RusEconomics

Rosneft's share price could increase, but will it carry any rights?

2006-08-09T02:54:00.000+04:00

The Share Price

Rosneft’s current share price could be described as uninspiring, following its mammoth IPO in July. Investors, having snapped up shares at USD7.55, are now finding that their GDRs are currently priced at USD7.33 on the London Stock Exchange, despite the efforts of the underwriter.

To increase the capitalization, the government is intending to gain an inclusion into the sought-after A1 list of shares. However the rules state that no more than 75 percent of the company must be in the hands of one owner (or affiliated owners). At this moment in time, Rosneftgas holds an 85 percent stake in Rosneft.

The controlling stake must be then shuffled between different companies, with a possible 50 percent plus one share going directly to the government. This could be accomplished by dividing Rosneft into two parts and then liquidating one of them. The only problem is that the government and Rosneftgas could be considered as affiliates, which would make any transactions between them worthless. Although there are ways of contravening the regulation, that would bring more opaque systems into the equation. The stock exchange has the final word, and many analysts predict that it could give the go-ahead even if it goes against the law, however any glitch in the operation could impact the prestige of the company which is obsessed with public image before and after its IPO.

The Investors

Anecdotal evidence points to the fact that the advertising campaign targeted at pensioners has produced a result. Almost a third of private customers investing in Rosneft are over 50. Persons connected with education are second in the list, with 11.7 percent of shares to their name. People working in financial structures have invested 10.8 percent, while students hold an estimated 2.3 percent of Rosneft’s shares.

Such big number of pensioners investing is linked to high approval rating of the president and the government, something which could be attributed to state television.

Overall, big oil companies have snapped up 21% of shares with Malaysia’s Petronas leading the way with USD1.1 billion worth of securities. Russian businessman Oleg Deripaska has invested USD700 million and Chelsea’s owner Roman Abramovich - USD300 million

The Rights

People’s IPO could be here to stay, argue some analysts, with VneshTorgBank being the next big offering. Although these shares do not have the same right as those in the West, with at least some part of the population holding small stakes in state companies may mean that the government may come under pressure over its economic policy in the future. Had Yukos’ shares been in the hands of the people, the whole affair would have done much damage to the image of the state in the eyes of the population. However, it remains to be seen whether shares in state-owned businesses are not just ITM options which may or may not have weight at future AGM.

Vedomosti, Gazeta, Rusecon

Trade deficit by 2009?

2006-08-09T02:01:00.000+04:00

Russia’s difference between import and export could turn negative by 2009, said some experts in the government today.

The following scenario is based on Urals oil barrel priced in the range of USD65-54 for the next three years.

The ruble is expected to be stable in the range of 26.7-27.1 per USD. This is positive; after all, the ruble was looking to be unstoppable in its oil-influenced ascend. Strong ruble is said to hurt exporters, making Russian goods uncompetitive in foreign markets.

The price paid for making the national currency even out could be trade deficit (import higher than export). This essentially means that consumers will pay money which comes from high oil prices for goods which are not made in Russia, thus hurting the national producers. Even now, import from nearby countries to satisfy consumer demand is rapidly rising, posting an increase of 38.7 percent this year.

The possible trade deficit scenario is surprising, considering the current trade surplus of some USD63 billion.

Many analysts have expressed their disbelief at the idea that Russia could experience trade deficit, with some citing the stabilization fund as the solution in case the prognosis does indeed happen.

It is certainly worrisome that the Ministry of Economic Development should so calmly indicate that Russian goods may be redundant in the next years with the country relying heavily upon imports in the time when oil prices may go up as well as down.

Gazeta, Rusecon

Rosneft-style IPO coming soon

2006-07-21T03:07:00.000+04:00

The Russian government is satisfied with the way the IPO of Rosneft has been completed. Another Initial Public Offering is in the works, and it might come sooner rather than later.

The company in question is OGK-5, part of the RAO UES of Russia energy giant. The proposed date for the IPO has been moved from November 2007 to November 2006.

OGK-5 was separated from RAO UES as a result of a reform carried out in 2005. More components of RAO UES will come onto the market in this pilot scheme is a success.

The company is expected to raise around USD500 million.

The reasons for bringing the IPO date forward is that the current market conditions are conducive to an event of such magnitude, with investors showing appetite for owning securities of Russian energy companies.

The main person behind the IPO scheme is the head of the president’s administration Sergei Sobyanin. According to some analysts, he is trying to strengthen his position with regards to Kremlin’s internal politics.

The oil and gas sector is very competitive, with many of Kremlin’s top officials having links to it. The electricity sector could be considered as being up for grabs.

Gazeta, RusEcon

Economy of Deficit hits Russia

2006-07-21T02:49:00.000+04:00

Property, wine, cars are all in deficit and are priced higher than ever.

Russians, having experienced shortages of wine, have now resorted to buying and selling places in queue to buy popular foreign cars, such as Ford Focus. Car dealers, having not anticipated the increase in demand (analysts calculate it has risen by 50 percent), have run out of car models for the next few months at least. There were 400 thousand foreign cars sold in Russia in the first half of 2006. The most popular makes were Hyundai, Toyota and Ford. There is a 9 month waiting list to buy Ford Focus and Honda Civic. Car dealers are also experiencing shortages of transportation trucks needed to bring in extra automobiles from the makers. It appears that some have even resorted to using the railroad as a method of transporting vehicles.

Not surprisingly, the second hand market have seen rising price on already overpriced models sourced from abroad, usually in an opaque manner.

This shortage is attributed to yet another deficit, this time on the property market. Due to scarce availability and high prices (Moscow properties have added 30 percent to their value in the last half of the year), many have lost any hope of getting a foot on the property ladder, and as a result have moved their sight onto the automobile market.

Borrowing to buy a car in Russia is a much simpler process than acquiring a mortgage, something which can only be afforded by an estimated 1 percent of the population.

This deficit follows those present in other markets, notably in the alcohol and luxury goods sectors. As a result we are seeing prices many times higher than those in the West.

Vedomosti, RusEcon

Gazprom buys 51 percent of Zenit FC

2006-07-13T04:00:00.000+04:00

Former owners of St. Petersburg's Zenit Football Club, Vladimir Kogan and David Traktovenko, have made a profit of USD36.247 million in selling their club to Russian energy giant Gazprom. For the first time in the history of Russian soccer, we know the exact price of a club. Experts consider it fair, with prices of Russian players currently on the high side.

At the weekend Gazprom revealed the sum it had paid to gain a controlling stake in Zenit, one of the Russia's most popular soccer clubs. According to a Gazprombank IFRS report, the gas monopoly purchased a 51 percent stake in Zenit for USD36.247 million. The bank's press-service was not available for comment on Sunday.

David Traktovenko, former co-owner of banking house Sankt-Petersburg and Zenit chairman, refused to discuss the deal, quoting a clause in the contract forbidding the release of this information.

Most experts polled by Vedomosti say that the price Gazprom has paid is fair. German Tkachenko, president of ProSports Management and ex-president of Krylya Sovetov Samara, said that half the sports facilities of the St. Petersburg club, plus its players, who are professional by Russian standards, and its strong brand, are fully worth USD36 million. "Understandably, purchasing a club is a ticket to further spending, because Russian soccer is no money earner. But the ticket can be capitalized and resold to a higher bidder later on," he said.

The cost of players on the Russian soccer market is unrealistically high, said Maxim Belitsky, sport director of Sportima agency, and so the price Gazprom paid for half of Zenit can be considered adequate.

But an expert who asked to remain anonymous said that the gas monopoly had paid through the nose. Gazprom paid so much for the sporting brand, because only Zenit's training facilities and contracts with some soccer names are among the worthwhile items on its books. "Abramovich paid something like USD48 million for a controlling stake in Chelsea, and repaid about USD185 million in club debts. But Chelsea had on the physical balance some real estate in London's center, including a hotel. And the possible commercial benefits and sports successes of the London and St. Petersburg clubs are like apples and oranges," said the expert.

Earlier, deals to sell Russian clubs have never been made public. Spartak fans, for example, who wanted to know how much LUKoil vice-president Leonid Fedun forked out to acquire the club, had to make do with approximate expert estimates. Analysts and soccer market players estimated the Moscow club "at USD70 million."

Tkachenko said that before Krylya Sovetov was sold, he had put the full value of the club at about USD25 million. He did not name the size of the deal, however. For Torpedo Moscow, businessman Alexander Mamut offered USD31 million. Michael Sterling, director of sports market agency Global Sponsors, said that Russian clubs are generally difficult to put a price on - the soccer market is undeveloped, and market criteria are absent. He said Gazprom did aim to pay a market price for Zenit, because the company's top managers supporting the club were most likely moved by personal or image-building motives.

Russian soccer is now emerging from the shadows it had been in throughout the 1990s and early 2000s, said Tkachenko. Large companies such as Gazprom and LUKoil have entered the country's soccer market, he said, and the size of these concerns makes them do business by Western standards, and disclose the price of major purchases.

Vedomosti, RIAN

Criticism of state involvement in the economy

2006-07-13T02:21:00.000+04:00

The head of the US regulator SEC has insisted that, in order to fully attract foreign investment into Russia, the state should stop being a major shareholder in many of the country’s biggest companies.

This argument has attracted praise and criticism from analysts and there are those that say that the upcoming Rosneft IPO shows that Russia still attracts investment even if the companies’ shares don’t hold the same level of rights compared to those in the West.

Mr. Cox said that “state interests sometimes don’t coincide with the interests of the market” and that decisions “are likely to be influenced by politics”.

Freedom of press also attracted criticism from him, as it “goes against principles of transparency, which are vital for the investing community and correct functioning of the market”.

Currently, state controlled companies are attracting large level of investment. LukOil, Rosneft are all in favour with large multinational clients and the list is growing. Short-term outlook seems to be good.

In the long run, the success of government involvement in running companies is likely to fall to zero. Companies are more effective when they are not run by the state. Some even state that the recent stock market growth might have been even steeper had it not been for Kremlin’s involvement in the economy.

When will the government cease to be a shareholder? When the budget deficit appears, possibly relating to the fall of oil prices, say some analysts. Reforms could happen then together with the full market liberalisation.

Gazeta, RusEcon

Search-engine market to become more competitive

2006-07-10T04:41:00.000+04:00

Google is widely believed to make its foray into the Russian market this autumn. Not surprisingly, the current market leaders (Yandex and Rambler) are worried about this development.
Another, albeit much smaller, foreign competitor to the Russian companies comes in the shape of Webalta. The project, sponsored by an unknown foreign entity, is hoping to match Yandex and Rambler on technological grounds, but its chances are considered to be slim. To succeed, Webalta will need to spend a massive amount on marketing, something which it is unlikely to do.
The search-engine market in Russia is valued at between USD50 and 100 million.

Gazeta

Short: Gazprom

2006-07-10T04:28:00.000+04:00

GAZP 2005 Profit: USD11.5 billion.

Net Debt: USD29.6 billion.

Rating: BB+/Baa2/BB+.

Lack of communication between people and goverment - expert

2006-07-09T01:47:00.000+04:00

The live internet conference which had the Russian president answering live questions was classified as a PR stunt by the majority of the world press. Serious questions from the West contrasted sharply with the light-hearted ones coming from inside Russia.

The fact that no real questions were asked on the Russian site could be attributed to the Kremlin press service which controlled the incoming questions and selected those that it so fit. Avoided were the issues relating to Khodorkovsky (“due to a technical fault”, says Yandex), Chechnya and democracy, with only the situation around Georgia being present in the discussion. Instead questions about nothing (robots, kissing a kid on the stomach) demonstrated that not only the chat was orchestrated by the president himself but also that Russians have nothing to ask the most powerful man of the nation. According to an analyst, this could be due to the fact that people already know the answer that would have been given by the president and that it would not have changed a thing. This means that the price of Putin’s media responses about serious issues have dramatically depreciated during the seven years of his presidency. Only the naïve or desperate people would risk a serious analytical discussion about the state of the current affairs in Russia.

Vedomosti

Private security firms squeezed out by the state

2006-07-04T02:02:00.000+04:00

State security personnel, formerly under the Ministry of Interior umbrella, have struck a crucial blow to the private security firms, something which is bound to eliminate any kind of competition in the security personnel services market.

It was hoped that once the “VOJR” section on the Ministry of Interior was separated from the state forces in 2005 (to form FGUP Okhrana), the competition would have a chance to increase its share on the market which includes guarding warehouses, apartments and carrying out private detective work.

But the new law recently approved by the president states that former state security personnel are allowed to use weaponry and guard dogs to defend themselves, something which is prohibited for the private companies. Additionally they are allowed to enter premises without seeking permission if they believe that a criminal is hiding within.

Not surprisingly such move has virtually wiped out any signs of competition in the market which was valued in 2005 at around USD4.3 billion. Analysts say that this represents yet another attempt at monopolisation of the market by the state-controlled company. At present, FGUP guards around 16,000 objects in Russia.

No such law exists in any other developed country. In Great Britain, private security personnel are even allowed to participate in the Iraq war operations.

Vedomosti

Links:

FGUP Okhrana Webpage

Russian economy would collapse without corruption - expert

2006-06-30T03:45:00.000+04:00

The Russian economy would collapse if corruption was to disappear today. Such is the strength of the system of corruption in the country which occupies the 126^th place in the Transparency International index.

The transition to a legal economic system would require far too many resources and sacrifices to be taken. Not only it would take years for the country to progress towards a transparency, but support from business and the general public is vital.

Another issue which dogs any investor is insider trading. Whilst corruption scares foreign investors away, insider dealing negatively impacts the stock market. Although progress seemed to be made with the introduction of the Insider Dealing Legislation, the truth is that the new law is fundamentally flawed. Previously, any high-ranking official could have been under investigation, but now the legislation is only applicable to private companies. This means that Central Bank and the ministries have to regulate themselves while state officials are excluded from the list of potential suspects.

Since state officials are the likely recipients of unpublished price-sensitive information, their competitive advantage on the stock market will only increase. Not only is the state the biggest holder of Russian securities but its funds account for over 30 percent of the total 2005 Russian M&A. Corporate control of the ruling political system will become more apparent with the upcoming IPOs of Rosneft and VneshTorgBank. This potentially suggests that the level of insider trading will only increase in the future and, just like corruption, it will become a Russian institution.

Vedomosti

Tatneft leaves NYSE

2006-06-29T03:52:00.000+04:00

Russian oil company Tatneft has announced its intention to delist from the New York Stock Exchange (NYSE). It will be the first time a Russian company has left the world's biggest exchange. Tatneft said its decision was based on the growing cost of securities registration in the United States and a desire to focus on trading on the London Stock Exchange (LSE), where it is also listed.

But market players say the company failed to comply with the NYSE's requirements.

A source in Tatneft's Moscow office said the company currently had 21% of its stock listed on the NYSE in the form of American Depositary Receipts (ADR), all of which could be moved to the LSE. The delisting decision is to be considered by Tatneft's board of directors on June 30.

"Since spending on registration with the U.S. Securities and Exchange Commission has grown substantially in the past few years, the company has decided to move international trading in its securities to London," Tatneft said in a press release.

Other market players say these reasons are not crucial.

"The company most likely does not want to provide transparent financial reports," said Konstantin Batunin, an analyst with Alfa Bank. "The LSE requirements on issuers are less strict, and the disclosure volume is smaller."

Vladislav Metnev, an analyst with the Troika Dialog brokerage, agreed.

"One of the reasons is delays with the provision of reports, which proves that Tatneft does not need the NYSE listing," he said. "It may reduce its disclosure standards after delisting from the exchange."

Tatneft has had disclosure problems for years. Its press release said the company had sent the SEC an audited report for 2004 and an unaudited report for the first half of 2005. Had the company postponed the reports, it would have lost its listing on the NYSE anyway.

Kommersant, RIAN

State prohibits cross-border M&A

2006-06-27T03:06:00.000+04:00

Contrary to the popular belief in Russia, it is not Europe that is not letting Russian companies into the Western market, but rather it is the state which gives out far too few approvals to cross-border mergers and acquisitions.

As the Vedomosti editorial continues, Mr. Mordashov was one of the lucky ones to get a chance of entering the European market. Since no deal is a sure deal, a failure was a possibility but with the lack of other possible mergers between Russian and foreign companies, each deal that falls through is felt painfully in the country.

Russia is falling behind in foreign M&A. Only 23 percent of all merger and acquisition activity goes to those that involve foreign companies. This compares with the Eastern Europe’s 40 percent Slovakia’s 60 percent and Ukraine’s 95 percent. The small amount of cross-border activity is due to the fact that the government does not allow it, something which incongruent with Russia’s desire to enter the WTO.

Vedomosti

The fallout from the Arcelor-Mittal merger

2006-06-26T01:36:00.000+04:00

[Update 2]

An agreement has been reached between Mittal Steel and Arcelor to form Arcelor Mittal, the world’s biggest steel company. Although there has not been a response from Severstal or Mr. Mordashov yet, others reacted with anger.

Viktor Khristenko, Russian's energy minister, has accused Europe of ‘russophobia’, as it tries to block the global ambitions of the strengthening Russian economy.

Others believe that Severstal was used as nothing more than a bargaining chip to get Mittal to up the stakes in the battle to merge and to push up Arcelor’s capitalisation.

Although, some analysts affirm that Mr. Mordashov is not going to be too downbeat on the failure to push the proposed merger through. According to a Prospect analyst, Mr. Mordashov could be looking at Corus as the next likely candidate for a merger proposal.

The perceived damage to Russia’s reputation (after all the Severstal-Arcelor deal was personally approved by the president) could be repaired by Roman Abramovich. The Chelsea owner could have been possibly given an order to create another steel empire. The new union of steel companies could include Evraz (41 percent belongs to Mr. Abramovich), Severstal and possibly Corus. Then, Roman Abramovich would try to sell the resulting company to Arcelor-Mittal for an undisclosed stake in the newly formed company, thus repeating the Kremlin-endorsed strategy.

Another source points to the possibility of Abramovich financing Severstal’s improved bid for Arcelor.

What is clear is that the steel market could change radically in the near future. In fact, as the author of a letter to the FT rightly suggested, the newly merged company should be called M&A Steel.

Gazeta, Vedomosti, RusEcon and other sources.

Turkmen gas price hike might force changes

2006-06-22T04:45:00.000+04:00

[For John especially]

Continuing this week’s analysis of the gas sector, most of the non-governmental media in Russia is discussing the relationship between the exporter (Turkmenistan) and the unlikely importer (Russia) as the Central Asian nation is demanding that Gazprom must start paying higher prices for its gas. Many, especially in Europe, see Russia solely as an exporter of gas, without realizing that it desperately needs to import gas of its own in order to fulfill all of its obligations on the domestic and foreign markets.

Fundamental issues

Why does Gazprom give priority to the export market? As it has been discussed before, this is due to the fact that Europe is paying five times more than the domestic consumers (around USD250 per thousand cubic meters). In fact, the so-called “market price” could be defined the “the price Germans pay”.

Opaque state-owned companies seem to care more about their profit than about the needs of the people. As the monopoly and its controlling shareholder, the government, concentrates on acquiring European companies and resources in order to generate more capital, domestic customers’ fate seems irrelevant, which is dangerous as Russians could be considered as being mostly at risk if an energy crisis is to occur in the future.

This unhealthy situation, centering around the wide discrepancy between export and domestic, is made worse by the fact that there is no easy solution to it. If we are to bring domestic prices in line with “German prices”, then inflation will spiral and is unknown what effect this will have on the stability of the political system. Any other solution will requires political pressure, something which is unlikely to come in this time when political apathy and lethargy has gotten hold of the population. Decreasing consumption (energy-saving is virtually unheard of in Russia) is a difficult process of educating the public and let’s face it: it will not give results in the next few years.

Russia might be producing an image of an energy-super power who can bully its neighbors into submission but the truth is that it can be bullied by its own suppliers in the exactly same way. Let’s assume for a minute that Turkmenistan does turn off its gas at the source. This will not only cause widespread mass-media inspired panic in Western Europe, but will also put the Russian, Ukrainian or Georgian consumer in danger of spending the winter fighting gas shortages.

And Russia can’t do anything about it. Turkmenistan will not respond to any king of political pressure, it has no wine or mineral water to ban, no visas to reject and it does not depend on Russia for its energy supply. Hence it holds all the cards.

Blessing in disguise?

So Turkmen’s government has decided to double the prices it charges. After all, Turkmenistan is mimicking Russia exactly, by raising prices and warning it that it might turn the gas off or switch its supply to China. In the future, we might see Russia importing gas at “market prices”.

The first victim of this price hike will be Ukraine. Currently buying Turkmen gas (together with the more expensive Russian gas) from the shady RosUkrEnergo outfit,

Ukraine will see its import prices increase, something which will undoubtedly put pressure on the economy. Vedomosti analyst even goes as far as affirming that USD250 per thousand cubic meters will collapse the Ukrainian economy completely and that could be a secret ploy to remove Yulia Tymoshenko from the ruling post. Something to consider then.

The Turkmen gas price hike might be a blessing in disguise. Of course Turkmen gas is less vital to the Russian economy than Russian gas is to the Ukraine economy but it is important nonetheless. Gazprom is promising to increase its exports, something which produces shortages on the domestic market (which the Turkmen gas covers). Liberalisation might be a distant dream, but with the difference between export and import prices getting smaller, Gazprom will loose the desire to import foreign, politically unstable, gas and will put more of an effort into increasing its own supply, something which might benefit the economy as a whole. Also, the one-price system could see the disappearance of third party companies related to Gazprom which give it a bad image of an opaque state corporation where corruption is rife.

Hope for the future

Gas economics is creating Russia enemies all around. At this moment, the only friendly consumer getting cheap gas is the Russian citizen. Looking back, it could be argued that not before long the Russian consumer could theoretically become disgruntled with the energy politics of the state. Keeping the media under control might help. It is not unfeasible that the West will get blamed for the gas shortages with accusations of protectionism coming from Kremlin.

So far the market economy in the energy sector is giving way to centrally planned mechanism of a vertical political system. Whether the difficult times brought on by suppliers ‘not playing ball’ will pressure the system into changes is debatable. What is clear is that it will get worse before it gets better.

Vedomosti, RusEcon, Gazeta, BBC News and other sources.

Ford stripped of customs breaks

2006-06-21T15:43:00.000+04:00

Russian authorities have for the first time become involved in a serious conflict with a foreign car manufacturer assembling its vehicles in the country. Customs officials have accused the Ford plant in Vsevolozhsk, Leningrad Region, of breaching an investment agreement, and have stripped it of tax breaks on imported car parts. This is a signal to all western auto companies starting production in Russia: even the slightest omission in the observance of the rules will be strictly penalized.

The plant, Ford Motor Company, produces 60,000 cars a year, operating under the Import to Free Customs Warehouse regime. The 1991 investment agreement stipulated that Ford was to increase domestic component production to 40% in 2006 and 50% in 2007. In August, the company is planning to sign a new agreement with the Economic Development and Trade Ministry, to obtain industrial assembly status, together with other obligations.

Sources say the company has disputes with the Russian ministry every year on how to estimate the percentage of local production, which, according to the Customs Warehouse regime, is calculated with an eye to the real costs of production. As a result, the total includes the wage bill for employees, and outlays on energy and land lease.

Toyota, Nissan, General Motors and Volkswagen have already announced their desire to build assembly units in Russia, and the issue of local manufacture is among the most contentious for them. The authorities on Monday made it clear they would not give foreign companies an easy time.

"The norms and commitments listed in agreements with foreign investors must be strictly fulfilled," the Industry and Energy Ministry said on Monday, commenting on the situation. "Any respected automotive company must honour its obligations," echoed Maxim Sokolov, chairman of the St. Petersburg committee on investments and strategic projects.

Kommersant, RIAN

Liberalisation of the gas market needed

2006-06-21T03:29:00.000+04:00

RAO UES of Russia, the country biggest buyer of gas, is currently experiencing gas shortages. In order to combat this, the government is proposing price hikes, but true liberalisation of the gas market is needed is the country is to avoid huge energy shortfalls in the future.

RAO UES controls a third of the domestic gas market, which translates to 150 billion cubic meters of gas annually (total production is 640.6 billion, total export – 151 billion and rising). Two thirds of the gas it buys comes from Gazprom itself (through a daughter-company named MezhRegionGas), while the other more expensive third comes from “independent” producers, which are usually not only controlled by Gazprom itself but are a gateway to money laundering and corruption.

The gas shortages are due to the fact that Gazprom, the nation’s source of gas, cannot deliver any more gas because it is saving for the winter by transferring gas into the reserves. Additionally, as many analysts have many times pointed out, Gazprom will experience gas deficit by 2010. As the nation’s demand increases, Gazprom is simply unable to keep up.

The domestic market will see prices of USD100 per thousand cubic meters of gas, but this will do little to solve the underlying problem. If the situation stays unresolved, gas shortages have the potential of hurting the nation and taking away as much 5 percent of the annual GDP. A full liberalisation of the gas market is needed, which would allow independent companies to stake their claim on the domestic pipe-politics.

Support us and you will pay less?

Currently, most of Gazprom’s profit is from export to foreign countries, where the prices paid are higher. The monopoly has already planned for gas increases for Russia’s neighbors, and even those countries that are considered “friendly” will have to pay the price Western Europe is paying. There are suggestions that countries that happen to be in the Russian orbit might get better treatment, with Gazprom allegedly seeking ways to minimize damage to the economy from sudden price increases for countries such as Belarus. However, some are more cynical about the proposed price hikes with BrokerCreditService’s analyst believing that Russia will try to tempt other countries into maintaining pro-Russian stance in return for cheaper gas. It will be important to see how the price dispute with Belarus turns out.

Vedomosti, Gazeta, RusEcon

Russian tycoon ready to bargain for steel producer Arcelor

2006-06-19T15:18:00.000+04:00

The head of Russian steel giant Severstal, Alexei Mordashov, will not back down on a merger with Arcelor; potentially, he is prepared to offer better terms than the company's rival, Mittal Steel. This is because top-level politics has become involved in the deal, so Mordashov already has no right to lose.

For Russia's top brass, the project is a matter of international prestige - the deal has been endorsed by President Vladimir Putin himself. If Severstal succeeds, Russia will be respected in Europe as a politically strong partner, one that saved Luxembourg-registered Arcelor from a takeover.

For the time being, Severstal has the upper hand in its battle against Mittal Steel. On June 11, Arcelor's board of directors unanimously turned down a Mittal Steel bid, and recommended that its shareholders vote for a merger with the Russian company at a meeting on June 30. However, some Arcelor shareholders are critical of the Severstal offer, mainly because it is less transparent. They say Mittal Steel's offer is more understandable, and the information it contains is more detailed and clearer.

Troika Dialog analyst Sergei Donskoi said both companies have room for maneuver. Mordashov may increase the size of his offer or reduce his stake in Arcelor, but Severstal is not financially as well-heeled as Mittal Steel.

"Mordashov will not gain from lowering his stake in Arcelor," said Finam analyst Natalia Kocheshkova. "On the contrary, he is anxious to increase it. Severstal must have a blocking stake at all costs, otherwise the deal has no purpose, because Mordashov would then swap greater control over Severstal for less control over Arcelor."

BrokerCreditService analyst Vyacheslav Zhabin said the deal with the Russian company has the support of the Arcelor management, who, if Severstal wins out, will keep their posts for four more years, as proposed by Severstal. "Arcelor managers will have to demand a higher offer from Mordashov to hold on to their positions. Otherwise they will be unable to explain to their shareholders why they should agree to the Severstal proposal, even though it offers less cash," the analyst said.

Gazeta.ru, RIAN

Arcelor's management should listen to its shareholders - The Economist

High oil prices key to stock market performance

2006-06-19T02:10:00.000+04:00

Some predictions for the stock market performance in the case of USD100 priced Brent oil.

Aton analysts: RTS will exceed 2500 points. Gazprom could double its market capitalisation, SurgutNefteGas’s share price will rise by 84 percent and TNK-BP’s by 83 percent.
UBS: Gazprom will be 2.8 times more expensive, Lukoil – 3 times, TNK-BP – 2.6 times and SurgutNefteGas – 2.3 times.
BroketCreditService: TNK rising by 22 percent and SurgutNefteGas by 27 percent.

Oil priced as it is now, at USD70 per barrel.

UBS: Gazprom’s share price will increase by 93 percent, Lukoil by 124 percent, SurgutNefteGas’s by 75 percent and TNK-BP’s by 162 percent.
Troika Dialog: After 2008, Lukoil will be 3.5 times more expensive, TNK-BP – 3 times and SurgutNefteGas 2.5 times.
BroketCreditService: Lukoil will be 1.5 more expensive and TNK-BP will increase its market cap by 25 percent.

It remains to be seen if the oil price will increase. Some analysts believe that the oil price has peaked with USD50 being the likely price for the future. Others, most notably Goldman, believe that oil could go as high USD105 per barrel. Additionally, some investors go by such indicators as oil futures which seem to point to oil priced in the region of USD70 in the next few years. Does the investor’s outlook on oil prices dictate whether he or she should buy Russian blue-chips now? Moscow-based Kazimir Partners seems to think so while others will disagree.

Oil Bourse

There are some fears that the high oil prices will mean that oil will not be traded on exchanges, with direct contracts between the government and the client prevailing. The January debut of the oil burse could have problems, as the private oil companies do not have the necessary availability of oil in order to trade it on the domestic exchange. In order for the oil bourse to be a success, there needs to be liquidity, something which will be difficult to accomplish even if state-owned companies will be given the order to provide a minimum amount of products to be traded.

Vedomosti, The Economist, RusEcon, Gazeta

Uralkali to IPO

2006-06-19T01:29:00.000+04:00

Uralkali, one the biggest potassium salt producers in the world, will go forward with a 10 percent flotation which will net the company over USD350 million.

Last Friday, the board of Directors has decided to call for an EGM in order to vote on the underwriting agreement. The underwriter is still unknown to the public.

The company’ owner, Dmitry Rybolovlev, is the latest Russian billionaire to take his company public. Mr. Rybolovlev is considered to be one of the most opaque businessmen in Russia. 30^th in the Forbes list of Russian billionaires, he now resides in Switzerland. In 1996 he was accused of murdering his business rival, but after spending only 11 months in prison he was released on bail and subsequently cleared by the courts.

Vedomosti

Arcelor's management should listen to its shareholders - The Economist

2006-06-18T19:25:00.000+04:00

The battle for Arcelor is about more than steel

Mittal Steel's chances of taking over Arcelor are improving

The Economist has accused Arcelor’s chief executive and chairman of trying to save their jobs at the expense of Arcelor’s shareholders, by backing Severstal’s acquisition of the company.

Euro-Nationalism. Arcelor’s management affirms that Mittal Steel is not in-tune with ‘European Values’, despite the fact that it is registered in Holland and run out of London.
Hypocrisy and bad standards of corporate governance. Proposed merger with the Russian opaque giant would put Mr. Mordashov as the dominant shareholder.
The victims. Arcelor’s shareholders are denied a say in this, despite the fact that a third has demanded a vote. The management insists that the law allows it to proceed with the Severstal deal without any vote at all. Perhaps, as The Economist suggests, shareholders should sell their stakes to Mittal by July 5^th, so that Mittal will have the 50 percent necessary to make the Severstal deal fall through. This would punish the management team which exploited shareholders’ rights.
Most analysts favor the new Mittal offer, while the management prefers the Russian variant. Shareholders should be able to decide.

The Economist

Russia to have sole regulator of financial services

2006-06-15T03:26:00.000+04:00

[Added Link + Update]

A proposed sole regulator will have the powers to maintain vigilance over banks, insurance companies and the financial markets.

The new regulator’s employees will be full-time professionals appointed by the government. The concept of a sole regulator was thought up by the Federal Financial Markets Service and it will be presented to the public within a year, in March 2007.

Currently several regulators control the financial services in Russia. For example the Federal Financial Markets Service looks over Russian stock markets, Rosstrakhnadzor maintains control over the insurance sector, while the Ministry of Finance – over pension funds. The Central Bank regulates the banking system.

In fact, anyone familiar with Great Britain will notice that this new concept is similar to the FSA (Financial Services Authority), which is an independent non-governmental body with statutory powers given by the Financial Services and Markets Act 2000. The FSA is financed by levies imposed on all authorised companies. Thanks to this new regulator, London is seen as having one of the best regulatory systems on the planet, a far cry from the fragmented and inefficient system that was there before.

The Russian version looks good on paper, but it remains to be seen whether the idea will work. Currently the government cannot even agree whether such regulator is needed. Some affirm that the system works fine as it is now and no major change is necessary. Other officials are on record saying that no firm proposal will be accepted before 2009. The idea of taking away powers from the Central Bank has also drawn criticism.

Vedomosti, RC

New insider dealing legislation brought in

State monopoly in newspaper market

2006-06-15T01:23:00.000+04:00

Around 20 of Russia's largest state-run newspaper printing companies may be integrated into a single holding. Publishers fear that the new monopoly will dictate conditions to them.

Market players say there are about 30 federal newspaper printers in the country. After the largest state-run regional printers merge, as happened in the Soviet era when the Partizdat system was formed, the country will see a large group of printers monopolizing the newspaper market, which is estimated at USD250 mln, including paper cost.

"State-owned printers still control a significant 50 percent of the Russian newspaper market," said Viktor Shkulev, head of the Board of the Ashet Filipaki Shkulev publishing company. "However, control over these printing companies is dispersed, and they fail to cooperate in protecting the interests of printers from publishers."

Market players are concerned that such a large network of printers would be better positioned than private printing companies in buying paper, which makes up 50 to 80 percent of the total newspaper cost, and would establish a large degree of control over publishers, especially in certain regions.

According to Soyuzpoligrafprom, which developed the concept of integrating state-run printers, the current value of all the companies to be united is not more than USD100 mln. The network may be privatized after the first stage of the reconstruction, to last from six to twelve months. Concept designers say the network will then be worth USD300 mln.

Marina Pereverzeva, vice president of the Promsvyazkapital Group, which controls media assets, believes the privatization scheme would be less effective and transparent than the sale of separate companies. Other market players have similar views. "Consolidating newspaper printers under the control of a single company is economically inadvisable," said Vadim Goryainov, head of the Novaya Tipografiya Company and president of the Popular Press publishing house. "And if economically inadvisable acts are being carried out, this would suggest that they are being done in the interests of a limited group of individuals."

Kommersant, RIAN, RC

Gazprom begins its attack on the Yamal project

2006-06-14T21:34:00.000+04:00

[Update 1]

Gazprom does not want to see foreign companies undertaking the Yamal peninsula liquefied natural gas (LNG) project, and has involved the courts in order to get the right to work on the project by itself.

Gazprom owned 25.1 percent of Tambeyneftgaz, which gave the license to another company, Yamal LNG, in order to attract foreign companies such as Repsol. Since Gazprom has refused to participate in the project designed to attract foreign players onto its turf, the controlling stake in the Yamal LNG field now belongs to the chairman of Tambeyneftgaz, Nikolai Bogachev. The other 49 percent were supposed to be shared between Repsol, Shell and Petro Canada.

Gazprom-Invest, part of Gazprom, has involved the courts in alleging that the transfer of the license to develop the field is illegal.

Yamal LNG was to develop and transport gas by itself, bypassing Gazprom’s export network, something which angered the monopoly. Gazprom needs to increase its reserves and getting rid of rivals to develop the Yamal field is the surest way of doing so – argue the analysts.

Gazprom is not the only company which tried to acquire a piece of Tambeyneftgaz. Dmytro Firtash’s partners, the co-owners of RosUkrEnergo, also attempted to buy a stake in it, but failed to reach an agreement after Bogachev demanded a USD400 million price tag, something that the prospective buyers thought was far too steep.

Gazprom’s mission is to show the world that it can fulfil all of the demands placed on it. However, in order to do that, it might have to import additional gas from Central Asia as it does not have enough. Additionally it needs to have access to ALL of the new development projects. In order for that to happen, competitors have to be barred first and this is where the state comes in with its General Development Scheme plan which details the future of the energy sector and places Gazprom as the only candidate for the development of any new gas project in the country.

Vedomosti, Gazeta.ru, RC

Gazprom warns Repsol to stay away from Yamal

Where is the RTS headed next?

2006-06-14T03:15:00.000+04:00

Following the worst stock market day performance for over 1.5 years, here are some predictions:

Deutsche UFG – 1450 at the end of 2006. 2007-2008 is difficult to predict. RTS could go as high as 2000 and as low as 1000 or worse.
Uralsib – 1750 at the end of 2006. However a real sell-off could be on the horizon.

Vedomosti

Sales techniques enticed pensioners into investing in stocks

2006-06-13T22:46:00.000+04:00

[Update 1]

The Russian government has used public communication and media in order to pressure private customers, who know little about the stock market, into investing their money on the market.

The massive growth prospects of the stock market were highlighted not only in business media, but on state-controlled television as well. For example, 9AM television news, watched primarily by pensioners and other unsophisticated investors, featured pieces on the “incredible” possibilities of making money on the stock market. It is then not surprising that pensioners flocked to invest in shares. A quarter of a Russian brokerage company Finam’s clients are over 50.

Pensioners have a long history of bogus advertising targeted at them. Several state-owned radio stations transmit 10 to 20 minutes worth of questionable adverts before news bulletins, which are mostly popular with the older population. These adverts usually push unproven medicaments and relate to offers which deceive the pensioners into giving up their homes for virtually no money.

Some two weeks before the Gazprom stock nosedived, the monopoly’s Deputy Chairman Alexander Medvedev has used state television in order to declare that Gazprom’s market capitalisation will reach USD1 trillion. Following the announcement, the share price went up in the short term.

Additionally, employees of many companies connected to the state were told by their bosses that they must invest in Russian companies. When the first correction occurred, many of those that invested were given bogus explanations and promised big returns in the future. While these employees were actively discouraged from selling their holdings, those closer to the government were busy cashing in on the stock they bought years ago.

Most of the April and May investments made by private customers went into Gazprom, Transneft and Sberbank. When these clients ring up their brokers, the salesmen used hard-sell techniques in order to convince people that buying Gazprom only is not good value for money and that the customer needs to buy stock in other companies as well. These companies were usually much more risky for the investor, but provided a higher commission for the brokers. Only 12.5 percent of customers managed to leave the broker with only Gazprom shares in their portfolios.

Massive influx of investors may have helped the market produce big results, with the RTS gaining 40 percent in the first four months of the year. However, when the market declines rapidly, it’s usually those that were pressurised into buying that suffer the most.

RC, Vedomosti

New insider dealing legislation brought in

2006-06-13T17:40:00.000+04:00

The May 15^th “Black Monday” was caused by insider dealing. That is the opinion of several high ranking officials, and the new legislation being brought at the end of 2006 is designed to dissuade people from trading on inside information.

“As there are no fundamental reasons for the market to collapse, we can suspect that it was caused by insider trading,” Oleg Vyugin, Chairman of the Federal Service for Financial Markets, said. If this was the case, he added, large-scale strategic investors were to blame, not speculators. At the same time, it has to be said that the official stressed there was no firm evidence that the fall was caused by insider dealing. This mirrors the affirmation by Andrei Kozlov, Senior Deputy Chairman of the Central Bank, who also told reporters that Monday’s the 15^th of May fall was largely triggered by insider trading.

According to Oleg Vyugin, the Russian stock market has to have a reliable defense system against insider dealing, if it is to compete with other leading markets in the world. The new legislation will begin with including 15 practices which will be prohibited under the law. The legislation is based on that of the EEA, according to Vyugin.

Under the new laws, the regulator will only have the right to conduct an investigation, and if it does find something, then it will pass on all the necessary information onto the Ministry of Internal Affairs. The regulator can question not only individual dealing on price-sensitive information but also those that can be providers of inside information, such as family members of the company’s directors.

What sets the Russian Insider Trading legislation apart from some Western ones is the fact that the Russian Insider Dealing offence is only a civil one. That means that the courts cannot impose prison sentences, only fines. In that sense, the new legislation is similar to the Market Abuse FSMA2000 S118 law in the United Kingdom.

Oleg Vyugin stated that it is his belief that the new system will be effective when dealing with this widespread problem on Russian Stock Market. The majority of blue-chips are said to be trading on insider information, with GAZP being one the worst.

Full implementation of the law is expected in Spring 2007. It remains to be seen whether it will curb the practice that puts the majority of investors at a severe disadvantage on the market.

RC, Gazeta.ru, RBC

Banks mislead about profits in order to escape tax

2006-06-12T03:04:00.000+04:00

Twenty six banks have lied about their profits, in order to escape paying more taxes. The real profit made by those banks is some RUR11.6 billion higher that the reported figure. The Central Bank has decided against naming and shaming.

In order to manipulate their profits, banks can deposit more capital into the various reserves available to them and/or customer accounts, amounting to a so-called ‘pollution of trust’.

It was noticed some time ago that these banks were showing meagre results, however that was first attributed to poor management.

The fact that the banks are publishing misleading statements could mean that in the future they would commit a much more serious breach of their obligations, argue analysts.

The future of the banks is unknown. Fines are likely as are prohibitions.

RC, Vedomosti

Russian car-making industry in danger of dying out

2006-06-10T18:15:00.000+04:00

Russian national car-making industry is in danger of being squeezed out by its foreign competitors as over 50 percent of foreign cars sold in 2010 (up from 27 percent now) could be made in Russia.

The latest firms to sign contracts for manufacture in Russia are Nissan and PSA Peugeot Citroen, joining the likes of Volkswagen, General Motors, Ford and Toyota.

Most Russian factories are now engaged in construction and manufacture of foreign cars, with the only exception being AvtoVaz, who is and will be getting financial help from the state in tune to USD5 billion. AvtoVaz has around five to ten years to prove that it is able to mount a serious competition to the foreign car-making companies. Protectionist measures designed to help the Russians and thwart foreigners, such as an increase in import tax and the prohibition of right hand drive cars did not yield an expected result.

The state is protecting AvtoVaz because it employs or is related to around 5 million people in the country. A failure to compete with foreign companies would produce a sizeable social problem for the government. That might happen when the import tax will be reduced. It now stands at 25 percent (+1 euro) per cubic centimetre of the engine and it will gradually go down to 15 percent in the seventh year after Russia’s accession to the World Trade Organization. Thus, AvtoVaz MUST fundamentally improve its cars by 2014 at the latest, or risk being relegated to a status of a also-run and dying out.

The disappearance of the Russian carmakers, AvtoVaz included, might not produce a big social hit as the number of people employed by the global networks of car parts and servicing established by the foreign companies in Russia will employ millions of people, hence effectively substituting AvtoVaz in the market – argue analysts.

However, AvtoVaz has a slim chance of survival. Its advantages over the competition include price, vast network of servicing dealers and the nationalism of its buyers, who prefer to buy Russian rather than foreign cars. Additionally, subsidies and protectionism by the government does usually help national corporations, as it is argued by the management consulting firm McKinsey. For that to happen, a liberalization of the market has to happen, similar to China and India. Since the Russian market resembles the Asiatic ones, one can predict that if the Russian car-making industry is to survive it will not be AvtoVaz but a completely new player that will emerge as a challenger to the likes of Ford and Toyota. In that sense, the death of AvtoVaz might be a birth of the first truly competitive Russian car.

Vedomosti, RC

Non-energy companies grow slowly after IPOs

2006-06-09T03:07:00.000+04:00

As IPO fever is about to hit Russia, a word of caution has to be sounded. Unlike 2004 IPOs, the majority of companies which held IPOs in 2005 were slow to grow and some even depreciated. Russian companies, unlike those in the West, might fall even in the first month after their respective IPO.

Six out of seven companies which held their Initial Public Offerings in 2004 grew faster than the RTS index. The story changed in 2005, with only three out of fifteen beating the index (which grew 83 percent in 2005 and added another 21 percent in 2006) and five depreciating with Amtel Vredestein loosing 38 percent of its value.

The lack of real growth by newly listed non-energy companies could be explained by the fact that the RTS is heavily inclined towards the oil and gas sector; hence its growth is higher than that of companies that are not related to the energy sector. Gazprom and Lukoil, spurred by high energy prices, managed to comfortably beat the index growth. With such prevalence of the energy companies on the stock market, investors are having a hard time diversificating their portfolios and a continuing rise in oil prices might make Initial Public Offerings by other companies seem unattractive.

Fast growth in the non-industrial sector (retail grew 50 percent in the last year) means that the companies’ owners want to cash-in, leaving little to an investor or a stag. Hence, they do not issue shares at a cheap price, even if an IPO might bring political security so needed with the upcoming difficult elections in 2008. The companies might be overpriced and any slowdown in the rapid growth of the past years may produce sharp declines in share prices.

Another explanation for the slower growth of 2005 IPO companies is that several conflicts between businesses and the state meant that many ‘traditional’ companies were far too cheap. After the Gazprom liberalisation, the blue-chips grew considerably faster than the new companies.

Many are reluctant to hold shares in newly listed companies and Morgan Stanley even refused to participate in the Cherkizovo IPO, alleging that the company’s proposed high share price was not attractive to investors. STS Media, last week, cut its proposed flotation share price from USD16-18 per share to 13.5-15.5.

Despite these warnings, there are too many gullible investors who are willing to pay attention to the hype the investment bankers spread on their road-shows. And as long as there are a good number of such investors, underwriters will always propose high priced IPOs, say the analysts.

Vedomosti, RC

State-owned companies' debt mounting

2006-06-08T22:24:00.000+04:00

Whilst Russia is paying back debt of the former Soviet Union, state-owned companies are borrowing more and more, something which is dangerous since in order to pay that debt back, crucial Russian assets will have to be sold. In the end it will be the government who will have to pay back the debt accumulated by state companies.

Russia’s debt stands at USD71.4 billion (down from 97.4 billion in 2005) while the figure for state-owned companies is much higher at USD176.2 billion (up from 108.2 billion in 2005). This means that in 2005, the government paid back 26 billion while the companies have borrowed USD67.3 billion. While the government is holding talks on paying back its debt to members of the Paris Club of creditors in the amount of USD12 billion, Vneshtorgbank is about to borrow USD4 billion by itself only.

The danger is as follows: in order to pay back their debt, companies are holding IPOs. It comes as no surprise that it is state corporations which hold the lead in Initial Public Offerings. Rosneft’s IPO in July will go towards paying back its accumulated debt in the amount of USD7.5 billion. The government and Russia is loosing part of an important asset in order to pay back the debt that was owed. The more debt, the more important energy assets will have to be given away to foreign investors, something which not only negates the riches brought on by high oil prices but something which could negatively impact Russia in the future.

Vedomosti, RC

Anti-goverment websites might come under hacker attack

2006-06-08T16:22:00.000+04:00

The difficulty of controlling freedom of speech by the government on the internet might be solved with an easy method.

DDoS-attacks (Distributed Denial of Service) have been used to take down sites such as www.compromat.ru already and more attacks are coming, predict analysts. Additionally a moment of high political tension might see some other website-blocking technology being used in order to shut the websites down.

RC, Vedomosti

Electricity shake-up could solve energy woes - comment

2006-06-08T16:21:00.000+04:00

The Russian government yesterday approved the liberalisation of the electricity sector from next year and cleared the way for the listing of generating assets on foreign exchanges.

This allows private investors to enter power generation sector and permits generating companies to hold IPOs to raise funds necessary to finance the necessary shortfall needed to modernize the system and avoid blackout crisis in the coming years, with Moscow being especially susceptible to them. The government hopes to raise up to USD4-5 billion by 2008. Generating companies will not be truly independent shareholder companies though, as RAO UES of Russia will remain the direct owner of them.

The decision is a rare example of structural reform and a victory for Anatoly Chubais, head of the Unified Energy System.

Mr Chubais said it could attract billions of dollars of private investment into generating capacity. "The fight is over. I believe there is no chance for any political opponent to stop this programme now."

Now it remains to be seen whether this fundamental shift will produce results so critically needed.

Financial Times, Mosnews, Moscow Times, RBC, RC

Russia facing gas, heat and electricity shortages

Russia set to establish Gazprom's export monopoly in law

2006-06-08T16:10:00.000+04:00

Moscow has reacted angrily to the European Commission's campaign to secure the liberalization of the Gazprom's monopoly on natural gas exports.

On Tuesday, a bill on natural gas exports was submitted to Russia's parliament that would secure in legal form the existing practice, when the energy giant - the sole owner of the natural gas transportation network - controls exports.

Sources agreed that this was an open rebuff to Brussels, and the rush was due to the Kremlin's desire to have the provision on the statute books before the Group of Eight summit in July.

Valery Yazev, one of the bill's authors, said he hoped that it would be passed in all the three readings this month.

It is time the government declared natural gas a strategic commodity and put gas trade under total state control, like weapons sales, Yazev said. However, the bill provides for an exception for production-sharing agreements, including the Sakhalin II project, which is developed by a Shell-led foreign consortium.

Judicially, any company that has gas reserves in Russia can sign a contract with a potential buyer and demand the right to ship the amount to the border. Attempts are made regularly. The latest one was the intention of Spain's Repsol to acquire a controlling stake in regional producer Tambeineftegaz, which holds the license for the Yuzhno-Tambeiskoye gas fields with reserves of over a trillion cubic meters. The Spanish company hoped to build a plant at the field and to start independent gas exports. French Total eyed another independent gas producer, Novatek, 18 months ago, also with a view to exports.

Obviously, none of the transactions has a future in the current circumstances. The French company, which was told its conduct was "unacceptable," quickly changed tack and approached Russian gas reserves from the front door. This helped it to make it to the final stage of Gazprom's tender for the massive Shtokman gas field in the Barents Sea.

Vremya Novostei, RIAN, RC

State may take over Norilsk Nickel - analyst

2006-06-08T04:01:00.000+04:00

Authorities are considering declaring nickel deposits strategic. Following this decision the industry itself - above all mining and metals company Norilsk Nickel - may come under state control.

"The scheme is simple," says Dmitry Parfyonov, an analyst with Prospekt brokerage. "First, nickel deposits are declared strategic, and then Norilsk Nickel itself may be brought under state control. The same scheme can be applied to VSMPO-Avisma Corporation, the world's largest producer of titanium products."

Partly foreign-owned joint ventures will be allowed to take part in tenders to develop strategic deposits only if their Russian stakes are not less than 51%, analysts forecast. This is the scheme used by Norilsk and Anglo-Australian RIO Tinto to set up JV RioNorGeologorazvedka, announced in January. The foreign stake in the venture is only 49%.

"Everybody knew that the state will declare nickel fields strategic, as it did with copper and gold deposits," says Vyacheslav Zhabin, a BrokerCreditService analyst. "The fact that the matter is still under consideration does not mean anything. Just look at current metal prices on world markets and their upward growth trends. The decision will not be slow in coming."

Zhabin says the state's moves are justified: the world is hungry for resources, and control over one's own reserves should not be ceded. "The strategic status of the deposits will make things difficult for foreign companies, but they will cope with this somehow," the analyst says.

Nezavisimaya Gazeta, RIAN

War must be avoided - comment

2006-06-07T03:19:00.000+04:00

There is now a possible danger that a violent conflict involving Russia could happen in the next few years. Whether a conflict will happen or not is in the hands of the Russian government.

The image of the “enemy” has fully crystallised in the minds of the Russian people, as it is reported by Levada-Centre. USA, Ukraine and Georgia are now seen as the primary enemies by the people, helped by isolationist rhetoric and aggressive foreign policy of the Russian state. The negative feelings towards the “enemy” are much stronger than the positive feelings towards the perceived allies of the country, notes the report.

The loss of individuality in the face of the “common enemy” has been known to happen before, especially visible during the 1930’s USSR, Hitler’s Germany and the Imperialist Japan. All of those countries ended in violent and bloody conflicts, something which must be avoided in the present-times Russia. There are a number of simmering conflicts on the country’s borders, with those with Georgia and Ukraine being especially worrying.

RC, Vedomosti, Levada

Societe Generale buys 10 percent of Rosbank

2006-06-07T03:16:00.000+04:00

Société Générale has acquired a 10 percent stake in the Russian bank Rosbank for a sum of USD317 million. Additionally there is an option for an additional 10 percent, something which would take the French bank’s stake to 20 percent.

The limitation of 20 percent is due to the fact that the Russian government does not welcome foreign players onto the national banking scene. Selling a controlling stake in Rosbank was strictly prohibited.

Vedomosti

Talking about stabilization fund's future is prohibited

2006-06-07T02:50:00.000+04:00

The government, taking advice from an international law firm, is taking measures to prohibit officials from mentioning the possible ways the country’s stabilization fund could be invested in the future. This is done to minimize the risks of the foreign creditors taking steps towards freezing Russian assets.

Cleary, Gottlieb, Steen & Hamilton LLP (CGS&H) has warned that there is a possibility of such actions by persons who oppose the current political and economical situation in the country, especially as Yukos shareholders continue to try to recoup USD40 billion from the government via Russian and international courts.

Hence, “it is better to avoid premature talk of what to do with the stabilization fund” – said Prime Minister Mikhail Fradkov.

CGS&H’s relationship with the government also comes under fire as its opaque nature means that there are no contracts and the money paid to the company could be classified as “under the table”. Additionally it is unclear how the company was selected to perform advisory service to the government.

Analysts say there is a definite risk to Russian assets abroad, with Noga claiming success before. The unpredictable nature of Russian politics in the next few years means that state officials must hedge their risks in relation to the safety of the stabilization fund.

Vedomosti, RC

Government to decide on multinationals' influence on Russian security

2006-06-06T18:53:00.000+04:00

The Economic Development and Trade Ministry, the Industry and Energy Ministry and the Russian Academy of Sciences will soon study the influence multinational corporations have on Russia's national security.

The results will be reported in the third quarter of 2006. The tight timeframe is no coincidence: the government is working on a bill that may restrict foreign investors' activity in strategic industries and, apparently, wants to obtain complete information on multinationals' presence in the country's production and the domestic market in general.

Dmitry Sorokin, deputy director of the Institute of Economics of the Russian Academy of Sciences, said that work on a system of interaction between the economy and multinational corporations was particularly important given Russia's potential forthcoming accession to the World Trade Organization.

"We have allowed multinationals to exert an overly strong influence in some sensitive industries, such as aircraft building," he said. "Russia's food security is also under question. We need norms that would regulate the activity of foreign players in the economy."

However, there are fears that officials will interpret the study as the instruction to find ways to block multinationals with restrictions and prohibitions.

Iosif Diskin, co-chairman of the National Strategy Center, said the government had decided to consider the issue after the latest developments around the Sakhalin II energy project.

"An analysis of the transaction raised questions from the country's leadership, because revenues from the produced oil will be distributed only after the investor has covered the expenses. There are suspicions that foreign partners are exaggerating their expenses," he said. "Another important issue is future agreements on Russian natural gas fields that will be developed with foreign firms."

Novye Izvestia, RIAN

Investment in the energy sector critically needed

2006-06-06T02:26:00.000+04:00

The Russian energy sector suffers from years of dangerous underinvestment and that needs to be changed if the country wants to avoid the risk of having massive shortages of electricity, oil and gas.

The electricity consumption figures for 2005 are 940 billion Kilowatt-hour units (down from 1074 in 1990), although Moscow’s consumption has risen considerably. Electricity outages could impact the GDP growth by as much as 5 percent. To combat electricity deficit, over USD15 billion a year of investment is needed, but the current figure is that of only USD5 billion a year. A series of IPO’s could in theory attract investment but the future will show if that is the case.

The situation in the oil and gas sector is as critical. According to specialists, the state monopoly Gazprom needs to invest USD11 billion each year just to fulfil all of its obligations. The Yukos affair has seriously impacted the sector, slowing down the oil output growth (from 11 percent in 2003 to 2.5 percent in 2005) and impacting the yearly GDP growth by as much as 1.8 percent. What makes matters worse is that foreign investors are lining up to invest in the sector but the government is not allowing it.

Vedomosti, RC

Iskander Mahmudov enters into a cooperation with the state

2006-06-06T02:00:00.000+04:00

Iskander Mahmudov, a notorious 1990’s businessman linked to various criminal scandals, has sold a stake in his company to the Russian state.

JSC Russian Railways has acquired a 25 percent stake in Transmashholding, a Russian transportation mechanical engineering giant for an undisclosed sum. Transmashholding’s capitalization is predicted by some analysts to be in the region of USD2 billion.

The new union between the companies will be headed by Russian Railways’s Vladimir Yakunin.

This sale follows a now familiar scenario where private companies have to merge with or be acquired by state-controlled companies in order to isolate themselves from potential political and economical risks and/or minimize their chances of falling foul of the authorities.

Vedomosti, RC, Kommersant

Biggest foreign deal in Russian history will not happen for now

2006-06-05T17:42:00.000+04:00

VimpelCom, Russia's second largest cell phone operator, will not purchase Ukraine's largest mobile operator Kyivstar for USD5.456 billion in the foreseeable future in what would have been the biggest overseas deal in Russian business history.

VimpelCom chief executive Alexander Izosimov said Thursday the major shareholders of Alfa Group and of the Norway-based Telenor communications, IT and media company, had failed to reach progress after three months of talks and would not acquire 36.3 percent and 36.1 percent stakes in a joint company.

Telenor representatives said the termination of duel partnership - when a conflicting shareholder could launch a process enabling only one partner to buy out all shares - was the main pre-condition for the VimpelCom-Kyivstar merger. But this scuppered the talks because Alfa Group refused to buy a 100 percent stake in the new joint company.

Experts said in early February that the deal was unlikely to be concluded. "The talks have been unsuccessful for the last month and the parties have basically returned to their initial positions," said Konstantin Chernyshev, senior analyst with Uralsib financial corporation. "VimpelCom is expanding aggressively in Ukraine and will soon pass the point of no return in terms of investment, which means a merger with Kyivstar would be pointless."

"Conflicts are a typical feature of Alfa Group, which has profited during the merger talks, strengthened its ties with the VimpelCom management and enhanced its positions in Kyivstar," Boris Ovchinnikov, analyst of J'Son & Partners consulting group, told the paper. "Alfa Group possibly needed tactical victories during the talks rather than the merger itself."

VimpelCom ADRs had risen 4.95 percent on the New York Stock Exchange by 21.00 p.m. Moscow time Thursday despite the news. "VimpelCom's impressive first-quarter performance and its successful initial start in Ukraine reduced the impact of the bad news about Kyivstar," said Nadezhda Golubeva, an analyst at Moscow-based Aton brokerage. "The better VimpelCom's subsidiary in Ukraine develops, the less investors will care about how it entered Ukraine."

Kommersant, RIAN

Rosneft flotation not a people's IPO

2006-06-05T16:47:00.000+04:00

It has been revealed that in order to buy shares in the upcoming Rosneft flotation a person would have to agree to spend more than RUR20 thousand. Thus, this cannot be called a true people’s IPO, since the monthly average Russian wage is just RUR10 thousand - say the analysts.

People behind the deal have argued that it will be too expensive to lower the entry requirement and indicated that it is the shareholders which decide such matters.

The Kremlin will float a stake of USD8-13 billion in state oil firm Rosneft just days before it hosts a Group of Eight summit, as it wants to present the IPO as its input to global energy security, bankers said on Monday.

Vedomosti, Reuters

Gazprom warns Repsol to stay away from Yamal

2006-06-05T02:40:00.000+04:00

Gazprom has warned that it will prohibit the USD6 billion joint-project between Repsol and Tambeyneftgaz for a liquefied natural gas (LNG) in the Yamal peninsula.

Gazprom’s management is unhappy at the fact that it has lost out on the participation in the Yamal’s South Tambei gas condensate field. Gazprom Group wanted to own the controlling stake in the project while the rest should have been distributed between foreign companies which include Repsol, Shell and Petro Canada. However, Nikolai Bogachev, the chairman of Tambeineftegaz, is said trying to block attempts by Gazprom to control Tambeyneftgaz, thus generating anger within the monopoly.

Gazprom has involved the government in trying to regain to control in the project. GazpromBankInvest has sent a letter to Mikhail Grishankov, first deputy chairman of the State Duma (lower house) security committee, complaining about the actions of the Bogachev and Tambeyneftgaz. Such tactics are likely to work and Bogachev has already admitted that he will sell Gazprom any stake it desires in the project.

Analysts argue that this shows that foreign energy companies cannot work in Russia without GAZP’s permission, much like TNK-BP cannot start developing its proposed East Siberia gas project because Gazprom considers it premature.

Vedomosti, RC

Segei Ivanov becoming the 2008 favourite with foreign media

2006-06-04T00:10:00.000+04:00

FT analysts said that the dismissal of Mr. Ustinov, the country's hardline chief prosecutor, was a sign of the strengthening of Sergei Ivanov, the powerful defence minister and another strong candidate to succeed Mr. Putin as president in 2008. The president and Mr. Ivanov both served in the KGB, the Soviet secret service.

France’s Le Figaro’s belief is that Mr. Ustinov was a member of the so-called “Family”, a group of individuals who had considerable power in Yeltsin’s times and included the now exiled Boris Berezovsky. Thus, Mr. Putin wanted a chief prosecutor that is ideologically closer to him, with Mr. Kozak being the likely successor for the role. The paper concludes that president Putin is using the battle for corruption as an explanation for the dismissals which are designed to reorganize the government as the 2008 elections get closer.

Financial Times, Gazeta

UBS sees trouble ahead

2006-06-02T02:11:00.000+04:00

UBS has predicted that the 2008 presidential elections will bring trouble to the Russian stock market. Particularly singled out was the risk of the battle for control by the different Kremlin factions and the vast number of Russian IPO’s, which could mean that investors will start selling in order to buy new companies’ shares.

Al Breach of UBS has stated that it is his opinion that president Putin will leave his post in 2008, passing his duties to another “Putinite”.

But despite the fact that the political system will likely survive intact past 2008, there are a number of risks the presidential elections pose for the stock market. One such risk is the internal battle for control between different Kremlin factions which could lead to impact a few state-controlled corporations although a second Yukos case is unlikely, says Breach. Recent examples of such struggles for power away from the public gaze include the so-called “battle against corruption” and the suspension of trading in Transneft’s preferred shares.

The fact that many companies could be left without “their man in Kremlin” will lead them to increasingly rely on an IPOs to diffuse the risk. The amount of Initial Public Offerings will only rise in the run-up to 2008, amounting to approximately USD25-40 billion. Such big amount will put pressure on the market and will see investors selling previously held shares before deciding to buy the newly available ones.

Vedomosti

Gazprom to continue overseas expansion

2006-06-01T16:14:00.000+04:00

Russian gas monopolist Gazprom is considering buying assets in Slovenia. The Slovenian authorities are selling the Nafta Lendava oil refinery and are also ready to invite the Russian gas giant to build gas power stations in the country, in exchange for more Russian gas.

Nafta Lendava's activities include marketing of oil products and drilling of oil wells. The plant is 100% state-owned, and has annual revenues of $78 million. According to a Slovenian Economics Ministry official, LUKoil has also shown interest in the company. LUKoil declined to comment.

"Why does Gazprom need a Slovenian refinery?" asked Vladimir Milov, president of the Institute for Energy Policy, adding that the Slovenian government's controlling stake in gas distributor Geoplin d.o.o. Ljubljana would be more lucrative to Gazprom. The possibility of the government selling the stake is being actively debated in Slovenia, he said.

Gazprom would like to have access to end customers in Europe, so it may also show interest in Slovenian gas operators, said Sergei Suverov of Gazprombank. Geoplin d.o.o. Ljubljana is an old partner of Gazprom - last year, it signed a new gas supply agreement for 2007-2015 with Gazexport, the Russian gas giant's export arm.

However, the Slovenian economics ministry official said selling the stake is not a priority for his country, although it would like to involve Gazprom in the construction of gas power stations in the future.

The Slovenian authorities have already been considering the possibility for a few years, said Andrei Zubkov, an analyst with Trust investment bank. The project may prove beneficial for Gazprom, he said, because Slovenia has a high level of income. In addition, it borders on energy-hungry Italy, a potential destination for electricity exports.

Slovenia's energy system is primarily based on hydro power stations with a capacity of 2,800MW, while there is also a 676MW NPP on the border with Croatia and four thermal power stations with an aggregate capacity of 1,262 MW, the bulk of which is produced by coal-fired plants.

Vedomosti, RIAN

Trade war between Belarus and Russia about to erupt

2006-06-01T04:05:00.000+04:00

The behind the scenes power struggle between Russia and Belarus is set to take public stage after Belarus retaliated at Russia’s proposed fourfold gas price increase. The Belarus customs stopped a Russian convoy of trucks carrying tobacco and alcohol for sale in the region.

The action is explained as a failure of the Russian company to comply with the import law; however no such requests were made before March.

The order not let Russian produce through was not local but rather came from higher sources, say the analysts. The Belarusian government is unhappy at the USD200 for thousand cubic meters of gas price which is proposed by Gazprom. Currently, Belarus pays USD46 per thousand cubic meters. The power struggle also involves BelTransGas and the possibility of a unified state.

A full scale trade war could happen between the nations, with Belarus raising prices for transportation and the rent for the Russian military bases. Russia could hit back with limiting import of the Belarusian produce, akin to the current Georgia situation. Belarusian export into Russia is currently valued at USD5.7 billion a year.

Vedomosti, RC

Rostelekom shares surge 10 percent in one day in a case of insider dealing

2006-06-01T03:30:00.000+04:00

Trading in Rostelekom shares on RTS had to be stopped as their price rose 10 percent on Wednesday, in what appears to be a case of insider trading. Trading in preferred stock was also brought to a halt as they rose past the 15 percent limit. Since May the 22^nd, the company stock market capitalization grew 30 percent whilst other blue-chips were struggling in the wake of the emerging markets sell-off.

The precise reasons for the price surge are unknown. Some analysts attributed it to the announcement that the company’s profits will rise six fold in the next year, due to the change in how its daughter companies operate. However, that information was already published and known to the market. What is more, the immediate financial results of the company are not good, as the Q1 2006 profits are down by 15 percent. Such considerable increase in share price with no apparent price-sensitive information published points to a case of insider dealing, similar to when MosEnergo’s shares rose unexpectedly in 2004, only to be revealed later that Gazprom is acquiring the company. Inside information is most likely coming from a primary source in Rostelekom’s management.

The buyer is Russian and is using a foreign bank as an intermediary. Some analysts speculated that Victor Vekselberg is the mystery buyer but he has denied that.

Analysts issued a “sell” recommendation on Rostelekom’s shares.

Vedomosti, RC, RTS.ru

Mayoral elections to be scrapped

2006-06-01T00:35:00.000+04:00

Elections for mayor risk running the same fate as the elections for regional governors as there are growing calls to abolish them.

This comes after the Volgograd mayor, Evgeny Ishchenko, was detained after the session of the United Russia party at the region’s legislature. Two groups of state investigators searched the mayor’s office and apartment and seized documents.

The Volgograd mayor is charged with exceeding authority, abuse of power and illegal business. Evgeny Ishchenko pledges not innocent. The prosecutors are to file a petition with the court asking to issue an arrest warrant for the mayor. The mayor was said to be involved in a conflict with the United Russia-appointed regional governor.

Evgeny Ishchenko’s detention is the second high-profile criminal case against a regional leader after the arrest of Alexey Barinov, head of the Nenets Autonomous Area. The scandals only support Kremlin proponents of the abolition of mayoral elections. Unofficial sources report that a bill has been submitted to the State Duma to sanction the appointment of municipalities’ heads following the pattern of governors’ nominations, which, however, runs against the Russian Constitution and international law.

The abolition of mayoral elections is one of the many initiatives to ensure that the 2008 elections run as smoothly and predictably as possible.

BBC Russia, Kommersant, RC

Pro-Kremlin party to abolish protest voting

Europe warned that it could be left without gas

2006-05-31T23:09:00.000+04:00

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?

2006-05-31T22:33:00.000+04:00

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

2006-05-31T15:54:00.000+04:00

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

Pro-Kremlin party to abolish protest voting

2006-05-30T14:36:00.000+04:00

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

2006-05-30T05:45:00.000+04:00

[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

2006-05-30T04:11:00.000+04:00

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

2006-05-30T03:51:00.000+04:00

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

Gas trader RosUkrEnergo set to expand

Study of the Russian Media

2006-05-29T20:39:00.000+04:00

[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

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

2006-05-29T20:17:00.000+04:00

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

2006-05-29T15:32:00.000+04:00

[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?

2006-05-29T15:24:00.000+04:00

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

2006-05-29T01:16:00.000+04:00

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 16^th. 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

Arcelor to issue shares for Severstal to take stake

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

2006-05-27T00:14:00.000+04:00

[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.

Yuganskneftegas's debt foul play

Russia's largest gold-mining company launches ADR program

2006-05-26T15:48:00.000+04:00

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

2006-05-26T15:46:00.000+04:00

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

2006-05-26T02:21:00.000+04:00

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

2006-05-26T02:07:00.000+04:00

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

Foreign investment in Sakhalin under threat

2006-05-25T21:53:00.000+04:00

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

2006-05-25T21:33:00.000+04:00

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

2006-05-25T14:48:00.000+04:00

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

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

Barinov, Russia's last popularly elected governor arrested

2006-05-25T14:42:00.000+04:00

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

Rosneft's opponent to go to jail

Foreign energy companies denied access to natural resources

2006-05-25T02:54:00.000+04:00

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

2006-05-25T02:51:00.000+04:00

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

2006-05-25T02:35:00.000+04:00

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

Media in Russia substitutes other civic institutions - expert

2006-05-24T15:36:00.000+04:00

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

2006-05-24T15:34:00.000+04:00

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

2006-05-24T04:35:00.000+04:00

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

2006-05-24T02:40:00.000+04:00

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

2006-05-24T02:25:00.000+04:00

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 14^th 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

Russian Minister Laundered Money To Buy Mobile Operator

2006-05-23T14:21:00.000+04:00

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

2006-05-23T14:13:00.000+04:00

[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

2006-05-23T14:03:00.000+04:00

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

2006-05-23T01:29:00.000+04:00

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 1^st 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

Russian Banking: A land of limited opportunities

2006-05-22T16:11:00.000+04:00

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.

Russian Railways, Siemens ink high-speed train contract

2006-05-22T14:58:00.000+04:00

On May 18, Russian Railways (RZD), the country's rail monopoly, inked a contract after two years of talks with Siemens for the purchase of eight custom-made high-speed trains worth 34.5 million euros from the German company. A 300-million-euro pre-contract agreement stipulating a 30-year warranty and post-warranty support was also signed.

In 2005, former RZD president Gennady Fadeyev signed a contract on purchasing 60 Siemens bullet trains that were to have been assembled at the Demikhovo machine-building plant in the Moscow Region, owned by engineering giant Transmashholding. But current RZD president Vladimir Yakunin said on Thursday that Russia lacked the required technical base for implementing this project.

"RZD, which paid 40 million euros for the bullet-train project, will own all production forms and records," said RZD vice president Valentin Gapanovich. RZD plans to operate one such ten-car train based on the Velaro train, with a speed of 250 km/h, along the Moscow - St. Petersburg route. The German trains will be able to travel at up to 300 km/h after Russia upgrades its rail track.

Yakunin said the price of the trains had been halved during the talks. Gapanovich said the expense was justified, because Russia has not been able to find technology of this kind anywhere else.

Natalia Odintsova of the Russian Funds investment group said the contract price matched the cheapest European contracts in this category. "This is a mutually advantageous contract, because Siemens considers Russia a strategic market."

Vedomosti, RIAN

Government to replace Yukos shareholders

2006-05-22T14:54:00.000+04:00

Yukos, an embattled oil company, has filed a motion with an American court seeking to lift a ban on the sale of its foreign assets that was introduced at request of its temporary administration. Shareholders want to sell Yukos's stake in Mazeikiu Nafta, a Lithuanian refinery, and pay off their debts to the government. But the authorities are getting ready to replace the beleaguered major's shareholders.

"If the transaction is not completed soon [the Lithuanian government set the deadline at May 26], we will most probably lose it, and the plant can be nationalized," Yukos admitted.

Objections of temporary administrator Eduard Rebgun could be a sign that the government is working on a new scenario for Yukos's property. Most probably, the company will survive and keep all of its assets, but its shareholders, i.e. Menatep Group, will be replaced.

So far the Prosecutor's General Office does not have any financial charges to bring against Menatep shareholders, which means that it cannot seek its foreign assets to be arrested, confiscated and handed over to state-owned firms.

The government now hopes to receive assistance from Alexei Golubovich, Yukos' former director for strategic planning and corporate finance, recently arrested in Italy. Investigators expect him to testify about the illegal operations of Yukos shareholders, about certain threats on the part of one of them, Leonid Nevzlin, and about attempted murders that were allegedly prepared on his orders. But more importantly, he is expected to testify about the company's and its shareholders' involvement in money laundering.

Yet this is where the detainee will face the greatest danger. If he gives the necessary evidence, he will testify against himself, as he was in charge of all financial operations. This means that he will be automatically accused of money laundering and will not be able to get away with a suspended sentence.

Golubovich was told "not to resist" extradition to Russia, as his wife Olga Mirimskaya runs a successful business in Russia, the Russky Produkt company.

Gazeta.ru, RIAN

Russia to buy gas from Kazakhstan at higher prices

2006-05-22T14:31:00.000+04:00

"Our specialists have reached agreement on extraction, processing and transportation of Kazakh gas," Putin said in televised comments. "We have also agreed on prices." Russia will buy gas from the neighbouring region Kazakhstan at a price of USD140 per thousand cubic meters (up from USD60), something which is closer to the true market price. Currently Russia buys approx. 8 billion cubic meters of gas from Kazakhstan every year.

Analysts predict that this price rise will be felt in Ukraine, who was getting cheap Kazakh gas as part of the deal which saw Russia turn off the gas supply last winter. Currently Ukraine pays USD95 per thousand cubic meters, but this figure could go up as soon as Russia starts paying more for its gas imports. Ukrainian President Viktor Yuchshenko said earlier in May he expects Ukraine to pay a stable price for the next five years, although Gazprom said it would review the agreement from July 1 with the new price likely to be around USD130 per thousand cubic metres of gas.

Apart from Kazakhstan, Turkmenistan and Uzbekistan are likely attempt to raise the prices at which they sell their gas to Russia. Russia is willing to cooperate as it is afraid of the possible construction projects that will bypass Russia completely. At the moment Russia is the sole importer of gas from the Central Asia regions. However, Kazakhstan is keen to sell its gas to other countries, be it to Europe through the proposed Caspian Sea pipeline or to China.

Vedomosti, UNIAN, Moscow Times, RC

Rosneft's opponent to go to jail

2006-05-22T14:05:00.000+04:00

Alexei Barinov, the Arkhangelsk regional governor, could face jail in what experts consider to be a vendetta for his conflict with Rosneft.

Barinov is charged with stealing money in the amount of RUR30 million, however he is known for a conflict with Rosneft when the state-company was accused by the regional government of tax avoidance and bypassing environmental laws.

Additionally Barinov could be also held liable for not removing the regional senator Sabadash, as requested by the siloviki. Here, political experts affirm that such bullying by Kremlin could have negative repercussions and unite the regional governing team even more.

Vedomosti

FT: Energy gives the power to surging markets in Russia

2006-05-20T22:34:00.000+04:00

Financial Times

Fund managers are keen on Russia’s oil and gas companies and "Investors are making money in Russian government bonds".

The risks are considered to be lower than before the restructuring. High oil prices benefit the economy.
Russian stock market remains an attractive place for investors, despite the 11% correction. The RTS has risen 302 percent in the last 3 years.
Ruble is strong and so is the country’s foreign exchange reserve.
Gazprom, LUKOIL and Bank of Moscow are the favorite blue-chip companies.
Metals, Chemical and timber companies are becoming more important.
Jupiter's Emerging European Economies fund, run by Elena Shaftan is up 252.45 per cent in the last three years.

Although,

Companies’ performance is tightly tied to energy prices, if oil price falls then so will the RTS.
The returns on some companies are not good in comparison with those in the West.
Approach the market with caution, danger of re-nationalization looms over the region.
Remember the 1998 crisis when Russia defaulted on its debt.

Stabilization Fund nears USD67 billion

2006-05-20T22:32:00.000+04:00

The size of the Stabilization Fund of the Russian Federation is close to RUR1.8 trillion (about $66.67 billion at the current exchange rate), Prime Minister Mikhail Fradkov said at the meeting of the intergovernmental council of the Eurasian Economic Community in Minsk on Friday. He said the Stabilization Fund topped RUR 1.2 trillion at the beginning of this year.

RBC

Kremlin to secure control over VSMPO-AVISMA

2006-05-19T17:48:00.000+04:00

The Russian titanium producer VSMPO-AVISMA has made a resolution in principle to sell its stake to state-owned arms agency Rosoboronexport, the corporation's General Director Vladislav Tetyukhin told a press conference in Verkhnaya Salda. According to him, the parties are now discussing the size of the shareholding, its value, and the deadline for its sale. Rosoboronexport had announced its intention to acquire a controlling stake in VSMPO-AVISMA in March 2006, but the latter declined the offer as impractical.

Vyacheslav Bresht and his business partner were trying to fend off stealth attempts by the Russian state to take control of his company, causing the postponement of the IPO and angering its two biggest customers – Boeing and Airbus.

This appears to be the latest example of a state-owned company trying to muscle in on a private business under the banner of “defending national strategic interests”. The Kremlin has already secured control over some of the country’s largest companies, including Yukos and Sibneft.

RBC, Financial Times, RC

Russia's budget would run major deficit without oil revenues - expert

2006-05-19T15:47:00.000+04:00

In June, the Russian Finance Ministry intends to present a new draft budget without oil revenues. Experts told the paper that Minister Alexei Kudrin's initiative was unlikely to be implemented any time soon, as it is senseless to adopt such a budget given Russia's dependence on oil.

According to the minister, he does not intend to pursue a non-oil budget and calculations will only be used as an argument against increasing the budget's expenses. "So far we do not intend to implement a scheme used in Norway and Kazakhstan, where the budget does not take into account oil export revenues," he added.

Yevgeny Nadorshin, an economist with the Trust investment bank, said this was realistic. "In this case, the budget deficit could reach 35%, or 8-10% of GDP," he said.

If the country changes its budget policy, the deficit will have to be covered from the oil returns fund. "But then the idea becomes senseless. What's the point of calculating the budget?" Nadorshin said.

He said that, in his opinion, Kudrin's initiative was purely populist. "At present, oil dependence looks somewhat abstract, but it will be clearer in the new budget. Then it will be easier for Kudrin to prove that spending should not be increased."

Alexei Kalinin of the Razvitiye Biznes Sistem consulting company said, "The new budget is a visual aid." It is unclear whether ministry experts will be able to exclude completely oil revenues from the budget. "Most probably, they will choose a simple calculation method: revenues from severance tax, petrochemicals duties and the oil company profit tax will be crossed out," Kalinin said. "But it is unlikely that they will be able to eliminate companies' additional oil-related revenues."

Biznes

Governor demands cancellation of mayoral elections in regional capitals

2006-05-19T15:46:00.000+04:00

Russia's executive authorities have made yet another attempt to integrate the mayors of regional capital cities into President Vladimir Putin's famous "power vertical."

Yegor Stroyev, governor of Orel Region in southwest Russia and former speaker of the upper house of parliament, has called for mayors of regional capitals to be appointed along similar lines to governors.

The same proposal had previously been made by influential regional leaders, including Eduard Rossel, governor of Sverdlovsk Region in the Urals, and Murtaza Rakhimov, president of the Volga republic of Bashkortostan. However, all of these attempts failed.

In early 2005, the State Duma, or lower house of parliament, rejected a bill submitted by the parliament of Bashkortostan that proposed a scheme similar to Stroyev's. A Duma committee concluded that the bill was in violation of the Constitution.

Instead, a group of deputies from pro-presidential party United Russia led by Vladimir Mokry suggested a bill that would transfer some mayoral economic and financial powers to governors if the mayors in question failed to use them. The bill is rumored to have been inspired by the presidential administration. But approval has run into unexpected difficulties, and this week the house's council, which decides its agenda, put off its discussion at least until fall.

Deputies say Stroyev's idea cannot be realized without amending the Constitution.

Sergei Reshulsky of the Communist Party said the Constitution clearly stipulates that local governments are not part of the system of bodies of state power. Attempts to ignore the Constitution will have negative results, he said, as everyone who later comes to power will feel free to interpret the Constitution in their own interests.

Independent deputy Vladimir Ryzhkov said Stroyev was searching for a way to keep his regional team, nearly all of whom had been arrested on suspicion of corruption. He said Stroyev needed a project that would suit the Kremlin and help him find a way out of his current predicament.

Gazeta.ru

Putin embraces populism - expert

2006-05-19T15:45:00.000+04:00

Russian President Vladimir Putin wants to rule out any surprises. This is probably why he has embraced populist ideas and virtual policy before the beginning of a new political cycle, Vladimir Milov, president of the independent Institute of Energy Policy, a think tank, told popular business daily Vedomosti.

He said Putin's previous addresses to parliament had contained not only slogans, but also elements of an honest assessment of the political and economic situation in Russia and possible formulas for solving problems.

But this year's address turned a new page in Russian politics, putting an end to discussions of real life and real problems and ushering back unrestrained populism and black-and-white propaganda cliches.

Here is its message. "We" are good; "we" develop health care, education and science, build new housing, and have helped to curtail conflicts in the former Soviet republics. "They" are wolves out for the kill, disregarding human rights and democracy when their own interests are at stake.

Although Putin cited President Roosevelt in his address, it was more in the style of President Reagan and his caricature "map of the world according to Ronald Reagan." It was compiled in the 1980s on the basis of the former actor's statements.

Reagan preferred to describe the world in simplistic phrases, which brings to mind the lying on Russia's state-run television when it refers to [Georgian President Mikheil] Saakashvili and [Ukrainian President Viktor] Yushchenko as "Western hirelings."

Now we have been offered an official presidential myth-making strategy in the same spirit, Milov said.

Putin's address also reminded him of the speech of Soviet Communist Party leader Leonid Brezhnev at the 26th party congress. Putin does not look like Brezhnev so far, but there is a long way ahead, especially given the ongoing debates over the need to prolong Putin's presidential powers.

Vedomosti

ENI could offer Gazprom access to its distribution network in Italy

2006-05-19T03:33:00.000+04:00

ENI, the Italian energy company, is said to have offered Gazprom access to its distribution network in Italy in exchange for the 25 percent stake in the South Russian natural gas field. EON is interested in the same South Russian filed stake but is unlikely to let Gazprom into the German distribution market. The ENI interest could theoretically put more pressure on EON, analysts say.

Gazprom has so far acquired a 50 percent of WINGAS from BASF so it can concentrate on selling and marketing natural gas in Germany. The Russian monopoly is desperately trying to get access to the European distribution market where prices are more than twice as high as the bulk prices it currently charges.

Vedomosti, RC

General Prosecutor demands the names of the Transneft preferred shares owners

2006-05-19T03:16:00.000+04:00

The General Prosecutor's Office has demanded the brokerage houses, which were earlier told to suspend its transactions in Transneft preferred shares, to reveal the names and addressed of the shares owners. This move is unlikely to the disputed, but analysts have expressed fears that this breach of confidentiality will negatively impact the investment climate in Russia.

The trading in preferred shares was suspended earlier in the month after alleged irregularities that were committed in the 1990’s.

Vedomosti

Possible signs of banking crises in the future - summary

2006-05-19T02:57:00.000+04:00

Interfax Analytics has warned that Russian banks could face a crisis in 2007 if the current trend of failure to pay back loans is continued. According the analysts the figure of RUR1 trillion is thought to have been borrowed by the Russian consumers and companies. The outstanding debt has increased threefold, with the Central Bank admitting that its estimated figure of 2 percent is far too small to gauge the situation. The culture of living in debt is blamed for the rise of loan defaults.

Another risk to the banking system is thought to be the ongoing stock market correction. Foreigners loosing their appetite for emerging markets could mean that capital will flow out the country, similar to the crisis of 2004 which saw the outflow of some USD9 billion and the collapse of Guta Bank. Although similar hit is not expected as the stock market has grown considerably since then. Banks could see difficulties paying back the capital they used to invest on the stock market. Medium-sized banks are thought to be most susceptible to the risks.

The decreasing of banks' liquidity could mean another setback by 2009. If the tendency of falling bank liquidity is maintained, and it is in many aspects related to the policy of withdrawing money for the stabilization fund, the banks will be in a difficult situation," the Russian Union of Industrialists and Entrepreneurs President Alexander Shokhin said. "Credit resources in Russia are quite expensive. This is why major businesses try to attract funds from foreign financial organizations, where the price of money is lower," Shokhin said.

Interfax, Gazeta, Vedomosti, Business Week, RC

EON will not give Gazprom minority stakes in its companies

2006-05-18T20:11:00.000+04:00

[Correction]

E.ON Ruhrgas will not give Gazprom access to its distribution network as part of the asset exchange for the South Russian natural gas field, company head Burkhard Bergmann stated yesterday. Gazprom may refuse to negotiate with E.ON Ruhrgas in response and renew discussions of the project with other European companies. Thus only BASF has agreed to work under Gazprom's rules. It increased the Russian gas monopoly's share in its distribution network last month.

Kommersant

Belarus is ready to give up 50% of Beltransgaz

2006-05-18T19:28:00.000+04:00

Belarus is ready and willing to swap 50% of Beltransgaz for assets of Russian gas producing entities. As representatives of the Belarusian government told Interfax, such a statement was made by First Deputy Prime Minister of Belarus Vladimir Semashko at a conference held as part of the Belarusian Industrial Forum. "We are prepared to offer a 50% stake in exchange for assets in Russian gas producing concerns which would allow us to pump 12 bcm of gas a year" – Belarusian government spokesmen quoted Semashko as saying. According to a source interviewed by Interfax, Vladimir Semashko also noted that relevant talks between the companies are currently under way. The Belarusian party understands that they won't be simple, as it clearly sees which objectives Gazprom is pursuing – to gain control over gas transportation systems in Europe, Asia and in Belarus it is striving to obtain status to impact, to a certain extent, the operations of Beltransgaz, Belarusian government officials quoted the first deputy prime minister as saying. So far, Gazprom has declined to comment on the statements by the Belarusian party. Meanwhile, the most recent asset swap transactions executed by Gazprom showed that the gas holding (RTS: GAZP) could, provided that it picks up 50% interest in gas transportation and marketing entities, sell minor stakes in its gas producing projects. However, in this case the terms for gas sales through a single export route and the market price remain in effect.

Finam

Russian tax agencies scrutinize TNK-BP

2006-05-18T19:10:00.000+04:00

Russian-British joint oil venture TNK-BP has set aside 35.1 billion rubles ($1.3 billion) to meet back-tax claims that may be presented after authorities finish inspecting its subsidiaries' operations during 2002 and 2003. Experts have recommended that the company also start preparing to meet tax claims for 2004 and 2005.

The conclusions of tax inspections into the operations of the Tyumen Oil Company (TNK) and Sidanko in 2002 and 2003 have been sent to TNK-BP as the companies' legal successor.

Ivan Gogolev, the PR spokesman of TNK-BP, said the initiative to create a reserve fund proceeded from the company's international practice. "This is a standard procedure for dealing with local tax agencies," he said.

Gogolev said the reserved sum was the top ceiling expected for back-tax claims. "We even hope to have some money left over. The size of the fund was calculated to meet maximum claims, and will remain unchanged until payment time," he said.

The reserve fund is only intended for back-tax payments, but analysts say TNK-BP should also create a fund for future claims, as the tax authorities are closely scrutinizing its operations.

"TNK-BP stands out among Russia's natural resource companies, possibly because it has a large share of foreign capital," said Alexander Blokhin, an analyst with investment company Antanta Capital. "All other companies are loyal to the authorities, and are therefore left alone. For this reason, they do not need to create such reserve funds."

TNK-BP was created in 2003. Half of it belongs to British Petroleum, and the other half to Alfa Group (one of Russia's largest privately owned financial-industrial conglomerates) and a consortium of Access Industries and Renova.

In 2005, it produced 75.35 million tons (553.82 million bbl) of crude; net profit according to Russian Accounting Standards was 59.3 billion rubles (more than $2 billion) during the year, and revenues totaled 702.65 billion rubles ($26 billion).

Gazeta