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Business Watch: July 9, 2002

9 July 2002, Volume 2, Number 27
Tom Winterton, general director of the TengizChevroil (TCO) joint venture owned by ChevronTexaco, Kazakhstan, U.S. ExxonMobil, and LUKArco, announced the launching of an $800 million project to increase oil output at Kazakhstan's Tengiz oil field, Reuters reported on 2 July. According to TengizChevroil, the company will work to increase oil recovery through gas injections. Test injections are expected to begin at the oil field in 2004. Winterton told reporters, "This technology, when applied, allows us to recover more oil out of the reservoir over its life," Reuters reported. As a result of gas injections, TengizChevroil hopes to increase production at the Tengiz oil field by 3 million tonnes of crude oil per year or 60,000 barrels per day beginning in 2005. In 2001, 12.7 million tonnes or 60,000 barrels per day were recovered. Winterton said, "The [total] output under the second-generation project...may be between 19 million metric tones (380,000 bpd) per year...22 million tonnes [440,000 bpd]." TCO plans to expand through 2005 at a cost of $2 billion. (TGP)

Russia's Sakhalin Energy and South Korea's Korea Gas Corporation reached an agreement to cooperate on the Sakhalin-2 project. According to Sakhalin's administration, the decision to cooperate was made at a meeting between Sakhalin Governor Igor Farkhutdinov and representatives of the Korea Gas Corporation. Sakhalin Energy, which operates the Sakhalin-2 project, plans to extract natural gas and distribute it in liquid form, RosBusiness Consulting reported on 2 July. The product will then be exported to Japan and South Korea. China may also become a consumer in the future. Sakhalin Energy plans to explore the Sakhalin sea shelf in search of Lunsk and Piltun-Astokhsk oil and gas deposits. The deposit reserves could potentially reveal 140 million tons of oil and 550 billion cubic meters of gas. Other companies participating in the project include: Shell, a UK-Dutch company with a 55 percent stake; Japanese Mitsui with a 25 percent stake; and Japanese Mitsubishi with a 20 percent stake. (IAM)

Russia's Sibur-Neftekhim will not pay dividends for 2001 due to heavy losses. The company's board of directors made the decision following a shareholders' meeting in Nizhnii Novgorod, RosBusiness Consulting reported on 2 July. Regulations concerning 2002 profit distribution were proposed by the board but not approved. According to Sibur-Neftekhim General Director Petr Nikitin, the issue of new regulations will be discussed by the end of August 2002. The discussion has been postponed as Sibur-Neftekhim awaits a court decision to determine whether bankruptcy proceedings will be filed against its co-owner, Sibur. Nikitin blamed Sibur-Neftekhim's losses on the "economic collapse and negative situation on the foreign oil market" coupled with increasing gas prices and wage adjustments at the company's factories in 2001. According to the shareholders' annual report, Sibur-Neftekhim's sales profits in 2001 amounted to approximately 3.8 billion rubles ($120.4 million) in 2001, a 148 percent increase over 2000. The company's gross profits rose to 557.1 million rubles (about $17.7 million), which is about 2.6 times more than in 2000. Profits from sales were 119.9 million rubles (about $3.8 million), balance-sheet losses were 93.1 million rubles ($2.97 million), balance-sheet profits were 60 million rubles ($1.9 million), net losses were 107.1 million rubles ($3.4 million), and net profit was 50.9 million rubles ($1.62 million). (IAM)

Alfa Bank shareholders elected seven representatives to their board of directors at the company's annual general meeting. The only change in the board's composition was the elimination of a representative from the Bank Restructuring Agency, RosBusiness Consulting reported on 3 July. Shareholders also confirmed bank financial records and decided not to pay 2001 dividends. According to a report approved at the meeting, bank capital reached 768.68 million rubles ($24.39 million) in 2001. Assets for the same year amounted to 116.74 million rubles ($3.7 million) and balance sheet profits were reported at 494.76 million rubles ($15.7 million). Four auditors, including ZAO UNOKON/MS Consulting Group, ZAO Intercom-Audit, ZAO KPMG, and ZAO PricewaterhouseCoopers, were selected to verify Alfa-Bank's 2002 financial operations, RosBusiness Consulting reported. (TGP)

As part of the UN oil-for-food program, Russian oil company Tatneft delivered 28,000 tires valued at 1.5 million euros to the Republic of Iraq to be used for agricultural vehicles, cars, and trucks, RosBalt news agency reported on 2 July. The tires were produced by Nizhnekamskshina, which counts Tatneft and Tatneftekhiminvest-Holding among its investors. Nizhnekamskshina has already signed six contracts to deliver tires to Iraq and is awaiting approval by the UN Security Council for three more. Tatneft has also filed new applications with the UN in order to participate in future deliveries to Iraq in 2002. (TGP)

Ukrainian Deputy Prime Minister Vasyl Rohovyy announced on 1 July that Ukraine has made progress toward World Trade Organization (WTO) membership criteria, Reuters reported. Speaking at a news conference Rohovyy said, "All our partners agreed that Ukraine has made real progress over the last year to enter the World Trade Organization. They said Ukraine had tackled matters in real earnest and work on the protocol for Ukraine's entry is edging closer," Reuters reported on 1 July. Since Ukraine submitted its application for membership in 1993, the country has worked to overcome difficulties in the areas of intellectual property, tariffs, and trade. Ukraine wants to join the WTO by the end of 2003. In order to meet the deadline, the country must first pass 15 laws through its parliament by March of that year. (TGP)

According to the CIS Statistics Committee, Armenia's year-on-year industrial growth for the first five months of 2002 was 11.2 percent, RosBusiness Consulting reported on 3 July. This was the largest increase in industrial production reported by CIS states, not including Uzbekistan and Turkmenistan, which lacked available information. Other CIS states that registered an increase in industrial production included: Kazakhstan (10 percent growth), Moldova (8.6 percent growth), Tajikistan (8.3 percent growth), Ukraine (3.1 percent growth), Belarus (3.1 percent growth), and Russia (3 percent growth). Kyrgyzstan reported a 10.7 percent drop in industrial production during the same period. On average, CIS states recorded a 3 percent growth in industrial production from January to May. (TGP)

In a speech to a Democratic Atsakh Union congress, Nagorno-Karabakh President Arkadii Ghukasian noted that private investment in the unrecognized republic's economy totaled $20 million between 1999 and 2002, Mediamax reported on 2 July. According to Ghukasian, increased foreign investment demonstrates investor confidence in Nagorno-Karabakh's economy and leadership. The president also said that the republic is experiencing "positive changes in the socioeconomic sphere" as a result of the influx of foreign funds, Mediamax reported. The Armenian diaspora community alone has contributed several million dollars in humanitarian aid to Nagorno-Karabakh since 2000. (TGP)

Russian oil company Slavneft began exporting crude and refined products on 3 July, five days after a management dispute brought exports to a halt, AP reported. Exports ceased on 27 June when Slavneft President Yurii Sukhanov and other members of senior management were locked out of the company's Moscow headquarters. Police entered the Slavneft offices on 27 June searching for evidence against Sukhanov who has been accused of embezzling funds. Police allowed Sukhanov back into the office on 2 July. According to Slavneft management, the company lost $7 million in exports each day during the five-day shut down. The dispute over who legally manages the company has not yet been resolved. Slavneft plans to export 1.41 million metric tons (112,000 barrels) of oil per day in the third quarter of 2002, AP reported. (IAM)

Ford President in Russia Hernik Nenzen announced on 2 July that JSC Ford-Vsevolozhsk will open a car factory on 9 July in Vsevolozhsk, Russia. The manufacturing capacity of the factory will be 25,000 cars per year. According to Nenzen, the factory will produce from 3,000 to 4,000 cars in 2002. RosBusiness Consulting reported that 50 test vehicles have already been made. Ford management in Russia plans to start selling cars to the public at the end of August. JSC Ford-Vsevolozhsk plans to increase its dealership network from 27 to 71 in 2002 by opening new operations in Russia's Vladivostok, Krasnoyarsk, and Irkutsk regions. The estimated price for the new Russian-made Ford is the equivalent of $10,900. According to RosBusiness Consulting on 2 July, the price of Russian cars may rise as Russia's metal manufacturers, including Magnitogorsk Metal Works, Severstal, and Novolipetsk Metal Works increase prices on metal production. The Economic Council of General Directors of Volga Regional Car Producers predicts that the cost of Russian cars will rise 10 to 12 percent to offset the higher price of metal. Russian car producing giant AvtoVAZ announced that this price rise will be harmful not only for the Russian car industry, but will also have a negative impact on general car sales. According to AvtoVAZ, price increases will likely lead to overall budget losses. (IAM)

Russian Economy Minister German Gref announced on 2 July that the euro's exchange rate increase of $0.01 relative to the U.S. dollar will raise Russia's foreign debt approximately $100 million per year, RosBusiness Consulting reported. Gref said that import duties in Russia, which are estimated in euros, will in part compensate for the foreign debt payment losses. A rise in euro rates will decrease imports and increase Russian exports. (IAM)

Under the leadership of Sergei Bordanchikov, oil company Rosneft has been led from near bankruptcy to production growth.

Bordanchikov began by seeking buyers for a sizable stake in Rosneft in an effort to raise capital. He then managed to re-acquire holdings that had been effectively given away through insider trading (see "RFE/RL Business Watch," 2 July 2002). Russian observers credit Bogdanchikov with bringing Rosneft -- a fully state-owned oil company involved in developing the potentially lucrative Sakhalin oil deposits -- back from the verge of bankruptcy in the late 1990s. He has leveraged this apparent success in order to promote the creation of a powerful new state energy company.

Bogdanchikov, known as a supporter of strong state structures, appears to have won a measure of respect from former Prime Minister Yevgenii Primakov and current President Vladimir Putin. Bogdanchikov supports the consolidation of all Russian state-owned oil companies into a new Russian national oil company (Gosneft). Such a company could potentially become a major rival to Russia's privately held firms. As a state instrument, Gosneft could act as the exclusive agent for all Russian oil sales made under Moscow-brokered Production-Sharing Agreements (PSAs) with foreign partners. This would be extremely lucrative and, at the same time, provide a means for controlling Russian firms seeking foreign investments and partnerships for energy-development projects. This would justify Russia's oil magnates' concern over the success of Bogdanchikov's Rosneft and the prospect of a consolidated Russian government energy enterprise such as Gosneft. The struggle over the leadership of Slavneft is tied to this vision of creating a new consolidated state oil company in Gosneft. It is a struggle that has engaged the attention and involvement of Rosneft's Bogdanchikov in supporting one candidate against that of his old rival, Sibneft's Roman Abramovich.

Bogdanchikov has consistently increased Rosneft's oil and gas production each year since taking the helm. The increased production has been politically important for him and his relations with the Putin administration, given taxes paid to the government and the need to keep gas flowing and competitive at Moscow and St. Petersburg filling stations (Rosneft has more stations than any other provider). During a 6 May 2001 meeting between Bogdanchikov and Putin, the Russian president mentioned with satisfaction that Rosneft "was paying more taxes than anybody else to the budget," RosBusiness Consulting reported.

Expansion has been the hallmark of Bogdanchikov's leadership. While efforts to sell stakes in Rosneft failed in 1998 and 1999, Rosneft was successful in raising $316 million from the sale of stakes in the offshore exploration project Okhotsk to the Indian ONGC Videsh company, Bloomberg News reported on 16 February 2001. Bogdanchikov described the agreement as a strategic partnership with ONGC Videsh, which would invest as much as $2 billion in the Okhotsk Sea project in exchange for the oil produced, according to Intercon. In May of 2001, Rosneft also announced that it planned to build a gas pipeline to the Russian mainland from the Sakhalin Island project in order to service the Chinese market, according to Intercon. It was hoped the pipeline could transport up to 3 billion cubic meters of gas per year to the mainland for sale. It was also estimated that there was an additional 425 billion cubic meters of gas in the Okhotsk offshore project.

The September 2001 Rosneft board meeting revealed plans for the company's development through 2020 (see "RFE/RL Business Watch," 14 September 2002). The board decided to increase oil production to 40 million tons a year by 2020 and increase annual gas production to 45-50 billion cubic meters over the next 19 years. Bogdanchikov wasted no time implementing these plans with a series of initiatives. While visiting Komsomolsk-on-Amur, Bogdanchikov announced that Rosneft would increase the volume of oil production to 17 million tons in 2002 compared to 15 million tons in 2001, RosBusiness Consulting reported on 16 September 2001. By October, Rosneft's plans to increase its capitalization two to three times within two years was announced by Rosneft-Perspektiva Deputy General Director Olga Tankova. Tankova told RosBusiness Consulting that foreign experts currently estimate the company's capitalization at $4 billion. "The higher the capitalization, the higher is the hypothecation value of a company and accordingly, its potential for receiving loans and investments," Tankova stated (see "RFE/RL Business Watch," 18 October 2001).

In 2002, focus appeared to shift from the Far East to the Black Sea basin with the 4 March joint venture plans with Romanian Romgaz (see "RFE/RL Business Watch" 5 March 2002). On 24 April, Rosneft signed an agreement with French oil company TotalFinaElf to conduct exploration of the Russian Black Sea sector near Tuapse (see "RFE/RL Business Watch," 5 March 2002). With momentum growing, the meeting between President Putin and Bogdanchikov on 6 May seemed to confirm that the plans of both men to establish a powerful state oil and gas company coincided.

Back in the spring, Bogdanchikov had risked tarnishing his squeaky-clean image by reportedly becoming involved in the struggle for management control of Slavneft (see "In Focus," below). This struggle seems reminiscent of the "oligarch wars," which were a common feature of the Boris Yeltsin presidency. A review of Bogdanchikov's past indicates that the Slavneft clash is simply another phase in a lengthy battle between Bogdanchikov and Sibneft's Abramovich, reportedly a major player in the "family," the "clan" of Yeltsin-era Kremlin insiders (see 1 July, Bogdanchikov has allegedly aligned himself with Tuva Federation Council representative Sergei Pugachev of Mezhprombank (MPB) and the Kremlin "chekist" faction (i.e., Mikhail Sukhanov) in a fight with Abramovich and the "family" (i.e., Sukhanov). The question is: Will any other political leader risk his reputation over this Slavneft fight?

Unfortunately for President Putin, questions are now being raised quite openly about his leadership style, or lack thereof, in the Slavneft battle. This is at odds with President Putin's carefully nurtured image (see "The Dimming Of The Presidential Myth," "The Russia Journal," 5-11 July 2002). Today, the president continues to enjoy high public-approval ratings. What, if any, effect this will have on those ratings remains an open question. However, the title of the 5 July editorial in "The Moscow Times" indicates how his reputation may be affected: "Slavneft Saga Shows Putin's Weak Side."

The Russian-Belarus state-owned oil company Slavneft reopened its Moscow offices on 1 July following a three-day shutdown by authorities, AP reported on 2 July. Slavneft is currently in the midst of a crisis in which two opposing clans are fighting for control of the state-owned company. The crisis has had diplomatic implications, since Russia owns 75 percent of Slavneft (55.27 percent belongs to the Federal Property Ministry and 19.68 percent belongs to the Federal Property Fund) and Belarus owns 10.8 percent. It appears that Belarus sided with one of the would-be kings struggling for control of Slavneft, Mikhail Gutseriev, who was removed by the Russian government. According to "Pravda" on 13 May, "Sukhanov's candidacy was proposed by the State Property Ministry in the name of the [Russian] government." The office of Russian Prime Minister Mikhail Kasyanov supposedly initiated Sukhanov�s candidacy.

In May, Yurii Sukhanov was elected Slavneft president by shareholders to replace then-Slavneft President Gutseriev. Sukhanov received more votes than both Gutseriev and Anatolii Baranovskii, another contender for the Slavneft presidency. "Sukhanov easily beat his rival Anatolii Baranovskii in the contest. Baranovskii is a vice president of Rosneft; the wholly state-owned oil company that may have its eye on Slavneft as an addition to its assets. Baranovskii had been appointed acting president by Gutseriev before taking a 'leave of absence.' Baranovskii's candidacy also received the support of the Belarus government. In addition, Baranovskii was supported by Mezhprombank, associated with the St. Petersburg team around President Putin," Prime-TASS reported on 29 May. The attempt to replace Gutseriev with Baranovskii failed. The efforts of the St. Petersburg team, including Sergei Pugachev and Rosneft President Sergei Bogdanchikov, to wrestle control of Slavneft from Sukhanov, Sibneft's Abramovich-supported candidate, has continued despite the election's outcome.

Gutseriev had been removed from his position as Slavneft president due to "allegations that he had used his position to finance his brother's unsuccessful campaign for the presidency of the Russian Republic of Ingushetia," AP reported on 2 July. One week before the May shareholders' meeting, Sukhanov was also accused of "alleged abuse of power." According to "Pravda" on 13 May, "On 29 April, the Prosecutor-General's Office filed a criminal case against him [Sukhanov]." A court in Ufa nullified Sukhanov's election at the end of May, "upholding a claim by a minor shareholder," reported on 1 July. Since then, Gutseriev has been fighting to return to the oil giant. He wasted no time acting. "With a ruling from an Ufa court in hand, Gutseriev on Tuesday [2 July] stormed Slavneft's office with three busloads of OMON special police forces," AP reported on 2 July.

The OMON, paramilitaries under the Russian Interior Ministry, raided Slavneft's offices on 27 June during U.S. President George W. Bush's visit to Moscow. That event shocked many and raised questions as to how such an incident could occur during a visit by the U.S. president. The police searched the premises for information on Sukhanov's alleged criminal activities that could later be used against him. Police ordered all employees out of the building "including Sukhanov's bodyguards from the security firm Tsenturion-M. This same firm guards the Sibneft offices and several companies affiliated with it, being, in fact, the security service of the powerful Russian oligarch Roman Abramovich," reported on 1 July. However, as the police entered the Slavneft offices, representatives of two private-security firms accompanied them. These private security firms, "BIN-Zashchita [which is part of Gutseriev's holding BIN] and Interbezopasnost [which renders the same services to Sergei Pugachev of Mezhprombank, who actively supports Gutseriev]" clearly indicate the groups represented in the Slavneft struggle ( 1 July).

The removal of all staff from the headquarters during the raid resulted in a halt of Slavneft production. Andrei Shtrorkh, first vice president of Slavneft, in an interview on radio Ekho Moskvy on 28 June appealed to the Russian government "being Slavneft's main owner, the state should define its stance, make out who should lead the company and allow the company employees to come to their work places." Indeed the silence from the top of the Russian government concerning the Slavneft struggle has been interpreted as weakness on the part of Russian President Vladimir Putin. According to a 2 July editorial by "The Moscow Times," "Putin's silence can only really be interpreted as weakness, and a far cry from the image of a president who has cowed and corralled the once mighty oligarchs that his spin doctors would have us believe." Others agree, according to AP on 2 July: "It's time for Russia's leaders to get involved in Slavneft," said Ivan Bambiza, President of the Belarus state company Belneftekhim. "The goings-on at Slavneft undermine the economy and negatively reflect on the company's image. Management instability incurs serious costs," commented Bambiza.

"The Moscow Times" editorial on 5 July was extremely critical concerning the Russian President's lack of involvement arguing: "His [Putin's] failure to do so [speak out] sends out a signal that, far from ruling the roost, Putin is impotent before the powerful clans that surround him. Or even worse, that he is in some way in hock to the powerful interests battling it out. And if Putin can't keep his own house in order, what hope is there for establishing the fabled level playing field for doing business? Putin's ongoing silence comes across not so much as golden but as beholden. And, if that's the case, beholden to a pretty shady bunch of characters.

The struggle for Slavneft represents one revealing view into the struggle for power and control between the Russian government and the various clans that are represented in Russian business and government circles. It also underlines the limitations facing the Russian president in consolidating his power and bringing order to country ruled more by powerful interest groups than the rule of law, which is essential for attracting and sustaining the foreign investment that Russia desperately needs. (PMJ)