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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: 257 - (30/05/02)

Politics

The prime geopolitical relationship for Russia remains that with the US, as Putin well realizes. He has decided to opt for a strongly pro-Western and pro-US line in foreign policy, much against the grain of advice of Kremlin insiders and the top military brass. 
Both the foreign minister, Igor Ivanov, and the defence minister, Sergei Ivanov, are reluctant advocates of this policy, while opposition to it in the Duma extends even to generally pro-government forces, Unity and Fatherland for Russia. They point to the US encroachment in the former Soviet Union, notably in Central Asia (Uzbekistan, Kyrgyzstan, Tajikistan) and in Georgia in the Caucasus. Russia is gaining little in their opinion in return for the cooperation with the US in its campaign against terrorism.
Certainly, the summit between Bush and Putin in late May tended to bear out the fact that Russia has won only cosmetic concessions from the US. Washington is pushing ahead with plans for a missile defence shield in contravention of the ABM Treaty, although offering Moscow the opportunity to cooperate in its construction.
The Bush Administration is agreeing to reduce nuclear warheads for the two states to 1700-2200 apiece, but is intending to stockpile, not dismantle, warheads taken out of operation.
Even on trade matters, Russia's adhesion to the World Trade Organisation (WTO) is not being accelerated and the administration is continuing its tariff policy on steel and other imports into the US. Putin calls for the US to treat Russia in commercial matters as a 'normal' country. But still Washington is reviewing trade with Russia on a year-by year basis. Normalisation is not yet on track. The summit was largely a fanfare about very little in concrete terms. Putin must be as disappointed as many of his officials at the outcome, despite all the banquets and bear hugs, but he gave little comfort on Bush's mission to persuade Russia to discontinue assisting Iran's nuclear reactor programme. He made the parallel with US aid to North Korea in the same context. Checkmate, it would appear!

The Economy
The Russian economy is a text-book example of how a massive devaluation, which is generally taken as a disaster, can become a huge boon. Not only has the economy boomed, GDP rising by 8.3% in 2000 and 5% in 2001, with 3-4% growth expected this year, but the stock market has soared, performing well in 2000 and being the best performer among the world's bourses in the last twelve months.

a) Russia compared with Indonesia
Over the last six months there has been only one better performing stock market, Indonesia's, that is in dollar terms (in local currency Russia's remains number one). This discrepancy reflects higher inflation in Russia than Indonesia, some 18% currently against the latter's 13%. But then Russia is still experiencing the effects on prices of the colossal, more than 200%, devaluation of the rouble in late 1998.
It is curious that these two countries both had crashes in the late 1990s, massively turning off investors. This shows the short-term thinking of many in the investment business, whether direct or portfolio. For once a crash has occurred there is often no better place to invest than in the economy in question. Previous investors obviously got their fingers badly burnt. But newcomers henceforward can pick up assets much more cheaply and operate with lower costs in exporting from the country whose currency has slumped. It is of course a delicate matter to decide when an economy so afflicted has bottomed out.
In Russia's case it was clearly in late 1999, just when Putin was emerging as premier and as the Kremlin candidate for succession to the presidency. He has certainly had a lot of luck in his timing, presiding over a huge comeback. But how long can it last?

b) The continuing effects of devaluation
Three-quarters or so of the cost advantages of devaluation have been eroded by subsequent inflation, which still leaves Russian exporters with a competitive edge. The 2001 trade surplus of US$50.2bn last year (exports of US$100.2bn, imports of 50bn) is not going to be repeated this year, but a projected surplus of US$35bn is highly satisfactory and should enable a continuation of the financing of higher public expenditures, with the public budget, in surplus in 2001, going into only small deficit. A higher real exchange rate of the rouble should be manageable for both private and public finances.
The rouble is likely to continue to slide as prices carry on rising, itself an inevitable outcome of present policies. The government is following a policy of encouraging domestic prices to rise to internationally comparable levels after the long policy of artificially fixed pricing inherited from the USSR. Oil and gas prices are rising and so the asset valuations of oil companies and Gazprom (the top three oil firms and Gazprom are in the top 500 world firms on the latest FT list).
The main problem is sluggish investment, both domestic and foreign. FDI into Russia, which was recorded as negative in 2000 as capital flight from Russia continued, became positive last year at US$2bn; some US$4bn is projected for this year, still a small figure for an economy of Russia's potential. The government is aware that more reforms are needed if FDI is to be encouraged, less red tape, clearer accountancy standards, better business legislation and better courts. It is the job of the technocrats, Premier Mikhail Kasyanov and Economics Minister, German Gref, to provide them. 

c) Russia tames OPEC
In a move that pleased the US, Russia has ended its deal with OPEC limiting its exports of oil, at least for June and July. Premier Kasyanov said that oil exports will be restored in two months to levels they reached before the deal was made.
Oil prices rose by a third this year after Russia (world number two exporter after Saudi Arabia), Norway and Mexico agreed to heed an OPEC call to restrain exports. Russia was only agreeing to curb exports by 150,000 barrels per day, one tenth that of OPEC's 1.5m barrels per day. It may well now feel that it can take a free ride on OPEC restraint. But that is likely to be harder to attain. 
If Norway and Mexico follow Russia's example, then the summer, traditionally a period of slacker demand, could see lower oil prices. Brent crude for July delivery closed down two cents at US$26.36 per barrel on the news on May 17th. A far larger discount is on the cards. 

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AUTOMOBILES

Ford Focus on the assembly line


A pilot batch of 300 Ford Focus cars is already on the assembly line of the Vsevolozhsk motorcar works in the Leningrad Region and will be rolling off the line in a couple of weeks, the Russian Mirror has reported. 
Some of these first Russian-assembled Fords will go for road tests and another sample selection will be transferred for testing at the works' quality control laboratory.
The testing programme consists of examination of accuracy of body clearances, and welding quality control (the car body has 2,000 welded connections). There will also be testing of the undercarriage, manoeuvrability and suspension performance.
Certain Ford corporate clients have agreed to become test drivers of the pilot batch of cars, providing weekly reports on their cars' behaviour on the road.
The Russian-made Focus will go on sale in July. There will be three models: a sedan, universal and hatchback, all available with 1.6, 1.8 and 2-litre engines.
Some experts believe that the serial production of these cars can drastically alter the situation on the market for inexpensive foreign cars. According to the Ford Motor company, the car's price is still an open question. Nevertheless, analysts are of the opinion that the transfer of production into Russia might see the Focus's price drop by at least 25 per cent. Presently Focus cars are supplied to Russia from the Ford factory in Valencia, where they cost from US$13,500 to US$20,400 depending upon configuration.
The production facilities for the Leningrad Region assembly line were procured by the Ford Motor company from the "Russian Diesel" defence workshop in 1999. Since then, US$150m worth of investments in the plant's construction and personnel training have been made. 

GM-Avtovaz completes assembly plant

US-Russian car joint venture, GM-Avtovaz, has completed construction of the building that will house its assembly line, with the entire required infrastructure, the venture's Director General John Milonas said. 
The venture will begin loading up the assembly line on July 10th and launch production on September 23rd, Milonas told a news conference.
Initially the venture will use the Avtovaz painting capacity, but a building for its own painting division should be constructed by February and launched in March 2003.
The venture will produce 500 Chevrolet-Niva sport-utility vehicles this year, 35,000 next year, 60,000 in 2004 and 75,000 in 2005 he said.
Milonas added that GM-Avtovaz plans to have 91 dealers throughout Russia, including the dealers of GM CIS, some Avtovaz dealers and new dealers. The export version of the Chevrolet-Niva will be fitted with an Opel engine and probably, a Japanese transmission.

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AVIATION

Russia starts making low-noise aircraft engine

The Omsk Baranov Motor Works has started production of the latest VSU-10-02 auxiliary power plant, which in the near future will be installed on Il-96-300 passenger aircraft, ITAR-TASS News Agency has reported.
The new plant conforms to all international environmental and noise standards, and is 33 per cent more powerful than its VSU-10 predecessor. The twenty-year experience of VSU-10s operating aboard 103 Il-86 aircraft without a single failure speaks volumes about its reliability, the managing director and chief design engineer of the Omsk Motor Design Bureau, Valentin Kostogryz, told ITAR-TASS.
The cost of the VSU-10-02 plant designed by Omsk Motor Design Bureau is less than one-third than that of its American analogues.

Sukhoi corporation wins tender to design fifth-generation Russian warplane

The Russian government military industry commission, after going through bids, selected the Sukhoi company on 26th April, as the chief developer of a fifth-generation warplane, Interfax News Agency has reported.
The Yakovlev design bureau and MiG company will also be involved in the project, Minister of Science, Industry and Technology, Ilya Klebanov, said in answering a question by Interfax.
He said the companies are to submit a programme and a sketch of the plane for government approval before the year's end.

Iran, Russia to sign contract for building satellite 

Post, Telegraph and Telephone (PTT) Minister, Ahmad Motamedi, said recently that Iran is to sign a contract with a Russian company in Tehran for building and launching the Zohreh Satellite, IRNA News Agency has reported. 
The Public Relations Department at the PTT Ministry quoted Motamedi as saying that the satellite's equipment would be German and French. He said conclusion of the contract is a legal duty. 
"Over recent years, more serious activities had been launched and from among five European and Asian countries, a Russian company won the tender bid for construction and launching the satellite." 
Motamedi said the main parts of the satellite are produced in France and Germany at Iran's request. 
He added that the original contract would be confirmed by Russian space agency and confirmed by the government. Once the satellite is launched, it will save the country hard currency, he said. 

Russia brings in new helicopter engine

At least 100 new VK-2500 engines envisaged mainly for installation in export-oriented helicopters will be needed in 2003 for the serial helicopter production plants located in the cities of Ulan-Ude, Kazan, Kumertau and Rostov-na-Donu, Petr Izotov, general designer of the local Klimov plant, told Interfax-Military News Agency on 26th April. 
Helicopter production enterprises located in Ulan-Ude, Kazan and Rostov-na-Donu, as well as the Klimov plant, have received two samples of the engine each, Izotov said. In addition, four engines were made for bench tests. 
There are orders for supplies of six engines to the Ulan-Ude aircraft plant and six more to the Rostvertol joint-stock company in the second half of 2002, Izotov said. The Klimov plant is boosting production of component parts atits own facilities; it will take the first VK-2500 engine in the third quarter of this year. 
Currently turbines are manufactured at Ukraine's Motor-Sich company. "That is how the Klimov plant will launch production of the VK-2500 engine in small series this year," Izotov stressed. 
The VK-2500 engine has the same dimensions as the TV3-117VM/VMA engines mounted on Mi-8/17 Hip, Mi-28N Havoc, Ka-50/52 Hokum and Ka-32 Helix helicopters. The VK-2500 designer has proposed to all operators of helicopters with TV3-117 engines, that they replace them with enhanced-power VK-2500 engines during planned repairs. The new engine's specified service life totals 6,000 hours, which is considered to be extremely high for helicopters. 
In reality, TV2-117 and TV3-117 engines have never been in operation for more than 3,000 hours. The VK-2500 is a modernized variant of the TV3-117VMA engine. The modernization of engines that are in operation in the armed forces does not require huge expense. 
The engine can operate in temperatures of up 45 degrees above zero Celsius without losing capacity, which provides for its export to Africa, the Middle East and India. The VK-2500 engine, weighing 295 kg, has an enhanced capacity totalling 2,700 hp in emergency mode, 2,400 hp in take-off mode and 1,750 hp in cruising mode. Its specific fuel consumption amounts to 210 grams per horsepower in an hour.

Aeroflot confirms approval of terms for Sheremetyevo-3

Russian flag carrier, Aeroflot, has confirmed the approval of terms for construction of the Sheremetyevo-3 terminal with Sheremetyevo International Airport. The new model for managing the third terminal mtches Aeroflot's interests although much of what had already been developed had to be reviewed as a result of negotiations, Aeroflot Deputy Director General, Lev Koshlyakov, said. Negotiations on forming a joint company have reached the conclusive stage. However, it was agreed to announce the approved concept for managing the terminal at a later date, after the founding documents for the new joint company had been signed, Interfax News Agency reported, quoting Koshlyakov.
Aeroflot more than anyone wants the construction of the terminal speeded up, he said. At the same time the airline understands that new management at Sheremetyevo Airport required time to analyse the project. Aeroflot is pleased that Sheremetyevo has finally been able to formulate its position, which differs considerably from that of the airport's former management and brings something new to the project, the news agency quoted Koshlyakov as saying.
For Aeroflot the main priority is not to manage the airport or extract profits from it but to ensure a high service quality. For Aeroflot it was important that the management structure for the new terminal enabled some influence to be put on the management of aeroplane parking resources, price policy in airport services, and on the quality of ground service for passengers, he said. The joint company structure approved will enable these tasks to be realised. Aeroflot and Sheremetyevo decided to create a joint company to implement the construction of Sheremetyevo-3 with charter capital of at least US$10m. Sheremetyevo Airport has proposed that the company be called Moscow International Airport.
Sheremetyevo will receive at least 50% plus one share in the company, Aeroflot at least 25% plus one share, and the operator and strategic investor 25% minus two shares.
The main tasks of the new company will be to construct the new terminal, reconstruct Sheremetyevo-2 and manage these.

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CREDIT RATINGS

Fitch upgrades Russia's ratings

Fitch Ratings, the international rating agency, on 2nd May upgraded the Russian Federation's Long-term foreign currency (and eurobond) rating to 'BB-' (BB minus) from 'B+'. The Long-term local currency rating and MinFin Series VI and VII bonds were upgraded to 'BB-' (BB minus) from 'B' while the ratings on MinFin series IV, V and VIII bonds were raised to 'B+' from 'B-' (B minus). The Short-term rating was affirmed at 'B' and the Outlook on the Long-term ratings was changed to Positive from Stable.
The agency said that the upgrades reflect its increased confidence that the step-up in public external debt service in 2003 no longer poses a significant risk to payment, even if oil prices were to drop sharply. Consequently, the main risks now lie with the structural weaknesses of the Russian economy. These are of a more medium-term nature, meriting Russia's graduation to the 'double B' rating range. The Positive Outlook reflects Fitch's expectation that, under President Putin's leadership, the Russian authorities will continue to introduce and implement structural reforms that are vital to raise living standards and diversify the economy.
Fitch noted that Russia's good macroeconomic performance is continuing. GDP growth slowed around the turn of the year, after rates of 9% in 2000 and 5% in 2001. But it is now picking up and Fitch expects growth of 4% this year. Fitch expects a current account surplus of 6.5% of GDP this year, albeit down from 11.3% in 2001. This surplus and a decline in capital flight have enabled Russia to both repay debt early and increase foreign exchange reserves to US$38bn in mid-April from US$12bn at end-1999. As a result, gross external debt has dropped from 210% of current account receipts (CXR) at end-1999 to 138% of CXR at end-2001, close to the median of 'BB' rated sovereigns. Over the same period, the liquidity ratio rose from 88% to 150%, above the 'BB' median of 115%.
The agency said that disciplined fiscal policy and prudent use of the oil price windfall has played a key role in rebuilding Russia's creditworthiness. The federal government budget balance has been tightened from -5% of GDP in 1998 to +3% of GDP in 2001. Fitch estimates that the ratio of general government debt to GDP has halved from 98% of GDP at end-1999 to 49% at end-2001, while the ratio of government debt to revenues has fallen from 273% to 125%. Moreover the recent agreement with Germany on restructuring GDR debt has effectively knocked another US$6bn off Russia's recorded public and external debt.

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ENERGY

TotalFinaElf to study Black Sea oil potential with Russian firm 

The oil companies, Rosneft and TotalFinaElf, have signed a framework agreement to carry out studies in the Black Sea, Rosneft press secretary, Aleksandr Stepanenko, told Interfax News Agency. 
He said that the companies plan to carry out joint research in the region of the Tuapse trench. It is planned to begin work under the agreement soon, he said.
Earlier TotalFinaElf held talks with Rosneft on participation in the development of the Komsomolskiy field in the Yamal-Nenets Autonomous Area, with recoverable reserves of 120m tonnes of oil and 47bn cubic metres of gas per annum. However, talks on this project were halted as the sides found partnership in this area to be inexpedient.
The companies are continuing talks on possible cooperation on a number of projects, including TotalFinaElf participation in the development of the Shtokman field. Recoverable reserves at the field are estimated at 27m tonnes of oil and 3,205bn cubic metres of gas. The field has been confirmed on the list of projects that may be developed under production-sharing conditions.
Rosneft and Gazprom set up a joint venture at the end of last year to develop five fields in the Yamal-Nenets Autonomous District, including the Shtokman field.

Regional governor calls for alternative to Russia-China pipeline 

Irkutsk Region governor, Boris Govorin, has called for the building an export oil pipeline from Angarsk to the coast of the Sea of Japan. He made the statement at a presentation of the Transneft project, Interfax News Agency has reported.
The alternative project of an oil pipeline from Russia to China "will make Russian oil exports dependent on one client", he said. "Besides, oil delivery to China may devaluate the chemical and petrochemical industries of Irkutsk Region and prevent them from being competitive on the Chinese market," the governor noted.
The Transneft project is more flexible from the strategic point of view, Govorin said. It will bring oil to the Asia-Pacific region and the United States.
"Following the events of the fall of 2001, the United States regards oil purchases from Arab countries as financing terrorists and thereby is looking for alternative supplies," he said.
Transneft and the Maritime Territory administration signed a statement of intent in early April to build a pipeline to Russia's Vanino and Nakhodka ports. The project for an oil pipeline from Angarsk to Maritime Territory, which will make delivery to the Asia-Pacific region, will cost about US$5.2bn, Transneft said. It is planned to start construction in 2004; 50m tonnes of oil will be transported each year from fields on Krasnoyarsk Territory and the Sakha Republic (Yakutia) in Eastern Siberia...

Russia hopes to tap continental shelf to boost domestic oil resources 

The Russian Ministry of Natural Resources plans to submit for the government's consideration a draft strategy for developing Russia's continental shelf, Interfax News Agency has reported.
Deputy Russian Minister of Natural Resources, Ivan Glumov, told a news briefing in Moscow on 29th April that Russia has recovered 49 per cent of all prospected oil and gas condensate resources and 22 per cent of gas resources. In the past 10 years, 335m tonnes of oil and gas condensate and 586bn cubic metres of gas have been produced annually in the country.
The Barents-Kara oil and gas province is the only one prepared to "relieve" such provinces in western Siberia and is capable of ensuring Russia's domestic demands and export potential, Glumov said.
According to the ministry's information, about 4.2m square kilometres of Russia's sea territory is 200 to 300 m. deep, and 3.9m square kilometres of these shelves are regarded as potentially rich in oil or gas. In particular, 2m square kilometres are in the Western Arctic region (the Barents and Kara Seas), 1m in the Eastern Arctic region, 0.8m are Far Eastern seas and 0.1m southern seas, including the Caspian Sea.
A primary necessity of legal registration of the shelf resources as Russia's property is dictated by the fact that Russia has not settled its disputes concerning delimitation of sea areas with Norway in the Barents Sea, with Japan in the Sea of Okhotsk and Sea of Japan, with Georgia in the Black Sea and the Azov Sea and with the Baltic states in the Baltic Sea.

Russia, Croatia sign agreement to boost Russian oil exports to Mediterranean 

Croatian pipeline company, JANAF, signed a framework agreement for the Druzhba-Adria pipeline project on 29th April, a source in Transneft, the operator of the project, told Interfax News Agency.
According to the source, the agreement contains guarantees from the operator to transport 5m tonnes of oil per annum, which will be supplied by Tyumen Oil Company (TNK) and Yukos.
JANAF, which proposes to invest US$20m in the project, insisted on the inclusion of these guarantees in the text of the agreement. "Initially the Croatian side required bank guarantees from us but in the end we found a sensible solution," the source said.
The source explained that the agreement, with the corresponding changes, would be sent for confirmation to other participants in the project, in particular Slovakia's Transpetrol, Hungary's MOL and Yukos - who were not present at the signing ceremony for technical reasons. Ukraine's Ukrtransnafta has already approved the new agreement.
The source noted that implementation of the project would be possible after the signing of an intergovernmental agreement between the participating countries - Russia, Hungary, Ukraine, Slovakia and Croatia. The governments of these countries are currently agreeing a draft of this agreement.
The integration of the Druzhba and Adria pipelines will make it possible to increase exports of Russian oil to the Mediterranean market through the Croatian deep-water port of Omisalj on the Adriatic Sea. The project involves the gradual increase of exports from 5m tonnes to 15m tonnes of oil.

LUKoil to start construction of oil terminal in north west of Russia 

Russia's oil giant LUKoil is going to start the construction of an oil terminal in the Leningrad region in 2002, a source in the Leningrad regional government reported to RBC. The capacity of this terminal is expected to reach 10m tons of oil and oil products a year. The transfer of oil and oil product via the Leningrad region is forecast to reach about 50m tons by 2005. The source did not specify the cost of the project, as the Leningrad regional administration and LUKoil had not signed the relevant agreement yet. 

Russian government prepares auctions for Sakhalin-V 

In April, the Russian Ministry of Natural Resources will complete preparations for auctions for two sections of the Sakhalin-V oil and gas project: Khaigansky and Vasyukansky. 
Potential foreign investors of the project disagree with the decision of the Russian ministry to break up the contract zone into four to five independent blocks and sell them individually, Sakhalinskiye Novosti has reported. 
The oil and natural gas reserves are estimated at 600m tons and 600bn cm, respectively. Around 49 % of project shares belong to BP, while 51 % was divided between Rosneft and its subsidiary Sakhalinmorneftegaz. 

Gazprom regains stake in gas field sold to Itera and German TNG 

Gazprom has announced that it has bought a 49% stake in Severneftegazprom, a company with an estimated 700bn cm of gas. Gazprom bought the stake from Itera and TNG, a German company with a controlling stake in former Gazprom-controlled subsidiary Zapsibgazprom. Gazprom stated that it plans to increase its stake to a controlling one through the purchase of more shares from Itera. The Gazprom management is also due to decide the winner in a tender for financial auditing services. The company declined to comment on the decision, citing the fact that a formal recommendation to the shareholders at the AGM must come from the company's board of directors. The BoD will meet sometime on or after May 20th to decide on the management's proposal. Russian newspapers are spreading the idea that PricewaterhouseCoopers will be replaced by Deloitte & Touche. 
The market will take both of these news items as positive indications that the new management team at Gazprom is actively pursuing reform. The Severneftegazprom story also shows that questionable transfers of assets in the past can be reversed, regardless of how they have been dressed up to appear legal. We are placing our recommendation on Gazprom shares under review.

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ENVIRONMENT

Russia to spend US$335m to protect the environment

Russia's Ministry for Natural Resources is leading the way in formulating new state policies designed to improve the way the country uses its huge natural resources, the Russian Mirror reports.
Ministry officials have identified a number of issues for urgent resolution. For instance, no proper mechanism for managing the water supply has yet been developed, while sanctions for violating existing legislation concerning the water supply have been shown to be ineffective. As a result, neither the population nor industry is provided with good-quality water.
Approximately 30 per cent of the water supply in Russia is lost through leakages. The Ministry has proposed increasing water rates five-fold and toughening regional control over water supplies in an attempt to rectify the situation.
Another target is the ineffective use of the country's forests. Russian foresters cannot cope with the task of counteracting well-equipped and organised gangs of poachers. Over the past few years, the level of illegal deforestation has increased significantly. The damage inflicted has reached three billion roubles (approximately US$97m) a year. The authorities have urged the police, the tax police and the customs service to render all possible assistance to the forestry services.
With the raw materials sector expected to play a leading role in the Russian economy for many years to come, enterprises working in this field will be encouraged - and even required - to introduce nature-protection and conservations schemes, as well as resource-saving technologies, in any production and processing plans.
The Ministry for Natural Resources' own federal programme, The Russian Environment and Natural Resources (2002-2010), has been approved by the government and will cost tax-payers eleven billion roubles (US$355m).

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FOREIGN ECONOMIC RELATIONS & TRADE

Russia sees fuel exports to USA as gateway to international markets

The dynamic development of the Russian energy sector combined with the stability achieved create framework conditions for Russia to become a stable fuel supplier to the American market, Interfax News Agency has reported.
Russian Energy Minister, Igor Yusufov, made this statement at his 26th April meeting with US Under Secretary of Energy, Robert Card, the ministry press service reported.
Yusufov said the USA, as a party interested in deliveries of hydrocarbons from Russia, could give a signal to the West that Russia is a reliable place for investing in the energy sector.
The ministry report says that, at the meeting, the sides expressed the common opinion that in the present international situation close interaction between the two countries in fuel deliveries, technology exchanges and investments will serve the stable development of the Russian and American economies, making this development independent of political factors.
The press release quotes Yusufov as saying that Russia can and should become a key member of the world energy community and actively trade not only raw hydrocarbons but refined products. Card expressed the conviction that the prosperity of the Russian energy industry will promote the prosperity of Russia, which has strategic significance for the United States.

Russia continues manufacture of turbines for Iran, China

The Leningradskiy Metallicheskiy Zavod incorporated in the Silovyye Mashiny (Power Machinery) concern has manufactured basic parts for the 1,000 MW turbine to be installed in the Bushehr nuclear power station in Iran. The turbine will be tested soon, Interfax News Agency has reported quoting the plant's press service reports.
A turbine of the same capacity has been shipped to China. The weight of the 2,000-tonne turbine is just two-thirds that of similar slow-pace turbines. Its length is 51 m. The turbine is the first one of this power to be exported.
A second turbine of this kind is being manufactured while talks are underway on supply equipment for the third and fourth power unit in the Tianwan nuclear power station.

Polish province of Lodz looks at trade with Russian republic of Tatarstan

Representatives of the Lodz Province in central Poland arrived in Kazan on 23rd April. They are mostly interested in the petrochemical products offered by Tatarstan. In exchange, the Poles are offering agricultural produce. However, there potentially are many more spheres of bilateral trade. The prospects for such cooperation were discussed on 24th April at a meeting involving the Prime Minister of Tatarstan, Rustam Minnikhanov, and Lodz Province governor Krzystof Makowski, Tatar-Inform News Agency has reported.
The collaboration between Tatarstan and Poland is developing on the basis of the agreement between Tatarstan and Poland on trade and economy, science and technology and culture, which was signed 21st October 1996, and the treaty between the Ministry of Economy of Tatarstan and the Lodz Province of Poland about trade and economy, science and technology and cultural cooperation of 19th October 1996. Today Poland is one of the top foreign trade partners of Tatarstan: in 2001 the trade turnover between them was US$204.7m, the Tatarstan State Statistics Committee says...
Collaboration between Lodz Province and Tatarstan has been developing since 1996. However, as Minnikhanov remarked, recently it has been not so vigorous. He expressed the hope that this visit would be conducive in furthering contacts. Minnikhanov spoke at great length about Tatarstan's economy, the possibilities of the oil producing and petrochemical industries, aircraft construction and mechanical engineering, and agroindustrial sector.
Makowski noted that recent contacts between the presidents and prime ministers of Russia and Poland had given signals toward collaboration, and now Poland is very much open to cooperation with Russia, particularly with areas such as Tatarstan.
He noted the importance of a meeting between representatives of banks during the current visit... He said success was to be expected in expanding relations because both sides wanted it. He invited Minnikhanov to pay a return visit to Poland.

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FOREIGN INVESTMENT

Germany increases investments in Russia's Ural district 

Last year German investments in the economy of Russia's Ural Federal District were more than twice as much as in 2000. However, this volume is seen to be rather small. The amount of investments was US$112.9m in 2001, which was 9.1 per cent of the total volume of German investment in Russia. Direct investment comprised only 4 percent of them.
The trade turnover between Russia and Germany was US$22bn last year, which was 12.8 per cent more than in 2000. Some 20 per cent of this turnover fell to the Ural Federal District. The District's enterprises produced one third of the total volume of Russian exports to Germany, a representative of a regional information centre said in an interview with RBC. 

DaimlerChrysler to lend US$80m to Siberian engineering group

Germany's DaimlerChrysler AG will provide a loan of US$80m to the Siberian Engineering Holding (Sibmashholding) to upgrade the Krasnoyarsk Combine Plant and Altaidiesel, a Sibmashholding spokesman told Interfax News Agency. 
He said the issue of subsequent financing will be decided at the end of 2002, after German company Rovena conducts an independent audit. 
The money will be used to refurbish the plants for production of the new Yenisei-950 (Ruslan) combine. The three-year modernisation programme was developed by DaimlerChrysler and Sibmashholding, which signed a cooperation agreement on April 10th during Russian-German intergovernmental talks in Weimar. 
Supplements to the agreement setting out the time table and amount of financing are now being readied for signing. 
The Krasnoyarsk plant is to produce 500 of the new combines this year, and is expected to be producing 4,000 annually by 2005. 
Sibmashholding was founded by the Krasnoyarsk Combine Plant, Altaidiesel (Barnaul), Altai Tractor (Rubtsovsk), and the administrations of the Krasnoyarsk and Altai territories, and the Novosibirsk and Omsk regions. These regional governments hold about 40% of shares, and the remainder is divided among the founding companies. 

Can-Pack to build US$60m aluminium can plant

US company Can-Pack plans to build a US$60m aluminium can plant in the Leningrad region, said the region's Governor, Valery Serdyukov. Construction will begin this year and be completed in 2003, Interfax News Agency reported.
A site is now being selected. Possible locations are the Gatchina, Tosno and Vsevolozhsk districts. The plant, which will be built in two phases, will be able to produce 1.6m cans per year.
The construction project has been discussed with Baltika, one of Russia's leading brewers, Serdyukov said. Baltika director of input resource development, Gennady Guschin, said earlier that the appearance of a third Russian supplier of aluminium cans would push prices down. There are currently only two aluminium can makers in Russia: Russian Aluminium's Rostar, and a plant in Narofominsk that belongs to Britain's Rexam.

Stora Enso returning Nizhny Novgorod project

The investment committee at the Finnish timber company, Stora Enso, is again looking at the possibility of carrying out a project for the building of a US$35m corrugated cardboard and packaging plant in the Arzamas district of the Nizny Novgorod region, New Europe reported recently. 
The company announced its intention of asking the regional administration for support under a regional law on guarantees and support to foreign investment. The Director of the regional Economics Ministry's Foreign Economic Ties Department, Alexander Lezov, said this law envisages offering investors a number of tax breaks for part of the payments into the regional budget under the condition that an enterprise brings in investment and expands its taxable base. Last year, the Stora Enso management informed the Nizhny Novgorod authorities that it was backing out of the project for lack of a sufficient sales base, later reversing its decision.

Russian bank chief keen to boost foreign investments in Urals region

Russia's Vneshtorgbank is determined to actively cooperate with major German companies in projects to attract investments to the Urals Federal District, Vneshtorgbank President Yuriy Ponomarev said at the closing ceremony of the second international conference for foreign investments in the Urals in Frankfurt-am-Main on 27th April, Interfax News Agency has reported.
He stressed the development of political relations between Russia and Germany, which accelerated after the visit of President Vladimir Putin to Berlin and Weimar, should inevitably lead to the expansion of joint businesses and economic ties.
"We should fill credit lines with concrete deals. Now that Russia's credit rating has grown, we should respond promptly to the favourable investment situation," Ponomarev said.
In his opinion, the annual credit ratings of Russian companies and regions should play an important role in attracting investments. "There can be no major investments without confidence and there can be no confidence without disclosing information," he said.
Ponomarev was sure that Vneshtorgbank "by virtue of its size, experience and ties with the international financial community, can become an active participant in crediting and investing in the development of the Urals Federal District."
The international conference was organized by Interfax News Agency and the administration of the Urals Federal District with support from the German council for foreign economic relations and the Frankfurt urban development society.

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FOREIGN LOANS

Russia borrows US$120m for budget reforming from IBRD 

According to the government's information department, the Cabinet approved a proposal made by the Russian Finance Ministry in coordination with the Economy, Foreign and Justice Ministries, to sign a loan agreement with the International Bank for Reconstruction and Development (IBRD) for the development of budget federalism and the reform of regional finances, RBC has reported.
The signing of this agreement will release US$120m in loans to the Russian Federation with 17-year repayment and 5-year grace periods. These loans will be serviced and repaid by the federal budget. 

EBRD backs leasing for mid-sized Russian mining, construction firms

The European Bank for Reconstruction and Development is teaming up with Caterpillar Inc., the world's largest manufacturer of construction and mining equipment, diesel and natural gas engines and industrial gas turbines, and Raiffeisenbank Austria, Moscow, to set up a US$12m pilot leasing facility that will give the US firm's medium-sized Russian customers access to a flexible form of financing.
The EBRD, part of whose strategy includes promoting the development of leasing, is lending US$8m to Raiffeisen-leading, Moscow, Raiffensenbank's leasing arm so that Russian firms operating in the mining and construction industries can access modern equipment despite the country's traditional shortage of longer-term funding. Raiffeisenbank itself will put up the other US$4m.
The EBRD believes the risk-sharing formula embodied in the Caterpillar leasing facility will serve as a model that can be replicated in various sectors of Russia's economy and spread to the Bank's other countries of operation, Dmitry Touline, EBRD Senior Adviser, said at a signing ceremony in Moscow.
"This leasing facility further contributes to Caterpillar's efforts to ensure our customers in the CIS has competitive financing to help them obtain the equipment and solutions they need to succeed." Said James Tevebaugh, Caterpillar's CIS Managing Director.
This is the second leasing facility the EBRD has signed in Russia where this form of financing is still being tested, although the number of leasing companies is expanding fast. In February, the EBRD committed to lend US$10m to Russia's leading provider of leasing services to small and medium-sized enterprises, DeltaLeasing, a wholly owned subsidiary of the US-Russia Investment Fund.
Caterpillar customers cleared to participate in the scheme will typically have to make a down payment equivalent to between 15 - 35 per cent of the value of the equipment being leased. Lease tenors will normally average three years, although they can go up to five years. The value of the leased equipment can be from US$500,000 to US$5m.

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MINERALS & METALS

OMK to invest US$91m in steel complex

United Metallurgical Company (OMK) intends to invest US$91m in the construction of a steel smelting complex based at Chusovoi Metallurgy Plant (Perm region), which is part of the company. The OMK press service said that a presentation of the project to build Stal OMK was held in Chusovoi, at which the finalised parameters of the project were made public.
It is planned that the project to build a complex with a capacity of 800,000 tonnes of steel blanks will take three years. It is also planned that the pay-back period for investment is two years. Meanwhile, OMK management announced that the capacity of the new plant would amount to 1.5m tonnes of steel per annum, with investment of US$120m.
Production from the new complex will be distributed among three of the company's plants: 320,000 tonnes of steel will be supplied annually for wheel production of Vyksa Metallurgy Plant; 240,000 tonnes - to unit number one at Chelyabinsk Metallurgy Plant to produce seamless pipes and 240,000 tonnes - for the production of merchant shapes at Chusovoi Metallurgy Plant.
The new smelter will include an electric furnace, a ladle furnace, a vacuum unit and a continuous casting unit. According to the press service, SMS-Demag, VAI, Samsung, Danielli and Novokuznetsk Metallurgy Plant are participating in a tender to supply equipment for the complex.
Interfax News Agency quoted the press service as saying it is necessary to build the new complex because the open hearth furnaces at the company's plants: Chusovoi Metallurgy Plant, Vyksa Metallurgy Plant and Chelyabinsk Pipe Rolling Mill, which should meet the company's requirements, are worn out and obsolete. "After the implementation of the Stal OMK project these will be replaced by one production complex," it said.
OMK Director General, Anatoly Sedykh, said at the presentation that the setting up of its own steel smelting production, capable of meeting the company's requirements for steel blanks, would give OMK the possibility of maintaining its independence on the market and additionally insure its business from sharp fluctuations in economic and political conditions.
The OMK group includes Chelyabinsk Pipe Rolling Mill, Vyksa Metallurgy Plant (Nizhny Novgorod region), Chusovoi Metallurgy Plant, Shyolkovo Metallurgy Plant (Moscow region), Vtormetinvest (Moscow region) and Metallinvestbank. OMK owns significant packets of shares in these companies.

New diamond field discovered

A deposit 115km from the northern city of Arkhangelsk could be worth as much as US$4bn, experts believe, the Russian Mirror has reported.
It has been established that the deposit consists of one diamond pipe and the geological prospecting company responsible for the discovery has submitted to the Ministry of Natural Resources a detailed evaluation of the precious crystals lying at a depth of 610 metres.
Drilling holes have shown that diamonds also lie as deep as 1,024 metres, which would seem to open up the prospect of hitting upon more highly-productive diamond-bearing pipes during continued prospecting in the next three years. Plans for a mine to be built at the site are likely to cost around US$450m. The investment, according to the financiers, would be repaid within 16 years.
Canada's Archangel Diamond Corporation has a claim on the deposit, as it had funded prospecting work together with a Russian company until 1998. It has invested around US$6m.
The first deposit in this district, consisting of five kimberlite pipes and valued at US$12bn, was discovered back in 1980. The new pipe is located just 25 kilometres away from there but, according to the geologists, has quite a different "Classical" structure compared to the richest fields in South Africa and Yakutia.

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PHARMACEUTICALS

Russian, US companies to build pharmaceutical factory near Moscow

Russia's Askor-M company and the American Resources International firm based in North Carolina have signed a contract valued at US$11.75m for the construction on a turnkey basis of an industrial facility in Moscow Region, ITAR-TASS News Agency has reported.
The facility will manufacture special pharmaceutical solutions, including blood substitutes.
Under the agreement, American commercial banks will provide loans to finance the project. The US Export-Import Bank will guarantee 85 per cent of the loans. Russia will cover 15 per cent of the project cost. The AKB Investment banking corporation will act as the guarantor for the Russian side.
Russian specialists who participated in the preparation of the contract told ITAR-TASS that advanced technologies would be used by the new enterprise to enable it to keep the pharmaceutical solutions for five years, which is extremely important to meet the needs of the Ministry of Emergency Situations [Civil Defence, Emergencies and dealing with consequences of Natural Disasters] and the Russian Defence Ministry.
The signing of the accord took place in the Russian trade mission in Washington on 16th April. It was timed to coincide with Russian Economic Development and Trade Minister, German Gref's, visit to Washington.
The deal can be seen as one of the specific results of the Russian-American business dialogue launched last year. The aim of the dialogue is to involve the business communities of the two countries in the solution to pressing problems associated with the development of entrepreneurship and in the improvement of the business climate in Russia.

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RETAIL INDUSTRY

IKEA invests in Moscow retail centre

IKEA Russia, the local division of Swedish furniture maker IKEA, has invested US$250m in the consortium of the new MEGA retail centre in Moscow, which is scheduled to open on December 12th, reports New Europe. Peter Odlund, the head of the MEGA project, told a news conference that the centre in southern Moscow is being built by Swedish construction company Skanska. 
The 150,000 sq. m. centre will have room for 250 stores, restaurants, cafes, cinemas, an ice rink and parking. The second phase of the project calls for adding 20,000 to 50,000 sq. m. of retail and office space. The centre's stores in the initial phase are expected to have a combined turnover of over US$675m per year, Odlund said. The centre will be anchored by an IKEA store and an outlet of the French hypermarket chain Auchan. Other tenants will be home appliances chain Tekhnosila, Reebok, Sportmaster, Benetton, Yves Rocher and restaurant chain Sbarro, among others.

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SCIENCE & TECHNOLOGY

Science spending to increase five-fold

The Vice-President of the Russian Academy of Sciences, Nikolai Laverov believes he will see an increase in budget spending on science rise five-fold by 2010, the Russian Mirror has reported.
Laverorv pointed out in a recent report that in 2002, government financing of the Academy would increase in comparison with 2001 by 50 per cent.
In addition, funds for procuring scientific equipment would double in comparison with last year and exceed US$800m.
According to the Vice-President, fundamental science and education in Russia are becoming state priorities. And he is confident that the new policies for developing science and technologies will also be conducive to "progress in these spheres."
Laverov also described as "a thing of the past" the practice of government's simply "donating money to science."
The Vice-President of the Academy stresses that "science has already learnt to earn money." The Academy, he points out, has some institutes which bring in over US$15m a year.

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SHIPPING

Russian western ports to expand, increase turnover

Priority to enter the Kaliningrad sea port will be given to civil vessels, the port's captain, Vasiliy Belyayev, the first deputy of the head of the port administration, said at a news conference dedicated to the eighth anniversary of the sea port administration, BNS News Agency has reported.
He said that the agreement on this had been reached between the port's administration and the Baltic Fleet in 2001 and had been legally registered. However, the Baltic Fleet continues to control the passage of all vessels through the sea channel.
Priority to enter the port used to belong to military vessels. Belyaev said that "this very important decision was taken in the interests of owners of vessels and to improve services given by the port complex of Kaliningrad Region."
At the same news conference Georgiy Sebov, the head of the sea administration, said that in 2002 the administration is going to decide on the transfer of the third 12 ha basin of the Baltic navy base to the Russian Transport Ministry. It has been planned to set up a car ferry Ust-Luga (Leningrad Region)-Baltiysk (Kaliningrad Region) -German ports there. At present the ferry Ust-Luga-Kaliningrad-Kil [Germany] operates.
"When the Baltiysk ferry is put into operation we will do three trips a week and will also start taking passengers on the ferry," Sebov said.
The total cost of the reconstruction of the third basin has been estimated at US$ 3.5m.
A total of 36 trips were made in August-December 2001 after the ferry started to work. The ferry has been working at 60 per cent of its capacity only.
Sebov said that there were plans to build a large sea port of 62 ha in the town of Baltiysk at the Vostochnyy [peninsula].
In its later report at the Baltic news agency, BNS, said that the part of the Kaliningrad sea channel up to the Izhevskoye harbour will be widened up to 80m in the next two years. It will also become deeper down to 10m. Sebov said at the news conference that US$ 8.5m are needed to do this. The enlargement of the channel will allow vessels to go in both directions simultaneously.
The deepening of the whole [Kaliningrad sea] channel down to 9.75 m will cost another US$32m. A financial plan to attract investment for this purpose has to be drafted before 15 May 2002.
The port administration is going to ask the Lukoil-Arctic-Tanker enterprise to take part in the project so that increased traffic of tankers between the sea and Lukoil terminal in Izhevsk could be organized.
Sebov added that in 2001 the total cargo turnover of the port complex including trade and fishing terminals as well as the port's oil base and a conveyor was 5.8m t which was 32 per cent higher than in 2000.
In the first quarter of 2002 the turnover was 80 per cent higher than during the same period in 2001.
"The transportation of oil and oil products has significantly increased. It is expected that starting in 2004 the annual oil transit in the Kaliningrad Region will be six million tonnes," Sebov told journalists. He said that even without any serious renovation of the port the cargo turnover might be increased up to eight million tonnes annually.

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TRANSPORT

Russian official upbeat on future of India transport corridor


The North-South international transport corridor, linking India, Iran, Russia and northern Europe, is expected to handle over 20m tonnes of export and import cargo this year. Russia's earnings are estimated at about US$400m, the vice president of the European-Asian transport union, Yuriy Shcherbanin, has told Interfax News Agency, citing the Russian Transport Ministry.
He said the Russian, Indian and Iranian parliaments had recently ratified an agreement to establish the North-South international transport corridor. In May, the transport ministers of the three states will meet in St Petersburg to announce that the transport corridor has been given international legal status.
Following the announcement, as provided for in the tripartite agreement, other countries, including Kazakhstan, Lithuania and some of the Gulf states, interested in the project, may also join it.
Shcherbanin said that Russia and Iran are currently energetically developing their Caspian port infrastructure. Russia is building moorage berths in the sea port of Olya in Astrakhan Region to handle transit containers, and is modernizing the oil terminals of the Makhachkala sea port.
The new transport corridor will mostly handle tea, spices, alumina, timber, metals and various equipment.
The North-South international transport corridor runs from India to northern Europe through Iran and Russia. It can annually handle up to 40m tonnes of cargo by railways, motorways, seas and rivers. This cargo is currently being transported by sea through the Suez Canal.

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