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Business Watch: September 14, 2001


14 September 2001, Volume 1, Number 10
OIL & GAS
ROSNEFT DISCUSSES BUSINESS PLANS (10 September)
The board of directors of Russian oil company Rosneft has discussed plans for the company's development through 2020, Rosneft's press service told RossBusiness Consulting. The board decided to increase the volume of oil production to 40 million tons a year by 2020. In addition, Rosneft plans to increase annual gas production to 45-50 billion cubic meters over the next 19 years. The company's representative announced that Rosneft is going to diversify its business and begin coal and electricity production. The board approved Rosneft's participation in the authorized capital of Kamchatskgazprom. Kamchatskgazprom and Rosneft plan to cooperate on the construction of a gas pipeline.

TNK TO SELL ONLINE (12 September)
Russian oil producer TNK is set this week to make the first online oil tender offer through the Internet-based OILspace services group, selling just over 50,000 tons of Urals crude, trade sources told Reuters on 11 September. TNK plans to sell 52,000 tons of Urals crude loading out of the Baltic Sea port of Ventspils on 28 to 29 September. The tender will be awarded on 14 September. Industry sources say this will be the first live transaction over OILspace's Nexus system, a proprietary platform that allows for multilateral negotiations and auctioning of oil cargoes. OILspace, a privately owned company founded last year by an oil trader and a mathematician, is an online services company that aims to provide a variety of services to oil companies, from news feeds to risk-management tools to back-office tasks.

GAZPROM NOT TO PAY DIVIDENDS (12 September)
Gazprom will not pay interim dividends in 2001, board member Aleksandr Semenyaka declared at a meeting with Gazprom shareholders on 12 September. In 1999 and 2000, Gazprom paid all interim dividends, according to ITAR-TASS. But since the government approved amendments to the law on joint-stock companies in July 2001, nothing has been said about the necessity to pay interim dividends. Necessary changes will be introduced to Gazprom's charter to bring it into line with federal law, Semenyaka said. In 2000, 15 percent of the company's net profits were allocated to pay dividends. This decision set Gazprom's net profits at 48 billion rubles (about $1.63 billion). That figure is expected to double to 100 billion rubles (about $3.40 billion) in 2001.

BUSINESS ALERT
FIRST SUKHOI PASSENGER JET TAKES FLIGHT (10 September)
Russian aviation design bureau Sukhoi, best known for its fighter jets, announced on 7 September that its first passenger aircraft had successfully made its maiden flight, Reuters reported. Sukhoi spokesman Gennady Litvinov said the flight was made by the Su-80 in Komsomolsk-on-Amur in the Far East. Sukhoi is eyeing the production of a small short-range passenger plane as a means of boosting revenues and helping it enter the market for passenger aircraft. Russia's airlines will need to replace hundreds of planes in the next few years from their aging fleets. Some airlines have commented that an "air taxi" like the Su-80 could be used for short-range flights where larger planes are inefficient. The plane, which can carry 35 passengers or 8 tons of cargo, is scheduled to be fully certified by 2003. It has a flight range of 3,000 kilometers at a cruising speed of 500 kilometers per hour. "Our twin-fuselage Su-80 will be equipped with two General Electric turboprop engines and can use paved and ground runways," Litvinov said. "There are already orders from foreign and domestic airlines to [occupy production at] our factory for four years," he added. "The factory's capacity is from 15 to 20 planes a year." The U.S. aerospace giant Boeing is eyeing a joint venture with Sukhoi and the Ilyushin design bureau, another leading Russian plane builder, on the creation of a new Russian commercial aircraft. Preliminary plans call for the design and construction of a regional jet seating up to 100 passengers. Boeing would help market the plane both in Russia and abroad. The proposal is currently undergoing a feasibility study.

NUCLEAR POWER STATIONS MEET WORLD STANDARDS (10 September)
All Russian nuclear power stations meet world safety standards, the head of the State Atomic Supervision Department, Yuri Vishnevsky, said in an interview with RosBusiness Consulting. He said there is no station in Russia that needs to be closed for safety reasons. However, some reactors at Russian nuclear-power stations have been in use for 30 years and are thus approaching the end of their core life. The main problem for these stations is extending their operating life, Vishnevsky noted. These stations include the Voronezh, Leningrad, and Kola nuclear-power stations. Some 30 stations are operating in Russia, generating about 15 percent of the country's electricity.

RUSSIA REMAINS ON FATF'S BLACKLIST (10 September)
The Paris-based Financial Action Task Force (FATF), supported by some 30 industrialized nations, has kept Russia on its blacklist of nations not cooperating in the fight against illegal practices, AP reported. However, the FAFT has withdrawn its threat of sanctions against Russia. New legislation in Russia requiring banks to report large transactions by their clients prompted the task force to lift the sanctions threat, said Clarie Lo, head of the group. The FATF noted that Russia had taken promising steps toward blocking the laundering of cash by criminals. The group closed its three-day meeting by adding Ukraine and Grenada to the blacklist, which now names 19 nations or territories. Ukraine, it said, lacks an adequate system for reporting suspicious transactions to international financial institutions. The blacklist will be reviewed again in February, when the FATF meets in Hong Kong. Jimmy Gurule, the treasury's undersecretary for enforcement, said, "International cooperation is vital in our fight against money laundering. The United States will continue to partner with other FATF countries in a joint effort to combat money laundering on a global scale." Money laundering involves exchanging or investing funds earned from illegal activities such as prostitution, gambling, and drug trafficking in order to conceal their source and make the money appear legitimate.

MINISTRY SLAMS DRUG (10 September)
The Russian Health Ministry has suspended pharmaceutical magnate Vladimir Bryntsalov's license to produce Russia's most popular heart medication, hawthorn-berry tincture, known for its low price and high alcohol content, "Vedomosti" reported on 10 September. The tincture is sold in 100 milliliter vials and costs six to 10 rubles. It is the best-selling medicine in the country outside Moscow, according to the Pharmexpert medical research center. The company had its license suspended because it altered the recipe of the mixture and its production technology, said Deputy Health Minister Anton Katlinsky. Pharmexpert says that hawthorn tincture accounts for more than 10 percent of the company's output. Tincture sales netted the company $6.6 million last year and $4.2 million in the first quarter of 2001. Bryntsalov has chosen to ignore the ban. "This is not at all serious," said the company's director, Viktor Kolomi.

GAZPROM TO LIMIT FOREIGN OWNERSHIP (12 September)
A Gazprom representative said the company will reach its 20 percent ceiling on foreign ownership in 2002. Gazprom said foreigners can boost their combined stake in the company to 20 percent as part of a liberalization of trade in the shares. According to the head of Gazprom's securities department Alexander Semenyak, Gazprom will sell some of its own shares in 2002 and 2003. Foreigners under the law can only purchase American Depositary Receipts, more expensive than the locally quoted ordinary shares. Gazprom says foreigners currently own a total 11.5 percent of its shares, although market analysts say the 20 percent level has already been reached via "gray schemes," which have allowed foreign shareholders to covertly trade in local Gazprom shares. Semenyak said the quota will be met via auctions or tenders under a scheme the company has yet to determine.

RUSSIAN BUSINESS ABROAD
AEROFLOT EXPANDS CARGO SERVICE (12 September)
Aeroflot will expand its cargo services from Europe to the Far East by four DC-10 freighter flights a week to Beijing and Shanghai from October, a senior Aeroflot cargo executive told Reuters. "In addition to the existing three-times-a-week cargo flights from Luxembourg to Tokyo, we are now planning to operate four weekly flights to China," said Alexander Kiritchenko, Aeroflot cargo manager in Luxembourg. Kiritchenko said the cargo flights will comprise one departure from Luxembourg to Beijing on Mondays, one flight from Hahn to Beijing on Fridays, and two flights from Hahn to Shanghai on Wednesdays and Sundays. A second weekly flight from Hahn to Beijing will be added in November, bringing the total number of new routes to China to five this year, he said.

LOCAL CELLULAR LEADER MOVES TO TAJIKISTAN (11 September)
North-West GSM, the first Russian cellular operator to take its business abroad, has formed a joint venture with Tajikistan's fixed-line operator, TT Mobile, the "St. Petersburg Times" reported on 11 September. TT Mobile was formed in August as a 75:25 joint venture between the local cell-phone provider and state-owned Tajiktelecom. The company received a GSM license from the Tajikistan Communications Ministry and plans to start operations in the capital Dushanbe in February. The new company will be the second GSM operator on Tajikistan's tiny cellular market after Somoncom, which launched in March 2000, with about 500 subscribers. Although less than 5 percent of Tajikistan's population has fixed-line phones, North-West GSM sees "big potential" on the mobile market, said spokeswoman Maria Gavrilova. Russia's third-largest mobile operator with almost half a million subscribers, North-West GSM plans to invest $5 million by 2003, Gavrilova said. She declined to detail how Tajiktelecom is contributing financially or how many subscribers TT Mobile could attract. The joint venture will compete with another start-up, Indigo-Tajikistan, majority owned by U.S. MCT Corporation, which controls Somoncom.

TURKMENISTAN-RUSSIA PREPARE OIL-GAS DEAL (11 September)
Turkmenistan and Russia are preparing a 10-year cooperation agreement in the oil and gas sectors, according to a Turkmen government official, Reuters reported. The official said there had been discussions on selling Turkmen gas through Russia to third countries and on involving Russian companies in developing oil and gas fields in Turkmenistan, including offshore fields on the Caspian shelf. The agreement could be signed during a planned visit by Russian Prime Minister Mikhail Kasyanov to Ashgabat on 28 September. An Energy Ministry source said the Russian delegation confirmed Russia's willingness to buy up to 30 billion cubic meters of Turkmen gas per year. Discussions also focused on securing supplies of Turkmen gas to Ukraine across Russia. Ukraine has contracted to buy 250 cubic meters of Turkmen gas over the next five years. Turkmenistan will deliver 30 billion cubic meters to Ukraine this year, transported across Uzbekistan, Kazakhstan, and Russia, the agency reported.

ECONOMIC NEWS & BUSINESS STATISTICS
TROIKA BUYS MINORITY STAKE IN ROSGOSSTRAKH (10 September)
The Russian State Property Ministry said on 7 September that Troika Dialog investment bank had acquired a 9-percent stake in state-owned insurer Rosgosstrakh for 201 million rubles ($6.83 million), Reuters reported. Troika Dialog declined to comment on its plans, but Interfax news agency quoted an industry source as saying the investment bank had bought the stake for a client. Rosgosstrakh is a household name in Russia and was the monopoly retail insurer during the Soviet era. "Today's sale was a success. We were right with the starting price," said Vladimir Malin, chairman of the State Property Fund. The starting price was 153 million rubles. The company is the only state-owned insurer and in 2000 collected premiums of 3.88 billion rubles ($131.8 million), up 122.3 percent on 1999. Payouts rose 4.2 percent to 1.34 billion rubles. "The fact that the final price exceeded the starting price by 30 percent is a result of openness and transparency, which accompanied each stage of the sale," said First Deputy Property Minister Alexander Braverman. The other four bidders -- Lornaka, Kobra-Kapital, Ansilas, and Auditaviatrust -- are little-known Russian firms. Troika's investment-banking head, Oleg Tsarkov, said the bank was considering participating in future auctions. According to Reuters, the sale was the first of three offers planned to reduce the state stake to 50 percent plus one share in the insurer.

AEROFLOT RECEIVES $30 MILLION LOAN (12 September)
Leading airline Aeroflot signed a one-year, $30 million syndicated credit organized by Raiffeisenbank of Austria and was eyeing an issue of Eurobonds or other medium-term securities, Reuters reported on 12 September. The co-organizers were Commerzbank Eurasia and Citibank. The loan was backed by revenues from ticket sales abroad. According to Aeroflot's deputy general director for finance and planning, Nikolai Kuznetsov, the funds will be used to refinance work on a third terminal at Moscow's main airport, Sheremetyevo. Aeroflot's director of treasury operations, Sergei Sukovatov, was quoted as saying that the loan will help Aeroflot to develop a positive credit history, and will allow the company to take long-term loans in Western markets.

GOLDEN TELECOM BUYS ADS (12 September)
Golden Telecom has agreed to acquire an alternative fixed-line telecommunications company in the Volga-region city of Nizhny Novgorod for $2.9 million, Reuters reported on 12 September. Golden said in a statement that the company, ADS, was the largest alternative fixed-line carrier in Nizhny Novgorod with 13,000 lines. Golden already offers long-distance and Internet services in Nizhny. "ADS will allow us to enhance our offerings and access additional customers because of its extensive networks," Chief Executive Officer Stewart Reich said in the statement.

POLITICAL ECONOMY
RUSSIA'S COFFERS RECEIVED EXTRA $3.9 BILLION (12 September)
Russia's treasury received 117.35 billion rubles ($3.9 billion) in revenues above its target in the first half of this year, according to the Finance Ministry. The ministry said in a statement that 41.2 billion rubles had been spent to service the country's foreign debts. Russia planned to accumulate the money it receives from high prices for its main exports -- oil, gas, and metals -- in a fund designed to tackle a 2003 peak in foreign-debt payments. Prime Minister Mikhail Kasyanov said earlier that Russia will accumulate $5 billion this year to cope with $19 billion in foreign-debt payments and servicing. Russia is to pay about $14 billion in 2001 and 2002, Reuters reported.

WHO IS IN? WHO IS OUT?
REMEZOV HANGS ON TO POST (11 September)
Aleksandr Remezov will remain Mosenergo's chief despite the decision of an extraordinary shareholders meeting of 31 August 2001, RosBusiness Consulting reported. Remezov said at a press conference that his stance was legal and backed by eight court decisions. Remezov also mentioned that he had not received notification of his dismissal from the leadership of Unified Energy Systems.

WHAT'S UP? WHAT'S DOWN?
MOODY'S UPGRADE (10 September)
Moody's Investors Service has changed the outlook on its "B3" long-term foreign-currency deposit ratings of six Russian banks to "positive" from "stable," "The Moscow Times" reported on 10 September. The banks affected include Alfa Bank, Aljba Alliance Commercial Bank, Gazprombank, JSB Rosbank, and state-controlled Vneshekonombank and Vneshtorgbank. "This action follows the recent announcement by Moody's that it changed the outlook on the 'B3' foreign-currency bank-deposit ceiling of the Russian Federation to positive from stable," Moody's press release said. Moody's also changed to "positive" from "stable" the outlook on the "B2" rating of the EMTN program of Alfa-Russia Finance BV, which is fully guaranteed by Alfa Bank.

S&P RAISES LUKOIL AND TATNEFT RATINGS (13 September)
Standard & Poor's (S&P) ratings agency announced on 13 September it had raised its long-term ratings on Russian oil company LUKoil to "B" from "CCC" and on Tatneft to "B-" from "CC." S&P also said in a statement that both companies had been removed from "creditwatch," where they were placed on 28 June, and the outlook for both was said to be "stable." S&P said the ratings action was due to a slower-than-expected erosion of the companies' competitive cost position, a solid 2002-2003 export profile, and debt levels that were expected to remain manageable. The companies also had an improved domestic market and increasingly favorable refinancing prospects, Reuters reported.

PROFILE
ISKANDER MAHMUDOV
The head of the Urals Mining Metallurgical Company (UMMC), Iskander Mahmudov, has been described as the second-most-frightening and -influential man in Russia after Boris Berezovskii. He gives no interviews, rarely shows up at social events, and is considered by some to be the most "secretive" of Russian businessmen. Mahmudov controls over 40 percent of Russian copper production and appears to be involved in every major scandal in the copper industry. With business partner Oleg Deripaska, Mahmudov performs the role of a sword of retribution, showing no mercy for competitors. Without any other information available, the media has tended to "demonize" Mahmudov, calling him an evil genius of the newest Russian economy. On 10 September, Russian magazine "Profil" published its opinion of Mahmudov in an attempt to provide an objective picture of this businessman.

The 37-year-old oligarch was born in Bukhara and spent his childhood in Tashkent. He graduated from the Oriental Department of Tashkent State University. The university was closely connected to the security and military services and prepared its students to work in the Middle East and Eastern countries where the Soviet Union was active in selling arms. After graduation, Mahmudov worked in Libya and Iraq for four years. Although a translator by profession, Mahmudov accepted a bigger role in the Middle East. "In these countries, a translator is a person who makes decisions," he told "Profil." "Many of our experts simply did not understand the Arabs. They never encountered this mentality, history, and traditions." Consequently, he said, translators often had to make the decisions.

Mahmudov returned from the Arab world during perestroika in mid-1980s. For some time Mahmudov worked for Uzbekintorg, a state foreign-trade company, which gave him solid trade experience. Soon, Mahmudov decided that Uzbekistan was not big enough for his ambitions and moved to Moscow. In Moscow, he ran into old friend Mikhail Chernoy, a Russian financier reputedly with links to criminal elements. Makhmudov and Chernoy embarked on their first steps in business together with the question, "Well, what shall we do?" They did some trading before Mahmudov began work for the Trans World Group (TWG) with offices in London. TWG gave him experience and extensive business ties. TWG also served as a launching pad for his copper business, which now controls more than 40 percent of Russian copper production. The remaining 60 percent is controlled by Norilsk Nikel. Many call Mahmudov a monopolist; Russian anti-monopoly authorities refuse to register his UMMC. Despite his business success, Mahmudov has remained personally isolated from the Moscow business elite. He has never confided in anyone aside from Oleg Deripaska who also came to Moscow from a provincial town, Dzerzhinsk in the Gorkovskaya oblast. Mahmudov-Deripaska present a colorful duo, "Profil" believes. Despite a number of differences, both Mahmudov and Deripaska are characterized by a bulldog grip and an aggressive approach to business.

Some reports have linked Mahmudov with infamous criminals such as Nordex President Grigory Luchansky and Almazhan Tokhtakhunov. Both men have been described as criminal intermediaries. Mahmudov's links to the Kremlin are also significant. One document indicates his relations with Kremlin adviser Valentin Yumashev and Nazir Khapsirokov, an aide to Alexander Voloshin, head of the Presidential Administration. Banker Alexander Mamut, chairman of MDM Bank, has also been added to this most-interesting mix of associates. It is no wonder that Mahmudov has been referred to as the second-most-influential businessman in Russia.

Every scandal over a major aluminum or copper company has seemingly involved Mahmudov and Deripaska. The accusations against Mahmudov are the same -- he acts arbitrarily, using militia and secret service to take control of companies. But Mahmudov says that people should not fear him. Rather, they should beware because he and Deripaska "do not forget insults." Mahmudov warned: "Even if you cannot repay it immediately, you should keep this insult in your memory, and the time to repay it will eventually come." Another recent scandal in which Mahmudov's name emerged was "a steel magnate's family drama" (see RFE/RL Business Watch," 9 and 16 August, 2001). As soon as Alexei Mordashov, head of metallurgical giant Severstal, announced his plans to acquire Kuzbasugol (Kuzbas coal company), which is within a fiefdom of Mahmudov, Mordashov's ex-wife accused him of not paying alimony. In an earlier interview with "Profil," Mordashov suggested Mahmudov's involvement in the scandal. Mahmudov denies the accusations. However, he closely followed the scandal. He says: "[If] Mrs. Mordashov gets anything through the court, I will try to buy it." "Anything" presumably refers to Severstal shares. Rumors spread that Mahmudov and Mordashov discussed defining their spheres of influence -- Mahmudov offering to keep the Urals and Siberia and suggesting that Mordashov take the North. Central Russia was not divided but left for the first one able to acquire it. According to those rumors, Mordashov agreed but suddenly made a claim to acquire Kuzbasugol. Mahmudov, as stated earlier, is considered to have a good memory and does not forgive what he considers insults. Hopefully, Mordashov knows this.

It should be noted that Mahmudov is an admirer of sharks, and his friends give him sharks for birthdays. "I feel very sympathetic to these fish.... I used to have a dream of swimming holding on to a shark. This dream came true. Sharks are very smart creatures. They never attack first. They attack when they are hungry or when somebody hurts them. So, do not hurt them," he said. This could be the best warning sign for those who still want to disturb the "deep waters" of his business fiefdom.

IN FOCUS
WHO CAUSED TROUBLES FOR SEVERNAYA NEFT?
Russia's Natural Resources Ministry on 7 September revoked the permit of Russian oil company Severnaya Neft for developing the lucrative Val Gamburtseva oil deposit. Recently appointed Natural Resources Minister Vitaly Artukhov in August ordered his ministry to start legal proceedings into the distribution of some deposit licenses. As a result, the ministry said in a statement, "The Natural Resources Ministry has decided to withdraw the right to exploit the field by Severnaya Neft due to violations in the license agreement." Severnaya Neft's spokeswoman, Yelena Prorokova, argued the reason for the withdrawal was a failure to make social payments to the region. She said payments could be made only after regional parliamentary approval. At the time, the regional parliament was still on vacation, Reuters reported on 10 September.

Another explanation for Severnaya's misfortune is that its winning bid in March of just $7 million for the 475-million-barrel Val Gamburtseva deposit outraged Russian oil companies, which allegedly had offered as much as $100 million. Andrei Vavilov, the chairman of Severnaya's board of directors, supports this explanation but goes further in his speculation. In an interview with "Kommersant Daily" on 10 September, he made statements accusing Russia's leading oil companies, LUKoil and Sibneft, of having staged this situation. Vavilov believes that Artukhov "passionately fulfills oligarchs' assignments." He stated that the minister cannot distinguish an oil well from a drill; he has never seen an oil field and spreads rumors that President Putin ordered him to revoke the license, the statements went. According to him, the real reason behind this decision is Severnaya's infringement on LUKoil's sphere of interests. LUKoil's head, Vagit Alekperov, cannot bear competition and cannot live with the idea that Severnaya is competitive, Vavilov said. Furthermore, Severnaya's level of growth is much higher than that of LUKoil. At the same time, Vavilov stated, Alekperov does not want to dirty his hands. He would rather find and finance hitmen to destroy the company and its leadership. In Severnaya's case, it was only the license revocation, although Alekperov and his cronies believe they have no limits and can do anything, Vavilov stated.

Vavilov believes that Severnaya has been the target of oil magnates because the company conducts business honestly. Other oil companies, including LUKoil and Sibneft, evade paying taxes and hence enjoy a huge advantage, that argument goes. According to Vavilov, Severnaya pays $51 per ton of oil, while LUKoil pays only $16 and Sibneft $13 per ton of oil. Vavilov accused the oligarchs of effectively robbing the state coffer. "I will not be surprised if tomorrow Alekperov and [Roman] Abramovich call me a CIA agent who is sent with a special mission -- to show that Russian oligarchs do not work well." Vavilov explained why such a huge tax gap among oil companies occurs. He said that Severnaya states the market price for oil and, enjoying high profits, the company pays high taxes. Other oil companies, on the other hand, sell oil through offshore companies, he said; they declare production prices instead of market prices. As a result, they pay a third less in taxes than Severnaya. Unfortunately, Vavilov said, this situation is supported by current Russian legislation. Existing laws allow the oligarchs "to pursue the cheating policy -- evade paying taxes and save this money to acquire more oil fields and companies," he said. Article 57 of Russia's constitution covers taxation policies; Vavilov suggested that Abramovich has the constitution from cover to cover and taken notes. Vavilov believes Abramovich therefore should know how the state works. "The only thing he knows is how to steal a trainload of oil," Vavilov concluded. These outspoken comments could ring true if the license to develop Val Gamburtseva is issued to LUKoil or Sibneft.

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