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Business Watch: December 11, 2001

11 December 2001, Volume 1, Number 22
Tyumen Oil Company (TNK) on 30 November received the highest foreign-currency issuer rating of any Russian company since the country's 1998 financial crisis, PR Newswire reported. The upgrade, by Moody's Investors Service from "B2" to "Ba3," makes TNK Russia's highest-rated corporate borrower. "The upgrade by Moody's will help Tyumen Oil in its continued work on the capital markets and improves Russia's overall investment climate," said Joseph Bakaleinik, TNK's chief financial officer. Moody's said the foreign-currency issuer rating of Tyumen Oil is stable, and that its local-currency issuer rating would remain at "Ba2" with a stable outlook. Through acquisitions and capital investment, TNK has grown rapidly into one of the world's largest oil companies in crude oil reserves and production, while cutting costs. Established in 1995, TNK is owned by the Russian Alfa Group and U.S.-Russian Access/Renova. It has proven crude oil reserves of more than 8.2 billion barrels and produces more than 840,000 barrels of crude oil per day. (TSK)

Sibneft oil company said on 30 November it received $568 million in cash by reselling a 27 percent stake back to the company's core shareholders in a sale that infuriated minority investors, Reuters reported. "All payments were made fully in cash," said a Sibneft representative. The source also said the company still did not plan to place a $250 million eurobond issue until the end of 2001. The company bought the 27 percent stake in December 2000 from its core shareholders for $542 million and sold it back for $568 million in July, a move that was disclosed only in October and surprised minority investors. Minority investors were also furious after the company said the treasury stake was paid for in cash and non-cash instruments. The source added that Sibneft remained committed to increasing its oil output to 20.5 million tons, or 410,000 barrels per day, and to 25 million tons in 2002 from 17.2 million tons in 2000. (TSK)

Gazprom CEO Aleksei Miller said in an interview with "Ogonek" that any division of the firm as part of a planned government reform would take a long time, Reuters reported. The government said a reform of Gazprom, the world's largest gas company and a major contributor to the Russian budget, could include dividing its key functions -- producing and transporting gas. According to Miller, the interests of shareholders, creditors, the state, and gas buyers would all have to be taken into account if the company is split up. "In any division of Gazprom, at least two serious questions arise: Who would be the inheritor of the debt, and who would be able to guarantee export contracts?" he added. Miller said sending gas to Europe would continue to be the company's main activity. But he said the Chinese market could one day rival Europe. He also said Gazprom wanted to be rid of its non-core companies, which Miller numbered in the hundreds. Gazprom has been criticized for inefficiency and waste by allowing itself to take on unprofitable activities. The company has already announced it will sell its media arm, Gazprom-Media. Miller said the firm was looking into how much it spent on its media activities. The previous management was criticized for a lack of transparency in its management of subsidiaries. (TSK)

Archangel Diamond Corporation sued Russian oil giant LUKoil and a subsidiary on 27 November, claiming fraud and other claims and seeking $1 billion in damages, AP reported. The lawsuit, filed with the Denver District Court in the United States, accuses LUKoil and its subsidiary, Arkhangelskgeoldobycha, of not honoring agreements to give Archangel Diamond 40 percent interest in a diamond discovery in northwestern Russia worth more than $5 billion. Archangel, based in Lakewood, Colorado, invested more than $30 million in exploration and other work, the lawsuit claims. Archangel spokesman John Haigh told Reuters that once Arkhangelskgeoldobycha discovered the mine was more valuable than originally thought, it failed to live up to its end of the bargain. "We have tried to get LUKoil and its subsidiary to comply with the terms of an agreement signed in 1993," he said. LUKoil operates in Eastern Europe, Georgia, Azerbaijan, and the U.S. Last year, the company bought Getty Petroleum Marketing and its network of 1,300 U.S. gas stations for $71 million, the first Russian purchase of a publicly held American company. (TSK)

Russian metals giant Norilsk Nickel said it will cut nickel output in 2002-03 due to modernization work at its Nadezhdinsky plant, but analysts questioned whether the cut would take place, Reuters reported. They said Norilsk had enough facilities to offset a possible output decline at Nadezhdinsky. Even if it decided to cut nickel output, the market would remain unaffected as Norilsk had built up stocks to satisfy demand, they added. Yurii Filippov, first deputy CEO of Norilsk's Arctic subsidiary, was quoted as saying, "Taking into account the key role of the Nadezhdinsky plant, which produces 70 percent of Norilsk's [nickel] matte, logically a substantial decline of nickel output will take place." He gave no concrete figures. Norilsk is to turn Nadezhdinsky into a full-cycle facility, processing all local nickel and cobalt concentrate into refined products, with a limited amount of copper as a by-product. Filippov said reconstruction of Nadezhdinsky was the most important stage in the modernization of the plants of Norilsk's Arctic subsidiary, which account for 80 percent of its output. He said that in 2002 and 2003 Nadezhdinsky's nickel-smelting facilities would be modernized and the building of a leaching facility would start in the middle of 2003. (TSK)

Global communication-systems equipment supplier Andrew Corporation announced it has completed sales of its interests in a group of Russia-related telecommunications service providers, PR Newswire reported. The purchaser is Antel Holdings, a newly formed subsidiary of the Menatep Group. As stated earlier, the transaction includes a 49 percent stake in Rascom, a 45 percent stake in Metrocom, a 45 percent stake in Macomnet, a 64.4 percent stake in Magistral-Telecom, and a 99.72 percent equity stake in MKS. These companies provide local, domestic long-distance, and international voice and data communications to corporate customers and other telecommunications carriers. Menatep Group also purchased Andrew Telecom, an international telecommunications carrier based in the U.S. Specific financial details of the transaction were not released. (TSK)

Preliminary work on launching television network NTV-Ukraine has been completed, Ukrainian entrepreneur Vadim Rabinovich told An agreement on cooperation between NTV and Ukrainian television was reached earlier. The new channel will start broadcasting in January 2002. According to Rabinovich, the new network's staff will consist of Ukrainian (90 percent) and Russian (10 percent) journalists. "The NTV policies will be preserved, and [that] is the most important thing. We will work together as a team collectively gathering the topics. In alliance with the Russians, we consider ourselves younger partners," Rabinovich stated. (TSK)

The European Bank for Reconstruction and Development (EBRD) may invest $250 million in railroad development in Russia in 2002, Railroad Minister Nikolai Aksenenko said after a government meeting on 28 November, RosBusiness Consulting reported. According to Aksenenko, the World Bank also showed readiness to invest in railways next year. Russian banks are also ready to invest, "but they have high interest rates and short-term [loans]," he said. The Railroad Ministry plans to receive 37 billion rubles (about $1.2 billion) in borrowed funds next year, Aksenenko stated. He said the total volume of the Railroad Ministry investment program for 2002 is 161 billion rubles (about $5.4 billion), 110 billion rubles (about $3.7 billion) of which is to be received through amortization funds; another 13 billion rubles (about $434.3 million) will come from profits. The Railroad Ministry expects to post a balance-sheet profit of 35 billion to 36 billion rubles (about $1.2 billion) in 2001. (TSK)

Russia, which has faced falling revenues due to a drop in world oil prices, can still avoid borrowing from the International Monetary Fund (IMF) in 2002, Finance Minister Aleksei Kudrin was quoted as saying by Reuters. "We will not need IMF credits; Russia has enough of its own financial instruments which will be used to fulfill the budget," Kudrin stated. Russian government officials have said recently that if oil falls very sharply, then the country could borrow from the IMF and restructure debts to the Paris Club of creditors. Kudrin predicted oil prices of between $16.50 and $18.50 per barrel next year. The price of $18.50 per barrel of Russia's main Urals export crude was the lowest forecast in the country's 2002 budget. Urals usually trades at around $1.00 to $1.50 below benchmark Brent crude, which was at $19.68 per barrel in late European trading. Kudrin also said total Russian foreign debt would fall this year to 55-60 percent of gross domestic product, from 138-144 percent last year. "We are becoming a normal country with a normal level of debt, even in comparison with European states," he stated. (TSK)

Belarus Interior Minister Vladimir Naumov was unanimously elected president of the country's ice hockey federation, Reuters reported. The 45-year-old major general replaces KGB Colonel Yuri Borodich, who has headed Belarusian hockey since 1998, in an effort to beef up the nation's second-most-popular sport before next year's Winter Olympics in Salt Lake City. A number of Belarus sports federations are headed by high-ranking KGB and government officials. President Alyaksandr Lukashenka doubles as the country's Olympic Committee boss. Belarus earned a spot in the 14-team Olympic hockey tournament by finishing second behind Germany at last year's qualifying competition in Norway. (TSK)

The interior minister of the Karelia Republic, Igor Yunash, has been appointed an adviser to Russian Interior Minister Boris Gryzlov and commissioned to Moscow, "Vremya novostei" reported. Yunash will be in charge of the ministry's migration policies. Major General Yunash began his career as a criminal investigator, then became the republic's interior minister three years ago. Meanwhile, Oleg Gordeev, former director of the central control office of Russia's Fuel and Energy Complex, has been appointed deputy energy minister. Gordeev's appointment was approved and signed by Prime Minister Mikhail Kasyanov on 28 November. Earlier, Gordeev was decorated by the Russian government for "many years of excellent service" and his personal contribution to the development of Russia's fuel and energy sector. (TSK)

Motorola Broadband Communications Sector has been selected a key supplier for developing the Moscow region's broadband network by PentaCom, a subsidiary of Russia Broadband Communications, PR Newswire reported. Motorola will provide the core solutions that enable PentaCom to offer advanced interactive broadband data, voice, and video services to over 1 million homes in Russia. Specifically, Motorola will supply Voice over Internet Protocol (VoIP) consumer premises equipment, cable modems, and cable-modem termination system technology, along with network infrastructure electronics that include fiber-optic transmitters and nodes, and cable-television decoders. "We are committed to doing what is necessary to help PentaCom deliver advanced services to their subscribers," said Bickley Remmey, corporate vice president and general manager of Motorola Broadband-Europe, Middle East, and Africa. "Russia Broadband Communications is leading the cable industry in Russia by making services like voice and high-speed data available to its customers," he added. "Motorola has proven itself as a key partner in the development of our Moscow region network, and we look forward to a long and beneficial relationship," said Ken Rodgers, CEO of Russia Broadband Communications. (TSK)

Fitch international rating agency assigned an indicative rating of "B" to the City of Moscow's 400 million euro in Loan Participation Notes, issued by JP Morgan and due in 2006, Business Wire reported. This is the second foreign-currency issue launched by the Russian capital this year. The structure of the transaction is similar to the 300 million euro issue launched last month -- JP Morgan issued the notes to fund the City of Moscow under a Credit Facility Agreement. The liability of the bank toward the noteholders is limited by cashflows provided by Moscow to repay principal and interest, which makes the underlying credit risk associated with the notes entirely the city's. The purpose of the issue is also to refinance foreign-currency obligations redeemed earlier this year. It will have a neutral effect on Moscow's debt burden. Moscow accounts for about 6 percent of the Russian population and for 15.1 percent of the country's gross domestic product. (TSK)

The amount of investments made by Russian enterprises abroad continues to exceed the amount of foreign investments in Russia, "The Moscow Times" reported, citing the State Statistics Committee. In January to September 2001, Russian investments abroad totaled $13.42 billion, while foreign investments in Russia were $9.72 billion. In January to September 2000, Russian investments abroad totaled $11.52 billion, while foreign investments were $7.89 billion. Russian investments abroad are usually short-term and quickly removed from other countries' economies. By the beginning of October 2001, Russian capital abroad amounted to just $3.32 billion, while foreign capital accumulated in Russia was $34.42 billion. (TSK)

North Ossetia President Aleksandr Dzasokhov uniquely combines two very different and sometimes mutually exclusive qualities. On the one hand, he is the most popular politician and a true leader in his traditionally communist-oriented republic; people view him as a guarantor of the current political regime, which has effectively created better standards for ordinary people. On the other hand, the federal government considers him a talented diplomat who has managed to ease the Ossetian-Ingush conflict and to legalize the production of Ossetian vodka, which used to yield huge illegal revenues. Although Kremlin insiders call Dzasokhov "a legacy of Soviet times," they do it in a friendly manner without any sarcasm toward the communist past.

According to "Profil," Dzasokhov was born in Vladikavkaz, the capital of North Ossetia, in 1934. As a child, he dreamed of joining the military. But after high school, Dzasokhov chose the North Caucasus Institute of Non-Ferrous Metals. As a student, Dzasokhov was an active Komsomol member, and his career developed according to a relatively common Soviet scenario. At the age of 22, he became the first secretary of the Vladikavkaz (then Ordzhonikidze) Komsomol Committee. Within a few months, he was commissioned to Moscow to join the Komsomol Central Committee, where he headed the International Committee. In 1967, Dzasokhov was appointed first deputy of the Soviet Committee of Solidarity to Asian and African countries. That committee was affiliated with the International Department of the Communist Party's Central Committee. Dzasokhov was in charge of developing relations with various liberation movements around the world.

During a business trip to a summit of the International Organization for Solidarity to Asian and African countries in Nicosia, Cyprus, in the early 1970s, Dzasokhov was among the hostages taken by Palestinian terrorists. One day, armed attackers invaded the Hilton hotel where the summit was taking place; they shot dead the secretary-general of the organization and took the participants hostage. The gunmen, it turned out later, were representatives of Palestinian organizations extracting revenge on the secretary-general for visiting Israel a few days earlier. "We were held hostage for over 24 hours," Dzasokhov said later. "Then the terrorists received an aircraft and took some Arab hostages aboard. Shortly after, there was a fight at the airport, then a trial, and then the case disappeared from the media. Apparently, a big political game was going on."

All told, Dzasokhov worked for 16 years in the Solidarity Committee, which has been identified as a front organization utilized by the Soviet KGB in the 1970s and 1980s for disinformation and "active measures." Dzasokhov reportedly fared well in managing some of the most difficult negotiations with Asian leaders. Many of his friends attribute that quality to Dzasokhov's Caucasus roots. Aleksei Vasilyev, director of the Research Institute of African Countries, told "Profil" that, "Dzasokhov's Caucasus characteristics were best illustrated by his respect for the elderly and his loyalty to friendship under any circumstances." Dzasokhov "is a man of European caliber," Vasilyev asserted. "The combination of these qualities made him a welcome guest in the very different countries of Asia, Africa, and Central Asia." This quality was extremely important when Dzasokhov served as ambassador to Syria. In the early 1980s, Syria was an important partner to the Soviet Union and a major player in the Middle East. Syria "is a complex country, but it trusted Dzasokhov and listened to him. [That] means a lot. Dzasokhov is not a man of extremes. He can find compromises, which is not typical for people from the Caucasus," Vasilyev said.

When Dzasokhov returned from Syria in the mid-1980s, he was introduced to Mikhail Gorbachev, who raised him to the level of the Politburo (Political Bureau of the Communist Party in the USSR). After the August 1991 putsch, Dzasokhov was at a crossroads: On the one hand, he was offered a leading position at the headquarters of Solidarity to the Asian and African Countries movement, based in Cairo. He liked the offer but could not "tear himself away from his roots." On the other hand, he had an idea to run for a position on the Supreme Council from North Ossetia. Dzasokhov chose the latter option. On the strength of the enormous popularity he enjoyed in North Ossetia, he easily won the elections. Once on the Supreme Council he headed the body's international committee.

Tremendous changes occurred in Dzasokhov's home region in the mid-1990s. According to a senior official from the presidential administration, each of the subjects of the federation chose "its area of specialization" to survive in the new economic environment in Russia. For North Ossetia, it was the illegal production of vodka -- providing almost half of the illegally produced and distributed vodka in Russia. "The feds were tired of this unlimited vodka boom. For some reason, the Kremlin decided that Dzasokhov is capable of handling the problem," said the presidential administration source. This was implicitly communicated to Dzasokhov, and in one private conversation he said, "Ossetia does not have a leader or a president. I might have to become one. Of course, I am better off in Moscow because I am respected there. However, I cannot abandon my people. If elected, I will have to work [in North Ossetia]." With 77 percent of the vote, Dzasokhov became president of North Ossetia in 1998. Everyone seemed to be happy. Thus Dzasokhov has been a diplomat and a leader at the federal level while maintaining his close ties to the republic.

North Ossetia is one of very few places in the Caucasus that boast of relative stability. One of its major problems is the Ossetian-Ingush conflict. According to a Kremlin source, due to Dzasokhov's efforts, the conflict has been eased. The dispute over the Prigorodsky region of Ossetia dates back to the 1940s, when Ossetians took the houses of Ingush people deported by Josef Stalin. The conflict was aggravated in the early 1990s, and skirmishes still break out occasionally. "With both sides being right, the Ossetian-Ingush conflict is impossible to settle," Vasilyev said. However, Dzasokhov has managed it well. He also "diplomatically" resolved the problem of illegal vodka production. He did not bargain with the outlaws but rather legalized production by suggesting they "give up underground business" and created favorable conditions for "clean" business operations. Dzasokhov now says budget revenues from vodka taxes have grown by 76.1 percent and declares that "the republic is no longer needy." (TSK)

A minority shareholder claims a lack of dividends is a result of the company's manipulation of assets without properly informing shareholders. On learning that the company posted no profits, the shareholder asked the court to declare the company bankrupt. It is a normal enough scenario; but what is less normal is a minority shareholder receiving a lucrative $10 million offer for its 15 percent stake, then refusing the offer and again asking the court to declare the company bankrupt. Stranger still is the same minority shareholder's insistence on bankruptcy after saying the company is on the mend and will soon rake in profits and increase in value. Bankruptcy, on the other hand, would render the company virtually worthless. If this were a dispute between shareholders in a factory or a bank, one could imagine the minority shareholder had some cunning plan. But in this case, "Russia Journal" reported, there is neither logic nor a business interest: Instead, it is pure politics.

The minority shareholder in this case, a pension fund affiliated with oil giant LUKoil, launched a suit against television company TV-6, owned by exiled oligarch Boris Berezovsky. TV-6 took in members of the NTV team who quit that broadcaster after its seizure by state-owned Gazprom in April, rather than work for the new owners. Now, LUKoil is playing the role that Gazprom played in the NTV saga -- that of battering ram and liquidator. It has to deliver the fatal blow but at the same time shroud the move in apparent legality.

The "dispute between two companies" pretext used in the NTV conflict does not work so well in this case, however: TV-6 has no debts to speak of, its new management has boosted the channel's ratings, and LUKoil rejected an offer for its stake in the broadcaster. Berezovsky told "Argumenty i Fakty" last week that, "In less than a year, TV-6 turned itself from an outsider into a TV channel of national significance." According to TV-6 General Director Yevgenii Kiselev, "In a matter of months, we have extricated the company from a grave crisis and boosted its average rating and the channel's audience-share twofold. Our 'notorious' net asset balance has long been positive. We have almost doubled our advertising revenues." But these arguments fell on deaf ears in bankruptcy court, which, as in the NTV case, appears to have favored political expediency in its decision. In the TV-6 case, the authorities look to be even less worried about the negative political and public consequences than they were during the NTV case. President Vladimir Putin's support for anti-Taliban operations has given the Kremlin a free hand to do what it thinks necessary at home, "Russia Journal" asserted.

TV-6 case might indeed have nonpolitical consequences. LUKoil and the courts have resorted to a previously unused provision in the Civil Code to close TV-6. In Russia today, it would be possible to close massive numbers of businesses on the grounds that they had shown no profits and little or no revenues, though they continue to function. Russian business has practically institutionalized the unwritten practice of hiding money from excessive taxes by showing no profits; and the state has turned a blind eye to the practice, realizing that to do otherwise would give entrepreneurs little chance of survival. But now a precedent has been set that could give the state a powerful weapon against inconvenient businesses.

According to "Nezavisimaya gazeta" on 26 November, a Moscow arbitration court adopted another ruling on the liquidation of TV-6. Within a maximum of six months, the television company will have to vacate its channel six frequency. "We feel a certain regret at this court decision," Media Minister Mikhail Lesin told "Kommersant" on the following day. "We hope that the shareholders will reach an agreement and settle this dispute peacefully. We will act only in accordance with the law. A frequency can be put up for tender either when a company's license expires or for some other reason. I'd like to see the court decision and, in accordance with it, look at the options." Lesin's comments demonstrate a certain amount of bewilderment. "Russia Journal" suggests that Lesin is also on his way out and is being kept out of important decisions -- or hints that perhaps the state media-strangling machine is now on automatic pilot.

Comments on the court decision have certainly cast doubt on the circumstances surrounding the broadcaster. "This is a political decision and I am sure the decision was made by [President] Putin personally," said majority-owner Berezovsky.

"I am convinced that the conflict over TV-6 has been political from the outset," General Director Kiselev told "Nezavisimaya Gazeta." He continued: "It emerged on 14 April that I would be in charge of the channel. Exactly two weeks and one day later, LUKoil filed a suit for the liquidation of TV-6. During the court case, representatives of LUKoil said the following: If you had elected a different general director -- our candidate -- there would have been no liquidation case. I personally have no complaints about [LUKoil President Vakhit] Alekperov."

Alekperov, meanwhile, was quoted as saying earlier, "TV-6 is a good company and is worth good money." He added that he is nevertheless prepared to liquidate it.

According to Kiselev, "Any normal person might have become confused in this triangle. I even had the suspicion that he was trying to hint to public opinion that he was being forced into this action. Incidentally, back in the summer [businessman] Badri Patarkatsishvili publicly spoke about his contacts with Alekperov, who said frankly that he was being forced to act that way."

Berezovsky does not blame Alekperov, "It is not easy to be independent enough and strong enough to be able to stand up for your own opinion."

Kiselev says he is "not pinning any particular hopes on organized support from any parties, organizations, or public structures." Experience shows that the regime is able to ignore protests from both the public and businessmen. The same thing was also observed during events surrounding NTV, says Kiselev: "We had a fairly large number of supporters, but all the voices of protest were ignored. It is not the old NTV or TV-6 that is the problem. The problem is the powerlessness of public opinion. I am simply convinced that this is the story of all of us. This is a trend. TV-6 has displeased some people, some people may have personal scores to settle with me, considerations of competition, a maniacal desire to ensure 'information security,' some people want to gain control of an attractive piece of property. But, once they have destroyed TV-6, they may provoke a chain reaction in society, which will lead who knows where." Kiselev is not giving up, however: "We can lodge an appeal and once again try to contest this ruling in court. That is what we intend to do."

LUKoil, with no apparent strategic interests in the media sector, could sell the government its substantial stakes in the media in exchange for favors. The company's current strategy is expansion outside of Russia; to achieve this, LUKoil is dependent on the consent of the Russian government. In pursuing the liquidation of TV-6, LUKoil will ensure this support from the Kremlin, asserted. Observers of the Russian political scene know that any TV channel can be taken off the air at any given time; the law allows for it. But for this to occur, an order from the Kremlin is required, "Russia Journal" reported. On condition of anonymity, one senior government official said a few days ago that such an order would certainly come. Commenting on the situation at TV-6, the official said, "They will definitely close it. Maybe they won't even wait until the appeal is examined. The law allows this, it seems. They'll close it."

If TV-6 is shut down, it will be a serious blow to freedom of speech and another step down the road of political uniformity. (TSK)