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Update No: 254

The Russians are in a better position than before. Yet there is still a host of problems that confront them. Widespread poverty and unemployment, a rising incidence of diseases (AIDS included) which the West has largely banished, a collapse of social services, desperately under-funded schools and hospitals. Yet for all that there is hope.
One undoubted improvement is that Russia now has a vigorous and able younger man in charge, Vladimir Putin, who is clearly an efficient operator, whatever else he may be. Yeltsin must be given the credit of choosing a successor who is going to eclipse him in public esteem.
Putin's popularity may well not last. He has various unpopular measures that are, nevertheless, imperative to implement. Cutbacks in the armed forces are one top priority. The US is now so dominant in military matters that Russia has no chance of competing at all. The Pentagon's budget is to be over US$340bn by 2002-3, equivalent to the next 19 states' military budgets combined. And quantity is transformed into quality here. The US disposes of weapons that no-one else possesses. That is why victory was so swift in Afghanistan.
Putin, nevertheless, feels that he has certain advantages over Bush. For one thing he is certainly much brighter. He would not have allowed his advisers to have sold him such a silly idea as the 'axis of evil,' referring to such disparate countries as Iran, Iraq and North Korea, which are extremely unlikely to be in cahoots against the US; they detest each other.
The economy has been growing for the last two years, GDP up by 8% in 2000 and 5% in 2001. This was primarily due to a boom in energy, which accounts for one half of exports. A lower global oil price in 2001 than in 2000 was the main reason for a lower growth rate.
But the economy was also picking up on the after-effects of devaluation in late 1998. The Russians are growing and eating their own food again, whereas before the devaluation they were importing one half of their foodstuffs. The craze for foreign artefacts generally has abated; and Russian products are once again to the fore. The proof of this is that Russia has the largest trade surplus of any country in the world, US$40bn plus.
Buoyant prices in 2000 and early 2001 enabled the state to pay off US$10bn of national debt, Putin said in the New Year. Things could still continue to go Russia's way in 2002, but there are certain disturbing trends. The effects of devaluation have now worked through the system, while global oil prices have come down. Any more growth will have to come from productivity improvements. With no proper banking system there is no way for savings in one sector to finance investment in another. Smaller firms tend to be starved of capital.
The IMF predicts inflation coming in at 13% for the year, no mean achievement three years after a massive over-200% devaluation. The Russian economy is at a turning point and 2002 should show in which direction it is moving.

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AGRICULTURE

Russia to export about 4 million tonnes of grain

Russia will export about four million tonnes of grain by 1st July 2002, Deputy Prime Minister and Agriculture Minister Aleksey Gordeyev said, ITAR-TASS News Agency has reported.
He told journalists that Russia will export first of all barley, wheat and fodder grain to the Middle East and "partly to Europe."
Gordeyev said Indochina countries are most promising buyers of Russian grain "due to the big population of the region."
At the same time, he stressed that Russia traditionally imports grain, primarily for remote regions. Kamchatka, Chukotka and the Far East usually import up to one million tonnes due to high transport costs that make grain purchases in Canada cheaper than inside the country.
The minister believes that these regions will import about one million tonnes of grain this year.
Gordeyev said that within the next two months Russian companies will work out a schedule of grain supplies to Iraq. Grain exports to this country are expected to reach about 300,000 tonnes.

Case New Holland plans US$10m agri-tech project

The company Case New Holland plans a US$10m agricultural equipment assembly project in Russia in 2002, company representative, John McAuliffe, said. The project calls for the assembly of 50 grain harvester companies from imported parts in Bashkortostan this year, reports New Europe.
The programme calls for the assembly of 300 combines next year, McAuliffe said, speaking at the roundtable "Agribusiness in Russia: Today, Tomorrow and WTO" on January 30th.
The financing scheme envisages that parts deliveries will be paid for by Russian banks on the basis of a credit agreement with Western banks. The finished equipment is to be sold through technological machine outlets to buyers who will settle with the Russian banks with percentages of harvested crops, he said.
The plan is for the project to bring in such export agents as OND (Belgium), KUKE (Poland) and Hermes (Germany). McAuliffe also announced that Case has since 1993 shipped 500 grain harvesters to Russia, 190 of those last year alone.
He labelled Bashkortostaan, Tatarstan and the Tyumen region as regions the company prioritises for working with. Company specialists estimate that demand in Russia for grain harvesting combines is now 100,000 machines, and 300,000 for tractors.

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AUTOMOBILES

Ford builds first test car

In January the Ford Motor Company assembled the first trial model Ford Focus at its plant in the Leningrad region town of Vsevolozhsk, Interfax News Agency quoted the president of the US company's Russian division, Henrik Nenzen, as telling a news conference in St Petersburg. 
Ford plans to launch serial production at its Russian plant in June, he said. The plant will produce a first pre-serial batch of 45-50 Ford Focus cars in February-March that will be given to corporate clients for rough handling, Nenzen said. By June the plant is to turn out about 500 such vehicles for testing in Russian road conditions. Ford plans to initially produce up to 5,000 cars a year at its Russian plant, and eventually bring annual output up to 25,000 vehicles. There is also a technical possibility of increasing annual output to 100,000 vehicles.

GAZ to produce new D-class autos

The Gorky Automobile Works (GAZ) President, Nikolai Pugin, said the company plans to set up the capacity to produce a new front-wheel drive D-class automobile, reports New Europe. 
GAZ plans to produce 50,000 of these cars a year at separate premises, he noted. The company produces only E-class cars, trucks and minibuses and is now working on designing the new car, Pugin said. GAZ is searching for a strategic partner with which it can organise production of the new automobile. Several months will be needed to make the relevant decision. Fiat remains the company's major partner with regard to cars, Pugin said.

General Motors contemplates Astra production in Russia

The GM-Avtovaz joint venture at the end of 2002 will decide on the possible production of the Opel Astra car of the General Motors family, GM Vice-President for Russia and Newly Independent States, David Herman, told the Moscow press on 29th January, Interfax News Agency has reported.
In summer 2001, Avtovaz, GM and the EBRD signed a general agreement to set up a joint venture to manufacture the Chevrolet-Niva (VAZ-2123) cross-country vehicle.
Herman said it may cost US$60-80m to launch the production of the Opel Astra without counting engine production. He said the JV has the equipment and moulds for manufacturing the Opel Astra. The production of components and the body with Russian equipment and from Russian steel should make the car cheaper in Russia, he said.
Herman stressed the importance of manufacturing part of the components in Russia. This applies to the engine, among others. If the engine is produced locally, it can be installed not only in the Opel Astra, but also in Avtovaz vehicles, he added.

VW mulls building St Petersburg plant

German carmaker, Volkswagen, is considering setting up an assembly plant in St Petersburg, the city's deputy governor said. Negotiations have entered their final phase, and are expected to be completed in the first half of this year, Sergei Vetlugin told a news conference, New Europe has reported.
The size of the plant and amount of investment in it are still under negotiation. Production of components at plants in Northwest Russia is still under consideration. VW sold 7, 254 vehicles through its official dealers in Russia last year, 109 per cent more than in 2000. The figure does not includes sales of car models made by Volkswagens other divisions ( Audi, the Czech Republic's Skoda and Spain's Seat).

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AVIATION

Sibir Airlines posts 130% jump in passenger travel

Sibir Airlines increased passenger transport by 130% last year to 1.918 million passengers including flights by Moscow's Vnukovo Airlines, a company source said, New Europe reported recently. Passenger turnover more than doubled to 5.417 billion passenger-kilometres. The company filled 71.2% of its seats and the commercial load ratio was 69.2%.
Cargo transport increased by 56.5% to 14,086 tonnes and cargo turnover was up 80% to 531.4 million tonne-kilometres. Last year, the Ministry of Transport allowed Siberia Airlines and Vnukovo Airlines to jointly operate their aircraft fleets.
The acquisition of Vnukovo Airlines by Sibir Airlines was approved in April at a special shareholders meeting. Vnukovo share-holders approved the deal in May. Sibir Airlines has 1,071 shareholders. The biggest are the State Property Ministry with 25.5%, AO Rusinprom-Invest (Novosibirsk) with 19.54%, SEP-A (Gorno-Altaisk) with 18.9%, Portfolio Investment (Novosibirsk) with 12.66%, and Eurofinance Investment Company (Moscow) with 5%.

Russian-Ukrainian jumbo transport aircraft starts commercial flights

The world's largest transport aircraft, the Antonov-225 Mriya, the modernized super-heavy-duty jet, made two commercial flights in February, during which it transported 187.5 and 200t of cargo, the director of the Antonov aircraft-building company said in a telephone conversation with ITAR-TASS News Agency.
Anatoliy Vovnyanko said the Antonov-225 jets, the only ones with a payload of up to 250t, are destined to occupy a niche on the international air haulage market that is still vacant. The Antonov-225's closest competitor, the West-European super-jet A380, will not appear on commercial routes until 2006.
The Antonov-225 jets are manufactured jointly by Russia and Ukraine. They were designed in the 1980's as the transport platform for the Russian Buran space shuttles. The Antonov company built the frame of two jets of the family then, and one jet was completed to take part in Buran's only unmanned flight in 1988.
As the Soviet Union slid into financial crisis the Buran project was cancelled and the only Antonov super-jet was mothballed. It was not until 2001 that the Antonov group and the Motor-Sich [Ukrainian aeroengine] company managed to raise US$20m to modernise the first Antonov-225.
The second jet that was not finished in 1988 is now 30 per cent ready. Another U$50-60m is needed to make it airworthy. The future of the project is contingent on success of the first jet's commercial performance.

Commercial engine exports fill order book for Russian aerospace major

Russia's Energomash Corporation will manufacture 101 rocket engines for export, its general director and designer Boris Katorgin has said, Interfax News Agency has reported.
"We continue working with Lockheed Martin, whom we are supplying with RD-180 rocket engines. We have a contract for 29 engines, 13 of which have been delivered to date. Energomash will manufacture a total of 101 engines for commercial use outside Russia," he said in an interview with 'Vedomosti' newspaper published on 31st January.
"World prices of several million dollars have been set for our engines. The total value of the contract is around US$1bn. It will provide us with good financing until around 2010," Katorgin said.
He added that the RD-180 engines are sold through the RD AMROSS joint venture set up with US company, Pratt & Whitney. Though Pratt & Whitney "is actively involved at the stage of composing proposals, decision-making on coupling the engine with the rocket and refining engines," Russian technologies are sufficiently protected by the law, he said.
The second programme in which Energomash is involved is Sea Launch, under which it is manufacturing RD-171 engines for the first stage of the Ukrainian-made Zenit launch vehicles. So far 12 engines have been delivered and three more are being worked on, he said.
Energomash is also developing RD-191 engines for the Russian Angara LV project. Katorgin said the first engines have been made and passed field tests.
"The Angara programme has federal status, but actually only the Khrunichev space centre has been paying us. Very little money from state coffers was channelled to Angara," he said, adding that about half of the resources invested in the project came from Energomash.
Quoting Khrunichev, the interview claims that some US$10m has been invested in the development of the RD-191.

BA considers switching from Sheremetyevo to Domodedovo

British Airways commercial manager for Russia, Romania, Bulgaria and Ukraine, Daniel Burkard, discussed further cooperation with Sheremetyevo International Airport Director General, Sergei Belyayev. "The airport is prepared for a dialogue with airlines and will do everything possible to meet their needs," the airport's press secretary, Konstantin Ugodnikov, said after the meeting, New Europe has reported.
He said the talks had dealt with the current tariff policy, the servicing of British Airways liners and the quality of service offered to the passengers.
"This meeting was not the last one. Similar talks will be held with representatives of all other companies," Ugodnikov said.
Last December British Airways announced that it is holding talks with Domodedovo airport, on transferring is flights from Sheremetyevo, whose services do not meet its requirements, to Domodedovo.

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BANKING 

Russia, EBRD agree on Vneshtorgbank restructuring plan

Russian Prime Minister, Mikhail Kasyanov and EBRD [European Bank for Reconstruction and Development] president, Jean Lemierre have reached an agreement as for the joint concept of restructuring of the Russian Vneshtorgbank, the Foreign Trade Bank, RIA News Agency has reported . 
At his meeting with Lemierre on 2nd February they came to "a joint understanding as for the concept of Vneshtorgbank restructuring based on the previous agreement with Russian Central Bank Chairman Viktor Gerashchenko."
Lemierre confirmed that the concept was "acceptable to the EBRD." "A trilateral vision of work on this important project" will be outlined very soon," he said. Kasyanov said that US Citibank had displayed interest in the reform of Vneshtorgbank. He did not specify in what form Citibank might participate in the project.

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ENERGY

Oil field development

State-owned oil company, Rosneft, plans to invest US$140m to develop the Prirazlomnoye oil field this year, Prime-Tass News Agency quoted the Arkhangelsk regional administration as saying. 
The field, located in the Barents Sea, is being developed under a production-sharing agreement by Gazprom and state-owned oil shelf development Rosshelf, which together have 50 per cent, and by Rosneft, which controls the other half, the administration said. The percentages held by Gazprom and Rosshelf were notgiven. 
Total investments required for the field's development are estimated at US$1bn. The recoverable reserves are estimated at 76.4 million tons of oil. The companies plan to start production in 2004. 
The three companies are ready to develop the field together with other companies and are willing to reduce their share in the project, the official said. 
Germany's Wintershall said in January it would decide on its participation in the project this autumn, The Moscow Times informs. 

Local company wins 20-year right to Chechen oil wells

The joint stock company, Grozneftegaz, has won a tender for the right to develop and operate oil fields in Chechnya for the next 20 years, ITAR-TASS News Agency has reported.
Its general director Baudi Khamidov told journalists that two years of hard work had yielded results. "We did restoration work in the whole oil-extracting complex of Chechnya. We have managed to extinguish practically all burning wells, and the sky is clear over the republic now," he said.
Grozneftegaz has increased oil extraction 10 times to 3,300 tonnes daily. Last year it extracted more than 700,000 tonnes and will seek to double the output this year. There are nine operating oil fields now and the company plans to start using four more.

BP likely to get licence for Sakhalin-5, says Russian Far East governor

Foreign investments in the development of the oil shelf under the Sakhalin-1 and Sakhalin-2 projects will top US$1bn this year, Sakhalin Region governor Igor Farkhutdinov told a news conference at ITAR-TASS News Agency on 31st January.
He said that the peak of investment activities fell on the year 1999 when US$1.42bn were invested in oil prospecting in Sakhalin. Investments dwindled down to US$250m in 2000 and again doubled last year, hitting US$450m, Farkhutdinov said.
National investments look much more modest against the background of interest of foreign companies, Farkhutdinov acknowledged. He noted at the same time that Russian capital is showing certain activity. For instance, the Alfa-Eko company plans to invest at least US$15m in the development of the oil-refining industry on Sakhalin.
Farkhutdinov said that further development of the Sakhalin-1 and Sakhalin-2 projects will largely depend on the development of the island's infrastructure. Companies that invest money in the development of the Sakhalin shelf [offshore fields], could participate in the construction of roads, airports and ferry services on a redemption basis, he said.
"We demand this from operators of the project," the governor said, adding that a full understanding with foreign investors in this field has not been reached yet.
Speaking of still another project - Sakhalin-5, Farkhutdinov noted that British Petroleum confirmed at a recent meeting that it wants to receive the so-called through licence on that section of shelf even on risk conditions.
In other words, the company is ready to lose invested money if there is no oil in that area. The Ministry of Natural Resources does not object to transferring a licence to BP on the development of that section, Farkhutdinov added.

1st phase of Yamal-Europe to reach capacity in 2003

During a visit by President Vladimir Putin, and an accompanying delegation to Poland, the sides negotiated the deadline by which the first section of the Yamal-Western Europe gas pipeline would reach its planned capacity and set a date for the end of 2003. ORT channel quoted Russian natural gas monopoly Gazprom head, Alexei Miller, as saying in an interview that the legal foundation for cooperation in the gas sector was also discussed. The sides confirmed first of all that in the future cooperation in the gas sphere will be based on an agreement from 1993, New Europe reported recently.
The gas agreement is of principal importance. The Polish side has confirmed financing in full for its share of the first section of the Yamal-Western Europe project. "What is also important is the fact that the Polish side will make a proposal within a month to improve the tax regime for this project," Miller said.
Russia benefits not only from getting foreign currency returns from gas exports to Poland, but also because Poland is a transit country, Miller said. "This is crucial because it determines the volume of gas deliveries to other European countries," he said. In 2001 Gazprom delivered 7.5bn cubic metres of gas to Poland

Gazprom and SIBUR to invest in Nizhny Novgorod

Russian natural gas monopoly Gazprom and its subsidiary SIBUR, during 10 years of partnership with SIBUR-Neftekhim (a SIBUR subsidiary in Nizhny Novgorod) plan to implement a programme to develop the petrochemical complex in the region, amounting to US$2-2.5bn, SIBUR-Neftekhim said in a press release recently. The proposed strategy is an expanded version of an earlier investment programme by SIBUR and SIBUR-Naftekhim in Nizhny Novgorod region, which amounted to US$400m, reports New Europe.
The investment has two strategic areas. The first involves the development of a complex for the production of aromatic hydrocarbons with the isolation of paraxylene - a component for the production of terephthalic acid, which is a major component in the production of polyethyleneterephthalate. The company will use gas condensate from the Far North, with naphthenic hydrocarbon of up to 35 per cent, as raw materials.
The second strategic area involves the development and operation of Volonzhinsky gas field (Vologda region) with the subsequent processing of gas with high ethane content at a new pyrolysis unit.
The implementation of the project will create the necessary prerequisites for the development of polymer production in the cities of Kstovo and Dzerzhinsk. In particular the capacity of an EP-300 ethylene and propylene unit will increase from 240,000 tonnes to 360,000 tonnes per year and the capacity of an ethylene and glycol plant will increase from 150,000 tonnes to 200,000 tonnes of monoethyleneglycol per year.

Blue Stream start-up set for late summer

Start up work on the Blue Stream gas pipeline from Russia to Turkey will begin at the end of the third quarter of 2002, Gazprom executive board member, Bogdan Budzulyak said, New Europe has reported.
Speaking to reporters in Berlin on January 25th, he said that at a company executive board meeting it was acknowledged that work on the pipeline is behind schedule due to delays in pipe deliveries from Italy.
The pipe supplier for the onshore section of Blue Stream includes two onshore sections - from Izobilnoye to Dzhugba in Russia and from Samsun to Ankara in Turkey - and Dzhugha-Samsun section under the Black Sea.
The US$3bn pipeline will carry 16bn cubic metres of gas annually.

Russian grid boss welcomes Western strategic investors

Strategic investors may come to the Unified Energy System of Russia [UES] as early as this year, UES chief executive Anatoliy Chubais told correspondents on 3rd February in New York, where he is participating in the World Economic Forum's annual session, RIA News Agency has reported.
Investments in securities and financial markets are not what the UES and the whole Russian economy basically need, Chubais said. "We badly need direct strategic investments in our power stations, in power generating facilities," he pointed out. "People who are discussing energy problems at the forum are company leaders and potential strategic investors," Chubais said.
"So far we cannot boast about achieving a concrete result [in attracting strategic investments], but preparatory work is in progress," he said.
Answering a question by a RIA correspondent about the situation with non-payments in the Russian energy sector, Chubais stressed that "we are proud of the fact that from 1st January 2002 the company [UES] has no debts to Gazprom, nuclear power stations and the public sector, which is the first time in many years." "We ceased to be debtors, we put the company's financial affairs in order and have prepared for restructuring," he said. Chubais specially stressed that "it is impossible to attract foreign investors to a company bogged down in debts."

First wind-powered generator in service on Far Eastern islands

A wind-powered generation unit has been constructed on the South Kuril island of Kunashir as part of the federal programme for the social and economic development of the Kuril Islands. The executive management of the programme told ITAR-TASS News Agency that the first generator produced by the Danish company, Vestas, for the Kuril Islands has been installed in the settlement of Golovino. The unit has a daily capacity of 225 kWh, which is expected to cover all the requirements of the fishing village. 
The Kuril Islands have become home to the development of unconventional sources of energy. This work is being financed from the federal budget as well as from the extrabudgetary fund of Sakhalin Region and by the State Fishing Committee. Experts believe that the construction of geothermal heat and power plants, mini-hydroelectric power plants and wind-powered generators on the islands will make it possible to phase out large-scale deliveries of coal, fuel oil and diesel fuel.

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FINANCIAL NEWS

Economy grows 5%, industrial output up 8% in 2001

Russia's GDP growth slowed to five per cent in 2001 from 8.3 per cent in 2000, Interfax News Agency has reported, citing an economic development and trade ministry socio-economic report on last year. Industrial production rose 4.9 per cent last year.
On the whole, improvements in key economic indications seen since the 1998 financial crisis, continued in 2001, the ministry said. Russia has enjoyed three years of uninterrupted economic growth. GDP has grown almost 20 per cent in the three years since the crisis and industrial output has risen by more than 30 per cent, returning to the levels of respectively and 1993.
GDP in dollar terms increased dramatically last year, easing the problem of foreign debt servicing, the ministry said. One of the key achievements of 2001 is that economic growth continued in the face of fundamental shifts in growth factors, from external to domestic while in 2000 external factors directly contributed 37 per cent of economic growth in Russia, in 2001, the figures was only 12 per cent, the ministry was quoted as saying.
Capital investment and household consumption growth continued to outstrip growth in GDP and industrial output. Capital investment rose by an estimated 8.7 per cent in 2001, and retails sales were up 10.8 per cent. Real retail sales were at their highest since this figure was first calculated in 1994.
There was a strong federal budget surplus in 2000-2001, while previous years were plagued by chronic deficits, the ministry said.
However, a number of negative trends began to rear their heads in 2001, especially in the latter months of the year. Economic growth slowed in the second half of the year, and even came to a stand-still in the fourth quarter.

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FOREIGN INVESTMENT

Sharing with the EBRD

The European Bank for Reconstruction and Development plans to buy a 10% stake in the Stinol refrigerator plant in the Lipetsk Region from the Italian Merloni Elettrodomestici, The Russo-British Chamber of Commerce Bulletin has reported. 
The deal estimated to be worth €13.6m, was finalised in November after being approved by the EBRD board. EBRD is expected to credit the enterprise. The first US$10m is to be put into the plant next year.
The aim is to renovate Stinol's product range and boosts its production capacity. The Italians intend to make 1 million refrigerators at Stinol this year and 1.2 million the next. Projected investments for 2003 are even more impressive, when Merloni intends to spend US$30m to set up the production of its washing machines at Stinol.

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FOREIGN LOANS

EBRD chief upbeat on cooperation with Russia

The president of the European Bank for Reconstruction and Development (EBRD), Jean Lemierre, considers cooperation between the EBRD and Russia to be wonderful, he said in an interview with RIA News Agency by the way of comment on his meeting with Russian Prime Minister Mikhail Kasyanov in New York. The head of the Russian government was participating in the World Economic Forum held in the USA.
"We have discussed concrete issues of Russia-EBRD cooperation," Lemierre said. He particularly mentioned the joint project on construction of a flood-protection dam in St Petersburg and EBRD's participation in the restructuring of the Unified Energy System of Russia company.
The EBRD president noted with satisfaction that the bank had attracted 820m euros of investments into the Russian economy in 2001. During this year the amount of EBRD-attracted investments may top one billion euros, he said.

World bank approves US$120m for financial reforms in Russian regions

The board of directors of the World Bank has approved the grant to Russia of a US$120m loan in support of a Russian government programme on reforming the financial system in the regions, the Moscow representative of the World Bank told ITAR-TASS News Agency on 30th January.
The World Bank expert working on the project, Lawrence Hannah, points out that "the project does not only provide assistance to regions in the administration of their finances, but will also assist in raising the effectiveness of the work of Russian state institutions."
The implementation of the project will help regional administrations to solve problems in the spheres of education, and health care as well as social protection of the least well-off sections of the population more effectively. The loan funds are subject to repayment over 17 years.

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MINERALS & METALS

Norilsk Nickel signs credit agreement with Commerzbank AG

The Russian mining and smelting company, Norilsk Nickel, has signed a credit agreement with Commerzbank AG, Frankfurt am Main. According to this agreement, Norilsk Nickel will receive a one-year US$30m credit, the company's press service reported. 
This credit will be allocated within the framework of pre-export financing and it will be spent on replenishing the company's floating assets. The settlement of this credit will be serviced by Commerzbank Eurasia, a Moscow subsidiary of Commerzbank AG. Commerzbank AG and Norilsk Nickel are planning to continue their cooperation that has been developing successfully for three years. 

Five-year plan reserves Yakutia's diamonds

ALROSA the Russian diamond mining company, has started to deliver diamonds on its new five-year US$4bn contract with De Beers, The Russian Mirror reported recently.
The new agreement, in force since the New Yea,r stipulates US$800m of sales annually, half of the overall Russian diamond extraction.
The other 50% will go to the domestic market (Russian cutters will be able to sell 15% of this stock circumventing De Beers).
There is a clause in the contract allowing for the external sales volume to be reduced for the last two years of the agreement, while increasing domestic purchases to US$900m, and later, to US$1bn a year. The government believes that Russian cutters and jewellers can cope with such a volume of raw material.
A presidential decree to be issued soon will allow ALROSA to sell 5% of De Beers' supplies (in order to control the corporation's prices) in addition to 15% of its total volume of extraction.
Unlike previous agreements with De Beers, this time the Russian government is not directly involved, but rather influences the market through export quotas. Obviously, there is an interest in weakening ALROSA's dependence on its main foreign partner. The reduction of sales to the traditional monopolist and liberalisation of the internal market can only promote development of the Russian diamond industry (currently it is working only to 20-30% capacity).
Alexei Kudrin, Deputy Prime Minister and the Minister of Finance, believes that the liberalisation of diamond sales is a correct move, since Russia needs to develop its own independent diamond-extracting industry.
According to Kudrin, the agreement will ensure the stability of diamond sales' revenues, which will not be at the mercy of the markets, while providing an insurance against any gaps in demand.

Russian, foreign companies purchase new KrAZ shares

The 57 million new common shares issued by Krasnoyarsk Aluminium Smelter (KrAZ) were bought by eight Russian and two foreign companies, a source close to the smelter's board of directors said.
Russian Aluminium (RusAl), whose shareholders previously owned 66.13 per cent of KrAZ, bought 22 per cent of the new shares. Two companies registered in the British Virgin Islands that are affiliated with RusAl - Dilcor International Ltd and Foreshore Ventures Limited - bought respectively 8 per cent and 5.8 per cent of the new issue.
"For now one cannot say for sure that the other companies are also tied to RusAl," Interfax News Agency quoted him as saying.
He added that a number of KrAZ shareholders were not properly informed about the new share issue, and therefore could not participate in their purchase. He did not say whether he was referring to companies tied to former KrAZ board chairman, Anatoly Bykov, who controlled about 28 per cent of KrAZ shares before the new issue. Bykov is under investigation on charges of attempted murder.

Investing in aluminium plant

The Astromex British company plans to build an aluminium plant in Vsevolozhsk, Leningrad Region. The original plan envisages not only the processing of aluminium, but the production of aluminium products as well, The Russo-British Chamber of Commerce Bulletin has reported.
Astromex had already set up OAO "Vsevolozhskiy aluminium plant" in 2001 to establish an aluminium production factory estimated at US$230m. That plan has never been implemented as it was not approved by the Regional committee of the Leningrad Region.
Astromex is the second Western investor after Ford to look seriously at the potential of Vsevolozhsk. Ford will open its production facilities there later this year.

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RETAIL INDUSTRY

French retails coming

The French Auchan company has revealed plans to build ten hypermarkets along the Moscow outer ring road (MKAD) within the next three years, putting about US$300m into the project, the Russo-British Chamber of Commerce Bulletin has reported. 
Construction of the first hypermarket began on October 24th at an intersection of MKAD and the Ostashkovskoye Highway and is scheduled to open in summer 2002. The hypermarket with a trade floor of about 14,000 sq.m and a total area of 40,000 sq.m, will service 7,000 to 8,000 shoppers daily and will have an assortment of 40,000 to 45,000 goods, most of them will be locally produced. 
In the near future, Auchan will begin construction on its other plots along MKAD, including Marfino and Krasnogorsk district. Three new plots have just been picked, located in Kotelniki and along the Kashirskoye and Kievskoye highways.
Patric Lange, head of Auchan Russia, confirmed that talks are in progress for the construction of another Auchan store, to be situated next to the new Ikea store in the settlement of Kommunarka.

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SCIENCE & TECHNOLOGY

Converting cold into heat

Scientists from a Siberian institute are working on a new technique to convert chemical energy into electricity and heat, reports the Russian Mirror. The new technology, developed after a marathon research project, is based on fuel elements and is ecologically clean, safe and noiseless.
Fuel elements, the researchers in Novosibirsk claim, can be used to manufacture cars, gardening equipment, and high capacity electrical installations.
The world annually is spending up to one billion dollars developing this technological miracle. Multi-nationals such as Mitsubishi, Ford and General Motors, all have high hopes for it.
The Russian version developed by the Novosibirsk-based Prospective Research Institute is expected to yield results in the near future. They intend to use fuel elements in combination with thermocompressors, which embody the principle of "a refrigerator in reverse," i.e. producing heat from cold. To be more specific, they would be able to significantly raise the temperature of subsoil waters, river water and other heat-carriers, from 5-10° to 60-70° Celsius.
In the West, thermocompressors supply heat to entire neighbourhoods. Russia, too, has this kind of experience: some villages in Siberia get heat from underground waters. Village boiler-rooms are equipped with thermocompressors made in Russia.
The Novosibirsk Institute has taken part in the improvement of these standard thermocompressors and researchers have suggested that electricity for "heat- from-cold" work be taken not from the central power grid, but from local heat elements-powered electricity plants. The efficiency of such technological complexes, which simultaneously produce electricity and heat, can be increased to 95%.

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SHIPPING

New terminal opened in Russian Pacific port

A new terminal for the export of mineral fertilizers was opened in the Vostochnyy port in Nakhodka [the Maritime Territory] on 4th February. It will bring US$75m to the Russian budget per year, Russian Transport Minister Sergey Frank said at the opening ceremony, RIA news agency has reported.
The ceremony was also attended by the Russian president's plenipotentiary representative in the Far Eastern Federal District Konstantin Pulikovskiy, Maritime Territory governor, Sergey Darkin, and other officials.
Russia exports to Asian countries 1.5m t of mineral fertilizers per year, Frank said. About one million tonnes of fertilizers produced in the Urals were annually shipped to China, Korea and Japan through the Baltic ports. Now this export flow from the Urals to Asia will be channelled to the Vostochnyy port.
The cost of the construction of the terminal with a designed capacity of 2.5m t of cargo per year was US$3m.

Russian-Chinese shipping line to increase volume of cargo traffic 

Russia's largest sea shipping company, the Far-Eastern DVMP, and the Chinese national navigation company China Shipping have signed an agreement to increase the volume of cargo traffic along Asian sea routes, reported the press centre of DVMP. 
According to the press centre, the company's business cooperation with Chinese navigation companies develops steadily and dynamically. For instance, 4,823 international containers were shipped in the 15 months that followed the opening the Russian-Chinese shipping line, Fesco China Direct Line. The line, which opened in October, 2000, is becoming increasingly popular with consignors from China, South East Asia and the USA. 
Cargos shipped by Russian and Chinese vessels along the Trans-Siberian mainline transit the Russian port of Vostochny on their way to Russia's western regions, the Commonwealth of Independent States, and Europe. 
In January, the Russian-Chinese shipping line launched a new shipping service that delivers cargos from Asia to Kazakstan, Uzbekistan, Finland, and Estonia.

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STOCKS & SHARES

The Stock Market comes of age

Russia's young stock market has been more a casino than a place to invest since its inception seven years ago. Last year, the market's performance was second only to that of China, but in 1998, it was the worst-performing emerging market in the world, the International Herald Tribune has reported.
But as Russia enters its fourth consecutive year of economic growth and the private sector bubbles to life, analysts are saying this market may be ready for investors, not just gamblers.
"This place has been a speculation, sometimes opportune and sometimes dreadful," said Bernard Sucher, a managing director at the investment bank, Troika Dialog, who moved to Russia in 1993 after nine years on Wall Street. "I've refused to use the word investment for most of the time I've been here. But now Russia is threatening to become a capital market."
A boom in Russia's oil industry has propelled the market. The main stock exchange is in the Russian Trading System. It has quadrupled in value since it hit a low in 1998, the year the government defaulted on its domestic debts. Bond prices have risen even more.
Despite an 80 per cent jump in the value of the Russian market last year, stocks are still relatively cheap, said Peter Boone, head of research at Brunswick UBS Warburg, an investment bank in Moscow and a subsidiary of UBS Warburg.
This is partly because the market fell so far in 1998: the RTS index fell 96 per cent in the 12 months through October 1998, and has yet to climb back to its autumn 1997 levels. The riskiness of investing in Russia, Mr Boone said, has also kept valuations down.
Russia's stock market is small, only about 10 stocks are traded actively, out of 235 companies listed, and the average daily volumes on the RTS range from US$15m to US$50m, with another US$400m traded abroad and on another Russian exchange that trades only in roubles. That limits choices for Russia-dedicated mutual funds, which typically stick to the most liquid stocks, like oil companies and mobile phone operators.
The Pilgrim Russia Fund was the best performing US-based emerging market mutual fund over the last three years, with an annual return of 56 per cent a year, according to Lipper Inc., a fund-tracking company. The fund was managed by Troika Dialog until early in 2001, when ING Barings, which bought it the year before, brought in its own managers.
"Few other markets have as much going for them as the Russian market," said Samuel Oubadia, senior investment manager at ING Investment Management in the Netherlands. This was not always the case. Despite last year's performance, the fund was the worse in its category in 1998, when the Russian stock market collapsed after the government defaulted on its debts.
About 40 per cent of the fund's assets are held in oil companies, led by Surgutneftegaz OAO, Russia's No.3 oil company. Other large holdings include Norilsk Nickel RAO, a metal producer, at 5.2 per cent of assets at the end of last year and Vympel-Communications, a mobile phone company, at 4.1 per cent.

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TOURISM

China includes Russia in list of countries permitted for tourism

China has included Russia in a list of countries which Chinese nationals are allowed to visit as tourists said Alexander Sorokin, deputy chief of the tourism department of the economic ministry.
Until recently the list consisted of only 16 countries, however, at the beginning of the year Russia was added to it. The Chinese side said the number of tourists visiting Russia might grow by 200,000 this year. Earlier, only residents of northern Chinese provinces bordering on Russia were permitted to visit Russia under an intergovernmental agreement on visa-free group travel that come into force in November 2000. In that way over 234,000 Chinese visited Russia in 2001, some 30 per cent of them were shopping tourists and the rest regular holidaymakers and businessmen. 
Now a resident of any part of China will be able to visit Russia. "This will bring a flow of Chinese to Russia, coming for vacations and ready to spend money, if services are available, Interfax News Agency quoted Sorokin as saying. "The Chinese government recognises growing public interest in trips to the European part of Russia. China estimates the future flow of tourists to Russia at about one million people a year," he said.

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TRANSPORT

Russian government confirms trimmed rail investment programme

The Russian government on 24th January approved the Railways Ministry's investment programme for 2002 which had been submitted for the first time for the Cabinet of Ministers to discuss back on 28th November 2001 by former Railways Minister Nikolay Aksenenko, 'Nezavisimaya Gazeta' has reported He had asked the government to confirm an investment portfolio worth a total of R161bn. The Ministry of Railways had planned to distribute this money as follows: to channel R122bn into ensuring the stable working of the railways (obligatory expenditure) and to invest R28bn in the implementation of long-term projects and R11bn in the development of the social sphere.
However, the project was "trimmed" by the experts from the Ministry of Economic Development and Trade who considered the Railways Ministry's plans as being "out of step with financial potential." The programme was referred back for further work on condition that the railways people would manage to fit all their expenditures into a sum of R94bn. This immediately sounded the death knell for major and extremely long-term projects such as the construction of the railway bridge crossing that was to link the island of Sakhalin with the mainland.
Speaking at a press conference on the results of the government session, the Railways Minister, Gennadiy Fadeyev, noted that in implementing the programme the department would gear itself to its own needs and its own specialist fields. He cited Mikhail Kasyanov who had stated that the Railways Ministry's main task must be to resolve issues connected with ensuring traffic safety and meeting the needs for shipments

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