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Business Watch: March 5, 2002

5 March 2002, Volume 2, Number 9
Russia, which pledged to cut oil exports vital to a plan by the Organization of the Petroleum Exporting Countries (OPEC) to support world prices, said it would be cautious about making any more reductions, Reuters reported. Responding to pressure from OPEC, Russia agreed to reduce its exports in the first quarter of this year by 5 percent. The oil cartel wants more of the same in the second quarter and is sending a top delegation next week to Moscow to argue its case. According to Finance Minister Aleksei Kudrin, caution is the name of the game. "The Russian government is very careful in its policy of limiting exports," he said. "We will decide the extent to which a further export reduction is sensible," Kudrin added. "We do not intend to enter OPEC and therefore we do not take part in tough [restrictive] measures, but we would like to have our own kind of parachute to get through crisis years." Russia is certain to come under pressure to extend the export cuts when OPEC Secretary-General Ali Rodriguez comes to Moscow for a 3-5 March visit. Kudrin said any decision will include an examination of oil prices and domestic factors such as the balance of payments. Russia's 5 percent first-quarter oil-export reduction involves a cut of 150,000 barrels per day. Officials and oil companies have so far been very careful in forecasting whether further reductions will be made. Industry executives and the government are set to meet on the issue in March. (TSK)

Russia's forestry and paper industry could earn up to $100 billion per year for Russia if the government provides major support, according to a report prepared by the Union of Forestry Industrialists and Exporters. Russia is home to 23 percent of the world's forests but accounts for just 2.3 percent of the world's timber and paper products. The country produced about $7.5 billion worth of timber and related products in 2001, with exports earning $4.3 billion in hard currency, AP reported. Industry, Science, and Technology Minister Ilya Klebanov said at a national conference in Komi that the nation's resources are "not being used effectively." He promised the government would review measures to help the industry grow 300 percent by 2010. The union renewed its calls for the government to resurrect a forestry ministry to take over management of both forests and the industry itself, currently overseen by the Natural Resources Ministry and the Industry, Science, and Technology Ministry, respectively. Zakhar Smushkin, head of the country's largest pulp and carton holding, Ilim Pulp, proposed creating a government corporation that would contribute forest lots, infrastructure, tax credits, and loan guarantees to attract investors and set up companies in return for blocking stakes that could later be privatized. Other proposals involve developing legislation that would allow the industry to use its main asset, the forests, as collateral to secure loans.

Competition in the industry is also growing. Both Ilim Pulp and SibAl are eyeing the Arkhangelsk pulp and paper plant, a top-five cellulose producer. SibAl approached the Titan group, which manages the plant, but Titan sold its controlling stake to foreign investors last year. SibAl, which owns the Krasnoyarsk pulp and paper plant, "has many plans in the sector and would be interested in buying into Arkhangelsk pulp and paper if offered," SibAl spokesman Aleksei Drobashchenko said. With the acquisition of Ust-Ilimsk, Ilim Pulp has boosted its share of the Russian pulp market above 70 percent and plans to raise its revenues from about $700 million in 2001 to $900 million in 2002 and $1.22 billion by 2004, "The Moscow Times" reported. (JMR)

The World Wide Fund for Nature (WWF) warned that Russia's illegal logging could destroy Russia's Far Eastern forests within five years. The WWF estimated at least 20 percent of timber logged in Russia is cut illegally or in violation of legislation due to bribery and a lack of funds to enforce controls. It urged the Group of Seven nations, China, and South Korea to stop the purchase of illegal timber. It called on Russia to tighten controls on timber crossing its frontiers and take other steps to enforce the rules. Illegal timber sales were worth some $450 million a year, and two-thirds of this was earned abroad. The illegal logging in the Russian Far East makes up approximately 1.5 million cubic meters of wood annually. "It is a highly profitable activity for smugglers and the local mafia," the Swiss-based group quoted its Russian project manager, Anatolii Kotlobay, as saying. The destruction of the forest area also poses a threat to a number of endangered species -- including the Siberian Tiger and the Amur Leopard -- which could lose their natural habitat, the WWF said. (JMR)

Carlsberg Breweries is choosing a brewery from the Baltika Beverages Holding (BBH) to produce its well-known Carlsberg label in Russia, company spokeswoman Margrethe Skov said from Copenhagen, Denmark. Ownership of BBH, which owns a number of breweries in Russia and the Baltics including local market leader Baltika, is evenly split by Carlsberg and British giant Scottish & Newcastle, "The Moscow Times" reported. (TSK)

Volvo's aircraft engine division and Aeroflot have signed an agreement whereby Volvo will overhaul the engines powering the Russian airline's four DC 10-40F jetliners. The value of the deal is $57 million but could double to $115 million if Aeroflot decides to add more of the planes to its fleet, AP reported. The contract is the first in which Volvo Aero is offering a total package of services, including spare-engine support, engine-condition monitoring, and wing support, according to the company. Aeroflot has 93 aircraft in service and is Russia's largest cargo carrier, accounting for more than 70 percent of the country's international air traffic.

Meanwhile, Aeroflot has announced that smoking will be banned on all of its flights starting 31 March. Aeroflot spokeswoman Lyubov Kalinina noted that passengers will be offered an assortment of nicotine-containing products such as chewing gum and inhalers as a substitute for smoking. The airline has already stopped selling cigarettes during flights and introduced some nonsmoking flights a few years ago. This policy was later extended to all flights lasting less than four hours. Kalinina said that a poll of 5,000 passengers recently conducted by the airline showed that 70 percent of nonsmoking passengers and 40 percent of smokers supported the ban on in-flight smoking. (JMR)

Ukrainian Deputy Prime Minister Vasyl Rohovyy, who led a recent Ukrainian delegation in talks with the International Monetary Fund (IMF) in Washington, said that Ukraine has failed to resolve a key tax issue with the Fund. He added that the resumption of a lending program is unlikely. Rohovyy said his country cannot follow the global lender's advice to issue hundreds of millions of dollars' worth of domestic debt to pay value-added tax arrears to exporters. "We cannot agree with this proposal. To repay the arrears with treasury bills is a way [to] nowhere. It can create a financial pyramid and destroy stability." He said the government outlined to the Fund a number of short-term steps to boost budget revenues. The cabinet is also planning a tax reform that it hopes will help unfreeze payments from a stalled $2.6 billion, three-year IMF loan. "We have submitted our proposals to the [IMF] mission.... We will wait for their decision or a signal from Washington," he told Reuters. Analysts doubt the government will be able to resolve the tax dilemma any time soon, as officials have their minds set on the 31 March parliamentary elections and vital reforms are unlikely to be introduced before May. The IMF has stopped lending to Ukraine on a number of occasions after the government failed to deliver on its promises of reform. (JMR)

Russia's gross domestic product (GDP) rose 3.3 percent year-on-year in January, Prime-TASS reported a source at the Economic Development and Trade Ministry as saying. Industrial output for January rose 2.2 percent year-on-year, the source said. Investments rose 5 percent year-on-year. The ministry has reported a January 2001 GDP of 582.6 billion rubles ($18.9 billion). (TSK)

Russian state telecom holding Svyazinvest forecasts that revenues will rise 27 percent year-on-year to $3.3 billion in 2002, Prime-TASS quoted Svyazinvest General Director Valerii Yashin as saying. He said the company's revenues totaled $2.6 billion last year. According to Yashin, investment is expected to rise to $1 billion this year, from $700 million in 2001. He did not provide any other figures. Yashin said the government will sell a 25-percent-minus-one-share stake in Svyazinvest only once the company's capitalization reaches $15 billion. Svyazinvest's current capitalization is $5 billion, he said. (TSK)

Standard & Poor's has revised its outlook on MFK bank from stable to positive, "The Moscow Times" reported. The statement was made following MFK's announcement of a merger with sister bank Rosbank. Both MFK and Rosbank are constituents of Interros group, which includes metals giant Norilsk Nickel. Standard & Poor's affirmed its CCC- long-term and C short-term counter-party credit ratings on the bank. (TSK)

On 22 March, Alt Consulting will be hosting a seminar titled "Managing Company's Growth" at Marriott-Tverskaya Hotel in Moscow, "Vedomosti" reported. Alt Consulting experts have pledged a practical course for top managers and business owners. The purpose of the seminar is to introduce the methodology of developing companies' strategies and growth promotion. The agenda of the seminar covers the factors ensuring successful business in Russia, developing and implementing a company's growth, restructuring a company, and creating a holding company. (TSK)

Russia may increase the crude oil export tariff to $9 per ton from the current $8 per ton from April, a source close to the federal Commission for Protective Measures in Foreign Trade was reported as saying. According to the source, the government panel was scheduled to meet early next week to discuss setting the new tariff rate. "It is likely that the tariff will be raised slightly," the source said. Russia sets the crude tariff every two months, pegging it to the price of the Russian Urals blend. The current tariff was set from 1 February. The source said that the Urals price averaged $18.50 to $18.60 per barrel in January and February, which corresponds to a tariff rate slightly above $8.9 per ton. "There are still some days left until the end of February, and therefore one cannot give the average figure with absolute precision," the source said. "But the Commission is likely to ignore the decimals [and round the rate up]," Reuters reported. (TSK)

Russia's ruble rate fell to a new low on 26 February, with the average exchange rate set at 30.89 to the U.S. dollar. The drop constitutes a 2.5 percent decline this year in nominal terms. Officials are debating whether to allow the currency to drop faster and force the economy to be more competitive at the cost of more pain for ordinary Russians, Reuters reported. The Russian Central Bank, which is defending the currency's slide, is all too familiar with the situation as a result of the 1998 financial crisis. The Central Bank fears that if it lets it go, it will again be at the expense of ordinary citizens still haunted by ruble plunges of the past. But proponents of a weaker currency argue that if the ruble stays high, the economy will be artificially protected and competitiveness further eroded. President Vladimir Putin's economic adviser, Andrei Illarionov, said in a nationally broadcast television interview last week that with economic growth sputtering it was crucial to halt ruble's real appreciation. He estimated that the ruble had risen in real terms by almost 50 percent over the past three years because of inflation that has been eroding competitiveness within the economy. "To get it back it to its natural situation it should obviously be slightly devalued," he said. Natalia Orlova, an analyst with Alfa Bank, said, "Basically they now have two options: first, to protect the ruble from depreciation, which actually will mean low levels of reserves; or increase the reserves to their target of $40 billion, and in this case the ruble will fall to around the 34 level by the year end. " (JMR)

Although still subject to jokes in the West, the Lada remains Russia's top-selling car despite the post-Soviet opportunity to buy foreign vehicles, Reuters reported. The standard model, Zhiguli, still sells like hotcakes along with other types of Ladas, all made by the country's leading car manufacturer AvtoVAZ. According to AvtoVAZ head Vladimir Kadannikov, "As far as competition is concerned, we do not fear it." Kadannikov, who has spent 44 years in the industry, can base his assertion on the fact that AvtoVAZ cars are still the most popular in Russia. Of the more than 1 million new cars sold in Russia in 2001, some 70 percent were made by AvtoVAZ, while new foreign cars accounted for less than 10 percent of the market. Kadannikov conceded AvtoVAZ cars are behind the West in quality, but said they offer the best value in Russia. "There are better cars, but there are no cheaper cars," he said. A Lada's average price is $3,000 to $5,000, whereas the cost of a new Western vehicle is more than $10,000. Kadannikov aims to launch a new line of cars in the coming years that will require some $800 million in investment and for which he hopes to get some outside investment, either Russian or foreign. According to Kadannikov, Russia needs a car industry to ensure jobs. (TSK)

Russia's fourth-largest oil producer, Surgutneftegaz, said on 27 February its 2001 pretax profit fell by more than 20 percent, Reuters reported. Analysts said the fall in profits was typical for the sector after oil prices declined last year. Surgut released no actual figures, but said the pretax number would be 20 percent lower than the 86.26 billion rubles ($2.78 billion) it made in 2000. It also set a 2001 dividend per ordinary share of 0.033 rubles and 0.1 rubles per preferred stock, after 0.04 rubles on common and 0.18 rubles on preferred stock in 2000. Surgut said net sales revenues fell 6 percent last year due to unfavorable prices, although output rose 8 percent. "There was a growth in costs which was mainly due to a rise in natural monopolies' tariffs. Expenses alone grew 60 percent," it said in a statement. A company source told Reuters on 26 February that net profit would be 40 percent below the 19.5 billion rubles of 2000, an announcement that sent the share price down by about 4 percent. (JMR)

RUSSIA'S EXPORTS TO DROP IN 2002 (27 February)
Russia will export far less this year as global demand for the nation's oil, timber, and metal resources continues to drop, a senior official on the State Customs Committee stated. The fall in export earnings "will be unfavorable for Russia," Mikhail Vanin, the committee's chairman, was quoted as saying. According to Vanin, the value of Russian exports will fall by about 8 percent this year to $92 billion, while the value of the country's imports will grow by 14 percent to reach $47 billion. Russia's economy is highly dependent on the export of natural resources, and foreign economists have long urged Russia to curb its dependence on oil and gas exports and develop other sectors to allow the country to export finished products. President Vladimir Putin has made boosting Russia's economy a major goal of his administration. In a bid to attract more investment, he has quickly pushed through initiatives such as tax cuts and new labor laws. According to AP, however, foreign investors remain wary, pointing to corruption, convoluted and often contradictory laws, and weak, slow courts as key obstacles. (TSK)

Badri Patarkatsishvili, the closest ally of self-exiled oligarch Boris Berezovsky and the former chairman of independent television station TV-6, recently has faced a host of political troubles in Russia. On 29 July, Russian Prosecutor-General Vladimir Ustinov announced that Patarkatsishvili was wanted on charges of conspiring to free Nikolai Glushkov, former deputy general director of Aeroflot, from prison, "Kommersant" reported. In late January, Ustinov announced that the Aeroflot case had been re-opened. Earlier, Patarkatsishvili was accused of fraud. Now, both Berezovsky and Patarkatsishvili are accused by the Federal Security Service (FSB) of embezzling Aeroflot funds and using them to finance Chechen terrorists. According to "Kommersant," the specific charge related to Article 208 of the Criminal Code - "establishment and leadership of a military formation, unjustified by the federal legislation."

Concerned for his freedom in Russia or for other reasons of his own, Patarkatsishvili turned to his native land, Georgia. According to "Expert," Patarkatsishvili's immediate plans are closely tied with Georgia. In early December, Patarkatsishvili allocated $1 million of his personal funds in a 5 percent, three-year credit to the Tbilisi city administration for covering city energy expenses and gas-debt payments. Patarkatsishvili's lawyer, Niko Kobalava, made clear that Tbilisi should always rely on Patarkatsishvili's generous assistance. For the people of Georgia, Patarkatsishvili's activities are welcome. At least they have hope that Tbilisi's districts will have enough gas supplies. Patarkatsishvili's money is now being used to establish a media holding which will include television and radio company Imedi (Hope), several local newspapers, and a private information agency. Patarkatsishvili is said to generously provide grants to the science and cultural sectors, willingly financing nonprofit projects. According to "Moskovskii Komsomolets," he tried to buy Airzena airlines, but has not succeeded so far.

Clearly, Patarkatsishvili's activities have not gone unnoticed by the government. Its opinion is not unified, but it is definitely more cautious than that of the public. "Expert" quoted Georgian President Eduard Shevardnadze as saying that he "is not against the activities of his compatriot if it is to the benefit of Georgia." Some skeptics state that Patarkatsishvili is going to buy Georgia and give it to the Kremlin as a pay-off for his sins. Others believe that Patarkatsishvili is trying to gain popularity and trust among people and the government to buy some major pieces of property, including the Tbilisi Sports Palace and Dinamo Stadium. Some even state that Patarkatsishvili will eventually seek the prime minister's post when it is re-established.

According to "Expert," Patarkatsishvili is planning to run for the parliament. Speaker of the parliament Nino Burdjanadze has expressed criticism and said, "I would not recommend that Patarkatsishvili run [for parliament]. We have to find out who is looking for him and why. [Patarkatsishvili] has to decide what country's national he is �- Georgia, Russia, Israel, or whatever else." She was also quoted by the Prime News Agency as saying that she "would not like Patarkatsishvili to involve [himself] in the political life of Georgia and to have influence over any branch of power." According to former Justice Minister Mikhail Saakashvili, Patarkatsishvili "has not yet become the main factor of Georgian policy," Prime News Agency reported.

However, Saakashvili's biggest concern is Berezovsky's, and thus Patarkatsishvili's, interest in Georgia. Saakashvili stated that he "always had been afraid of the oil gangsters," implying Berezovsky-Patarkatsishvili involvement in the oil business. Despite vocal criticism, Georgia rejected Russia's extradition request for Patarkatsishvili on the grounds that domestic legislation does not allow the extradition of Georgian nationals to the law-enforcement agencies of foreign countries, "Kommersant" reported on 21 November. Even if his guilt is proved, Patarkatsishvili will have to be charged in Georgia.

Patarkatsishvili was born to a practicing Jewish family in Tbilisi in 1953. He is a highly religious man and a frequent visitor to the synagogue, "Profil" reported in 1999. Patarkatsishvili's marriage to a Russian orthodox shocked his family. People describe him as a charming man, citing what they characterize as a miraculous alloy of the Caucasus vastness of soul and Jewish business aptitude. According to business weekly "Kompaniya," Tbilisi remembers Patarkatsishvili as an active Komsomol leader. As a young man, Patarkatsishvili used to work in the car-repair business -- tough but rewarding work, given the level of criminality in that business in the Soviet Union. Patarkatsishvili is still accused by some of leading criminal groups controlling the auto business. According to, Patarkatsishvili moved in 1993 to the Moscow region and in 1994 to Moscow, thanks to the help of his friend, Otari Kvantriashvili, a late reputed crime boss.

In 1994 while working at auto maker AvtoVAZ, Patarkatsishvili was introduced to Berezovsky, head of a research laboratory. As a mathematician, Berezovsky had been implementing automatic systems of management at AvtoVAZ since the mid-1970s. Berezovsky and Patarkatsishvili, both born in the Caucasus and both married to Russians, became close friends. With perestroika on the threshold, Berezovsky persuaded Vladimir Kadannikov, a long-term AvtoVAZ director, to let him control the sales. Kadannikov, an expert in technology, but a novice in finances, agreed. Access to the plant's resources allowed Berezovsky to create carmaker LogoVAZ in 1994, his first serious business endeavor. According to "Profil," Patarkatsishvili was on LogoVAZ's board from its establishment and was involved exclusively in the financial deals and controlled LogoVAZ's financial flows. As a skilled economist, Patarkatsishvili made sure that Berezovsky got a controlling stake in AvtoVAZ. Eventually, Berezovsky would appoint Patarkatsishvili to lead all his financial projects.

In 1995, Patarkatsishvili's career shifted from LogoVAZ to ORT television, where he soon became "the sole real power," according to Patarkatsishvili's ORT deputy, Kirill Ignatyev. "Profil" reported that in 1996-97, Patarkatsishvili significantly raised the salaries of ORT employees (an average reporter received $2,000 per month). Commenting on the raise, Patarkatsishvili said, "You think we pay you [that much] because you are doing something good? No. We pay so that you do not do any harm." "Kompaniya" said the mid-1990s was a golden age for Patarkatsishvili. With Berezovsky making his way to the highest echelons of power in Russia, Patarkatsishvili turned everything he touched into a commercial and business success. In fact, Patarkatsishvili played a key role in the privatization of major oil company Sibneft. What was done back in 1997 would be difficult to repeat nowadays: A leading manager of Berezovsky's team was appointed for some inexplicable reason to head the Sibneft auction. Patarkatsishvili's main task was to make the final price affordable for Berezovsky and eliminate as many contenders as possible. He succeeded. With the starting price set at $100 million, Sibneft was sold to Berezovsky for $100.3 million. In the meantime, some offered as much as $177 million and others were not allowed to participate, "Kompaniya" reported.

In the first interview ever given by Patarkatsishvili, he described himself as a man of honor -- raised and living in strict accordance with his principles and beliefs, "Kommersant" reported on 4 July. Those principles were probably behind Patarkatsishvili's decision to contribute a letter, "Putin turns Russia into a banana republic," to "The New York Times" on 29 February. Patarkatsishvili stated in the piece that as far as mass media is concerned, Putin is following the course of former Peruvian President Alberto K. Fujimori, who in 1997 forced independent Frecuencia Latina TV owner Baruch Iher to leave Peru after he criticized Fujimori's regime. Patarkatsishvili called the Federal Security Service (FSB) "the real power behind President Putin" and accused it of waging "a war against NTV and TV-6 for reports on massacres in Chechnya." He added: "We, Boris Berezovsky, Vladimir Gusinsky, and myself, owners of Russian independent media networks ended up abroad under a threat of extradition on trumped-up charges." Patarkatsishvili said he believes the similarities between Russia and Peru will continue. "Fujimori's government toppled.... Similarly, the people of Russia will prevent the transformation of their country into a banana republic," Patarkatsishvili concluded. (TSK)

A strange twist emerged in the ongoing debate over relations between companies and their accountants when Russia's largest oil producer, LUKoil, claimed its poor-looking nine-month results were due to good accounting rather than bad management, Dow Jones reported. "We do our planning, day-to-day management and everything else including dividend payouts under the Russian accounting system, but [investors] make their valuations of us under the American accounting system," LUKoil Vice President Leonid Fedun said, according to the agency. LUKoil's nine-month results under U.S. Generally Accepted Accounting Principles (GAAP) showed a steep rise in operating costs, which ate up a large chunk of profits. This sent LUKoil shares into a tailspin as analysts revised their full-year earnings forecasts downward. LUKoil managers even added fuel to the fire by failing to explain the increase in operating costs to investors. Although LUKoil's stock has risen 3.7 percent this year, its performance pales when compared with Yukos, which is up 25 percent since 1 January, and Sibneft, which is up 45 percent. According to GAAP, LUKoil was required to consolidate fully the costs of three subsidiaries which it either acquired or gained control of in 2001, Fedun said: LUKoil Perm, Ritek, and Arkhangelskgeoldobicha. Consequently, LUKoil booked almost $400 million in additional operating costs. The company's Russian accountants counted only LUKoil's share revenues and profits at these three subsidiaries, leaving aside their costs. "We couldn't explain it right away because we didn't understand it ourselves fully," Fedun said. Some analysts expect LUKoil's 2001 full-year profits to drop as much as $800 million, from $3.59 billion in 2000. Fedun did not make a forecast for the full-year profit, saying that much will depend on whether auditor KPMG insists it write off exploration wells in the northern Caspian Sea and its fleet of icebreakers. These would come to "about $300 million," he said.

To help bring costs under control, LUKoil plans to slash its investment plans and operating costs by up to 30 percent, Fedun said. "From the overall investment plans of $2.5 billion, it will be [a cut of] about $700 million to $800 million," Fedun said. Another cost-cutting option under consideration is a possible spin-off of drilling arm LUKoil Burenie, which employs 30,000 people or 23 percent of LUKoil's 130,000 total staff. "I believe a decision on this will be made this year," he said. On the revenue side, Fedun said, LUKoil can ship profitably to the U.S. market from Russia. "The Timan Pechora oil can do it," he said. "Why do you think we bought Getty?" According to Fedun, the Timan Pechora fields in Russia's north could ship as much as 110,000 barrels a day to the U.S. to feed the 1,200 gas stations which came with LUKoil's acquisition of Getty Petroleum in late 2000. Fedun said he hopes the U.S. and Russian presidents discuss the Timan Pechora issue at their Moscow summit in May.

Despite some setbacks, LUKoil is seeking to add length to its value chain and expand downstream. "The Balkans region offers the best growth outlook for oil, gasoline, and lubricants demand because the car penetration is lower than in other regions," Fedun said. LUKoil is considered a front-runner to win the upcoming tender for Greece's Hellenic Petroleum, since main rival Yukos pulled out in late February. "We would like to center our further expansion in the region around this company," Fedun said, referring to Hellenic. In addition, Fedun said LUKoil is also still talking to partners with a view to investing in Czech petrochemical concern Unipetrol. (TSK)