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Business Watch: December 27, 2001

27 December 2001, Volume 1, Number 24
World oil prices slipped on 17 December as the Organization for Petroleum Exporting Countries (OPEC) kept dealers on tenterhooks about the prospects for joint output curbs with rival non-OPEC producers. According to Reuters, London Brent blend crude eased 30 cents to $18.85 a barrel, reversing most of the previous week's 58-cent gain. U.S. light crude fell 28 cents to $18.95. Mexico, Russia, Oman, and Angola have said they will cut exports, and all eyes now are on Norway. Norwegian Oil Minister Einar Steensnaes said Oslo would announce the size of its reduction after a cabinet meeting on 17 December. The cartel offered to slash output by 1.5 million barrels per day (bpd), its fourth cut in a year, if non-aligned producers cut 500,000 bpd. Angola last week offered to cut 22,500 bpd, bringing to 297,500 bpd the total cuts so far pledged by non-OPEC producers that also include Russia, Mexico, and Oman. Norway is believed likely to opt for a 150,000 bpd cut. That would bring non-OPEC producers' pledges to 447,500 bpd, still short of the 500,000 bpd target. OPEC ministers, unhappy about the non-OPEC response so far, agreed last week to hold an emergency meeting on 28 December in Cairo to decide on a final response. (TSK)

Russia's second-largest oil firm, Yukos, announced it would maintain its aggressive growth in oil output in 2002, although the country is supposed to be helping oil cartel OPEC support world prices, Reuters reported. Yukos stated it would spend $1 billion next year and would raise oil output by 24.3 percent in 2002 to 71.5 million tons from 57 million tons this year. It also said it would increase its domestic refining operations by only 4 percent. Yukos is among the Russian companies that have agreed jointly to cut exports of oil by 150,000 bpd in the first quarter of next year, although the company's statement made no mention of any such plans. Yukos has been one of the most aggressively developing Russian oil companies and has already shown a solid 15 percent growth in oil output this year. The company recently bought the second-largest stake in troubled Anglo-Norwegian construction and engineering company Kvaerner. It is also a front-runner to buy a 49 percent stake in Slovak oil pipeline Transpetrol. (TSK)

Russian pipeline monopoly Transneft announced its plans to load the first tanker from a newly built crude export terminal on the Gulf of Finland on 25 December, Reuters reported. "We have asked six of Russia's biggest oil companies to pump their volumes to load the first 150,000-ton tanker from Baltic Pipeline System (BPS)," a Transneft official stated. Russian traders added the volume of the first load might range between 100,000 tons and 150,000 tons. BPS is a combined new oil pipeline designed to ship Western Siberian and Timan-Pechora crude and a newly built oil terminal in Primorsk on the Gulf of Finland. Transneft said in October it was planning to complete the first stage of the BPS by December 2001 and to export up to 12 million tons of crude in 2002. The monopoly has already invested some $450 million into the BPS project and will need another $200 million to boost its capacity to some 18 million tons by the end of 2002. (TSK)

Global diamond giant DeBeers has signed a $4 billion trade agreement with Russian miner Alrosa, extending cooperation between the two rough-diamond firms for another five years, Reuters reported. The marketing agreement covers 50 percent of Alrosa's annual production of rough diamonds, which DeBeers will market. Of that amount, $500 million worth of diamonds per year will be run-of-mine, and $300 million an export assortment. The remaining 50 percent will be available to supply Russia's own growing cutting industry. The deal was signed in Russia by top DeBeers officials and Vyacheslav Shtyrov, head of the Russian diamond monopoly, and also needs approval from the European Union. Alrosa and DeBeers currently have a three-year marketing agreement, expiring on 31 December, under which Alrosa must sell at least $550 million worth of uncut diamonds to DeBeers, but no more than 26 percent of DeBeers' sales. (TSK)

Platinum group metals (PGM) export quotas for 2002 for some Russian producers and a five-year platinum quota for metals giant Norilsk Nickel may be issued in early January, Interfax reported. "Quotas for mining companies have already been agreed and submitted to the government. A resolution can be expected to emerge at the beginning of January," Deputy Finance Minister Valerii Rudakov was quoted as saying. Rudakov, who also is head of state repository Gokhran, said that the draft resolution would grant Norilsk a five-year quota for platinum and a one-year export quota for another platinum-group metal, rhodium. The resolution will grant a one-year quota to platinum producers Koryakgeoldobycha and Amur. Norilsk, the world's largest producer of palladium, has a 10-year export quota for exports of this metal. Rudakov said a separate resolution issuing quotas for PGM exports from the state reserves will be drafted later. (TSK)

Metals giant Norilsk Nickel was quoted by Reuters as saying that the units of its Arctic production plant, which account for some 80 percent of Norilsk output, have been hit by bad storms. The head of Norilsk's Arctic division, Dzhonson Khadzhagaev, stated that a strong snowstorm effectively froze its Zapolyarny mine and an ore-enrichment plant. He also said the slag dump of its nickel plant had been paralyzed and two of its plants almost halted. He added that local employees were finding it difficult to get to work. He gave no details of any loss of output. (TSK)

Venezuela may buy military helicopters from Russia and is studying a possible joint space-satellite program as part of increased cooperation and trade ties, Reuters reported. Venezuelan President Hugo Chavez made the announcement after signing accords on tourism, export-credit mechanisms, and government cooperation with Russian Prime Minister Mikhail Kasyanov. Since taking office in early 1999, Chavez has been courting Russia in order to broaden Venezuela's foreign policy ties and loosen a traditional economic and political alliance with the U.S. "The world needs a strong Russia, [and] we need a multipolar world," Chavez was quoted as saying. A bilateral military accord signed earlier this year opened the way for increased exchanges of personnel, information, and equipment, including the possibility of future arms purchases, the Venezuelan president said. Chavez forecast that bilateral trade could be sharply increased from its current low level of around $100 million. Both leaders said the two countries were also studying a wide range of potential energy cooperation projects, in crude oil exploration and production, gas, petrochemicals, fuels, and hydro-electricity generation. (TSK)

Russia imported 1.57 million tons of grain in January to October 2001, compared with 4.25 million tons in the same period last year, Interfax reported. The cost of grain increased from $118 per ton in January to October of last year to $126 in the same period of 2001. More than half of the imported grain -- 915,000 tons, compared with 2.5 million over the corresponding period last year -- came from CIS countries. (TSK)

Russia's industrial output fell by 2.9 percent in November compared with the previous month, but was up 4.7 percent compared with year-ago levels, the State Statistics Committee announced. It said in a statement that industrial output rose 5.1 percent in the first 11 months of the year, compared with a 12.7 percent rise in the same period last year. According to Reuters, average November daily production was flat month-on-month in seasonally adjusted terms. (TSK)

Russia has paid $24.61 million to the International Monetary Fund (IMF) as due, Prime-TASS reported a Finance Ministry official as saying. Russia's next debt payment to the IMF, about $25 million, was due on 27 December. Earlier this year, Deputy Prime Minister and Finance Minister Aleksei Kudrin said Russia would pay a total of $1.448 billion to the IMF this year, reducing Russia's debt to the fund to $7.69 billion by the end of December. Russia stopped borrowing from the IMF in the summer of 1999. Russian officials have repeatedly said the government was unlikely to resume borrowing from the fund, unless the foreign economic situation deteriorates sharply. (TSK)

VTB EYES $110 MILLION LOAN (19 December)
State bank Vneshtorgbank (VTB) expects to receive a syndicated loan of up to $110 million early next year, Prime-TASS quoted bank Vice President Aleksei Obozintsyev as saying. Obozintsyev said the credit would be managed by the European Bank for Reconstruction and Development (EBRD), with which it is currently negotiating. He said the loan might be raised to $150 million. VTB currently has assets of $4.3 billion and working capital of $1.6 billion, the news agency said. The bank posted profits by international accounting standards of $217 million in the first 10 months of the year. (TSK)

President Vladimir Putin has signed into law three landmark pension reform bills, Prime-TASS reported. According to the Kremlin press service, the bills include a law on labor pensions, state pensions, and mandatory pension insurance. Out of Putin's package of pension reform bills, the State Duma and the Federation Council have yet to approve bills on individual pension accounts, the management of pension funds, the pension system, and professional pension systems. The current pension system is based on a "pay-as-you-go" system inherited from the Soviet Union. Under Putin's reform plan, the pension system is to be transformed into a fully funded one, with individuals progressively accumulating their own future pension funds. Putin said he was satisfied with the progress of the pension reform. "The work was intense, and in the end we have received a very high-quality set of drafts," he said. Putin said the reform was an important step in modernizing Russia. (TSK)

Prosecutors have sent a long-delayed corruption case involving national carrier Aeroflot to a Moscow district court, bringing the high-profile case a step closer to trial, AP reported. Several Aeroflot executives are accused of funneling the airlines' revenues to two Swiss firms founded by tycoon Boris Berezovsky, Forus Services, and Andava. The embezzlement caused $252 million in damages to Aeroflot, the Prosecutor-General's Office said in a statement. Berezovsky has refused to show up for questioning and is living abroad to avoid prosecution, which he considers to be motivated by his criticism of the Putin government. The defendants include Aeroflot's former first deputy general director, Nikolai Glushkov, former Deputy General Director Aleksandr Krasnenker, Vice President for Finance Lydia Kryzhevskaya, and the head of the Financial United Corporation, Roman Sheinin. They face charges of embezzlement and failure to return foreign-currency revenues to Russia. (TSK)

Finance Minister Aleksei Kudrin announced that the government was sticking to its forecasts for growth of around 4 percent next year, despite an expected fall in prices for key oil exports, Reuters reported. "Russia maintains its forecast for solid development in 2002, and our forecasts do not change," Kudrin was quoted by Russian news agencies as telling an Italian-Russian cooperation forum. (TSK)

David Arquette, Tim Blake Nelson, and Emily Mortimer are starring in "A Foreign Affair," a dark comedy based on the "romance tours" designed to pair lonely American men with beautiful Russian women who hope to find freedom through marriage, "Variety" reported. Now shooting in St. Petersburg, "Affair" is the story of two brothers from the U.S. Midwest who go to Russia to find and bring home a traditionally minded wife for the younger brother. Nelson and Arquette are executive producers on the film, which is being shot during a real romance tour. (TSK)

Aleksandr Ananenkov was appointed to the post of the deputy chief executive officer of Gazprom on 17 December, RosBusiness Consulting reported. Ananenkov was previously the general director of the Yamburggazdobycha gas company. In his new position, Ananenkov will be in charge of production-related issues, said a source from the company's press service. According to "The Moscow Times," previous Deputy CEO Pyotr Rodionov, a St. Petersburg native, resigned shortly after joining the company in July. (TSK)

Russian State Duma Deputy and former Prime Minster Yevgenii Primakov was unanimously elected president of the Russian Trade and Industry Chamber at the fourth congress of this organization on 14 December, RosBusiness Consulting reported. In his address to the chamber, Primakov announced he wanted to make the Chamber "the major link between the government and business." He sees his mission as promoting cooperation between the business community and the government, mediating disagreements between business elites, and advancing Russian economic interests abroad. Primakov also noted the crucial role the Chamber will play after Russia's admission to the World Trade Organization. (TSK)

Car production will increase 3.2 percent year-on-year to more than 1 million cars in 2001, an official at the Industry, Science, and Technology Ministry told Interfax. "In the outgoing year, the ministry's forecasts came true for both cars and buses," production of which will rise 1.9 percent to an estimated 55,000, said Aleksei Serezhenkin, who is in charge of the automotive industry at the ministry, citing preliminary estimates. Truck output, however, slumped 4 percent this year, he said. Compared to 1998, "production of cars has risen by about 20 percent, and production of trucks by even a little more," Serezhenkin said. (TSK)

Coal production rose 5.6 percent year-on-year to 222.2 million tons in the first 10 months of 2001, Interfax reported a coal industry agency as saying. Coal sales in Russia and abroad grew by 7.8 million tons to 204.8 million, Rosinformugol said. Exports were up 19.9 percent, while imports grew 1.3 percent. Exports grew by 5.7 million tons to 34.3 million, 4.7 million tons of which went to the CIS and the Baltics. Exports outside the CIS grew 21.4 percent, and exports to the CIS were up 10.9 percent. (TSK)

Gold and platinum production in the Far East Khabarovsk region is expected to total 17 tons this year, up 25 percent year-on-year and 12 percent above target, ITAR-TASS reported a regional administration official as saying. (TSK)

Russian arms and military exports will exceed $4 billion this year and may climb again in 2002, Reuters reported. Russia reported $3.68 billion in weapon exports in 2000, with revenues to state coffers totaling $2.84 billion. Aleksandr Denisov, deputy chairman of Russia's committee for foreign military-technical cooperation, said the exact figure for this year would only be clear by March 2002 but that it would be "more than $4 billion and less than $5 billion." "Next year we hope that Russia will exceed that level," Denisov said. He added that one-third of the total sum to be received by Russia in 2001 would consist of payments for military hardware and arms deliveries carried out the previous year. An annual review by the London-based International Institute for Strategic Studies (IISS) said India and China were Russia's main customers for 2000, but that Iran was shaping up as one of the biggest for the future. Arms exports remain an important source of revenue for Russia, which saw its share of world weapons trade shrink dramatically after the collapse of the Soviet Union. (TSK)

Tatneft oil company said it expects its 2001 net profit to be 20 billion rubles ($660.5 million), down on 2000 levels. A company statement quoted Chief Executive Shafagat Takhautdinov as making the forecast. He did not say if the estimate was according to Russian accounting standards or internationally accepted standards, which the company also reports. Its 2000 net profit to U.S. GAAP standards was 24 billion rubles and 23 billion rubles under Russian standards. (TSK)

The chief of the Russian president's secretariat, Igor Sechin, is believed to be one of the most influential people in President Vladimir Putin's circle of trust. According to recent and persistent rumors, Sechin is masterminding the overthrow of his boss and Putin's chief of staff, Aleksandr Voloshin. Those who know Sechin well say that, while he is diligent and industrious, Sechin would never dare a political solo -- all his steps reflect the will of the president. In this matter, when they say 'Sechin,' people mostly mean 'Putin.' Even the press calls Sechin a "phantom" or a "man without a face."

Sechin was born in St. Petersburg in 1960. After graduating from the Portuguese department of Leningrad State University, he was commissioned as a military interpreter to Angola. Some say he was sent to Angola by the KGB -- though no documents have ever been produced to substantiate that claim. Sechin prefers not to talk about it. But in the late 1980s, when Sechin was a staffer at the International Office of Leningrad State University, his office received a letter from the Executive Committee of the Leningrad City Council. The Council was looking for a Portuguese-speaking official for its department in charge of relations with its sister cities. Sechin was chosen for the post, and made responsible for St. Petersburg's relations with Rio de Janeiro, Barcelona, and later Milan.

Sechin proved to be so diligent and industrious that St. Petersburg Mayor Anatolii Sobchak once took him on as a member of a local government delegation to Brazil. On this business trip, Sechin was introduced to Putin, then Sobchak's assistant. When Putin became deputy mayor, he appointed Sechin chief of his secretariat. One of Sobchak's assistants, Valerii Pavlov, compared Sechin with a sponge that absorbs everything. "He [Sechin] was not canny. On the contrary. He worked like a faithful dog, which bites only if the master gives an order to bite. It was never about Sechin. It was always about his master [Putin]," Pavlov stated. He added that the secret of Sechin's success was a strict compliance with the main apparatchik rule: Make no decision for a more senior official, never exceed your authority, and never show inappropriate emotions for a situation.

In 1996, Sobchak lost his bid for re-election. When Putin resigned, Sechin voluntarily followed his former boss. Later, Sechin became the first official from St. Petersburg who followed Putin to Moscow. In fact, Putin said during his presidential campaign that he brought just one person with him �- Sechin. Sechin's former co-workers assumed that Putin would never find anybody more loyal and faithful than Sechin. Moscow officials sensed that Sechin was not sophisticated enough for big-time politics and apparatchiks' games. However, they liked Sechin for his liberal attitude �- he did not make Putin's office an unassailable fortress. Nor was he jealous or hysterical if somebody spent extra time in Putin's office, in contrast to other officials close to Putin. Sechin is generally viewed as having helped to make Putin "the most accessible" prime minister ever in Russia.

Sechin's most valuable quality, according to some of those close to him, is that he never exaggerates information, but precisely reflects it. He is believed not to bargain over his powers or position-related benefits. Some in Russia consider this quality very close to lunacy. But recently, there are increasingly skeptical statements concerning Sechin's unconditional loyalty. One St. Petersburg official who preferred to remain anonymous told "Profil," "I do not believe that, being so close [to the president], one can remain politically innocent. I think Sechin has realized that. Those who speak about Sechin's unquestioning loyalty mainly talk about his St. Petersburg period. They do not know the Moscow Sechin. I think he has changed a lot."

Sechin's Moscow image is not without its blemishes. The press repeatedly has accused him of forming a shadow cabinet that is said to be sending orders to the Prosecutor-General's Office and the Control Chamber in the event that some company or individual is to be targeted. Press reports charge that the members of Sechin's shadow cabinet "are only striving for power." In fact, this is the first time in years that more and more Kremlin insiders are predicting major changes. Officials are increasingly questioning the ability of once-powerful Voloshin to keep his post. In the midst of all these rumors, Putin has remained calm. A career spy and apparatchik, he does not openly react to escalating rumors and speculation -- further complicating the situation as it is viewed from outside the Kremlin. One retired KGB general who has known Sechin for many years told "Profil" that these rumors could be true, "although Sechin will never do anything without an order from the top." He added cryptically: "Does that mean that everything is being done on the president's initiative? You decide..." (TSK)

In an unprecedented move, Gazprom's board of directors has voted to buy back a 32 percent stake in its gas-producing subsidiary Purgaz from Itera. The decision appears to be the first step by the new management toward showing its commitment to reform the natural gas monopoly.

"We were given one small Christmas gift from Gazprom with this Purgaz solution," said Boris Fyodorov, a Gazprom board member who represents the interests of minority investors and was a fierce critic of the previous management. "At least something is happening, and we should keep our optimism despite the discussions about the weakness of the management," "The Moscow Times" quoted Fyodorov as saying. Purgaz was not on the board's agenda, and Gazprom CEO Aleksei Miller reportedly surprised the board by raising the issue.

Purgaz supplies about 70 percent of the gas extracted by Florida-registered Itera, which was once a favorite Gazprom subsidiary. Initially, Itera obtained 49 percent of Purgaz in exchange for agreeing to develop the Gubkinsky gas field. But in 1999, Gazprom sold a further 32 percent stake to Itera for a symbolic 32,000 rubles (about $1,300 at the time), keeping a mere 19 percent for itself. Purgaz, meanwhile, turned out to be Itera's main extraction firm. According to "Vedomosti," in 2000 Purgaz produced 14 billion cubic meters (bcm) of the 18 bcm of gas produced by Itera. Thus, the daily speculates, Itera's status as a major gas producer appears to be finished. According to Fyodorov, the repurchase will cost Gazprom some 5.7 billion rubles ($188 million). The additional expenses will come from debts generated by Itera, which is presently a major Purgaz creditor. Itera will not be able to argue the decision, Fyodorov said, citing an assurance given by Miller at the meeting. Fyodorov said the deal is likely to be completed not by direct cash payments, but through mutual debt and asset offsets between Gazprom and Itera.

According to "The New York Times," the buyback decision capped months of struggle between President Vladimir Putin's appointee, Miller, and the powerful interest groups he has been wrestling with since his appointment six months ago. He has come under siege by old-guard Gazprom managers and hungry oil companies, all eager to grab pieces of the business while the company is still in disarray. The matter was also a litmus test for Miller in the eyes of investors, who were eager to see if he would be able to rein in the old Gazprom crew. It was the old guard that masterminded the Purgaz deal and a number of other deals that loosened Gazprom's grip on some of its assets. "[Miller's] intentions are both to stop the stealing and to recover lost assets, but there are such powerful vested interests trying to stop him," said William Browder of Hermitage Capital Management in Moscow, which owns Gazprom shares. "He's not running the company like his own personal piggy bank. That's important."

"Izvestiya" has welcomed Miller's attempt to "rehabilitate the far-from-impeccable reputation of the gas giant" in the eyes of the investors. It has also said that, slowly but surely, the Miller team is gaining victory over the old guard under former chief Rem Vyakhirev.

Miller took the helm of Gazprom after years of mismanagement and lack of investment had driven the company into decline. Production in Russia's gas industry, which controls one-third of the world's reserves, has fallen 16 percent since 1990. According to "The New York Times," giant Russian fields developed in the 1970s and 1980s are producing less than they were a decade ago, and new fields must be tapped to halt the slide in output. "Relying on the super-giant fields of the past is no longer enough," said Simon Blakey, director of Cambridge Energy Research Associates in Paris. "The Russian gas industry is at a turning point."

At the same board meeting, Gazprom managers discussed the company's financial and asset-management strategy. According to board member Fyodorov, presentations lacked concrete details but nevertheless suggested positive trends. "There was a lot of the right words in the right context," Fyodorov said. Gazprom's main programs aimed at increasing production are now in the hands of the government, since the state must decide whether to raise gas tariffs, a vital source of funding for Gazprom, Fyodorov said. Of the $5 billion needed to finance production-boosting projects, $3 billion has yet to be found, "The Moscow Times" said. Last month, Miller said Gazprom was seeking a 24 percent tariff hike for domestic deliveries, which are still a fraction of global rates.

A major drag on Gazprom's development, analysts say, is low gas prices within Russia itself. The company sells gas at home for less than a one-tenth of prices in Europe. That means Gazprom's European sales -- only one-fifth of its output volume -- make up two-thirds of the company's earnings. The government has been slow to react to Miller's requests to raise prices. So Gazprom's ambitious investment program remains "wishful thinking," Fyodorov said. At current prices, "the production level cannot be sustained," he added. "There was no point in discussing concrete projects when one-third of them would have to be thrown away."

"Izvestiya" agreed, saying, "If the gas monopoly is not reformed and the government blocks the rate hike on its domestic market, the new [Gazprom] management's projects are doomed to failure." The only solution is to raise gas prices, the daily concluded. (TSK)