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Business Watch: October 23, 2001

23 October 2001, Volume 1, Number 15
UN Secretary-General Kofi Annan and the head of Yukos oil company, Mikhail Khodorkovskii, met for the first time to discuss cooperation between the UN and the Russian oil giant, ITAR-TASS reported. The talks were held at UN headquarters on 12 October. According to Khodorkovskii, UN-Yukos cooperation is very important to the fate of several social projects in Russia. Both sides signed documents as part of the Global Agreement program proposed by the UN secretary-general. Under the agreement, UN specialists will develop several programs in the areas of the environment and human rights. (TSK)

Russian oil company Yukos announced its bid for a further 12.9 percent stake in Anglo-Norwegian engineering group Kvaerner, which would make Yukos the biggest shareholder with 25 percent, Reuters reported. According to a company statement, the shares would be purchased at 15 Norwegian crowns per share. Kvaerner shares closed at 14.50 crowns on 16 October. Yukos CEO Mikhail Khodorkovskii said he would consider purchasing Kvaerner subsidiaries should they be put up for sale in an eventual restructuring of the Anglo-Norwegian group. "Yukos would actively consider purchasing Kvaerner's Hydrocarbons subsidiary and the Process Technology business of Kvaerner's Engineering and Construction division," he said. "Any new issue of shares should also be considered together with other options for the continued financial viability of Kvaerner," he added. Struggling with a bankruptcy threat, Kvaerner is trying to raise 2 billion Norwegian crowns ($227.9 million) through a rights issue. (TSK)

More than 50 companies, mostly Moscow-registered, have bid to participate in a tender for the right to import raw sugar at a discounted import tariff in 2002, Reuters reported. According to the Economic Development and Trade Ministry, the winners will be able to import 3.65 million tons of raw sugar at a rate of 5 percent of the customs value, but no less than 0.015 euros per kilogram, or 15 euros per ton. In the first half of the year, 3.35 million tons may be imported and another 300,000 tons can be brought in during the fourth quarter. The quota will be sold in 146 lots of 25,000 tons each at a starting price of 1 million euros per lot, or 40 euros per ton. Aleksandr Vlasov, an analyst with the Russian Sugar Information agency, said a reasonable price for the first-half quota should not exceed $58. Last year, traders paid $45 to $61 for the right to import sugar within the quota with the lowest prices paid for sugar to be imported in the fourth quarter. That auction brought around $214 million to government coffers and in September the tender commission's deputy head, Andrei Kushnirenko, said he expected the 15 October sale to bring 25 percent to 30 percent more revenues. All raw imports above the quota will be liable to a 40 percent tariff next year, but not less than 120 euros per ton. Russia plans to increase the current 30 percent tariff, but no less than 90 euros per ton, to 40 percent, but no less than 120 euros per ton in the fourth quarter of this year. The tariff can only become effective one month after a resolution setting it is signed by the prime minister and officially published, which has not yet happened. (TSK)

KrasAir, Russia's third-largest passenger carrier, announced talks on acquiring a plane from Airbus or Boeing, Reuters reported. Vladimir Komyakov, the airline's commercial director, stated that KrasAir met with Airbus officials in Moscow for consultations two weeks ago. "We are having regular contacts and are carrying out frequent consultations with Airbus on acquiring an aircraft such as the A320 in the future. But we cannot say we will not be ready to buy it tomorrow," he said. Komyakov said KrasAir officials also discussed with Boeing the possibility of acquiring one of their planes. KrasAir's biggest purchases to date were new Tupolev Tu-204-100 airplanes acquired last November and in July. KrasAir has options to purchase more airplanes from the Aviastar plant in the Volga city of Ulyanovsk over the next four years. (TSK)

Moscow has halted talks on the use of the remainder of a $150 million commodity loan, granted to Yugoslavia in December 1997, due to non-payment of interest, Reuters reported. The loan was to help Yugoslavia's economy recover after a decade of warfare and sanctions under Slobodan Milosevic's rule. It was extended by $30 million last October, following Milosevic's fall, to secure energy imports last winter. "Non-payment of interest on the commodity loan accrued by 15 July has forced Moscow to ban any further talks with Belgrade on using the credit line," said Boris Medvedev, head of the economic department at the Russian Embassy in Belgrade. Belgrade has used $105 million of the funds for equipment in the energy sector, Medvedev added. (TSK)

Russia plans to resume negotiations with the Council of Europe on the export of Russian steel to Europe at the beginning of November, RosBusiness Consulting reported. According to Russian Deputy Economic Development and Trade Minister Maxim Medvedkov, a new agreement between Russia and the Council of Europe will replace an old one expiring in December 2001. He added that the consultations will be held on 16 October on the problems of exporting Russian pipes to Ukraine. Ways to further liberalize bilateral economic relations will also be discussed. However, Medvedkov said the metal workers favor restrictions imposed on the volume of Ukraine's pipe exports to Russia as they begin to bring positive results. (TSK)

Unified Energy Systems of Russia (UES) has succeeded in qualifying to participate in a tender for the privatization of an electricity distribution network in Armenia, RosBusiness Consulting reported. According to the tender commission, UES has complied with the tender terms. Specifically, a participant in the tender should have an annual volume of revenues over $100 million and authorized capital of more than $250 million. A contract on the sale of shares in Armenia's electricity network is expected to be signed between 7 January and 1 February 2002. The investor will be offered 75 percent plus one share in Armenian companies. (TSK)

Gazprom plans to join a consortium of Western companies -- consisting of German Ruhrgas, French Gaz de France, and Italian Snam -- participating in the privatization of the gas industry in the Czech Republic, A&G News reported. The Czech government intends to privatize the national gas-transporting company, Transgas, and also to sell shareholdings in regional gas-distributing companies. The consortium plans to compete for the purchase of 49 percent of the shares of Slovakian State gas monopoly Slovensky Plynarensky Priemysel (SPP), which shares in the ownership of the gas pipeline between Russia and Western Europe. (JMR)

Russia has agreed to provide four long-range Tupolev-22 bombers to India through a lease arrangement, ITAR-TASS reported. Russian Deputy Prime Minister Ilya Klebanov, who is currently visiting India, is expected to sign a lease deal with the Indian government shortly. The Tupolev-22 bombers, which are used by the Russian military to carry nuclear weapons, would substantially increase India's air power and could heighten tensions between India and Pakistan, two nuclear powers who are vying for control and influence in Kashmir. (TSK)

Russian gas giant Gazprom proposed parity privatization of Lithuanian gas retailer and distributor Lietuvos Dues, ITAR-TASS reported. Gazprom's chief executive officer, Aleksei Miller, explained the details of the proposal during a working visit to Lithuania, where he met with President Valdas Adamkus, Prime Minister Algirdas Brazauskas, and parliamentary Speaker Arturas Paulauskas. Gazprom wants the Lietuvos Dues capital to be split into four 25 percent stakes and distributed among future foreign-strategic investor Gazprom, the Lithuanian government, and companies operating in the country's gas market. Miller said this will prevent any of the participants from gaining a blocking stake in the company. It will also guarantee both stable gas supplies to consumers in Lithuania and transit of gas from Russia to the Kaliningrad region, he said. Miller said Gazprom's proposal was not an ultimatum. "We are prepared for an open dialogue aiming to benefit the Lithuanian consumers and promote the effective operation of Lietuvos Dues," he stated. (TSK)

Gokhran, the Russian state's precious-metals repository, will buy fewer than 26 tons of gold from commercial banks this year, Reuters reported. A Gokhran official said the initial purchasing plan was 40 tons, but that was not fulfilled due to insufficient funds. "The Finance Ministry did not have enough funds to carry out planned purchases in August-September," the official said. For the first nine months of 2001, the repository bought 10.3 tons of gold, compared to 10 tons for the same period last year. In 2000, the repository bought approximately 25 tons of gold. (TSK)

The investment potential of Russia's North-West Federal District will be the focus of a conference, "Value Investing in the North-West Region of Russia," on 17 October, Business Wire reported. The conference will be held at the Europa Hotel in St. Petersburg. Conference organizers include Andersen, Russian investment bank NIKoil, the German Business Association in the Russian Federation, international ratings agency Standard & Poor's, and Dresdner Bank. Russian government officials will discuss the current Russian investment climate and the outlook for the region. (TSK)

A Russian governmental commission on 16 October reviewed protectionist measures in trade and customs policy. Finance Minister Aleksei Kudrin chaired the meeting, which discussed the abolition of export taxes on gold and oil, ITAR-TASS reported. The government plans to cancel the export tax on gold because its price on world markets has fallen from $278 an ounce in 1999 to $266 in 2001. Russian gold producers are of the opinion that their fiscal load should be scaled down. The governmental commission will also review a change to the oil-export tax, now 23.5 euros per ton. The commission will also discuss damages to Russian producers of caramel sweets due to expanding exports. A special import tax on foreign-made caramel is expected to be introduced. (JMR)

Russian President Vladimir Putin and visiting Polish President Aleksander Kwasniewski on 15 October cited improving ties between their countries and urged greater cooperation between nations bordering the Baltic Sea. They agreed that the details of building a Russian gas pipeline through Poland will be worked out before year�s end. Kwasniewski believes that Poland "should use its transit potential" between Russia and Europe and "participate in the development of the European trade infrastructure and European trade exchange," ITAR-TASS reported. The two presidents discussed not only oil and gas transit but also "ground roads and border passes between the two countries." Poland hopes that, beyond trade flows from Russia, the transit of goods from Asian countries, particularly China, will also increase. In addition, Putin touched on a key political issue: the future of the Russian enclave of Kaliningrad, which is bordered by Poland. Putin will visit Poland on 16-17 January 2002 to coincide with the anniversary of the liberation of Warsaw from the Nazis. (JMR)

Visiting U.S. Commerce Secretary Don Evans on 15 October praised Russia for implementing reforms in line with developing a market-based economy. He said, "Separately and apart from the [response to the 11 September] horrific attacks, it is obvious to the business community that this country is moving toward a market-based economy," Reuters reported. "Their reforms, their actions demonstrate that they are serious about developing a market-based economy," he added. Evans noted that U.S.-Russian relations have warmed since U.S. President George W. Bush took office. Evans said the U.S. will support Russia's membership in the World Trade Organization (WTO). Evans attended the announcement of the first oil tanker loading from the Caspian Pipeline Consortium's (CPC) $2.5 billion Kazakhstan-Russia pipeline, in which Chevron is lead investor. "The CPC sends an important message to the world that the United States, Russia, and Central Asia are cooperating to build prosperity and stability in this part of the world," he told a news conference. U.S. companies have invested over $1 billion in CPC. He also noted that the second-biggest investor in Russia was Pepsi Co's Frito-Lay snack-foods subsidiary, which is spending $40 million on a new plant to be built in Kashira, south of Moscow. The plant will come on line in 2002. Frito-Lay has already invested $20 million to develop a distribution system that reaches over 70 percent of Russia. (JMR)

The Moscow city government, seeking to raise its stake in municipal utility Mosenergo, wants to hand its heating substations to the utility in return for shares, a city property department official told Reuters. The deputy head of the municipal property management department, Galina Petrova, said a share issue to facilitate the swap was possible. The deputy head of Mosenergo's securities department, Natalya Khokholkova, said earlier that the company was not considering a share issue and did not plan to raise the issue at its next board meeting. Petrova said the city, caught in a deadlock with Mosenergo majority shareholder Unified Energy System (UES) over the CEO's chair, wants to raise its stake from 2.98 percent to 5 percent. "If we have 5 percent, and then we need 10 percent if it becomes worthwhile or politically necessary, we will look into buying shares on the secondary market," Petrova said. UES, Russia's national utility, owns 51 percent of Mosenergo. A new shareholders meeting must be called to replace former CEO Aleksandr Remezov, who was sacked at the instigation of UES in September but has yet to be replaced. UES has said the city government insists on Remezov as its only candidate. (TSK)

Russian Aluminum (RusAl), the country's largest producer of the metal, announced it will lay off 7 percent of its 73,500 employees, Reuters reported. The decision was taken in an attempt to cut costs prompted by lower demand and prices for aluminum and aluminum products. The job cuts include a 25 percent reduction at the company's head office. The company will also make "adjustments" to salaries and bonuses, with bonuses calculated according to production results and market prices. Russian Aluminum was formed by a merger of the largest aluminum-producing facilities in the country. (TSK)

Russia's second-largest primary aluminum producer, SUAL Holding, raised output to 446,700 tons in the first nine months of 2001, a 1 percent rise from the same period in 2000, Reuters reported. The data does not include output by the Nadvoitsy smelter in northwest Russia, where SUAL has a 37 percent stake. Nadvoitsy produced 69,000 tons of primary aluminum in 2000 and plans to raise output to 72,000 tons this year. SUAL produced 1.24 million tons of alumina in January to September 2001, up 5.2 percent from the same period last year. It said the company's total bauxite extraction in the first nine months of 2001 was about 3.35 million tons. SUAL gave no comparative figure for January-September 2000. (JMR)

Until recently, Dmitri Chirakadze, the vice president of MIKOM (Metals Investment Company) and an associate of arrested Mikhail Zhivilo, had only a supporting role on the Russian business and political stage. His biography, however, can be considered something of a thriller. At the age of 25, he became a vice governor in charge of industry in the vast Kuzbas area of Siberia. When his business interests came into conflict with those of his business competitors, he received a clear message to stop. Apparent hitmen attacked Chirakadze near his apartment and stabbed him eight times in his neck and chest. He survived, miraculously, and even redoubled his business vigor. Some observers believe that, having survived all the ordeals of contemporary Russian businessmen, Chirakadze might become a leading player among the Russian business elite.

Chirakadze was born in Moscow in 1970. Within two years, Chirakadze's parents had divorced and his father Zurab, an 11th-generation Grand Duke of Georgia, kidnapped him in defense of the "traditions of his nation" and the belief that a boy should be raised by his father. Hidden from his mother, Dmitri spent two years in Kutaisi with his father's relatives. The family dispute was resolved by the Communist Party Committee of a large automobile plant, where Dmitri's father worked. The party prevailed over "national traditions," and Dmitri was returned to his mother in Moscow. After graduating from a university in Moscow, Chirakadze served in the Soviet army. When he returned, he enrolled in law school. Chirakadze never completed law school, however, giving preference to the idea that life itself is the best education.

Chirakadze's career might have been very different if he had not happened to meet Yuri Zhivilo, the elder brother of the future MIKOM president. They met one morning in an ice pond, where both practiced swimming in the freezing waters of one of the Moscow's parks. Soon, Mikhail Zhivilo invited Chirakadze to join the newly created MIKOM. When people ask if he had any expertise in the aluminum industry when he came to MIKOM, Chirakadze laughs, "Who understood anything at that point? We just made things happen." Zhivilo chose to begin operating for MIKOM at the Novokuznetsk Metallurgical Plant (NKAZ). An army of "red" directors at NKAZ was "dying but not giving up their positions." They reportedly battled against the team of entrepreneurs who came to revive the decaying industry after years of inefficient Soviet economic policies. Few believed things could change. Soviet-style "coal generals" said about Chirakadze, "What can this youngster do?" Chirakadze had little time to pay attention to any criticism, but he inspired at least some to believe that things could change. According to an official within the regional administration, Chirakadze lifted the industry off its knees. Chirakadze's NKAZ paid its workers' wages on time, which was rare in the region.

At some point, Chirakadze's calls for profitability and competitiveness offended some other businessmen. One night, when Chirakadze arrived in Moscow from Kemerovo to visit his mother, he was attacked near her apartment. First he was hit with a metal pipe; once he passed out, the assailants stabbed Chirakadze eight times in his neck and chest. But he more than survived the attack; he seemed to return stronger than ever.

Meanwhile, MIKOM ran into business problems in the region when Communist Aman Tuleev became the new governor of Kemerovo. He called MIKOM's team "fat Moscow cats." Local police tried to arrest Zhivilo for financial wrongdoing before he managed to escape and fled to Moscow. When a murder plot against Tuleev was revealed, Zhivilo and Aleksandr Tikhonov, a Russian Olympic champion, were named as primary suspects. Zhivilo left Russia, and Chirakadze became MIKOM's acting president. Throughout the arrests of senior MIKOM managers suspected of plotting Tuleev's assassination, Chirakadze remained untouched. Some speculate this happened because he rarely signed financial documents.

Shortly before Zhivilo left Russia, another scandal involving MIKOM and NKAZ erupted. Negotiations were conducted between MIKOM and Oleg Deripaska's Sibirski Aluminum, also a NKAZ shareholder. The talks focused mainly on the division of power and profits. Zhivilo wanted MIKOM to run NKAZ and profits to be distributed according to shareholdings. Deripaska disagreed with such an arrangement. Unexpectedly, MIKOM lost control over NKAZ. The plant was declared bankrupt and ownership was transferred to the management of Sibirski Aluminum and then Russian Aluminum. NKAZ's U.S. trading-company partners -- Base Metal Trading SA, Base Metal Trading Ltd., and Alucoal -- filed a $2.7 billion lawsuit with a New York district court. Sibirski Aluminum, Russian Aluminum, and Mikhail Chernoi -- the main shareholder of both companies and a reputed Russian criminal boss -- along with Oleg Deripaska were accused of fraud, murder, money laundering, and corruption. The lawsuit was filed because the plaintiffs claimed to have lost sales contracts for Novokuznetsk metals and thus proved unable to return money they had lent to NKAZ as a result of the declared bankruptcy. According to "Profil" magazine, U.S. Secretary of Treasury Paul O'Neil was Zhivilo's partner, and his name came up during the investigation. The magazine speculates that, with all these big names involved, any court decision will be purely political. Those allegations, no matter how doubtful, remain popular among the conspiracy-hungry public.

According to "Profil," the Bush administration is more willing to cooperate with the new Russian business elite than with the old Yeltsin team. On the other hand, Putin's team is also willing to discard Yeltsin's oligarchs. As a result, the magazine asserts, MIKOM became sits at the crossroads of geopolitical interests. As officials in New York investigate the business deals of Zhivilo's associates, Chirakadze continues to work as MIKOM's president. Considering Putin's need for new business leaders, Chirakadze's career might be facing exciting new turns. (TSK)

Prosecutors from California have again postponed court hearings in the case against Ukraine's former prime minister, Pavel Lazarenko. Ilya Kolosov, a Ukrainian political analyst, believes the decision was influenced by the Russian Federal Security Service (FSB) and the Russian Prosecutor General's Office.

According to the Agency of Political News (APN), new evidence revealed by the investigation prompted a delay in the trial against Lazarenko, accused of embezzlement and the illegal transfer of $300 million to foreign bank accounts. APN believes Ukraine's former deputy prime minister and the leader of the opposition Batkivshchina party, Yulia Timoshenko (who was also a long-time commercial partner of Lazarenko's), is the focus of the investigation. In Ukraine, Timoshenko is accused of committing financial misdeeds. Meanwhile in the U.S., officials drew attention to the Moscow links of the "gas princess." Specifically, investigators are seeking evidence concerning Timoshenko's ties to former Gazprom Chairman Rem Vyakhirev and some of Gazprom's top managers close to Vyakhirev. Along with Timoshenko, they will reportedly be summoned for questioning.

This is not the only lawsuit involving Lazarenko and Timoshenko. The Russian Prosecutor-General's Office has not closed the so-called "$450 million case." Most of this money -- from the Russian Defense Ministry budget -- disappeared in 1997 and 1998 after a number of complex deals between Gazprom, NRB and Imperial banks, Unified Energy System of Ukraine (UESU), and the Russian Defense and Finance ministries. At that point, UESU was under Lazarenko's control and Timoshenko was company president. Gazprom officials believe that prosecutor's office sent information on this and other related cases to their U.S. counterparts investigating the origin of the "Ukraine millions." APN speculated that all this will lead U.S. officials to the conclusion that Timoshenko was a corrupt link between Lazarenko and Gazprom.

It appears that the new Gazprom team, consisting mainly of former FSB officers, is looking for any evidence that could be used against the old Vyakhirev team. That view is bolstered by recent controversy over the deputy chairman's seat on the Gazprom board of directors. The deputy chairman is in charge of the company's financial inflows. As soon as Vyacheslav Sheremet left, Gazprom head Aleksei Miller handed the position to Petr Rodionov, an influential member of Vyakhirev's team. In less than two months, however, Miller decided to give the position to his deputy, Vitali Savelyev, a representative of the St. Petersburg financial elite. Rodionov kept the post of first deputy chairman, which gives him status but virtually no real power. Some rumors have it that this was compensation to Rodionov for revealing to the new Gazprom team the secrets practiced by Vyakhirev's team on how the company's assets were illegally transferred to other companies and financial networks.

APN asserted that putting Timoshenko under fire was part of a raft of confidential political agreements concluded between Russian President Putin and Ukrainian President Kuchma during their meeting in Kyiv on 23 September. Unlike other opposition parties in Ukraine, Batkyvshchina is not battling financial problems. Some observers believe that, in the 2004 presidential elections in Ukraine, Batkyvshchina will introduce and promote popular former Prime Minister Viktor Yushchenko as an effective counterweight to Kuchma and incumbent Prime Minister Anatolii Kinakh. Some believe that if he wins, Timoshenko will be appointed prime minister. Other Intercon sources doubt that scenario and point out that friction between those two is high. One Ukrainian said flatly that Timoshenko is finished, politically.

Keeping all this in mind, the investigation into secretive commercial deals between UESU and Gazprom's old team may prove beneficial for Gazprom's St. Petersburg team as well as the Kremlin. The former will be able to rid itself of Vyakhirev's old associates, while the latter will be provided a good chance to support the Kuchma administration in Ukraine.

As far as Timoshenko is concerned, her current political standing is shaky and uncertain, speculates. Under the threat of criminal investigation in Ukraine, Timoshenko turned herself from the only female oligarch in the vast territory of the Commonwealth of Independent States into a political opposition figure -- "suffering for her belief." At first, the West was quite tolerant of her new political image. However, Timoshenko's radical political ideas (when compared to those of Yushchenko), her questionable business reputation, and links with corrupt officials seem to have turned the West's opinion upside-down. In a new game for the political future of Ukraine -- while Moscow supports Kuchma and Washington supports Yushchenko -- Timoshenko appears to be an unwelcome player. Moreover, concludes, Timoshenko's long history is likely to haunt her as investigators in Russia and the U.S. gather evidence. (TSK)