Wednesday, May 31, 2006

Europe warned that it could be left without gas

Alexander Shokhin, president of the Russian Union of Industrialists and Entrepreneurs, has warned Europe that it might be left without gas, as China will get priority once the proposed pipelines are built.

Two gas pipelines to China are planned for construction. Supply is set to start in 2011.

The warning, coming before the G8 meeting, is said to be politically motivated. It essentially warns the West of the consequences of conducting anti-Russian politics and blocking Gazprom’s expansion plans in Europe. Alexander Shokhin has been chosen to deliver such words because he is not as easily linked to the government. Gazprom officials have been trying to improve the monopoly’s image lately, with Alexander Medvedev giving a full-page interview in yesterday’s Financial Times, where he defended Gazprom’s policy on Ukraine and warned Europe that any plans to bypass Russia in securing gas supplies from Kazakhstan ‘will not fly’.

Similar warnings of gas shortages have been voiced before by foreign analysts. Then, Alexei Miller did his best to assure Europe that there are enough supplies to cover all export markets.

According to analysts, Russia will likely need to import all of the Central Asia gas in order to fulfill its future obligations.

Gazeta, RC, Financial Times

Second correction coming?

There are growing signs that a second correction could be coming to the Russian Stock Market. The RTS could sharply hit 1200 in the coming week, predict some analysts.

The second emerging markets sell-off has already claimed its first victims: the Brazilian stocks have lost 4.5 percent on Tuesday, while the Indian 30-share sensitive index, Sensex, has lost a record 4.6 percent on Wednesday.

The MSCI Emerging Markets Index is down by 11 percent in May.

Gazeta, Financial Times, RC

Gazprom increases tariffs for independent producers

From July 1, Russian energy giant Gazprom proposes to raise natural gas pumping rates for independent companies by over 20%.

But experts said the company was too opaque whether the raise is economically justified and not a political ploy designed to hurt private companies.

Gazprom has repeatedly explained that while independent producers invest only in development and production, the gas monopoly has also to run gas transportation facilities. However, tariffs for independents have tripled since 1997, whereas Gazprom pumping costs have gone up just by 21%.

Alexander Blokhin, an analyst with Moscow-based Antanta Capital, told the paper, "It is hard to see how justified Gazprom is in its wish to push the rate up by 20%-25%, instead of 10%-15%."

Alexei Gromov, an expert from the Institute of Natural Monopolies Research, says: "Actual gas transportation costs are currently impossible to calculate because of the monopoly's intricate and non-transparent expense structure."

"Gazprom's appetite to drive its tariffs up again may be seen as a signal to independent producers to sell gas to Gazprom at the wellhead," Gromov continued. "Such a scheme is working successfully with LUKoil, which sells all its gas from the [West Siberian] Nakhodkinsky deposit to Gazprom."

The analyst said, "It won't be long before the gas monopoly is not interested in the Russian market". He thinks the idea for a gas exchange set out in President Putin's May 10 state of the nation address is certain to take shape in the foreseeable future. Then the market of end-use consumers will become more attractive. "This explains Gazprom's striving to capture it in any way, including by increasing pumping rates," Gromov said.

Gazeta.ru, RIAN, RC

Tuesday, May 30, 2006

Pro-Kremlin party to abolish protest voting

A bill has been submitted to the Russian parliament that seeks to abolish the "against all" vote at federal elections. United Russia, a pro-Kremlin party that has a majority of seats in the lower chamber, has already said it is willing to endorse the initiative. The opposition is positive that the bill is backed by the Kremlin, which is getting rid of everything that could prevent it from winning the elections in 2007-2008.

Boris Nadezhdin, secretary of the political council of the liberal Union of Right Forces, said that the Kremlin was afraid that the elections could be disrupted. "At regional elections on March 12, 'against all' took the second or third place," he said. Now the authorities are doing their best to prevent a repetition in October, on the next voting day, and, all the more so, at federal elections, he said.

Sergei Reshulsky, coordinator of the Communist faction, said, "The idea is born from bureaucrats' desire to make their life easier," so that they can get the necessary result by excluding any protest vote and reducing the required turnout.

A low turnout is beneficial for the ruling party. In such circumstances, only disciplined voters come to the ballot boxes and they vote either for the incumbent authorities or for the Communists.

Experts said that the authorities were getting ready for the 2007 parliamentary election, when United Russia should win another majority.

Andrei Ryabov, a scholar-in-residence of the Moscow Carnegie Center, said the party wanted to build its future campaign around the social topics that gave rise to the four national projects in health care, housing, education and agriculture. Yet none of them has guarantees of successful implementation, so the authorities want to neutralize opposition voters, he said.

Kommersant, RIAN, RC

Investors do not fear the 2008 elections - comment

[Update 1]

Russia, in the eyes of investors, has reached its most stable political and economic situation since the collapse of the USSR. Only 35 percent of investors (down from 54 percent in 2005) consider Russia to be a higher risk country compared to other emerging markets. Even the upcoming 2008 elections do not seem to scare investors away, as many of them predict that the stability will not be challenged by the difficult electoral process. Over 90 percent of investors say they will expand their dealings in Russia in the next few years.

2005 has been the best economic year for decades, buoyed by high commodity prices and the stock market has soared. Political stability has also been achieved, albeit drawing criticism of rolling back on democracy. The sheer size of the market attracts investors the most, with other 90 percent saying that it has influenced their decision to invest. Stable economic progress has attracted 82 percent of investors whilst 48 percent approve of the political stability.

Corruption is the most negative occurrence in the country with the over 82 percent (up from 72 percent in 2005) of the participants expressing worry about it. Undemocratic values of the governing elite rile 67 percent of investors, while lack of law and fair courts – 72 percent.

RC, Vedomosti, Gazeta.ru

BRIC Direct Foreign Investment 2005 in USD billions (Change in respect to 2004):

1.       China - 60.0 (no change)

2.       Brazil - 15.6 (minus 14.3 percent)

3.       Russia – 13 (plus 33.6 percent)

4.       India – 8.15 (plus 15.2 percent)

More foreign M&A to happen soon

The Russian government has set itself a goal, to enter the world economic elite and be seen by the leading countries in the world as an equal member. The deal between Severstal and Arcelor has set an important precedent and it means that the state strategy has changed from nationalisation to internationalisation. The ruling party wants Russian companies to merge and acquire other major international players and we can fully expect other major buyouts and mergers to happen in the next few years, both with the West and the East.

Severstal also plays an important role in gas politics. The company produces pipes for the North-European gas pipeline which only adds to the forthcoming energy dialogue with the West, as it is an important addition to the production-transportation-distribution of gas scheme.

Vedomosti, RC

RosUkrEnergo owner failed to pay for his stake in other gas companies

Dmytro Firtash, the Ukrainian tycoon who last month revealed his ownership of RosUkrEnergo, owns other companies in the gas industry including Zangas, a pipelines builder, and its Austrian sister company also called Zangas, which recently built a stretch of pipeline for Turkmenistan in exchange for gas. This is according to an interview in the Financial Times by Robert Shetler Jones, Mr Firtash’s British partner.

Mr. Firtash acquired a 75 percent stake in Zangas from the previous senior management which includes Oleg Deripaska and Victor Belyaev. The deal was supposed to be valued at USD20 million but, according to the management, Mr. Firtash has failed to pay a figure of USD10 million.

Zangas separated into two sister companies, a Russian and an Austrian one, after Mr. Firtash bought the controlling stake in it. Whilst the Russian one faced bankruptcy, Zangas GmbH Austria was building pipelines in exchange for gas but had trouble selling it. This is where Dmytro Firtash came in, assuring Zangas that he will sell all of its gas.

Separately, officials in Russia’s southern Astrakhan region announced last week that Mr Firtash had taken control of an undeveloped gas field by acquiring control of the Astrakhan Oil and Gas Company.

With the help of Gazprom and its bank business, Gazprombank, Mr. Firtash has built an empire worth hundreds of millions of dollars.

Vedomosti, Financial Times

Related Article:

Gas trader RosUkrEnergo set to expand

Monday, May 29, 2006

Study of the Russian Media

[Correction]

State media encounters no resistance from the passivity and submissiveness of the masses as the lack of free media in the country pushes further away the prospect of an emergence of a functional and dynamic society.

Russian people generally prefer pro-government media which transmits positive and optimistic information and entertainment programs, rather than serious analytical programs, the experts said. The so-called new middle class ignore media which deal with problems in the society by focusing instead on optimistic sources of news, with “Vzglyad”, the internet-based newspaper, being one such example. However it is television which seems to have most impact, with the two primary channels reaching the vast majority of the country.

Such choice for positive media is said to be influenced by the longing for stability, safety and happiness as over two-thirds of Russians express fear for the future, four-fifths of the population live in fear for their personal safety (also called the “Beslan syndrome”) and three-quarters of the population believing that Russians are less happy now than they were few years ago. Additionally to this rise of fear, people have noted the decrease in law and order. Such sociological events will eventually lead to the rise of isolationism and xenophobia among the populace.

The reluctance of people to give attention to the media which focuses on negative news also stems from the collapse of the Soviet Union and the subsequent chaos which left the nation in deep shock from which it has not yet recovered. The nostalgia for the old times is all too visible, with over 68 percent (up from 63 percent in 1998) of people expressing their sadness at the disappearance of the Soviet Union. It is not then surprising that Russian people tend to view post-Soviet social and political institutions in a mostly negative light.

Through mass media, the state controls the minds of the people setting definitions and boundaries for the virtual “we” (Russian people) and “they” (foreigners, Western political sphere) and, in order to strengthen the government’s position, it produces key symbols for the masses. One of those symbols is the lack of alternatives. State media effectively stands for the notion that there are no real alternatives to the current regime, that of Mr. Putin. Another is the re-emergence of the view of the “golden” Soviet age, with the 1970’s being presented as the most positive time in the recent Russian history without any references to the crimes under the Communist rule and the subsequent human suffering. This explains why Russian people feel no guilt for the actions of the Soviet Union.

Another supposition which is presented through the media is the “special path” for Russia. People are literally made to believe that Russia cannot follow any other political system and must find its own way. Additionally, the mass media harbours the view that foreigners or even Russian emigrants can never understand the problem that the country is facing, thus their views and advice are ignored while the outsiders risk being labelled as enemies. Importantly, the enemies of the regime become also the enemies of all Russians.

Most Russians do not feel pride in their country and the majority has lost hope of joining the ranks of the so-called “civilized world” in the near future, something which fans the fire of extremism and fanaticism in the country, be it xenophobia, corruption or vast spending on luxury goods. While the government tries to promote the sense of pride and nationalism in the country, the separation between the people and the elite grows bigger as, paradoxically, over 62 percent of Russians do not want their country to become a colossal and powerful nation setting political and economic trends around the world.

And so, what is presented in the media of the political elites and what is happening on the ground becomes ever more disparate, only enforcing the totalitarian nature of the political system whilst making any possibility of evolutionary progress unlikely.

RC, Vedomosti, Vremya Novostei

Related Articles:

Kremlin to get tighter grip on media than Communist Party had - expert

Media in Russia substitutes other civic institutions - expert

Being pro-Putin is the single most important asset for investors - comment

As shown by many recent economic developments in the country, the single most important asset for foreign and Russian investors to have is the ability to acquire ideological values that are close to those of the Russian ruling elite.

An investor can demonstrate his or her loyalty to Mr. Putin’s regime in many different ways. One is to mention you are a big fan of his political system. In fact, it seems impossible to find a FT interview with an investor in Russia without coming across praise for the president. However such praise must be accompanied by actions that do not go against the will of the government, otherwise the investor may encounter problems, as shown by Mr. Browder.

Another way to gain brownie points is to invest where the Kremlin wants you to, as shown by the Mr. Mordashov of Severstal and its investment in several Kremlin-linked projects. Had Mr. Mordashov not done so, his deal with Arcelor would not have happened.

In order for Russians to invest abroad, it must be congruent with the Kremlin’s need for expansion. Severstal and Alexei Mordashov was able to succeed in showing that it was a Russian company acquiring a stake in Arcelor rather than foreigners getting access to a national company. In fact, Mordashov’s strategy to gain approval was limited to mimic the expansion of Gazprom in Europe and it was a triumph. Mikhail Khodorkovsky failed to do the same thing, as his attempt to sell a stake in Sibneft/Yukos to ExxonMobil immediately drew criticism from the state. Interros’s deal with Siemens also collapsed because of the inability to gain approval by the Kremlin.

Thus, in order to conduct business in Russia with least problems, you must show that you are loyal and adaptive to the political values that Kremlin holds.

RC, Vedomosti

Steel consolidation in full flow as Abramovich buys into Evraz

[Correction]

The state has ordered the Russian steel industry to consolidate, as it is shown by the Severstal deal with Arcelor and Roman Abramovich’s acquisition of a considerable stake in Evraz, Russia's second-largest steelmaker. But Abramovich will not stop there, as another acquisition is on the cards.

The Chelsea Football Club owner has paid USD3 billion for the forty percent stake, bought from Alexander Abramov, a man who has previously been accused of bribery as he allegedly made the payment to the official in a bid to reverse Ukrainian government efforts to renationalise Nikopol, one of world's largest ferro-alloy producers.

Additionally, Abramovich is said to be sizing buying into Alisher Usmanov’s metals and mining empire. Usmanov, known as the ‘hard man of Russia’, is said to favour such consolidation move.

Roman Abramovich’s spending spree could be explained by the fact that he has USD25 billion of unused assets after he has sold Sibneft to the state and a fifty percent stake in Rusal, the largest aluminium producer in Russia, to Oleg Deripaska, his personal friend who is married to former president Boris Yeltsin's granddaughter.

Vedomosti, RC, Observer

Where is the stock market heading next?

The stock market was obviously overheated. A huge influx of money to emerging markets began in 2003 after a Goldman Sachs' report on the good economic outlook for the BRIC countries (Brazil, Russia, India and China). "At that time a few other large investment banks, such as JP Morgan, published reports on good prospects of emerging economies," said Maxim Shein, head of analysis with the BrokerCreditService brokerage.

Since then, the MSCI emerging markets index has soared from 300 to almost 800 points. However, the achievements of emerging economies were less spectacular than those of their stock markets. In 2005, for instance, Russia's benchmark RTS index grew by 85%, whereas GDP was up only 6.4%. So a correction was inevitable.

Expert opinion on future developments is split. Roland Nash of Renaissance Capital said that the situation on the Russian market could deteriorate because of global reasons, such as a further increase of global central banks' interest rates or an unexpected drop in commodities prices. There are also local risks that could aggravate investors' sentiments. After July's Group of Eight summit in St. Petersburg Russia's political course could destabilize, Nash said.

Inside Russia an event could take place that will make corruption overshadow the market's growth potential in investors' eyes. As a negative signal, Nash mentioned rumors about the possible resignation of Economic Development Minister German Gref.

Shein said that large investors, who in fact provoked growth on emerging markets, are not interested in selling their BRIC assets yet. "Many companies have posted such gains that investors can easily survive another 15% plunge," he said.

Kommersant, RC

Severstal deal personally approved by Putin

The fact that the Severstal merger with Arcelor was personally approved by president Putin means that Kremlin, except for objects of “strategic interest”, has decided not to block mergers and acquisitions in relation to foreign companies, say analysts. Severstal’s billionaire owner, Alexei Mordashov, received a personal approval from the president on May 16th. Mordashov is known for his close ties with Mr. Putin and Severstal has been known to invest where Mr. Putin has asked in. In 2003, Severstal has spend more than USD20 million to acquire a nine percent stake in bank “Russia” which is connected to many high-ranking government officials. Another politically-motivated action is Severstal’s investment in a television channel Ren-TV.

The deal between Arcelor and Severstal has drawn a fire of criticism from the shareholders of European steel giant as they attempt to block its defensive merger with Russian steel company. “Investors will want to know how Severstal's assets have been valued, what political risk has been taken into account and why the board felt compelled to spend €13bn on a rival when shareholders could have taken a premium offer for their stakes in Arcelor from Mittal", said a banker with close links to leading shareholders. According to analysts at Commerzbank, the true value of Severstal's assets is closer to EUR10 billion than the EUR13 billion being paid by Arcelor.

The deal is also condemned by some as illogical for Arcelor since it will produce about 50 million tonnes less steel than a merger with Mittal and deprive Arcelor of the chance to tap into Mittal's sizable operations in the booming markets of China and India.

However, Standard Life Investments said on Friday that Arcelor's plan to buy Russia's Severstal adds more value to Arcelor shareholders in the medium term than Mittal Steel's hostile offer for Arcelor.

In Russia, the opinion is divided with some believing the deal will raise Russia’s business image around the world, while others are unhappy at the prospect of capital outflow and a foreign company having full control over the biggest metallurgy corporation in the country.

Vedomosti, AFX, RC, Guardian, Reuters

Related Article:

Arcelor to issue shares for Severstal to take stake

Saturday, May 27, 2006

Western investors should not endorse the Kremlin's rapacity - The Economist

[Correction & Update]

Thou shalt not steal

Fancy a piece of appropriated property?

The good side of buying into Rosneft:

·         Some believe that Western investors can help clean up Russia.

·         Russia’s oil as too lucrative to ignore, possibility of making money.

·         Rosneft is Russia's second-biggest oil producer and has bigger oil reserves than Exxon. Rosneft’s 2005 profits are five times higher than 2004.

·         State control will shelter investment from predation, as well as securing access to new production licenses and generosity from the tax authorities.

Commercial perils:

·         Rosneft may face lawsuits from Yukos shareholders and other unexpected problems post-2008.

·         Kremlin determines its strategy hence irrational behavior and decisions.

·         State-run companies have had higher costs and lower productivity. Overall production may decline.

·         The listing is as a way of paying back a loan used to finance an increase in the state's stake in Gazprom.

Moral issues:

·         Most of the company's output comes from a subsidiary called Yuganskneftegaz, previously owned by Yukos and bought by Rosneft in a rigged sale.

·         Tax claims against Yuganskneftegaz’s under Yukos’s control were illegal, now they have been slashed.

·         Wrong, extra-judicial behavior towards Yukos transformed the company from en efficient business to an opaque state company.

·         The sale goes against property right and decent courts.

Kremlin hopes that the Yukos affair will be erased from history, but that gamble should fail.

Related Article:

Yuganskneftegas's debt foul play

Friday, May 26, 2006

Russia's largest gold-mining company launches ADR program

Russia's Polyus Gold, the country's largest gold producer, is seeking authorization to place its securities on western markets. The company's ADRs (American Depositary Receipts) may be traded on over-the-counter markets in the U.S. and Europe as early as next month.

Polyus Gold holds the gold-mining assets of Norilsk Nickel. The new company was registered in March. In May it began trading its stock on Russia's stock exchanges, the RTS and MICEX. On Wednesday it applied to the Federal Financial Markets Service (FSFR) for permission to launch a program of first-level ADRs totaling 35% of its authorized capital, according to the company's head of investor and public relations, Denis Davydov. The ADRs will be launched in June.

Before the end of last year Russian companies were allowed to place up to 40% of their stock on foreign markets, an opportunity seized by Norilsk Nickel. However, in early 2006 the FSFR put a 35% cap on Russian companies' stock circulating abroad. "Some of the Norilsk Nickel ADR owners, in the period from the beginning of the year and until Polyus applied to the FSFR, waived the right to Polyus ADRs, receiving local shares instead, so the Polyus ADR program is just under 35%," said Dmitry Usanov, head of investor relations at Norilsk Nickel.

Larisa Zelkova, director of public relations at Interros, said that her company had partially waived their rights to Polyus ADRs, increasing their ownership of the company's local shares. "This is the way we enable portfolio investors who acquired Norilsk ADRs to obtain the same number of Polyus ADRs," she said.

Alexander Pukhayev, an analyst with Deutsche UFG, said the decision by Polyus to launch an ADR program would improve the liquidity of the company, whose securities will gain strong interest from western investors. Gazprombank analyst Sergei Suverov said that Polyus Gold's ADR program may become one of the five largest among Russian companies. Large ADR programs have been launched by LUKoil (over 60%), Gazprom (35%) and Rostelecom (39%).

Vedomosti, RIAN

Moldova should change foreign policy to win back Russian market

Moldova does not intend to keep away from the Russian market, but on the contrary will honor all product-quality commitments. However, Chisinau will probably have to comply with political, not hygiene demands to pick up where it left off on the Russian market.

Just over a year ago the Russian Federal Service for the Oversight of Agriculture banned the import of Moldovan fruit and vegetables, and Moldovan wines were banned in March 2006. Earlier, 75% of Moldova's wines and fruit and 12% of all vegetables were exported to Russia.

Experts doubt the situation will be changed if Moldova meets the demands of the federal veterinary and consumer watchdogs. "Evidently, the tension in economic relations followed political differences between Moscow and Chisinau," said Nikolai Petrov, an expert for the CIS with the Moscow Carnegie Center. "Even if Moldova meets every hygiene demand made by Russian officials, it will soon face new claims. Russia obviously expects the country to correct its foreign policy course, not economic conduct."

The Moldovan government has decided to diversify agricultural exports. Great hopes are pinned on Bucharest which, its neighbors hope, will push them into Europe as soon as it enters the European Union in 2007. True, experts warn, the toughest demands on fruit and vegetables, which are not always satisfied by western European farmers, reign on the EU markets too.

"There is not a single chance for Moldovan products to enter the European market soon," Petrov said. "As for long-term prospects, everything will depend on whether Moldova will find enough funds for improving product quality, promoting and advertising its goods. Europe is likely to offer financial assistance to Moldova, but the latter's trade dependency on Russia is so great that the assistance may fail to yield any fruit."

Novye Izvestia, RIAN

Drug Firms Flood Russia

Russia is emerging as one of Europe's fastest-growing pharmaceutical markets, with sales having tripled since 2000 and demand increasing for innovative drugs, according to a report released on Thursday.

Consultancy PricewaterhouseCoopers said sales were forecast to increase by around 10 percent per year, reaching about $6 billion in 2010, fueled by rising incomes as the economy picks up.

At the same time, the federal government has lifted funding on the health care system to $3.6 billion this year from $1.9 billion allocated in 2005.

Most drugs in Russia currently originate from overseas suppliers. Sanofi-Aventis is market leader in Russia with a 6.6 percent share, while Novartis ranks second, with 4.5 percent.

Reuters

Arcelor to issue shares for Severstal to take stake

Arcelor, which is fighting an unsolicited bid from rival Mittal Steel, will go ahead with a rights issue that will allow Russian steelmaker Severstal to enter its capital, a source close to the matter said on Thursday.

"Yes, there will be a rights issue and yes, it is Severstal," the source said. The board of Arcelor meet on Thursday to discuss a deal under which Severstal would take a stake in Arcelor, which is fighting a hostile bid from rival Mittal, sources familiar with the matter said earlier Thursday.

Reuters

Thursday, May 25, 2006

Foreign investment in Sakhalin under threat

Russia's ministry of natural resources on Thursday threatened the country's largest foreign investment, saying energy production sharing agreements in Sakhalin, in the far east of the country, were not effective and should be reviewed.

The ministry said it plans to apply to the Russian Duma, the lower house of parliament, to review agreements which it believes are damaging Russia's national interests. It said it will also initiate legal proceedings against Total, the French oil company, for violating the licensing conditions for the development of the Kharyaga oil field in the north of Russia.

Sakhalin is a major oil and gas region with approximately 45bn barrels of oil - equivalent to the remaining reserves in the North Sea.

MSNBC, Financial Times

Electricity group membership sparks first step toward end of CIS

Politicians and experts in Ukraine and Moldova have suggested that the dissolution of the Commonwealth of Independent States is imminent after the Union for the Coordination of Transmission of Electricity, an association of transmission system operators in continental Europe, said it would consider the two countries' membership applications in May.

CIS power grids operate independently of the European network. In 2002, Anatoly Chubais, chief executive of utility giant Unified Energy System of Russia, said $100 million in investment could establish a joint power grid between Vladivostok and Portugal that could help generating companies and consumers reduce costs significantly. But the Ukrainian-Moldovan plan would damage the chances of the project being successful.

Chubais told the CIS Electric Power Council in St. Petersburg last week that the projects were mutually exclusive, and that Ukraine and Moldova would have to separate from Russian and Belarusian grids if their regional project were implemented. Chubais said this would cause serious problems for Russia, Belarus, Latvia, Estonia, Georgia and Azerbaijan, while Armenia would be indirectly affected.

Seraphim Urekyan, leader of the parliamentary faction Our Moldova, said Ukraine and Moldova, members of GUAM (a four-member regional association with Georgia and Azerbaijan), would soon issue a political statement after their energy demarche. Urekyan said his faction had launched a signature-collection campaign in favor of Moldova's UCTE membership, as this would cause it to break with the CIS.

Ukrainian political scientist Viktor Nebozhenko said his country's intention to withdraw from the Russian power grid also implied political separation.

Both Kiev and Chisinau agreed with Moscow's integration plan when UES suggested establishing the Eurasian power grid. But some post-Soviet republics now want to receive Western rather than Russian energy guarantees after their natural gas conflicts with Moscow.

Nezavisimaya Gazeta

Russian media ignores the Reiman affair

Russian media has failed to report the news that a high ranking telecommunications official was embroiled in a scandal relating to money laundering and ownership of a significant stake in the country’s telecoms industry.  

The main wire service did not report the story nor did any of the state-controlled television channels.

Leonid Reiman, an ally of Putin, was found guilty of “using his position to ensure that a significant stake in Megafon was transferred for no value to IPOC”.

Financial Times, RC

Related Article:

Kremlin to get tighter grip on media that the Communist Party had - expert

Barinov, Russia's last popularly elected governor arrested

Alexei Barinov, governor of the oil-rich Nenets region, was arrested yesterday on suspicion of fraud and embezzlement in what local legislators and politicians described as a politically motivated attack on democracy.

Mr. Barinov was the last governor to be elected by popular vote before a new system came into force that allows Vladimir Putin, the president, to appoint regional leaders.

Viktor Fomin, a member of local parliament, said the arrest, coming before parliamentary elections next year and presidential elections in 2008, was meant to show governors what would happen to them if they did not obey the Kremlin's orders.

Barinov, a former head of a subsidiary of Lukoil, Russia's largest oil company, was involved in a conflict with Rosneft, an oil group controlled by the state, over its alleged failure to pay RUR900 million to the region under a social responsibility agreement with the company.

Rosneft is chaired by Igor Sechin, the deputy head of the Kremlin administration who is believed to be behind the government's attack on Yukos and who has close links to the country's prosecutor-general.

Additionally Mr. Barinov has also fallen out with Moscow over the region's representative in the country's upper house of parliament. Sergei Mironov, speaker of the upper house of parliament, demanded that four regions, including Nenets, revoke their senators as part of an anti-corruption campaign launched earlier this month by Mr. Putin.

Financial Times, RC

Previous article:

Rosneft's opponent to go to jail

Foreign energy companies denied access to natural resources

Foreign energy companies’ hopes of getting access to Russia’s natural resources suffered a blow yesterday as the court ruled in favour of the inclusion of large oil fields in the list of “strategic interest” objects. Fields with more than 150 million tonnes of oil or 1 trillion cubic meters of gas are now off-limits to foreign companies.

This action will make it harder for private energy companies to get access to natural resources with LukOil’s plans to develop the Timano-Pechora already under threat of re-nationalization and takeover by Rosneft. The winners are Gazprom and Rosneft, who will have virtually no competition in the sector.

Vedomosti

Gas trader RosUkrEnergo set to expand

RosUkrEnergo, the company known for being the intermediary between Gazprom and Ukraine’s Naftogas, is set to buy a 74.5 percent stake in Astrakhan Oil and Gas Company. Experts say this is just the first step in the company’s quest for expansion.

The price of the acquisition is unknown although analysts affirm that the AO&G’s reserves are valued at a minimum of USD500 million.

Astrakhan O&G Company has the license to develop part of the Astrakhan condensate field which contains 220 billion cubic meters and 20 million tonnes of oil.

The RosUkrEnergo representative denied that any deal has been struck.

RosUkrEnergo has long planned a London flotation but so far has failed to find a bank willing to take the deal forward.

Vedomosti, RC

Moody's boost for Transneft, Gazprom, RZD and SovKomFlot

Despite the Baa2 country ceiling on Russia, Moody’s has boosted Transneft’s rating to A2, Russian Railways (RZD) to A3 whilst Gazprom and Sovkomflot have been upgraded to Baa1.

Vedomosti, RC

Wednesday, May 24, 2006

Media in Russia substitutes other civic institutions - expert

The media in present-day Russia tends to serve as a substitute or replacement for other civic institutions such as political parties, trade unions, and interest groups, said Leonty Byzov, head of the analysis department at the All-Russia Center for the Study of Public Opinion (VTsIOM).

Electronic media provide real unity of Russians' values and information, uniting them into a virtual political nation.

Russians who are critical of most government and civic institutions view the president and the mass media as their chief authorities. According to VTsIOM data, President Putin's approval rating has been at 72-77%, with the media as a civic institution holding second place with 53-55% during the past year. The government's ratings are 32-34%, and the average ratings of parliament are slightly above 20%. Political parties and trade unions enjoy much less confidence, with 17-19% and 12-14% respectively.

Over 75% of all media consumers watch TV, primarily the two main channels - Channel 1 and Rossiya.

The key media audiences belong to the new middle class, who support the current authorities, the expert said. They have adjusted themselves to today's economic and social realities, and prefer positive, optimistic information and entertainment programs, rather than serious analytical programs. They prefer today's mass culture to traditional and elitist culture. Today's media in Russia fully meets such demand, Byzov said.

Modern television is almost the only real network uniting Russians who belong to different social extremes and live in different economic and social dimensions across vast distances, the expert said. Back in the 1990s, differences in the information policy among TV channels formed the so-called political clubs, or proto-parties, but no such differences are evident now. All strata of today's society consume the same information "food", prepared according to the same information recipes.

The electronic media command mass support and mass mood changes. It is this state of affairs that has been made use of by the current leadership, who are managing to significantly control public mood by maintaining a grip on key media sources.

Vremya Novostei, RIAN

Businessmen seek parliament's protection from law enforcers

Russian entrepreneurs have asked parliament to introduce changes to legislation that would prohibit law-enforcement and security structures from confiscating companies' goods for further sale. Until recently, businessmen preferred to settle matters with law enforcers on their own. The latter maintain that they are combating smuggling practices.

"This is a popular practice," said Boris Fantayev, executive director of the Union of Producers and Importers. "But until recently, companies tried not to make it public, and to settle things quietly, buying their way out." Now that businesses have voiced their annoyance, the problem is being discussed "everywhere, up to the Prime Minister."

Sales of confiscated goods, which are declared exhibits, involve representatives of the Interior Ministry, prosecutors, and staff from the Russian Federal Property Fund. Goods are stored at the Fund's depots and then sold via companies close to the structures at 20-30% of their real cost. The returns are divided between the participants of the scheme, while the state budget receives not more than a quarter of what is due.

"Current legislation allows for launching proceedings against a company that has agreements with another company, which has been subjected to criminal charges," Fantayev said. "Recently, $10-12 million worth of furniture was confiscated from a company using this principle."

At the same time, law-enforcement structures are never held liable for their actions, he said. "Recently, a company tried to complain about illegal confiscation to prosecutors, but the complaint was not accepted," he said. "Businessmen are not the only ones who use loopholes in legislation to dodge taxes. State employees do the same for their own profit."

Parliament has agreed that the laws need amending. "The entire process of arresting a batch of goods, appointing experts, and holding examinations, is closed and poses many questions," said Boris Reznik, deputy chairman of the low chamber's information policy committee.

Novye Izvestia, RIAN

FTfm: Russia finds favour over Middle East

FTfm Performance Review: AXA WF’s Emerging Europe Equities fund.

Investors are casting aside political risks and putting money into energy stocks in Russia:

  • Russia is more stable than the Middle East.
  • Large oil reserves and gas is a sought-after commodity.
  • Put money into oil and banking stocks, with construction and consumer credit groups also a good bet.
  • The fund reported a 236.2 percent return in the last three years (vs. 216.4 percent benchmark).

But it is still important to monitor risks:

  • Degree of uncertainty, as shown by the Yukos affair.
  • Gazprom is poorly run and far from profitable.

Monopolies unhappy at 2007 domestic price tariffs

Domestic gas prices in 2007 will grow by 15 percent and electricity by 10 percent. This figure has angered state monopolies who demanded a steeper price increase. Gazprom had proposed a 22 percent price raise, while RAO UES wanted to increase the electricity prices by 12 percent. The companies explained their proposed plans by the need for investment in the infrastructure.

Monopolies’ plans were denied because it was thought the proposed price would amount up to an extra 1 percent in inflation.

RAO UES, though, will continue pushing for its goal of 12 percent rise in 2007, 9 percent in 2008 and 7.5 percent in 2009.

Vedomosti

Yuganskneftegas's debt foul play

Yuganskneftegas, the asset formally owned by Yukos, had its outstanding tax debt slashed nearly six times, seemingly motivated by the fact that it is now owned by state-controlled Rosneft rather than Yukos.

Under Yukos, Yuganskneftegas debt to the government amounted to USD4.46 billion. It has now been slashed to USD760 million.

As it turns out, Yuganskneftegas started to win court battles against tax evasion as soon as it was seized by Rosneft, having favourable rulings in both 2005 and 2006. Analysts say that this proves that the tax evasion charges against Yukos were politically motivated and the jury was biased.

Yuganskneftegas was formerly the main production unit of Yukos and accounted for 70% of the group's output. It was seized by the state in 2004 and sold for USD9.35 billion to a shell company called Baikal Finance Group, whose registered address is a cafe in the small town of Tver, some 100 miles from Moscow. It was the only bidder in the auction. A few weeks later, Rosneft announced it had bought Baikal Finance Group. That helped the Russian government circumvent an injunction imposed by a court in Houston on the sale of Yukos' assets. The owners of Baikal Finance Group have never been publicly disclosed and are considered to be just state-sponsored middle men in this deal.

The authorities seized Yugansk in 2004 to help pay off Yukos' total tax debt of USD24 billion (relating to 2002).

Yukos's former head, Mikhail Khodorkovsky, is now in prison in Siberia.

Rosneft is poised for a controversial LSE IPO on the 14th of July.

The 2005 net profit of Rosneft according to US GAAP rose five-fold to USD4.159 billion against USD837 million in 2004, the company's press service reported.

LA Times, Vedomosti, RC, Guardian, RBC

Tuesday, May 23, 2006

Russian Minister Laundered Money To Buy Mobile Operator

A Swiss business arbitration tribunal has ruled that Russian Telecommunications Minister Leonid Reiman used money-laundering schemes in a bid to purchase a stake in mobile phone network operator OAO Megafon.

"The tribunal's decision has confirmed that the only beneficiary of the Bermuda-based IPOC fund and its alleged option over a 25 percent stake in MegaFon is Reiman," said LV, which has been embroiled in a dispute with IPOC over the stake for nearly three years, in a statement late Monday.

It also said that the Zurich tribunal found that the money used by IPOC to make the down payments on the stake option payments had been "criminally sourced".

The financial-industrial holding Alfa Group, now the owner of LV, was accused of using "bribery and corruption" to try to derail the legal proceedings.

Business Week, Vedomosti

Russian goverment may have artificially manipulated Gazprom's share price

[Update 1]

The Russian Government might have been artificially creating demand for Gazprom’s shares, thus lifting its value over USD300 billion.

The fact that the monopoly’s size and power was mentioned at the president’s state of the nation address indicates that the GAZP share price has become an important part of a patriotic and nationalist rhetoric; hence its capitalization was artificially high. The address was the peak point and has given many individuals connected to the state a chance to make a good profit.

The early days of the stock market correction showed that even tiny external factors still wiped billions of the company’s value, yet other Russian blue-chips were hardly affected. GAZP value entered steep decline some time before the rest of the market followed.

The fact that the share price decline came so soon after the president’s address to the nation is a possible embarrassment to Putin.

Rumours of stock price manipulation and insider trading by the state were also rife when YUKOS value fluctuating wildly.

The current stock market correction is also blamed on insider trading. “Some part of the stormy growth and fall of the Russian stock indices has been evoked by economic causes, but a substantial part is insider trading,” Central Bank First Deputy Chairman Andrei Kozlov told reporters on Tuesday. A limited circle of people, usually connected with the government, make money on the Russian stock market, while the rest of investors will “look like fools”, PRIME-TASS cited him as saying.

Vedomosti, ITAR-TASS, RC

Motorola may lose Russian market

Swiss-Russian company RussGPS has accused Motorola of violating patent regulations on seven Motorola cell phones being sold in Russia. The models, worth over $19 million, were confiscated in March from Euroset, the country's largest cellphone retailer. Market players said RussGPS' action is a continuation of the scandal, while an apparent alliance between law-enforcement agencies and "patent racketeers" may create serious problems for Motorola and even force it out of the Russian market.

RussGPS spokesman Pavel Panov said Motorola had violated his company's patent No. 31183 for the "useful model" Mobile Communications Terminal by producing and supplying cell phones to Russia. Euroset is also alleged to have violated the patent by selling Motorola phones. The patent, which is valid across Russia, concerns "most Motorola cellphones and phones of other producers based on Motorola circuits," said Panov.

RussGPS will demand that Motorola sign a license agreement and pay it for the right to supply cell phones to Russia. Panov said mobile retailers would also have to pay for the right to sell them. "We have warned all major retailers that they may be violating our rights by selling Motorola phones," Panov told the paper.

Patent-law experts said this was a typical example of a "patent racket." Vadim Uskov, head of the law firm Uskov & Partners, said it took one month to register "useful-model" patents, which are not checked thoroughly by the Russian Agency for Patents and Trademarks. "As a rule, these patents are not new and are obtained for blackmail purposes," Usov told the paper.

"It appears that law enforcement agencies have declared an all-out war on Motorola, which may lose large national-market segments or the entire market, because Motorola phone sales may be banned completely in Russia due to this patent dispute," said Eldar Murtazin, head of Mobile Research Group.

Kommersant, RIAN

Part of the Stabilization Fund to be invested in foreign shares

Around 10 to 33 percent of the Stabilization Fund is going to be invested in shares of foreign blue-chip companies, according to the deputy head of the government staff Mikhail Kopeikin. The so-called Future Russia fund will be created by 1st of July 2006. Kopeikin also proposed that the rest of the Stabilization Fund should be invested in AAA-rated bonds issued by Euro-zone countries, the United States and Britain.

The Stabilization Fund is said to hit RUR2.09 trillion by 2007 and RUR3.06 by 2008.

Vedomosti, RC

Monday, May 22, 2006

Russian Banking: A land of limited opportunities

The Economist

Russian banks are growing:

  • Russian corporate lending up 31 percent, retail deposits up 39 percent.
  • Mortgage market USD2 billion. Predicted to hit USD20 billion by 2010.

However,

  • Credit quality is falling.
  • Banks’ profits no longer enough to fund its capital ratios.
  • Regulatory capital declined by 3 percent from Q1 2004 to Q3 2005.

Banks everywhere and nothing to buy:

  • Banks need capital from foreign investors, through equity, subordinated debt or selling entire banks.
  • 1,199 licensed banks, but apart from top 100 all are tiny or serve the needs of one or two controlling shareholders.
  • State-controlled Sberbank accounts for 26 percent of all assets and liabilities and 54 percent of retail deposits.
  • Second and third biggest banks are also state-controlled (VneshTorgBank and GazpromBank).
  • Four biggest privately owned Russian banks account for only 8 percent of the market.
  • Foreign banks account for 7 percent of the market.
  • Aim of private banks is to sell to foreigners at a good price.

IPO’s:

  • Rosbank this year; VneshTorgBank and GazpromBank the next.

Problems:

  • Russian assets are no longer cheap.
  • Credit quality will go down when the downturn hits.
  • Russian population is unpredictable.
  • Russian government is not easy to predict either: loves foreign investment but a lot of protectionism over ‘strategic value’. This is one of the issues holding up Russia’s bid to join the WTO.