uncertain and risky," he said. The EU is pressing Moscow to do more to open up its markets to foreign competition. "We consider that Russia has made remarkable progress towards restoring macro-economic stability and equilibrium. It is true that in spite of this fact, substantial economic problems remain," Robles said at the end of the meeting of finance ministers from the Group of Seven leading industrialized nations. "The economy is slowing down in spite of the good situation and investments -- and this is one of the problems we have underlined -- are losing dynamism." A senior EU team held talks in Moscow in early February on services, industrial tariffs, non-tariff barriers, and the level of allowable subsidies to agriculture. (JMR)

An international conference on the Caspian Sea status, environmental protection, mineral development, and navigation will take place at Moscow's President-Hotel on 26-27 February, ITAR-TASS reported. High-ranking officials from Russia, Azerbaijan, Iran, Kazakhstan, Turkmenistan, and the U.S. will attend the forum. "This is the first scientific-working conference to dwell on legal aspects of the Caspian Sea status," a senior expert stated. "Earlier the priority was given to energy issues." Russian Deputy Foreign Minister and President Putin's special representative on the Caspian status Viktor Kalyuzhny will open the forum. Azerbaijani Deputy Foreign Minister Khalaf Khalafov, special Caspian envoy of the Iranian Foreign Ministry Mehdi Safari, and the U.S. secretary of state's Caspian envoy Stanley Mann will deliver reports. The Moscow conference "may help outline prospects for legal support to the mutually beneficial cooperation between coastal states, interaction with partners outside the Caspian region, and peace and tranquility in the Caspian Sea zone," experts were quoted as saying. (TSK)

Georgian Deputy State Property Minister Geno Malazonia told the "Georgian Business Weekly" that the ministry has submitted changes on the nation's bankruptcy laws to the parliament. According to these changes, the State Property Ministry undertakes control of bankrupted enterprises, thus not allowing management companies to bankrupt and sell separate parts of the bankrupted enterprises. This would halt the process of selling such enterprises piecemeal. (JMR)

Ukraine and the International Monetary Fund (IMF) failed to reach agreement on the key issue of valued-added tax (VAT) during the Kyiv visit of an IMF monitoring team. The IMF wants the government to pay more than 6 billion hryvnias ($1.1 billion) of VAT tax refunds to exporters. The government says it is short of cash to repay the funds after parliament wrote off companies' debt to the state budget. Exporters say the delays have become unacceptable and are impacting business successes, Reuters reported. The IMF says the problems mean other companies balk at paying the tax up front, aware the unresolved issue could deprive them of a major slice of their revenues. The VAT dispute has stalled discussions on releasing funds from a $2.6 billion IMF loan program. So far, Kyiv has received only $1.3 billion under an Extended Fund Facility three-year program approved in 1998 and which will expire in September. Ukrainian Prime Minister Anatoliy Kinakh said on 11 February that the VAT dispute "is a very serious problem. We plan to complete the work on VAT problems this week. The government is taking steps to improve the situation." The VAT refund debt is estimated at about 13 percent of the 2002 total budget revenues of 45.4 billion hryvnias. Analysts said the IMF's aid would become increasingly important this year and next as the government faces a foreign-debt payment crunch. Ukraine will have to pay $1.598 billion on its debts in 2002 and $1.764 billion in 2003. "The IMF money remains very important for the economy and its importance will even rise this year due to growing payments on foreign debts," analyst at Dragon Capital brokerage Andriy Dmitrenko said. He added, "Besides, exports are expected to slow down this year." (JMR)

Kazakh President Nursultan Nazarbaev has told bureaucrats that they must move their families to the new capital of Astana or lose their posts. "I order that within one month, by 8 March, your families move and settle here. You have apartments and all the necessary conditions here. Otherwise, return to your families and leave your posts," Reuters quoted him saying. Astana has received hundreds of millions of dollars in foreign and internal investment since Nazarbaev moved the capital from Almaty in 1997. Glitzy hotels, posh bars, and huge supermarkets have all mushroomed in Astana since then, but most bureaucrats return to Almaty every weekend. The president expressed surprise over the financial ability of modestly paid bureaucrats to fly frequently to Almaty. A return ticket costs $240. "Where the hell do you get the money?" Nazarbaev asked the ministers. (JMR)

Latvia's statistical office on 11 February released new figures showing that industrial output fell 6.2 percent month-on-month in December and posted an annual gain of 1.6 percent, which was well below market expectations. Total output for the month came to 152.4 million lats ($237 million), Reuters reported. Total output for 2001 came to a preliminary 1.795 billion lats, rising an annual 8.4 percent, the statistics office said. Statisticians said the monthly decline in industrial output was influenced by a 46.6 percent drop in the quarrying industry, with the manufacturing sector falling 12.7 percent. (JMR)

United Financial Group (UFG) initiated coverage of Russian dairy and juice maker Wimm-Bill-Dann with a "hold," warning it faced growing competition, a research note said. Wimm-Bill-Dann on 8 February issued American Depositary Shares (ADS) at $19.50 per share, raising $134 million in net profits, in the first Russian initial public offering (IPO) for 1.5 years. "Currently, WBD has a strong position in the market, but we expect its market share to continue to fall as competition from both multi-nationals and local players intensifies," the note said. "We believe that a price of $23.70 would leave the company looking fully valued, but we would consider revising our forecasts were we to see firm evidence that the company is regaining its market share," it added. Wimm-Bill-Dann shares last traded in New York at $22.60, up $3.10 from its $19.50 issue price, a gain of some 16 percent. The company controls 30 percent of the Russian juice and dairy market's total production capacity, but UFG said it had lost market share, Reuters reported. (TSK)

Lithuanian inflation rose faster than expected in January. The nation's statistics department released a report showing that inflation was driven higher by a 1.8 percent monthly rise in food and beverage prices, a 3.5 percent strengthening of transport goods and services, and a 5.7 percent jump in electricity costs. Lithuania's consumer price index (CPI) rose 1 percent month-on-month with the headline annual rate increasing 3.2 percent. The statistics department also said the country's producer price index (PPI) rose a monthly 1 percent with the year-on-year rate sliding 3.2 percent, impacted mostly by changes in oil prices. A Reuters sampling of analysts showed Lithuania's CPI was expected to rise between 0.3 percent and 0.6 percent month-on-month in January for an annual increase of between 2.5 percent and 2.8 percent. Statisticians said producer prices were most affected by fluctuations in refined oil products, which firmed 4.3 percent month-on-month while plummeting an annual 26.7 percent. (JMR)

Russia's former foreign and prime minister, one-time spy chief, and current head of the Russian Chamber of Commerce, Yevgenii Primakov has maintained an image as an active and prominent political leader for years. These days, Primakov's name is often associated with Russia's accession to the World Trade Organization (WTO). Earlier this month, Primakov's Chamber of Commerce sent a concept for Russia's accession to WTO to the government. Although the chamber warned of potentially unreasonable conditions for membership, the document does not appear to say anything new, reported. The chamber basically offered to reconsider the negotiation strategy with the WTO -- and some say to cleverly oppose it from within. Today, there are familiar voices in the Duma remarking that Russia would be forced to compromise itself to join the WTO. The chamber has offered to attract businessmen -- the oligarchs -- into the negotiation process, saying they will be able "to promote Russia's interests." This idea is not original. But the oligarchs must be mindful that, according to WTO guidelines, only senior politicians negotiate with the organization. (Otherwise, it would be extremely difficult to avoid financial speculation in capital inflows.) postulates that with his authority and influence, Primakov will likely be used by the oligarchs to reach out to the government, whose attitude has dramatically cooled toward some of Russia's biggest businesses.

Primakov, 71, assumed the post of president of the Chamber of Commerce in September, after his predecessor Stanislav Smirnov resigned following revealing reports by the chamber's control commission on apparent financial misappropriations. Primakov was unanimously elected to head the body by the chamber's 4th Congress. Alternative candidates were not offered: "Primakov's election was sanctioned by the Kremlin," reported on 14 December. Primakov's career had been in limbo since he resigned on 3 September as chairman of the Fatherland-All-Russia political faction that had 45 seats in the 450-member Duma. On February 11, the Fatherland Party officially disbanded, joining Unity and All Russia Party to form the United Russia Party. His original resignation from Fatherland was interpreted as Primakov's display of displeasure over the alliance between Yurii Luzhkov's Fatherland faction and the pro-Kremlin Unity party, according to Primakov said his resignation would give a new parliamentary leader plenty of time to prepare for general elections due in 2003. According to the "Financial Times," Primakov's resignation prompted speculation that he might soon be offered the post of foreign affairs adviser, or a post as special representative to the Middle East by President Vladimir Putin. According to, Putin publicly treats his former contender for the presidency with deference and respect.

Primakov's election to the Chamber of Commerce presidency was widely welcomed, reported. Prior to his election, the chamber played a marginal role in Russian business life. A politician of the federal level, as well as Primakov's international connections, were expected to enhance the chamber's role and transform it into a sort of "business foreign ministry" aimed at protecting Russian exporters' interests on world markets. When elected, Primakov said he would expand the breadth of the chamber's activities: "The Chamber of Commerce must become a main link connecting entrepreneurship, business, and the government." Primakov said the country's oligarchs should also unite with the chamber. "The chamber should unite all levels of the Russian business," Primakov stressed. According to, the chamber has a chance to assume some functions of the government. Primakov plans to suggest that the government transfer a licensing right to the chamber. This would no doubt provide the body with a new means of financing its expansion plans.

Primakov was Russia's prime minister for only eight months. According to "Argumenty i fakty," Primakov was brought in as a "political plumber" to save "the All-Russia house" from the effects of the 1998 default. Primakov stated that his months at the head of government were beneficial for both Russia and its people. In an interview with Stringer information agency, Primakov said his government led the country out of the August 1998 crisis, having reached a general agreement with the International Monetary Fund (IMF) and ensured domestic economic growth. In his book "Eight Months Plus," Primakov said that those eight months also "revealed the narrowness of the pseudo-liberalism which drew Russia into the abyss of an ultimate crisis." Primakov expressed hope that his government's proposals for building statehood, curbing corruption, and preventing economic crime would be continued; but his period as prime minister cannot be described as reformist. According to some sources, Primakov ignored all the signs of "the Family's" plot to dismiss him -- a reference to President Boris Yeltsin's inner circle of family members and close associates. Boris Berezovsky was reportedly one of the main protagonists. According to "Argumenty i fakty," Primakov became dangerous for "the Family" and the oligarchs in those eight months. To them, Primakov represented a return to the past and a threat to their free-wheeling ways.

On 12 September 1998, when Primakov was being appointed prime minister, President Yeltsin's era was in fact already over, Stringer offered. From that day, "the Family" began a frantic search for both Primakov's and Yeltsin's successors. Primakov's was very different from all other Yeltsin governments: It did not rely on Yeltsin, Anatolii Chubais, Boris Berezovsky, or Roman Abramovich for its decisions. Instead, Primakov's government relied on the support of the Duma and the Federation Council.

According to Stringer, Primakov created a new model of governance for Russia. He created a mechanism for the gradual transfer of power from the president to the prime minister. Later, Kremlin adviser on information policy Gleb Pavlovskii said Primakov created a model for opposition within power itself -- a means for a power transfer from Yeltsin to Primakov. According to Pavlovskii, this model was later used by the oligarchs in the operation called "Successor," which ultimately resulted in the appointment of Vladimir Putin. (PJ, TSK)

Shareholders in Gazprom, led by independent director Boris Fedorov and a Moscow fund manager, William Browder, are gathering documents to challenge PricewaterhouseCoopers (PwC), the Russian gas giant's auditor. Browder is running for a seat on the Gazprom board of directors on a platform that includes firing PwC as the company's auditor. A vote will be taken in June on the issue of retaining PwC.

Browder is also in talks aimed at possibly launching a class-action lawsuit against PwC in the United States on behalf of investors in Gazprom's American depositary receipts (ADRs). The claim rests on the view that investors made financial decisions on the basis of flawed audit reports. Browder's fund, Hermitage Capital Management, has been buying Gazprom shares since 1996.

"BusinessWeek" reports that the shareholders are accusing PwC of "conducting dangerously lax audits of Gazprom, sheltering management from scrutiny over many questionable dealings, and depriving investors of vital information." Fedorov has said, "If an auditor knows it cannot do a proper review, then it is just doing it for the money." Browder added, "PwC missed egregious transactions that were obvious to everybody else and hurt shareholders."

Shareholders have filed claims against Russian companies in the past, but this case is different because Russian President Vladimir Putin has added his concern regarding PwC's audit of Gazprom's financial books. In June, the president pointed out, "We know that enormous amounts of money were misspent." The Russian government holds a 33 percent stake in Gazprom. Putin appointed Aleksei Miller to replace Rem Vyakhirev as Gazprom's chief executive officer last summer with the ostensible task of making Gazprom more efficient and transparent.

A PwC report reviewing the ties between Gazprom and gas export group Itera has reportedly fueled suspicions of relaxed auditing. One incident involves the transfer of gas from Gazprom to Yamal-Nenetsk as payment in kind for $200 million in taxes. The region then sold the gas at a low price to Itera, which in turn sold it to customers outside of Russia for a "significant profit," "Business Week" reports. PwC said in its report that this saved Gazprom from borrowing cash at high interest rates to pay taxes. Based on information from the Russian Audit Chamber, Browder's firm concluded that the transaction denied Gazprom of $5.5 billion in pre-tax profits. In a second alleged incident, Gazprom sold Itera a 32 percent stake in subsidiary Purgas for $1,200. The auditing firm noted that the market price was approximately $400 million. PwC reportedly defended Gazprom's transaction by stating that it was too cash-strapped to develop the Purgas field. At that same time, however, Gazprom had enough liquidity to provide a $616 million loan to Itera. A third controversy covers the awarding of $1 billion in contracts by Gazprom to Stroitransgaz. In 1999, a block of Gazprom stock was transferred to Stroitransgaz; this information did not appear in the Gazprom 1999 annual report, which was approved by PwC. It was later determined that managers and relatives of Gazprom owned more than 50 percent of Stroitransgaz. Under pressure from Fedorov, Gazprom disclosed Stroitransgaz as a related party in its 2000 annual report.

PwC's explanations of these events appear to some analysts to be aimed at obfuscating not only the suspicious transactions, but also auditors' inability to get complete information from management. PwC has been criticized for not conducting the diligence that some believe an auditor should. Despite such an obstacle, PwC has signed off on the gas giant's financial books year after year. Andrei Sharonov, a deputy minister at the Economic Development and Trade Ministry, pointed out, "Auditors have been working on behalf of management rather than shareholders." Doubts about the validity of PwC's audits have helped keep Gazprom's value below that of its western competitors, even though Gazprom controls one-fourth of the world's gas reserves.

While President Putin supports the clean up of Gazprom's financial books, he and his government have stalled plans to restructure Gazprom. Prime-TASS news agency reported that the Russian government has delayed a reform plan for Gazprom for the remainder of 2002. The agency said the decision spells a further delay in restructuring the gas sector, which was originally planned to be discussed in November of last year.

In fact, the government has been delaying Gazprom reforms since Putin took office nearly two years ago, Reuters reported on 5 February. In June 2000, Russian Economic Development and Trade Minister German Gref presented a three-stage plan for the reform of Gazprom and the creation of competition for Russia's natural monopolies. This included the division of Gazprom into distribution and production entities. The government dropped the breakup idea when it unveiled its second restructuring plan in December 2000. Hopes for a new push for the restructuring were raised when Putin appointed Miller as chief executive. But this new push stalled in June, though the government gained control of the company's board. Trade publication "Petroleum Argus" reported that the government has assembled a list of new candidates for board seats in an effort to replace the entire 11-seat body in June.

It remains unclear whether the government is willing to push reforms -- bringing greater transparency and accountability to Gazprom and increasing its valuation -- or will continue to muddle through with a mix of political intrigue and public posturing. So far, the actions of the government provide little confidence that change is on the way. (JMR)