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Business Watch: April 30, 2002

30 April 2002, Volume 2, Number 17
Russian Prime Minister Mikhail Kasyanov predicted that in three years rising gas prices will make it possible for independent gas producers to compete with gas giant Gazprom. In an interview with Reuters, Kasyanov said, "[It will take us] a maximum three years, but if we can do it quickly, we will do it." While domestic oil and petroleum-products markets are fully liberalized in Russia, the government regulates prices in other energy sectors, such as gas and electricity. Gazprom, in which the state is a major shareholder, wants the government to increase prices, saying it is losing $1.5 billion a year on domestic sales. Local prices are one-tenth of export prices. The government has approved a price hike of 20 percent this year. Russian oil firms have said they are ready to produce more gas and help the world's biggest gas firm support its flagging output. In return, however, they want to access Gazprom's export pipelines. Gazprom's refusal to do so has led to mounting pressure on the government to break up the monopoly into separate production and transportation units. Kasyanov said that boosting gas prices further would not be too painful for the economy, "[Gazprom] is the only monopoly I don't exclude making another decision [on raising prices] later this year." But the government also wants Gazprom and other state-controlled monopolies to get their own houses in order instead of making consumers pay more to bail them out. (JMR)

Russia's top oil producer, LUKoil, unveiled a 10-year plan to become more efficient by trimming its work force, shutting down wells, and cutting production costs, the Associated Press reported. The company believes the plan will boost its annual net profit by $500 million over the next two to three years. The plan would reduce the cost of producing crude to between $2.60 and $2.80 per barrel by 2004. LUKoil Vice President Leonid Fedun said that current costs are more than $3 per barrel. While LUKoil is Russia's largest oil producer with daily output of 1.6 million barrels a day, its market capitalization is only $14 billion compared with the No. 2 oil producer Yukos's $22 billion. According to U.S. Generally Accepted Accounting Principles, LUKoil reported a 21.1 percent decline in its nine-month net profit last year to $1.94 billion from $2.46 billion a year earlier. Analysts expect LUKoil's 2001 full-year profits to drop as much as $800 million from $3.59 billion in 2000. The company currently operates about 25,000 wells. LUKoil plans to cut its staff by about 20,000 people to total 120,000 by the end of the year. Most of these cuts will come from the spin-off of LUKoil's drilling unit Lukoilburenie, which employs 18,573 people, or about 14 percent of LUKoil's current total payroll of 140,000 people. The reform plan is aimed at allowing LUKoil to boost its output by about 15 percent a year starting in 2005. LUKoil shares have risen less than 50 percent over the past year, though the benchmark index has doubled. Fedun said LUKoil's key aim was to raise its market value. (JMR)

Speaking at the U.S.-Russia Business Council, Deputy Prime Minister and Finance Minister Aleksei Kudrin said that Russia will not extend its cuts in its oil exports past June, Reuters reported. He said: "We're not going to maintain the limitation after the second quarter. We are not planning to try to fight the trends in this area. We only wanted to soften the rapid drop [in oil prices]." Russia agreed to help the Organization of the Petroleum Exporting Countries (OPEC) stabilize world oil prices by cutting its exports by about 150,000 barrels per day, or 5 percent, from January through June 2002. Russia ranks as the world's second-largest oil exporter behind Saudi Arabia. Other key non-OPEC producers such as Norway and Mexico also joined in the production cuts to help lift prices from a slump late last year. Figures released in early April showed Russia exported 2.65 million barrels per day (bpd) in the first quarter of 2002, up from 2.54 million bpd in the fourth quarter of last year. The data excludes oil in transit from neighboring Kazakhstan and Azerbaijan.

Russian Prime Minister Kasyanov said in Copenhagen on 23 April, however, that Russia has made no decision to end restrictions on oil exports, nor has the issue even been discussed, reported. He said Russia will decide the issue in the "usual manner" following consultations with the heads of oil companies. Kasyanov added, "If the market is stable, it will be one decision; if not, another." (JMR)

Speaking at the Moscow International Oil Club, U.S. Energy Department Undersecretary Robert Card said the U.S. administration will not impose restrictions on Russian oil imports and will probably increase them, Interfax reported. Card said the U.S. was prepared to buy Russian oil, noting that U.S. refineries can process all types of oil. Card also pointed out that the U.S. is ready to do more business with Russia. "American oil refineries look at crude regardless of what country it comes from," "Kommersant" quoted him as saying. A fairly small amount of Russian oil is consumed in the U.S. due to high transportation costs, he said. Card noted, however, that "If Russia offers a reasonable price, we will buy oil in Russia," the Associated Press reported. The U.S. is looking for alternative sources of oil to cut its dependence on OPEC, given the unrest in the Middle East and uncertainties over Iraq. Mexico and Venezuela are the main oil suppliers to the U.S. Card met with Fuel and Energy Minister Igor Yusufov on 26 April to discuss the preparations for a G-8 energy conference scheduled for early May in Detroit and the Russia-U.S. summit. (JMR)

Italian oil-and-gas giant ENI predicts that production at its Karachaganak oilfield in Kazakhstan will double by mid-2003 thanks to infrastructure improvements, Reuters reported. ENI Chief Executive Vittorio Mincato said, "We are completing important infrastructure [improvements] to treat and transport liquids to European markets." The treatment system and a pipeline linking Karachaganak to the Caspian Pipeline Consortium will double output from 150,000 to 300,000 barrels of oil a day by mid-2003, Stefano Cao, head of ENI's Exploration and Production Unit, said. Karachaganak is held by British Gas and ENI, which own 32.5 percent each, while ChevronTexaco has 20 percent, and Russia's LUKoil 15 percent. Mincato said ENI would also shortly prepare to begin drilling at Kalamkas. ENI is also building two artificial islands in Aktote and Kairan in the Caspian Sea and will start preliminary drilling in 2003. (JMR)

Yukos Chief Executive Mikhail Khodorkovsky said that the second-largest Russian oil producer is losing market share to Caspian competitors, primarily in Azerbaijan and Kazakhstan, as a result of required Russian cuts on oil exports to help the Organization of the Petroleum Exporting Countries (OPEC) stabilize world oil prices, Reuters reported. He noted that Azerbaijan and Kazakhstan are filling in the gaps created by the Russian cuts. He told the Third International Oil Summit in Paris, "OPEC has cleared the space for our competitors. Any reduction in Russian exports that OPEC is asking for, is immediately compensated by Caspian countries." From October last year to January 2002, Russian exports fell by 80,000 barrels per day (bpd) on the Transneft pipeline, while exports from Kazakhstan rose 50,000 bpd and those from Azerbaijan rose 30,000 bpd, he said. The Yukos chief said Russia is prepared to talk to OPEC about management of supply in the mid-term, ranging from 2003 to 2005, but only if it takes note of Russia's increasing production, which is expected to rise 5 to 9 million bpd by 2005."Our concerns are that Russia has to take a part of the oil market that OPEC is voluntarily giving away, but it is important that OPEC take into consideration Russia's circumstances," Khodorkovsky said. Russian Finance Minister Kudrin said in Washington that Russia will not extend cuts in exports of about 150,000 bpd beyond June. But Prime Minister Kasyanov said that the decision will be made in the usual way. (JMR)

Vimpelcom, Russia's second-largest mobile-telephone provider, found strong support for its $250 million, three-year international bond issue on 17 April. The bond was launched at the tighter end of expectations with a yield of 10.45 percent, an official from one of the sale's lead managers told Reuters. (J.P. Morgan and UBS Warburg were lead managers of the Vimpelcom sale.) The official said the sale was oversubscribed by three times with 40 percent of the buyers coming from the United States, 28 percent from the United Kingdom, 12 percent from Germany, and the rest from Italy, Switzerland, and Scandinavia. Demand also reflected the profits investors have made from Vimpelcom's larger rival, Mobile TeleSystems, which launched a $250 million, five-year bond in December. It was launched at a yield of 10.95 percent and now trades in the region of a 9.3 percent to 9.4 percent yield. That bond was increased by $50 million this year. Moody's Investors Service gives Vimpelcom's bond a B3 rating, whereas Standard & Poor's gives it a B. Both agencies give MTS a higher rating: B+ from Standard & Poor's and Ba3 from Moody's. (JMR)

Interros, controlled by financier Vladimir Potanin, may consider reducing its 60 percent-plus stake in Norilsk Nickel, the world's largest producer of platinum and palladium, Reuters reported. Interros Chairman Andrei Klishas confirmed that the company was considering restructuring the stake and seeking other opportunities. Changes would, "depend on market conditions," Klishas said. Norilsk, along with many other companies in Russia, is under pressure to improve shareholder rights and to boost the value of the company. Interros, as the majority shareholder, is key to such moves for Norilsk. Though Uneximbank, Potanin's vehicle for acquiring stakes in Russian industry, has collapsed and was folded into his Rosbank, Interros is a key player in Russian industry with stakes in media companies, power-equipment companies, banking, oil, and metals companies, as well as Norilsk. (JMR)

Intelsat and Katelco signed a 10-year contract on 17 April, under which Intelsat will provide television and high-speed Internet services to households and businesses in Kazakhstan. In addition to the six channels of local video programming customers were able to view previously, Intelsat capacity gives them new access to between 10 and 20 pay-television channels, Internet, distance-education, pay-per-view, corporate television, and satellite cable stations. John Stanton, president of Intelsat Global Sales & Marketing, Ltd., said in a company press release, "We are pleased that Katelco will use Intelsat capacity to bring the full benefits of multi-channel TV entertainment to Kazakhstan's residents." Vladamir Kushnir, President of Katelco, explained the selection of Intelsat because it "was flexible enough to focus strong Ku-band capacity over Kazakhstan to respond to our exact requirements for the DTH service quickly and easily." (JMR)

Russian President Vladimir Putin and Czech Prime Minister Milos Zeman met in Moscow on 17 April to discuss improving ties, economic cooperation, the war against terrorism, and Russia's relationship with NATO, the Associated Press reported. Zeman praised Putin as a "great statesman" and said their talks were friendly and rich in substance. On 16 April, Zeman and Russian Prime Minister Kasyanov reached a deal to settle the last of Russia's Soviet-era debt to the Czech Republic. Russia will repay the $1.1 billion debt by supplying combat aircraft, nuclear fuel for Soviet-built Czech nuclear power stations, and other goods. The two governments reached an agreement last fall for a private firm to pay the remainder of the $3.6 billion debt; Russia will later repay that firm. Zeman said that with the debt issue solved, the two countries now have ample opportunities to engage in closer economic, political, and military cooperation, the Associated Press reported. Zeman also said that his cabinet strongly supported building closer ties between Russia and NATO. "The Cold War is over, but we now have a common enemy in the face of international terrorism. Russia's help in fighting global terrorism has opened opportunities for deepening ties between Russia and NATO," Zeman told reporters. (JMR)

Polish Treasury Minister Wieslaw Kaczmarek announced on 24 April that a joint venture of U.K.-based Rotch Energy and Russian gas-and-oil giant LUKoil wants to buy Poland's second-largest oil refinery Rafineria Gdanska, Reuters reported. Privately owned Rotch has been shortlisted to buy Gdanska, with an oil throughput capacity of 85,000 barrels per day, but questions over its ability to pay the reported $1 billion price tag for the purchase and investment pledges have placed the sale on hold. Kaczmarek told reporters in Frankfurt that, "A consortium of Rotch and LUKoil will start a due-diligence process next week, so there is no discussion of canceling the project." He said that if the sale of the 75 percent stake in Gdanska fails, it will be merged with Eastern Europe's largest downstream fuels firm PKN Orlen. The Polish market is already largely dominated by PKN and thus, the Treasury Minister supports the sale of the refinery as a better solution. (JMR)

Russian Finance Minister Kudrin said the ruble could appreciate by 3 percent per year. At a conference in London, Kudrin said, "We believe the appreciation of 3 percent per year in real terms is a sustainable level," Reuters reported. The Central Bank, the key ruble supporter, targets the ruble rate at 33 against the U.S. dollar by the end of the year. (JMR)

Russian Deputy Economic Development Minister Arkadii Dvorkovich said the government may raise the 2003 gross-domestic-product growth forecast to 5 percent from 4 percent. Dvorkovich's comments come after President Putin in his state-of-the-nation address criticized the government for not being ambitious enough in its economic plans. "To make economic growth even stronger, one should propose something more systemic," Dvorkovich told Reuters. Economic Development Minister German Gref said in Paris that any attempts at a serious growth increase would lead to a crisis. On 18 April, his boss Aleksei Kudrin, finance minister and deputy prime minister, said Russia's economy would expand 3.2-3.8 percent in 2003, compared with 4 percent budgeted for this year. But following Putin's state-of-the-nation address, Prime Minister Kasyanov told Reuters that economic growth could prove better than expected next year because of the global recovery. (JMR)

The International Monetary Fund (IMF) has revised its 2002 GDP forecast for Russia from 3.6 percent to 4.4 percent. According to the semi-annual assessment report of the world economy, the IMF said the economic rebound in Russia has been, "truly impressive." The IMF also said, however, that there are risks to the downside if oil prices fall and warned that sustained growth depends on the success of structural reforms, Reuters reported. The IMF reiterated that the Central Bank should stand ready to sterilize excess market liquidity to ensure that the inflation target is achieved. The fund praised the country for reform progress so far, but called for more in areas such as the financial sector. (JMR)

Russian Deputy Prime Minister and Finance Minister Kudrin said in an interview on Russian television, following meetings at the annual spring session of the International Monetary Fund (IMF) and the World Bank, that the West is ready to invest in Russia. He said that the G-8 finance ministers have highly assessed the condition of Russia's economy. For the first time in the past few years, Kudrin said, the development of the Russian market really has become the focus of lively interest, according to BBC Monitoring. Kudrin noted that figures discussed with the World Bank "concerning substantial increases in investment inside Russia are no longer mere gestures.... [U.S. Federal Reserve] Chairman Alan Greenspan summed it up and said that in the past 18 months, Russia has undergone a surprising course of development. No one expected that Russia would actually achieve the results it has achieved." He also indicated that the West is ready to support Russia's admission to the World Trade Organization. The finance minister did acknowledge G-7 concerns over Russian inflation. The inflation rate in the country was 18 percent last year. "But still, they said inflation is high and we have to try to bring it down," he said.

Economic analysts advise investors to be cautious. The Russian Trading System (RTS) index, which has almost doubled in value in a year, could be slowing down. The RTS is hovering at 400, and once it approaches 450, investors will be making assumptions not supported by economic and political fundamentals, Reuters reported. Christopher Weafer, head of research at Troika Dialog in Moscow, explained: "Around 440 is where the parachute is.... The chances are it will run past that level because the momentum will be behind it, but once that happens investors need to be aware that they are making assumptions which may or may not prove to be correct." The RTS last passed the 400-point mark just eight months prior to the 1998 financial collapse. John Paul Smith, head of global emerging markets at Swiss investment bank Pictet, said he thought the RTS would fall by 20 percent if there was a sharp drop in the oil price. "The trouble is that a lot of people are still interested in Russia as a play on oil," he said, adding that the market's growth meant there are very few bargains left in the country's stocks. (JMR)

Ratings agency Standard & Poor's (S&P) on 22 April raised its rating for Lithuania's long-term external debt to BBB from BBB-. S&P said it reflects the country's improving track record of fiscal prudence and progress on structural, fiscal, and legal reforms. Fitch Ratings affirmed the country at BBB- in February. S&P's rating is now in line with Moody Investors Service, which rates the country Ba1. S&P said that structural reforms, in particular in the energy sector, had supported the country's efforts to be granted accession to the European Union, Reuters reported. Lithuania is one of 10 countries expected to join the EU in 2004 provided it meets key conditions by the end of this year. (JMR)

Neftegaz 2002 and MIOGE are holding a conference on "New Russia," which will focus on oil and gas, in Moscow on 24 to 28 June. Russia's oil-field development up to 2005 will require some $40 billion in equipment and services. In addition to the Sakhalin PSA-based multibillion-dollar development projects, Russia's oil majors LUKoil, Yukos, and TNK have plans to invest some $7 billion to $8 billion in expanding upstream and downstream production, according to BISNIS. Neftegaz 2002 is offering a venue for U.S. companies to gain valuable market exposure, establish important contacts, and explore new business opportunities in this rapidly expanding market. Neftegaz will bring together key industry players and top managers of some 500 local and international companies working in Russia, including all U.S. oil and gas exploration/production companies and equipment/service providers active in the market. (JMR)

Kazakhstan's Central Bank Chairman Grigorii Marchenko on 17 April defended Kazakh President Nursultan Nazarbaev's decision to establish a secret Swiss bank account holding $1 billion that the Kazakh government received from selling a stake in the Tengiz oil field, Reuters reported. Kazakh authorities said neither the president nor his family have benefited from it. "As an economist and banker, I can only say this was the right decision from the economic point of view. It is quite another matter that due to political and legal reasons it was not properly arranged," Marchenko said. Prime Minister Imangali Tasmagambetov first defended the fund, saying it had helped the country to avoid imminent bankruptcy during a series of financial crises. The government says some $880 million from the secret fund was spent in 1997-98 to pay off huge pension arrears and to support the budget amid a sharp fall in revenues, when prices for oil exports plunged and Russia fell into financial crisis. Marchenko said $212.6 million still in the secret fund had been transferred to the country's National Fund of oil income, a so-called "fund for future generations," since the start of this year. He said the latest transfer was made on 15 April. The Central Bank, which manages the $1.53 billion National Fund, expects new transfers to be made soon. He declined to give any details of further transfers. Opposition groups have formed the People's Oil Fund in order to monitor the government's financial activities. (JMR)

On 18 April, "Kommersant" published an open letter from the Russian Union of Industrialists and Entrepreneurs to Russian President Putin calling for improvements to the upcoming reforms of small-business taxation. The letter noted that the proposed changes "leave the crucial problems of the majority of businessmen unsolved." Among other things, "the old accounting system remains; of 20 existing taxes only four will be abolished; small businesses are excluded from the unified system of the value-added tax, which rules out any opportunity for small businesses to operate legally." The letter added that limitations stipulated by the bill concerning the implementation of the simplified taxation system, "do not promote the extirpation of corruption in state authorities, which regulate business activity." With this in mind, the Russian Union of Industrialists and Entrepreneurs asked the president to "charge the government with making amendments that have been prepared by the representatives of Russian business community to the final bill." (JMR)

South African Mark Shuttleworth became the second space tourist on 25 April, when he and Russian cosmonaut Yurii Gidzenko and Italian pilot Roberto Vittori blasted off on a Russian rocket from the Baikonur cosmodrome in Kazakhstan. He appears to be doing quite well in orbit, after his nerve-racking liftoff, the Associated Press reported. Following Dennis Tito's lead, Shuttleworth, who is 28 years old, paid the Russian Space Agency $20 million for the trip to space. The rocket is scheduled to dock with the International Space Station on 27 April and return on 5 May. Shuttleworth had trained with NASA for a week at the Johnson Space Center in Houston and went through other tests and training with the full crew.

Meanwhile, U.S. company Inter Orbital Systems plans to offer regular space flights for tourists taking off from Tonga at the price of $2 million each, according to The company already has its first customer lined up. (JMR)

Deputy head of the Ukrainian Agriculture Ministry's Grain Department Ivan Martynyuk said that Ukraine's 2002 grain crop may reach a record 40 million tons, compared with a current estimate of 36.6 million tons, Reuters reported. Ukraine's harvest last year totaled 39.7 million tons. Martynyuk said, "This spring, Ukrainian farms used much more fertilizer than a year ago and they completed spring grain sowing at the best time." However, some analysts question the forecast. "We see no real grounds for such an optimistic forecast," said Mykola Vernytsky, analyst at leading agricultural consultancy ProAgro. (JMR)

Russia's State Statistics Committee using the International Labor Organization's methodology calculated that unemployment fell in March 2002 by 1.5 percent compared with February 2002, to 6.3 million people. That amounts to 8.9 percent of the country's total working-age population, ITAR-TASS reported. However, the number of those officially registered as unemployed rose by 1.7 percent in March compared with February, reaching 1.27 million, which is some 20 percent of the overall total of unemployed and 1.8 percent of the total working-age population. Compared to the end of March 2001, the total number of unemployed dropped by 7.1 percent over the course of the year, while the number of those officially registered rose by 15 percent. The State Statistics Committee estimated that, as of the end of March 2002, the size of Russia's working-age population was 70.6 million, about one-half of the country's total population. Of all those with employment, 63.8 percent worked in large and medium-sized enterprises.

Meanwhile, the average wage of Russian workers reached 4,172 rubles ($133.68) per month in March 2002, against 3,725 rubles ($119.34) in February and 2,964 rubles ($94.97) in March 2001, the Russian State Statistics Committee said. The average wage in Russia has increased by 40.9 percent since last March, Interfax reported. However, the actual wage (adjusted for inflation rates and with taxes and mandatory payments deducted) has increased by 20.6 percent. (JMR)