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  RUSSIA

REPUBLICAN REFERENCE

Area (sq.km)
17,075,400

Population
145,470,197

Principal
ethnic groups

Russians 82%
Tatars 3.3%
Ukrainians 2.7%

Principal towns
Moscow (capital)
St Petersburg
Novosibirsk
Nizhni Novgorod
Yekaterinburg
Samara

Currency
Rouble

President
Vladimir Putin

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Background:
The defeat of the Russian Empire in World War I led to the seizure of power by the communists and the formation of the USSR. The brutal rule of Josef STALIN (1924-53) strengthened Russian dominance of the Soviet Union at a cost of tens of millions of lives. The Soviet economy and society stagnated in the following decades until General Secretary Mikhail GORBACHEV (1985-91) introduced glasnost (openness) and perestroika (restructuring) in an attempt to modernize communism, but his initiatives inadvertently released forces that by December 1991 splintered the USSR into 15 independent republics. Since then, Russia has struggled in its efforts to build a democratic political system and market economy to replace the strict social, political, and economic controls of the communist period.

Update No: 258 - (27/06/02)

Need for more FDI
Russia has a relatively well-developed equity market for the region, but has not attracted foreign investment (FDI) anything like commensurate with its size. FDI at US$2bn in 2001 and a likely US$4bn in 2002 is small beer compared with the US$8.671bn into Poland in 2000, the US$6.5bn there in 2001 or the estimated US$7bn for 2002. The 10m population Czech Republic has attracted US$4.477bn in 2000, US$4.820bn in 2001 and estimated US$7bn in 2002, easily eclipsing Russia.
Most FDI into Russia goes into one sector, that of energy. The rule of law and climate of corporate governance are improving, but are still not sufficient to lure many firms in. Nevertheless, there is a new mood in Moscow and the heartlands of Russia, due as much as anything to a more effective and forceful government. Putin is modernising sector after sector, squeezing out the more corrupt tycoons. After tackling the oil industry last year and then the minerals sector he is aiming to overhaul the arms or munitions sector and export trade. The gas giant, Gazprom, is due for much-needed reform under the new management of his appointe, Chairman Alexei Miller. The nepotism and side-kicks of old need to be swept away if Gazprom is to realise its enormous potential as a world-class corporation.
The economy is being given a new central bank chief, committed to reducing inflation from 18% in 2002, even while allowing GDP to grow respectably at 3.5% this year after growth of 8.3% in GDP in 2000 and 5% in 2001. The economy's robust performance in this decade has underpinned a rise in the stock market, one which last year was the highest in the world.

Putin tightens his grip on the Duma
President Putin is bringing a new broom to politics as well as the economy. Hitherto he ruled with the tacit support of the communists in addition to the backing of his own faction, United Russia. Now he has condoned a purge of the communists from top posts in the Duma, key committee chairmanships. The communist leader, Gennady Zyuganov, further weakened his party by demanding that three remaining Communist Party committee chairmen and the Duma Speaker, Gennady Seleznev, resign in protest, which they refused to do. They chose to stay put, but were then evicted from the party. The 'Seleznev faction' is now a rump in the Duma, which is effectively dominated by United Russia.
Putin now has no serious rival to his power. The presidential aspirants of old, Mayor Yuri Lushkov of Moscow and former foreign minister and premier Yevgeny Primakov, have now joined forces with United Russia. Putin is forging what he calls a 'managed democracy.' This complements his liberal economic policy and rapprochement with the West. With the taming of Luzhkov and Primakov and the death in an air crash of Alexander Lebed, there is no serious contender for the presidency other than Putin. Zyuganov will stand again no doubt, but after the split he has little chance and little purpose except to measure the minority who do not support Putin.
The comments of two close observers are worth quoting. "The romance is over between the communists and the Kremlin," said Valery Federov, director of the Russian Centre for the Study of Current Political Events. Speaking of "the inevitable demise" of the party, he added: "There are no prospects now for the Communists ever again to come to power." With an ailing constituency of the old and the disadvantaged their day is surely over. Gennady Khodyrev, governor of Nizhni Novgorod, who quit the party last month in protest put it briefly: "If the party does not change its style and methods, the party will gradually die."
Khodyrev and other left-wing provincial governors know that Putin calls the shots in the regions too via seven new presidential envoys, the "super-governors," to whom they are now subordinated. Putin is exerting his muscles metaphorically throughout Russia's polity, as he is wont to do actually in practising his karate in the gym. Russia has a new strongman without doubt. 

Land bill excludes foreign ownership
There has been a significant development regarding agricultural land. Russia's lower house approved on 21st June a bill to create a legal system to buy and sell farmland, but only after President Putin's government agreed to an amendment prohibiting foreigners from owning agricultural property. The legislation would ban farm sales to any company in which foreigners have an interest.
Protestors demonstrated on the street outside the Duma, opposed to any sales of Russian farms, whilst the debate on the issue was going on inside, where passions on the matter were running very high on Russia's slow move to a market economy, especially when it comes to its farmland.

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AUTOMOBILES

EBRD helps first western tyre-maker launch Russian output

The European Bank for Reconstruction and Development (EBRD) is investing US$20m in a Russian plant being built by France's Michelin group, the first western tyre manufacturer to take advantage of Russia's potential to set up its own production line for the local market.
The deal, driven by the rapid growth of the Russian auto sector, will give the EBRD a 49% stake in the plant being built at Davydovo, 100km east of Moscow. The rest of the shares will be owned by the Michelin Group.
Dragica Pilipovic-Chaffey, Director of the EBRD's Russia Team, said the entry of a major strategic investor such as Michelin into the Russian market should stimulate industry competition and raise quality standards.
The deal sends an important signal to other investors - both foreign and local - considering investments in the Russian market, Ms Pilipovic-Chaffey added.
This investment will create much needed jobs and contracting work for small and medium size enterprises in the region. In addition, Michelin will provide extensive training, in Russia and abroad to the plant's employees.
When it reaches full capacity in 2005, the Davydovo plant's potential output will be 2.1m tyres a year. Michelin, one of the world's biggest tyre makers with a 19% share of the global market, wants the plant to rely increasingly on local suppliers of raw materials in Russia once these meet the necessary quality standards.
The estimated size of the Russian tyre market is at present 20m units a year, but Russia's car ownership figures are expected to double over the next five years. Michelin has already set up a nation-wide distribution in Russia where it competes with other western manufacturers in the premium segment that represents 7-8% of the local tyre market.

AvtoVAZ finds investors to finance Kalina project 

Russian automotive company, AvtoVAZ, has found investors that will lend funds this year for a project for building a family of automobiles in the new Kalina line, New Europe reported recently. 
AvtoVAZ President and Director General, Vitaly Vilchik, said the automaker was able to find on the Russian market financial institutions prepared to extend loans from US$10m to US$100m. The plant will have enough of these and its own funds to implement the Kalina programme this year. 
AvtoVAZ is planning to put US$200m into the Kalina programme in 2002. Plans call for the test batch of automobiles to roll off the plant's main assembly line at the end of 2004. Building these vehicles will be done on existing and additional production facilities. The overall price tag on the project is around US$800m. The Kalina line will comprise a sedan model VAZ-1118, a station wagon model VAZ-1117 and a hatchback model VAZ-1119.

Ford to open Leningrad plant 

Ford Motor Company plans to officially open its subsidiary, ZAO Ford Motor Company, in Vsevolozhsk, Leningrad region, on July 9th, ZAO said. Sales of Ford Focus cars produced at the new automobile plant will also begin in July, reports New Europe. The plant expects to produce around 4,000 cars in 2002 and is now producing samples for testing in Russian conditions. A commission has confirmed that the new plant meets all pertinent Russian legislation and regulations. 
Ford Motor Company has signed another two contracts with Russian suppliers for the plant in Vsevolozhsk. Avtoarmatura in St Petersburg will supply positive battery clamp covers and Iternkos-IV (St Petersburg) will supply battery brackets. Ford plans to reach similar agreements with other Russian companies.


GM-AvtoVAZ to begin car production in June 

The joint venture, GM-AvtoVAZ, in the near future will start the test assembly line production of automobiles, AvtoVAZ President and Director General, Vitaly Vilchik, said. The vehicles assembled after September 23rd will be for sale to the public. 
The joint venture, the general agreement for the creation of which was signed by AvtoVAZ, General Motors and the European Bank for Reconstruction and Development (EBRD) last summer, plans to start making Chevrolet-Niva model vehicles on that date. "We are pinning great hopes on the new Niva. I think this car has a big future," Interfax News Agency quoted Vilchik as saying. 
Initially, the joint venture will be using AvtoVAZ's painting facilities, and next March will start using its own facilities planned to be constructed before February. GM-AvtoVAZ plans to turn out 500 Chevrolet-Niva model automobiles this year, 35,000 next year, 60,000 the year after that and 75,000 in 2005.

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AVIATION

New Aircraft


The Irkutsk Aviation Building Association (IAPO), the Ilyushin Aviation Complex, and Hindustan Aeronautics Limited (HAL, India) intend to produce a new multifunctional transport aircraft (MTA), patterned on the Il-214 jet, IAPO President Alexei Fyodorov has announced to the press. 
According to Mr Fyodorov, an experimental MTA is to be developed in 2006. It was earlier reported that it would cost about US$200m to develop this MTA and manufacture test models. The associated companies believe it would make sense to attract more investors to the project. 

Aeroflot estimates IAS net profit to top US$20m 

Russian flag carrier Aeroflot expects to post a net profit of over US$20m to international accounting standards for 2001, the airline's First Deputy Director General of Finance, Alexander Zurabov said, New Europe reported recently. Auditing firm, Arthur Anderson, is now completing an audit of Aeroflot's accounts for 2001.
Aeroflot closed 2000 with a net profit of US$8.6m to international standards. The airline's charter capital of 1.111 billion roubles is split into one rouble common shares.
The government holds a stake of 51.17 per cent. Nominal holders of Aeroflot shares are Bank Cs First Boston AO, Brunswick Warburg Nominees, Chase Manhattan Bank International, and the Depository Clearing Company.

Russian partnership for pieces of Airbus

European aircraft-building consortium, Airbus, has chosen the Kaskol group of companies as its main partners for implementing the first stage in a programme of cooperation with Russian aircraft manufacturers. Airbus chief cooperations officer, Gustav Humbert, and the Kaskol president, Sergei Nedoroslev, initialled an agreement at the end of May. Under the accord, Kaskol will open an engineering centre in Moscow and make preparations for the manufacture of units and components for Airbus planes, the Russian Mirror reported recently.
The new programme is part of a broader strategy developed by Airbus within the framework of a strategic partnership agreement between EADS, the European Aeronautic Defence and Space company - the main Airbus shareholder - and the Russian Aerospace Agency. That agreement was signed in Moscow in July 2001.
"With our assistance, Russians will get access to the world market and, at the same time, preserve their know-how," Gustav Humbert said in an Izvestia interview recently. He added that neither partner would lose its identity in this cooperation. "Within EADS, we are the French, Germans, Spaniards and British united under a common roof. In cooperating with Europe, Russia will also preserve its specific features, well known in the world aerospace industry."
Fifty Russian specialists will take a course of practical training at Airbus enterprises in France and Germany. Later, the engineering centre will be able to provide subcontracts for several hundred Russian specialists and designers to work on Airbus projects.
"Probably, in the future, we'll take part in manufacturing components for the mass-produced Airbus aircraft and the latest A-380 super-jumbo airliner," said Kaskol president, Sergei Nedoroslev. "The Nizhni Novgorod Gidromash plant, which is part of our group, has been supplying manufacture and supply of chassis for the A-400M transport aircraft."
The A-400M is a rival to the Russian-Ukrainian An-70. Europeans also, at one time, played a part in designing it at the initial stage of development. Humbert pointed out that the European governments then decided to build their own version of a transport plane. "And we have orders for 196 aeroplanes from eight countries," he stressed.
The Russian Aluminium company has been named as a potential supplier of aluminium materials for Airbus and a contract could be signed within the next two to three months.
"The Verkhnyaya Salda metallurgical production association," Humbert pointed out, "will be the main supplier of 55% of all titanium deliveries for us."

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BANKING

Russia will strip bad banks of licences, back good ones

Three months after a change in leadership at Russia's central bank, an official appointed to overhaul the ailing banking sector outlined an ambitious plan to revoke the licences of bad banks and offer federal insurance on retail deposits to the rest by 2005, the Wall Street Journal Europe has reported.
Analysts applauded the proposal as the first real sign that the Kremlin is ready to tackle one of the economy's most pressing problems: a weakly capitalised banking sector bereft of trust and unable to mobilise funds for investment. But even the man unveiling the plan, Andrei Kozlov, the central bank's first deputy chairman, acknowledged that implementing it would be a huge challenge "organisationally, mentally and legally."
Speaking at an annual banking conference in St Petersburg, Mr Kozlov said the central bank would inspect all of the country's 1,300 banks to determine which are financially sound. "By January 1st 2005… all those that do not pass inspection will have their licences for working with retail clients revoked," Mr Kozlov said. "They can then close, merge with someone else or get a different licence." 
The survivors will pay dues to a fund that will help insure retail deposits, a protection currently available only at state-controlled savings bank, OAO Sberbank. The central bank hopes that widening the guarantees will help build trust among depositors deeply suspicious of banks after losing their savings in Russia's 1998 financial collapse. Russians are estimated to have stashed tens of billions of dollars under their mattresses. 
After the 1998 crash, then-central bank chairman, Viktor Gerashchenko, did little to punish bad banks, revoking licences from only a handful and bailing out some of the most politically connected with soft loans. In March, the Kremlin fired Mr Gerashchenko and replaced him with Sergei Ignatyev, the former deputy finance minister, who has pledge to overhaul the sector to help spur economic growth.
In a brief interview after his speech, Mr Kozlov said he couldn't predict the number of banks that would lose licences. And he added that banking legislation would have to be amended to allow the central bank to carry out the inspections in the manner it desires. Current law allows the central bank to monitor only a strict set of data reflecting a bank's current and past performance. Now, the central bank wants to start scrutinising a bank's business plan and risk- management polices to forecast how it will perform in the future, "whether it will be bankrupt in the next two or three years or not," Mr Kozlov said.
Along with the inspection, the central bank will require all banks to adopt international accounting standards by 2004. Representatives of the International Monetary Fund and World Bank attending the conference, applauded Russia for taking action but cautioned against rushing and allowing bad banks to slip into the deposit insurance programme. "I think a failed deposit insurance programme is worse than none at all - it wouldn't do much for trust," said Michael Fuchs, senior economist in the World Bank's European and Central Asian department.
Mr Kozlov stressed that, in addition to improving bank supervision, the state should reduce excessive regulatory hurdles and paperwork that have made Lenin unprofitable, particularly to small business in the regions. According to Moscow brokerage house, Renaissance Capital, it can cost an existing bank US$200,000-300,000 and take several months to open a regional branch, while the merger of two commercial banks can take as long as two years.

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BONDS

Russia plans US$700m issue

Russia is set to issue US$700m of international bonds in restructuring one of the remaining sections of its Soviet-era commercial debt, the Financial Times reported on 19th June.
Russia will use the new bonds to restructure US$1.2bn of Soviet debt inherited from the International Bank for Economic Cooperation and the International Investment Bank - the Soviet institutions involved in trade finance within the former Communist bloc.
The deal is important, because it brings Russia closer to returning to the international capital markets after its 1998 financial crisis.
Russian officials said the country would not issue new debt until it has restructured old Soviet debt.
Russia has still to issue up to US$2bn worth of new bonds to restructure Soviet debt owed by foreign trade organisations.
"The restructuring of the Soviet commercial debt is another milestone on the way to Russia's recovery and reintegration in the international capital markets," said Philip Poole, chief emerging markets economist at ING.
The Soviet commercial debt is likely to be restructured on terms similar to those granted by the London Club of commercial creditors. Under the deal, 37 per cent of the principal and 33 per cent of the interest were written off.
Russia is expected to return to the international capital markets by the end of this year, with an issue of between US$1bn and US$2bn.

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CREDIT RATINGS

Fitch upgrades St. Petersburg's ratings to BB minus

Fitch Ratings, the international rating agency, has upgraded the Long-term foreign currency and local currency ratings of the City of St. Petersburg to 'BB-' from 'B' and revised the Outlook to Stable from Positive.
The rating upgrades reflect St. Petersburg's strong fiscal and budgetary performance in recent years, the sustainable growth of the local economy and the sharp reduction in the city's debt burden.
The performance of the local economy plays a key role in the City's credit rating, as the budget revenue is by and large made up of taxes. In 1999-2001 the City economy grew rapidly and, for the first time in recent years, out-performed the national average. The economy is expected to grow further in 2002 and onwards. The City enjoys a diversified economy that reduces the impact of downturns in any one sector or company.
However, its demographic profile is unfavourable with an increasing proportion of old people which will not only place pressure on certain budget expenditures, for example healthcare, but make it difficult to restructure utilities and public transportation companies in view of the large proportion of those entitled to concessions on user charges in line with the federal legislation.
St. Petersburg has historically realised high operating and current balances despite some unfavourable changes in tax legislation and tax-sharing arrangements with the Federation. Further changes in tax legislation are expected tin the future, but they should be less damaging thanks to solid growth and are likely to go hand-in-hand with compensation measures provided by the State. Expenditure flexibility exists due to a sizeable proportion of capital investment as well as the moderate share of compulsory items in expenditure.
St. Petersburg considerably decreased its total debt burden between 1998-2001 from 86% of current revenues to 29%, thanks to a reduction of almost 64% in the outstanding amount of eurobond debt. But setting up a reserve fund for the remainder of its Eurobond debt, the City is now well prepared for timely and full repayment in June 2002. Rollover risk associated with domestic borrowing is mitigated by a decreasing interest rate environment and the long maturity profile. Risks associated with non-consolidated entities such as city-owned ut8ilities and transport companies is minimal, as their financial indebtedness is well controlled by St. Petersburg. Moreover, loss-making city-owned companies are being reformed to reduce their dependence on City subsidies.
St. Petersburg is the second largest city in Russia by population and one of the largest ports in the Baltic Sea.

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ENERGY

Astana, Moscow to transport oil through Samara, St Petersburg 

Russia and Kazakstan have agreed that up to 15m tonnes Kazak oil will be transported through Russia via the Samara-St Petersburg route in addition to the Caspian Pipeline Consortium. RTR television quoted Kazak President, Nursultan Nazarbayev as saying.
Nazarbayev gave high marks to the agreement that Russia and Kazakstan reached on the Caspian Sea area, calling the document historical. The Caspian sea's huge biological and natural resources should not become a territory of conflict and fighting, Nazarbayev said.
Russia and Kazakstan play a key role in the stabilisation of the region's situation and have set an example for other countries, he noted.

LUKoil to invest US$65m in Burgas refinery upgrade

LUKoil plans to spend US$65m this year on upgrading and increasing the capacity of the Burgas Neftochim refinery, Troika Dialog informs. Neftochim is the largest refinery in Bulgaria and controls 85% of that country's market for oil product. The refinery's slated capacity is 12 mt/y (240 bpd), but it is at present running at half this figure (6 mt/y, or 120 bpd). LUKoil is seeking out new markets for output from the refinery in Cyprus, Turkey and other countries in the Balkans.
The Russian company purchased a 58% stake at end 1999 for US$101m, undertaking at the time to invest a total US$408.3m in its new acquisition between then and 2005. Thus far, it has invested US$200m of that amount. The release of this information is viewed as an attempt to counter criticism levelled at the company by the owners of Polish PKN Orlen in the battle over a 75% stake up for auction in Gdansk refinery.

Sibneft strikes record with Sugmut well

Sibneft's first horizontal well at its Sugmut field has come on stream with output of 9,010 barrels (1,250 tonnes) per day, the highest of any well in Western Siberia.
The well has a total length of 4,450 metres, including a vertical section of 3,170 metres and a horizontal section of 1,280 metres, the longest ever drilled in Russia. The well is the first of eight horizontal wells to be drilled by Pride Forasol, a unit of Pride International, under a US$60m contract signed last year. Halliburton, Schlumberger and Baker Hughes are subcontractors under the project.
Sibneft earlier this year completed a horizontal well at its Karamovskoye field, which flowed at a rate of 7,390 barrels (1,025 tonnes) per day. The well was drilled by the company's Sibneft-Drilling subsidiary using a Russian rig and locally developed geosteering technology, which allows drill operators to gather geological data in real time as they bore holes.
Sibneft last year raised the average output from new wells by more than one third to 469 barrels (65 tonnes) per day. Horizontal wells yielded 2,820 barrels (392 tonnes) per day, or more than six times the average for new wells. Sibneft intends to bring 43 horizontal wells on stream by the end of 2002.
The combination of cutting-edge technology and extensive experience offered by international service companies has enabled us to achieve high growth at a low cost, and become Russia's fastest growing producer," said Sibneft president Eugene Shvidler.

Russia to sell off state holding in oil major

A packet of 5.9 per cent of shares in Russian oil major, LUKoil, will be sold in July this year, state secretary and Russian first deputy property minister, Aleksandr Braverman, told Interfax News Agency.
The deputy minister refused to say what the start price for the shares would be as this information could have a negative influence on the company's situation. At the same time, Braverman noted that things are progressing according to schedule for the sale of the LUKoil share packet.
It is planned to place the state-owned packet of LUKoil shares on the London Stock Exchange in the form of GDR [Global Depositary Receipts]. 
The company plans to start the procedure of receiving a listing in the London exchange after the preparation of its report for 2001 to US GAAP [generally accepted accounting principles]. It is expected that the financial report will be published in time for the company's shareholders' meeting, which is set for 27th June in Moscow.

Sibneft share offer 

The Siberian oil giant, Sibneft, is planning to raise US$100m with the sale of one per cent of its total share issue.
The oil company announced that its main shareholders had agreed to place one per cent of the company stock with institutional investors outside the United States.
The move will increase the amount of shares freely circulating on the market to the level of 13 per cent, and will bring its owners, which include Roman Abramovich, the Governor of Chukotka, an additional US$100m.
"The main shareholders plan to reduce their share in the company's statutory capital to 75 per cent, from 88 per cent at present. Sibneft, in this connection, is considering the possibility of listing its shares on international stock exchanges," Evgeny Shvidler, Sibneft President, was quoted in a press statement.
According to the Kommersant newspaper, the investment company, Brunswick UBS Warburg, will manage the initial share placement. The sale is likely to be a success, with potential buyers contracting Brunswick within hours of announcement.
Market experts certainly approve of the Sibneft decision, as investors had been dissatisfied with the low level of freely tradable shares and the company's excessive dependence on its own shareholders.
At present, Sibneft's free float is 12 per cent. Similar parameters for other Russian oil companies are: LUKoil - 52 per cent, Tatneft - 30 per cent, YUKOS - 19.3 per cent. YUKOS provides a good model for Sibneft, since the increase of its free float has drastically increased the company's value. YUKOS currently ranks first among Russian companies in terms of market capitalisation - US$25.5bn.
Analysts believe that Sibneft has decided to impose such a strict limitation on the placement of its shares because, as a rule, shares are placed outside the United States in order to reduce overheads. Underwriter services in the United States are 10-15 per cent higher than they are in Europe. Moreover, the risk of minority shareholders instituting lawsuits is very high in the US, and that makes legal expenses in America up to three times higher than is the case in Europe. At the same time, the restriction imposed by Sibneft will not hamper the Americans keen to buy its shares via European branches of US companies on the European exchanges.

Russia hoping to get the most from Slavneft sale 

The Russian Property Relations Ministry is hoping to get as much as possible from selling 19.68% of the state shares in the Slavneft company, Russian First Deputy Property Relations Minister, Alexander Braverman, told a news conference. "When the president of Slavneft was elected, the shareholders' legislation was fully observed and none of the sides had complaints about the election procedure or other issues related to the meeting," Braverman said, referring to the scandal that has recently engulfed Slavneft when the company's shareholders elected Yury Sukhanov as president on May 13th.
Interfax News Agency quoted Braverman as saying any conflict situations are not adding to the company's capitalisation, but at the same time these situations have no radical effect on the company's capitalisation.
"I am convinced that if the situation is resolved by the autumn, when the sale is scheduled, it will give us all the opportunities to get as much as possible from this package," he noted.
A bailiff on May 17th gave Slavneft representatives a copy of the court's ruling, which declared invalid the decision made by the Slavneft shareholders to elect Yury Sukhanov president of the company.
The corresponding writ of execution, which was issued based on the ruling of the Ordzhoninidze regional court of Ufa (the capital of Bashkortostan), has been forwarded to the Slavneft administration.

EBRD's 200m Euro loan for Gazprom in the pipeline 

The European Bank for Reconstruction and Development (EBRD) may approve a project to lend 200m Eros to Russian natural gas monopoly Gazprom, Deputy Finance Minister, Sergei Kolotukhin said. The prospects for the Gazprom loan were discussed by Russian and EBRD officials at the bank's annual meeting in Bucharest, Interfax News Agency quoted Kolotukhin as saying. "After these negotiations, we have more confidence that, after the bank makes the corresponding decision, this loan will be provided," he said.
Meanwhile, the Russian Property Relations Ministry will not make any offers to privatise Gazprom state shares in 2002 or 2003, First Deputy Property Relations Minister, Alexander Braverman, told a news conference. Braverman also said he is confident that LUKoil, whose state shares are schedule to be sold this summer, will prepare an annual report meeting foreign standards.
Dmitry Medvedev, deputy head of the presidential administration and the Gazprom Board of Directors, previously said that the Russian government would probably approve the decision to lift restrictions on trade in Gazprom's shares on the domestic market before the June meeting of Gazprom shareholders. He also said that the second liberalisation stage, when barriers will be removed between Gazprom's domestic and foreign securities markets, will begin in 2002.
Gazprom recently also approved the issue of US$400m worth of Eurobonds issued in April, when Gazprom placed its entire US$500m issue, a source in the board said. The new Eurobond issue is planned for the end of second or third quarter and yield will be 9% annually, the source said. The agenda of the Board of Directors meeting was entirely devoted to the upcoming stockholder's meeting.
In addition, the Board of Directors recommended that the stockholder's meeting confirm PricewaterhouseCoopers as auditor of the 2001 results. This decision was not upheld unanimously, but by a majority of votes. PricewaterhouseCoopers emerged the winner from a tender held by Gazprom. KPMG was in second place. If the stockholders do not confirm PricewaterhouseCoopers as auditor, KPMG will take its place. The Board of Directors also approved amendments to the Charter, a new provision on the executive board and on the chairman of the executive board, and other internal documents.

Russian State Council group looking to overhaul coal industry 

A working group of Russia's State Council is expected to present a report to the president by August on how to increase the competitiveness of the Russian coal industry, ITAR-TASS News Agency has reported.
The decision was made at the group's first technical meeting on 13th June. President Putin ordered the formation of the group after his meeting with members of the State Council's presidium last May.
The group's members are unanimous the coal industry is sliding towards a crisis again.
Working group chairman, Kemerovo Region Governor Aman Tuleyev, recalled that the coal industry was restructured back in the first half of the 1990s, but the country is faced with the risk angry miners may stage protest action on the country's main railway lines again.
This year's coal output is down 15 per cent on the year to 269.2 million tonnes. At a time when coal companies have 16 million tonnes of coal in stock, Russia is importing 26-28 million tonnes of coal from Kazakhstan.
Although the industry is 75 per cent privatised, the working group believes it is the government's job to settle such problems as price policies, transportation rates and coal miners' social issues.
Coal companies may find it necessary to conclude a cartel agreement to keep prices at an adequate level. Working group members believe that Russian coal prices are unduly low.
Speakers at the group's session said the government must support exporters. Introduction of marine transportation rate discounts would make it possible to noticeably push up exports and ease tensions considerably, Tuleyev said.
Raising the competitiveness of the coal industry meets national security interests. Russia will exhaust its gas fields in fifty years to come, while explored coal reserves will last at least for six decades.
"It is obvious that that the coal industry may play a stabilizing role in the future," Tuleyev said.

Russian power grid chief urges unification of European, CIS energy systems

The Russian national power utility UES [United Energy Systems] of Russia CEO, Anatoliy Chubais, believes that unification of the European and CIS energy systems would be in the interests of the whole population of Eurasia, ITAR-TASS News Agency has reported.
In an address to the sixth St Petersburg economic forum on 19th June, Chubais said the CIS countries were in the process of restoring the once-disrupted links between their energy systems. Similar processes were under way in Europe, he said. As a result two energy macrosystems are taking shape on the region's energy map and the border between them might prove what Chubais described as a "new Berlin wall." "The strategic solution will be in eliminating that wall," he said.
Chubais sees a future integral energy system covering the whole Eurasian space from Portugal to Siberia and from Scandinavia to Almaty.
Russian electricity prices will always be lower than those in Europe, Chubais said. At the same time he described the current electricity prices in Russia as a "disincentive to energy saving".
A realistic policy lies somewhere between these extremes, he said.

Russian, Chinese senior officials discuss major projects in energy sector 

Chinese State Council member, Wu Yi, and the head of the China National Petroleum and Natural Gas Corporation, Ma Fucai, met Russian Deputy Prime Minister, Viktor Khristenko, on 15th June to discuss major cooperation projects between the two countries in the fuel and energy sector, ITAR-TASS News Agency has reported.
The talks also involved senior officials from the Russian gas holding Gazprom, the oil company Yukos, interested ministries and agencies.
In an exclusive interview with ITAR-TASS, Khristenko said the focus was mainly on the implementation of the West-East gas project initiated by China, which envisages the participation of Gazprom and Shell.
He stressed that Russia and China were interested in the development of the Chinese gas sector. To this end, the two countries will set up a joint venture to develop the Chinese gas market. Prospects for cooperation in the gas sector "generated proposals on strategic partnership between Gazpromand the Chinese national oil and gas corporation".
The sides also discussed interaction in the oil sector. A feasibility study for a Russia-China oil pipeline should be finished in July. The 2,400-km-long pipeline will cost about US$2bn.
The results of this work will be discussed at a meeting of the bilateral subcommission on energy at the end of July. The sides also touched upon the steadiness of Russian oil supplies to China through railway border checkpoints.

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FINANCIAL NEWS

World Bank says 5.2% GDP growth possible in mid-term

Annual GDP growth of 5.2% in Russia is possible in the period from 2002 to 2010 if reforms are continued and the external economic situation remains favourable, the World Bank said. If Russia manages to accelerate GDP growth from 4.5% to 5.2% in the medium-term, this should be considered a success, Interfax News Agency quoted the World Bank's senior economist in Russia, Christoph Ruhl, as telling a news conference.
The World Bank has calculated projections for four medium-term Russian growth scenarios that took into account two main factors: oil prices and further reform, Ruhl said. According to these projections, if economic reforms are continued Russia could accelerate GDP growth to 4.1% at an oil price of US$15 per barrel, and to 5.2% at a price of US$23 per barrel. If reforms stall, growth is forecast at 2.2% at an oil price of US$23 and 1.5% at a price of US$15.
The News Agency quoted Ruhl as saying the most likely scenario would be where Russia presses on with economic reform, but oil prices are not high. Russian economic growth could accelerate only with a considerable influx of investment and a sharp reduction in capital outflows, the World Bank said in a report on the Russian economy.
Ruhl said that long-term growth rates significantly higher than 5% are unlikely in the near future, and would require exceptional investment inflows. Such an influx of investment would be possible only if economic reforms are implemented that would staunch capital outflows, and rectify Russia's negative balance on foreign investment, he said.
He recalled that investment growth slumped to 1.2% in the first quarter of 2002. Capital investment needs to grow 17% annually for Russia to attain GDP growth of over 5% in the medium-term, Ruhl said. It will be very difficult to achieve such a level of investment because the balance of investment in the Russian economy remains negative. The flow of investment needs to be turned around.
In the period from 2000 through 2001 investment outflows exceeded inflows by US$6.8bn, he said. If this money were used to finance domestic capital investment, investment would have grown by 7% in the dollar equivalent in the two years, he said.
In order to achieve even higher economic growth, of more than 6% annually for example, Russia would need to see average annual capital investment growth of more than 22% for eight years, with fairly high oil prices, of about US$23 per barrel, Ruhl said. This would be a very high growth rate, and although there have been cases where countries have achieved such economic growth, they were exceptions, he added.

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FOOD & DRINK

McDonald's to spend US$40m for chain development

US fast-food major, McDonald's, intends to invest no less than US$40m on the expansion of its chain of restaurants in Russia in 2003, said public relations manager for McDonald's-Russia, Svetlana Polyakova. Plans call for opening no less than 25 restaurants in a number of Russian cities, she reported. The average cost of one outlet will be about US$1.5m.
As to parent company McDonald's exploring the possibility of retailing non food items at its restaurants, she said that this is not being developed for Russia. "All our efforts are concentrated on expanding the Russian restaurant chain," Interfax News Agency reported Polyakova as saying.
This year, as in 2001, McDonald's plans to develop such avenues as Mak-Avto in Russia, and aside from stand-alone outlets, to open outlets inside major retail centres, something the company has only one of, in Moscow.
The company now has 76 restaurants in 24 Russian towns; 57 are in Moscow and the Moscow region. The company has already opened another three in the country this year, and plans call for another 22. The first will appear in Voronezh, Rostovon-Don, Naberezhniye Chelny, Kazan and Almetevsk, and talks are ongoing on the opening of points in Sochi and Saratov. Around half the 25 planned restaurants will be opened in the Russian capital, eight in St Petersburg.
Russian suppliers provide McDonald's with around 75 per cent of its raw materials. Among these are a Moscow bread and baked goods combine (flour), a meat plant in Penza (beef) and the cattle farm in Barybino (milk). McDonald's has invested more than US$230m in its Russian business over the last 12 years. 

Nutritek launches baby-food plant outside Moscow

ZAO Nutritek has opened its first plant for the making of modern baby food, clinical nutrition and special dietary foods in Russia, having invested US$40m in the project sited in the Moscow region of Istra, Interfax News Agency reported.
Director General, Valery Ignatov, announced at the opening ceremony that the project financing came in part from OOO Nutritek and one of Russia's oldest producers of baby foods, Istra-Nutritsiya, the founders of ZAO Nutritek. State budget funds were also used, under the federal presidential programme Deti Rossii (children of Russia).
The new enterprise's production capacity is rated at around 1,500 tonnes of dry products per year, 6,000 tonnes of sterilised liquid products and 11,000 tonnes of water for the preparation of baby foods, which meets in full the country's needs for clinical nutrition and special food products.
The idea is for the plant to turn out around US$1.5m worth of product this year, take that to US$4.7m next year and to a yearly US$25m in five years. The plant has plans that included the production of more than forty different products, including maternal milk replacements, foods for those suffering a variety of genetic ailments, tube-fed clinical-use foods, and also food products for athletes.
ZAO Nutritek was founded in 1993 with the support of the Russian Healthcare Ministry, Agriculture Ministry and Social Welfare Ministry. Construction of the plant started in 1997. The general contractor for construction installation was the Danish company APV. The plant boasts production space of 5,000 square metres.

Wimm-Bill-Dann, Nestle, Danone deal has potential 

A deal between the Russian juice and dairy company, Wimm-Bill-Dann, and the food-producing giants Switzerland's Nestle and France's Danone has potential, UFG analyst for consumer sector companies, Alexei Krivoshapko, said. Commenting on media reports that Nestle and Danone are engaged in talks on buying the controlling stock interest in Wimm-Bill-Dann, he expressed doubts that the market value of certain types of the latter's business would be acceptable to potential buyers. "If talks with the two companies are going on, of course they have the potential for continuation," Interfax News Agency quoted Krivoshapko as saying. What would attract Nestle is the Russian company's established dairy market share and stable raw materials base and sales networks.
If the deal comes off, then this would be Nestle's largest investment in Russia," he said, noting that the company has invested around US$200m in the production of confectioneries and frozen products in the country. Nestle does sell juice, but mainly in the United States.
"What's in it for Danone is less obvious, the company already has a good network of milk suppliers and sales, but it is not represented on the juice market," Krivoshapko said. He expressed doubt that Danone, which is one of Russia's dairy market leaders (mostly yoghurts and tvorog), would be looking to put out milk and other basic dairy products.
One possible scenario in the development of events with Danone is its buying Wimm-Bill-Dann production facilities for yoghurt and tvorog in Moscow, Novosibirsk and Kiev. As other types of Wimm-Bill-Dann's business are not basic for Danone, a deal could fall through, the news agency quoted him as saying. The Wimm-Bill-Dann PR department is denying talks are going on, explaining there has been a ban on any stock operations since it placed ADS on the New York Stock Exchange. The idea of selling a controlling stock interest in the company is a non-starter, the sources noted. "Rumours that Nestle is getting set to buy into Russia's biggest enterprises, including Wimm-Bill-Dann, crop up regularly, but there is nothing to support them," sources at the Nestle offices in the Russian capital say. Danone office sources declined to comment.
Wimm-Bill-Dann is one of Russia's biggest juice and dairy producers, founded in 1992. It commanded 36.5% of the country's juice market. It comprises 14 enterprises distributed among 10 cities around Russia and the Commonwealth of Independent States. On February 8th, Wimm-Bill-Dann placed 10.62 million American Depository Shares on the New York Stock Exchange at US$19.50 per share, or a total of US$207.1m. Danone snapped up four per cent of the company stock during the placement for roughly US$16m.

EBRD helps international confectionery group expand in Russia

The European Bank for Reconstruction and Development is lending US$18m to help the Chupa Chups confectionery group, the world's leading producer of lollipops, increase its presence on the Russian market.
The long-term loan will enable OOO Chupa Chups Rus to raise it production capacity as well as expand it distribution network. The firm is a subsidiary of the Spanish-based confectionery multinational Chupa Chups S.A.
"This deal will have a positive impact on the modernisation of the food distribution channel in Russia, one of the main challenges for the sector in that country. Chupa Chups' success also shows the benefits that a long-term commitment to Russia may bring to western niche players," said Hans Christian Jacobsen, Director of the EBRD's agribusiness Team.
"These long-term resources will support Chupa Chup Rus's continued expansion in Russia and neighbouring countries. The Russian market still has substantial room for development, despite already being one of the largest outlets for Chupa Chups in the world," Mr Xavier Bernat, President of Chupa Chups S.A., said.
Across the region, the EBRD has signed 158 investments in the agribusiness sector totalling more than €1.6bn. In Russia the EBRD's total net cumulative commitments at the end of 2001 stood at €4.3bn.
Chupa Chups Rus has been operating in Russia since 1991 and is currently the country's leading producer and distributor of sugar confectionery products. The company has a 90 per cent hare of the Russian lollipop market.

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FOREIGN LOANS

Russian home-buyers to get help from EBRD and IFC

The European Bank for Reconstruction is lending US$20m to help expand Russia's fledgling mortgage industry in a country where an estimated 60 per cent of the population own their own homes but where residential mortgages are still a largely unknown instrument, the EBRD announced in a press release.
The EBRD loan matches a similar one from the International Finance Corporation, the private-sector arm of the World Bank.
The EBRD is making a 10-year revolving loan to Russia's first dedicated mortgage bank, DeltaCredit Bank (DCB), in an attempt to overcome what has been one of the main constraints hampering the growth of mortgages in Russia - the lack of long-term funding.
The EBRD considers that the growth of mortgage lending will play an important role in the development of the banking sector, in which the potential of retail lending is still largely untapped. A functioning mortgage system also helps to create a more liquid housing market and enable more first-time buyers to purchase their own property, said Jonathan Woollett, Director for non-bank financial institutions at the EBRD.
DCB is owned by the US-Russia Investment Fund, set up with US Congress funding. DCB began operations after an earlier successful pilot programme of lending through Russian partner banks to establish the DeltaCredit brand name. DCB has since taken over the mortgage portfolio of the partner banks.
Over US$30m in mortgage loans has been lent under the pilot programme to date in Moscow and St. Petersburg. DCB's standard mortgage is a 10-year dollar-denominated loan of up to US$200,000 secured on the underlying property. In February 2002, the EBRD advanced a US$10m loan to another wholly owned subsidiary of the US-Russian Investment Fund, DeltaLeasing. Russia's leading provider of leasing services to small and medium-sized businesses.
For further information contact Richard Wallis, EBRD, tel: +7095 787 1111; e-mail WallisR@mos.ebrd.com.

EBRD okays 15bn Euro loan for Russia over 10 years 

The European Bank for Reconstruction and Development has in its 10 years approved financing of around 15bn Euros for projects in Russia, EBRD Director for Russia, Belarus and Tajikistan, Sergei Ovseychik, said.
EBRD allocated 4.9bn Euros of its own money. The rest was provided by other investors that the Bank attracted for projects in Russia, Vremya MN quoted Ovseychik in an interview on May 18th. EBRD investment was used in the financial sector, industry, transport, telecommunications, energy and mining, he added.
In accordance with the EBRD charter, at least 60% of loans should go to the private sector because the Bank's main task is to provide aid to countries in Central and Eastern Europe during the transition period. The private sector accounts for 84-85% of the EBRD loan portfolio for Russia, reports New Europe.
A five-year strategy adopted by the EBRD envisages annual investment in the Russian economy of one billion Euros.
"Following the August 1998 default the Bank hesitated about what to do next. But with the resumption of Russian reforms it has become more involved in our economy," the newspaper quoted Ovsetchik as saying.
As an example, he named two figures, the 220m Euros approved in 1999 and the 822m Eros of financing approved in 2001. "We hope, as probably all shareholder countries do, that the bank will continue to implement its function as a catalyst for investment," he said.

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MINERALS & METALS

Canadian businessmen to negotiate collaboration with Russian diamond monopolist 

A delegation of Canadian businessmen visited Moscow by invitation from ALROSA, Russia's diamond monopolist. They planned to negotiate collaboration issues and investments in ALROSA for the company's strategic plans. In addition, Canadian businessmen will make a trip to the Yakut republic, where ALROSA's factories are located, the company's press service reported. 
The Canadian delegation consists of representatives of leading producers of mining and construction equipment as well as officials from companies that render marketing and communication services, etc. In particular, the delegation includes representatives of the following companies: Advanced Geo Technologies (AGT), Arkbro Industries, Beltel, Boart Longyear GmbH, Breaker Technology Inc., Cubex Ltd., Export Development Canada, Gemcom, Geosoft, HATCH, Nordic Mine Technology Inc., SNC and other. 

Russia to sell shares in MMK 

Russia intends to sell government-owned stakes in Magnitogorsk Metallurgical Combine (MMK), one of the country's biggest steel mills, in 2003, Alexander Braverman, a first deputy property minister, told a press conference, New Europe reported recently. 
The state owns 17 per cent of the steel mill. MMK, a traditional exporter of steel to China, will also suffer most from the duties of the Chinese government on Russian steel, Deputy Economic Development and Trade Minister, Maxim Medvedkov, said

Norilsk Nickel makes pledge on dividend plan 

Norilsk Nickel, the Russian mining group said at the beginning of June that it would pay a dividend of up to 25 per cent of annual net income from 2003 in an effort to close the share price gap with rivals, the Financial Times has reported.
It is Norilsk's first long-term commitment to dividend levels seen at US, European and Australian peers and follows a sharp rise in the 2001 dividend payments.
Norilsk produces about 20 per cent of the world's nickel and 40 per cent of the palladium. It has been criticised in the past for paying very low dividends under its former corporate structure, which controlled its operating activities through a listed holding company.
The net-income figures used as the basis for the dividend will be calculated under international accounting standards rather than Russian accounting rules. Mikhail Seleznev, analyst at United Financial Group in Moscow, said the statement would help attract a more diversified base of western investors to the company.
"Now that we have a formal board-approved dividend policy, this is a serious improvement in the corporate governance of the company," he said.
Norilsk reported a 75 per cent fall in first quarter net profit to R3.74bn (US$119m) from R14.78bn in the same period last year.
Profits were hit by weaker palladium prices and the absence of nickel exports in the first two months of the year.
Norilsk's dividend policy is in line with those adopted by other large Russian companies. LUKoil, Russia's largest oil producer, pledged a dividend of 20 per cent of its earnings by 2005 and 40 per cent by 2008. Norilsk is expected to publish 2001 financial results to international accounting standards in the third quarter.

Russian nonferrous metal giant gets US$200m loan 

Norilsk Nickel Mining and Metals Company (Norilsk Nickel MMC) has secured a three-year syndicated US$200m loan from Western banks using 60,000 tonnes of nickel as collateral, Interfax News Agency has reported quoting a company official has said.
The general agreement was signed in Moscow on 23rd May, Aleksandr Popov, the company's deputy general director and chief treasurer, told Interfax. "But the deal involved a lot of paperwork and it was only just finalized in Amsterdam," Popov said. The interest on the loan is LIBOR + 2 per cent.
Norilsk Nickel plans to delegate most of the funds "for production-related investments," Popov continued.
He said the loan facility was fully underwritten by Credit Suisse First Boston (the documentation agent), ING (facility agent and joint bookrunner) and Standard Bank London Limited (security agent and joint bookrunner). Natexis Banque Populaires joined the facility as co-arranger prior to the execution of the facility documentation. The collateral is stored at warehouses in Rotterdam.
Norilsk Nickel is the world's largest producer of nickel, platinum-group metals, and a major copper producer. It exported 177,400 tonnes of nickel and 422,000 tonnes of copper in 2001. The Interros group holds the controlling share in Norilsk Nickel.

Norilsk Nickel plans to increase gold production 

The Norilsk Nickel company intends to diversify its business and to increase the volume of gold production so as to offset a fall in profits resulting from a reduction in the demand for and, therefore, low prices of palladium, a representative of the company's Press Service told RBC. 
The mechanism and the methodology for development of the new kind of Norilsk Nickel's business are supposed to be approved in the third quarter of this year. Gold production is a collateral business for the company now. This metal is mined as a by-product at sulphide deposits. Norilsk Nickel produced not more than 5% (about 7 tons) of all gold produced in Russia. 
Norilsk Nickel's volume of production reached RUR107.3bn (US$3.43bn) in 2001. The company's profit exceeded US$1.5bn, despite a reduction by 1.5 times compared to the 2000 level.

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TELECOMMUNICATIONS

Telecoms require at least US$20bn in investment

Russia's telecommunications industry requires at least US$20bn in investment over the next few years, Telecoms Minister, Leonid Reyman, said at a conference in Moscow on the perspectives for Russian-European integration in the 21st century. "A very important direction of development for Russian telecommunications in terms of integration with Europe is the harmonisation of legislation in accordance with European standards," Interfax News Agency quoted him as saying. 
One of the most important tasks for the industry is the rational use of economic potential internationally, for which Russia must receive equal access to the international goods and services market, the minister said. The Russian telecoms industry's development in the near future will concentrate on ensuring the accessibility of high quality telecoms services throughout the country, stimulating honest competition on the market, advancing the development of the industry and supporting domestic production, he said.

Russian telecom satellite launched 

A Proton-K booster rocket with a new-generation telecommunications satellite, Express-A1R successfully blasted off from the Baykonur launch pad in Kazakstan on 10th June, ITAR-TASS News Agency has reported.
The booster is to put the communications satellite into a high elliptical orbit in implementation of the state programme for launchings of communications and navigation satellites.
The Express-A is intended for fixed and trunk communications, the relay of television and radio programmes, telephone and telegraph communications in digital format. The satellite weighs 1,600 kg. The length of its active functioning in orbit is more than seven years while its overall service length is about ten years.
The technical resources of the satellite make it possible to use the relay of any types of data, including signals for the transmission of data, video conferences and high-speed access to the Internet.

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TRANSPORT

Russian experts upbeat on linking Trans-Siberian, Trans-Korean railways 

Reconstruction of the Trans-Korean railway's eastern sector and building of a junction with the Trans-Siberian railway will require R3bn, Russian technical experts said today upon results of research of the Trans-Korean railway system, ITAR-TASS News Agency has reported.
The Russian Railway Ministry has submitted the documents on the project to the Russian government.
The ministry's press centre said the experts had drafted all the materials for a feasibility study on reconstruction of the Korean railway line.
The junction of the Korean and Russian railway systems will help attract a huge number of Europe-bound cargoes from Pacific countries, as the united railway system will offer a much more efficient and less expensive route of transportation.

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