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Business Watch: October 16, 2001

16 October 2001, Volume 1, Number 14
Russia will export record volumes of crude and oil products this winter, notwithstanding lower world prices and possible Organization of Petroleum Exporting Countries (OPEC) output cuts, traders said on 12 October. Only bad weather could prevent Russia from substantially boosting energy exports in the coming months, market players say. "If there are no excessively long storms in Novorossiisk, the all-time high figure will be easily reached this year," Eugene Khartukov, director of the Moscow-based Energy Studies University told Reuters. Traders see oil exports from the former Soviet Union rising by at least 8 percent in 2001 and by another 5 percent to 7 percent in 2002, when Russia opens new export routes. Russian oil production is expected to rise to 340-350 million tons (about 7 million barrels per day) in 2001 from 323 million tons in 2000, while exports are set to reach 155 million tons up from 143 million in 2000. Russia already had a record export year in 2000, surpassing Soviet-era crude export volumes of 120 million tons in the days when the Soviet Union was the world's largest oil producer with 600 million tons of annual output. But limited crude export routes together with rising output are also encouraging Russia to send more fuel and diesel abroad. (TSK)

Russia's top arbitration body plans to examine a lawsuit challenging the restructuring of metals giant Norilsk Nickel, but the company said there is no reason to reverse the program. According to Reuters, the High Arbitration Court will examine an appeal against the rulings of two lower courts which rejected the lawsuits against Norilsk. Norilsk has completed a complicated restructuring involving the swap of Norilsk parent-company shares for shares in its core unit, Mining and Metals Company (MMC) Norilsk Nickel, that have since become the firm's main traded equities. The Federal Securities Commission (FSC) had challenged the purchase by Norilsk Nickel of the trading company Norimet in an earlier stage of the restructuring. The commission said the Norimet deal should have been approved by a general meeting of Norilsk shareholders and a court ruling in its favor could have meant that shares issued by Norilsk or its subsidiaries would have been annulled. If the court's presidium finds the FSC suit has merit, it will be returned for new hearings to the lower Moscow arbitration court. This was rejected in April. Nevertheless, Norilsk expects the court to decide in its favor. "We hope this action will not affect the restructuring, as we are convinced of its absolute legitimacy," said Anatolii Komrakov, Norilsk's spokesman. "We are happy that the highest authority will deal with the issue and we expect it to put the end to the case." (TSK)

Rostar, a wholly owned subsidiary of Russian Aluminum, has concluded a line of credit with Citibank T/O (Russia). The arrangement will finance beverage-can production at the Rostar plant in Dmitrov. Rostar is Russia's leading producer of aluminum beverage cans, according to its press release. With a capacity of 1.3 billion units a year, Rostar produces cans for such companies as Baltika Brewery (BBH), Vena Brewery, and Yarpivo, and is exclusive supplier to PepsiCo in Russia. Citibank T/O, a Citigroup subsidiary, is one of the largest banks in Russia. The credit facility is the first instance of cooperation between Citibank and RusAl. Andrei Kurilin, Citibank T/O vice president, said the bank's strategy is aimed at broadening ties with Russian companies and, in particular, with suppliers to the bank's international clients such as PepsiCo. The new relationship with RusAl fits ideally with this strategy and the bank anticipates broadening the ties in future. Details of the credit arrangement were not disclosed. (JMR)

Russia plans to offer investors the chance to swap a $1 billion OFZ long-term government bond for new paper maturing at different dates, Deputy Finance Minister Bella Zlatkis told Reuters on 10 October. "In November, we will propose a swap of the 31 billion ruble ($1.05 billion) bond, which matures in mid-December," Zlatkis said. Investors taking up the offer will be able to choose maturity dates that suit them, she said, adding that preferences varied from six months to 2004. The swap would be carried out via the Moscow Interbank Currency Exchange. (TSK)

If the Federal Energy Commission approves an increase in prices for gas, Unified Energy System (UES) of Russia will insist on an immediate increase in prices for electricity at power stations that use natural gas. UES head Anatolii Chubais made that announcement at a meeting with journalists, commenting on Gazprom's initiative to increase gas tariffs by 20 percent, RosBusiness Consulting reported. Chubais stressed that an increase in electricity tariffs will be slower than an increase in gas prices. He also recalled that, according to the 2002 budget draft, tariffs for electricity will increase 30-32 percent during the year 2001. (JMR)

Members of the banking and insurance group Avtobank and Ingosstrakh have signed a strategic partnership agreement with the state oil company Nafta-Moskva, Russky Aluminy, and Ruspromavto, a holding that unites producers of construction and road equipment. Natalia Raevskaya, chairman of Ingosstrakh's board of directors, announced that this agreement is a strategic step toward enlargement of the group's businesses, RosBusiness Consulting reported. It will provide for an opportunity to render banking and insurance services to new clients -- ferrous and non-ferrous metal enterprises, car producers, and chemical and oil companies. (JMR)

The Russian Central Bank will auction off $50 million in cash on 29 October to help foreigners repatriate funds locked in special accounts since the 1998 financial collapse, Reuters reported. Central Bank auctions are a way for foreign investors to take money from so-called "S" accounts out of Russia, although there are other limited investment opportunities. The accounts hold ruble proceeds from GKO treasury bills that were restructured in the wake of the 1998 crisis, when the government defaulted on domestic debt and effectively devalued the ruble. The Central Bank sold all $50 million offered at auction on 4 October at a minimum rate of 31.50, a substantial premium to the official Central Bank rate. (JMR)

Russian Prime Minister Mikhail Kasyanov is expected to discuss Russia's debt and trade volume with the Czech Republic. Russia's debt to the Czech Republic stands at $3.6 billion. Czech and Russian representatives are expected to discuss ways to restructure it, organize counter-deliveries of goods, or make an assignment of a debt. The sides will discuss trade and economic relations, including gas deliveries. Supplies of Russian gas to the Czech Republic are currently made within a framework agreement signed between the then-USSR and then-Czechoslovakia in 1980. Russia and the Czech Republic are now expected to sign a new agreement on gas supplies. Russian supplies currently meet 75 percent of Czech demand. The remaining 25 percent comes from Norway, ITAR-TASS reported. Last year, Russia supplied the Czech Republic with a total of 7.4 billion cubic meters of gas. Under the existing contract, Russia will annually supply the Czech Republic with 7.6 billion cubic meters of gas until the year 2014.

Trade between Russia and the Czech Republic reached $1.2 billion in the first half of this year, which is 15 percent more than the corresponding period last year. The volume of Russian exports to the Czech Republic is expected to increase 15 percent this year, while imports to Russia will increase by 30 percent. The most important joint projects of the two countries are the production of car tires in Tolyatti, the production of sanitary equipment in the Moscow region, and gas stoves in Tula. Other significant projects include the construction of a gas-processing factory in the Komi Republic and the upgrading of elevators in Moscow. (JMR)

Dragis Pesic, prime minister of the Federal Republic of Yugoslavia (FRY), predicts that trade between Yugoslavia and Russia will rise to $1 billion in 2002, whereas this year trade turnover is expected to run at $500 million. Pesic provided this information to ITAR-TASS ahead of a scheduled session of the Russian-Yugoslav intergovernmental commission for trade, economic, scientific, and technical cooperation. Pesic said that trade turnover ran at $391.7 million over the first seven months of 2001, as against only $405 million in 2000, although at the end of the 1980s trade turnover between the former Soviet Union and Yugoslavia amounted to almost $7 billion annually. The Yugoslav premier admitted that at present there is a substantial disparity in reciprocal trade, which had been brought on by the predominance of Russian energy resources in the export to the FRY. This accounts for almost 70 percent of its total. (JMR)

Trade turnover between Russia and Sweden hit $680 million for the first five months of 2001. A high-ranking foreign economic expert provided this information in an interview with ITAR-TASS on 5 October. He noted that a trend for stable growth persists in trade. In the expert's opinion, the visit by Swedish King Carl XVI Gustav to Russia, scheduled for 8-14 October, can give new impetus to Russian-Swedish trade and economic cooperation. A delegation of businessmen and industrialists will accompany the king on his visit. Sweden is on the list of 10 major foreign countries investing capital in development of the Russian economy. Last year, the volume of Swedish investment amounted to $308 million, or 2.8 percent of the total volume of foreign investments in 2000. (JMR)

The governments of Russia and Argentina have signed a Convention on the Prevention of Double Taxation of Incomes and Capital, ITAR-TASS reported. The document was signed on 10 October during the fourth session of a Russian-Argentine intergovernmental commission on trade, economic, scientific, and technical cooperation by Sergei Shatalov, Russia's first deputy minister of finance, and Oracio Chigisola, chairman of the Argentine part of the commission and first deputy foreign minister. Shatalov pointed out that the work on the document had been conducted for about eight years. The convention opens up fresh opportunities for cooperation between the two countries. "The previously existing obstacles to business will be removed," Shatalov emphasized. The convention improves the investment climate and determines how taxes are to be levied on such income as interest, dividends, and license payments. The document also provides for cooperation between the taxation agencies of the two countries, an exchange of information between them, and determines a mechanism to settle contentious issues. (TSK)

Oleg Vyugin, chief economist of the Troika Dialog investment company, announced at a seminar on the Russian loan market that the surplus in the Russian budget may amount to $7 billion by the end of 2001. He noted that part of those funds may be spent for repayment of foreign debt. He also mentioned that, in the event oil prices stay at $22 per barrel in 2002, Russian financial reserves may reach $10 billion by the end of 2002. (JMR)

Russia's Kyshtym Electrolytic Copper Plant has produced its first platinum group metals, the plant's deputy technical director, Viktor Sharabrin, told Reuters. "On 28 September we packed the first five kilos of palladium for shipment and passed it through the necessary certification procedures. The first shipment of platinum has not yet been refined," Sharabrin stated. He said the plant intended to produce 25 kilograms of the metals per month until the end of the year, of which around two-thirds would be palladium and one-third platinum. He added, "The proportion depends on the contents of the metals in the raw materials we have obtained." Kyshtym, situated in the Urals Chelyabinsk region, has installed a facility with a designed capacity of 1.5 tons of platinum metals per year, which permits the extraction of the metals from the waste of other metals production and used catalysts. It will supply the metal to domestic plants producing catalytic converters for automobiles, in which platinum and palladium are used to clean exhaust gases. Sharabrin said the plant expected to increase output of platinum metals to 125 kilograms in 2002 so long as it was able to accumulate sufficient raw-material stocks. (TSK)

The fourth international economic forum Moscow-Invest 2001 is being held in Berlin. Moscow Mayor Yurii Luzhkov is participating in the conference, which was organized by a Moscow-based international business association. The conference focuses on the development of business partnership between the capital of Moscow and Berlin and investment policies and outlooks for foreign investors in Moscow, in particular. (JMR)

The Russian Finance Ministry has sent a draft document on issuing $1.5 billion worth of Eurobonds in November 2001 to secure Russia's Soviet-era trade debt, Prime-TASS news agency reported. The government plans to approve the draft document within a month. Russia's total trade debt amounts to around $4 billion, but the government managed to strike a deal with creditors similar to the one it signed with the London Club of creditors, which discounted the debt by about one-third. Russia will issue two sets of Eurobonds totaling $2.5 billion. The first issue, to be launched this year, will mature in 2006-2010. The next issue will take place next year and will mature in 2007-2030. (JMR)

Russia's government may scrap its 5 percent export tariff on gold starting 1 January 2002. "It seems that there are now no opponents to scrapping the [gold] tariff," the secretary of the government commission for protective measures in foreign trade, Andrei Kushnirenko, told Reuters. The commission will examine ending the tariff, set in April 1999, at an upcoming meeting. Gold producers and banks have lobbied for the abolition of the tariff. The Gold Industrialists Union stated in August that Russia will produce 150 tons of gold this year, up from 143 tons in 2000. Of this, 100 tons will be exported this year compared to around 80 tons last year. If the commission approves scrapping the tariff, its decision will become effective after the prime minister endorses it and it is published in the government gazette, "Rossiiskaya Gazeta." (JMR)

The Rezh nickel plant, an intermediate producer of nickel output, stopped production due to low world-metals prices and high railway tariffs. "September results have shown that we have losses, so we have decided to suspend work," Sergei Paivin, a department head at the plant, told Reuters. He said all the plant's employees will be on vacation until at least 1 November. Rezh, built in 1934 in the Urals Sverdlovsk region, produces matte with nickel content of 12 percent to 14 percent. The matte is processed into nickel by Ufaley, a minor metals producer in the neighboring Chelyabinsk region, on a tolling basis. Ufaley halted nickel output at the end of September due to weak world prices. (JMR)

Russian carrier Aeroflot will weather the slump in global aviation following the attacks on the U.S. with less trouble than its Western peers, the company's chief executive said in an interview. Valerii Okulov told Reuters that Aeroflot had suffered few of the kind of repercussions which have sent many top airlines reeling and was confident of rising revenues. "We are not oriented to a single market. Diversification has allowed us to maintain our stability despite significantly worsened market conditions," he said. "While our major market is Europe, we have significant markets in Russia, Southeast Asia, the Far East, and the Middle East. So the company is keeping its stability." He refused to go into detail about the company's financial performance when asked what year-end figures would look like. "Tentatively, the airline's revenues have grown about 18 percent," he said, declining to give any forecast on profits. Aeroflot, 51.17 percent state-owned, posted a net profit of $8.6 million on revenues of $1.4 billion in 2000. (TSK)

The president of the Sakha Republic (Yakutia), Mikhail Nikolaev, is often compared with Russia's former president, Boris Yeltsin, based on their similar appearances and sometimes daringly impudent acts. On the eve of Yakutia's presidential elections, Kremlin officials are desperately looking for a candidate more suitable for the federal government. However, almost all believe that Nikolaev will win again.

Nikolaev was born in Yakutia in 1937. In 1961, he graduated from a veterinary college in the town of Tomsk. Soon, however, he quit treating animals and became a Komsomol leader with the Yakutia Region Komsomol Committee. After finishing communist finishing school within the auspices of the Communist Party's Central Committee, Nikolaev's political career skyrocketed. Just before the Soviet Union collapsed, Nikolaev was elected chairman of Yakutia's Supreme Council. Until the dissolution of the USSR, Nikolaev remained a fervent communist. Following the August 1991 coup, however, he showed political elasticity and dropped his Communist Party membership.

Nikolaev's friendship with former President Yeltsin was a decisive factor in his political career. They first met when Yeltsin was the head of the Sverdlovsk (now Yekaterinburg) Region Communist Party Committee. Their interests overlapped in the diamond industry. Yeltsin sought diamonds for the Sverdlovsk jewelry plant, and Nikolaev helped supply them. The next time Yeltsin and Nikolaev met was when the former was already Russia's head of state. During his visit to Yakutia, President Yeltsin also met with the mayor of Yakutsk at the time, Pavel Borodin. Yeltsin liked Borodin so much that he offered him a Moscow position almost immediately. Borodin's promotion, in turn, raised Nikolaev's political fortunes. When Yeltsin moved from his apartment on highly prestigious Tverskaya Street to Osenny Boulevard, he gave his Tverskaya apartment to Nikolaev. Along with the apartment, Nikolaev received the Yakutia presidency. He won the regional presidential race in 1991 with 76 percent of the vote.

For 11 years of his presidency, Nikolaev ran an authoritative regime in Yakutia. First of all, Nikolaev changed the name of the region. Yakutia became the Republic of Sakha. Secondly, he sought political independence from Russia and wanted Yakutia-Russia relations to be based on the international legal system. This was quite understandable -- all diamonds from Yakutia went directly to the nation's capital. Nikolaev did not like these business arrangements and called for political sovereignty. A few months later, when Moscow and Yakutia reached an agreement to leave 20 percent of the produced diamonds in Yakutia, Nikolaev announced that he did not want political sovereignty any longer. He stated he would prefer economic sovereignty, as it promised more power along with money. Although a far-away region, Yakutia produces practically all of Russia's diamonds, antimony, and over 20 percent of its gold. According to some observers, Nikoleav has attempted to build an economy in the republic similar to that of the United Arab Emirates -- controlled and regulated by the government and strictly divided. Nikolaev himself controls and allocates huge amounts of money -- $100 million to $200 million moves annually through only one of his numerous funds.

Nikolaev likes to announce that Yakutia will become Russia's outpost in Asia. This is likely one of the reasons why Nikolaev's inner circle calls him "Tsar": A tsar is very distant from his people. It is difficult to meet Nikolaev and his close associates. One deputy of the Russian State Duma said, "A request to meet with Yakutia's president is considered impudent. It is easier to reach [Russian President Vladimir] Putin." Putin's character reportedly inspires Nikolaev, and he aims to duplicate some of Putin's political measures. Following Putin's appointment of regional envoys, Nikolaev decided to do the same. He divided Yakutia into five regions and appointed his own representatives to each of the regions. But while he is a friend to his envoys, Nikolaev cannot befriend the parliament. The publication "Profile" believes this hostility is the result of the parliament's extreme curiosity into his affairs. The deputies often start their own investigations into their president's activities. Those accusations have led to massive misappropriations. Specifically, Nikolaev is accused of establishing public funds for personal use.

One of these funds -- The Fund Of Future Generations -- was established to support the deteriorating ecosystems in the republic. A parliamentary investigation proved that the fund was the founder of private AKA Bank, and the fund's money was used to pay the cell-phone bills of Nikolaev's friends. Another fund -- Children Sakha-Asia -- has a logo, "Everything for the best of our children." The opposition believes that the fund is actively engaged in the tourism business. It has provided loans and credits to "unknown" organizations. The fund's president is Nikolaev's daughter, Olga. But the scandals involving Nikolaev's name never seem to extend beyond Yakutia's borders. Moreover, once started, the scandals dissolve quickly. Some persistent "investigators" have been punished. When the local "Tuimaada Sanata" newspaper published some of the findings of the parliamentary investigations, it was simply shut down without explanation.

Nikolaev spends a great deal of time in Moscow, away from his home region. Some observers believe that Nikolaev has made a number of political mistakes. According to one official in the Kremlin administration, Nikolaev's first mistake was to announce he would not run for a third term. Nikolaev believed he would receive an invitation to work for Putin's administration, but that did not happen. Nikolaev's second mistake, according to some analysts, is his inability to reach consensus with his own parliament. By law, he cannot run for a third term. Nevertheless, the parliament could allow a third term for the regional presidency; but this appears unlikely. Nikolaev's final mistake is that he receives no political support from the federal government. During one meeting with Putin, Nikolaev said that Putin's commission established to keep local legislation in line with federal laws was useless. Nikolaev has said he is "the master" of Yakutia. Such statements are not appreciated by Putin and a reaction can be expected.

These days, the Kremlin is actively searching for a better presidential candidate in Yakutia. According to "Profil," the Kremlin is considering three candidates: Pavel Borodin; diamond-producer Alrosa's president, Vyacheslav Shtyrov; and Russia's deputy prosecutor-general, Vasilii Kolmogorov. Despite severe federal opposition, Nikolaev is believed to be the strongest potential candidate in the upcoming elections. He is called "tsar" for a reason: Nikolaev has the real power in Yakutia. Moreover, the recent gubernatorial elections in the Primorye Region prove that the Kremlin is still powerless against the local "masters." (TSK)

The privatization project that was widely touted as the major sell-off of 2001 has been shelved. Despite a previous agreement, the Russian government has decided not to sell a 6.13 percent stake in oil giant LUKoil to foreign investors. LUKoil also scrapped a plan to offer the company's bonds on Western markets, citing unfavorable market conditions.

Facing a deadline of refinancing Eurobonds due in 2001 to 2003, LUKoil actively campaigned to attract foreign investment by the end of 2001. In an attempt to avoid a direct competition with the Russian government, LUKoil issued shares serving as collateral when LUKoil placed $300 million to $400 million in convertible bonds on Western markets. The issue consisted of 16.6 million ordinary shares. Dutch financing arm LUKInter Finance BV bought the stake for $11 per share. "LUKInter Finance BV was the only bidder for these shares and it won the tender," a spokesman for LUKoil said. The Federal Securities Commission, Russia's main market watchdog, said in a statement it registered the results of the placement on 9 October, the "Russia Journal" reported.

In 2000, the Russian government announced its decision to sell 50 million of state-owned LUKoil's shares. With an expected yield of $600 million to $800 million, the project promised to be the main privatization event of 2001. The agreement raised numerous arguments and controversies between the involved parties. The Russian Fund of the Federal Property (RFFP) broke off relations with the investment bank Credit Suisse First Boston when the fund discovered the bank had provided consultations on the LUKoil sale to both the Russian government and BP oil company.

In 2001, an agreement was reached between the LUKoil and RFFP to coordinate their efforts in the LUKoil privatization deal. The stock was offered for sale on the London Stock Exchange and the listing on the London Stock Exchange was expected to be completed in February 2002. Prime Minister Mikhail Kasyanov told "Vedomosti" that the government will reach a final decision in November. However, on 10 October a LUKoil official stated that the company's bond issue has been postponed until 2002 on the grounds that, "The markets are in bad shape now." He said that LUKoil's decision is firm and independent from the government's project.

The government appears to have agreed with the company decision. "It's better to take a pause right now and not to place [the shares on the market]," a governmental official told "Vedomosti." "However, we do not officially cancel the sale. The sale is supported by an article in the state budget. It is also a part of the privatization program for 2001. The profits are included in the revenue side [of the budget]," the official said. The daily speculates that as long as the government does not suffer a budget deficit in 2001, it will not offer LUKoil for sale. Although the officials are still considering a sale price of $15 per share, the current market price for LUKoil shares is 55 percent lower than expected. Moreover, the market price is less than $10 a share. This is the minimum price limit for companies sold to foreign markets by "Komprivatizatsya," which was chosen to sell LUKoil.

Valerii Nesterov, an analyst at Troika Dialogue Brokerage, believes that LUKoil shares will not rise to $15 per share this year -- and probably not in 2002. "Even if oil prices rise, the price of [LUKoil] shares won't." Nesterov also stated that at this point the government and LUKoil are not in desperate need of money. The latter announced a more than $1 billion surplus in 2001. In 2003, however, when the state budget comes under threat of deficit, this money will be needed by the government, Nesterov said. In financially favorable years, like 2001, gigantic privatization projects do not make much sense, Nesterov concluded. So the title "Deal of a Year" should probably be given to Kuzbasugol (Kuzbas coal), which was privatized with the government's participation for $180 million. (TSK)