12 November 2002, Volume 2, Number 34
SIBNEFT STOCKS UP FOR SLAVNEFT AUCTION...Sibneft has obtained a $90 million loan from Westdeutsche Landesbank, "Vedomosti" reported on 5 November. The loan is just part of a package of credit guarantees totaling $675 million that Sibneft secured recently, allowing the oil company to pump up its cash reserves for the upcoming privatization of Slavneft. Troika Dialog analyst Valerii Nesterov told "Vedomosti" that Sibneft's current debt of $1.8 billion -- $10 per barrel -- leaves room for another $500 million in borrowing. These latest loan moves follow a 30 October earnings report that suggests Sibneft may have increased its stake in a trust that owns 12.98 percent of Slavneft from 25 percent to 75 percent (Tyumen Oil Company [TNK] holds the remaining 25 percent stake). Controlled by politically influential Roman Abramovich, Sibneft is seen by many as a front-runner in the race for Slavneft. DK
...AS TNK THROWS HAT IN RINGTNK President Semen Kukes told the "Financial Times" on 5 November that his company will enter a bid for a 75 percent stake in Slavneft in the next two weeks. Kukes was cagey on the possibility of a joint bid with Sibneft, saying only, "We have a similar approach to Sibneft." The State Property Fund has set a minimum price of $1.3 billion, while analysts say competition could send it up to $2 billion. In a move widely seen as preparation for the Slavneft auction, TNK recently completed a $400 million bond issue. Alfa-Group, which controls TNK, floated an additional $175 million in Eurobonds on 5 November. Prime Minister Mikhail Kasyanov has said the Slavneft auction will take place no later than 20 December, gazeta.ru reported on 9 November. DK
YUKOS SURGES INTO FIRST PLACE...According to Energy Ministry statistics, Yukos displaced LUKoil as the leading Russian crude-oil producer in October, "Vedomosti" reported on 6 November. Yukos produced 6.429 million tons in October against LUKoil's 6.412 million tons. LUKoil representatives grumbled that the Energy Ministry does not include production abroad and results from partially owned subsidiaries in its statistics, which would have raised the company's total to 6.8 million tons. Yukos spokesman Aleksandr Shadrin parried with a reminder that if Yukos maintains its 18 percent rate of production growth, it will produce 82.6 million tons in 2003, firmly claiming the leading spot in the industry. "Kompaniya" No. 238 gave Yukos a different vote of confidence, rating Yukos CEO Mikhail Khodorkovskii Russia's second most powerful oligarch behind Sibneft tycoon Abramovich. Khodorkovskii's high rating rests in part on his "unusual" policy of "maximum openness," which makes Yukos attractive to Western investors and guarantees Khodorkovskii "a good exit strategy if things go south in Russia," the magazine commented. DK
...AS TATNEFT LAGS BEHINDTatneft's earnings report for the first half of 2002 revealed a 60 percent year-on-year decrease in net profits, "Vremya novostei" reported on 6 November. Calculated to U.S. GAAP (Generally Accepted Accounting Practices), first-half net profits fell from 16.8 billion rubles ($528.8 million) in 2001 to 6.7 billion rubles in 2002. Revenues slipped 16.1 percent to 63.2 billion rubles. Pretax profit per barrel was $3.6 compared to $8.9 for Sibneft, $7.1 for Yukos, and $6.1 for LUKoil. Although the results were the worst in the industry, Renaissance Capital analyst Vladislav Metner told "Vedomosti" on 6 November that, in a "positive tendency," Tatneft reduced its debt by $220 million to $650 million. "Vedomosti" also noted an issue of "dubious options" in the second quarter of 2002. Tatneft sold executives 9.4 billion shares at a face value of 0.1 ruble each, incurring losses of 155 million rubles. Industry analyst Pavel Kushner lambasted the scheme as "devaluing the very idea of options." DK
CONSENSUS ON CURRENCY CONTROLSFirst Deputy Central Bank Chairman Oleg Vyugin announced on 5 November that currency controls will remain in place until 2007, "The Moscow Times" reported on 6 November. The issue of currency controls has provoked heated debate, with the Russian Central Bank, the Economic Development and Trade Ministry, and the Russian Union of Industrialists and Entrepreneurs all presenting competing versions of a draft bill. Vyugin told reporters at a press conference that the State Duma should receive a compromise bill by the end of the month. It will reduce the mandatory sale of exporters' hard-currency revenues to 30 percent and curb the Central Bank's emergency powers to control capital transactions in crisis situations. In a 6 November editorial, "Vedomosti" described the compromise bill as "aiming to free the economy from official harassment." Noting that the bill could quickly become law, the editors' only comment was, "The sooner, the better." DK
SBERBANK PROFITS SWELL TO $904 MILLIONState-controlled Sberbank reported a net profit of $904 million for the first nine months of 2002, "The Moscow Times" reported on 5 November. The record profit, calculated under Russian accounting standards, far exceeded expectations of $740 million, according to Troika Dialog analyst Andrei Ivanov. Other analysts noted that the profit jump may stem from accounting innovations and requires further explanation. Sberbank announced in a 4 November press release that total assets as of 1 October reached the 1 trillion ruble ($31.48 billion) mark. Sberbank continues to dominate the Russian banking industry, holding some 70 percent of all personal savings deposits. DK
COMPETITION TAKES OFF FOR NEW RUSSIAN REGIONAL JETThe Russian Aviation and Space Agency is considering proposals from the Sukhoi, Tupolev, and Myasishchev aircraft companies to develop a new, short-range regional aircraft to rejuvenate domestic carriers' aging fleets, "The Moscow Times" reported on 5 November. The state will provide 3.8 billion rubles ($120 million) of financing over 10 years to develop a 50- to 95-seat aircraft with a range of up to 4,000 kilometers and a price tag of $25 million. Industry analysts told "Vedomosti" on 4 November that state support will cover only 15-20 percent of development costs. At the same time, other Russian players are looking to ailing German aircraft manufacturer Fairchild Dornier and its 70-seat 728 regional jet as a possible alternative. Swiss-based Aviation Finance Consulting, acting in concert with Russian combat jet manufacturer Sukhoi and helicopter-maker Mil, presented $300 million in bank-financing guarantees in the course of a bid for the bankrupt German firm, AP reported on 5 November. Aluminum tycoon Oleg Deripaska's Basic Element has already made an offer for Fairchild Dornier. The firm's creditors decided on 5 November to give prospective buyers four more weeks to hone their offers, "Sueddeutsche Zeitung" reported on 6 November. Yet another player entered the fray when Swiss military-industrial firm Ruag expressed an interest in Fairchild Dornier, AFX reported on 9 November. Even if a Russian investor were to acquire Fairchild Dornier, a foreign-produced place would incur 40 percent taxes if imported for sale in Russia. Still, the need for a new short-range jet is acute, and Fairchild Dornier's 728 prototype could be airborne long before Russian-made competitors -- with a little luck and almost $1 billion in financing. DK
ECONOMIC DEVELOPMENT MINISTER SENDS SHEREMETEVO HEAD PACKINGEconomic Development Minister German Gref personally oversaw the dismissal of Sheremetevo Airport Director Sergei Belyaev, igniting a new controversy over the airport's troubled reconstruction program and reopening a Pandora's box of scandals past. Gref, who heads state-run Sheremetevo's board of directors, ousted Belyaev at a 2 November board meeting and replaced him with recently fired Deputy Director Yevgenii Bakhteev, "Izvestiya" reported on 5 November. The board charged Belyaev, who was on sick leave and did not attend the meeting, with insufficient preparation for the winter and the allotment of 15 million rubles ($472,144) in dubious credits to top executives. Belyaev had clashed with Gref over securing investment support for a new $300 passenger terminal, with Belyaev pushing for a deal with Aeroflot and Gref looking to foreign investors. In a 6 November interview with gazeta.ru, Belyaev defended the credits as "incentives" and accused Gref of "brazen incompetence," promising to seek satisfaction in court. In a dismayed 5 November editorial, "Vedomosti" noted that since 1999 the airport has seen five reconstruction projects and two management teams come and go, all against the backdrop of a "lousy Soviet airport, a gaping vacant lot in place of [new terminal] Sheremetevo-3, and fleeing foreign airlines." DK
ILIM PULP WINS COURT VICTORY OVER DERIPASKA AND KOGANEmbattled pulp and paper holding Ilim Pulp Enterprises scored a victory over aluminum magnate Oleg Deripaska and St. Petersburg banker Vladimir Kogan on 4 November when the Kemerovo court presidium overturned a ruling that had allowed the duo to snap up a controlling stake in the enterprise, "The Moscow Times" reported on 5 November. Deripaska's Basic Element and Kogan gained a 61 percent stake in the mill as a result of the original ruling, which came in response to a suit by a minority shareholder alleging violations in the privatization of the Kotlas Pulp and Paper Mill. Ilim Pulp spokesman Svyatoslav Bychkov commented wryly to "Vedomosti" on 5 November, "Our opponents have lost a basic element that allowed them to make a grab for our assets." Lesprom Industry Consulting analyst Anna Kurbatova told "Finansovye Izvestiya" on 5 November that "the struggle may quiet down for a while, but it will pick up again." Meanwhile, Director Yurii Zayats announced that in 2003-07 Ilim Pulp hopes to invest $521 million into the Kotlas mill, the largest of its kind in Europe. Throughout the conflict, Ilim Pulp has managed to retain physical control of the enterprise, traditionally a vital factor in Russian corporate takeovers. DK
NORILSK NIKEL SHELLS OUT FOR NEW MOSCOW ADDRESSVladimir Potanin's Norilsk Nikel is purchasing a prime piece of Moscow office space that once belonged to now bankrupt Promstroibank, "Vedomosti" reported on 4 November. Realtors value the 20,751-square-meter complex on Tverskoi Boulevard at $40 million, making it one of the priciest addresses in the capital. Norilsk Nikel had no public comment on the sums involved, although a source "close to the deal" confirmed to "Vedomosti" that the papers had been signed. DK
MTS MOVES IN ON UKRAINIAN CELLULAR MARKETRussian cellular giant Mobile Telesystems (MTS) announced on 5 November that it acquired a 57.7 percent stake in Ukrainian Mobile Communications (UMC), "Kommersant" reported on 6 November. MTS paid a total of $194.2 million, acquiring 16.3 percent stakes from Dutch operator KPN and German Deutsche Telekom for $55 million each, and a 25 percent stake from Ukrtelecom for $84.2 million. Options agreements with Dutch TDC and Ukrtelecom might allow MTS to pick up the remaining shares as early as next year. With 1.5 million subscribers and revenues of $215.8 million in 2001, UMC is the second largest Ukrainian mobile operator, "The Moscow Times" reported on 6 November. Renaissance Capital analyst Aleksandr Kazbegi told "Vedomosti" on 6 November that MTS got a bargain, paying only $275 for each new subscriber. Similar acquisition by MTS and Vimpelcom this year cost them $350-$500 per new subscriber. With only 6.7 percent of its 49.3 million population wired into cellular networks, Ukraine represents an expansion-ready market. The addition of 1.5 million subscribers brings MTS' total to 7.2 million, shoring up the company's standing as Eastern Europe's largest cellular operator. DK
GOLDEN TELECOM ANNOUNCES EARNINGS, TOUTS SOVINTEL ACQUISITIONFixed-line carrier Golden Telecom posted increased profits in the third quarter of 2002 and predicted that its acquisition of Sovintel will spark even more impressive revenue growth in 2003, Reuters reported on 5 November. The holding boasted a net profit of $7.8 million in the third quarter against a $1.9 million loss for the same period in 2001. Revenues for the period jumped from $37 million to $46.3 million. The company's chief financial officer, David Stewart, sees the acquisition contributing to burgeoning revenues of $320 million-$340 million in 2003. But Troika Dialog analyst Tom Adshead told "Vedomosti" on 5 November that Golden Telecom had only managed to add "around $1 million" in net profit from its consolidation of Sovintel, which was completed in late September. Analysts also noted that revenues from business lines and Internet services showed a 4 percent decline from the preceding quarter. DK
AROUND THE CIS
ARMENIA SETTLES DEBT TO RUSSIA WITH COLD, HARD PROPERTYRussian Prime Minister Kasyanov and his Armenian counterpart Andranik Markarian signed an agreement in Yerevan on 5 November to settle $93.76 million of Armenia's debt to Russia with the shares of five enterprises, "Izvestiya" reported on 6 November. Armenia will pay the remaining $7 million of its debt in cash, "Vedomosti" reported on 5 November. Russia is to acquire the Hrazdan Thermal Power Plant, which supplies 40 percent of Armenia's electrical power; the Mars electronics plant; and three research institutes by May. For its part, Russia pledged to invest money to develop the foundering enterprises. Russia hopes to reach a similar "debt-for-investment" deal with the Paris Club of Western creditors. Deputy Finance Minister Sergei Kolotukhin told "Izvestiya" that the same model could be applied to Kyrgyzstan as well as other Russian debtors that lack the funds for a cash settlement. Prime Minister Kasyanov was guardedly optimistic about Russia's latest acquisitions, parrying a journalist's query about their real value with the comment that "one of these enterprises is even modern." DK
BELARUS GAS SPAT ENDS WITH A WHIMPERRussian Prime Minister Mikhail Kasyanov and his Belarusian counterpart Henadz Navitski reached an agreement in Moscow on 11 November to quell a rancorous conflict over Belarusian debt to Gazprom, gazeta.ru reported the same day. Belarus will add its own money to a $40 million credit from Russia and make at least $82 million in payments on its $202 million outstanding debt by year's end, "Vedomosti" reported on 12 November. The conflict erupted on 1 November when Gazprom began to squeeze off gas supplies to Belarus after pumping its annual quota of 10.2 billion cubic meters. Belarus had hoped to extend an arrangement that allowed it to buy gas at the Russian domestic price of $24 per 1,000 cubic meters (tcm), but Gazprom would have none of it. Belarusian President Alyaksandr Lukashenka threw a televised tantrum on 6 November, claiming it is actually Russia that owes Belarus transit fees for gas shipments to Europe. With tempers now cooling and an understanding reached, all that remains is for Belarus to secure a new gas supplier for the rest of the year -- at market prices. Itera President Igor Makarov gave Minsk a taste of the new rules when he told Interfax on 11 November that he will offer $40 per tcm. The show will go on in December when Russia and Belarus sit down to discuss gas contracts for 2003. DK
CREDIT WHERE CREDIT IS DUEThe world's wealthiest economies are united in their flagrant and passionate violation of what is perhaps William Shakespeare's best-known bit of aphoristic wisdom: "Neither a borrower nor a lender be." According to Federal Reserve statistics, U.S. consumers disregarded the first half of the maxim in September to the tune of over $1.7 trillion (excluding loans secured by real estate). Not be to outdone, U.S. commercial banks extended their disdain of the concluding phrase to $4.125 trillion (in the form of loans and leases).
If the U.S. economy could not function without credit, credit itself could not exist as a ubiquitous institution without credit bureaus. Credit bureaus collect information on the solvency and past repayment performance of individuals and businesses and make it available to potential creditors in the form of credit histories. In the United States today, commercial credit-reporting giant Dun & Bradstreet's database contains information on nearly 15 million American companies, while the big three consumer reporting agencies -- Experian, TransUnion, and Equifax -- keep tabs on virtually every adult American with enough money for a bank account.
With Russia more than a decade into capitalism, eyes are turning to the underdeveloped state of the country's credit economy and the lack of a nationwide system of credit reporting. Three versions of a draft bill on credit bureaus have diligently slogged off to the Russian parliament since 1997 only to founder in obscurity. But times are changing. The Ministry of Economic Development formed a high-level working group earlier this year to prepare a new draft bill on credit bureaus for presentation to the cabinet by the end of 2002. With President Vladimir Putin publicly committed to financial reform, a blue-ribbon commission in place, and the once-obstreperous parliament now reliably pro-presidential, chances are good that a legal framework will soon emerge for credit bureaus to begin greasing the wheels of borrowing and lending.
In a 2 November interview with AK&M, Boris Voronin, chief specialist at the Economic Development Ministry's Department of Investment Policy and member of the credit bureau working group charged with hammering out the new law, discussed the issue's past, present, and future. While the law will likely include either "licensing or some softer form of state control," "whoever wants to create a credit bureau will have every right to do so." The law will also be based on a new legal definition of bank confidentiality to make it easier for credit bureaus to obtain necessary information. Voronin noted that the law will likely shy away from the compulsory provision of information about past credit transactions in favor of allowing banks, businesses, and individuals to supply information on a voluntary basis. In order to get the system up and running, banks will be required to keep larger sums on reserve if they fail to justify a credit-granting decision with reference to a positive credit history. Foreigners will be allowed to create credit bureaus. Finally, the project will consider the experience of Mexico, where the country's largest banks cooperated with state bank to create a nationwide credit-reporting system after international financial organizations made future anticrisis aid conditional on improved credit reporting.
When, and if, the bill on credit bureaus assumes its final form and becomes law, Russia's emergent credit bureaus will find themselves trailblazers in a harsh environment. Dun & Bradstreet got a taste of what might lie in store for others in its attempt to create a National Credit Bureau (NKB) in Russia. Originally conceived as a Western-style information clearinghouse that would obtain and provide information on a for-profit basis, the NKB found banks more concerned with husbanding information they already have than with the possibility of expanding their business by gaining access to a broader range of sources. A 25 December 2001 article in "Nezavisimaya gazeta" identified three main problems that dogged the NKB: 1) Russian banks frequently extend credit only to affiliated businesses with which they prefer to settle accounts in-house; 2) banks worried that by providing information about deadbeat debtors they would prevent them from making good on their obligations by obtaining credit elsewhere; and 3) banks were loathe to share information about good clients for fear that others would then try to lure them away. Dun & Bradstreet CIS Director Vladimir Maleev -- listed as a member of the Economic Development Ministry's working group in a June 2002 AK&M report -- told "Nezavisimaya gazeta" that the NKB eventually reached an agreement with the State Statistics Committee (GKS) to gain access to businesses' annual reports. The reports the GKS receives, however, are often inaccurate and out-of-date, and the resultant database lacked much of the key information that makes a credit history so valuable to potential creditors.
Outside of the commercial sphere, credit bureaus will face even greater obstacles. Russians have bitter memories of the fiscal debacles that marred the 1990s, most notably the shuttered commercial banks that left depositors in the lurch after the 1998 financial crisis, and have little trust in the banking system. The deficit of trust runs in both directions, as banks are only too aware of consumers' often-tenuous job security and the vast extent of off-the-books earnings.
Despite these roadblocks, the Russian economy stands to reap substantial benefits from a workable system of credit reporting. "Information Sharing, Lending and Defaults," a paper prepared in May 1999 for the Centre for Studies in Economics and Finance, used data from 40 countries to show that while bank lending comprises a mere 31.1 percent of GDP in countries without information sharing on creditworthiness, the figure jumps to 67 percent in countries with information sharing. The authors were careful to note that the correlation is not so cut-and-dried, as higher lending rates are found in countries with higher GDP per capita and better law enforcement. They noted in their conclusion, however, that the relation between lending rates and information sharing "persists even when one controls for other institutional and economic variables."
Daniel B. Klein drew attention to another benefit of credit bureaus in "Credit-Information Reporting," a paper on credit reporting and free-speech issues in the United States that appeared in the Winter 2001 issue of "Independent Review." Klein wrote, "Credit bureaus make opportunities -- credit, employment, housing, insurance -- more available and affordable to everyone." He went on to call credit bureaus "part of the foundation of civil society." More specifically, Klein noted that in the United States, consumer credit bureaus initially developed as nonprofit associations for the benefit of members. "Although most credit bureaus today operate on a for-profit basis," he concluded, "their fundamental function has not changed: the provision of information that permits two parties...to trust each other and hence to engage in mutually advantageous exchange."
Not everyone takes such a rosy view of credit bureaus, of course. A credit history contains highly sensitive information, and the slightest error can have momentous consequences in a society where quality of life comes to depend on access to credit. Concerns over confidentiality and accuracy led to the passage of the Fair Credit Reporting Act (FCRA) in the United States in 1970 and its subsequent amendment in 1996. While consumer-advocacy groups continue to publicize horror stories of lives wrecked by irresponsible, unresponsive credit bureaus, wronged consumers can score victories when regulations are vigorously enforced. For example, on 29 July a federal jury in Oregon ordered credit bureau TransUnion to cough up $5.3 million in damages -- the largest settlement ever awarded under the FCRA -- for repeatedly bungling a woman's credit history.
With such problems now only a glimmer on the horizon, the vast majority of Russians -- especially those scraping by as best they can -- would be likely to respond to the idea of concern over one's credit history with a phrase often used to describe such peculiarly "Western" ills as teenage obesity and suburban angst: "We should have such problems." But with the exigencies of the global financial system increasingly acting as the driving force for societal change, they may not have to wait long. DK