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Business Watch: August 24, 2001

24 August 2001, Volume 1, Number 7
Crude oil from Kazakhstan's Tengiz field, delivered through the Caspian Pipeline Consortium's (CPC) new pipeline, on 17 August finally reached the Russian Black Sea port of Novorossiisk. A new date for the delayed official opening ceremony of the $2.55 billion multinational project is still undecided. Russia's ITAR-TASS news agency said earlier this week it could be held on 20 September. The original opening date of 6 August was delayed, as CPC shareholders had not adopted a final transportation agreement. Kainar Kazhumov, CPC's project manager at Kazakhstan's national oil company, Kazakhoil, told Reuters, "CPC oil has already reached the consortium's terminal near Novorossiisk. There were certain technical issues to deal with, but finally the crude is there." The 1,580-kilometer (987-mile) pipeline will have an initial annual capacity of 28 million tons (560,000 barrels per day). Capacity is set to rise eventually to 67 million tons (1.34 million bpd).

Russian oil exporters saw a 12.2 percent price-hike for oil transportation on 17 August. Russia's crude oil pipeline monopoly, Transneft, lobbied for the price increase. With the extra funds ($25 million this year), Transneft hopes partly to cover the cost of the construction of the bypass section of Baku-Novorossisk pipeline past Chechnya. The total cost of construction exceeded $140 million. The oil companies anticipate a further increase in the transportation costs, as Prime Minister Mikhail Kasyanov issued a decree regarding the financing of the Baltic oil pipeline (BTS). All of the $460 million required for the project will be funded by domestic oil companies, the "Financial Times" reported.

On 17 August, Yukos oil company won licenses to develop the Severo-Pudinsky and Kul-Egansky oilfields in the Tomsk region with estimated recoverable reserves of 8 million tons of oil. The license cost Yukos $18 million. The company, along with Itera, is planning to purchase licenses for oil and gas deposits in Western and Eastern Siberia. New oilfields are much needed by Yukos to provide an uninterrupted oil supply to China, which is expected to become its largest oil customer abroad, the "Financial Times" reported. It is predicted that Yukos will deliver 30 million tons of crude oil to China annually after the transnational oil pipeline between China and Russia is built.

Russian oil services group Transneft has refused to transport oil produced by Kazakhstan- and Turkmenistan-based companies through the Baku-Novorossiisk pipeline, claiming that the oil has a higher viscosity coefficient and could block up the pipe. However, owners of the viscous oil and many petroleum traders are not in a hurry to make use of a new oil-cleaning service offered by Transneft due to its high cost ($7 per ton), "Kommersant Daily" reported. If Transneft fails to reach an agreement with the petroleum traders, the oil will be delivered to Novorossiisk using other methods. Consequently, the Baku-Novorossiisk pipeline will be out of action for the foreseeable future. According to statisticians, Transneft's losses arising from the pipeline's standstill will exceed $40 million by the end of this year.

The payment of high dividends to Sibneft shareholders confirms the opinion that majority shareholders of this oil company are going to sell their shares in it, a bank analyst noted in an interview with RosBusiness Consulting. He noted that almost all net profits of the company (more than $600 million) were paid out in dividends, saying this testifies that Sibneft shareholders are not going to reinvest this profit in the company. Experts expect that information on the sale of Sibneft to Surgutneftegaz may emerge in the near future. Analysts recommend to buy shares of Surgutneftegaz due to their possible rise. Sibneft representatives refused to comment on this information.

The press service of the Sakhalin regional administration told RosBusiness Consulting that over the next six or eight years $12 billion in real industrial investments will be allocated to the Sakhalin-1 and Sakhalin-2 projects. Over $2 billion has been spent on the development of oil and gas fields in accordance with product-sharing agreements within the framework of the two projects. Sakhalin-1 and Sakhalin-2 operators allocated more than $160 million in direct payments to the Russian government and various bonus payments. In accordance with the Sakhalin-2 project, about 2.2 million tons of high-quality oil has already been produced by the Vityaz oil-producing complex. Approximately 3,000 contracts worth $700 million were signed with Russian companies. Currently, the Sakhalin region is the only area in Russia which is successfully developing oil and gas fields in accordance with product-sharing agreements within the framework of the Sakhalin-1 and Sakhalin-2 projects, officials stressed.

Russia's largest oil producer, LUKoil, will focus on getting a listing on the London Stock Exchange prior to a listing on the New York Stock Exchange. Vice President Leonid Fedun told a news conference, "First we will get (LUKoil stock) listed in London by the end of this year, but New York remains a goal." After repeated promises to sell American Depositary Receipts (ADRs) in New York since 1999, LUKoil announced in June that it would switch its first planned foreign listing to London instead. Apparent reasons for the move were LUKoil's delay in releasing financial results, fears of U.S. government opposition over LUKoil's Iraqi operations, and criticism of its business practices, AP reported. Fedun didn't say when LUKoil would seek to sell ADRs, but said that any foreign listing would be carried out only if it helped LUKoil to increase its market capitalization. LUKoil has enjoyed dramatic profits thanks to high world oil prices and has been expanding internationally. Last winter, LUKoil purchased Getty Petroleum gas stations in the U.S. LUKoil recently released long-awaited results audited to U.S. standards, showing that its net income had tripled to $3.31 billion in 2000.

A ceremony to mark the filling of the first oil tanker with Kazakh crude exported via the Caspian Pipeline Consortium's pipeline to Novorossiisk has been postponed from 2 to 20 September, Caspian News Agency and Caucasus Press reported on 16 and 17 August. That ceremony had been planned for 6 August but was postponed due to disagreements between the shareholders -- which include several international oil companies and the Russian and Kazakh governments, which have 24 and 19 percent stakes, respectively. Meanwhile, more than 100 people have staged a protest in Gelendjik on the Black Sea coast near Novorossiisk to focus attention on the ecological risks inherent in exploitation of the pipeline, Glasnost-North Caucasus reported. They demanded that city authorities hold a referendum on whether permission should be granted for the loading of crude from the pipeline onto tankers at Novorossiisk.

Russian gas group Gazprom will participate in the privatization of Slovenski Plinarenski Priemisel, Slovakia's largest state-owned natural gas-processing plant. In turn, Slovak authorities agreed to allow Gazprom to build a pipeline through Slovakia. The construction project through Slovakia is attributed to Gazprom's decision to lessen its dependence on a Ukrainian route. Observers note that the purchase of a foreign enterprise is not a typical move for Gazprom which, with this purchase, will strengthen its positions in Eastern Europe, "Kommersant Daily" reported.

Russian Deputy Prime Minister Aleksei Kudrin said Russia's inflation this year will amount to 16 percent to 18 percent. Speaking on Ekho Moskvy radio, he said the figure was somewhat greater than that spelled out in the budget, but ultimately it will be lower than in 2000. Kudrin predicted a stable currency market in Russia, adding that in nominal terms the ruble slipped in the first half of the year while in real terms it actually strengthened. "There will be no significant changes on the currency market," he said. Kudrin believes that the 2002 nominal exchange rate of the ruble will continue to decline slowly within the limits of 1 percent to 2 percent. The exchange rate set by the budget is 31.5 rubles to the dollar, Xinhua reported.

The Russian Finance Ministry has set aside $25.05 million to pay the International Monetary Fund (IMF) on 24 August, a Finance Ministry official stated. Russia is making the payment a day in advance as the actual due date, 25 August, falls on a weekend. Russia made a $103.44 million payment to the IMF on 6 August, and $32.83 million and 18.45 million euro payments on 10 August. The country is scheduled to make about $2.07 billion in payments to the IMF this year.

The Russian Antitrust Committee has teamed up with the Economic Development and Trade Ministry against Russian rail group Russian Railroads. On 17 August, the two state bodies attempted to deprive Russian Railroads of the right to control prices for exporting goods. According to the ministers, the right to regulate prices for rail transportation belongs to the Antitrust Committee (MAP). Ilia Yuzhanov, MAP's head and a longstanding opponent of Railway Minister Nikolai Aksenenko, managed to enlist support from Economic Development and Trade Minister German Gref and a personal friend of President Vladimir Putin's. This is a powerful alliance opposing Aksenenko, the "Financial Times" reported.

Russia will seek to raise debt at lower interest rates on foreign markets to keep payments low next year and decrease its total debt before a 2003 peak in payments to foreign creditors, Sergei Kolotukhin, a deputy finance minister, said. Russia will try to borrow $1-2 billion at rates below 10 percent to create fresh reserves while decreasing interest payments, he added. "Our task is to borrow at less than 10 percent," Kolotukhin said, adding that potential Eurobond issues could be denominated in dollars and euros. "Prospects for a change in our credit rating will be clear only at the beginning of next year. My contacts with investors tell me that the rates on Eurobonds will be near the levels of 1996-97," before the August 1998 debt-default that wrecked Russia's position on international capital markets. He said Russia will try to cut its total debt to 40 percent of gross domestic product (GDP) by 2003, from 50 percent of GDP now. Russia is gearing up to make $18-19 billion in payments on foreign debt in 2003 and has laid out plans for a budget surplus and a return to the capital markets in 2002 to meet those obligations on time. Russia must pay $14 billion next year. "It would be unreasonable to enter the market in 2003 when everyone knows you have a payment peak. The rates will rise," Kolotukhin said. He said Russia still saw a partial write-off of a $42 billion debt to the Paris Club of state creditors as ideal but believed it was unlikely. He said that Russia also had to restructure debts to creditors outside the Paris Club. Without a debt-restructuring, he said 2003 payments would rise to $20-21 billion. He said Russia will only seek to restructure payments to the Paris Club in 2003 if its plans to tap the debt market fail. Kolotukhin also said the Finance Ministry plans to announce a tender to buy out its debt from creditors. "We shall practice an early purchase of debt from creditors, especially those who are not members of the Paris Club -- there are 10 to 15 such states. Of course, the buy-out will take place at a discount," he told Reuters.

Three people were killed in an explosion in a Georgian apartment block on 22 August, apparently while trying to cut up tank and artillery shells in order to sell the pieces as scrap metal, Reuters reported. A Security Ministry official said two other people were injured in the blast, near the Vasiani military base just outside the capital Tbilisi. "They were cutting the shells to sell the metal," said the official. "But the heat from the cutting caused one to explode." A local news agency said two women and one man were killed by the blast, but the Security Ministry did not confirm that information. Georgian television showed pictures of the burned-out apartment with more than a dozen shells still lined up against the wall. The Vasiani military base was evacuated by Russian troops earlier this year and is now occupied by Georgian forces. The Security Ministry official said the practice of cutting up explosives for their metal was not uncommon in Georgia.

Tatyana Riskina was appointed chairman of the Russian Development Bank (RBR), created by the government a year ago. She previously served as chairman of DIB Bank. With the appointment, Prime Minister Mikhail Kasyanov hopes to revitalize RBR, which is expected to acquire Promstroibank's chain of branches, one of the most extensive in Russia. According to Riskina, the bank's main goal will be financing domestic enterprises. Many say Yukos oil company will surely benefit from this appointment, since DIB Bank is currently handling Yukos' financial account operations and is controlled by Mikhail Khodorkovsky, the Russian oil group's head, the "Financial Times" reported.

Despite a minor drop in the dollar during the week of 13-17 August, Russians continued to hold on to their dollar savings. Russian government spokesman Aleksei Volin, reassuring his countrymen over the fate of the dollar, said he saw no chance it would fall strongly against the ruble, Reuters reported. He said the ruble would only strengthen once the economy was maintaining growth. Russian currency exchanges have reported no rush by people to swap some of their estimated $50 billion to $60 billion savings into rubles. An informal poll carried out by Moscow's Ekho Moskvy radio showed 80 percent of Russians put more trust in the dollar than in the ruble. A report released by Dresdner Bank Group said 65 percent of Russians held their savings in hard currency, most of which is in dollars. The ruble has been gradually depreciating in nominal terms throughout the year, although it has gained in real terms, or adjusted for inflation.

Hozh-Ahmet Nuhaev, the so-called "Godfather of the Chechen mafia," has been a notorious character in the Russian press for his multi-faceted and illegal activities in Russia and abroad. There has been speculation about his "special" informal relations with Russian self-exiled oligarch Boris Berezovsky, who appealed to Nuhaev for "roof" protection services while traveling in Chechnya in the mid-1990s. In the past few years, Nuhaev and Berezovsky have reportedly developed common interests in the oil sector, promoting their people to the highest positions in the Caspian Pipeline Consortium. Narcissism and a maniacal addiction to bluff are the basic features of Nuhaev's character. But his high-profile participation in June at a Moscow conference on Islam may be his unofficial, but transparent, emergence as the Kremlin's new candidate for the presidency of Chechnya.

Back in the late 1970s, Nuhaev did not know that his "career" would motivate British author Frederick Forsythe to incorporate his character into the book "Ikona," which in part describes the phenomenon of the Russian mafia and corruption. While a law student at Moscow State University, Nuhaev and Said-Hassan Abumuslimov, later the vice president of Chechnya, organized an illegal group for the liberation of Chechnya. Abumuslimov was in charge of the group's policies and information center, while Nuhaev provided financing and arms, reported.

In an interview with the German "Die Woche," Nuhaev described how the Chechen mafia developed in Moscow. According to Nuhaev, by the late 1980s there was a power vacuum in Russia, in general -- but particularly in Moscow. Independent criminals and bandits were robbing banks and cooperatives at will. Police and other law enforcement agencies were unable to prevent such robberies. Nuhaev decided that it was time to intervene and take advantage of the situation. He first formed a group of reliable and tough Chechens. They then offered Moscow businessmen protection in exchange for acceptance of the Chechens as legitimate business partners. The businessmen agreed, and the "Chechen epoch" in the last days of Soviet Union began. The KGB called the group the "Chechen mafia," and it is now believed to be the model for organized criminal groups in Russia. The organization, Nuhaev said, reflected the clan structure of the Chechen nation. Each clan protected its own business territory, but all clans were united in one community. The community resembled an army with strict discipline and autonomous "divisions." Nuhaev acted as the coordinator of these clan activities.

In 1994, Nuhaev was indicted by the federal authorities for extortion and fled Moscow for Chechnya. Johar Dudaev, then president of Chechnya, offered him the position of counter-intelligence chief, which Nuhaev accepted. To this day, in spite of his recent trip to the Moscow conference, he remains a wanted man. How could this wanted criminal and dangerous Chechen fighter be allowed to freely come and go from Moscow?

Following Dudaev's death in April 1996, Nuhaev was appointed first deputy prime minister in the government of Zelimkhan Yandarbiev. In the spring of 1997, Nuhaev and his old friend and business partner Mansur Yakhimchik -- a citizen of Poland, Chechnya, and the UK who had converted to Islam -- registered the Caucasus-American Chamber of Commerce in Washington. During their trip to the United States they introduced their organization with its aspirations to the Washington scene by claiming to have the backing of Adnan Koshoggi. Money was spent freely and lavishly from their quarters at the Ritz Carlton Hotel. Nuhaev and Yakimchik later founded "Transcaucasus Energy Consortium" with American, British, Polish, and some Arab companies, ostensibly to provide protection services in the Caucasus and build pipelines -- which would ultimately bring oil from the Caucasus and Caspian to the Port of Odessa across the Black Sea from Georgian Ports of Poti and Batumi. The oil would traverse Ukraine and Poland to the port of Gdansk. (Next week, Part 2: Nuhaev shifts his focus.)

Russia's prosecutor general has dropped two lawsuits against Sibneft, a major oil company, and its top managers on charges of fraud, embezzlement of billions of dollars, and tax evasion. In a letter obtained by the "Vedomosti" newspaper, senior investigator Gennady Teterkin of the Prosecutor General's Office told Sibneft President Yevgeny Shvidler that the cases were dropped "because nothing criminal was found in the actions of the company's managers."

The scandal began in May with an official statement from the Prosecutor General's Office accusing Sibneft of multibillion-dollar embezzlement and tax evasion. Valentin Ustinov, Russia's prosecutor general, pledged to personally participate in the investigation. One case outlines allegations that Sibneft failed to pay 12 million to 14 million rubles ($409,000 to $477,000) in taxes and obtained tax privileges to which it was not entitled. Another case concerned the 1995 loans-for-shares privatization of Sibneft, the controlling share package of which was then sold to the Oil Finance Co. for $300,000 above the starting price of $100 million. Oil Finance Co. was at the time headed by Boris Berezovsky, who is now living in self-exile in Europe.

According to "Kommersant," following the case's closure, rumors spread that agreements had been reached between the Sibneft leadership and President Vladimir Putin's administration. Allegedly, the Sibneft officials agreed on the financial claims forwarded by the presidential administration and paid millions of dollars into the state budget. The funds were not hard to find: On 16 August, the Sibneft board of directors decided to pay $612 million in dividends. The company denied the allegation. "We would never use such a primitive scheme to pay off the so-called debts," a Sibneft official told "Kommersant." "We would supply oil products to the government, thus settling the problem with the Prosecutor's Office." In this case, the same official said, the investigation proved no violations had been committed by Sibneft officials.

The case appears similar to others launched in the past against energy companies. The scheme used against oil companies includes the filing of a lawsuit, some party involved getting compensation, and the case getting closed. Some examples illustrating this scheme include a LUKoil case. In July 2000, the Federal Tax Police Service launched a criminal case against the LUKoil management on tax evasion related to over $500,000. In August 2000, the case was dropped. Instead of the initial 760 million rubles, LUKoil agreed to pay 5 million rubles. At the same time, a lawsuit against LUKoil President Vagit Alekperov and LUKoil chief accountant Lubov Hoba was also dropped. In February 2001, the Control Chamber began a revision of the allegedly improper privatization of 49.8 percent of Tyumen Oil Company (TNK). In a month, the press reported that a criminal case was launched against TNK for violating the terms of privatization, specifically for non-compliance with the investment obligations. TNK offices in Nizhny Vartovsk were searched and top managers, including President Semen Kukes, were summoned for questioning. In June, however, the Control Chamber experts decided that the privatization was conducted properly.

The Sibneft case is connected, albeit tenuously, with Berezovsky's statement this month about his plans to pull out of the oil business. They are both prerequisites for making the company (Sibneft) fully acceptable to investors, said Chris Weafer, head of research at the Troika Dialog brokerage. "There is a general feeling in the market that Sibneft is looking for a strategic foreign investor. A foreign company is not going to get involved when there is an open criminal case against Sibneft and Berezovsky is still a major shareholder," he added. It is unclear how many Sibneft shares Berezovsky owns through third parties or whether he owns any shares at all. "Negotiations are being conducted concerning my oil assets," Berezovsky told the "Izvestia" newspaper. "As of today [24 August], the fate of Sibneft hasn't been decided," he said. "This is the only part of my business where talks are taking place." Berezovsky claims he owns 7 percent of the company and his shares are managed by a team under Roman Abramovich. Oil-and-metals tycoon Abramovich, a close Berezovsky ally in the 1990s, is still perceived as "untouchable" because of his Kremlin ties.