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Business Watch: February 26, 2002

26 February 2002, Volume 2, Number 8
The Organization for Petroleum Exporting Countries (OPEC) will send a high-ranking delegation to Moscow in early March to lobby Russia to prolong a curb on its exports, Reuters reported. OPEC Secretary-General Ali Rodriguez and OPEC President Rilwanu Lukman plan to meet Russian Prime Minister Mikhail Kasyanov on 3-5 March. "We are trying to win the support of Russian oil companies for an extension to the cuts beyond the first quarter," stated an OPEC official who preferred not to be named. Russia, which ranks second in oil exports after Saudi Arabia, agreed to restrict crude sales for three months from 1 January. It was one of five non-OPEC countries to cooperate with OPEC as that group reduced supplies for a fourth time in a year to prop up sagging prices. OPEC said its measures will last for six months to ride out the recession in the global economy, but Russia committed itself to just three months. Many Russian oil companies are opposed to the cut, which trimmed crude exports by 150,000 barrels per day. According to Reuters, Kasyanov is expected to meet representatives of oil companies in early March to discuss the prospects for exports in the second quarter. (TSK)

Russian major oil producer LUKoil is planning a fourteenfold jump in natural gas production by 2010 with the aim of raising exports fiftyfold, Reuters reported. According to Andrei Gaidamaka, LUKoil's deputy director of investment strategy, gas output will rise to 69.3 billion cubic meters (bcm) in 2010 and 84.3 bcm in 2020 from 5 bcm in 2000. "Significant growth is likely to come from LUKoil's Caspian reserves, and new volumes will be monetized through liquefied natural gas projects and through the buildup of pipeline export volumes," Gaidamaka stated at an oil conference in London on 19 February. He said the aim was to ramp up exports from just 10 percent of total output in 2000 to 35 percent by 2010 and 50 percent by 2020, with the remainder sold on the domestic Russian market. That would take total exports from just 500 million cubic meters in 2000 to 24.5 bcm in 2010 and 42 bcm in 2020. (TSK)

According to a recent statement by Russian Labor and Social Development Minister Aleksandr Pochinok, Russia has recently lost more people at the workplace than in wars, reported. Even the losses in Chechnya and in Afghanistan were "much less," Pochinok stated. The minister stressed that fatalities were occurring due to careless management trying to minimize the cost of the production while neglecting industrial safety. Moreover, the equipment used in the majority of industrial enterprises has not been renewed for years. According to the State Statistics Committee, about 45 percent of industrial enterprises representing over 6 million employees, have unsatisfactory safety conditions. As a result, more than 500,000 Russians receive physical disabilities annually. Until decisive steps are implemented by the state, Russia will keep losing thousands of its citizens to unsafe work conditions. (TSK)

Lithuania's privatization agency finalized the sale of a 76 percent stake of Agricultural Bank to Germany's Norddeutsche Landesbank Girozentrale (Nord/LB). The $18 million deal is in line with the German bank's expansion strategy in the Baltic region. The fund said Nord/LB will pay 71 million litas ($17.96 million) for the stake in Agricultural, Lithuania's third-largest bank, and will also invest 65 million litas in a new share issue, Reuters reported. This was Lithuania's third attempt to sell Agricultural; its last state-owned bank. The bank ended December with assets of 1.87 billion litas and posted a net profit of 8.46 million litas for full-year 2001. The deal is expected to close at the end of March. Nord/LB was the only bidder in the tender. (JMR)

Asset-stripping under the old management of Rem Vyakhirev (see "RFE\RL Business Watch," 19 February 2002) reportedly cost Russia's Gazprom $2 billion annually. Board representative for minority shareholders Boris Fedorov told Reuters that new measures under the management of Aleksei Miller could put the gas monopoly on the road to financial success. "Drainage of resources at Gazprom was about $2 billion a year through asset-stripping," he said. "Now the management is making real efforts to return these salvage whatever can be salvaged." He said another $1 billion would be saved by spinning off about 100 non-gas subsidiaries such as yacht clubs and hotels, while purchasing costs could be cut by up to 30 percent, Reuters reported. However, he added, "This year will not be a fantastic year for Gazprom; but if all things promised are implemented, next year we will see a different company with a different capitalization." He noted that Miller, although hesitant at first, has started to implement real reforms. (JMR)

Russian Finance Minister Aleksei Kudrin stated at his ministry's meeting that the amount of cash fleeing Russia fell by almost $8 billion in 2001, Reuters reported. According to Kudrin, government policy should now focus on fighting inflation and boosting investments. Capital flight has been a key problem for successive governments as the oligarchs sent billions abroad rather than invest in their crisis-ridden nation. The flow was also linked with the flow of money-laundering cash. Kudrin stated that capital flight in 2001 fell to $17 billion, down $7.4 billion. He said the share of capital flight in the country's balance of payments also fell, from 16.2 percent in 2000 to 10.9 percent in 2001. Russia has set up a special commission to investigate capital flight and money laundering, part of pledges to an international money laundering body to fight illegal funds. Kudrin said the government should also keep up its fight against inflation, which hit 18.6 percent in 2001, well above original forecasts of 12 percent to 14 percent. "Budget policy should be based on the task of lowering inflation, controlling the state of the financial market, and creating stimuli for investments into the real [production] sector," he stated.

With the financial collapse in 1998, Russia disappeared from the global financial map. In 2001, however, the Moscow stock market jumped 91 percent, and it is still climbing, while Russian bond yields continue to drop. According to "Business Week," Russia is once again an investment draw. "Russia is now back on the radar screens of global investors," says Philip Poole, head of emerging markets at ING Barings in London. Russia is expecting its fourth straight year of economic growth in 2002. And growth has been driven not just by a domestic oil boom but also by vigorous consumer demand, which surged 10 percent last year. Spurred by the good economic news and by warmer ties between Russia and the U.S. following 11 September, both domestic and foreign investors are venturing in. Daily trading volumes in Russian shares, though still far below pre-1998 levels, have risen from $180 million in September to a recent peak of $300 million. Moscow-based juice-and-dairy group Wimm-Bill-Dann recently said it does not want "anyone to find skeletons in the cupboard." "We feel a big responsibility, and we intend to meet that by being totally transparent," a company statement added. If others do the same, the Russian market may finally come of age. (TSK)

Russia's Sinarsky Pipe Plant is to buy a controlling stake in Romania's Artom pipe plant, "The Moscow Times" reported. Artom has capacity to produce 200,000 tons of pipe per year. According to Sinarsky spokeswoman Natalya Levitskaya, Sinarsky was acquired last week by MDM Group's pipe division, Pipe Metals Co., or TMK, and rival United Metals Co., or OMK. OMK produced over 1.5 million tons of pipes last year, while TMK produced more than 1 million tons and Sinarksy about 540,000 tons. (TSK)

Russian industrial output growth slowed to 2.2 percent year-on-year and declined by 7.5 percent month-on-month, said Aleksandr Surinov, deputy head of Goskomstat, Russia's state statistics committee. Goskomstat reported earlier that output grew 2.6 percent month-on-month in December. Industrial output normally declines in January when there are fewer working days due to New Year's and Orthodox Christmas. According to Reuters, Russia's industrial output grew 4.9 percent in 2001 and 8.0 percent in 2000. (TSK)

The price of Russia's benchmark 30-year dollar bond rose in early London trading on 20 February after Finance Minister Aleksei Kudrin detailed plans to cut the country's debt burden. The 5 percent global bond due March 2030 was 64.25 percent of face value bid, 64.5 offered at 0949 GMT, 0.625 percentage points higher on the day. "It is trading higher again, partly on Kudrin, partly on a firm bid for emerging markets," said a trader at a London bank. Kudrin stated earlier that Russia hopes to slash its total state-debt burden in the next three years, taking it below 40 percent of gross domestic product by 2005, from 51.9 percent at the beginning of 2002. Traders said Russian debt prices had been rising for some days on rumors the government was buying back bonds due in 2003 and 2004. According to Reuters, Russia has been buying back international debt to reduce 2003 debt repayments from the scheduled $19 billion. The country is due to make payments of around $14 billion in 2002. (TSK)

Moscow's Business Center Daev Plaza is hosting a seminar on "An Assessment Of Personnel Efficiency" on 26 February, "Vedomosti" reported. The goal of the seminar is to familiarize the executives with the management methods based on an objective assessment of each employee's business skills. The seminar will also cover the subject of building transparent system of bonuses and benefits, and promoting motivation and efficiency of the personnel. The seminar will be led by Aleksandr Lityagin, president of the Human Resources Club, and MBA professor at the Moscow State University. (TSK)

Russian President Vladimir Putin called on his cabinet to cooperate with the Central Bank to keep macroeconomic indices stable, Xinhua reported on 19 February. According to the president, seasonal variations will not lead to upheavals or problems, but economic processes must be followed closely. Putin said the January inflation rate of 3.1 percent was a three-year high. Elementary discipline must be observed in all economy-related ministries, he stressed. The January inflation rate has caused worries among economic analysts that the target inflation of 12 percent to 14 percent written in the budget will not be met. (TSK)

President Putin believes that interruptions in electricity supply are not the result "of some objective reasons, but of poor performance" by some senior officials, ITAR-TASS reported. Speaking at a cabinet meeting on 18 February, Putin said special attention should be drawn to the problem. According to Putin, there are flaws in the work of the government. Putin called on the Finance Ministry to respond promptly to emerging situations. "All those problems, all that uproar, could have been avoided," the president reportedly said. He suggested the next cabinet meeting start with a report by the Minister of Agriculture Aleksei Gordeyev. "With spring coming, there are more and more agricultural problems we have to handle," the president stated. (TSK)

Some 2,226 young Russians gathered for a simultaneous kiss on Moscow's Kievsky pedestrian bridge on 16 February, setting what they hope is a new world record, AP reported. Aleksei Svistunov, president of the PARI information agency, organizer of the event, said the kiss-off should earn a place in the record books. The event was a part of St. Valentine's Day celebrations in the Russian capital. According to Svistunov, the previous record of 1,400 people kissing simultaneously was held by the U.S. in 1996. (TSK)

Top brewer Baltika's net profit according to Russian accounting standards rose 76 percent year-on-year to 4 billion rubles ($129.8 million) in 2001, "The Moscow Times" reported. Baltika's 2001 revenues rose 61 percent year-on-year to 15.7 billion rubles on beer sales of 140 million decaliters, up 32 percent on the year, the company said in a press release. The company invested $115 million into its operations in 2001, highest since the company was founded in 1990. Baltika's share of Russian beer production rose to 22.5 percent last year from 20.1 percent in 2000. (TSK)

Russian ice cream exports rose 8.8 percent year-on-year to 11,100 tons in 2001, while imports fell 11 percent to 3,200 tons, Prime-TASS reported. In 2000 and 1999, Russia exported 10,200 tons and 8,900 tons, respectively. Vyacheslav Vygodin, chairman of the Russian Union of Ice Cream Manufacturers, said he expects ice cream exports to increase further in the coming years. Imports of ice cream have continued to fall from a peak of 19,000 tons in 1998 to 5,700 tons in 1999 and 3,600 tons in 2000. (TSK)

Russian Deputy Finance Minister Sergei Kolotukhin announced that Russia's foreign debt in 2003 will be lower than the expected $19 billion. A senior Russian officials said it will have to pay a maximum of $17 billion, but the figure could be as low as $16 billion. Russia has reduced the amount of foreign debt by buying back obligations in part. Some analysts said the country has cut its 2003 repayments to as low as $14 billion due to such repurchases. Kolotukhin told Reuters, "If the government had not actively managed the debt, then in 2003 we would have had to pay $20.5 billion." He did not provide an explanation on the rise in the foreign debt. Kolotukhin added that, according to latest ministry estimates, the total size of Russia's foreign debt at the end of last year was between $132 billion and $134 billion. Russia said its total debt burden was $138.1 billion in foreign loans and domestic liabilities of 531.1 billion rubles ($17.20 billion) at the end of 2001. (JMR)

Yevgenii Primakov graduated from the Moscow Institute of Oriental Studies, where he specialized in the Arabic World, in 1953. After failing to defend his economic thesis at Moscow University, Primakov went to work as a journalist for Radio Moscow in 1956. He eventually rose to chief of Arabic broadcasting, but he fell out of favor with a Central Committee member for his independent views. In 1962 he became a "Pravda" correspondent and soon was posted to Egypt in light of his fluency in Arabic. In Egypt, he made important contacts that would serve him well in the future. Primakov eventually returned to Moscow as director of the Institute of Oriental Studies before being promoted by Aleksandr Yakolov in 1986 to head the prestigious Institute of World Economy and International Relations (where the infamous British spy for the KGB, George Blake, worked). During the Soviet era, the Institute prepared classified policy reports for the Central Committee and Politburo in addition to doing other confidential work for the KGB. Primakov accompanied Mikhail Gorbachev to China in 1989 and impressed the Soviet leader. At the break-up of the totalitarian regime, Gorbachev and Boris Yeltsin offered Primakov the leadership of the SVR external intelligence service, with which he had actively collaborated for decades after his initial recruitment as an informant in Moscow at the Oriental Institute. In one article, Primakov's exploits were described as even scooping the KGB. As deputy director of the Institute of World Economy and International Relations in 1972, he notified the chief of the KGB in Cairo while there on a business trip that Anwar Sadat was preparing to abrogate the Soviet-Egyptian treaty of friendship and expel all Soviets. The KGB chief in Cairo, Vadim Kirpichenko, an old friend from their school days together at the Oriental Institute, refused to believe the report, countering that the KGB had too many well-placed sources not to know such important information. About one week later, Egypt expelled all Soviets.

Supportive of the Palestinian and Kurdish causes, Primakov became very close to the Kurdish leader Barzani. He also predicted the power struggle in Iraq and Saddam Hussein's eventual victory. He has since been a close associate of Saddam's and, in particular, of Tariq Aziz's. Some have even speculated that Saddam and the Iraqi�s provided Primakov financial support for his political activities and anti-American positions in the post-Soviet period. Picked by Gorbachev to work on his sweeping program of political reforms, Primakov proved to be an ardent supporter of the former Soviet leader. But during the failed coup attempt in 1991, he hesitated to take sides. This would pay off with his appointment by Gorbachev and Yeltsin to head the foreign intelligence service (SVR) that was hived off the KGB.

His appointment to head the SVR in 1991 quickly established his credentials as the first academician put in charge of the 12,000-strong espionage agency. In 1993, the SVR released a comprehensive study on NATO's growing threat to Russia. This was unprecedented in the history of the former totalitarian state and a further indication of Primakov's ability to influence Russian foreign policy from his seat at the intelligence service. It was also a sharp contrast to the pro-Western orientation of Russian Foreign Minister Andrei Kozyrev. It would not be long before this orientation shifted toward a Cold War orientation when he replaced Kozyrev as foreign minister. "I tried to preserve [the heritage of] intelligence but make it adaptable to the new conditions and demands," Primakov said in his book, "Eight Months Plus." He is all too modest in his assessment; his fingerprints are all over the more aggressive steps taken in the "near abroad" to advance and protect traditional Russian "spheres of influence."

According to the "Financial Times," Primakov was seen as a conservative in foreign policy and other areas. When he succeeded the pro-Western Kozyrev in 1996, Primakov encouraged closer ties with China and India, and a more skeptical and confrontational approach to U.S. global influence. As foreign minister, Primakov led an appreciable rise in anti-American statements and positions that challenged the U.S. on a number of international issues. Primakov�s performance at the Foreign Ministry was duly appreciated and noted by SVR Director Vyacheslav Trubnikov, who has since become first deputy foreign minister and a serious contender to replace Foreign Minister Ivan Ivanov. In one of his rare interviews, Trubnikov said, "We are categorically against NATO enlargement, and it fully correlates with the position of our foreign minister. We have complete mutual interaction and support. We supplement each other." He especially promoted challenges to the U.S. leadership role in global security issues. Specifically, he supported resistance to U.S. influence in the former Soviet states matched with positions opposing the unipolar world of American domination. This became a popular Russian theme, internally.

Primakov supported this example with a more aggressive stance in the former Soviet space. On 28 April 1993, Yeltsin and the Russian Parliament signed a special document proclaiming Russia�s right to militarily intervene within the 15 former Soviet Republics to defend Russia�s territorial integrity. The new geo-political theory focused on the "Near Abroad," stressing its strategic importance as a sphere of exclusive Russian interests. This was not well received by the former republics. The formulation Primakov advanced is best described as follows: If the former states of the Soviet Union can be kept weak, Russia can buy time until it is stronger and can regain its dominant position of power and influence, regionally and internationally. As prime minister from 1998 to 1999, Primakov became known for his high-profile antics to project Russia as an independent world power and leader. His trilateral policy of promoting a Russia-China-India alliance to counter the United States was aimed at reinvigorating Russian foreign policy. He even used theatrics to underline this independence: One example was turning his aircraft around in mid-air to abort a visit to Washington, D.C., and snubbing the American superpower to protest NATO's bombing of Russia's Serbian allies.

On 12 May 1999, Primakov reported to President Yeltsin's Kremlin office. According to "Komsomolskaya Pravda," Yeltsin told him: "You have played your role. Now you might have to resign. Just write a resignation letter. Mention any reason you want and...let us remain friends." According to "Le Soir," Primakov responded, "I agree with your decision. This is your constitutional right, but I believe you are making a mistake." On the same day, Yeltsin made a televised speech and said that Primakov had fulfilled his duty by uniting society and achieving stability under harsh circumstances. Yeltsin said Primakov's government had effected much-needed tactics. Strategically, however, a new economic stimulus was needed, and for this matter Primakov had to be replaced, the president said. "I am confident that a new prime minister will be able to bring new dynamics and new energy to the work of the cabinet," Yeltsin concluded. In just two months, newly appointed Sergei Stepashin was replaced with Putin as prime minister.

One event not generally associated with Primakov's removal was the arrest of a number of serving and former members of the Georgian defense and security establishment attempting to overthrow Georgian President Eduard Shevardnadze and his government in May of 1999, the same month of Primakov's removal. Confidential sources in the Georgian security service claim that Primakov's involvement in this plot can be shown by the following factors. First, they claim they intercepted communications between ringleader Igor Giorgadze -- who is wanted in an Interpol warrant for a 1995 assassination attempt on Shevardnadze in Tbilisi -- and conspirators in Georgia planning a 1999 attempt on the president's life. Giorgadze boasted to the Georgian conspirators that he had the backing of the Russian prime minister (Primakov) in the plot to overthrow the Shevardnadze government. In a 1999 interview with Radio Liberty Moscow, a former director of the US National Security Agency, retired General Lieutenant William Odom, confirmed the Georgian information. Moreover, Odom said, Georgian intelligence was aware of a meeting between Primakov and Giorgadze concerning the 1999 plot held at the old KGB complex in Minsk, Belarus. Some say it was these events -- and Primakov's presumed involvement -- that led to his removal by President Yeltsin from the position of prime minister. While this is speculation, one might describe it as informed speculation. Additionally, others believe it was Sergei Stepashin who provided President Yeltsin with the information on Primakov's Georgian coup involvement. This ultimately led to Stepashin's appointment as prime minister. But Stepashin -- known as "the fireman" for his master's thesis at the MVD academy on the role of party organizations in combating fires during the siege of Leningrad -- could not extinguish the firestorm created by Primakov's removal. In two short months, revenge was exacted and Vladimir Putin was appointed prime minister.

Primakov is clearly a remarkable man who cannot be underestimated. He might be best described as a man for all seasons, knowing when to wait and when to move with various political forces. From his humble origins -- growing up in Tbilisi, Georgia; born to a Jewish family; raised in a communal apartment by a single mother -- he has survived and flourished as few have amid various purges, shakeups, and government changes during his many years of service during Soviet and Russian times. He has also overcome personal tragedies, and medical and psychological crises. Privately, he is seen as open and gregarious, a "ladies man," and a friend and companion via his Caucasian ways. His loyalty to friends is perhaps best illustrated by the fact that Primakov for years maintained close friendly ties with the so-called "godfather" of the Russian Mafia, Otar Kvantrishvili, who was assassinated in Moscow in 1994. As a true friend, Primakov did not shy away from attending Kvantrishvili's funeral -- at which his colleagues from the SVR observed him. Even today, Primakov has offered to testify in defense of his old friend, Slobodan Milosevic, at the international war crimes tribunal in The Hague.

Primakov�s superb intuition -- based on knowledge, experience, and instinct -- have always been complemented by his great ability to analyze events and predict their future course (aside from his removal from the office of prime minister). His role in the Russian Chamber of Commerce will no doubt serve to slow or stall Russian membership in the World Trade Organization (WTO), but it is far from clear whether he can succeed in the longer term. Only one person can determine that outcome: the president of Russia. Some say hope springs eternal; but for Primakov, ever cautious and calculating, the presidency still remains outside his grasp. (PMJ, TSK)

Anatolii Chubais, responsible for Russia's privatization program in the 1990s and now chief executive of Unified Energy System (EES), during a European Union-Russian investment forum in Italy announced the future plans for EES, Russia's electricity monopoly. Ten years have passed since he launched state sell-offs in Russia, and now Chubais is working on tenders, spin-offs, and investment goals for EES. He noted that EES plans to hold its first tender for the construction of a generating facility in the third quarter. "This month, the board of [EES] and minority shareholders will be discussing a key project, the second block of the North-West power plant," he said. He added that if the board and shareholders approved the project, a tender will be held for its construction before the third quarter. The North-West plant will have a capacity of 450 megawatts and use advance combined-cycle technology, Reuters reported. A second plant will use the same technology and cost approximately $120 million, "Vremya Novostei" reported. The tender will require a $100 million investment to repay arrears from the construction of the first plant, which started operations at the end of last year.

Chubais pointed out that EES is planning tenders of its generating units in the hope of generating foreign investment. Talks are also being held with potential foreign investors. Chubais noted that the Pskov generating unit may be prepared for a tender this year. France's Electricite de France, Germany's EON, and U.S.-based AES Corporation have expressed an interest in the tenders. Italy's Italenergia consortium has also inquired about possible sell-offs.

Chubais said that EES needs $20 billion to $35 billion in investment over the next 10 years, Dow Jones Newswires reported on 19 February. The funds will be used to boost production capacity to meet growing demand. He acknowledged concerns surrounding the electricity crisis in Russia as reported by the Organization for Economic Cooperation and Development. The EES chief executive predicted that demand for electricity will grow in the next 10 years, adding that the supply side is currently "stretched." "Il Sole," in an article published on 19 February, quoted Chubais as saying, "Things are bad. In the last 15 years there have been no investments." He noted that things are not good domestically because tariffs are unreasonably low.

On 24 January, the Russian government approved a plan to increase electricity prices by 20 percent for the first half of this year. The price hike was lower than financial analysts had predicted (they forecast a 35 percent price increase). Russian Economic Development and Trade Minister German Gref said the rise in electricity prices to households would average 17.6 percent. Transmission fees for EES were raised by 20.2 percent and back-dated from 1 January, Reuters reported. Starting 1 March, prices for electricity on the federal wholesale market will rise by 20 percent. State-controlled monopolies in railways, power, and gas have complained that they provide supplies and services at well below market prices. Chubais optimistically said that prices for industrial and retail consumers alike will reach European levels within three years. Dow Jones reported that Russian prices are currently less than a quarter of the rate in Western Europe. The tariff hike was a key measure within the restructuring of state-controlled monopolies.

EES is planning an overhaul as part of the government's structural reform program. In a interview with the "Financial Times" published on 19 February, Chubais noted that he is proud of the 1990s privatization plans. He pointed out that Russia will have private property for generations to come. "And I did it," he said. "With all the mistakes. Despite all the criticism. I did it." Chubais also noted that he admires Russian President Vladimir Putin because he is making courageous long-term decisions in economic and foreign policy. It should be noted that the "Financial Times" interview concluded that Chubais has his eye on the Russian presidential election of 2008, when Putin's second term would end. "Izvestia" reporters have also noted signs that Chubais has far-reaching plans and presidential aspirations. (JMR)