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Business Watch: December 4, 2001

4 December 2001, Volume 1, Number 21
LUKoil plans to invest over $200 million in its retail sales network before 2005, LUKoil Vice President Vagit Sharifov said at the International Oil Forum in Moscow. LUKoil invested $50 million in the retail sales network in 2000, he added. Under a new program of oil products sales that is currently being developed, 13 companies have been formed to raise sales efficiency and support cooperation with the state companies. LUKoil plans to build or buy over 3,000 gas stations in the next five years. Furthermore, Sharifov stressed, LUKoil is promoting cooperation with foreign companies based on franchising agreements. According to RosBusiness Consulting, LUKoil sold over 800,000 tons of oil products this year. (TSK)

The total volume of investments in the Moscow region's economy may reach 56 billion rubles (about $1.87 billion) in 2001, which exceeds the corresponding figure for 2000 by 14 billion rubles (about $468 million), RosBusiness Consulting reported. According to Nikolai Repchenko, deputy chairman of the Moscow regional government, the share of foreign investment in the industrial sector and service providing is between 4 percent and 5 percent. He said 24 special programs, including those on real estate loans and gas supplies, are being implemented now. Repchenko believes the implementation of these programs along with the 2002 budget will allow "a substantial increase in the region's investment rating next year." (TSK)

Russia's leading oil company, LUKoil, and national energy utility Unified Energy Systems (UES) are negotiating the possibility of establishing joint ventures, LUKoil President Vagit Alekperov announced at the International Oil Forum in Moscow. He said the joint ventures will be created with UES electricity stations located near LUKoil refineries to allow saving significant assets while purchasing electricity. These joint ventures could be opened in Volgograd, Perm, and Nizhnii Novgorod, he added. (TSK)

Gazprom's board will discuss the state of settlements with the federal budget within the framework of the implementation of the Yamburg agreements at its regular meeting, ITAR-TASS reported. The board will also discuss an item concerning "a collective executive body" at Gazprom and a procedure for fixing deals with company shares. The board will also consider an option for using a credit granted by the European Bank for Reconstruction and Development (EBRD) for the building of additional parallel branches of gas pipelines and a section of underwater pipeline in Ukraine. (JMR)

Russia and Ukraine have agreed to coordinate their weapon sales to third countries, according to Aleksandr Denisov, chairman of Russia's committee on military technology cooperation with foreign countries. According to ITAR-TASS, both countries are expected to sign a bilateral agreement in 2002 that will specify the coordination measures. Denisov believes the agreement will help Russia and Ukraine become partners on arms markets while eliminating unnecessary competition between their manufacturers. He said he hopes the document will eliminate dumping prices and enable Russian enterprises to provide technical maintenance for weapons systems that Ukraine sells to third countries. Denisov said the Russian and Belarusian governments are considering a similar agreement. The document will specify "rules of the game" on the international markets and in sales coordination. (TSK)

Energy Minister Igor Yusufov and visiting Croatian Deputy Prime Minister Slavko Linic signed a protocol on launching oil transportation via the Adria-Druzhba pipeline, ITAR-TASS reported. Russia is expected to export a total of about 5 million tons of oil via the pipeline in 2003. The Adria-Druzhba project, which is currently under construction, involves linking the Druzhba and Adria pipelines to increase the delivery of Russian and Caspian crude to refineries in the Balkans as well as the Mediterranean via Croatia's Omisalj terminal. (TSK)

Bottler Coca-Cola-HBC announced the purchase of Coca-Cola's bottling operations in Moscow, St. Petersburg, and central and far-eastern Russia, Reuters reported. According to a company statement, the transaction also included the acquisition of Coca-Cola's equity in Coca-Cola Molino Beverages. In July, Coca-Cola-HBC signed a letter of intent to buy the Coca-Cola's operations in Russia, Estonia, Latvia, and Lithuania for around $200 million. The company expects to conclude arrangements for the purchase of Coca-Cola's holdings in Estonia, Latvia, and Lithuania by the end of the year. Coca-Cola HBC is the world's second-largest bottler of Coke products, listed on the Athens, London, and Sydney stock exchanges. Upon completion of the deal, the company said it will have operations in 26 countries with more than 500 million consumers. (TSK)

ITAR-TASS reported that the prime ministers of Kazakhstan and Russia on 28 November would sign an agreement on cooperation in the gas sphere that is expected to contribute to long-term mutually advantageous cooperation in prospecting, developing, and exploiting gas deposits. It should also clear a path for the transit of Russian and Kazakh gas to third countries' markets to the year 2010. The document was expected to be signed during a working trip to Moscow by Kazakh Prime Minister Qasymzhomart Tokaev. (JMR)

The Estonian Finance Ministry said it expected the annual growth rate of average gross wages to slow somewhat in the fourth quarter. "Although the Estonian economy is also experiencing a cool-down, there will not be a remarkable decline in the [annual] growth of wages in the fourth quarter," the ministry said in a statement. "Still, we will presumably see a slight slowdown as the firms are pressured to cut administrative expenses to keep themselves competitive," it added. The statistics office said on 20 November that Estonia's average gross monthly wage in the third quarter was 5,300 kroons ($297.9) -- down 8.1 percent from the second quarter but up 12.9 percent from the third quarter of 2000. The gross average wage was 5,767 kroons in the second quarter of 2001 versus 4,694 kroons in the third quarter of 2000. (JMR)

The Russian diamond monopolist Alrosa will start floating an eighth issue of ruble bonds for a total of 500 million rubles ($16.71 million) on MICEX on 27 November, a source in the Russkie Fondy company reported to RosBusiness Consulting. Russkie Fondy is acting as a financial consultant in the issue. The bonds will be issued for two years at a nominal value of 1,000 rubles (about $33.41). The National Depository Center will act as a depository of this issue. (JMR)

Russia's trade surplus totaled $44 billion in the first 10 months of 2001, with exports doubling imports, the Economic Development and Trade Ministry said. Trade turnover reached $129.4 billion, a rise of 7.2 percent over the same period last year, Xinhua reported. Imports increased by 19.6 percent to $42.7 billion, including a 26.8 percent rise in imports from non-CIS countries and 2.8 percent growth in imports from CIS members. Exports stood at $86.7 billion, up 2 percent year-on-year, including a 0.7 percent increase in exports to non-CIS countries and a 10.4 percent jump in exports to CIS countries. (JMR)

The leftist radical public movement Working Russia was transformed into a political party at its 11th congress, held in Moscow on November 25, reported. According to a party statement, the political course of the Working Russia will not change. Its main goal will be "the restoration of power of the working class in the Russian Federation and building a communist society." (TSK)

Santa Claus Academy, an official residency of the so-called "master of the Russian winter," has opened in Moscow, RIA-Novosti reported. According to Lyudmila Komarova, director of the Balakirev Arts School, the academy will train professionals to work with children. The academy will focus on training experts and developing and promoting practical methods and techniques to work with children. The philosophy of the academy will be based on characters from fairy tales, folk stories, and literature. It will also develop and prepare programs for children's events. The main goal of the academy is to revive Russian traditions of celebrating New Year and Christmas and use the Santa Claus character as a tool for developing in children such qualities as kindness, compassion, and empathy. (TSK)

Russian State Duma has prepared a draft law on criminal charges for the abuse of the Russian anthem, reported. According to the Duma press service, the draft was offered for a first reading by Sergei Apatenko, a deputy from the Unity faction. Apatenko suggests expanding the existing article of the Criminal Code that spells out punishment for abuse of the state flag, emblem, and the anthem. The draft states that abuse of the Russian state flag, emblem, or the anthem will be penalized "with the fee of 100 to 300 minimal monthly salaries (300 rubles per month), restriction of freedom for up to two years, detainment for as much as three to six months, or imprisonment of up to one year." (TSK)

Video copies of the wildly popular "Harry Potter and the Sorcerer's Stone" are on sale in Ukraine since 28 November for a little more than $2 a tape, dpa reported. The film appears to have been recorded using a video camera at a pre-premiere screening and re-recorded with a voice-over in Russian. Sound quality is scratchy and silhouettes of an apparently U.S. movie audience are visible at the end of the film. Traders said the tape has found some buyers but that Ukrainian consumers seemed to prefer action features or cartoons. Ukrainian pirate traders appeared to be distributing the films via networks of street traders, many literally operating "underground" in full view at entrances to metro stations in large cities. Most late-release films and CDs are available at similar stands for between one-tenth and one-twentieth of their western retail price. Traders of pirated goods in Ukraine typically avoid prosecution by bribing police or making fake certificates on their products. (TSK)

Sonic Duo, formed by Finland's Sonera and Russian investment banking boutique LV Finance, launched a new mobile-phone network in Moscow, but analysts saw it hardly denting competitors that include Vimpelcom and Mobile Tele Systems (MTS), Reuters reported. The newcomer said it will launch competitive rate plans and unique services such as quick retrieval of shop, bank, and restaurant addresses. "We do seriously intend to fight for leadership in the Russian mobile communications market," Sonera Vice President Marti Huttunen said in a statement. Sonic Duo is the Moscow foothold of the pan-Russian Megafon mobile-phone alliance, which groups Sonera, Sweden's Telia, LV Finance, and St Petersburg's Telekominvest. "Unless Sonic Duo's tariffs are extremely aggressive, which we understand is not the case, the operator's launch in Moscow will not have any significant detrimental impact on MTS's and Vimpelcom's operations," Renaissance Capital analyst Andrei Braginsky said. He added that monthly fees looked higher than those of MTS and Vimpelcom and per-minute charges would be similar or higher. (TSK)

For the first time in its history, the Russian Association of Advertising Agencies (RAAA) has expelled one of its members, "Vedomosti" reported. Ator advertising agency was expelled from the association for persistent violations of legislation applicable to advertising alcohol beverages. Since January 2001, advertising agencies have been reluctant to cooperate with wine and vodka producing companies. This happened after the High Arbitration Court of Russia ruled in favor of the Anti-Monopoly Ministry in its struggle with St. Petersburg-based advertising agency OMM. OMM insisted that the law on advertising permitted ads for alcoholic beverages. The ministry referred to a law on ethyl alcohol production and processing, which allows alcohol advertising only at its factories. According to Andrei Berezkin, the head of Espar-Analitic marketing agency, Ator was the only major Moscow-based company advertising alcoholic beverages. He said that roughly 500 Ator stands advertising alcoholic beverages likely yield about $500,000 per month. Some of this money, however, Ator pays in fees to the anti-monopoly agencies. The decision to expel Ator was made at an RAAA conference held on the sidelines of a Moscow advertising festival last week. (TSK)

Local elections in the Tula region were held on 24 November, reported. According to Tula Regional Elections Committee, with over 25 percent of the constituency participating, the elections were declared valid. According to preliminary results, the incumbent mayor of Tula, Sergei Kazakov, received over 73 percent of the ballots cast. Kazakov was running for a second term in office. (TSK)

A new radio station is opening in Moscow and in the Moscow region, "Vremya Novostei" reported. FM station Radio Vostok (Radio East), which is scheduled to be launched in early 2002, will focus primarily on introducing Eastern civilization, including Buddhism and Islam, to the local public. Initially, Radio Vostok will broadcast in Moscow and the Moscow region. A few months later, it will expand to the entire territory of Russia. According to Igor Borisov, general director of the radio station, negotiations on broadcasting Radio Vostok programs are being held with officials in Armenia and Georgia. Commenting on the format of the programs, Editor in Chief Vasilii Gusev said that it will be informational, entertaining, and in Russian. (TSK)

The share of hydroelectric power stations operating in Russia is one of the lowest in the world, totaling only 18 or 20 percent, Unified Energy System (UES) head Anatolii Chubais announced at a meeting in St. Petersburg with representatives of Russia's hydroelectric power stations. He said one of the aims of restructuring the Russian energy sector is to move the country into a leading position in hydroelectricity production. According to RosBusiness Consulting, that will be achieved through market reforms and the creation of a liberal energy market. Chubais said the total volume of investments in the hydroelectric industry will amount to $290 million in 2001. In particular, $200 million will be allocated by UES and $20 million will come from the federal budget. Chubais insisted this volume of investment is one-tenth of what is required. (TSK)

Russian gas giant Gazprom was awarded its first-ever credit rating by Standard & Poor's (S&P) rating agency. S&P said in a statement it had assigned the energy giant's foreign-currency debt a single "B" rating. That gives it a positive outlook on a par with other well-regarded and -managed Russian energy companies such as LUKoil, RosBusiness Consulting reported. "The ratings reflect the company's role as the owner and operator of essentially all exploration, production, processing, transportation, and export assets in Russia's highly developed natural-gas sector, and its privileged position as a supplier to the large and growing Western European market," S&P said. Gazprom accounts for one-quarter of the world's natural-gas reserves with 29.9 trillion cubic meters of proven reserves at fully owned subsidiaries. Aleksandr Ovchinnikov, fixed-income analyst with Troika Dialog, said, "The rating will probably give a necessary boost for Gazprom to move on with an issue of Eurobonds." No figure has been confirmed for the size of Gazprom's Eurobond issue, but estimates range from $750 million to $7 billion, the "St. Petersburg Times" reported. (JMR)

A recent drop in oil prices throughout the world and a call by OPEC (Organization for Petroleum Exporting Countries) to cut off oil production have raised the visibility of Russian Energy Minister Igor Yusufov. When he accepted the position of energy minister a few months ago, Yusufov announced his intention to rehabilitate this "half-dead structure" and turn it into a "super-efficient ministry." The media in the past has characterized him as a "functionary" and even a "machine." These days, Yusufov faces a challenge that demands a full spectrum of diplomatic skills -- finding a balance between Russia's national interests, those of Russia's private oil companies, and OPEC members.

Yusufov was born in Daghestan 45 years ago to a father who some believe to have been chairman of the Daghestan Council of Ministers, according to "Profil." But this is unconfirmed because Yusufov has said very little about his family. He once rebuffed a discussion of his family history by saying, "Ordinary parents. Let's not go into details." After finishing high school with excellent marks, Yusufov chose not to go to college. Instead he accepted a position on the shop floor at the RadioElement plant, which produced equipment for the Soviet military industrial complex. One year later, Yusufov entered the Novocherkassk Polytechnic Institute, where he was also a secretary of the Komsomol Committee. Before graduation, he joined the Communist Party. Yusufov still has fond memories of his membership in that party and almost universally talks nostalgically about those days. He believes that his activities as a Communist Party member taught him organization, agitation, and a number of other useful skills.

Extensive communist and public activities, as well as a university diploma with honors, afforded Yusufov many opportunities -- including a Moscow-based job in the late 1970s. Yusufov spent four years at energy utility Mosenergo. The Mosenergo administration soon recommended Yusufov for a project in Cuba to build a thermoelectric power station. By that time, he spoke perfect English and it took him only six months to master Spanish. At a recent OPEC meeting in Vienna, Yusufov was reportedly welcomed at the airport by OPEC's secretary-general, Ali Rodriguez. The two warmly greeted each other in Spanish before Rodriguez, confusing Yusufov with an interpreter, said, "Everything is fine, but where is the [energy] minister?"

When the Cuban period ended, Yusufov was accepted to the Soviet Foreign Trade Ministry Academy. Upon graduation, he received a job at Technopromexport, a company affiliated to the Foreign Trade Ministry and engaged in construction of energy installations and energy infrastructures abroad. Upon the collapse of the Soviet Union in 1991, Yusufov received a professionally appealing offer. When Boris Yeltsin was elected president, he established a number of economic structures accountable to the president. Yusufov was offered a position as deputy director in charge of international relations at the Committee for the Protection of Russia's Economic Interests. Within six months, however, the Committee was abolished and all its functions handed over to the Ministry of External Economic Relations -- then headed by Peter Aven, now a powerful oligarch. Within the ministry, Yusufov coordinated the activities of Oboronoeksport. He also participated in its restructuring and the formation of Rosvooruzhenie, the state-run arms, weapons, and military exporter.

Having subsequently left the Ministry of External Economic Relations, Yusufov landed another high-caliber position. In 1998, he became head of one of the country's most secretive organizations, Rosreserv (Russian Reserves). That organization stockpiles food supplies, fuel, oil, gas, and other energy reserves for emergency situations in Russia, and is directly accountable to the president. In light of such connections, journalists have speculated about Yusufov's possible affiliation to the KGB. But Yusufov denies any relations with the KGB or its successor, the FSB. "I have never been in contact with this organization. It's even pitiful. Everybody speculates about [supposed ties with the KGB], but nobody ever tried to hire me." After three years with Rosreserv, Yusufov accepted a position at the Energy Ministry following a personal request from President Vladimir Putin. Yusufov is rumored to have struggled with the decision, torn between a desire to accommodate the president, on one hand, and the attraction of remaining at Rosreserv to prepare for that entity's partial privatization. If that sell-off plan were implemented, Yusufov could have become a powerful oligarch in his own right.

In his new post at the Energy Ministry, Yusufov inherited a semi-collapsed structure that had been without a director for almost six months. However, Yusufov pledged to return the ministry to its formerly powerful status. Several months into the process, some steps have indeed been undertaken.

"Profil" reports that Yusufov sent a number of letters to Prime Minister Mikhail Kasyanov requesting the return of a number of the ministry's former functions. Firstly, there is the regulation of oil exports, which is now in the hands of the commission headed by Deputy Prime Minister Viktor Khristenko. Secondly, the Energy Ministry is requesting some functions now under the control of the Environment Ministry, including control over the implementation of license agreements. Thirdly, the Energy Ministry wants to control state-owned shares in oil and gas companies. So far, a number of governmental and non-governmental officials have criticized Yusufov for being overly ambitious within an inefficient ministry. The oil sector, however, seems to have welcomed Yusufov's initiatives. According to a top manager within a leading Russian oil trading company, "Khristenko's commission is led by geopolitical objectives in its decision-making.... The Energy Ministry is much closer to the specific problems in the [oil] industry. [Yusufov's initiations] will probably be better for us."

Yusufov appears reserved and diplomatic in his public statements. "We are not trying to take anything from anybody," he said. He stressed the need to achieve "a balance in the fuel and energy [sector of] Russia." Yusufov's diplomatic skills could come in handy as Russia becomes embroiled in an open confrontation with OPEC over the need for significant cuts in oil production. At a recent meeting with the energy minister of Mexico, another non-OPEC oil producer, Yusufov suggested establishing an organization for non-OPEC producers. According to his plan, such a forum could be "an information-providing structure aimed at stabilization of world oil prices." As of late November, instead of a symbolic cut of 30,000 barrels per day (bpd) announced earlier in the month, Russia had agreed to cut exports by 50,000 bpd in the fourth quarter. This is still considered a symbolic cut by OPEC; the organization is pressing Russia, Mexico, Norway, and Venezuela to cut their oil output by 500,000 bpd. (TSK)

It has been years since Russia's non-ferrous metallurgical industry suffered such a deep crisis. A sharp drop in world prices for non-ferrous metals has raised questions about the profitability of what was, until recently, the most profitable sector of Russian industry. Russian aluminum industry officials have been forced to resort to mass lay-offs, which has not been the case for years. Some believe that although deep and painful, the current crisis is very temporary. According to "Kommersant," those optimists expect prices for such commodities to rise as early as the fourth quarter of this year. Pessimists, on the other hand, do not envisage industrial stabilization even in 2002.

In the past 10 years, aluminum prices have been lower than the current price only once: In the mid-1990s, when Russia started to export huge amounts of aluminum to world markets, the price on the London Stock Exchange fell to $1,000 per ton -- below even the current price of approximately $1,280 per ton. But it is important to note that, back in the 1990s, that low market price was not as significant for Russian metallurgical industry because of low production and transportation costs. The situation has since changed dramatically. Production costs have skyrocketed. Energy tariffs have been raised, as well as transportation costs and salaries of industrial workers. Furthermore, with increasing consolidation in the Russian aluminum industry, producers have begun to invest into industrial projects. This ultimately shows up in the production costs of aluminum. According to an official from Russian Aluminum (RusAl) holding, the current production cost of aluminum is $1,000 per ton. This is dangerously close to its price and, in October, it led to a 25 percent reduction in RusAl's central office staffing. Shortly afterwards, RusAl announced massive lay-offs at its plants and salary cuts for the remaining workers. The company had to accept a new, streamlined business plan -- the first step was to switch cell-phone providers for its top managers in search of cheaper rates.

According to "Kommersant," other Russian producers of non-ferrous metals are probably in a worse situation. The board of directors of Ufaleinickel, a nickel producer based in the Chelyabinsk region, decided to halt production until "better times," while its employees were sent on forced "vacation." The only comfort the plant's managers could extend to employees was the "assurance" that the situation at foreign non-ferrous plants was similar and their workers "suffer to the same extent."

Troika Dialog said on 27 November that Norilsk Nickel plans to cut its output -- including nickel, copper, and cobalt -- by at least 10 percent in 2002, which is significantly larger than the expected cut of just 2 percent. If the company actually reduces base-metal output by 10 percent, then 2002 revenues could fall 3 percent below the forecast of $3.1 billion. On the other hand, lower sales would have a compensatory effect on the nickel price in 2002, the company stated.

The metal market players keep posing the same question: What next in metal prices? Has the market hit bottom, or does the industry need to prepare for worse times? These days, little appears to favor a positive prognosis. Aluminum prices are defined by consumer demand. Its main consumers -- aircraft and auto producers, as well as construction and food industries -- are in a difficult position. There is scant hope among aircraft producers. After the terrorist attacks in the United States on 11 September, the number of air travelers has plummeted. British Airways has estimated that within a few years, only four major air carriers will maintain operations in Europe, with the rest going bankrupt or merging with larger carriers. The situation in the auto industry is also far from favorable. According to officials from AutoVAZ, Russia has produced 5 million fewer automobiles this year than in the same period of 2000. There is no boom in the Russian construction market.

According to audit and consultancy PriceWaterhouseCoopers, some of market analysts believe that in the fourth quarter of 2001, prices for aluminum, copper, and cobalt will rise by 7 percent. The price for nickel and palladium is expected to rise by up to 9 percent to 11 percent. What will bring about that rise? Analysts at BB&T Capital Market believe the prognosis will prove correct, citing what they believe to be an inevitable rise in demand. (BB&T predicts demand for aluminum may rise by 1.9 percent in 2002.) According to their analysts, the market is stagnating but there is no reason to believe this situation will continue. In just a few months, that argument goes, non-ferrous producers will not only recover but even gain from increased market demand.

Although much skepticism exists, some metal producers remain optimistic. The vice president of SUAL Holding, Vladimir Skornyakov, told Prime-TASS that his company expects a 3 percent to 4 percent rise in aluminum on the world market in 2002 and a 10 percent rise in the domestic aluminum market. (TSK)