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RUSSIA


  
   

 
Key Economic Data 
 
  2002 2001 2000 Ranking(2002)
GDP
Millions of US $ 346,520 310,000 259,600 16
         
GNI per capita
 US $ 2,140 1,750 1,690 100
Ranking is given out of 208 nations - (data from the World Bank)

REPUBLICAN REFERENCE

Area (sq.km)
17,075,400

Population
144,526,278

Principal 
ethnic groups 
Russians 82%
Tatars 3.3%
Ukrainians 2.7%

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

Currency 
Rouble

President 
Vladimir Putin

  

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

Update No: 278 - (01/03/04)

The elections for the presidency on March 14th have been livened up by three events, the first two being the last-minute declaration of her candidacy by Russia's leading businesswoman, the half-Japanese Irina Khakamada, and the disappearance from February 5th to 10th of the most outspoken opponent of Putin, Ivan Rybkin, who has given conflicting accounts of his absence. The third event, of greater import, is the dismissal of Premier Mikhail Kasyanov and the government on February 24th.

The premier and government are gone
To take the last matter first, Putin has finally done what he was expected to do all along, sack his premier, who is a Yeltsin-era figure, who was close to the jailed oligarch, Mikhail Khodorkovsky, whom he had the temerity to defend when he was arrested on October 25th. From that moment his own fate was sealed, as he must have been aware. He had shown more loyalty to his business friend than to the president, an unforgivable offence. Technically, the government has to go as well, but most ministers are likely to be re-appointed after a new premier is found.
There is another angle to the affair. If the turn-out is less than 50%, then constitutionally the election is rendered invalid, and none of the candidates in the first ballot can go on to the re-run. If perchance that happened out of voter apathy at what everyone sees as a foregone conclusion, then the constitution no doubt would be rapidly changed by the supine parliament. But Putin is making doubly sure that the premier he came to dislike does not step into his shoes on a technicality. Doubtless, if it looks as if the turn-out is not reaching the 50% mark, ballots will be stuffed in outlying regions by obliging officials keen to keep in with the Kremlin.
It is not clear if Putin will elevate his closest ally in government, hawkish defence minister, Sergei Ivanov, to the premiership or appoint another technocrat such as Kasyanov. The premiership in Russia is responsible for co-ordination of the work of the economics ministries, while the security services and the army, plus foreign policy services, all answer directly to the president. 
A re-elected Putin could just leave the temporary premier in place, Viktor Christenko, deemed a safe pair of hands. There is no doubt that the removal of Kasyanov is yet another victory for the silovici, the former KGB agents that abound in Putin's entourage. Russia is more and more resembling a police state.

The presidential race
In Russia most people attribute everything that goes on in the political scene to the machinations of the Kremlin. It is certainly not hard to see why Khakamada's nomination should have been supported by a part of the administration, fearful that the turn-out would fall below 50%, in which case the first round is rendered null and void and no candidates from that round could go on to the second round. This is most unlikely to happen, some 62% in polls declaring their intention to vote. But even a low turn-out over 50% would harm Putin's credibility. With Khakamada in the race women at least would be that bit more likely to vote, since she is an ardent feminist. Anyway the campaign sorely needed a bit of colour to encourage people to vote and this she has provided.

The Rybkin affair
So even more dramatically has the Rybkin affair enlivened the electoral saga. He now totally withdraws his statements made on immediately re-appearing on February 10th, which he did in Kiev. He had then said that he had just disappeared for a few days' relaxation with friends. He now says he was abducted and drugged, something he was at first loath to admit for fears of his own safety and those of his dearest. The fact that he did not tell his wife of any intention to have a break, something she attests, bears him out to that extent.
The affair is a tangled one and cannot be understood without a realisation of who Rybkin is. For he is not just any old Russian oppositionist. He was once a Kremlin insider, who played a role in major events. He knows the ropes and as a maverick is now the more dangerous, especially if he made an impact with a new demarche on Chechnya, the war with which is Putin's one Achilles Heel, becoming more unpopular with the mounting casualties there and in terrorist attacks in Moscow. 
In the 1990s Rybkin was Secretary of the Federal Security Council and had a major role in negotiations to resolve the First Chechen War in 1994-96. Familiar with the Chechen dossier, he has been involved in informal negotiations since in Switzerland and Lichtenstein to end the second war, although whether with the approval of the Kremlin is quite another matter. That it is very likely without official approval is shown by his close alliance with another former intimate of the Kremlin who is now certainly a pariah, Boris Berezovsky, who also has excellent connections with the Chechens. Rybkov was in London on February 3rd conferring with Berezovsky and the local representative of the Chechen cause, Akhmed Zakaev, a recent recipient like Berezovsky of British asylum from extradition to Russia. He asked the latter his opinion of whether a recent offer made to him to meet Chechen President Aslan Mashkadov in Kiev was genuine. Zakaev wanted a week to verify the matter; but an impatient Rybkin left for Kiev two days later. 
At this point the plot thickens. Once in Kiev the Chechen intermediary took him to an apartment and told him that Mashkadov would come two hours later, offering tea and sandwiches. These must have been drugged, because he awoke later to find himself in another apartment with two masked men with guns. They showed him what he described as "an abominable video," in which he figured. An obvious blackmail attempt, if true, and almost commonplace in its use by Russian internal security forces, and one of the men said that this was a special forces operation. 
Here the story becomes even more obscure. Rybkin was after all released, albeit once freed he made straight for London again, where he has taken refuge. Has he been successfully blackmailed, and if so to do what; or did he elude his captors without that happening? Were his actual contacts pro Russian Chechens, to whom the conduct of the war is being increasingly devolved, Or Russian security forces or, indeed, rogue elements of the Chechen secessionists playing a game of their own? Clearly Rybkin has a lot of explaining to do, if in fact he knows himself.
The affair is highly reminiscent of a key event in the rise to power of Putin that took place in April 1999 when he was the head of the FSB, the former KGB. The Russian Prosecutor-General of the time, Yuri Skuratov, had been charged with investigations into financial malpractices concerning the turbulent financial crash of 1998. His enquiries were obviously causing great discomfort to certain key Kremlin players, especially as the premier of the time, Yevgeny Primakov, was aspiring to be the new Mr Clean of Russian politics by backing them. Very conveniently a cassette was released by the FSB of Skuratov in bed with three teenage prostitutes and he had to resign. Putin had saved the bacon of the Kremlin elite. Primakov was dismissed soon afterwards and after a brief three-month interval Putin moved centre stage as premier himself and Yeltsin's trusted successor, giving the entire entourage immunity from prosecution. Such is the way high politics are conducted in Russia.
Does the Rybkin affair fit into this pattern, being the brainchild of some aspirant future Putin in the upper reaches of power? It is too early to tell.

The Kremlin still pulls the strings
One thing is for sure; the Kremlin is taking no chances with these elections and wants their man to have a resounding a victory as possible. 'Divide and rule' is their motto. The emergence of a new force in Russian politics in December's Duma elections, that of Rodina, a split-off from the communists, attracted 9% of the vote. The split was engineered by the Kremlin in all probability, but now seems to have alarmed its initiators that a force separate from the pro-government bloc, United Russia, with a dangerous momentum of its own has been created. 
Yet another split has conveniently occurred in the ranks of Rodina no less. The one co-chairman prepared to stand against Putin, Sergei Glaziev, has been repudiated by the other, Dmitri Rogozin, as the party's official candidate against Putin. Rogozin makes no secret of his pro-Putin stance. The party has split into two factions and now has less chance of sustaining its momentum and drive.
 

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AUTOMOBILES

Avtotor considers building Opel Vestras

The Kaliningrad-based auto-building Avtotor is looking at adding the Opel Vestra to the KIAs, BMWs and Hummers it already assembles, New Europe reported recently. 
"This is just an idea for now, but I think it's possible agreement will be reached with (General Motors) on this model. If the Opel Vestra proves the most acceptable and profitable for the automobile market, we will have talks on it," Vedomosti quoted Avtotor Holding Director General, Valery Sokolov, in an interview recently. He was commenting on reports of negotiations with GM on building the car. "Time will tell how our cooperation with this concern will develop," he said. "We have signed a general agreement with GM, and it's possible that we will be assembling this and other of the concern's models." Avtotor is for now focusing on the Hummer, assembly of which has just begun. Avtotor "is negotiating with several companies and planning to set up the new production of automobiles in this price niche, which is massive, or a little bigger," Sokolov said. "Presumably, we will be able to announce the same of a new partner sometime in the not-too-distant."

Mitsubishi increases 2003 sales considerably

Mitsubishi Motors increased its sales of new cars through official deals in Russia by 116% in 2003, according to a recent press released from Rolf Holding, the official Mitsubishi distributor in Russia. The Japanese corporation sold a total of 17,663 new cars in Russia in 2003, up from 8,167 in 2002. The Carisma model sold the best last year. Its sales rose to 7,867 cars, up from 4,493 in 2002. The second best-selling model was the Lancer. Its sale began in late August, and reached 2,758 cars by the year's end. The number of Pajero off-road vehicles sold in 2003 was 1,508, compared to 885 in 2002. Rolf Holding pointed to an expansion of Mitsubishi's sales and services network, with 10 new dealers founded last year. At present, there are 50 Mitsubishi dealers in Russia. Mitsubishi sold 6,004 cars in Russia in 2001 and 3,836 in 2000, through Rolf Holding's network, New Europe reported.

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AVIATION

Aircraft carrier pact with India to cost US$1.5bn


The contracts on the delivery of the Russian heavy aircraft-carrying cruiser Admiral Gorshkov to the Indian Navy are worth a total to US$1.5bn, Defence Minister, Sergei Ivanov, told Russian reporters on arriving in New Delhi recently, New Europe reported.
"The total sum of the contracts for the aircraft carrier and the deck aircraft is about US$1.5bn, "Interfax quoted him as saying. Ivanov added that the sum also covers the training of ship personnel. The main set of contracts are deals on the ship itself and Mig-29K airplanes for it. The Admiral Gorshkov deal "is not a bad start for this year," Ivanov said. "It's a very large contract. I began to speak about it when I was still secretary of the (Russian) Security Council in 2000. It's pleasant to note that these words ended in concrete sums and in concrete employment in our shipbuilding industry and shipyards."
In 2003, Russia supplied two state-of-the-art frigates to India. "We'll be handing over the third frigate any moment now," Ivanov said. "Before that, we were supplying submarines to India and repairing their diesel submarines."

KrasAir receives licence for cargo flights to Beijing

Krasnoyarsk Airlines (KrasAir) has received a three-year licence from Russia's aviation authorities to make scheduled cargo flights between Krasnoyarsk and Beijing, the airline said recently. In the future, when all the paperwork has been finalised, KrasAir will start making two flights a week on the Tu-204S cargo plane.
New Europe reported recently that KrasAir also applied to make scheduled cargo flights from Moscow to Beijing, but the authorities gave the licence to a large cargo airline from Moscow. The airline makes charter flights to China on the Tu-204S, which became possible after aviation authorities restored its licence to make cargo flights to China at the end of October 2003. The licence was temporarily suspended in the middle of 2003 after two cases of overloading I1-76 planes were exposed.
The airline stopped operating the I1-76 and leased three new Tu-204S cargo planes. KrasAir is Russia's fourth biggest airline.
The government owns 31%, private companies - 26.17%, individuals - 18.4%, and nominal shareholders - 4.3%.

New flight safety system successfully tested

State joint flight tests of a revolutionary onboard active system for flight safety have been successfully completed in Russia, the engineering centre of the MiG aircraft construction corporation ITAR-TASS News Agency reported. 
The MiG-29UB fighter was used for the tests. The onboard active flight safety system (BASBP) controls the work and working ability of the plane's crew. In the event of a pilot's inadequate actions or inaction, the system may take the pilot outside the frame of control, transfer the plane into safe flight mode and offer the pilot intellectual and functional support. After the pilot has recovered his ability to work, he can regain control of the aircraft.
According to the source, the system is intended for "drastically reducing" the number of air accidents caused by the so-called human factor. The system was developed by Russkiye Sistemy [Russian Systems] corporation. In the words of the corporation's head and chief designer, Valentin Sukholitko, "work is already under way" to install the system in the latest models of military aircraft, including the Su-27SM, the Su-35, the MiG-29SMT and the Mi-8 helicopter.
Work is planned to begin in the near future to install the system in the MiG-31 [Foxhound] interceptor fighter and the MiG-AT training plane. "The system has been included in the list of equipment for the promising military plane of the fifth generation," Sukholitko said. It can be adapted for civilian aircraft.

Russian researchers said working on fifth-generation air defence system

The Almaz research and production association, jointly with the Moscow-based Fakel design bureau, the Altair research and development institute, the national radio equipment research and development institute and the Nizhniy Novgorod radio equipment research and development institute, has developed a concept envisaging the establishment of the fifth-generation air defence system, Interfax-AVN Military News Agency web site reported.
"This concept will allow a new air defence system and a new theatre missile defence to be established by 2012, employing contemporary technologies and equipment."
"This is the very conclusion participants in a meeting of the expert council on airspace defence, held in Moscow, have arrived at," Vladimir Doshin, the expert council's secretary, told Interfax-Military News Agency.
According to Aldoshin, Pavel Sozinov, the deputy designer general of the lmaz association, and other participants in the meeting, emphasized that the draft design of the new air defence system, meeting the requirements of intercepting fifth-generation missiles, had already been developed by Almaz and adopted by the Russian Defence Ministry commission.
The Defence Ministry commission has also approved the draft design of upgrading the Triumf air defence system. According to experts, this project meets the requirements facing theatre missile defence with respect to intercepting fifth-generation missiles, which has been confirmed by state tests of the Triumf air defence system, considered to be a 4+-generation system.
"On approving the work stream embraced by Almaz and other flagship air defence system designers, the council decided to recommend that the Almaz-Antey consortium should be appointed flagship contractor for manufacturing such systems, while the Almaz research and production association should be appointed flagship designer of future air defence and theatre missile defence systems," Aldoshin said.

Russian air force takes delivery of upgraded helicopters

Five upgraded Mi-24PN Hind transport and combat helicopters intended for night-time operations will be transferred to the Russian air force, the chief of the air force press service, Col Aleksandr Drobyshevskiy, said recently. "The batch of five Mi-24PN helicopters will be handed over to the air force at the Rostov helicopter plant today. The next batch of these aircraft will be transferred in February or March 2004," Drobyshevskiy said, Interfax-Military News Agency reported. 
The helicopters will be initially sent to the 334th Army aviation personnel training and retraining centre in the town of Torzhok in Tver Region. 
Upgrade of in-service Mi-24P helicopters to the Mi-24PN level (P stands for "gun" in the Russian language and N for night-time operation) is handled by the Rostvertol plant in Rostov-na-Donu. The Mi-24PN carries BREO-24 avionics and Zarevo nighttime IR homing equipment. In particular, BREO-24 includes the Raduga-Sh sighting and surveillance system integrated with the Zarevo IR imager (earlier designated as Nokturn). The imager was designed by the Zverev plant in the town of Krasnogorsk outside Moscow. The sighting system is reinforced by an IR subsystem, laser range-finder and anti-tank missile control channel. BREO-24 includes an LCD, night-vision goggles and adapted cockpit lighting equipment. 
The new avionics render the helicopter round-the-clock operation capability and ability to use all types of inherent weapons. It provides for piloting the aircraft at altitudes from 50 to 200 metres at night and ensures high precision of navigation through the use of a digital terrain map and reference to a satellite navigation system. 
Armament includes the anti-tank missile system with Shturm or Ataka high-precision missiles operational 24 hours a day, unguided projectiles and in-built and suspended small arms and guns, such as the NPPU-23 gun system with the 23mm GSh-23 gun. Suspended armament may include up to 16 9M-120/120F/114 anti-tank projectiles of the Ataka-V system, suspended gun systems with 23-mm guns and allowance of 450 shells, and several air-to-air missiles. 
Combat efficiency of the modified helicopter is 50-70 per cent higher than that of the baseline Mi-24 Hind. As a result of simultaneous repairs, restoration and modernization, the helicopter has an overhaul period of 1,000 hours, or seven years in operation. Over 620 Mi-24P helicopters have been produced. 

KrasAir to buy Russian but lease foreign aircraft

The Russian state-owned Krasnoyarsk Airlines (KrasAir), one of country's four biggest carriers, is prepared to buy Russian-made planes but will have to hedge its risks by leasing western-built liners, Interfax News Agency reported recently.
On the one hand, the Russian market is not entirely ready for western-built craft because it cannot provide for their effective use, but on the other hand Russia is incapable of meeting its own airlines' needs for new aircraft in full, Interfax quoted Boris Abramovich, the director general of KrasAir, as saying.
"Ideally we'd like just two types of aircraft - the Tupolev Tu-204 and Ilyushin I1-96 - in our fleet, but unfortunately we are not currently able to unify our fleet," Abramovich said.
KrasAir is ready to buy more Tu-204 and to start buying I1-96-300, but the company is not sure that the Russian aircraft industry is capable of building these planes. "So, to mitigate our risks, we are having to diversify our fleet, although this is increasing our costs," Abramovich said. A homogenised fleet could probably reduce the airline's aircraft operating costs by 20%, he said.
The Russian aircraft industry's ultimate capability will not be known until after 2006, when new international restrictions on aircraft use enter into force. "After 2006 it will become entirely clear what to do with our fleet, how to develop it," Abramovich said. In the meantime, KrasAir is planning to lease two Boeing-767 by May this year. "There are no longer any reasons for not receiving these planes on schedule," Abramovich said.
KrasAir had hoped to receive its first Boeing-767 on lease in November 2002, but the event has been put back repeatedly because management was faced with minimising all aircraft-related payments and finding "very well-equipped planes with a very good technical history," Abramovich said.
Management has achieved both objectives, and has even worked out a way of importing western aircraft without having to pay customs duty of 20% of the cost of the liners. "Russia does not have the sort of market to justify payment of all charges on Boeings and then operate them at a profit," Abramovich said.
KrasAir proposes to avoid paying the duty by forming a joint venture with a foreign partner, which will pay the two Boeing-767 into the joint venture's charter capital. Abramovich said the partner had been identified, but he did not name it, as the time was not yet right. KrasAir will lease the planes from the joint venture and will only pay VAT, which went down from 20% to 18% on January 1st, when the planes are brought into Russia.
Abramovich said one of the Boeing-767 planes was 15 years old and the other 17, but they have only used up about 30%-35% of their potential.
The planes will be used for charter flights to Europe, but in the winter they will also be used for schedule flights. Abramovich said each of the Boeings would have to clock up at least 350 flight hours in their first year and 400 hours after that, "otherwise their flights will be unprofitable."
KrasAir is also negotiating a 15-year financial lease over two new I1-96-300 airliners with the Ilyushin Finance Co. If a deal is signed, KrasAir could receive the first I1-96 as early as June 1st this year. "One of the first things we must decide is whether KrasAir has the potential to warrant leasing two Boeings and two Ilyushins at the same time," Abramovich said.
The decision to lease the two Ilyushins will also depend largely on the financial terms of the leasing deal, and these have not been finalised. "We are only at the beginning of the journey, although we have reached an understanding on common approaches to the contract," Abramovich said.
He also said KrasAir would be taking an operating lease over two new Yakovlev Yak-42D aircraft which the Saratov aircraft factory had almost finished building.
KrasAir signed the leasing deal with the company Aviatrading LK in November 2003. And KrasAir is following new projects like the Tu-334 and the Russian Regional Jet (RRJ) closely.
KrasAir carries about 6.0% of Russia's domestic passengers and just over 3.0% of its international passengers.
It has 36 airliners, among them 11 Tu-154M, six Tu-154B, five Tu-204, four I1-86, five I1-76, three I1-62 and two Tu-134. The airline has more than 4,500 employees, about 550 of them flight specialists. Krasnoyarsk's Yemelyanovo airport is a KrasAir division.
The main destinations for scheduled and chartered flights are Ukraine, Germany, Greece, Cyprus, China, the United Arab Emirates, Thailand and Turkey.
The airline is also an official carrier under government-to-government agreements with South Korea, Germany and China.
The government owns 51% of KrasAir. Private companies own 26.17% of the shares, individuals 18.54% and nominal holders 4.3%.

Alfa Group Unit Lands Contract At Moscow Airport

The Wall Street Journal reported recently that a unit of Russian conglomerate Alfa Group won a three-year contract valued at about $2bn (€1.58bn) to turn Moscow's run-down Sheremetyevo international airport into a hub between Europe and Asia, officials said.
Alfa-Sheremetyevo was vying against International, which is 40.05%-owned by Russian flag carrier Aeroflot and also backed by France's Vinci SA, in the fierce months-long battle for the project.
At the meeting "we summarised the tender results and Alfa-Sheremetyevo was announced to be the winner," said Yuri Isayev, chairman of the airport's board of directors.
Mr Isayev, who also is deputy economy minister, said the airport and Alfa-Sheremetyevo are expected to sign a contract, which would stipulate specific investment projects and costs, six months after state approval.
Expanded for the 1980 Olympic games, the airport has seen little renovation since. Passengers often complain of its dingy interior and snaking queues for passport checks.
It has gradually lost a large chunk of its business - including some of the world's biggest airlines - to privately owned Domodedovo, a modern and well-equipped terminal.
As the winner of the tender, Alfa will be in a good position to take a large share of what could be the lucrative expansion of Sheremetyevo in the long term through the addition of a third terminal. Alfa also pledged that it would give equal opportunities to all airlines, while Aeroflot made it clear that if it won the tender it would use its position to maintain its dominance here.
Mr Baranovsky said his firm may have to borrow cash to cover some costs of the project.
Alfa Group, which is BP PLC's partner in Russia, has said it would use its expertise in the oil, telecommunications and banking businesses to increase Sheremetyevo's passenger traffic and renovate the airport's two existing terminals.
It also has struck deals with French building giant Bouygues SA, Munich Airport International and Airport Consulting Vienna ahead of the tender announcement.
"We'll do a good job in these three years to turn it into a European-class airport. And if we can prove that to the government, we hope they will prolong our contract," Mr Baranovsky said.

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BONDS

Gazprom bond issue to be closely watched


Oao Gazprom placed 10bn rubles (€281.7m) of three-year bonds in a deal that market participants said showed the domestic debt market is maturing, reported the Wall Street Journal recently.
Analysts said that some of the issue went to foreign investors, who have so far been kept out of the ruble debt market by government hostility and the poor liquidity in the corporate sector.
Investors said the recent issue is likely to become a benchmark for all corporate Russian debt because its size will guarantee an active secondary market and because it accurately reflects market demand for a credit quality that is on a par with government debt.
"This ushers in a new stage of development for this market," said Kieran Donnelly, managing director of fixed income with MDM Bank in Moscow.
The bond was priced to yield 8%, a negative real interest rate for ruble-based investors faced with an expected 10% inflation rate this year. But it was a yield premium of 1.73 percentage points to Gazprom's dollar-denominated Euro-bond of 2007.
Alfa Capital and Troika Asset Management, two of the biggest private fund managers, said they hadn't taken any of the issue. "The yield just isn't that enticing," said Tim McCarthy, chief investment officer with Troika.
However, the yield premium over Gazprom's dollar-denominated Eurobond was substantial for anyone comfortable with the currency risk and the restrictions placed on them by the Russian Central Bank.
The relatively low yield on the bond was achieved without the two largest buyers in the ruble bond market - the Pension Fund of Russia, which is barred by its statutes from buying the bond; and state savings bank OAO Sberbank, which is trying to reduce its overall credit exposure to Gazprom to conform with central bank norms.
Alexei Sizov, head of debt product with joint lead manager Renaissance Capital, estimated that one-third of the issue went to foreign investors. However, a representative at one of the large foreign banks underwriting the deal reported a low participation rate among foreign investors, of about 10%.
Direct exposure by foreign investors could be limited by the central bank's insistence that the bonds be bought through so-called N-accounts, which effectively stop the investor from repatriating money in the account for 12 months.

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CREDIT RATINGS

S & P upgrade boosts Russia


The Financial Times reported recently that Standard & Poor's, the credit ratings agency, recently raised Russia's international rating to the top speculative grade level and domestic debt to the lowest investment grade level.
The agency lifted Russia's long-term foreign currency rating one notch from BB to BB+ with a stable outlook and its domestic equivalent also one notch from BB+ to BBB- with a stable outlook. The move comes just five years after Russia's US$ 40bn default on its domestic government bonds, and follows an upgrade of both its international and domestic ratings to investment grade by rival agency Moody's Investors Service.
Helena Hessel, credit analyst at S&P, said: "The upgrade reflects continued rapid improvement in external liquidity and government debt levels."
The agency said Russia's general government debt had fallen to 38% of gross domestic product by the end of last year from more than 110% four years previously.
With world oil and commodity prices well above long-term averages, resource-rich Russia has been able to dramatically improve its public finances.
Prices for Russia's 30-year benchmark bonds rose in early trading on speculation of an upgrade, but slipped from the day's highs following S&P's announcement. By late London trading, the long bond was at 98.75, with yield spreads over US Treasuries at 270 basis points.
Jim Croft, trader at Commerzbank, said: "Prices moved up ahead of the announcement on rumours of an upgrade, but they fell again on disappointment that Russia didn't get a full investment grade status."

Moody's upgrades Moscow ratings

Moody's Investors Service has upgraded to Ba1 from Ba2 the city of Moscow's issuer and debt ratings, reflecting strong economic growth, the city's prominence in the national economy and a moderate although growing debt burden, said the agency in a press release recently. Moody's also views Moscow's accumulation of, and its ability to generate operating surpluses as a positive credit factor, because it signifies a high degree of self-financing capacity and hence a more moderate need for debt financing. Moscow continues to play a crucial role in the economic lifeline of the country. Many of the nation's largest industrial concerns are headquartered in the city and it remains Russia's primary recipient of both foreign and domestic financial and human capital. Its diverse economic base makes it more resilient to economic downturns than other Russian regions and its wealth indicators are expected to stay substantially above the national average. The upgrade also takes account of Moscow's strong budget management and its success in maintaining stable financial fundamentals in the recent past, despite adverse tax reforms instituted at the federal level. Going forward, the maintenance of prudent budget policies and continued strong economic growth are expected to generate operating surpluses averaging 15-20% of operating revenues, New Europe reported.

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ENERGY

Lukoil gets deal for natural gas in Saudi Arabia


Russia's Lukoil Holdings joined a small club of foreign energy firms with a foothold in Saudi Arabia recently, announcing a deal to find and pump natural gas in the world's top oil-producing nation, the Wall Street Journal Europe reported recently.
The project is small by the standards of Saudi Arabia's immense hydrocarbon reserves but creates a potentially useful new link for OPEC's leading member with the world's No 2 oil exporter.
Saudi Arabia is in the midst of a historic reopening of its energy resources to foreign investment. But talks for integrated projects - coupling gas exploration and production with utilities and petrochemicals investments - collapsed last year after the Saudi government and three foreign consortia, two led by Exxon Mobil Corp and one by Royal Dutch/Shell Group - failed to agree on commercial terms.
Shell and France's Total SA in July salvaged an exploration-only deal to form a joint venture with state-owned Saudi Arabian Oil Co and seek gas in an 80,000 square mile (208,000 square kilometre) area of the kingdom's southeast. The Saudis broke up the rest of the projects into their gas, petrochemicals, water and electricity components and began inviting tenders.

Lithuania, Russia close deal on purchase of gas company shares

The Russian concern Gazprom has bought a 34 per cent stake in the Lithuanian gas company Lietuvos Dujos (Lithuanian Gas). The deal was signed today by the director of the Lithuanian State Assets Fund, Povilas Milasauskas, and Gazprom's deputy general manager, Aleksandr Ryazanov. The two parties had been negotiating the deal for over a year and a half, ITAR-TASS news agency reported recently. 
The Russian concern paid 100m litas [US$37m] for the stake. Povilas Milasauskas said at a briefing that, "the signing of the contract does not mean that the deal on the privatisation of the Lithuanian gas company has been closed". He said that "the shares would be transferred to Gazprom within at least six months, after the Lithuanian cabinet approves a long-term contract on the supplies of natural gas by the [Russian] concern directly to Lietuvos Dujos. Talks on this issue are currently under way in Vilnius.
Ryazanov said he was satisfied with the deal and noted that it was "beneficial both for Russia and Lithuania". The German concern Ruhrgas [a consortium represented by Ruhrgas and E.On Energie] holds a 35.1 per cent stake in the authorized capital of Lietuvos Dujos (worth 341m litas) while the Lithuanian State Assets Fund owns 58.3 per cent of the shares. When the privatisation of the company is completed, the assets fund will retain some 24 per cent of the shares.

Russian oil output up 11 per cent in 2003

Russia produced 421m tonnes of oil in 2003, up 11 per cent on the previous year, Deputy Prime Minister, Viktor Khristenko, said, ITAR-TASS News Agency reported. 
Oil companies have therefore "achieved the forecast levels of 418-420m tonnes", he added.
Refining was up 2.6 per cent in 2003 to 190m tonnes. Oil exports for the year were 226m tonnes, of which 35m went to Belarusand Ukraine.

Russian natural gas output up 4 per cent last year

Russian natural gas output was up 4.2 per cent (by 25bn cubic metres) last year to 620bn cubic metres, Deputy Prime Minister, Viktor Khristenko, said, ITAR-TASS News Agency reported.
Supply to the domestic market was up nearly 3 per cent to 423bn cubic metres. Exports amounted to 190bn cubic metres. To Belarus and Ukraine they were up by 1bn cubic metres to over 46bn.

Russia's LUKoil buys almost 800 petrol stations in US

LUKoil is acquiring another 795 petrol stations in the US. The oil company's press release said that the value of the deal is US$265,750,000, RIA News Agency reported. 
Out of that amount, US$50m will be provided by LUKoil from its own funds. "The remaining sum will be raised by the exclusive and investment counteragent for the deal, the US bank Lehman Brothers, with the use of project finance instruments. The borrowed funds will be provided to LUKoil for a period of six years under the security of the real estate assets being acquired," the press release said. 
The petrol stations purchased from ConocoPhilips company are located in the states of New Jersey and Pennsylvania. "The annual sales volume of the petrol station network being bought is 1.2bn gallons of petroleum products, which will almost double the company's share of the US northeast market," the press release said.

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FINANCIAL NEWS

2004 Russian finance chief details EBRD deal, investment outlook


The European Bank for Reconstruction and Development (EBRD) is seeking a 20 per cent stake in Vneshtorgbank (VTB) [Foreign Trade Bank], Russia's deputy prime minister and finance minister, Aleksey Kudrin, has said. "For the time being, it is 20 per cent," he said, RIA News Agency reported.
EBRD President Jean Lemierre, at the same time, declined to comment on the size of the stake the EBRD would like to acquire. "We are so close to a decision that I can't possibly comment," he said.
Aleksey Kudrin and Jean Lemierre met at the World Economic Forum in Davos. As for the time scale of this possible deal, it could be finalized even before the presidential elections in Russia, which are due to take place in March, Jean Lemierre said.
"But in any case in the first half of the year," he said. He added: "We have already completed our study of the bank's financial condition, so we have done a great deal of work."
At present, Jean Lemierre went on to say, talks continue between the EBRD, the VTB leadership and the Russian government, which owns 99.9 per cent of shares in Vneshtorgbank. 
Jean Lemierre also told Novosti about the EBRD's plans to invest at least 1.2bn euros in the Russian economy this year. "We are probably the biggest investor in Russia. Last year, we invested more than 1.2bn euros, and plan to invest at least the same amount this year," Jean Lemierre said.
On Saturday, Jean Lemierre and Aleksey Kudrin took part in an annual Davos round table also attended by members of the consultative council on foreign investment in Russia.
"It was a very good meeting. And investors made some very good pledges as regards investment in Russia," Jean Lemierre said after the meeting. What is primarily of interest to investors at present, Aleksey Kudrin said, is progress in the administrative reform, as well as the development of the tax system and the financial sector.
"In particular, the issue is refunding, in a timely fashion, value-added tax on exports. Among all other tax administration issues, this one is at the fore today," Aleksey Kudrin said.
All those who represented major companies at the round table, according to Aleksey Kudrin, have confirmed that they have big plans for investments in Russia.

Russian GDP up 7 per cent in 2003, initial figures show

Russia's gross domestic product in December 2003 was up 8.2 per cent on December 2002, according to a Ministry of Economic Development and Trade dossier on the country's socioeconomic development in 2003.
Initial figures for 2003 show GDP up 7 per cent, ITAR-TASS news agency reported.
Russia's GDP in 2002 was up 4.7 per cent year-on-year, and up 5.2 per cent in December of that year. The economy grew by 5.1 per cent in 2001.

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FOREIGN COOPERATION

Russia said planning grain deal with Iran


The Russian government plans to sign an agreement with Iran to annually supply 2-3m tonnes of grain via the Caspian Sea, which would provide a stimulus for the development of the Eurasian economic area, Russia's Deputy Prime Minister Vladimir Yakovlev said recently. He did not elaborate, Prime-TASS News Agency reported. 
The Russian government is negotiating with China regarding the possibility of using Russia's trans-Siberian railway to supply Chinese goods to Europe and CIS countries as well as the use of other transportation routes via Russia and Kazakhstan, he said. 
In future, it is planned to use more intensively Russia's Baykal-Amur railway, which currently works at only 20-25 per cent of its capacity, he noted. 
Russia should use its natural and geographic potential, establish transport routes, build bridges, tunnels, sea-, river- and airports, and become a major transit country, he said.

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FOREIGN ECONOMIC RELATIONS

Russia completes tariff talks on WTO entry


Russia has completed tariff negotiations with 10 countries on joining the World Trade Organisation, said Deputy Minister of Economic Development and Trade, Maxim Medvedkov, recently. In addition, negotiations with 10 to 15 countries concerning access to their markets "have entered the final phase, which means that one to three tariff positions have not yet been agreed upon," Medvedkov told a news briefing in Moscow, New Europe reported recently. 
The most problematic are negotiations on prices for aircraft, cars and a number of agriculture products, said Medvedkov, who is leading the Russian delegation at talks on accession to the WTO. "Apparently, these are goods on which a compromise will be reached at the very last moment," he said. Russia will be able to sign protocols on access to services market with eight to 10 countries in the near future," he said

Russian state trade bank to finance projects in southern Africa

A delegation of Russia's Vneshtorgbank [foreign trade bank] led by its vice-president, Sergey Shilov, discussed in Namibia issues of boosting economic cooperation between the two countries. The delegation met on Tuesday [27 January] with Namibian Finance Minister, Saara Kuugongelwa-Amadhila, the leadership of the Ministry of Mines and Energy and banking sector executives.
"We confirmed Russia's readiness for stepping up business partnership with Namibia based on equal rights, Shilov said in an interview, ITAR-TASS News Agency reported.
"If the Namibian government displays an interest in cooperating with the Alrosa diamond-mining corporation or any other of our clients from a number of Russian corporations, Vneshtorgbank will be ready to provide the necessary financing," he noted
Shilov said an accord had been reached with head of Namibia's Development Bank, David Nuuyoma, about "the beginning of work on possible ways of cooperation between the two banks".
A Vneshtorgbank representative flew to neighbouring Angola to attend a meeting of the expert group on preparing the first meeting of the Russian-Angolan intergovernmental economic cooperation commission. Russia's Alrosa has been building a hydroelectric power plant on the river Chikapa in Angola's Southern Lunda province. The project costs US$45m. The plant is located in the area of the Catoca mining company, in which Alrosa holds a stake.
At present, the Russian government remains the largest shareholder of Vneshtorgbank, with a 99.9 per cent stake.

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FOREIGN INVESTMENT

Ministry says Russia's capital investments up 12.5 per cent in 2003


The capital investments in Russia's economy amounted to R2.183bn in 2003, up 12.5 per cent on the year, according to data provided by the Economic Development and Trade Ministry, Prime-TASS News Agency reported.
In 2002, capital investments in Russia rose 2.6 per cent on the year.
In December 2003, capital investments in Russia's economy increased 14.5 per cent on the year, against 3.2 per cent on the year in December 2002. In January-September 2003, foreign direct investments (FDI) in Russia's economy rose 77.3 per cent on the year. 

Russian foreign trade surplus up by a quarter in 2003

Russia's foreign trade surplus amounted to US$59.6bn in 2003, the Economic Development and Trade Ministry, said recently, Prime-TASS News Agency reported.
In 2002, the foreign trade surplus was at US$46.416bn.
Last year exports rose to US$134.4bn against US$107.3bn in 2002, while imports came to US$74.8bn, rising 22.6 per cent on the year.
Russia's exports to non-CIS countries amounted to US$113.3bn in the period, up 24.6 per cent on the year, while Russia's imports from non-CIS countries stood at US$59.6bn, up 22.1 per cent on the year.
Russia's non-CIS foreign trade surplus amounted to US$53.7bn in 2003, according to the ministry, while the State Customs Committee said that non-CIS foreign trade surplus in 2003 was at US$54.4bn.
Russia's total foreign trade turnover in 2003 stood at US$209.2bn, posting a 24.3 per cent increase on the year, and non-CIS foreign trade turnover rose 23.7 per cent on the year to US$172.9bn.

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FOREIGN LOANS

EBRD offers Vestel US$15m for TV plant project


The European Bank for Reconstruction and Development (EBRD) has extended a five-year, US$15m credit to Turkish company Vestel-CIS Ltd to use in building a television plant in Russia, the EBRD said recently. The EBRD noted that this credit represents the first foreign investment in television set production in Russia. Vestel-CIS runs the Turkish household appliance company Vestel Electronic Sanayi Ve Ticaret AS, New Europe reported recently.
The money will be used for two things: filling out working capital and building a TV plant in the Vladimir region town of Alexandrov costing US$47.5m. This factory will be able to build two million TV sets annually.
The other funds needed for this project will come from the Vestel group, International Moscow Bank and a group of Turkish banks. Building one of Russia's biggest high-quality television set plants will help boost competition in the sector, increase product quality standards and give a future spur to potential suppliers of television parts to set up local production.

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MINERALS & METALS

Diamond monopoly Alrosa outlines targets for 2004


Russia's diamond monopoly, the Alrosa group, which produces one quarter of the world's diamonds, plans its diamond output at US$2.26bn and its sales of cut diamonds at US$150.7m, Interfax News Agency reported recently.
The plans were approved recently at a meeting of the Alrosa supervisory council, which also set targets for ZAO Alrosa, one of the group members, - output worth US$1.51bn, sales of uncut diamonds to a total of US$1.6bn, and sales of cut diamonds to a total of US$137.1m, Interfax quoted the company's press service said. The groups' net profit target for this year was set at 16.71bn rubles.
The council also partially reshuffled the group's executive board. As in December, the council was unable to approve Alrosa's dividend policy.
The council also headed a report on talks between Alrosa and the European Commission on an Alrosa-De Beers agreement. "Approval was received from the supervisory council concerning the company's initiatives and action programme in development of negotiations with the European Commission," the press service said.
Alrosa comprises of about 40 enterprises. Alrosa Nyurba, Almazy Anabara and Russian-Angolan venture Catoca Ltd, in which Alrosa holds a 32.8% stake, are the group's biggest diamond producers. The group also includes two construction and two prospecting enterprises, credit and financial institutions, and a pension fund called Diamond Autumn.
The Russian Property Relations Ministry holds a 37% stake in Alrosa, 32% of the group's capital belongs to the Property Management Ministry of the Russian region of Yakutia, the company's personnel holds a 23% stake, and eight Yakutian districts together hold 8% interest.

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NUCLEAR ENERGY

Russia ready to take nuclear fuel from Lithuanian plant 


Russia will take nuclear fuel from Lithuania's Ignalina nuclear power plant (INPP) in case of its decommissioning, the Russian Ministry of Atomic Energy has said, ITAR-TASS News Agency reported.
Commenting on the 20th anniversary of the plant's launch and the possible shutdown of its power unit No 1 in December 2004 at the EU demand, Atomic Energy Ministry spokesman, Nikolay Shingarev, said: "The Ignalina NPP has been working successfully and accident-free since its commissioning, having generated 242.5bn kWh of energy in 20 years. It produces over 80 per cent of the electricity consumed in Lithuania".
The two reactors of the Ignalina plant "are the most powerful among the units of that type designed and built in the former Soviet Union", Shingarev said. According to our information, he added, "Lithuania is not that eager to decommission the plant".
"The Russian corporation Tvel supplies nuclear fuel to the INPP and the spent nuclear fuel is being stored in containers at the site," Shingarev said. However, "in case of the plant's shutdown, the issue of taking spent nuclear fuel from Ignalina back to Russia for storage and processing should be resolved in accordance with existing agreements, contracts and the International Atomic Energy Agency's rules", he said.
"The Ignalina NPP, after its revamp and the modernization of its safety systems, is one the safest nuclear power plants in the world," Russian Atomic Energy Ministry experts said.

Russia plans to develop new nuclear reactor by 2007

Russia's Atomic Energy Ministry plans to develop a new type of high-capacity nuclear reactor by 2007, Russia's state nuclear energy holding Rosenergoatom said in a statement, Prime-TASS News Agency reported.
The project has been launched to replace the existing power generating facilities as the ministry estimates that by the end of the decade conventional thermal power units with a combined capacity of about 30,000 MW will have to be put out of operation in Russia due to their amortization.
The new reactor, with a capacity of 1,500 MW and called VVER-1,500, is estimated to cost US$78m to design, while the construction of a power unit using this type of reactor will cost some US$1.3bn, a Rosenergoatom official told Prime-TASS. The official also said R400m should be spent on designing the reactor this year.
According to Rosenergoatom, the construction of the first such reactor may be expected by 2013. 

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TELECOMMUNICATIONS

Russian minister in Davos promotes rapidly-growing telecoms sector


Russia's telecommunications sector is showing sustainable growth. "For the third year we have a growth rate of over 40 per cent," Leonid Reyman, the minister of information and communications technology, said, as he commented on preliminary figures for 2003. He was in Davos for the annual World Economic Forum, ITAR-TASS News Agency reported.
"This growth is attributable to programmes adopted in the past three to four years," the minister said. "We think that the law passed last year by the State Duma and signed by the president will enable us to further improve the investment climate, and simplify procedures and make them more comprehensible to foreign investors. That's what we've been talking about at Davos."
Investment in Russia's telecommunications and information technologies is growing, Reyman continued, adding that it rose 42 per cent last year according to preliminary figures. "When we published our market development concept, it had the figure of US$33bn in 10 years. Everyone said that was too optimistic," the minister said. "I can say that we've reached that target, that is, about US$3bn a year. I mean foreign and domestic investment and also companies' investment in their own development. That's probably why we have such healthy market and corporate growth."

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