Business Watch: June 25, 2002

Surgutneftegaz CEO Vladimir Bogdanov predicts that his company will maintain production through 2010, according to Troika Dialog. In 2020, production is expected to be 960 barrels per day (bpd) and could realistically increase to 1,200 bpd by developing new fields, reported Skrin "Issuer" on 19 June. Bogdanov expressed interest in expanding into new regions of Russia, including the Komi Republic, the Nenetsk Region, and Eastern Siberia. These plans may provide short-term rewards for investors, but without a clear long-term development strategy to diversify and replace Surgutneftegaz's reserves, resources will be depleted. (PMJ)

Turkmenistan, Pakistan, and Afghanistan signed an agreement on 30 May to participate in the construction of a joint pipeline. The pipeline is intended to extend 1,460 kilometers and run from Davletabad in southeast Turkmenistan to Kandahar, Afghanistan via Multan, Pakistan. Construction of the pipeline will allow Turkmenistan to export its gas to world markets without Russian assistance. Some view the election of Hamid Karzai as president of Afghanistan's transitional authority on 13 June as the first indication that the pipeline may become a reality. The cost of the project has been estimated at over $2.6 billion. According to RosBusiness Consulting on 18 June, Turkmen President Saparmurat Niyazov invited Russia to participate in the project. Russian President Vladimir Putin has not expressed an interest in the trans-Afghanistan alliance, reported the Turkmen newspaper "Vremya Novostey." (TGP)

Ericsson and VimpelCom, under the trademark "BeeLine," will expand their cooperation in the mobile-phone market (GSM 900/1800 frequency range) into three regions: the Volga region, the North Caucasus, and Siberia. Ericsson press representatives announced on 20 June that the company will construct a new mobile-digital telephone-network center to be used by VimpelCom in operating the cellular networks in the above-mentioned territories. The contract also elaborates plans for Ericsson to provide a data-packet broadcasting service through the GPRS (General Packet Radio Service) channel for the regional networks operating under the "BeeLine" label. The delivery of equipment is expected by the end of July. (PMJ)

A $150 million agreement was signed on 18 June allowing Yukos subsidiary Williams to gain a stake in the Lithuanian firm Mazeikiu Nafta. "Today culminates over a year of hard work by the Lithuanian government, Yukos, and Williams," Williams Lietuva General Manager Randy Majors announced after a signing ceremony at the Lithuanian Ministry of Economy. "Williams is extremely pleased that the efforts of all the parties have finally become a reality, and we look forward to focusing on the continued modernization of Mazeikiu Nafta together with our new partner, Yukos. We are very grateful for the support of the Lithuanian government in moving this transaction towards completion," according to statements released on PRNewswire on 18 June. According to the terms of the agreement, Yukos will purchase $75 million in Mazeikiu Nafta shares and lend Mazeikiu Nafta an additional $75 million. Yukos will also provide Mazeikiu Nafta with a minimum of 5 million tons (or 35 million barrels) of crude oil per year over a 10-year period. Williams and Yukos will each hold 26.85 percent stakes in Mazeikiu Nafta, while the Lithuanian government will retain 40.66 percent. Commenting on the transaction, Yukos Chief Financial Officer Bruce Misamore asserted in a statement that, "This agreement is the first and largest of its type closed between a Russian and a U.S. company outside of Russia and the CIS [Commonwealth of Independent States]," according to the PRNewswire statement. "Williams, Yukos, and the Lithuanian government have set a precedent for cooperation in the European energy sector. Yukos is pleased to be making a long-term commitment to Mazeikiu Nafta, and the Lithuanian government and will be actively involved in making the company into one of Europe's best refining and transportation operations." (TGP)

The U.S. Agency for International Development (USAID) and Pinnacle Bank have joined forces to provide a two-week training program for top Russian banking officials, Business Wire reported on 17 June. The chairman of the board at the JSC CB St. Petersburg Bank for Reconstruction and Development, Dmitrii Pankin, and Tamara Osipenko, deputy chairman of the board for the Russian Regional Development Bank in Moscow, arrived in the U.S. on 2 June to participate in the program. Pankin and Osipenko are attending seminars in New York City on bank management and financial-system reform. The two will also meet with senior officials from Pinnacle and tour several of the bank's Nebraska-based locations. The training is intended to provide the bankers with information and tools that will be useful in promoting market-oriented reforms in Russia. (TGP)

Plans are being made to privatize Vneshtorgbank (VTB), Russia's second-largest bank. Speaking on state-run RTR television, Prime Minister Mikhail Kasyanov announced, "[The bank] will be gradually privatized, over five to seven years," Reuters reported on 16 June. The Central Bank will sell its 99 percent stake in VTB to the government for 42 billion rubles ($1.34 billion). This will be the first step toward full privatization. The European Bank for Reconstruction and Development has expressed an interest in investing in the bank in the future. (TGP)

The Russian State Statistics Committee announced on 20 June that the country's consumer-price-inflation (CPI) index increased by 0.5 percent in the first two weeks of June, compared to 1.7 percent for the month of May, Reuters reported. Daily inflation at the beginning of June was reported at 0.026 percent, down from 0.054 percent reported in May. Overall, inflation is expected to decline to 12 to 14 percent by the end of 2002. (TGP)

According to a report released by the Stockholm International Peace Research Institute (SIPRI), Russia has surpassed the U.S. as the world's largest exporter of conventional weapons, the BBC reported on 18 June. Russia's arms exports have increased six-fold in the last five-year period. A large portion of exports has gone to China and India. SIPRI predicts that the U.S. will quickly regain its lead in exporting arms. Over the past five years, the U.S. has exported $44.8 billion in arms compared to the $17.4 billion exported by Russia. Russia has fewer clients than the U.S. and less capital to invest in military research. (TGP)

The Russian State Duma will review amendments to the Russian Tax Code and other tax legislation on 21 June, RosBusiness Consulting reported. According to information received by the Russian Union of Brewers, the government was set to propose a 40 percent increase in beer excises. A 25 percent increase in the excise was previously advanced during the first reading of the bill. A representative from the Russian Union of Brewers said, "If such a radical measure is applied to the brewing industry, the Russian government will once again confirm its intention to resolve complex economic questions by means of a simple increase in the tax burden on this industry," RosBusiness Consulting offered. Baltika Company President and Deputy Chairman of the Russian Union of Brewers' Board Taimuraz Bolloyev said, "The Russian government expects a 4 percent growth in the gross output of the food industry in 2002, but the brewing industry will not achieve such a rate of growth after privileges for investors are canceled and the excise tax is increased even by 25 percent." (IAM/TGP)

President Vladimir Putin opened a meeting for the Presidium of the State Council in the Kremlin designed to discuss problems with Russia's timber industry on 17 June. "[Russia's] huge forestry resources could give the state a steady income," the president said, according to ITAR-TASS news agency. "This has not happened, and the output of the main types of forestry industry products has contracted by more than three times in the last 10 years." Putin stressed the necessity of developing forestry legislation as well as creating the infrastructure needed to bring wood-based products to market and trade, RosBusiness Consulting reported. Although Russia has access to one-fourth of the world's supply of timber, in 2001 it imported $1.5 billion in timber products such as paper and furniture, ITAR-TASS reported. According to RosBusiness Consulting, Putin called Russia's forests a "natural resource" that should be used "in a civilized way." (TGP)

Shareholders of Bratskekogas named six representatives from Itera to the joint-stock company's board of directors, Skrin "Issuer" reported. Itera's Yevgenii Nanivskii was elected chairman of the board. The mayor of Bratsk, A. Petrunko, was a month the other board appointments. No further details were immediately available. (PMJ)

Lower world metal prices in 2001 adversely affected the revenues for Norilsk Nickel, according to an article in "The Moscow Times." Norilsk Nickel revenues declined by 17 percent in 2001, while production of all major metals increased. Total revenues fell to 106.97 billion rubles, or $3.4 billion. The company also reported that top executives hold 838,237 shares, or 0.34 percent of total share capital. (PMJ)

Standard & Poor's has reaffirmed its B+ long-term foreign-currency issuer ratings for the city of Moscow (B+/Positive/B). Moscow continues to show sound budgetary performance, the agency said. The rating is important since Moscow remains the economic, political, and financial center of Russia. Moscow has a relatively diversified, service-based economy with a positive economic outlook. Concerns that the soccer riots would negatively tarnish the S&P ratings proved unfounded. (PMJ)

According to an announcement made by the Kazakh Central Bank on 17 June, the country's gold and foreign-currency reserves grew from $2.790 billion in May to $2.798 billion in June, Reuters reported. The Central Bank also announced on 17 June that Kazakhstan's total international reserves, including the country's oil fund, are now worth $4.452 billion. Finally, Kazakhstan's monetary base grew by 5.2 percent from end-May to 14 June. (TGP)

The Russian Central Bank announced on 20 June that Russia's gold and foreign-currency reserves totaled $42.5 billion on 14 June, RosBusiness Consulting reported. This marked a $200 million increase from the week of 7-14 June. Gold and currency reserves thus increased $5 billion in 10 weeks. Since 10 May, reserves have grown by $2.5 billion, and between 31 May and 14 June, gold and currency reserves were up by $300 million. On average, Russian gold and currency growth between 5 April and 24 May was more than $300 million a week. (IAM/TGP)

Sergei Pugachev, the "Orthodox banker" well-known for self-promotion and close ties to President Vladimir Putin, has come under scrutiny once again. On 18 June, grani.ru publicized an article concerning Pugachev's alleged bank accounts in France and Monaco that had been translated from French and appeared in the newspaper "Le Monde" on 20 June. The article alleges that an investigation is under way into bank accounts belonging to Pugachev, a former chairman of Mezhprombank and a current senator representing Tuva in the Federation Council. Gazeta.ru published an article by Petr Ivanov titled "Putin Instructs Pugachev To Return Capital To Russia: But The Oligarch's Mission Is Likely To Fail" on 20 June. This second article claimed that President Putin had asked the "chekist" entrepreneur-banker "to contact the ruling body of the Russian Union of Industrialists and Entrepreneurs to consider what might be done to retrieve Russian capital from offshore zones and reinvest it in the domestic economy."

The contrasting stories, run within days of each other, indicate that Pugachev has some insider knowledge on capital flows. The question then becomes: Who really asked whom to pursue the recovery of Russian capital abroad?

The timing of the article concerning the Putin-Pugachev meeting to curb capital flight from Russia and return billions from Europe serves as an interesting counterweight to the claim that Pugachev himself has been involved in questionable offshore banking. As it happens, the article's release also coincided with Putin's address to the sixth convention of the Commerce and Industry Chamber held on 19 June. At that convention, Putin called for the return of "enormous resources of Russian origin [capital]," according to 20 June strana.ru. Pugachev's reputation begs the question of whether he proposed that President Putin approach the "oligarch's union" to develop a plan for the return of expatriated capital. Pugachev is not well liked or well positioned in the union, and this strategy may have be an attempt by Pugachev to enhance his status vis-a-vis the group.

The meeting between Pugachev and Putin might also be viewed as an effort by Pugachev to deflect attention following the release of the French news reports regarding his own activities. According to "Gazeta" 20 June, an interview by Vladimir Mironenko with French Prosecutor Eric De Mongolfe released preliminary information concerning the French government's monitoring of suspicious bank accounts. The prosecutor then opened an investigation into suspected money laundering as requested by TRACFIN, a French special-investigative service. The bank accounts in question were traced to Pugachev, who was also interviewed on 20 June by Ludmila Romanova of "Gazeta." Pugachev refused to answer any questions concerning the French properties or his personal life.

Another version of the story alleges that the Pugachev investigation is a by-product of a probe into Pavel Borodin, who was reportedly managing funds for Yeltsin, Putin, and others connected with Yeltsin's presidential administration. Recently, Pugachev and Borodin have been active in Borodin's old stomping grounds, the diamond-producing region of Yakutia (Sakha Republic). "Meanwhile, other Russian oligarchs were viewing the situation in an entirely different light," gazeta.ru reported on 20 June. "A source well-versed in the affairs of the Russian Union of Industrialists and Entrepreneurs told gazeta.ru that if Pugachev had indeed been appointed 'chief of tax amnesty,' his mission was bound to fail because the oligarchs simply ignored him."

Others voices in the media claim that the French investigation might be the work of those connected with Slavneft after Mezhprombank (MPB) failed to acquire the energy giant. On 18 June, "The Washington Post" pointed out that the "Orthodox-chekist" banker Pugachev is increasingly the subject of controversy. A recent high-profile brawl concerning the Russian government's intention to sell a portion of its 75 percent stake in Slavneft left many to speculate which clan would end up controlling the remaining energy jewel. In a pre-auction proposal, the government made known its intention to sell a 20 percent stake in Slavneft. And in fact, the struggle for control of the last government-controlled (75 percent) energy powerhouse has been punctuated by fighting at the Slavneft headquarters, the physical removal of individuals, and bomb threats. These tactics have prompted questions over President Vladimir Putin's commitment to introducing Western standards of transparency and corporate governance. Politically, the struggle for control of Slavneft is a revealing indication that the influence of President Putin and his allies like Pugachev is not as all-pervasive as one may have suspected -- or as his media spin masters would like the public to believe.

Pugachev was linked to efforts at reinstating the previous president of Slavneft, Mikhail Gutseriev, who had been removed from the position by Prime Minister Kasyanov under pressure from the Kremlin. Gutseriev's removal was orchestrated after his brother, Ingush Interior Minister Khamzat, ran unsuccessfully for the governorship of Ingushetia. Both of the Gutseriev brothers were well-connected with a former Russian interior minister and current secretary of the National Security Council, Vladimir Rushailo. Citing confidential sources, "Novaya gazeta" reported on 29 April 2002 that the National Security Council secretary is one of the key members of the Yeltsin "Family" clan and has been linked to the Ingush clan responsible for smuggling fuel in neighboring Georgia.

Interestingly, Prime Minister Kasyanov has also been linked to the Yeltsin "Family," and rumors of his imminent demise have been repeated often enough. This may be wishful thinking, however, considering the sources. For example, many such reports have been repeated on broadcasts of TV-3 in Moscow. It is important to note that TV-3 reputedly is controlled by Sergei Pugachev and thus serves as a conduit for the "chekists," or St. Petersburgers, close to Putin. According to this hypothesis, this is all part of the chekists' spider-web effort to displace the power and influence of the "Family" within the Kremlin. If so, it has not worked as planned. Pugachev represents one of the new would-be oligarchs seeking advantage at the expense of Yeltsin "Family" insiders. TV-3 has been in the forefront of predicting the removal of Prime Minster Kasyanov and exposing his ties to Roman Abramovich and the role of the "Family" in the Slavneft fight (TV-3, 18, 15, and 13 May and 28 April 2002). Abramovich now appears more powerful than ever. In the end, Pugachev's approach may backfire.

Kasyanov and even Yeltsin himself have been increasingly outspoken. The lack of progress by Pugachev and his associates is clearly making "Family" members in government positions, as well as associated oligarchs, bolder in their public statements. More and more voices are expressing discomfort with Putin's top-heavy security clan. Some even appear ready to call the "chekist" bluff. Mikhail Zadornov, the political satirist at NTV Novosti, on 17 June claimed that Putin is none other than the press attache for the Yeltsin family.

The fight over Slavneft has exposed the strengths and weaknesses of the would-be kings among the political and oligarchic communities. The Yeltsin "Family" appears to have emerged on top. After Gutseriev was removed from presidency of Slavneft, Kasyanov quickly selected Slavneft Vice President Yurii Sukhanov to replace him. Sukhanov was previously employed by Sibneft and the "Family"-linked oligarch Roman Abramovich and viewed as one of his men. Vitalii Portnikov's grani.ru commentary on 14 June emphasized the dominance of the "collective Yeltsin" as compared with Putin's disorganized and quarreling "Northern alliance" or the "chekists."

Meanwhile Pugachev, the so-called "gray eminence" of the "chekists," continues to clamber for victory in the business sphere and for respect in general. His efforts to win the battle for control of NTV, TV-6, and now Slavneft have all ended unsuccessfully, while his isolation from the brotherhood of oligarchs has increased. His attempts to place himself in a position of prominence among the oligarchs have failed. Ranks are closing quickly against Pugachev, who has so far failed to find the formula for working with those who have carved out a niche for themselves and intend to keep it. (PMJ)