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Business Watch: August 9, 2001

9 August 2001, Volume 1, Number 5
A meeting of the board of directors of Russian gas giant Gazprom was held on 31 July. According to a company statement, the board has agreed it should buy back enough shares to regain control in a company that runs a western Siberian gas field, Zapsibgazprom, and analyze why it lost control of them in the first place. The field's reserves total 750 million cubic meters. Gazprom also said the board had ordered management to take auditors' recommendations into account on lending, awarding licenses or handing over property stakes and other assets. Gazprom had been criticized for lending to outside firms at the same time it was tapping international loan markets. The board agreed Gazprom and a group of Hungarian bankers would try to raise $175 million for two gas pipeline projects: Blue Stream from Russia across the Black Sea to Turkey and Yamal Europe from Western Siberia to Western Europe. According to Reuters, the next board meeting on 28 August is to discuss an issue of eurobonds and a proposed pipeline from China to Russia.

The LUKoil Overseas Holding Limited, a fully-owned subsidiary of the LUKoil oil company, has signed an agreement with Cyprus-based Aminex Production Company Limited to purchase a 55 percent stake in Aminex subsidiary AmKomi. According to LUKoil's press department, the deal will enable the oil giant to control 65 percent of AmKomi. Currently, 10 percent of AmKomi belongs to LUKoil-controlled Komineft oil company, 35 percent to the Property Ministry of the Komi Republic, and 55 percent to Aminex PLC. The total cost of the deal is $38.5 million. AmKomi holds nine licenses for producing hydrocarbon fuel and prospecting works in the Komi Republic. The republic's total volume of resources is estimated at 20.8 million tons. According to preliminary estimates, 7.8 million tons of oil could come from AmKomi oil fields over the next 20 years.

The Russian government on 27 July decided to slash the country's military-industrial capacity by almost half as part of a long-term program to overhaul an overgrown arms industry inherited from the Soviet Union. Interfax news agency quoted Deputy Prime Minister Ilya Klebanov saying after a government meeting that little more than half of the current 1,700 defense enterprises would remain by 2006. Klebanov said the plan, scheduled for final approval in a month, called for sweeping mergers across the industry to create "deeply integrated" companies in the mould of the European Aeronautic Defense and Space Company (EADS) and U.S.-based Boeing Company. Russia is working to adapt its military and Cold War strategies of large-scale nuclear and conventional engagements on different continents to the current political situation. The program includes drastic cuts in military personnel and equipment in favor of smaller forces equipped with sophisticated high-tech weapons. The Soviet Union's defense industry consumed a huge chunk of national income and went into steep decline after the 1991 collapse of communism.

U.S. Treasury Secretary Paul O'Neill and Commerce Secretary Don Evans said, following a two-day visit to Moscow which included meetings with Russian President Vladimir Putin and other key economic officials, that Russia's economic reforms are on track to improve the nation's business environment and thus attract foreign investment. They said economic reforms will make it a safer and simpler place to do business. Both U.S. officials felt a "sense of trust" developing between Russia and the U.S., which they said stemmed from talks between Putin and U.S. President George W. Bush, Reuters reported. Evans will lead a delegation of U.S. business leaders to Moscow in October to follow up on investment possibilities. Evans and O'Neill said they found the Russian representatives to be honest and straightforward about problems and opportunities.

Iraq's Deputy Oil Minister Faiz Shaheen told the "Al-Ittihad" weekly on 28 July that Iraq will grant Russian oil companies priority in future contracts in Iraq's oil, industrial, and trade sectors. He said this preferential treatment is due to "Russia's positive role in foiling the �smart sanctions' proposal" and support in the UN Security Council. Previously the Oil Ministry had criticized Russia for failing to implement contracts for the development of southern Iraqi oil fields. Russia threatened to use its veto in early July when the Security Council was considering a plan to overhaul the UN trade embargo on Iraq -- the so-called "smart sanctions" proposal. U.S. and British diplomats dropped the proposal and on 3 July the council renewed the standard oil-for-food program. The smart sanctions would have lifted most of the restrictions on trade imposed after Iraq's 1990 invasion of Kuwait. They would also have tightened enforcement of the arms embargo and blocked Iraqi smuggling routes. The Associated Press noted that Shaheen stressed, "Iraq will work to support the Russian economy in order to strengthen Russia's position against American and Western economic pressure. We have dealings with Russian oil companies under the oil-for-food program and we expect them to increase vastly in the near future."

Russian airline Aeroflot on 30 July announced it has put on hold plans to set up an Irish subsidiary before the autumn. Aeroflot first touted the possibility of an Irish subsidiary, which would give it new European routes under a European Union (EU) open-skies agreement, early this year when it made a failed bid to buy cash-strapped carrier Virgin Express Ireland. Aeroflot was considering several possibilities for establishing a foothold in Ireland, including buying an airline outright or launching one from scratch. Russian and foreign media last week quoted an Aeroflot official in London as saying the company was considering setting up an Irish airline that could begin operating from summer 2002. Boris Krivchenko reportedly said the new carrier could be set up over six to eight months with an initial fleet of two Boeing 737s, linking passenger flows within Europe to destinations that the airline already serves. The open-skies agreement stipulates that EU-licensed carriers can fly to any European destination if the route generates sufficient traffic and airport space is available. Russia's leading passenger and cargo carrier, Aeroflot would also need strategic investors as EU regulations require that a European partner own at least 51 percent of the subsidiary to qualify for the open-skies policy. Aeroflot has also been rumored to be considering a $500 million bid to buy Irish state airline Aer Lingus, though Aeroflot has denied the report.

Russian Aluminum (RUSAL), the country's top producer of the metal, has received a concession to develop the Dian-Dian bauxite mine in Guinea. The contract came during negotiations in Moscow between Guinean President Lansana Conte and RUSAL representatives. "A contract was signed, but I can give no details beyond that," a RUSAL spokesman told Reuters. Dian-Dian, near the border with Mali, is estimated to contain 400-700 million tons of bauxite. Russia and Guinea have been in talks on the development of the mine since Soviet times. Guinea has 30 percent of the world's known reserves of bauxite, the raw material for the production of aluminum, and is the second-biggest exporter after Australia. RUSAL controls more than 70 percent of Russian aluminum production. It is seeking raw materials for its huge Bratsk, Krasnoyarsk and Sayansk Siberian plants as well as for the Samara Metallurgical Combine and the Achinsk and Nikolayevsk factories.

KamAZ, Russia's major heavy truck manufacturer, will open an assembly line in Poland, RosBusiness Consulting reported. It will be KamAZ's third foreign assembly line. Polish production capacity will exceed that of the two other facilities. The first KamAZ foreign assembly line was established in Ethiopia, where roughly 330 KamAZ heavy trucks were assembled and sold in 15 months. In April 2001 KamAZ began assembling trucks in Kazakhstan with Isker Company. According to announcements by company officials, KamAZ intends to open branch offices in China, Vietnam, Cuba, Ukraine, Uzbekistan, and Azerbaijan as well. Negotiations are being held with officials of these countries.

Russia's gas exports will remain under governmental control, according to Russian Deputy Prime Minister Viktor Khristenko. Commenting on the restructuring of Russian gas giant Gazprom, he said that this will happen after the government approves "Concepts of the Russian Gas Market Development." The Concepts, which he said will "configure Gazprom," are expected to be approved in 2002. Khristenko noted that Gazprom currently receives complaints from oil companies that are not satisfied with Gazprom's gas transport services. Generally, Khristenko believes gas can be transported by either independent gas producers or by oil companies. He concluded that there are no serious complaints over gas deliveries in Russia.

Effective 1 January 2002, Russia will increase customs duties for used foreign vehicles over seven years old, Deputy Prime Minister Ilya Khlebanov told journalists after a meeting on the development of the domestic automobile industry on 6 August. He added that a recommendation to increase the duties will be sent to the government commission on protective measures in foreign trade and tariff policies, "Nezavisimaya Gazeta" reported.

The debts of 73 energy companies to the federal budget are to be restructured, RosBusiness Consulting reported. Russian Energy Minister Igor Yusufov said these entities are ready for the procedure, adding that the necessary documents are being prepared. The total debt amounts to 17.2 billion rubles (about $586.9 million), including penalties of 15.3 billion rubles (about $521.3 million). Some 20.7 billion rubles (about $705.4 million) of debt is to be restructured, representing 85 percent of what the federal budget is owed by the sector. Yusufov said that 10 energy companies are not ready for the procedure yet, since they are falling behind on current payments and thus accruing more debt. Their indebtedness totals 605.6 million rubles (about $20.6 million).

British Thomson Financial Datastream produced some surprising conclusions following a three-week analysis of the financial markets, reported. The Russian ruble is one of the most stable currencies, the analysts believe. The analysis was based on a comparison of foreign currencies' values against the U.S. dollar. For the seven-month sample, the value of the Russian ruble against the U.S. dollar dropped only by 3 percent, while the value of the British pound fell by 6 percent, the euro 7 percent, and the Japanese yen 8 percent.

Shareholders in Russia's second-largest cellular operator, Vimpelcom, approved an investment deal with Alfa Group and a share issue to facilitate the deal, Vimpelcom said on 27 July. According to a company statement, 99 percent of votes cast at an extraordinary general meeting were in favor of the measures. Alfa, a Russian financial-industrial group, agreed in May to invest $230 million in Vimpelcom's regional development project and take a 25-percent-plus-one-share stake in Vimpelcom. It will also take a stake of up to 42 percent in Vimpelcom-R, Vimpelcom's regional arm. "This gives the green light to all Alfa investments," Valery Goldin, Vimpelcom vice president for investor relations, told Reuters. An extraordinary general meeting on 27 July approved the first share issue of 5.15 million ordinary shares, the equivalent of 6.87 million American Depositary Receipts. Vimpelcom's longtime strategic partner, Norwegian operator Telenor, agreed to buy treasury stock and some of the founder's shares to maintain its 25-percent-plus-one-share stake in Vimpelcom. It has an option to buy directly into Vimpelcom-R. Alfa took three seats on the nine-member board. Telenor and Telenor Mobile executives also took three seats. A co-founder of the company who has been board chairman since 1995, Augie K. Fabela II, retained the chairmanship.

Princeton University, a top-ranked graduate and undergraduate educational institution, has named Tyumen Oil CEO and President Simon Kukes to the prestigious post of senior visiting fellow. Kukes will serve in Princeton's Council on Regional Studies from 1 September until 1 July 2002. The Council includes area studies programs such as those focusing on Russia. "I am honored that Princeton University has selected me and look forward to contributing to the knowledge and interest in Russian affairs at the institution," said Kukes. Kukes will lead seminars and conferences at Princeton University and other locations as arranged by the university. Kukes, a chemical engineer who holds more than 100 U.S. and Russian patents, has been president and CEO of Tyumen Oil since 1998. He has overseen a dramatic corporate restructuring that has attracted Western technology and investment. From 1979 until he joined Tyumen Oil, he held positions at Yukos, Amoco Oil, and Phillips Petroleum. In the late 1970s, Kukes conducted scientific research and taught at Rice University in Houston. Earlier this year, Kukes became the first Russian member of the board of directors of the Washington-based U.S.-Russia Business Council, the preeminent U.S. organization promoting trade between the two countries. He also serves on the boards of Parker Drilling Company and the Foreign Policy Association. Kukes graduated from Moscow's Chemical Technology Institute in 1969 with high distinction and from the USSR Academy of Science in 1973 with a PhD. He has been a U.S. citizen since 1982.

The Russian ruble edged down further against the dollar on 31 July as the central bank offered only minor support in a market awash with rubles, dealers said. The ruble's weighted average for 31 July settlement fell to 29.3193 rubles per dollar after the previous day's 29.2687 in a unified session of eight exchanges. Based on the results of the session, the central bank cut its official next-day rate to 29.32 rubles per dollar from the previous 29.27 figure. "Today is a fairly typical day for the end of the month. Ruble credit rates rose -- but only slightly -- and in morning trade dollar growth continued, but was cut short by the central bank," said Metallinvestbank dealer Sergei Romanchuk. Dealers said the central bank was selling dollars in the unified session at 29.3500 rubles per dollar, gradually lowering the rate to 29.3350. But they said invention was no more than $50 million in a session where volume was a total $114.67 million. Dealers said despite higher ruble credit rates, which is standard at the end of month as banks and companies close books, ruble liquidity was high and central bank intervention was little more than a stopgap measure. Bank balances at the central bank rose to 78.75 billion rubles on 31 July from 75.91 rubles the previous day.

Russian metals major Norilsk said it would restart its Norilsk Nickel plant early on 2 August after a small fire, which did not hit production. "The forced stoppage had no impact on output," Aleksandr Lamzin, head of the production department, said in a Norilsk statement. He said the fire had taken two hours to put out and that no one died. Norilsk said in February it would cut exports of nickel to 155,000 tons in 2001. The company's first-deputy CEO, Dmitry Zelenin, also said in June that the firm had exported 72,000 tons of nickel in the first half of the year. Norilsk does not provide comparative yearly figures, although it said last year it had exported 118,300 tons of nickel from January to December. Russian exports are often an important swing factor in London Metal Exchange (LME) nickel prices. The Norilsk developments only had a brief impact on LME nickel prices during 1 August trading. Three-month prices (MNI3) spiked up some $50 to $5,600 on the initial news of the fire, but subsequently fell back when it became clear that output would resume shortly. Reuters reported that Norilsk produces 20 percent of world output of the metal, which is mixed with steel to make non-corrosive stainless steel.

The leading Russian oil company LUKoil issued a report showing its revenues in the first half of 2001. The company's revenues amounted to 100.4 billion rubles ($3.43 billion), compared to 110.7 billion ($3.78 billion) during the corresponding period in 2000. The volume of pre-tax profit reached 23.3 billion rubles ($796 million), compared to 25.5 billion ($871 million) in the first half of 2000. Profit tax payments and other similar payments amounted to 5.3 billion ($181 million) rubles, compared to 4.1 billion rubles ($141 million) in the first six months of 2000. LUKoil's net profit reached 18.3 billion rubles ($625 million), which is 15.84 percent less than in the first half of 2000.

Amid skyrocketing popularity, the director of Severstal Metallurgical Plant, Aleksei Mordashov, is believed to be one of the oligarchs of President Vladimir Putin supposedly replacing similarly influential figures under former President Boris Yeltsin.

Mordashov was born in the town of Cherepovets in 1965. After graduating from Leningrad Engineering and Economics Institute in 1988, Mordashev returned to his hometown and received a senior economist position at Severstal. Four years later, he was promoted to economy and finance director by then-Director General Yuri Lipukhin. A nation-wide privatization rush pushed Mordashov to Severstal's Olympus. It is believed that Lipukhin assigned Mordashev to create a unit within Severstal that will purchase stocks, shares, and other "products related to privatization." Severstal-Invest was created with a 24 percent share owned by Severstal, and the rest by Mordashov. With a new law prohibiting anyone from being both director and chairman of the board, Lipukhin offered Mordashov the director's position at Severstal. Meanwhile, Mordashov was acquiring stocks and shares for Severstal, although primarily he worked for himself. By early 1996, Severstal-Invest became a major shareholder in Severstal, effectively making Mordashov owner of the plant. Mordashov managed to privatize one of the country's biggest metallurgical companies without the behind-the-curtain wars and intrigue that was the common practice. Mordashov recently announced that he personally owns 16 percent of the Severstal shares and controls 80 percent of its shares. In 2000, Severstal posted revenues of $400 million.

According to some rumors, Mordashov is considered by the federal government as a potential candidate for a deputy prime minister's seat. This might have emerged from the Severstal visit of incumbent Deputy Prime Minister Valentina Matviyenko. In a newspaper interview, she said that there was a potential government member in the town of Cherepovets. Despite his Vologda roots, Mordashov is affiliated with Putin's "St. Petersburg team." He is one of the oligarchs from the northwest who appeared in Moscow after Putin's inauguration. Mordashov became close to Putin through his friendship with another St. Petersburg oligarch, Vladimir Kogan. Some believe that Kogan was seeking Severstal's control share package. He ended up buying Severstal's bank, Metallurgical Commercial Bank, which used to be headed by Mordashov's friend, Valerii Sikorsky. Mordashov effectively handed the bank over to Kogan as a gift. Now, Kogan is servicing the biggest industrialist of the Russian northwest. "Profile" speculates that a new Kogan-Mordashov alliance will allow Putin to replace old Yeltsin-era oligarchs with new Putin-era successors.

To solidify his position, Mordashov is implementing a number of ambitious projects. One is the production of large-diameter pipelines for Gazprom, which have had to be imported. He plans to acquire coal reserves to complete the vertical integration of his company. The basic components in ferrous metallurgy are iron ore and coke, used for the production of cast iron and steel. Severstal controls some ore-producing companies. Coking coal has to be purchased from Vorkutaugol (Vorkuta coal) mining plant or on the open market. Vorkutaugol is Mordashov's first target. Mordashov is also trying to compete for the coal reserves of the Kemerovo region, the fiefdom of Iskander Makhmudov and his Urals Mining-Metallurgical Company. Makhmudov's name is commonly mentioned with Oleg Deripaska of Siberian Aluminum and Mikhail Chernoy. A powerful strategic alliance of Makhmudov, Deripaska and Chernoy has gained a reputation of being merciless and aggressive in business. However, Mordashov, often compared with a tank plowing through dirt, seems to be fearless approaching this target.

Russian giant pipeline monopoly Transneft has recently switched from an obedient arm of private business to a power in its own right while cozying up to the Russian government. It has used its newly found power to influence oil-export strategy and oil-production plans. "Transneft is constantly flexing its muscles to demonstrate its role has increased," said a Western bank oil analyst. According to Steven Dashevski, an analyst at Aton brokerage, Transneft has taken over all independent pipeline projects in the last two years, managing at the same time to force private oil firms to pay the construction costs by persuading the government to introduce a special investment tariff. Transneft has also taken over a Russian-Chinese oil-pipeline project as well as the Baltic pipeline plan from western Siberia to a terminus in Primorsk on the Gulf of Finland. This Baltic line was initially started by private companies. Valery Nesterov, an oil analyst for Troika Dialog brokerage, said Transneft would also soon produce its first oil in the Timan-Pechora province in the north, long dominated by LUKoil, a top oil company.

Transneft's growing power was demonstrated again on 24 July when Transneft stopped LUKoil from exporting oil through a court order. In a decision signed by Judge Cherkasov of Ryazan regional court, Transneft is prohibited from accepting any documents from LUKoil even if they are signed by LUKoil President Vagit Alekperov or his deputies. The court thus appears to be prohibiting one company from fulfilling a contract or agreement reached with another company. reported that LUKoil had refused to comment on the case. Transneft is also silent on the reasons behind the court decision. Transneft rushed to follow the court decision on the following day. This is unusual considering the common delay in following court orders in Russia. Sergei Grigorev, Transneft vice president, told RIA Novosti that on 19 June the complaint was filed and the court agreed to hear the case. The decision to stop any cooperation between Transneft and LUKoil was taken by Ryazan regional court on 23 July. The decision was implemented on 24 July by Transneft, which cut off any oil deals between the two companies. Transneft officials told "Komersant" newspaper that they do not know who initiated the complaint, as no name was mentioned in the complaint application. This is hard to believe considering that the format of a complaint requires this information.

Some Russian media believe that Transneft itself was behind the complaint. Others state the complaint was submitted by a single shareholder. "Komersant" reports that the relations between Transneft's head Semen Vainshtok and LUKoil President Alekperov have been quite tense. According to one senior official of a top oil company, "Vainshtok came [to Transneft] from LUKoil. Since joining Transneft, however, he has been working exclusively for the presidential administration." Transneft has maneuvered itself into a cooperative relationship with Russian President Vladimir Putin against LUKoil. It appears that Alekperov could be the next target in Putin's war against the oligarchs. However, Transneft should not disregard these warning signs. It should be aware that Putin's war could easily turn against Transneft itself.