Business Watch: July 2, 2002

Mikhail Khodorkovskii, head of Yukos oil company, has acknowledged that he is the owner of a 36.3 percent stake in the company worth approximately $7 billion, "The Times" of London reported on 23 June. Khodorkovskii made the information public in order to comply with U.S. disclosure requirements, a prerequisite for listing Yukos on the New York Stock Exchange. Khodorkovskii's decision may encourage other business members to come forward with similar revelations. If such information is made public on a more regular basis, Russia's attractiveness as a destination of foreign investment could increase. In the past, members of the Russian business community have kept their financial information quiet for a variety of reasons, including to avoid oversight, taxes, kidnappings, and other forms of violence. (TGP)

A two-year agreement has been signed between MegaFon, Russia's first cross-country mobile operator, and Nokia, a leader in mobile-phone equipment, to expand GSM network operations in central Russia, Reuters reported on 26 June. Financial details of the contract were not released. According to the agreement, Nokia will service Nizhnii Novgorod, Voronezh, and the surrounding areas with an advanced GSM network. Deliveries of equipment including network technology, transmission infrastructure, and support systems are under way and should be concluded by the end of July, according to a Business Wire release on 26 June. Nokia has also agreed to contribute management, training, and supervision services. Andrei Klimov, a spokesman for MegaFon, said, "MegaFon has been impressed with Nokia's GSM offering and its enthusiasm to satisfy our network requirements," according to Business Wire. "We are convinced that the GSM service we will provide our customers will greatly improve the quality of mobile service available in this market." Nokia Networks Senior Account Manager Denis Malyshev added, "We are cooperating closely with MegaFon to bring the very best of GSM service to central Russia, and we see this as the beginning of a long relationship that will accelerate the uptake of mobile services in this vibrant area." (TGP)

Russian officials announced on 21 June that four new nuclear reactors will be built to meet the country's energy needs, AP reported on 24 June. Old reactors will also be restored. Russia's nuclear program was largely suspended following the 1986 Chornobyl disaster. According to Oleg Sarayev, head of the Rosenergoatom consortium in charge of Russian nuclear power plants, "We are going to make a big surge forward after a long period of stagnation." The first new reactor since the disaster at Chornobyl opened in March 2001 in the southern region of Rostov. In addition to opening new reactors at home, Russia has signed agreements to build nuclear plants in Iran, India, and China. Russia is also in negotiations to win a contract for a nuclear reactor in Finland. Russian Deputy Atomic Energy Minister Valerii Lebedev said, "There is a good chance that we will win, taking into account the fact that the Soviet Union built a nuclear reactor in Finland which is considered one of the safest in the world," AP reported. (TGP)

Capital flight from Russia totaled a staggering $300 billion in the 12 years following the collapse of communism. Since President Vladimir Putin came to power in 2000, economic reform has topped the country's agenda. "We are in surplus on capital operations accounts in the second quarter of this year for the first time since reforms began," Finance Minister Aleksei Kudrin announced on 25 June, according to Reuters. "It means that capital inflow has exceeded capital flight. It means that we are facing a new reality in Russian economic policy in which investors trust the country, and we must confirm their trust by a real change in investment climate." According to AP on 19 June, Putin called on Russia's business owners to repatriate funds from their offshore accounts. Although Putin promised criminal charges would not be levied against business owners for unpaid taxes, Kudrin said on 25 June that mechanisms are not in place to prevent such prosecution, Reuters reported. Kudrin told participants in a conference being held by Renaissance Capital investment bank on 25 June that credit for Russia's improved business climate belongs to local investors. (TGP)

Almalyk (a.k.a. AGMK), a producer of Uzbek copper, zinc, gold, silver, and molybdenum concentrate, is the subject of talks on the possible sale of a majority stake in its plant to foreign investors, Reuters reported on 24 June. According to the deputy head of the State Property Committee, Makhmudzhon Askarov, the government is engaged in talks with a consortium including German Ferrostahl, Israeli Metal Teck, and Finland's Outokumpu. Askarov did not provide a timeline for discussions but did comment, "They have proposed setting up a consortium, which will first diagnose the [financial] state of the company and then privatize the plant," Reuters reported. Uzbek authorities are interested in selling a 46.5 percent share in Almalyk, which has been valued at $478 million. Investors other than the German-Israeli-Finnish consortium have approached the Uzbek government for discussions, but have been rejected. Still others remain leery of investing in Uzbekistan altogether and complain that the government will only allow transactions in which it maintains a controlling stake. Almalyk has continued to increase production. In 2001, Almalyk produced 77,470 tonnes of copper, 8.46 tonnes of gold, and 80,100 tonnes of zinc. Copper and gold production are expected to rise to 85,000 and 9.0 tonnes, respectively, by 2006. Between 2000 and 2001, production of zinc increased by 7,600 tonnes followed by silver, which rose 10.57 tonnes in the same period. In 2000, Almalyk's profits were reported at 15.85 billion sums ($21.26 million). (TGP)

Russia's efforts to join the World Trade Organization (WTO) are in part being hampered by the country's growing copyright violations. In 2001, Russia lost an estimated $849 million due to piracy of films, music, and video games, Reuters reported on 28 June. The pirated goods, which are sold in stores, metro stations, and markets throughout Russia, are often the products of organized crime. Following a visit to Moscow, Universal Music International President and Chief Operating Officer John Kennedy commented, "I can't think of any other crime [whose product] is available openly at a market in the city center without the authorities doing anything about it," Reuters reported. Laws to protect against piracy in Russia are weak and rarely enforced. According to Microsoft representative Yevgenii Danilov, "Active steps have to be taken by the state to draw up laws and make these laws work," Reuters reported. Jason Berman, chairman and CEO of the International Federation of the Phonographic Industry (IFPI) agreed. According to Berman, if Russia is serious about joining the WTO "it will have to make changes to its laws and to the way its laws are enforced." (TGP)

Speaking at a Kremlin press conference on 24 June, Russian President Vladimir Putin expressed Russia's interest in increasing economic cooperation with China. Putin said, "We hope political cooperation will not decline while relations in the civilian sectors of the economy would be raised," Xinhua reported on 24 June. According to the president, foreign policy cooperation "is as high as ever today." (TGP)

Russia's investment climate has improved since the 1998 financial crisis as a result of economic reforms introduced by President Putin. On 26 June, U.S. Ambassador to Russia Alexander Vershbow told Interfax news agency, "I think they [investors] see a very positive climate but still with some uncertainties.... So they walk. They don't run [to invest]," AP reported. U.S. Assistant Secretary of Commerce William Lash concurred with that sentiment, saying, "Clearly the market indicates that the investment climate in Russia is a positive one." Last year the U.S. alone invested more than $1 billion in the Russian economy. To make Russia even more attractive to investors, laws protecting investments must be strengthened. Russia must also improve transparency in the country's business transactions. (TGP)

The Russian State Statistics Committee announced on 21 June that real disposable personal incomes increased 8.7 percent from January to May compared to the same period in 2001, Interfax reported. During the month of May, Russians experienced an overall increase in real disposable incomes of 4.7 percent year-on-year. This was down 14.1 percent from April. Also in May, the average nominal per capita monetary income was reported at 3,203.40 rubles, a 23.7 percent increase year-on-year but a drop of 14.1 percent from the previous month. Average wages adjusted for inflation rose 19.5 percent year-on-year and rose 1.3 percent between April and May, Interfax reported on 21 June. (TGP)

According to an announcement by LUKoil, the oil producer expects net profits from the first quarter to fall from $690 million in 2001 to $170 million in 2002, Reuters reported on 27 June. Preliminary evidence also suggests that first-quarter revenues dropped from $3.6 billion in 2001 to $3 billion in 2002, LUKoil First Vice President for Finance Sergei Kukura announced. (TGP)

Sergei Mikhailovich Bogdanchikov was born in 1957 in the village of Bogdanovka, in the southern oblast of Orenburg. According to Rosneft's official website (http://www.rosneft.ru), Bogdanchikov graduated from the Ufa Petroleum Institute in 1981 with a first-class honors degree in "technology and complex mechanization of oil- and gas-field development" and a professional qualification as a mining engineer. According to rosneft.ru and neftegaz.ru on 19 December 2000, Bogdanchikov worked at "oil and gas enterprises" in the Sakhalin Oblast from 1981 to 1985 Bogdanchikov, according to the neftegaz.ru article, left the oil fields to work as propaganda instructor for the Sakhalin Communist Party organization from 1985 to 1988. He presumably returned to his work as an oil and gas engineer (no available biographical sketch fills in the gap from 1988 to 1993) before being appointed general director of Sakhalinmorneftegaz, a Rosneft subsidiary, in 1993. He held that post concurrently with a Rosneft vice presidency from 1997 until October 1998, when then-Prime Minister Yevgenii Primakov appointed him president of an ailing Rosneft. Bogdanchikov holds a doctor of science degree and was voted among Russia's "Most Professional Managers" by the country's Managers Association in January of this year, rmas.org reported on 21 January. He was also included on Kompania's list of the 15 most-powerful oligarchs on 8 April, and he is widely recognized as one of Russia's top managers.

Taking The Reins At Rosneft

Former Prime Minister Primakov appointed Bogdanchikov president of the Rosneft joint-stock state oil company on 16 October 1998. His predecessor, First Deputy Minister for Fuel and Energy Sergei Chizhov, held the position of acting Rosneft president from 25 August 1998 until Bogdanchikov's appointment. Bogdanchikov was well-prepared for the top managerial position at Rosneft, having headed the Rosneft-Sakhalinmorneftegaz joint-stock company since 1993 and having served concurrently as vice president of Rosneft's Far Eastern projects since 1997.

The Russian government had hoped to raise $1.6 billion by selling a 75 percent-plus-one-share stake in Rosneft. The government scrapped two auctions in 1998, citing poor market conditions and lack of interest. Rosneft's problems controlling its subsidiaries were also to blame. Rosneft lost a 51 percent stake in Purneftegaz, its most productive subsidiary, in a suspicious giveaway transaction. The company was forced to give up its stake in Purneftegaz after failing to repay both a loan and overdue fines of 40 million rubles to the Russian commercial bank Mapo; the stakes were being held as collateral against the loan. Chizhov claimed that some of the company's previous managers appeared to orchestrate the default and were benefiting from it financially. According to the "Daily Report on Russia" on 17 October 1998, then-President Boris Yeltsin had previously ordered the government to return the Purneftegaz 38 percent stake to Rosneft. Press accounts concerning the struggle over Purneftegaz and Primakov's cancellation of the Rosneft auction claimed that Roman Abramovich -- owner of one of Russia's largest oil companies, Sibneft -- ("Russia's New Oligarchs," BBC, 28 March 2000) and his then-Sibneft partner and now "oligarch-in-exile" Boris Berezovskii used their influence to orchestrate the Purneftegaz takeover through front companies. By exploiting management connections in Rosneft, the scheme was to decrease the company's sale value in order to extract the best-possible bargain once the company was privatized ("Izvestiya," 16 September and 10 July 1999; "Moskovskii komsomolets," 25 October and 12 July 1999; "Vedomosti," 4 September 2000; apn.ru, 22 March 2002; and "Kompaniya," 8 April 2002).

Turning To Slavneft

Today, the battle for control of Slavneft appears to be another episode in the old fight between Bogdanchikov, who has allied himself with former Mezhprombank (MPB) Chairman Sergei Pugachev, and Abramovich, who represents the interests of the "family." According to various Russian press articles, it is Sibneft that was the principle force behind efforts to remove Bogdanchikov as soon as he assumed the Rosneft presidency in 1998. Bogdanchikov's response was immediate and he initiated a purge of "family"-connected managers (politcom.ru, 14 May, 2002; "Kommersant," 16 October 1998).

Shortly thereafter, the Russian fuel minister at the time, Sergei Generalov, attending an energy conference in South Africa, commented on 30 October 1998 that Russia was considering forming a national oil company by merging state oil firm Rosneft with Slavneft and Onako. The idea has remained one of the enduring goals of Sergei Bogdanchikov's presidency at Rosneft. The latest police raid on the Slavneft offices on 27 June, according to Intercon's "Daily Report on Russia" on 28 June, underlines the commitment of the Russian government to pursue this vision against the background of warring clan interests. Russia owns 100 percent of Rosneft and has an 85 percent stake in Onako and a 77 percent stake in a Slavneft venture with Belarus, which owns 11 percent. Generalov said, "One of the options is that the government is going to create a national oil company, maybe in the next year. It's one of the possible options, and not a deal for immediate implementation. It's not a decision. It's one of many ideas," according to Intercon's "Daily Report on Russia" on 31 October 1998.

Minister Generalov also let it be known at the time that privatizing Rosneft was still an option, though the sale of Rosneft was canceled in May 1999 due to lack of bidder interest and low world oil prices. Another attempt to sell the company was postponed indefinitely in October 1999 by Prime Minister Primakov. At that time, Primakov said Russia would not accept knock-down prices for its remaining industrial treasures. Rosneft President Bogdanchikov was optimistic when he suggested that the company might be worth up to $3 billion if offered for sale in 2000. Once this failed to come to fruition, Bogdanchikov refocused attention on selling a stake in the Sakhalin-1 project in order to raise additional capital for investment.

In 1999, Bogdanchikov announced the impending sale of a stake in the Sakhalin oil and gas project. On 18 February of that year, the head of Rosneft declared that Russia would accept bids for a 19.6 percent stake in the Sakhalin-1 offshore oil project. He said that unnamed foreign companies, Russian oil company LUKoil, and gas monopoly Gazprom had expressed interest in the tender. Bogdanchikov said 49 percent of the combined stake of 40 percent held by Rosneft and its Sakhalinmoreneftegaz subsidiary would be tendered, but gave no other details, Reuters reported on 19 February 1999. Other participants in Sakhalin-1 are Exxon and the Japanese Sakhalin Oil and Gas Development Co. (SODECO) consortium, each with a 30 percent stake. In September, Rosneft said it planned to sell part of its stake, since it was no longer able to finance its participation, according to Intercon's "Daily Report on Russia" on 19 February 1999.

This failure to fund participation in the Sakhalin development project was one of the factors that led Bogdanchikov to sign the 18 June strategic agreement between Sberbank and Rosneft. (PMJ)

(Next week: Bogdanchikov: Turning Rosneft Around And Lobbying For Gosneft)

Rosneft, Russia's state-owned oil company, signed a cooperation agreement with Sberbank on 18 June that may be the first significant step toward realization of its strategic plan to become the country's leading oil company by 2015. An outline of the Rosneft strategic plan can be found on the company website at http://www.rosneft.ru. According to a company press release dated 19 June, "The agreement provides for development of long-term strategic cooperation between the Savings Bank [Sberbank] and Rosneft." The agreement also outlines a broad variety of potential loan and finance opportunities, including short- and mid-term loans as well as investment and financing of strategic projects such as oil production, refining, and other facilities worth approximately $700 million.

The ambitious plan seeks to integrate financial, information, accounting, and collection systems to improve financial management. Plans also include the installation of credit-card readers and banking services at Rosneft gas stations. The general agreement, signed by Sberbank President and CEO Andrei Kazmin and Rosneft President Sergei Bogdanchikov, seeks to develop cooperation between both Russian financial and industrial institutions, according to Rosneft.

However, some investment analysts question the decision by the bank to grant such a large loan facility to Rosneft. Troika Dialog analysts note in the 19 June Skrin "Issuer": "We believe that this deal has a commercial basis and [is] not merely [a] subsidizing of one state entity by another. Rosneft has one of the lowest levels of leverage in the industry and has demonstrated sound profitability. Nevertheless, we view the news as negative; the deal will increase the bank's risk profile and runs counter to its current strategy and interests."

Others question why Sberbank would grant such a large loan facility and not diversify its loan portfolio. This appears at odds with the bank's goals to increase lending to small and medium-sized businesses and individuals. Troika Dialog analysts conclude that: "$700 million exposure to a single company, which accounts for 28 percent of the bank's estimated equity, is an unreasonably high risk to take, particularly in view of the fact that oil and gas companies already account for over 25 percent of the bank's existing loan portfolio."

This strategic alliance may be an indication of a new round of moves by Rosneft President Bogdanchikov, not only to expand Rosneft but also to pursue the plan to consolidate various state oil and energy companies into an entity called Gosneft. The idea of creating Gosneft was first promoted by former Russian Prime Minister Yevgenii Primakov. One of the most-frequently mentioned first steps involves the merger of other majority state-owned companies (such as Slavneft) with the 100 percent state-owned Rosneft. The idea of creating Gosneft has been vigorously opposed by the Russian energy oligarchs. Thus, the oligarchs have reportedly attempted to use their political influence to have Bogdanchikov ousted from his Rosneft post on several occasions (see "Izvestiya," 16 September 1999). For this reason, today's battle for control of Slavneft and the recent police raids (see Intercon "Daily Report on Russia," 28 June 2002) to remove and replace one group of managers must be taken seriously as part of a larger scenario to consolidate state control in the oil industry and challenge the private oil-company owners who wield enormous power.

In a related development, Rosneft shareholders voted for a 12.9 percent dividend per share, Prime-TASS reported on 24 June. Shareholders also approved the annual report, income statement, and allocated 1.1 billion rubles for dividends at the meeting. A new Board of Directors including Bogdanchikov, the president of the company, and 11 representatives of the state was also approved. (PMJ)