Business Watch: April 23, 2002

Lithuanian oil firm Mazeikiu Nafta said its refining, crude-transit, and loading operations in the first quarter fell on the year and were well below plan. "We chose to do less refining, and so bring in less crude oil, because of the unfavorable market situation," Mazeikiu spokesman Tadas Augustauskas told Reuters. From January to March, Mazeikiu's refinery processed 1.461 million tons of oil and oil products, 11 percent less than in the same period of 2001, Augustauskas said. It had planned to refine 1.635 million tons. Throughput on the company's pipeline fell 21 percent on the year in the first quarter to 5.918 million tons of crude, versus a planned 6.750 million. Lower operations and profitability implied that first-quarter refining revenues were about $30 million less than had been planned. (JMR)

Gokhan Bildaci, general manager of Turkey's state gas-and-oil company, Botas, said the company will not pay fines to Russia and Iran because its first-quarter gas purchases from the two suppliers were below contract volumes. Turkey, which buys all its gas from Russia, Algeria, Iran, and Nigeria, received three quarters of the 14.6 billion cubic meters of gas it used last year from Russia. Bildaci said the take-or-pay clause in the contracts, which is aimed at protecting the supplier against buyer failure to get the contracted amount, was based on annual amounts. "We did receive less than contract volumes in the first three months. But for the clause to take effect you have to look at the annual purchases," he told Reuters. According to a Botas statement, Turkey bought 2.9 billion cubic meters from Russia and 285 million cubic meters from Iran in the first quarter of this year. "We bought 96 percent of the contract volume with Russia and 50 to 60 percent of that with Iran in the first quarter," Bildaci said. Officials hinted that they might have renegotiated a lower amount for this year with Iran to avoid the take-or-pay clause. More than 60 percent of the gas is used in power plants in Turkey. Bildaci said three new plants in western Turkey with a total power production capacity of 3,860 Megawatts would be partly commissioned in summer, ahead of schedule. "With gas-storage facilities, it is easier to control the demand and supply," he said. Bildaci also pointed out that work on another underground storage unit in central Turkey is under way. (JMR)

Japanese Prime Minister Junichiro Koizumi will send an energy mission to four Central Asian countries to build a long-term relationship with the region in a bid to shore up Japan's energy security, Kyodo News reported. He said, "I would also like to use this forum to call for cooperation with Central Asia, which has great potential as a source of energy." The team dubbed the "Silk Road Energy Mission" will comprise about 10 government, business, and academic experts who will visit Kazakhstan, Turkmenistan, Uzbekistan, and Azerbaijan sometime this year for about two weeks. It will be tasked with researching areas for possible bilateral and regional cooperation so Japan can procure crude oil and natural gas in the future, the officials said. Japan imports more than 80 percent of its energy supply, 85 percent of which is crude oil from the Middle East. Currently, Japanese companies have only minor stakes in oil-field development projects led by British Petroleum in Azerbaijan and an Italian firm in Kazakhstan. A Japanese consortium is also exploring deposits in Azerbaijan, but lags far behind international oil majors active in the region in which oil exploitation has only recently begun, the officials said. (JMR)

BP raised its stake in Russia's Sidanco to 25 percent on 16 April. BP said it had struck the $375 million deal with Access-Renova and Alfa Group, the majority owners of the Russian firm Tyumen Oil (TNK). This purchase underlines BP's confidence in Russia and its improving business environment," said Chief Executive John Browne. Alfa Group Chairman Mikhail Fridman said, "We view this transaction as an important step in developing our cooperation with BP and as a signal of renewed investor confidence in Russia." BP has struggled to maintain its investments in Russia, once getting into a fierce legal battle with TNK over Sidanco's assets. Now, with 25 percent plus one share, BP has full blocking rights under Russian law against the kind of moves that caused its original troubles, Reuters reported. Nine percent of the world's oil is produced in Russia and a third of its natural-gas reserves reside there. Sidanco produces some 380,000 barrels of oil and gas a day mainly in western Siberia -- as much as many smaller Western companies -- compared with BP's own daily output of about 2 million. (JMR)

Russian Prime Minister Mikhail Kasyanov and head of international oil major Royal Dutch/Shell Philip Watts met on 16 April to discuss new investment projects in Russia, Reuters reported. Royal Dutch/Shell investments into the Russian oil sector total some $1.7 billion. Watts also met with the head of Russian gas giant Gazprom Aleksei Miller and invited the company to participate in developing an oil-and-gas project on Russia's remote Sakhalin Island. Royal Dutch/Shell holds a 55 percent stake in the Sakhalin-2 project in Russia's Far East. Royal Dutch/Shell has already invested up to $2 billion in the project, together with its Japanese partners Mitsui and Mitsubishi. It plans to raise investment to some $10 billion over the next few years to build the world's largest liquid-natural-gas plant. Miller and Watts discussed the possibility of freeing the gas market in Russia and Europe. Watts told a news conference a joint venture to explore the Arctic Zapolyarnoe field could be set up in 2002 and gas supplies to Europe from the field could start in 2006. (JMR)

The possibility of selling a 26.85 percent ($75 million) stake in Mazeikiu Nafta to YUKOS will be discussed at an annual meeting of the shareholders of the Lithuanian company on 30 April, RosBusiness reported. The shareholders will consider the idea of increasing the company's charter capital by conducting two additional share issues. The company has prohibited its shareholders from purchasing the new shares. The documents concerning the deal between YUKOS and Mazeikiu Nafta were approved and submitted to the government of Lithuania on 11 April. The Lithuanian government owns 40.66 percent of Mazeikiu Nafta, while Williams, which manages the company, owns 33 percent. (IM)

Troika Dialog management purchased 80 percent of the company from Bank Moskvy on 8 April. This brings the management's stake to 95 percent, with the remaining 5 percent belonging to Hansa AG, a financial and investment firm controlled by George von Opel. Troika Chief Executive Ruben Vardanyan said, "From my point of view, the investment bank can and should be independent. It increases its effectiveness and capitalization." Vardanyan told Reuters that Troika planned attract more foreign investment and to reshuffle its shareholding structure, offering employees the option to buy more shares. He noted that no foreign investor would own a stake larger than 20 percent. Bank Moskvy Vice President Aleksei Sytnikov said the sale did not mean the bank had given up its investment-banking business. (JMR)

Baltia Air Lines, Inc. (BLTA), a U.S. startup airline preparing to operate non-stop flights from JFK International Airport to St. Petersburg, Russia, reported that it has already responded to the second round of comments in its filing for a BB listing. Baltia is current with its SEC filings, and recently applied to upgrade its listing from the Pink Sheets to BB. When asked about Jet Blue's public offering, Igor Dmitrowsky, President and Chief Executive Officer of Baltia Air Lines, Inc., said, "The significant demand for the Jet Blue stock is very encouraging to Baltia Air Lines." Baltia Air Lines, Inc., will accommodate passengers, as well as cargo, commencing in 2002. (JMR)

The Baltic affiliates of Andersen Worldwide have signed a memorandum of understanding with Ernst & Young to merge their operations, the Associated Press reported. The merger, to be completed within a month, follows similar moves in other countries since U.S.-based Arthur Andersen LLP was accused of obstruction of justice relating to the bankrupt energy giant Enron Corp. Ernst & Young will gain about 250 employees and annual revenues of approximately $10 million. (JMR)

Swedish furniture company IKEA is planning to invest $250 million to build the largest shopping center in Russia, a 150,000-square-meter giant to be called the "Mega" center. IKEA has already purchased the property in the Moscow suburb of Kommunarka where it plans to open the center on 12 December. The first floor will house some 250 stores, restaurants, movie theaters, and cafes, said Mega project manager Peter Odlund. The company is going to increase the size of the second floor by 20,000 to 50,000 square meters, reported Interfax. Up to 95 percent of the area has already been rented by such companies as Taco Bell, Auchan, Reebok, SportMaster, Benetton, Yves Rocher, and Sbarro, among others. According to Odlund, "The main surprise for Russian customers will be the appearance of South European Fashion retailers in Moscow." Revenue for the first year is expected to be $675 million. IKEA has two stores in Russia, which had a trade volume of $200 million in 2001. (IM)

Russian government officials have asked Japan for funding assistance in the construction of a hydraulic power plant in Tajikistan to support the reconstruction of Afghanistan, Kyodo News reported. The governments of Japan and Russia held their first working-level meeting on the issue on 8 April. Japan indicated it will consider the request after conducting a survey on the facility. (JMR)

Italy's De Tomaso and Ulyanovsk Auto Plant (UAZ) have signed a cooperation protocol under which the Italian company will start building UAZ Simbir off-road vehicles this summer at a 22 million-euro ($19.4 million) plant in Calabria, the Associated Press reported. Production will eventually grow to 20,000 cars per year, with the expectation that they will be sold in Western Europe. De Tomaso forecasts turnover of up to 500 million euros a year when the factory reaches full capacity. Marco Bereti, a De Tomaso official, said the UAZ vehicles could be sold using the dealership networks of partners such as Fiat. The UAZ Simbir is the first Russian car to pass tough European regulations for automobiles. UAZ general director Eduard Shpakovsky said the car's quality had to be raised to reach European standards. "It's a complicated process, working with our Russian parts suppliers to get rubber and plastic parts to standard," he said. The Simbir will cost 16,000 euros ($14,000) in Europe, while in Russia it costs from $8,000 to $10,000. UAZ also said it was planning to assemble cars in Vietnam starting this summer. (JMR)

Armenian President Robert Kocharian met on 15 April with Russian Communications Minister Leonid Reiman, who is in Yerevan to attend a regional conference called "Electronic Development for the Caucasus." Reiman announced that the Russian company Rostelecom has opened a representative office in Yerevan, Prime News Agency reported. He noted that this is the beginning of a serious relationship for development with Armenia. (JMR)

Russia's top oil producer LUKoil said it would almost double dividends for 2001, as its board voted to offer 15 rubles per ordinary share compared with 8 rubles for 2000, Reuters reported. "The offer is generous, especially because we expected LUKoil's net profit to fall considerably in 2001," said Vladislav Metnev from Renaissance capital brokerage. "I think this is one of the corporate-governance surprises that LUKOIL is preparing to offer this year. But it is also a step aiming to warm up the market before the ADR placement," he added. The Russian government said earlier it would sell 5.9 percent of its 13.5 percent stake in LUKoil through an issue of American Depositary Receipts on the London Stock Exchange in June or July. The sale could put up to $700 million-$800 million into the state's coffers, LUKoil said. Metnev said Renaissance saw LUKoil's net profit falling to $2.2 billion in 2001 from $3.3 billion in 2000. A total 2001 payout of $409 million would bring the profit-to-dividend ratio up to 18.6 percent from 11 percent in 2000. LUKoil had long been Russia's oil-stock favorite, but investors started to criticize the company for financial-reporting delays, high costs, and ineffective management. The company also said it would no longer pay dividends on preferred shares, because preferred shares had been converted in 2001 into ordinary stock at a one-to-one ratio. LUKoil paid 59.16 rubles per preferred share in 2000. According to RosBusiness, the unconsolidated profit of LUKoil was 20.9 billion rubles, (approximately $670 million) in 2001. The company's net undistributed profit was 31.9 billion rubles ($1.02 billion), which includes 12.7 billion rubles ($407 million) in dividend payments, 4.1 billion rubles ($131 million) in an accumulation fund, and 15 billion rubles ($481 million) in investments and loans to affiliated companies. (JMR)

Russian presidential economic adviser Andrei Illarionov said on 14 April that Russia needs economic growth so as not to be weak, poor, and backward, Interfax reported. He noted that Russian economic development is at half of what President Vladimir Putin and the government had stated. He noted that an annual growth rate of 8 percent during a period of 15-20 years requires an absolutely different economic-policy system and economic structure. Illarionov noted, "One can agree that we are doomed to 3 percent [annual growth] and be happy with that," but a different conclusion is also possible: "If these conditions are insufficient for 8 percent growth, let's change the conditions." (JMR)

The Templeton Russia Fund, a closed-end fund managed by emerging-markets expert Mark Mobius, is changing its strategy to invest more heavily in Eastern Europe, Reuters reported. Shareholders agreed to change the fund's investment policy so the fund will be able to make 80 percent of the value of its net assets in Eastern Europe and Russia. The $53.6 million fund is listed on the New York Stock Exchange. It is changing its name to the Templeton Russia and East European Fund, reflecting its new mandate. (JMR)

The international conference "Caucasus Without Narcotics" will be held in Tbilisi in May. The conference will be aimed at fighting drug smuggling and addiction. Georgian parliamentary Deputy Dzhemal Gakhokidze announced that the corresponding structures from all countries of the region and several international organizations will participate in the conference, Prime News Agency reported. (IM)

The Russian government has announced that more Russians are paying their income taxes. The rise is due in part to the adoption of a 13 percent flat tax on income. This is the lowest rate in Europe, the Associated Press reported. According to government figures, personal income taxes increased by nearly 47 percent in 2001, and tax revenue overall rose by 50 percent. Dmitrii Mikulich, deputy head of the Tax Ministry's Individual Income Tax department noted that early results from 2002 look even better. He said, "We expect the number of people filling out income-tax forms to increase substantially." Alexander Morozov, a senior economist at the World Bank in Moscow, said, "There are signs that more people are paying personal income tax, but the process of moving from shadow to light has only just started. There's a long way to go." Small and medium-sized Russian businesses complain they still face a burdensome array of taxes that are impossible to fulfill. The worst culprit, many say, is the social tax on salaries of up to 35.6 percent, which covers contributions to state pension and medical funds. There's also a 5 percent sales tax, a 20 percent value-added tax, a 5 percent advertising tax, a 2 percent property tax, a 1 percent road tax, plus a 24 percent tax on net profits after most other taxes, not to mention various registration fees. Russian President Vladimir Putin has promised a tax-reform package for small businesses that he called "no less revolutionary" than the flat tax on income. The reforms would eliminate many taxes for small businesses and give them the option of paying a 20 percent tax on profit or an 8 percent tax on revenues. (JMR)

Russia's most popular chocolate producer, Red October, plans to merge with rival Rot Front and place up to a quarter of the new firm's shares in American Depositary Receipts (ADRs) to raise $100 million, Reuters reported. Artem Kuznetsov, president of Gosinkor-Holding, which controls 51 percent of Red October and 52 percent of Rot Front, said the merger would be worked out after shareholders' meetings and consultations with the Moscow government, another shareholder in the firms. Kuznetsov said the new holding would work under the Soviet-era Red October name but would maintain brand names for their products. "We are uniting purchases, building up a unified marketing strategy and introducing a cross usage of capacities," he told a news conference. The Moscow government holds 24 percent of Red October and 23 percent of Rot Front. Red October and its eight regional factories account for 8 to 9 percent of Russia's confectionery market, while Rot Front holds about 3 percent. Red October produced 74,000 tons of sweets last year, while Rot Front produced 43,000 tons. "We hope that by unifying our capacities we will be able to occupy 12-15 percent [of the market]," Rot Front general director Valerii Pyshnyak said. Kuznetsov said Gosinkor-Holding planned to invest more than $20 million in the new company. (JMR)

The board of Moscow utility Mosenergo has appointed Arkadii Yevstafev as chief executive officer. Unified Energy Systems (EES) and its CEO Anatolii Chubais backed Yevstafev's candidacy. Yevstafev was selected over city-backed candidate Sergei Romanovskii, Mosenergo's construction chief. EES and the Moscow city government confronted each other last summer when Mosenergo CEO Aleksandr Remezov, who was backed by Mayor Yurii Luzhkov, was sacked. Shareholders recently voted to change Mosenergo's charter to allow the board to choose the CEO. Brunswick UBS Warburg power analyst Fedor Tregubenko said Yevstafev's permanent appointment was expected and would not substantially affect the stock price. He added the permanent appointment of a Chubais ally meant "the restructuring plan [for Mosenergo] will be completed in the depths of EES." (JMR)

The second meeting of the tariffs council for railway-cargo transportation is scheduled for 1 June. According to Russian First Deputy Railways Minister Vadim Morozov, the tariffs will be increased by 13 percent. He said that the meeting will discuss his proposal for changing the structure of the payments. "There can be no flat tariff scale. It should vary depending on the distance and type of cargo," said Morozov. The council is expected to finish reviewing suggestions by 15 May so that the Railways Ministry commission can adopt the decision before 20 May. The Railways Ministry wants to make the new rules effective on 1 June. Morozov believes that as a result, the overcrowding of Russian ports, "will be considerably reduced." Recently, thousands of boxcars waiting for unloading have clogged the ports. "The Russian Railways Ministry will suffer financially after adopting the new rules, but in any event, it is necessary to achieve the proper order faster," Morozov said. (IM)

Russian Labor and Social Development Minister Aleksandr Pochinok predicted a rise in unemployment in Russia in 2003. He said that this possible increase is due to the fact that in 2003, "Just a small percentage of the 80s generation will work." In addition, 450,000 people are expected to emigrate, of whom 230,000 will be unemployed. According to the Russian Social Statistics Department, up to 700,000 Russian citizens will be added to the number of unemployed in 2003. (IM)

The Russian State Duma adopted a draft law on the minimum wage ,according to which the minimum wage will increase from 300 rubles ($9.62) per month to 450 rubles ($14.44) per month starting on 1 May. This will be the fourth increase of the minimum wage adopted by the current Duma. The draft was approved by 413 votes to zero with two abstentions. Two years ago, the minimum wage was 83.49 rubles ($2.68) per month. (IM)

The bank that made Sergei Pugachev famous has been at the center of a number of allegations, which have made Pugachev anything but "orthodox" from a banking perspective. It also appears that his Orthodox religiosity has done little to alter this perception. According to Oleg Laurie, one of Pugachev's close associates was Eleonora Razdorskaya, who previously served as vice president of Mezhprombank (MPB). In November 2001, "Novaya gazeta" described her as the right hand of Pugachev when she worked at MPB. The article alleged that she handled all major financial flows of the bank and later became a business partner of Peter Berlin as co-manager of an offshore venture. Berlin's Benex company was featured in the Bank of New York (BONY) money-laundering scandal. The article quoted an unnamed FBI agent as linking MPB of Russia and Pugachev to "dubious transfers of large amounts of money." This publication, once owned by Boris Berezovsky, would later disclose that Pugachev approached Berezovsky on behalf of the Kremlin to sell his stake in TV-6.

Some, however, point to "Orthodox banker" Pugachev's ties to the Orthodox Church as the source of his reported influence with Russian President Vladimir Putin. Apart from his warm relations with Patriarch Aleksii, the two men are said to share the same confessor, Father Tikhon Shevkunov. Thus, "Kommersant" on 26 December 2001 claimed that Pugachev had a "huge spiritual influence" on Putin, though some sources have claimed that Pugachev has deliberately exaggerated his influence on the president. In a recent conversation with another powerful Russian banker, he suggested that the influence and closeness of Pugachev to President Putin is a "fabrication meant to be leveraged for [Pugachev's] benefit." However, Pugachev does share a vision with the so-called "Chekists team," which seeks to reinstitute order, strengthen the Russian state, and increase its power and influence abroad, especially in the republics of the former Soviet Union.

Whatever the degree of Pugachev's actual ability to influence Putin, the Orthodox banker has reportedly been a player in a number of shady dealings and "clan" machinations that span both the Boris Yeltsin and Putin presidencies. Apart from his involvement in the Mabatex and BONY scandals, Pugachev reportedly played a role in disgracing -- and replacing -- Yurii Skuratov as prosecutor-general when Skuratov displayed undue vigor in investigating the Mabatex scandal. Pugachev reportedly has maintained his interest in the Prosecutor-General's Office. Some press observers claim that he played a key role in pressuring Putin to appoint Vladimir Ustinov as Prosecutor-General over the president's reported first choice, Dmitrii Kozak in 2000. More recently, Pugachev has figured in a string of scandals and clan machinations, using his political and law-enforcement connections to, among other things, attempt to seize control of the state diamond company, Alrosa; help place fellow St. Petersburger Aleksei Miller at Gazprom to protect MPB's position in the trade of the natural-gas giant's shares; aid the authorities in their alleged efforts to pressure frequent press critic "Nezavisimaya gazeta"; and to force Finance Minster Aleksei Kudrin to pay off a substantial MPB loan (made on questionable terms) to the Yeltsin-era Presidential Affairs Administration.

Pugachev's ties to the statist-oriented Orthodox Church hierarchy; his financing of church-oriented, statist-nationalist publications; his reported role in the Gazprom takeover of the NTV network once controlled by anti-Putin magnate Vladimir Gusinsky, and his role in the TV-6 takeover, all point to the growing influence of the St. Petersburg group that has now been described in alliance with what has been described by Andrei Ryabov of the Carnegie Moscow Center as "the most radical representative of another wing." Polit.ru described this in November 2001 as the Kremlin's "Chekist team." Pugachev's alleged cooperation with Federal Security Service (FSB) Director Nikolai Patrushev and FSB Deputy Director Yurii Zaostrovtsev, chief of economic counterintelligence, in prompting criminal investigations of the Chekists political rivals has led some media sources to warn that Pugachev and his allies aim to install an anti-Western police state in Russia. Zaostrovtsev was behind some of the most publicized security-service operations, like the elimination of Gusinsky's NTV and attacks of the State Customs Agency according to polit.ru on 5 December.

Pugachev's role and success against Gusinsky and the perceived anti-Putin nationwide television channel NTV may have whet his appetite and those in the Kremlin who are eager to erase any significant independent media in Russia. The constant irritant of critical news coverage of the Chechen conflict was too much for the tastes of President Putin. Putin, with a taste for conformity and order in politics was uncomfortable with the likes of the Gusinsky and Berezovsky media. One of the main differences between the Yeltsin period and the Putin period concerns the attitude of the press. Yeltsin was much more tolerant of the critical media and used it to his advantage, to get re-elected.

Pugachev's Moskovia television channel made the announcement on 26 November of the imminent ouster of Aleksandr Voloshin. Polit.ru reported that Voloshin had been waging a war against the Chekist faction to protect TV-6, the controversial television channel owned by Boris Berezovsky. In November, TV-6 responded by "launching a campaign against the so-called 'Chekist team' of President Putin's office chief Igor Sechin." The battle for control of the Kremlin continues, but TV-6 appears to have been silenced as an independent force.

Pugachev's career, however, suggests that the machinations of the Chekist faction have as much to do with boosting its own economic fortunes and bureaucratic clout as they do with any political or ideological agenda. Judging by media reports, the Chekist group appears to be aiming at undermining the influence of the Voloshin-headed "Family," possibly by ousting Voloshin from his Kremlin post. This could leave the Chekist faction with more opportunities to exert influence on government and bureaucratic appointments, control state "financial flows," influence the privatization of state enterprises, use law-enforcement agencies and the courts to seize rivals' property (the possible redistribution of property in favor of the Chekists frequently referred to by Russian media), and to lobby for its own business interests. Already, the names and positions of the Chekist team are out-positioning members of the family. The hawks of the Chekist team include Prosecutor-General Vladimir Ustinov and his deputies Yurii Biriukov and Vasilii Kolmogorov; Victor Ivanov, personnel director of the Presidential Administration; Igor Sechin, head of the presidential chancellery; and the Orthodox banker Sergei Pugachev of MPB.

According to "Obshchyaya gazeta," the Chekist team follows the same line as the People's Patriotic Union of Russia Dogma. Specifically, the Chekists want the country's key posts -- political and economic -- to be held by "real Russian patriots (or the nationalist-oriented bourgeoisie) rather than oligarchs or "cosmopolitans." The article continues by describing Putin's attempts to stay above the fray of the Chekists and the Family in order to maintain balance between the clans. Pugachev has been called the Chekists' banker.

Some sources have credited Pugachev with authoring the idea of the Kremlin's announced goal of putting the oligarchs at arm's length from the authorities, supposedly sharply reducing the political influence of the business magnates. This was accompanied by the attacks on the highly visible Gusinsky of NTV and Media-MOST, along with Berezovsky of TV-6. This prompted many sources to claim that Putin had tamed the oligarchy. A more accurate description would be that he selected his own oligarchs who were more compliant, less independent, and held more to his political worldview. Henceforth, the interpretation of events went, the Russian political-economic system would function via institutions, not the machinations of the clans under Putin, and this was an improvement from the Yeltsin period. As events continue to unfold, especially the TV-6 takeover, it appears that the Chekists clan is gaining ground on that of Yeltsin's Family.

At arm's length or not, it is now clear that Pugachev was merely aligning himself with the Chekist team in order to displace his former Family comrades when appropriate. Pugachev continues to maintain some important relationships from the Yeltsin period, namely Pavel Borodin. This is another example where the continuity of the past meets the present. Borodin was originally from Yakutia, the diamond capital of Russia. There, in his powerful Communist Party position, he supported Yeltsin and obtained the coveted position as head of the Kremlin property fund. He is now returning to Yukutia as head of the Alrosa Corporation, which manages the diamond business and provides roughly 70 percent of Yakutia's budget.

Pugachev's career helps demonstrate that clan politics, clashes between the loosely knit, fluid influence networks that have dominated and defined post-Communist Russian politics, is still the most useful model for making sense of the Byzantine Russian political-economic system. Moreover, Pugachev's past reputation as a Family member suggests that the media's portrayal of an intra-Kremlin clash between old and new is oversimplified and misleading. Thus, Pugachev's career from Family loyalist to Chekist ally reveals the strong degree of continuity between the Yeltsin era and Putin's presidency.

Bulgarian Deputy Prime Minister and Economy Minister Nikolai Vassilev on 9 April said that Russia has claimed ownership over some of the property of Bulgarian tobacco monopoly Bulgartabak, Reuters reported. Russia's claim is likely to be an additional obstacle to the already difficult privatization sale. Vassilev told a news conference that if Moscow's claims proved to be well-founded, Sofia would consider various options, including providing a stake in Bulgartabak to cover the claims. "Russia says that there are historical documents signed some 55 years ago, according to which Russia owns some of Bulgartabak's properties in the capital [Sofia] and in the countryside," said Vassilev. He said that, according to Moscow, Russia gained ownership of that property after World War II as part of reparations it received from Germany. Bulgaria was a German ally during the war and German tobacco firms had subsidiaries in Bulgaria then. Bulgartabak has 22 domestic subsidiaries, including 12 processing factories; nine cigarette factories; and one producer of tobacco driers, filters, and packaging. It also has five subsidiaries in Russia and one each in Ukraine, Romania, and Yugoslavia. The privatization sale is for a majority stake of up to 80 percent in Bulgartabak and 3 May has been set as the deadline for submitting bids. "We are concerned that if the government keeps a golden share it could affect investors' interest because they want to make sure they will have full control on how to run the company," the International Monetary Fund's resident representative in Sofia Piritta Sorsa told Reuters. Nonetheless, officials have said that up to 13 potential investors have expressed interest in Bulgartabak, but industry majors like Philip Morris and British American Tobacco (BAT) would prefer to buy only its best factories. The social impact of Bulgartabak's sale is a politically sensitive issue, especially in the tobacco-growing regions populated by Bulgaria's impoverished ethnic Turkish minority. Bulgartabak was beleaguered by feuding and infighting on the board earlier this year. The company has also been viewed as an outdated and clumsy company.

Concern has been rising over illegal production of tobacco products and cigarettes in the Black Sea region. In Georgia, value-added taxes make domestically produced cigarettes higher in cost than smuggled or imported cigarettes. BAT believes that smuggled or counterfeited cigarettes account for 60 percent to 70 percent of the Georgian cigarette market, citing Russia as a major source of illegal imports. (see "RFE/RL Business Watch," 15 January 2002) However, other sources indicate that counterfeit production of cigarettes is a significant factor in the Abkhaz economy. One source indicated that the production of counterfeit cigarettes in Abkhazia represents approximately 50 percent of the separatist government's revenue. (JMR)