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: 270 - (26/06/03)
Return of the prodigal sums
A remarkable fact about the Russian economy is that five years after disaster it is doing reasonably well. And it is not just due to higher global oil prices. These have eased off; yet the economy continues to grow. Above all, private capital is returning. Russia is now where venture funds want to be.
Al Breach, chief economist at Brunswich UBS Warburg, says that the productivity of Russian companies has increased 12% in the first quarter of the year over the same period last year. Spending power is growing rapidly and the Russian market is expanding fast.
The result is that Russian capital is no longer just fleeing the country, but coming back in droves. The Central Bank estimates that while there was a net outflow of US$1.2bn in the first quarter of the year, a net inflow of US$2bn is expected for the second quarter. Mr. Breach puts the net inflow higher at US$5-6bn for the first five months of the year compared with a net outflow of US$13bn in 2002 and US$19bn in 2001. The return of the prodigal sums is under way.
The flight of capital from Russia has been a problem for a long time, since the country's independence in 1991, indeed even before then. The political turmoil and economic uncertainty, coupled with high inflation, led to an enormous seepage of funds, which reached US$30bn in 1996 when Yeltsin was re-elected.
The return of capital is a very welcome sign for Putin, expected to be re-elected next year. But Alexei Kudrin, Russia's finance minister, warned against over-optimism, "I see a lot of room for bold economic reforms over the next two to three years." There are still two main obstacles to improvements. Nearly half of the economy remains in public hands, while low levels of corporate governance still prevail in the private sector. The financial sector needs restructuring.
One of the main tasks is to integrate Russia into international structures, the World Trade Organisation and the Organisation for Economic Cooperation and Development. In early June it joined the Financial Action Task Force, which has led the fight against money laundering. WTO membership is due next year. Liberalisation of energy prices is top on the agenda, especially of gas to render Gazprom profitable and investor-friendly.
Build up to elections
The electoral campaign in Russia is underway. There will be a round of elections for the lower house of parliament, the Duma, in December.
The members of the Duma voted on June 18th on a motion of censure against the government put forward by the communists and the reform party, Yabloko, united for the moment in an alliance against their better instincts. Not surprisingly the parties in favour of the government, above all United Russia and Fatherland Union, voted for the government.
The communists and Yabloko knew of course what the result would be. They proposed the motion in order to put down a marker for the elections of December 7th. Despite being defeated with only 150 votes out of the 450 members of the Duma, the motion was in a way a success. It forced parliamentary groups to show their hand; as a communist deputy put it: "Now people know who are truly the pro-Kremlin groups."
The Liberal Democrat Party of Russia (LDPR) of Vladimir Zhirinovsky and the Agrarian Party voted for the motion of censure, while the party of reform inclinations, the Union of Right-Wing Forces, led by Boris Nemstov, abstained.
The issues at stake
In the course of the debate the leader of Yabloko, Grigory Yavlinsky, accused the government of being unable to head reforms and protect people against crime. Mikhail Khasanov, who was not present, explained himself a week beforehand. He admitted that the government had made mistakes. Even the pro-Kremlin parties made criticisms of the government, despite several ministers being among their ranks.
"The political economy of Khasanov is good only for the oligarchs," said Gennady Zhuganov, the head of the communists. "It is a government of oil tycoons, gas tycoons and big timber merchants." 'The oligarchs' is a very portentous theme in Russian politics, the key figures in the economy mostly in the primary sector of raw materials. They are very much in the bad books of public opinion and curiously of the Kremlin.
Oligarchs staging a coup?
There is, however, a very different story in circulation. A strange report, published on May 26th, has provoked a new debate about the role of captains of industry like Mikhail Khodorkovsky and Roman Abramovich. The work of 23 political gurus, brought together in the Council for National Strategy, created in 2002, the report maintained that "the country is on the point of experiencing a coup of the oligarchs." It says: "either the oligarchs will try to deprive Putin of power in the near future or the regime, in the person of Putin, will commence to crush the oligarchs in using all the repressive power of the government."
The prevalent cliché, invoked by Zhuganov, that the government is in the pocket of the oligarchs, is not quite the case. One of the first things Putin did on assuming presidential power three years ago, was to turn on two of them, namely Boris Berezovsky and Vladimir Gusinsky, both previously supporters of the regime. They are now both in exile.
Putin and his team are well aware of the unpopularity of the oligarchs with the public at large. Ahead of elections to the Duma in December, and indeed to the presidency itself (the real seat of power) in June next year, it makes sense to at least seem to be hostile to the oligarchs.
Actually Khasanov and Putin himself are creations of the oligarchs. But between now and next June Machiavellian politics will prevail. Beware the oligarchs; and oligarchs beware.
Kremlin closes last TV opponent
The media in Russia are being harassed mercilessly. In the original days of press and media freedom after 1991 newspapers and TV stations thrived so long as they had a sponsor, which meant a tycoon behind them. Both Boris Berezsovsky and Vladimir Gusinsky (of Media-Most) had huge media interests. Their magazines and TV stations were highly critical of the government, particularly during the first Chechen war.
Yeltsin has to his credit that he tolerated a measure of criticism. But Putin is far less tolerant of dissent. A sinister aspect of his rule is that avenues for free expression are dwindling rapidly in Russia.
On June 22nd the last independent national TV station, TVS, was closed. The press ministry insisted that this was simply due to its inability to pay its bills. The fact, however, that TVS was deeply critical of the Putin administration is not irrelevant. Now there are only three surviving national TV channels, all stridently pro-Kremlin. TVS has been replaced by a sports channel; dumbing down is now the order of the day.
The incident is but a repetition of an earlier pattern. As long as the oligarchs were broadly supportive of the Kremlin, their media organs could go in for mild criticism. But when Berezovsky fell out with the Putin regime, shortly after its installation 2000, his media outlets faced constant harassment. In the course of 2000 and early 2001, his TV channel, NDV, became highly critical of the regime. It was soon confronted with a host of bully-boy tactics, legal and financial obstacles. Gazprom duly took it over. When its journalists moved to another channel, TV6, that too was harassed and abruptly shut down.
The journalists of TVS blame the government squarely for the closure. The news editor, Yelene Korobova, said on hearing of the closure: "What stunned, is that their (the government's) excuse was that they were defending viewers' rights. If nothing else, that is the one thing we were defending." George Orwell would had the words for that: service in the Ministry of Truth.
AVIATION & SPACE
Russia's Soyuz rocket to launch Venus spacecraft in November 2005
The European Space Agency and the Starsem joint venture between Russia and Europe have signed an agreement at the 45th international aerospace show in Le Bourget to launch the Venus-Express automatic interplanetary station, ITAR-TASS News Agency has reported.
The station will be launched aboard Russia's Soyuz rocket from the Baykonur spaceport in November 2005.
The agreement was signed in the presence of director-general of the Russian Aerospace Agency [Rosaviakosmos] Yuriy Koptev.
The fact that the agreement was signed two weeks after a Soyuz had brought the Mars-Express automatic interplanetary station to the trajectory of flight to Mars shows that the European Union countries are sure of the Soyuz reliability and the high level of cooperation with Russia.
The confidence was also mirrored in the recent decision of the European Space Agency to build a launch pad for Russia's Soyuz rockets at the Kourou spaceport in French Guiana.
Russia needs just one major player in aircraft industry - minister
Russia should have only one national company producing military and civilian avionics, Deputy Prime Minister Boris Aleshin has said.
"In my opinion, the future of the Russian aviation industry is one large national producer of avionics," Aleshin told Interfax-Military News Agency at the Paris Air Show 2003 in Le Bourget where Aleshin headed the Russian delegation.
"I know no occasions in the global aircraft building industry when the company survived without having a full range of combat and civilian planes. The Sukhoi military aircraft corporation is very close to attaining this goal, but they should continue mounting the civilian component in aircraft production," the deputy prime minister said. This does not mean that there will be no small producers of aircraft, he noted. "But the state should be among the main players in the aircraft building industry," he said.
Aleshin stressed that diversification of products is the most important condition for developing the Russian aircraft industry. "The plants that we inherited from the USSR still have the full spectrum of technologies ranging from ore to the end product. They can produce everything, but global experience proved a long time ago that this is incorrect. Everyone should mind their own business and focus on their own diversified field.
Small and medium businesses can doubtlessly be very effective when they are oriented on a narrow technology field. For instance, why should the MiG corporation have its own avionics branch? It is bound to work for MiG only. And how many projects does MiG have?" Aleshin said.
Integration processes in the global industry coincide with disintegration processes at the moment, he argued. "No more than 20 large companies will remain on the global aviation market in 15-20 years and they will fully control the development of the aircraft industry. It is very important to take part in this process. If we do not become a part of the global labour distribution, we will remain just a source of raw materials that feeds the global progress," Aleshin concluded.
Narodny strengthens on Fitch upgrade
Moscow Narodny Bank's (MNB) ongoing performance improvement and strong capitalisation led to an upgrade by international rating agency, Fitch.
MNB's major changes are in its long term rating from BB+ to BBB-and its Outlook status was adjusted from stable to positive.
While international confidence in Russia accelerates with macro-economic indicators highlighting the robust and substantial capital inflow, this new rating for the fully licensed UK bank confirms its position above Russia's Central Bank.
Despite MNB being 90 per cent owned by Central Bank of Russia (CBR) it has experienced greater success since the upturn in the Russian economy circa 1999.
The bank was incorporated as a British bank in 1991 and it primary business has been in the financing of trade between the USSR, now the Russian Federation, and the rest of the world, but performance indicators are showing continual expansion in emerging European markets.
Andy Skelton, Group Treasurer of MNB said: "Our business continues to expand and the attainment of investment grade is recognition from Fitch that our business strategy is on track."
Vneshtorgbank to work with State Bank of India
Russia's Vneshtorgbank and the State Bank of India have signed a memorandum of understanding under which favourable conditions will be created for cooperation between them. The two banks plan to work together in running documentary operations and in financing trade, Vneshtorgbank's press service has announced. They are expected to set mutual limits on documentary operations and start negotiating the terms of an agreement to finance Russian-Indian trade. The memorandum also provides for information exchanges in various areas of interbank cooperation.
Vneshtorgbank's expanding ties with the financial institutions of India, one of Russia's main trade and economic partners, helps enhance the quality of services offered to Vneshtorgbank clients in handling foreign trade operations, and optimise the system of interbank settlements and financing schemes, the press service said. Under this strategy, in July 2002, Vneshtorgbank signed a US$25m credit agreement with India's Eximbank.
The State Bank of India is India's largest state bank. It has a vast network of subsidiaries in India and abroad, and affiliated regional banks, and has an office in Moscow. The State Bank of India is completing the work to establish a joint bank in Russia together with Kanara Bank.
Banks plan to join bond issuer ranks
The ranks of Russian companies planning to tap the international capital markets are swelling, thanks to record low interest rates and Russia's rapidly improving credit fundamentals, the Financial Times reported on 28th May.
The bankers said the latest entrants would include Ural-Siberian Bank and Zenit Bank, underscoring that the market was expanding well into the largely untested waters of lesser-known corporates.
Analysts said demand for such high-yielding paper remained strong and the risk of an asset bubble remote. But they warned that as issuance rose, investors should exert more caution with individual issuers.
"We're definitely seeing more of a need to drill down to the credit story than before," said John Bates, credit analyst at WestLB. "Russian issuance has been a bit topsy-turvy in that banks are issuing after other companies. This reflects the undeveloped nature of the Russian banking system."
Until recently, the Russian corporate market consisted almost exclusively of oil and gas companies, whose credit-worthiness benefits their export revenues. Many also have international standard accounts, making them more transparent than most Russian companies.
Russian corporate issuance in dollars is at US$3.45bn in the year to date, already outstripping last year's total of US$3.06bn, according to data from Dealogic.
Banks advising Ural-Siberian Bank, controlled by the oil-producing region of Bashkortostan, and Zenit Bank, partly owned by oil company Tatneft, said these were preparing the sale of short-dated bonds.
Ural-Siberian has hired ABN Amro and Commerzbank to lead-manage its issue, whose details will be confirmed shortly, while Zenit bank is promoting its US$250m deal on a roadshow. The sale will be done through book-building and is being underwritten by ING Financial Markets and WestLB.
Among Russian financials, just Alfa Bank and MDM bank have existing bonds on the international market.
The banking debuts would follow Russia's first international issuance by a consumer manufacturing company, Wimm-Bill-Dann, earlier this year. Other new entrants include holding company, Sistema, and diamond producer, Alrosa.
The flood of Russian issuance has prompted some concern among government officials but in a newspaper interview, Alexander Kurdin, finance minister, said foreign borrowing by Russian companies did not pose a "serious" risk as long as the government adhered to a tight fiscal policy. Russia corporate credit spreads have tightened some 150 basis points since the beginning of the year to yield 200bp to 250bp over sovereign debt, which has itself rallied strongly.
While the tightening is slowing, analysts say there is potential for further gains, partly because of strong domestic demand. WestLB analyst said corporate spreads may tighten a further 50bp-75bp by year end.
Dominique Audin, senior investment manager at Pictet, said he did not subscribe to the view that the current rally was a prelude to a bubble. "I don't thing these latest issues pose a systemic risk; they are very small and short-term," Mr Audin said. "But I would invest selectively and stay clear of some of the more obscure banks."
EBRD grants LUKoil US$80m loan
The European Bank for Reconstruction and Development (EBRD) is making a six-year, US$80m loan to a key subsidiary of Russia's LUKoil group with the aim of achieving significant environmental benefits and creating conditions for improved corporate transparency and governance, the Russo-British Chamber of Commerce Bulletin reported.
Half of the loan is to be syndicated to commercial banks - with ABN-AMRO acting as sole underwriter, joint arranger and bookrunner of the EBRD loan.
The loan will enable the LUKoil subsidiary, CSJC LUKoil-Perm, to start a programme to cut the flaring of gas to 20% by 2005, compared with 52% at a typical Russian oilfield. This gas, a by-product of oil production, will instead be converted into additional energy in the Perm region of the western Urals, hit by supply problems in recent winters. Moreover, LUKoil-Perm will implement a detailed environmental action plan with the Bank's encouragement.
"Large-scale environmental projects financed by well-known international banks are helping to implement what is an important component of our company's strategy and one which highlights its sense of social responsibility," said Andrey Kuzayev, President of LUKoil-Overseas Holding Ltd.
The loan will also be used to upgrade the company's management information system, a development expected to improve disclosure levels and the accountability of divisions within the company. And part of the loan will be used to develop more productive and larger scale oil and gas fields, particularly the state-of-art Sibirskoye field in the Perm region.
Russian oil major in negotiations with Iraqi administration
The LUKoil company is now holding talks with the Iraqi occupation administration on the West Qurnah-2 project. LUKoil's vice-president Leonid Fedun journalists in Moscow on 2nd June, Interfax News Agency has reported.
He said, at the same time, that the company would be able to hold final talks only with an officially elected and internationally recognized Iraqi government.
Russian oil major LUKoil outlines plans for asset sales
Russian oil major LUKoil plans to sell its subsidiary Bank Petrocommerce as well as a number of other assets, LUKoil Vice-President Leonid Fedun said on 2nd June.
By 2005, the company plans to sell its entire stake in the bank, Fedun said. LUKoil holds about 80 per cent in the bank, Prime-TASS News Agency has reported.
Also, Fedun said, LUKoil plans to announce a tender soon to sell its fleet of railway tankers, owned by its subsidiary LUKoil-Trans, which consists of several thousand tankers. Recently the company sold 10 such tankers for US$300,000.
The company is now also negotiating the sale of its fleet of mid-sized tanker ships, Fedun said, adding that it plans to retain its fleet of large tankers. He also said that talks to sell the assets of the LUKoil-Burenye subsidiary, which performs drilling operations. No further details were provided.
China and Russia ink oil pipeline agreement
China and Russia have inked one of the key final deals paving the way for a US$2.5bn oil pipeline stretching across the vast expanse of Siberia and into China.
On the third day of President Hu Jintao's state visit to Russia, China National Petroleum Corporation (CNPC) and Russia's private oil producer YUKOS signed an agreement, setting out key aspects such as the quality of oil to be supplied, contractual terms and the pricing formulas.
"The pipeline construction is the biggest project in Sino-Russian economic co-operation, and it is good news for both sides," said Ma Fucai, general manager of CNPC.
Under the agreement, CNPC agrees to purchase up to 5.13 billion barrels of Russian oil, worth some US$150 billion, between 2005 and 2030 supplied via the US$2.5bn pipeline running from Russia's Siberian oilfield to China's petroleum centre in Daqing.
"This (the pipeline) is the best choice for the least investment, shortest distance and lowest risk,'' Ma said.
The deal means the Russian government will put off, indefinitely, a rival project to the Japanese market, despite intense bidding from Tokyo to pull the oil its way.
On 29 April, Russian Prime Minister Mikhail Kasyanov revealed that a 3,800-kilometre line to Japan, stretching from Irkutsk to the Far East port of Nakhodka could be built only after more oil reserves are found and the Chinese market has been served.
Beijing-based analysts welcomed the deal, describing it is a mutually beneficial project for both China and Russia.
China became a net oil importer in 1993 and last year imported 70 million tons of oil. By 2005, that figure will have risen to 100 million tons annually.
Xing Guangcheng, deputy director of Institute of East European, Russia and Central Asian Studies with the Chinese Academy of Social Sciences, indicated that in the changing international arena, it would be disadvantageous if China only imported oil from a few countries.
"It is important for our energy security and strategy if we can import oil from Russia, a friendly neighbour,'' said Xing.
"We welcome this event as the logical outcome of a protracted process where economic interests prevailed,'' YUKOS spokesman Hugo Erikssen was quoted by the Moscow Times as saying.
The heads of both states gave the green light for the energy co-operation between the two corporations. President Vladimir Putin and President Hu Jintao signed a declaration stating that the energy partnership between the world's second largest oil exporter and the world's most populous nation was a priority.
In addition to the pipeline deal, the two oil companies also signed an agreement, under which YUKOS would supply CNPC with 6 million tons of crude between 2003 and 2006 by rail.
Angarsk-Nakhodka pipeline priority for Russia
The Russian energy strategy for the period until 2020 calls for the construction of the Angarsk-Nakhodka pipeline with a capacity of 50m tonnes of oil per year, Russian Deputy Prime Minister, Victor Khristenko, said, Interfax News Agency reported.
He noted that the same project involves the construction of a branch of the pipeline to Daqing in China with a capacity of 30m tonnes of oil per year. Speaking about priority oil export routes, Khristenko said that the government supported an increase in the capacity of the Baltic Pipeline System to 50m tonnes of oil per year with the possibility of increasing capacity even further in the future.
A project is also being developed to build a pipeline to tranship oil on the Kola Peninsula. Khristenko said that a feasibility study is already being prepared for the construction of a pipeline to Murmansk and that a decision would be reached in the mid-term. Among priority oil export routes, Khristenko noted the Druzhba-Adria project, with a capacity of 15m tonnes per year. Khristenko called the Caspian Pipeline System another priority route. Energy minister, Igor Yusufov, told journalists feasibility studies for the Angarsk-Nakhodka and the Angarsk-Daqing pipelines would be put on a list of priority measures.
YukosSibneft merger follows up BP mega-deal
BP and Tyumenneft (TNK) officials are set to sign the final agreement on their merger - the biggest deal yet in Russia - during President Putin's state visit to London, the Russian Mirror reported recently.
The new TNK-BP company, formed as a result of the British oil giant investing £6.5bn into the new venture earlier this year, will certainly aim to please shareholders right from the off, with company chief, John Brown, announcing plans to spend 40% of net profit on dividend payments.
Can the BP magic really be working so quickly? After all, the deal was only agreed in January. In the first quarter of 2003, the new company's output, according to Mr Brown, was up to 1.2m barrels of oil, which represents an impressive 11% year-on-year rise.
Following hard on BP's bold move into Russia, a merger between two of Russia's biggest companies, the oil giants Yukos and Sibneft, has produced the world's fourth-largest private producer in a deal reportedly valued at US$15bn. With hindsight, BP management will be breathing a sigh of relief at having stolen a march on the competition.
The stunning Russian link-up only reinforces the new power of Russian oil on the world's markets and elevates these companies to a new level of influence and prestige, but scuppers plans by players such as Shell who are rumoured to have been preparing a move on the oil acquisitions scene. Shell's focus is now switching to big gas extraction investments in the Far Eastern Sakhalin.
Yukos, in simplified terms, is paying US$3bn in cash for a 20% stake of Sibneft, and swallowing the rest of the company through a 'one-for-three' share swap.
And BP executives will be somewhat relieved to see that the price paid by Yukos represents a small premium to that paid by BP when it bought its half-share in the merged Sidanco-TNK oil company.
The YukosSibneft deal is the biggest emerging market merger ever. The new concern is sitting on estimated reserves of 19.4bn barrels of oil and gas. With 2.3m barrels of crude oil pumped per day, YukosSibneft accounts for a quarter of Russia's total output and boasts equivalent reserves and production to the United Arab Emirates.
Analysts have put the new Russian oil giant's value at around US$36bn, quite some progress from the US$259m paid for the two companies in the loans-for-shares deals of the mid-1990s.
It seems the troubled days of shady 'transfer pricing' schemes and oligarchic control are now finally behind the company which has embraced good corporate governance with a vengeance. The Yukos share price doubled between 1999 and 2001.
It is a sign of new confidence that such deals can now go ahead and that minority shareholder rights are respected under laws that are, at last, enforceable.
The junior partner in the deal, Sibneft, has been investing heavily over recent years and is the fastest growing Russian oil company, with production up nearly a third last year.
While much paperwork is still to be done to close the merger completely, the deal is still reverberating in the ears of analysts and industry specialists most of whom had expected Sibneft to be bought up by TotalFinaElf, Royal Dutch/Shell or Exxon Mobil.
By tying up together, Yukos CEO, Mikhail Khodorkovsky and his Sibneft counterpart Evgeny Shvidler, will have delighted the Kremlin by keeping key Russian oil deposits Russian.
Prime Minister, Mikhail Kasyanov, hailed the new company as "the flagship of the Russian economy." How this head of the fleet negotiates the troubled waters that are the oil industry in the new post-Iraq war scenario is likely to heavily influence Russian economic policy in general.
Sakhalin-2 shareholders to spend US$9bn on Phase 2
Shareholders in the Sakhalin-2 project have agreed the volume of investment in project and will spend US$9bn on the second stage of its implementation. The shareholders signed the corresponding agreement in Moscow recently. Consequently, a total of US$10bn will be spent on the entire project, Interfax News Agency reported.
In the near future contracts will be signed with builders and service subcontractors for the second phase of the project, including contracts worth US$4bn with Russian subcontractors. The project includes upgrading infrastructure on Sakhalin at a cost of about US$300m (roads, bridges, airports, railroads and ports).
According to the schedule for the project, a feasibility study for this construction will be confirmed in the coming months, including an environmental impact study, and the necessary permissions to carry out construction work will be received.
The second phase of the Sakhalin-2 project involves the development of the Piltun-Astoksky and Lunskoye fields off the Sakhalin coast, the construction and installation of additional stationary rigs, construction of an onshore terminal and construction of oil and gas pipelines to the village of Prigorodnoye, in the south of the island.
This village will be the location of a liquefied gas plant with a capacity of 9.6 million tonnes per annum, and also an oil and gas export terminal for year round shipping of oil and gas export terminal for year round shipping of oil and liquefied gas. Mitsui Co President and CEO, Shoei Utsuda as saying that the Sakhalin-2 project marks the start of Russian gas exports to Asia and the implementation of the first liquefied gas project in Russia. Thanks to colossal reserves and closeness to the market, this project may change the dynamic of fuel flows and contribute to energy security in Asia and the Russian Far East.
The Sakhalin-2 project is being implemented under a production sharing agreement. Recoverable reserves at the Piltun-Astokhsky and Lunskoye fields amount to 185 million tonnes of oil and 800 billion cubic metres of gas. Oil production began in summer 1999.
Shareholders in Sakhalin Energy, the operator of the project, include Shell Sakhalin Holdings BV (founded by RD/Shell - 55 per cent), Mitsui Sakhalin Holdings BV (founded by Mitsui & Co Ltd - 25 per cent) and Diamond Gas Sakhalin (founded by Mitsubishi - 20 per cent).
The two fields contain world-class reserves - about 1.2 billion barrels (160 tonnes) of oil and 500 billion cubic metres of natural gas.
As part of the first stage of the project, which began in June 1999, oil production is being carried out at the Vityaz production complex, with exports in 2002 of 10.77 million barrels of oil. It is planned to install two new rigs, build an onshore gas and condensate complete in north Sakhalin and to lay two pipelines a total of 850 kilometres. One of the most important elements of the project will be the modern liquefied gas plant, with two production lines with a capacity of 4.8 million tonnes per annum each. The plant will be located close to year-round shipping terminals in the south part of the island. It is planned to ship the first liquefied natural gas in the second half of 2007. Year-round oil production is expected to begin in 2006.
Russian gas giant signs deal to supply northwestern region
The chairman of the Gazprom board, Aleksey Miller, and [Novgorod Region] governor, Mikhail Prusak, have signed an agreement on supplying Novgorod Region with gas.
As ITAR-TASS News Agency learnt at the press centre of the region's administration,
the two sides will work out an investment project for supplying Novgorod Region with gas.
On the basis of the investment project, the sides will formulate a stage-by-stage gas supplying programme, as well as define sources and a plan of its financing. Programmes for saving energy and transferring auto transport and agricultural machinery to gas fuel will be worked out.
The agreement specifies that the objects supplied with gas at the expense of Gazprom will be its property. The regional administration has taken upon itself to ensure 100-per-cent payment by budget consumers of current gas supplies. In its turn, Gazprom will consider the possibility of allocating additional volumes of natural gas so fresh industrial capacities can be exploited.
Gazprom woos Seoul on supply deal
Gazprom and South Korea's state-owned gas company Kogas have signed an agreement that could result in direct natural gas supplies to South Korea and the joint development of a new pipeline network in eastern Siberia.
"A new chapter in cooperation between Gazprom and Kogas has opened," Gazprom CEO Alexei Miller told reporters after the signing ceremony.
"In Korea we say: A good neighbour is like a relative," Kogas chairman Kim Myung-kyu said in praising the deal, adding that since both Gazprom and Kogas are state-owned, a profitable business relationship should be easy to forge.
South Korea last year consumed 22 billion cubic metres of gas and the country expects demand to double by 2020, according to Gazprom.
Under the agreement, both companies are to work on feasibility studies and search for financing for future shipments of Russian gas to South Korea. Kogas is expected to finish a feasibility study for a pipeline from the giant eastern Siberian Kovykta field, which holds 1.9 billion cubic metres of gas. The licence for the field is held by Rusia Petroleum, which is owned by BP, TNK, Interros and the Irkutsk regional administration.
Miller said the shareholders of Rusia Petroleum had invited Gazprom to acquire a stake in the company. Earlier this year, Gazprom said it was considering obtaining the regional administration's 11.6 percent stake.
Miller noted, however, that Gazprom will control all transportation of gas from Kovykta, regardless of whether Gazprom joins Rusia Petroleum or not.
He said that a number of routes for a new pipeline are being discussed, including via North Korea. Miller also said that in the future gas could be supplied to South Korea from another large untapped field, Chayadinskoye, although a tender for the license to develop the 1.2 trillion cubic metre field has yet to be announced.
Gazprom is also looking into an option of becoming a shareholder in Kogas itself, once the state-company is privatised, Miller said.
Kogas's Kim also said that his company is interested in joining Sakhalin II, a Royal Dutch/Shell-led consortium that signed its first liquefied natural gas supply deal with Tokyo Gas on Monday. Previously, Kogas was tapped as a potential buyer for Sakhalin II gas, but the deal did not work out.
Kim said Kogas wants to join the multibillion-dollar project as an operator together with Gazprom. Miller said Gazprom is considering its options. Gazprom received an offer to join Sakhalin II more than a year ago, but has yet to make a decision.
Private company takes over water supply in Russian city
Starting from 1st June, the water supply function in the city of Perm [in the Urals], which has a population of one million, has been transferred to a private company, ITAR-TASS News Agency has reported.
Instead of the municipal water supply company Vodokanal, the task of supplying Perm with a sufficient amount of clean water, of maintaining heating pipes and the city's sewerage will now be performed by a private investor - a Moscow company called Sovremennyy Gorod. The Perm administration has leased the city's water supply facilities to the company for a period of 49 years.
The mayor of Perm, Arkadiy Kamenev, has said that the municipality's main requirement is obligation on the new owners not to raise tariffs in 2003 and to make further adjustments to the tariffs on the basis of the existing legislation and taking into account the growth in prices for energy sources and the rate of inflation. In addition, during the first three years the lessee will not be allowed to switch off the water supply to those households that do not pay their water bills without first agreeing the move with the local authorities.
Under the agreement, investment in the city's water supply system over the lease period will amount to about US$100m, including about US$20m in the first five years.
The parties to the agreement hope that the move will bring about positive changes. The city administration is sure that the private investors' initiative and entrepreneurship will help make the water supply system more efficient. The investors are calculating the possibility of making a profit by cutting water loss, which at present amounts to 40 per cent, and by introducing new technologies for measuring the rate of water flowing through pipes.
Russian finance minister hopes structural reform will boost economic growth
The implementation of the Russian government-proposed structural reforms will help accelerate economic growth in the medium term, Finance Minister, Aleksey Kudrin, said. He was speaking at a conference on 2nd June, arranged by the investment company, Renaissance Capital.
Prime-TASS News Agency quoted Kudrin as saying a reform in the sphere of currency control, control of natural monopolies and administration would furnish the basis for achieving higher economic growth rates. This is also the aim of the adjusted programme for social and economic development in the medium term.
"The combination of these measures will enable us to achieve the expected growth rates by the end of this decade in keeping with the objectives identified in the presidential message. In his state of the nation address to the Federal Assembly, President Putin set the task of doubling the GDP by 2010 as compared with that in 2000.
Kudrin said this year's economic growth rates might well rise above the expected targets. "The country's performance in January-May looks good enough. It indicates that this year's basic macroeconomic parameters may prove higher than expected, in particular, the GDP growth rates," Kudrin said.
FOOD & DRINK
Nestle brew up new coffee factory
The Swiss Nestle confectionery company is to invest US$120m in building a coffee factory in the Krasnodar territory, the Russian Mirror reported. Construction is scheduled to start in spring 2004 and be completed by autumn 2005. After the new enterprise attains full capacity, the share of locally produced coffee will reach 99% of Nestle's coffee sales in Russia.
FOREIGN ECONOMIC RELATIONS
China, Russia to increase trade turnover to US$20 billion a year - Hu Jintao
China and Russia intend to increase mutual trade turnover to US$20 billion a year, Chinese President Hu Jintao said in an interview with Interfax News Agency and the Russian State TV and Radio Company (VGTRK) in Beijing.
"Progress in bilateral trade has been particularly steady in the past four years. Last year, bilateral trade reached US$12 billion. From January to April, 2003, positive trends in bilateral trade continued to develop. In the first four months of 2003, bilateral trade reached US$4.5bn, up 30% from the same period last year," the Chinese president said.
Recalling that in the early 1990s, Presidents Jiang Zemin and Boris Yeltsin made the decision to work together to bring bilateral trade to US$20bn, Hu said, "I would like to assure my Russian friends that I am confident that the goal to bring bilateral trade to a record-high mark of US$20bn is feasible."
At the same time Hu noted that China and Russia must make more efforts to perfect the system of servicing trade between them. "What I mean is banking services, crediting, insurance and information backup. It is important to ensure the mutual access of goods, services and investments to our markets in order to open new areas, ways and forms of cooperation," he said.
The advantages of economic harmony between our two countries are becoming increasingly evident, the Chinese leader said. "For instance, the development and processing of natural resources and high technologies are evolving into new and promising aspects of our trade and economic relations. Major joint projects in the energy sector, including the nuclear energy sector, are making steady progress," he said.
Noting that Russia is one of the world's largest exporters of energy and fuel, while China has become one of the world's major energy importers, Hu emphasized that their cooperation in the energy sector holds great promise.
"We are glad that agreements have been reached on a number of large-scale and important projects in the oil and gas sector. I am sure that due to our mutual efforts and strong contacts, our cooperation in implementing these projects will bear fruitful results," he said.
Britain seeking investment opportunities in Russia
British Premier Tony Blair said in the interview with ITAR-TASS News agency that Britain was seeking to increase investment in Russia as the Russian economy developed.
"Britain has become a major investor in the Russian economy. There are some 400 British companies operating in Russia. They have invested about £3bn and we see this as very important," he said.
"In political relations, if we have differences, we know how to deal with them. And we work together very closely on issues such as the joint fight against terrorism. I consider these relations to be simply excellent and I am glad to see them. We have always called for the reinforcement of such relations".
Blair said he expected to see Russia become an economically powerful country. "Our most major capital investments currently are in the energy sector. Russia may become a major supplier of energy products for Europe and the whole world," he said, adding that its geographic location, resources and educated people made Russia an attractive partner for Europe, the USA and the whole world.
World Bank to lend US$161.1m for St Petersburg's development
The World Bank has approved a US$161.1m loan to finance the economic development of St Petersburg, Interfax News Agency reported the bank's Moscow office as saying. This will be the bank's contribution to the US$239.8m project, with Russia expected to provide the remaining US$78.7m. The repayment of the 17-year loan is to start in five years.
Some of the loan is intended for improving the city's business climate through setting up new private businesses, increasing the percentage of privately owned land and real estate and the number of deals involving them and improving the land use planning.
Some of the loan will be invested in consolidating the management of city finances and assuring steady inflow of revenue for the city budget. The remainder of the loan will promote the maintenance of St Petersburg position as a key cultural centre of Russia by rebuilding the key cultural monuments and tourist attractions, the bank's Moscow office said.
Sberbank to finance Segezha pulp and paper mill project
Russian savings bank Sberbank plans to finance a Segezha pulp and paper mill investment project with a loan of €410m. Sberbank President and Chairman, Andrei Kazmin, Segezha Director General, Vasily Preminin and Karelia President, Sergei Katanandov, signed the investment agreement recently, New Europe has reported. The parties intend to sign a loan agreement, which will detail how the funds will be allocated, in the near future.
The project envisages the upgrade of two papermaking machines, as well as welding and wood-preparation production at the mill. Segezha plans to improve quality and increase paper-boiling capacity by 120 per cent to 535,000 tonnes. The project also aims to develop production of coniferous pulp and increase paper bag production to 170,000 tonnes a year. The money also aims to develop production to 170,000 tonnes a year. The money will be disbursed in several instalments, the very first totalling €90m. The seven-year project is very important for the republic and Karelia may provide partial guarantees and tax breaks. The bank, Karelia and Segezha signed long-term cooperation agreements in 2001-2002.
MINERALS & METALS
VSMPO-Avisma forms JV with Allegheny Technologies
VSMPO-Avisma, the world's largest producer of titanium products, and Allegheny Technologies of the United States have set up a joint venture called Uniti that will make products from pure titanium. The venture will make and market a broad range if titanium and titanium products: ingots, slabs, strips, plates, billets, bars and seamless and welded pipes, Interfax News Agency reported.
The conditions on which the venture was set up and ownership distribution have not been disclosed. Uniti's target markets include chemical and petroleum processing, power generation, desalination, pulp and paper, construction and architecture, automotive and transportation, consumer and electronics. However, Uniti will not make products for the aerospace, defence and medical industries. Uniti will have its headquarters in Pittsburgh, which is where Allegheny is based. The venture's products will be made both in Russia and the United States. Uniti will begin taking orders on June 1st 2003.
Carl Moulton, a former aide to the vice president for strategic initiatives at Allegheny Technologies, has been appointed president of Uniti. Moulton has 30 years of experience in the special materials industry.
Russia defies US over Iran nuclear deal
Britain claimed recently that Russia had pledged to suspend exports of nuclear fuel to Iran until Tehran met the concerns of the International Atomic Energy Agency, the Financial Times reported on June 5th. But Moscow appeared determined to press ahead in spite of the concerns of other governments, including the US.
Tony Blair, British prime minister, told parliament that Vladimir Putin, Russia's president, had given the assurances at a recent G8 summit in Evian. But Alexander Rumyantsev, Russia's atomic energy minister, said deliveries of uranium to Iran's Bushehr power plant would begin next year, regardless of whether Tehran complied with US calls for stepped-up inspections of its nuclear programme.
Rumyantsev, said he expected to sign a final contract within two months, which would formalise Iran's obligation to return all spent nuclear fuel to Russia for reprocessing and storage.
The statement underlined Moscow's apparent resolve to proceed with the US$1bn (€885m, £610m) Bushehr contract. Putin indicated that Russian companies should not suffer "unscrupulous competition."
It contradicts an assurance a US official said Russia gave in May that it would not deliver nuclear fuel to Bushehr until Iran had signed the IAEA's "additional protocol" to broaden inspections in the country. A French official said Paris was also given the same assurance. Moscow has been under growing US pressure to halt nuclear cooperation with Iran until it signs the protocol.
In Madrid, on June 4th, Igor Ivanov, Russia's foreign minister, stressed there should be no link between the supply of fuel to Bushehr and signature of the additional protocol, adding Moscow was pushing for Tehran to comply.
However, there was scope for negotiation, Rumyantsev said Iran had expressed a willingness to sign the protocol if other demands were met, including the lifting of US sanctions. He said the US may have been justified in imposing sanctions on Russian nuclear research institutes suspected of involvement in proliferation before he was appointed minister, but no such concerns now existed and he doubted any such allegations had related to supplies to Iran.
He said talks were under way between his ministry and the EU on restrictions that would otherwise limit Russia's ability to reprocess spent nuclear fuel from power plants it built in former Soviet states which will join the EU. He added preparation of the contract with Iran on the return of spent fuel was subject to approval by Russia, and notably an ecological assessment.
The export of nuclear equipment and expertise represents an important source of revenue for Russia, estimated at US$3bn this year.
Metro unveils 1bn euro plan to capitalise on growth in Russia
Metro, Germany's biggest retailer, is poised to become the biggest foreign investor in Russia's fast-growing retail market after unveiling plans yesterday to invest up to €1bn (US$1.16bn) in the country over the next five years, the Financial Times reported on June 11th.
Speaking at the opening of its fourth wholesale supermarket in Moscow, Hans Joachim Koerber, chief executive of Metro, said: "This is only the beginning of our expansion in Russia."
Metro entered the Russian market 18 months ago and by the end of this year it plans to have six stores in Moscow and two in St Petersburg, with the figure for the country rising to 20 by 2005.
Several foreign retailers have moved to capitalise on the rapid growth of Russian consumer spending power, including Turkey's Ramstor, Sweden's IKEA and Auchan of France.
Vladimir Savov, retail analyst at Brunswick UBS Warburg, said disposable income in Russia was expected to grow by 17-18 per cent this year. Retail has been one of the fastest growing sectors of Russian economy over the past few years, with the food retail market alone estimated by analysts at US$100bn and growing at 15% a year - almost three times the rate of GDP growth.
However the market remains highly fragmented with about 10% occupied by modern supermarkets, only half of which are part of Russian or foreign chains.
The market is still dominated by small Soviet-era neighbourhood stores and open-air markets and kiosks. Despite Russia's growing wealth and increasing demand for Western goods, analysts say the retail space per capita ranks among the lowest in Europe.
"Russia is still a virgin territory for large foreign retailers with enormous opportunities for consolidation," said Savov.
Aleksey Krivoshapko, retail analyst at UFG, a Moscow-based brokerage, estimated that Metro's €1bn investment would add between 40-50 supermarkets across the country, giving it a presence in every large city in Russia. "This is a very aggressive strategy from Metro," said Krivoshapko.
The Russian retail market is led by Pyatorochka, which saw its sales more than double from US$212m in 2001 to US$501m last year. Ramstore of Turkey led the foreign chains with US$308m in sales last year.
After several years of flat growth in the German retail market - followed by a fall in retail sales last year - Metro has been aggressively pursuing opportunities abroad, becoming one of the world's most international retail groups. From 5% of turnover in 1996, foreign sales now account for 46% of revenues.
The group makes 70% of its capital expenditure outside Germany and runs 2,300 stores in 26 countries, with a stronghold in Eastern Europe. It is the biggest private-sector employer in Poland.
Russian shipyard lays down two submarines for China
Two diesel submarines for China's navy have been laid down in a ceremony at Sevmash defence industry shipyards in Severodvinsk, ITAR-TASS News Agency learnt at the enterprise on 3rd June.
Sevmash shipyards specializing in the construction of nuclear submarines have not manufactured diesel submarines for several decades. The cutting of metal for two diesel submarines, to be exported, was begun at the shipyards early this year. Durable steel has been supplied by Severostal company. No other details about the construction of the submarines for China have been given.
Russia and China struck the deal in May 2002 for the construction of eight diesel-electric submarines for China. Five of them will be built at the Admiralteyskiye Verfi shipyards in St Petersburg, one at Krasnoye Sormovo shipyards in Nizhniy Novgorod and two in Severodvinsk.
The submarines must be completed by 2005. These are submarines of Kilo class. They are regarded among the quietest submarines and have long been exported. There is information that the sum of the deal is in excess of US$1.6bn.
STOCKS & SHARES
Russian companies seek listings in London
The London Stock Exchange is talking to 20 Russian companies about possible listings, the exchange's head of Russian business development said in April, the Russo-British Chamber of Commerce Bulletin reported.
"We have spoken to more than 20 Russian companies that want to list in London," Ramila Patel said. "Some of these companies are ready to come to London as soon as market conditions are right, and others are getting internal systems in place in preparation for an international listing. It is difficult to say how many will come and exactly when. But there are also many, many more that are looking to come to London over the longer term."
Patel named no likely candidates, adding that many companies needed to improve corporate governance and that was a restraining factor.
Foreign listings help Russian companies to escape markets. Corporate governance requirements of foreign exchanges also soothe foreign investors wary of Russia's chequered history of investor relations.
Moscow phone card market to expand to US$50m
The market for prepaid telephone cards in Moscow will grow to US$50m this year, MTU-Inform Director General, Said Alimbekov, said at the Svyaz-Expocomm-2003 exhibition in the Russian capital, Interfax News Agency reported. MTU-Inform, a leading Moscow telecommunications operator, reckons the phone card market in Moscow was worth about US$35m last year.
The market is expected to grow to more than US$100m by 2005; MTU-Inform analysts think that seven per cent of Muscovites used phone cards last year, up from 1.7 per cent in 1999. This figure is expected to rise to about 20 per cent by 2005; meaning about two million Muscovites would be using phone cards.
Alimbekov said three major providers - Zebra telecom, Tario.Net and O.S.S - now control more than 100 small telephone operators.
MTU-Inform plans to increase sales of its own phone cards to US$500,000 per month by the middle of 2004, Alimbekov said. The company's main goal is to get at least 20 per cent market share in the Moscow area in the first few years of product promotion, he said.
At the news conference MTU-Inform announced the launch of international and domestic long-distance telephone services to private users based on its own intelligent digital network. Until now, MTU-Inform provided digital communications services primarily to corporate clients.
MTU-Inform is part of the Sistema Telecom holding company, which manages the telecommunications assets of Moscow conglomerate AFK Sistema. Alimbekov said Sistema Telecom is continuing to work on consolidating its fixed telephone operators in Moscow. The technical merger of the network of these companies could be completed by the end of this year, he said.
Russian ships to help lay fibreoptic cable across Arctic to Alaska
The nuclear-powered icebreaker Sovetskiy Soyuz and the motor vessel Kola of the Murmansk Shipping Line will take part in the realization of a new international Arctic project, to lay a fibreoptic communications cable from northern Norway to Alaska, ITAR-TASS News Agency has reported. Their modification for this new and unusual work is to be completed by mid-July, after which both ships will leave for the Arctic.
The communications cable will be laid away from existing Arctic shipping routes, to the north of Novaya Zemlya and other archipelagos in the Russian zone of the Arctic Ocean, the managing director of the Murmansk Shipping Line, Aleksandr Medvedev, told an ITAR-TASS correspondent in an exclusive interview. After modernization, the motor vessel Kola will be used to chart the relief of the sea-bed along the entire route of the cable. The task of the icebreaker will be to ensure safe working conditions in the severe Arctic ice. Two and a half months have been earmarked for this operation.
New bridge in Russia's western region shortens cross-border journeys
800-metre-long elevated bridge across the Deyma river has been opened for traffic near the city of Gvardeysk in Kaliningrad Region. The bridge is considered to be the biggest in the Baltic states area, ITAR-TASS News Agency has reported.
The commissioning of this large-scale project is of utmost importance to the transport complex of the Baltic states region. The bridge significantly decreases the travel time from Kaliningrad to the Russian-Lithuanian border and simplifies international transport operations.
According to the Kaliningrad Region administration, the construction of the bridge is included in federal programmes and financed from the state budget. The cost of the six-kilometre road and the bridge came to R191m.
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