6 November 2001, Volume 1, Number 17
OIL & GAS
SAKHALIN OIL AND GAS DEVELOPMENT DEEMED COMMERCIALLY FEASIBLE (30 October)The international consortium exploiting the Sakhalin oil and gas fields in the Russian Far East has declared the project commercially feasible, Kyodo News Service reported. According to the Economic Development and Trade Ministry, Sakhalin-I project is expected to produce 250,000 barrels of crude per day, starting at the end of 2005. The commercial exploitation is estimated to involve $12 billion in investment over the next 30 to 40 years. If realized, it will be the largest foreign direct investment in Russia. Japan National Oil Corporation and Exxon-Mobil each hold a 30 percent stake in the consortium. Russian and Indian companies hold the rest. Covering the Chayvo, Odoptu, and Arkutun-Dagi fields, the project is expected to help Japan secure a stable oil supply with less reliance on the Middle East. Estimated deposits amount to 2.3 billion barrels of crude oil and 510 billion cubic meters of natural gas, equivalent to 1.4 and 7 times Japan's annual consumption. Exploitation of the deposits off the northeastern coast of Sakhalin was initially proposed in 1972, the ministry said. (TSK)
ECONOMIC NEWS & BUSINESS STATISTICS
LUKOIL TO ACQUIRE NORSI-OIL (31 October)LUKoil-Volganefteprodukt, a subsidiary of Russia's LUKoil, will acquire NORSI-Oil with the latter giving up its trademark, RosBusiness Consulting reported. According to LUKoil President Vagit Alekperov, approval could come at a NORSI-Oil board meeting on 15 December. The president of NORSI-Oil, Vadim Vorobyev, is expected to become the head of LUKoil-Volganefteprodukt. He will represent LUKoil's interests in the Nizhnii Novgorod region, Alekperov said. LUKoil-Volganefteprodukt will consist of NORSI-Oil, the Nizhegorodnefteprodukt retail oil company, Vladimirnefteprodukt, Mariynefteprodukt, LUKoil-NN, and several financial and insurance companies. (TSK)
RUSSIA-ARMENIA COOPERATION TO GROW (27 October)Agreements on economic cooperation between Russia and Armenia are expected to be signed in Moscow in early November, ITAR-TASS reported. According to Serge Sarkisyan, Armenia�s defense minister, the documents will include an agreement on the transfer of Armenian enterprises to Russia or the establishment of joint-venture enterprises with Russia in repayment of Armenia's debt to Moscow. Sarkisyan co-chairs the intergovernmental commission for economic cooperation with Russia. (TSK)
RUSSIAN BUSINESS ABROAD
SIBNEFT TO DISCUSS INTERIM DIVIDENDS (30 October)Sibneft oil company's board of directors will discuss the payment of regular interim dividends at a board meeting on 12 November, RosBusiness Consulting reported. According to an official at Sibneft Press Service, management will recommend paying out $330 million to $370 million in dividends. Sibneft President Yevgenii Shvidler confirmed the company's policy of returning funds not included in investment projects to shareholders. The company will continue the large-scale investments in oil production that makes it Russia's leading company by the output growth. At the same time, Sibneft will optimize the ratio between borrowed capital and its own capital, Shvidler emphasized. As reported earlier, Sibneft announced a payment of 17.97 billion rubles (about $612 million) in interim dividends in August, the highest figure in Russian corporate practice. In October 2000, Sibneft for the first time paid $50 million in dividends. (TSK)
UMMC TO PRODUCE ZINC STARTING IN 2004 (29 October)Urals Mining and Metals Company (UMMC), Russia's second-largest copper producer, plans to commission a zinc refinery with an annual capacity of 150,000 tons by the end of 2004, Reuters reported. "The electrolytic zinc division will be built tentatively in three years," the company�s technical director, Konstantin Plekhanov, said. UMMC planned to start producing zinc and lead cathodes in 2000, but had to suspend the projects due to weak world copper prices. Plekhanov declined to comment on the fate of the firm's plans for lead. He said half of the 150,000 tons of zinc the company planned to produce each year would be refined from its own copper-output waste. The rest will be produced from acquired raw materials, including scrap. By year's end, the firm will prepare a feasibility study for the refinery, which will be built in a copper-foil workshop at UMMC's Uralelectromed plant. "I think in 2002 we will pay very serious attention to this problem," Plekhanov said. "We will try solving it with our own money, but if we don't have sufficient resources, we will have to start looking for investments." (TSK)
RUSSIA NOT TO RESUME PALLADIUM EXPORTS UNTIL 2002 (1 November)Russia , the world's major palladium supplier, is unlikely to resume exports of palladium until mid-2002, Reuters reported. According to Deputy Finance Minister Valerii Rudakov, "We are going to return to this [palladium] market when it becomes possible. But our forecast for palladium is pessimistic until at least the middle of next year." Russia's palladium stocks are held by the country's metal producer, Norilsk Nickel, the central bank, and the state precious metals and gem reserve Gokhran. Accounting for around 70 percent of all world supplies of palladium, Russia left the market due to weak world prices for palladium, which is used in catalytic converters to cleanse exhaust gases. The first deputy chairman at Norilsk Nickel, Yurii Kotlyar, said that, "Sales-volumes under long-term contracts are so small that they are not even worth mentioning." (TSK)
INTERROS GROUP BUYS FARM ASSETS (30 October)Agros, a farming branch of Russia's financial and banking group Interros, has acquired grain company Roskhleboprodukt and pig-breeding and grain-trading company Contract Holding, Reuters reported. Interros said earlier it plans to make Agros a vertically integrated structure that would control a major chunk of the grain, poultry, and pork markets. It said it will invest $50 million in Agros and will seek $200 million for the purchase of technology and equipment. According to Agros President Dmitrii Ushakov, the company's new assets include grain mills, silos, and animal-feed plants in various parts of the country, as well as several pig and poultry farms and trading companies. "Roskhleboprodukt will be the head company, which will manage this business," Ushakov said. Roskhleboprodukt was created in 1992 from the former ministry in charge of grain procurement in the former Soviet Union. Roskhleboprodukt acted as a government agent for distributing food aid from the European Union and the U.S. in 1999 and 2000. Interros, one of the country's largest groups, controls the metals giant Norilsk Nickel, major bank Rosbank, several machine-building plants, and its stakes in gas projects and media holdings. (TSK)
RUSSIA MAY GET EXEMPTION FROM ANNUAL EMIGRATION TEST (26 October)The Bush administration has started consultations with Congress on removing Russia and six other former Soviet republics from the list of countries for which the U.S. links normal trade with emigration policies, State Department spokesman Richard Boucher stated. According to Reuters, under the Jackson-Vanik amendment passed in 1974 during the Cold War, the Soviet Union and other communist countries could not have normal trading relations with the U.S. unless they could show that they did not restrict emigration. The requirement to pass the annual test has been a regular irritant in trade relations with Russia and abolishing the requirement would be a gesture of goodwill toward Russian President Vladimir Putin, a U.S. official said. Boucher said the six other countries which the Bush administration wants off the list are: Armenia, Azerbaijan, Kazakhstan, Moldova, Tajikistan, and Ukraine. Georgia and the three Baltic countries have already been exempted. In practice, the U.S. has certified in recent years that the countries have open emigration policies. (TSK)
KARACHAGANAK MAY STAY SHUT UNTIL 2002 (26 October)A tax wrangle shutting off oil and gas supplies from the Karachaganak field in Kazakhstan may keep it closed until 2002, threatening the output targets of Britain's BG, Reuters reported. Gas and oil producer BG derives 20 percent of its production from the field. The company told analysts in September the facility would need to be back on stream by the end of October, if its output targets were to be met. But project partner ChevronTexaco stated the field could be out of action until next year. Karachaganak was shut down for maintenance in mid-September and did not restart due to a dispute over VAT double-charging between the governments of Kazakhstan and Russia, which imports the output. Karachaganak last year produced 18 million barrels of oil equivalent of crude oil, gas, and condensate for BG and its partners: Italy's ENI, ChevronTexaco, and Russia's LUKoil. But the partners believe the field has the potential to become one of the world's "elephant" fields with billions of barrels of oil equivalent in liquid and gas reserves. BG's house broker, ABN Amro, said a shut-in until next year would cut BG's 2001 projected production by about 15 million barrels per day (bpd) to 290 million bpd, representing 3 percent growth on last year's 280 million bpd, compared with expectations of 8-9 percent. (TSK)
NORILSK TO EARN $2 BILLION FROM PLATINUM SALES 2001 (1 November)Russia's Mining and Metals Company (MMC) Norilsk Nickel hopes to earn about $2 billion from selling platinum group metals in 2001, First Deputy Chairman Yurii Kotlyar told Reuters. "This will allow us to fulfill all our obligations, to pay taxes and compensate the situation on the nickel market." According to Kotlyar, MMC also plans to increase its market capitalization to $10 billion from $2 billion. The company is completing share-restructuring in which shares in Norilsk are swapped for MMC shares. "The restructuring will be over by the end of the year. We are counting on getting a listing at the London [Stock] Exchange and probably on other exchanges," Kotlyar said. He added the company plans to distribute profits equally among its shareholders. (TSK)
RUSSIA TO SUPPLY ELECTRICITY TO N. KOREA (30 October)Russia and North Korea reached an agreement to discuss Russia's proposal to supply electricity to North Korea, Kyodo News Service reported. The plan calls for building a 30-kilometer power grid linking the Russian border town Khasan and the North Korean power system, as well as for supplying electricity from a power plant operated by Vostokenergo, a Russian regional power utility based in Khabarovsk. North Korea is facing a severe shortage of electricity. If the project is realized, it would likely increase Russia's influence on the Korean peninsula. The sources said Russia and North Korea plan to meet in November in Vladivostok to discuss the amount of power to be supplied, the price, and the methods of payment. Given Pyongyang's shortage of hard currency, it is possible that barter arrangements will be discussed. Russia also offered to help North Korea modernize its aging power lines. While Russia's Far Eastern coastal area around Vladivostok has been facing chronic power shortage, Russia says it has excess power supply capability in the Khabarovsk region and in the Amur region, where a new hydropower power plant is scheduled to be completed by summer 2003. (TSK)
FOREIGN INVESTMENT IN RUSSIA GREW BY 15 PERCENT (31 October)The total volume of investment to Russia from January to August 2001 grew 15 percent on the same period last year, ITAR-TASS reported. According to Deputy Prime Minister Valentina Matviyenko, the volume of foreign capital accumulated in the first half of 2001 totaled $33.8 billion. She believes the increase of foreign investment into the non-financial sector of the economy is encouraging. In the first half of 2001, Russia received $6.4 billion in investment, which is nearly a 40 percent increase year-on-year. Matviyenko said direct investment rose to $2.5 billion and went mainly into trade, transport, and the food and fuel industries. The total sum of direct investment into these branches made up $1.6 billion, or 64.4 percent, of all direct investment. (TSK)
ALROSA, TNK TO ISSUE BONDS IN NOVEMBER (1 November)Russia's diamond monopolist, Alrosa, is going to issue bonds worth $16.84 million starting from mid-November, RosBusiness Consulting reported. Coupon payments will be made every quarter. The bonds are expected to be floated via an open subscription on MICEX. Tyumen Oil Company (TNK) is going to issue roughly $101 million in five-year bonds in November. Oleg Surkov, deputy head of the TNK economic and financial department, announced the bonds will be issued with semiannual coupons of 15 percent. In 2002, TNK is planning an issue of eurobonds worth up to $500 million. The volume of this issue will hinge on market trends. (TSK)
RUSSIA�S ENVIRONMENTAL & HUMAN RIGHTS SEMINAR IN WASHINGTON (31 October)The Center for Democracy, the Kennan Institute for Advanced Russian Studies, and the Center for Russian Environmental Policy (CREP) will co-host a seminar, "Environment and Human Rights in the Russian Federation" on 6-7 November, PR Newswire reported. The event will take place at the Kennan Institute of the Woodrow Wilson International Center for Scholars in Washington. The seminar will feature several prominent Russian officials and experts, including Human Rights Commissioner of the Russian Federation Oleg Mironov, Retired Naval Captain Aleksandr Nikitin, Director of the St. Petersburg-based Coalition on Environment and Human Rights, and Aleksei Yablokov, CREP President and a former adviser to President Yeltsin on the environment and public-health issues. U.S. policy-makers, NGO leaders, and academic experts will join discussions on the relationship between environmental protection and human rights, freedom of information and association, the status and implementation of environmental law in Russia, and the international dimensions of environmental human rights. (TSK)
RUSSIAN-TURKISH BUSINESS COUNCIL MEETS IN KAZAN (1 November)At its ninth session in Kazan on 1 November, the Russian-Turkish Business Council (RTBC) will discuss ways to expand economic cooperation between the two countries, ITAR-TASS reported. Over 300 participants are expected to attend the session, organized by the Russian Ministry of Economic Development and Trade and the RTBC. The chairman of the Turkish-Russian intergovernmental economic commission and Turkey's minister of state, Yilmaz Karakoyunlu, said the Turkish delegation will consider joint projects in chemistry and oil processing. The Blue Stream project is one of the most important subjects on the forum's agenda. When realized, the project will provide for gas supplies from Russia to Turkey through a pipeline laid on the Black Sea bed. Turkey also expressed interest to the production of the Kazan Helicopter Manufacturing Plant. Ten Kazan-made helicopters are currently in use by the Turkish army. (TSK)
RUSSIA HOPES FOR GOOD WTO TERMS (30 October)Russia hopes for favorable conditions to join the World Trade Organization (WTO) due to its support for the U.S.-led antiterrorism coalition, Reuters reported. According to Finance Minister Aleksei Kudrin, "The number of favorable factors for joining the WTO is now maximal: economic growth...and politically favorable relations after 11 September events, the understanding that we have a lot in common." "Political support to get terms which are comfortable for Russia makes our plans realistic," Kudrin stated. Kudrin said Russia would boost efforts to join the global trade body. He believes that 2003 or 2004 would be realistic for Russia to join the WTO. "This is the time when we are technologically ready to join," Kudrin said. He added that local businessmen should not worry about foreign competition after WTO entry. Russia has been in entry talks with the WTO since 1993. (TSK)
RUSSIA EYES VAT CUT TO 16-17 PERCENT IN 2002 (30 October)Russia is considering slashing value-added tax (VAT) from 20 percent to 16-17 percent next year on most goods, Reuters reported. "We are pursuing the line of lowering VAT. If we give up lower rates [on certain goods] and tax breaks, we could introduce the 16-17 percent [rate]," Deputy Finance Minister Sergei Shatalov told an international forum of businessmen and economists. "I think next year we will be able to make such a proposal to the Duma." VAT on some foodstuffs is 10 percent, including sugar, meat, fish, and dairy products. (TSK)
WHO IS IN? WHO IS OUT?
KUKES TO CO-CHAIR ADVISORY COUNCIL (29 October)Simon Kukes, president and CEO of Tyumen Oil Company, has been appointed co-chairman of the bilateral advisory council of the Center for Russian Leadership Development at the U.S. Library of Congress. According to PR Newswire, the center administers the "Open World" Russian Leadership Program, which the U.S. Congress authorized and has funded since 1999 to foster mutual understanding and to improve relations between Russia and the U.S. The bilateral corporate advisory council was established to represent equal leadership and representation from Russia and the U.S. A U.S. co-chairman is to be announced shortly. Both co-chairs will take leadership roles in raising private funds to match federal appropriations in support of the program. Kukes has already committed Tyumen Oil to a contribution of $500,000 during each of the next three years, the first major donation from the Russian private sector to this program. "We expect that these exchanges of knowledge and experience will improve the business climate and further enhance political relations between Russia and the U.S.," Kukes said. (TSK)
WHAT�S UP? WHAT�S DOWN?
METRO AG OPENING JOBS IN MOSCOW (31 October)German retailer Metro is expected to open two wholesale outlets in Moscow on 1 November creating 1,000 jobs and making it the first of the world's top-five retailers to set up shop in Russia, Reuters reported. Metro said it planned to open a further three Cash & Carry outlets in Moscow and employ more than 2,500 employees in total in the Russian capital by late 2002. "We are coming to Russia as fair trading partners," Metro CEO Hans-Joachim Koerber said. "We will strive for very close cooperation with local manufacturers, businesses, and tradesmen." The group, which operates retail outlets in over 20 countries including China, Turkey and Morocco, said international sales rose to 43.9 percent of group sales from 41.7 percent in the first nine months of the year. Stung by declining margins in its mature home market, the company has said it aims to increase international sales to over 50 percent of group sales. Metro, which employed 185,000 workers at the end of June, is the world's number-five retailer by turnover. (TSK)
GLEB PAVLOVSKII: THE KREMLIN'S 'BLACK PR' CHIEFGleb Pavlovskii is among the most influential Russian politicians and is probably the only one who never confirms or denies his involvement in any political scandal. Instead, he enigmatically smiles in a belief that more rumors will produce greater respect, fear, and prosperity. In terms of general public opinion in Russia, Pavlovskii has participated in every major political event in recent years -- the 1996 political rise of Chubais; the 1996 Yeltsin re-election and his following resignation; Putin's appointment as Yeltsin's successor; Putin's victory over the Luzhkov-Primakov alliance; the unleashing of the second Chechen offensive; and the creation of the Unity party. Recently, speculation has also linked Pavlovskii to the creation of the Eurasia Movement of Aleksandr Dugin. In typical fashion, Pavlovskii has created a public movement to test certain theories and notions that might be incorporated into the Kremlin�s political formulations.
According to the magazine "Profil," however, Pavlovskii has not masterminded any political movement, faction, or political campaign. He does not "build anything because he does not have the building tools." Pavlovskii is a public relations- and image-maker, goes that line of argument. Others describe him more bluntly as a manipulator of public opinion. He "predicts things, and does it precisely," "Profil" said. Pavlovskii's uncanny skill even creates the impression that Russia lives by the scenario that he wrote back in the 1970s due to a good knowledge of history and freedom from "intelligence superstitions." According to "Profil," Pavlovskii was the only one who predicted Russia's fate -- from the empire, through the last decade of destruction to the new government structure, and new imperial ideology.
Pavlovskii was born into a family of construction engineers in 1951. As a student of history at Odessa State University, he and his friends created an organization called Subjects of Historic Activity. They dreamed of real socialism, equality, and brotherhood. In 1976, Pavlovskii came to Moscow "to change a biographical identity of an Odessa citizen." For some years, he labored as a construction worker. In his free time, Pavlovskii published a prohibited "samizdat" magazine called "Poiski" ("Search"). In the late-1970s, Pavlovskii's life resembled that of a romantic revolutionary. He described his dissident approach to life in the Soviet Union as hopeless. "No new ideas, [a feeling of] shame to leave the country, but no direction to go. An animal sense of deadlock -- being locked into your own biography. I decided to run away from my biography." This dissident escapism in the Soviet Union often ended in immigration or suicide. But Pavlovskii's "running away from my biography" resulted in his arrest on political grounds in 1982. He pleaded guilty and, instead of imprisonment, Pavlovskii was deported from Moscow to the northern republic of Komi.
In the early years of perestroika, Pavlovskii was granted permission to return to Moscow. He did not have a job and, generally, found himself unwelcome. Local dissidents did not let him back into their circle, accusing Pavlovskii of KGB connections. Tired of rejecting these accusations, he developed a new image built on "swaggering cynicism and intellectual epatage." He also decided to become an insider -- "a man inside the power [of the Kremlin]." With the collapse of the Soviet Union, there remained very few people who did not believe in change. Pavlovskii considered himself a strong pro-statesman, and he severely criticized Yeltsin's "anti-people regime," especially firing on the parliament in 1993. However, Pavlovskii said, "When I felt that our intellectual society turns from Yeltsinism to total anti-Yeltsinism, I immediately had a reverse reaction -- 'No way, I am not following this herd [mentality].'"
In 1996, Pavlovskii became involved in the creation of "a positive image" for President Boris Yeltsin. Soon Pavlovskii was nicknamed the Kremlin's "Black PR" specialist. "Back in 1995, there were only two people who believed that Yeltsin could be re-elected -- Chubais and me," Pavlovskii claimed. After Yeltsin's triumphal re-election, Pavlovskii continued serving the highest power in Russia in its struggle with the oligarchs. From time to time, Pavlovskii would manufacture public scandals involving some big names. However, his popularity skyrocketed in part due to Internet journalism, which began appearing in Russia in 1996. Pavlovskii was the creator of vesti.ru. He created and became editor in chief of the "Russian Journal" website. He exerts strong influence over smi.ru and the Kremlin's strana.ru websites. Pavlovskii became one of the most prominent figures influencing Internet development in Russia. He appears to have an instinct for success. This feeling, albeit with some advice from Yeltsin's daughter, Tatyana Dyachenko, brought Pavlovskii into a new political campaign in 1999.
In 1999, Pavlovskii made a move that surprised almost everybody -- he started to convince "The Family" (Yeltsin's inner circle) that the time had come for Yeltsin to resign and hand over his power to then-Prime Minister Vladimir Putin. "Project 'Leaving Yeltsin' existed for three years," Pavlovskii later said. "From the very beginning, Putin was considered as a potential successor, but many were pushed off by his specific background." Pavlovskii was not put off by Putin's KGB background. Moreover, rumors spread that Pavlovskii had developed a plan for a successful offensive in Chechnya. Some even said that Pavlovskii was behind the 1999 bombings of apartment complexes in Moscow. According to Pavlovskii, "the consequences of these bombings were unpredictable. The nation could unite around Putin or it could cast blame on the Kremlin." Luckily, Pavlovskii was playing on the Kremlin side back in 1999.
Putin granted Pavlovskii a long-awaited opportunity to influence Kremlin decision-making through the Fund for Effective Policies. So what's the secret of Pavlovskii's success, many wonder. Pavlovskii would never respond to such a question. Those who know him believe that his background in history combined with cynicism and a rare skill for manipulating information are the keys to his success. Often appearing in the media, Pavlovskii has become something of a political star these days. According to some rumors, he is writing a book.
"Profil" believes that in the same manner that he "created" an Internet network in Russia, Pavlovskii is creating a safety net that will come in handy when a not-so-grateful president decides he no longer needs Pavlovskii's advice. (PMJ, TSK)
YUKOS WANTS TO HELP, KVAERNER WORRIESEarlier this month, a leading Russian oil company, Yukos, increased its stake in struggling Anglo-Norwegian engineering group Kvaerner from 12.1 percent to 22 percent and agreed to pay $100 million for two London-based units of Kvaerner. These units provide services to Yukos oil fields in Western Siberia. The prospects of bankruptcy have motivated Yukos to consider additional steps to secure Kvaerner�s future. Yukos announced it was considering measures to help Kvaerner through its current financial difficulties, including purchasing new shares. "We think our investment in Kvaerner has prospects, but the company has to begin deep restructuring including the possible sale of non-core and unprofitable assets," Hugo Ericsson, the head of Yukos' international department, told Reuters. Ericsson declined to say which Kvaerner assets Yukos considered to be non-core or unprofitable.
Yukos, the second-largest oil company in Russia and 26th among Eastern Europe's top 100 companies, is reaching out to lend a hand to the financially troubled Angelo-Norwegian engineering firm Kvaerner. Yukos posted a net profit of $3.2 billion in 2000 and is well-positioned to expand its reached westward.
With its coffers filled with cash, Yukos has engaged in a buying spree that has focused primarily on its plans for the Chinese market. In January 1999, Russia announced plans to build an oil pipeline from Siberia to Beijing. The estimated cost of the project was $1.7 billion. Kvaerner's engineering capabilities factored into this massive 1,700-kilometer pipeline. The prospect of supplying 20 million metric tons of crude per year or 400,000 barrels a day to China has motivated Yukos to make investments. It has acquired stakes in Western engineering firms like Kvaerner. It has also invested in the Angarskaya Neftekhimicheskya Kompaniya, the largest refinery in Siberia. Yukos, which operates in 22 Russian cities, is reportedly responsible for 3.5 percent of Russia's gross domestic product (GDP). Oil companies in general account for up to 40 per cent of Russian GDP.
Yukos spearheaded efforts to develop the 600,000-barrel-a-day pipeline to China from Angarsk. With production on the rise and the price of oil up, Yukos is aggressively planning for the future. Last year, Yukos produced 49.6 millions tons of oil, accounting for an 11 percent increase in production. It expects to produce 56.5 millions tons of oil this year -- representing a combined 1.1 million barrels of oil per day. Yukos has plans to further expand production and will be well-positioned to take over the lion�s share of future Chinese oil distribution. The amounts of oil to be delivered to China could rise from approximately 20 million tons of crude in 2010 to 30 million tons in 2020. Today, China only imports 25,000 barrels per day from Russia. Meanwhile, according to the International Energy Agency, China�s appetite for oil will expand to 11 million barrels per day by 2020.
With activities in 35 countries and 35,000 employees, Kvaerner is currently seeking to refinance debt and plans to issue up to 2 billion Norwegian crowns ($224 million) in new shares to secure fresh funds. According to AP, Kvaerner expanded aggressively in the 1990s to become Europe's largest shipbuilder. It also bought Britain's Trafalgar House Ltd. in 1996. However, it ran into trouble with heavy losses in 1998 and 1999 and a plummeting share price that forced major restructuring including the sale of many of its shipyards. Kvaerner returned to profitability in 2000, but in October it announced a net loss of 4.1 billion crowns ($460 million) for the first nine months of this year versus a profit of 259 million kroner in 2000.
Some analysts believe Yukos might abandon the idea of supporting Kvaerner because the Russian company was interested only in its service units, Reuters reported. When Mikhail Khodorkovskii, head of Yukos, met Harald Arnkvaern, chairman of Kvaerner, in Oslo last week, he did so against a background of Cold War-style hostility, the "Financial Times" reported. When Yukos was simply a large Kvaerner customer, relations were healthy. With the acquisition of a 22 percent stake in the group, it has struck a national chord of suspicion about the Russians' motives, echoed in aggressive Norwegian media reports. For those discovering Yukos for the first time, there are plenty of skeletons relating to its past operations that trigger concerns, as there are at many Russian companies that emerged in or survived the 1990s. But for those who have observed the evolution taking place within Russia, there is a more positive slant that makes any final judgment ambiguous, the "Financial Times" stated. In the past two years, Yukos has shifted from corporate pariah to the darling of the local investment community. "Leopards may not change their spots, but rational company owners may realize that it is in their commercial interests to do so," says Stephen O'Sullivan, head of research at the Moscow brokerage UFG.
Yukos head Khodorkovskii came to public prominence in the mid-1990s. From his position at Menatep Bank, Khordorovskii acquired the Russian government's majority stake in Yukos during the controversial "loans-for-shares" privatizations. These auctions amounted to cut-rate sales to insiders. In a business environment characterized by widespread corruption and inefficiency, Khodorkovskii set out to consolidate his control. He squeezed out minority shareholders from Yukos' principal operating subsidiaries, Yuganskneftegaz, Samaraneftegaz, and Tomskneft. Disregard for minority shareholders is widespread in Russia, but Yukos' alleged abuses were given a particularly high profile because one victim was the vocal and tenacious U.S. foreign investor Kenneth Dart, the "Financial Times" reported. Bolstered by revenues from higher oil prices, Yukos reached an undisclosed settlement at the end of 1999, triggering a turning point for the company. With control assured over Yukos, Khodorkovskii was among the first to see the need for longer-term investment in his company. He put an end to transfer-pricing by consolidating Yukos' profits onshore, triggering record profits and payouts to all shareholders -- and correspondingly large tax payments to the state. The company has been richly rewarded: Yukos' stock-market performance has outstripped rivals LUKoil and Surgutneftegaz.
This week, Yukos said its rescue proposal would provide Kvaerner with working capital for the next week, allowing for the completion of talks to restructure Kvaerner's debts and the establishment of a syndicate to buy the new shares that Kvaerner plans to issue, AP reported. Kvaerner President Kjell Almskog, who stepped down over the crisis, said he did not think Yukos' proposal was the right answer. "We have a model, but the question is whether we gain acceptance by all parties,'' he said during a break in the talks. Besides a partial payment for its $100-million purchase of Kvaerner's London-based hydrocarbon and process-technology businesses, Yukos' plan includes a $150 million restructuring fund from a consortium of backers -- on the condition that banks restructure and forgive debt.
All eyes are now on Yukos' involvement with Kvaerner. Yukos has said it has no intention of taking control and that it wants to work with Kvaerner to develop the businesses in order to maximize its investment. "Investors have forgiven us once. They will not forgive us again," Khodorkovskii was quoted as saying. His handling of Kvaerner may prove an important litmus test. On 31 October, Yukos said it had "facilitated a group of independent investors" to help Kvaerner but ruled out the idea of participating in the 3 billion Norwegian crowns ($336 million) rescue rights issue. A spokesman said, " Yukos does not want to control Kvaerner. We acquired a 22 percent stake but that is the end of our financial involvement," the "Financial Times" reported. (PMJ,TSK)