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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)

Books on Russia

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

  

Update No: 285 - (01/10/04)

Totalitarianism is back
There is no doubt that historic events are occurring in Russia. There was the terrible tragedy at Beslan. How could it have been so badly handled without frightening misjudgements in the security services themselves?
Putin, the epitome of the KGB, is the last person to acknowledge as much. 
He has instead in effect abolished the fragile democracy initiated by Yeltsin. The KGB is back. The centre will now control everything - or so it hopes. Governors in the 89 regions are to be appointed by the authorities in Moscow, not be elected, as they have been until now since 1991. Local legislatures will be given the right to 'confirm' the decision of the centre. The craven local chiefs have relinquished their obligation to be re-elected without a murmur. 
Putin had already emasculated the upper house of parliament. He deprived the governors of their representation there on his accession in 2000. Its members are now all Kremlin appointees.
He has now emasculated the lower house, the Duma, Previously, there were two lists of members, one elected on an individual constituency basis, the other on a party basis. From now on there will be simply one list, the party one of course. Not that the party calls itself the Communist Party these days.
Just the United Russia party, that already controls more than 300 of its 450 seats. From now on it will control them all, directly or otherwise.
The Duma duly tamely accepted its own emasculation in late September. Russia is now a one-party state once again. 

Yeltsin chimes in
Yeltsin has re-acted. His whole historical achievement has been destroyed. Russian democracy is no more.
He now admits that his biggest mistake was to invade Chechnya in December 1994. He did so under the utmost provocation by a deranged Chechen leadership of the time, demanding immediate independence, unless 20 Russian soldiers, caught up in interethnic strife, were killed. 

Putin chimes out
There is far less excuse for Putin. His whole career has been based on the second recent Chechen War, still going on. He has nipped incipient Russian democracy in the bud. 
He is a supreme power freak; that is clear. From his late teens he was obsessed about one very powerful institution in Russia, the KGB, which he aspired to join and duly did. Its demise in 1991 was doubtless the most doleful experience in his life.
He is a fierce loyalist at heart and wants to see it back. He is now in a position to attempt it. Of course someone might well say that it never really disappeared. But it certainly was dismembered, he himself heading the domestic rump of the body, namely the FSB in 1998-99, before becoming premier and president.
Putin's early career was in one of the foreign espionage arms of the operation, namely in East Germany. He is keen to see them re-instated at the heart of things. In the Cold War the KGB was accurately described by a M15 handbook as the "biggest spy machine for gathering information the world has ever known." It considered itself the best of the world's security services and "felt contempt for the idiots who worked on domestic security." 

The KGB; is it really back?
The old KGB hands, the siloviki, have been making a big comeback under Putin, who has appointed them to over half of the top jobs in the apparatus, usually the key ones. But more was needed than a simple reshuffle of personnel, namely a revamp of the state.
On July 11th, a Sunday as it so happens, but showing that he never stops working, Putin signed a decree giving Nikolai Putrushev, the head of the FSB, the status of a cabinet minister, at the same time cutting the number of his deputies to streamline the organisation. The lift in rank is not so important. Few in Russia would doubt that the head of the FSB is a far more important figure than the premier, always having the ear of the president, the one person who matters. The chief of the FSB, by reason of his special knowledge, can really influence things. As a former head himself, Putin has an especial regard for its mystique. After all that is why he is where he is now.
Nothing shows this more clearly than the fact that he has adopted every one of its suggestions in his recent decree. The most important is that, henceforward, the foreign espionage service, the SVR, is to come under the control of the FSB, as in the good old days. It puts the Kremlin guard, the Federal Guards Service, under FSB control. Two other Soviet-era agencies, the border guards and government communication and information agency, were re-absorbed by the FSB last year. FSB departments will be disbanded and replaced by units called services, whose leaders will have more authority than before. The reforms will increase the director's authority by giving him the power to determine the size and make-up of the KGB's collegium, a high level group within the agency. The KGB in all but name is back. Or is it?
The changes will improve the efficiency of Russia's spy agency all right, speeding up decision-making and allowing a swifter transmission of information. Yeltsin's decision to disband it was highly political, because it had been hand in glove with the coup-plotters in August 1991. 
He didn't want it to be too efficient. Putin has no fears of a KGB plot to unseat him. He is their man after all. Actually, even this is not quite true. Putin trusts nobody, not even himself. 'Eternal vigilance' is his credo, creed and motto.
The powerful head of Russia's general chiefs of staff who defended the army against cutbacks was dismissed on July 19th as President Vladimir Putin stamped his authority over the cash-strapped military and placed allies in key posts. Kvashnin and two other dismissed generals were all linked to the five-year military operation in Chechnya, where violence flared on the eve of controversial elections, with a daring and deadly rebel attack in the southern republic of Ingushetia that officials were helpless to prevent 
Anatoly Kvashnin was replaced by his first deputy, Ukrainian-born career soldier 57 year-old Yury Baluyevsky, who helped to negotiate an arms reduction treaty with the US and also set up a joint council between Russia and NATO. 
The deputy head of the FSB was among several other senior officials dismissed in one of the biggest military reshuffles since Putin came to power four years ago. The others included Vyacheslav Tikhomirov, who headed the interior ministry's troops serving in Chechnya, and Mikhail Labunets, who oversaw the interior ministry's North Caucasus region. 
Viewed as a military hawk, Kvashnin headed the chiefs of staff since 1997 and regularly fought with the defence ministry -- run since March 2001 by Putin's close ally Sergei Ivanov, Russia's first civilian defence minister who was put in charge of reforms. 
Kvashnin did not readily tolerate rivals and had overpowered Ivanov in military structures, with army generals sneering at a civilian bent on cutting staff and with no military background, except for service in the KGB. The generals reckoned without Putin's penchant for his old KGB chums. The Kremlin decision ended a power struggle born with the Soviet Union's collapse in 1991. 
Ivanov was lifted in spirits on this development, saying that the chiefs of staff "should worry about future wars and be less concerned with day-to-day affairs." 
Under pressure from Putin, parliament recently approved measures that make the head of the chief of staff subordinate to the defence ministry and force him to report directly to it. 

                                         *****

But it is too late for the Russian state to recreate an agency with the reach or effectiveness of the former KGB. It lacks the funds; it lacks the ideological capital that communism lent it and it consequently lacks the talent. Latter-day bright youngsters go straight into the private sector these days. 
The momentum of Russian life is no longer so much under the control of the Kremlin, as in former times. Yeltsin achieved something irreversible here. With 70% of the economy now in private hands, the lure of the private sector is irresistible for KGB operatives themselves. Western agencies are convinced that Russian agents are deep into the drugs trade and related activities. A criminalised state system has come about, on which more in the future. It is perhaps just as well in this case that crimes not affecting state security have been taken out of the control of the FSB and given to another agency, although this one could fall prey to the same inexorable tendency to corruption. The FSB will retain investigative control over terrorism, extremism and espionage. 
The cycle of growth of the KGB, its curtailment and renewed growth under another guise is nothing new. The Tsarist state was renowned in the nineteenth century for its sinister secret police, whose wings were periodically clipped by the state itself. Founded anew in 1917 by Felix Dzerzhinsky, himself a Pole, it began its communist life as the Cheka. It had to contend with an appalling state of lawlessness in the Civil War and its aftermath.
Each time it grew too powerful or the blood on its hands too extensive it was re-organised. It became successively the OGPU, the NKVD, the NKGB, the MGB, and, finally, in 1954 the KGB.
The security reforms have taken local and foreign observers by surprise, rather unreasonably. It is all in the chilling logic of the regime, a grim Russian police state is in emergence. The state is also clamping down on free speech. But so are even more sinister elements.

The death of journalists and human rights campaigners
A keen optimist about Russian affairs was Paul Klebnikov, the Russian-American editor of Forbes Russia, which started in April, gunned down outside his office on July 9th. He thought that business disputes in Russia would henceforward be settled in the law courts than on the streets by bullets. He got it wrong and paid for it with his life.
He had just published a Forbes "100 Richest People in Russia," on the model of its 100 Richest People in the US. A radically different project. It pointed out amongst other things that there are 36 billionaires in Moscow alone, the highest concentration of billionaires in the world in any city, owning $110bn, $3bn apiece on average, amounting in total to one quarter of GNP. This is an obscenity in a country with the widespread poverty of Russia. They of course acquired this fabulous wealth in a post-communist decade by criminal means, with the connivance of corrupt officialdom.
The media have been keen to expose the situation. There have been 20 killings of journalists in the last decade in Russia as a consequence, 16 since Putin became president, as well as of human rights campaigners; and the significant thing is that not one of the cases has been solved. The police are either on a leash or there are those among them in the pay of the criminals. It is inconceivable that they would have had no lead on any one of the cases.
It emerged at about the same time that a reporter in St Petersburg, Maxim Maximov, has been missing since July 1st. He had been investigating the unsolved killing in 1998 outside her apartment home of Galina Starovoitova, a liberal politician, probably the best bet Russia could have had for a Russian equivalent of Mrs Thatcher.
On July 17th the body of Pail Peloyan was found on a Moscow ring road in the early hours of the morning. But as the journal he edited, Armenian News, is not at all political, private reasons are suspected for his death. But another contract killing all the same, just showing what sort of place Russia has become.
The criminal strangulation of the fourth estate is a serious matter in a country aspiring to democracy and a decent life. The five most significant cases of the last five years, before Klebnikov's decease, deserve scrutiny:-
1) On 16th July, 2000 Igor Domnikov, a reporter for 'Novaya Gazeta,' was killed in the entryway of his apartment building, which seems to be the most vulnerable place for potential victims of assassination. He may have been mistaken for a Novaya Gazeta reporter, Oleg Sultanov, who lived in the same building. Sultanov claimed to have received threats from the FSB no less to desist from reporting on corruption in the Russian oil industry.
2) On 18th September, 2001 Eduard Markevich, editor and publisher of 'Novy Reft,' a paper in the Sverdlovsk region exposing local officials, was shot in the back. The paper often criticised local officials. He had received death threats beforehand.
3) On 9th March 2002 Natalya Skryl, business reporter on 'Nashe Vremya' was struck down in Rostov-on-Don after investigating a struggle for the control of Tagmet, a local metallurgical plant. 
4) On 29th April 2002 Valery Ivanov, editor -in-chief of 'Tolyatinskoye Obozrenlye,' was murdered in Togliatti after his paper exposed controversial business deals, linked to government corruption and organised crime.
5) On 9th October 2003 Aleksel Sidorov, editor-in-chief of 'Tolyatinskoye Obozreniye,'
was killed outside his home. His newspaper was known for its fearless investigations into organised crime, government corruption and shady corporate deals.
The truth is that the endemic lawlessness in Russia has suited those in power, justifying the repressive measures of the Putin regime. Klebnikov really did not understand his newly-adopted country. Russia's prosecutor-general has taken over investigation into the affair. That on past form, means that it has been buried for good.

Russia offers key Kyoto endorsement
Not everything is negative, however, out of Russia.
The Russian cabinet on September 30th approved the Kyoto Protocol in a crucial step that could bring the long-delayed climate change treaty into effect within months, reports Associated press. 
But many Russian officials remain opposed to the treaty and Prime Minister Mikhail Fradkov, on a trip to the Netherlands, said he expected "difficult debate" when parliament meets - possibly before the end of the year - to decide on final ratification. 
The 1997 Kyoto Protocol seeks to reduce emissions of carbon dioxide and other greenhouse gases, widely seen as a key factor behind global warming. 
Without Russia's support, the pact - which has been rejected by the United States - cannot come into effect. It needs the support of 55 industrialized countries accounting for at least 55 per cent of global emissions in 1990. Canada has already ratified the agreement.
The United States says the Kyoto Protocol would harm its economy and argues it favours developing countries.
Industrialized countries are supposed to cut their collective emissions of six key greenhouse gases to 5.2 per cent below the 1990 level by 2012. 
The pact would come into effect 90 days after winning Russian support. 
Disagreement on how to tackle global warming has been a major source of tension between Europe and the United States in recent years. 
A draft bill will now be sent to the lower house of parliament, where the dominant United Russia party approves nearly all proposed legislation backed by President Vladimir Putin. A vote could be taken by the end of the year, one official said.

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AUTOMOBILES

Avtotor to produce Chevy SUVs


Kaliningrad automotive works Avtotor has received from General Motors certificates for the assembly of Chevrolet Tahoes and Trailblazers, Interfax reported recently, quoting GM CIS Marketing Director Pavel Videl. The first SUVs were put together at the Russian enterprise for certification, Videl said. "We expect to ship the 'off-roaders' to Moscow," he said. These vehicles will be sold in Russia through official Chevrolet dealers. Assembly of the two models continues in Kaliningrad.

Avtovaz predicts lower earnings for 2004

Avtovaz, a Russian car producer, has announced its net income is expected to decrease 13% this year to 6bn roubles (about US$138m), RBC reported recently. Its revenue is projected to surge 21.5% to 130bn roubles (about US$4.48bn), Avtovaz Chairman Vladimir Kadannikov told journalists. He added that the company may revise its forecasts later if the market environment changes or there are sharp fluctuations in energy prices. 
The group plans to increase the output of automobiles to 950,000 each year after 2012, said Kadannikov, cited by Itar-Tass. Last year the output was some 700,000 automobiles. Kadannikov said the Avtovaz plant needs more production capacities to ensure those plans come to fruition. The resources of the existing production capacities have been exhausted. According to his information, Avtovaz will purchase 300 hectares of land in the city of Togliatti worth US$10m this year. Entirely new car models will be assembled at the new production capacities.

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AVIATION

Russia's North Caucasus Military District commissions new helicopters

The North Caucasus Military District has received new Mi-24PN Hind fire support helicopters with more powerful armaments and round-the-clock operation capability, a spokesman for the Russian Defence Ministry said recently, Interfax-AVN Military News Agency web site reported. 
"Eight Mi-24PN helicopters have entered the inventory of the North Caucasus Military District's army aviation unit. Another six helicopters of this type are expected to join the District's units before the end of the year," the spokesman said. 
The Mi-24PN (P stands for "gun", and N for "night-time") is entering the inventory of the 4th Air Force and Air-Defence Army. The Mi-24PN carries the BREO-24 avionics and Zarevo night-time IR homing equipment that renders the helicopter the round-the-clock operation capability. 
Armament includes the antitank 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 23-mm GSh-23 gun. Suspended armament may include up to sixteen 9M-120/120F/114 antitank projectiles of the Ataka-V, 9M-10F or 9M-114 systems, up to ten S-13 projectiles, up to eighty S-8 projectiles, suspended gun systems with 23-mm guns and allowance of 450 shells, and several air-to-air missiles. Experts say the new helicopter's combat efficiency exceeds that of the Mi-24 baseline version 1.5 times.

Russia to assign R6bn to support civil aircraft production

The Russian government has decided to assign R6bn for the development and production of civilian aircraft in the draft federal budget for 2005, Yuriy Koptev, head of the defence industries department in the Industry and Energy Ministry, said recently, Interfax-AVN Military News Agency web site reported. 
"We have an absolutely abnormal situation regarding the civilian aircraft industry. It used to manufacture 300-350 airliners a year and held 17-20 per cent of the global market, and for the past few years has been producing just 10 to 11 aircraft a year," Koptev told reporters at the Gidroaviasalon-2004 international airshow. 
The renewal of the civilian air fleet is impossible without state support, he said. According to him, 199 air carriers operate on the Russian market, using 1,600 aircraft. To compare, Air France is four times smaller, but the number of passengers it airlifts is 2.5 times higher. 
"This situation cannot last for ever. No more than 30 per cent of our current air fleet will be in service by 2010, and not all of them will meet ICAO requirements allowing them to fly abroad," the official said. Citing forecasts of the Transport Ministry, Koptev said that 180 new planes must be commissioned before 2008. This requires investments totalling about US$3.5bn. The state support for aircraft building may amount to US$850-900m in the next four years, he said.

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BANKING

SocGen forms lending venture

Societe Generale, France's third largest bank, formed a joint venture with Baring Vostok Capital Partners, a Russian fund manager, to tap the country's market for consumer loans, Vedomosti reported recently. The venture, Rusfinance, with be 51% owned by Societe Generale's unit Bank Societe Generale Vostok, the newspaper said, citing Rusfinance's Director General Bertrand Gossart. The new company aims to extend US$20m in loans to Russian consumers by the end of the year, Gossart told the paper. Rusfinance will organise consumer loans in stores and through direct marketing and distance services, the paper reported.

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CREDIT RATINGS

S&P assigns BB and ruAA ratings to Norilsk Nickel

Standard & Poor's Ratings Services said recently it assigned its BB long-term corporate credit rating to Russia's largest mining and metals company, OJSC MMC Norilsk Nickel (Norilsk). The outlook is stable, the rating agency said in a statement.
According to Interfax, Norilsk Nickel could use a planned Eurobond issue to pay off an US$800m loan from Citigroup.
The news service said Norilsk Nickel plans to issue bonds and also attract Barclays Plc, BNP Paribas SA and HSBC Holdings Plc to organise a new loan. The money will be used to refinance a short-term US$800m unsecured loan from Citigroup, Bloomberg reported, citing a source in the bank.
The loan could be US$500m. The size of the bond issue will be determined at a later date, Interfax added. At the same time, Standard & Poor's assigned its ruAA Russian national scale rating to Norilsk. "The ratings reflect Norilsk's strong positions in the global markets of nickel, palladium, platinum, copper and gold; unique resource base; and strong financial profile," said Standard & Poor's credit analyst Elena Anankina.
"The key rating constraint for Norilsk is the risk of operating in Russia, where most of the company's cash-generating assets are based. The ratings and outlook factor in the general country risk, but do not assume any potential company-specific sovereign interference," she added.
In addition, the ratings are constrained by Norilsk's exposure to commodity price fluctuations, ambitious growth plans, and large capital expenditure plans. In the mid- to long-term, the ratings will be largely influenced by the evolution of Russia country risk.
The company has some borrowing and acquisition capacity under the current rating level, but Standard & Poor's will closely monitor the company's policy regarding any debt-financed acquisitions, dividends and capital expenditure, the rating agency said.

Fitch upgrades Rosbank ratings

Fitch Ratings upgraded Rosbank's long-term rating to B from B- (B minus) and changed its support rating to 4 from 5, the agency said in a press release, New Europe reported recently. Following the upgrade, the outlook for the long-term rating is now stable. Rosbank's individual rating of D and short-term rating of B have been affirmed. The upgrade in Rosbank's long-term rating and change in support rating reflect what Fitch views, as a result of the bank's expanding size and franchise, as an increased likelihood of support from the Russian authorities in case of need.

OMZ still on watch negative

Standard & Poor's Ratings Services has kept its CC+ long-term corporate credit ratings on Russian capital goods company OMZ (Uralmash-Izhora Group) (OMZ) on Credit Watch with negative implications, after obtaining new information on the company's liquidity position and business profile, the agency said recently in a statement, New Europe reported recently.
The CreditWatch implications were revised to negative from developing on August 2nd, 2004, after OMZ's announcement of the cancellation of its merger with the Russian power-generation equipment producer Power Machines (PM). The CreditWatch initially reflected the company's significantly impaired liquidity and Standard & Poor's concerns that OMZ's business and financial position could be damaged after the merger cancellation, the agency said.
"Since that time, Standard & Poor's has obtained new information concerning OMZ's current business position, new management structure, strategy, financial policies, and liquidity," said Standard & Poor's credit analyst Tatiana Kordyukova. "Our review will now be focused primarily on the company's liquidity situation, because OMZ's business profile seems consistent with the current rating level."
Despite some growth of liquidity sources available for OMZ, the company remains dependent on the willingness of banks to refinance the company's debt that matures at the end of 2004, and investors' confidence in the company's new debt instrument. "OMZ has confirmed that it has enough cash and committed bank lines to cover the upcoming put option of its Russian Rouble bond, even if it is fully executed on September 2nd, 2004," Kordyukova added.
"Repayment or refinancing of further maturities in 2004, however, will rely on the company's success in obtaining new debt financing and releasing cash from working capital and disposals." The CreditWatch is likely to be resolved once there is clarity about the company's ability to refinance these short-term maturities, S&P said.

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ENERGY

TNK/BP to create holding in Russia this year

TNK-BP plans to create a new holding company, registered in Russia, to serve as its main profit-centre by the end of this year, it was reported recently. TNK-BP is loosely calling the new company New Russian Holding, Vedomosti quoted Robert Dudley, the oil major's chief executive, as saying. TNK-BP will have to conduct further consultations with the Russian government and anti-monopoly agency, Dudley said, Interfax News Agency reported.
Initially, the Tyumen Oil Company (TNK), Sidanco and Onako will join the holding company, to be followed by the remaining companies. First the assets will be valued to see how the value of individual companies relates to the value of the holding company itself. Then, TNK-BP will offer minority shareholders an option to swap their shares for shares in the holding, Dudley said.
TNK-BP will make the offer by the end of this year or not later than the first quarter of 2005, he said. Four independent companies are valuing the assets. DeGolyer & MacNaughtion is auditing the reserves because this is the key aspect of the valuation, Dudley said. Deloitte will conduct an official valuation, PricewaterhouseCoopers will advise on tax issues and White & Case will be the legal consultant.
TNK-BP is setting up the new holding in order to simplify corporate structure by reducing the number of corporate bodies, consolidating the stakes of minority shareholders and boosting the transparency and effectiveness of corporate governance. Russia should welcome the appearance of a business entity with a simpler and more transparent structure, Dudley said.
The holding will be registered in Tyumen, Dudley said. He said TNK-BP's tax bills had soared this year. The only tax concession available to the company is for the Uvat fields, he said, adding that the company has no plans to use budgeted subventions in other regions or for other projects.
The Tyumen region has agreed to grant TNK-BP a subvention of 10 per cent or US$200m of the cost of the Uvat project, and a tax break of 4 per cent in accordance with the region's own laws.

Shell makes oil find in Russia

A Royal Dutch/Shell Group venture in Russia recently said an exploration well it drilled at the Upper Salym field in western Siberia found oil and should allow the company to boost its reserves at the site, New Europe reported recently. The well, drilled to 2,316m into the Bonus structure at the field, found an estimated 16m of oil-bearing sand, the venture said in a statement. Shell, Europe's second largest oil company, is counting on projects in Russia to help boost falling oil production and proven reserves. The venture, Salym Petroleum Development NV, is spending more than €1bn to develop the three Salym fields. "This should enable us to eventually increase the proven reserves for Upper Salym," Dale Rollins, the venture's chief executive officer, said in a statement. Shell, which is based in London and The Hague, owns 50% of the venture.

YUKOS sells gas asset to TNK-BP

YUKOS and TNK-BP have completed a deal that will give TNK-BP control over the gas producing company Rospan International, the Vremya Novostey newspaper reported on August 18th. Sources close to the deal said YUKOS had sold its 56% stake in Rospan to TNK-BP for €357m. Court bailiffs tried to prevent the deal. Recently, they issued an order to seize YUKOS' stake in Rospan. But Deutsche Bank refused to obey the order as YUKOS was not named as the owner of Rospan. After the Moscow Arbitration Court ruled that YUKOS shall pay 99.4bn roubles (about €3.4bn) in back taxes and fines for 2000, YUKOS' accounts and assets were seized. As a result, the company was unable to sell some of them and pay the tax demands. But it did not affect the deal with TNK-BP. The newspaper claims that official representatives of YUKOS, TNK-BP, Deutsche Bank and the justice ministry are silent on the issue. If the money goes to YUKOS' accounts, it will be automatically transferred to the state budget. Meanwhile, YUKOS itself insisted that court bailiffs take its stake in Sibneft as payment for tax claims. But bailiffs decided to sell the company Yuganskneftegaz, YUKOS' main production asset accounting for about 60% of the oil group's total output.

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FOOD & DRINK

InBev grows in Russia and China

InBev recently said it would continue to expand in Russia and China after strong growth in emerging markets helped boost its first-half net profit by 20 per cent, the Financial Times reported on September 10th.
The Belgian brewer, which has changed its name from Interbrew after gaining control of AmBev of Brazil, reported a net profit of €205m (US$250m) compared with €171m in the first half of 2003. Sales rose 7 per cent to €3.5bn. The earnings excluded AmBev since the €9.2bn transaction with the Brazilian group was only recently closed.
The deal created the world's largest brewer in volume terms. The merged company has earnings almost evenly divided between the mature markets of western Europe and North America and developing ones such as eastern Europe and Latin America.
John Brock, chief executive, indicated that InBev was ready to continue to make acquisitions in emerging markets even after the AmBev deal. The aim was to boost market share to 20 per cent in Russia and China, as well as Germany.
If a good opportunity arises, "you can assume that we will take a good hard look at it," he said. In Russia, "we're growing fast, we're doing well but honestly we would like to have more critical mass there."
InBev said beer volumes climbed 33 per cent in Russia on the back of strong demand for its flagship Stella Artois beer, sales of which rose 58 per cent. The company also benefited from new launches by its local venture, Sun Interbrew.
In China, volumes rose 16 per cent, boosted by recent acquisitions.
The company's strong growth in emerging markets contrasts with its performance in western Europe, where beer volumes fell 1.8 per cent in the first half. Like other brewers, InBev has suffered from weak consumer spending.

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FOREIGN ECONOMIC COOPERATION

Russia, Turkey to further energy cooperation 

Russian President, Vladimir Putin, has spoken in favour of developing and expanding trade and economic relations between Russia and Turkey, ITAR-TASS News Agency reported.
"We must diversify our relations. We have many directions for cooperation, energy is only one of these directions, although a very important one," Putin told Turkish media on the eve of his visit to Ankara. 
"We are ready to continue supplying fuel to Turkey, gas and maybe oil as well. We are ready to consider transit of fuel to other countries via Turkey," Putin said. "Several Russian companies are willing to take part in large-scale projects in Turkey in the electricity sector. We are also ready to increase machinery supply to the Turkish economy," Putin went on to say. 
"Russian companies are interested in taking part in the privatisations process in Turkey and this is quite feasible. We may also cooperate in the aviation and military spheres: we continue to compete for a major contract to supply helicopters to Turkey, etc. We have many areas for joining our efforts," he said.
"The latest examples of large-scale projects, such as the Blue Stream [natural gas pipeline], speak for the fact that we are capable of implementing the most grandiose, at first glance even inconceivable plans," Putin said.
"The results speak for themselves: if in 1992 trade between our two countries amounted to about US$1.3bn, by 2003 it went up to US$6.8bn, which is an almost six-fold increase. That's an incredible growth rate," he said.
In the first six months of 2004 trade grew by 60 per cent, this is a very good indicator which speaks of the fact that Russia and Turkey have fabulous cooperation prospects, Putin added.

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FOREIGN ECONOMIC RELATIONS

Lithuanian premier upbeat about economic cooperation with Russia

Relations between Lithuania and Russia will continue to develop actively even after Lithuania has joined the European Union and NATO, Lithuanian Prime Minister, Algirdas Brazauskas, said recently, ITAR-TASS News Agency reported.
He stressed that "cooperation between Vilnius and Moscow will continue to be based on good-neighbourliness, equality, mutual respect and bilateral benefit."
The prime minister said that, through joint efforts, the parties "managed to find a successful solution to the problem of Kaliningrad transit [via Lithuania], to define all legal aspects concerning the border and to sign the readmission agreement."
Brazauskas said that Russia was Lithuania's main foreign trade partner. He said that the turnover of goods between the two countries stood at US$2,872m in 2003 and that it would "be even greater" this year.
The Lithuanian prime minister said he believed that Lithuanian EU membership "opens wider opportunities of economic cooperation before Russia and Lithuania." He added that Russian companies, which had come to Lithuania with their capital, "are getting access to EU markets through it without any problems." Referring to [the Russian gas company] Gazprom, which bought a 34 per cent stake of the Lithuanian gas complex [Lietuvos Dujos, Lithuanian Gas], Brazauskas said that "by investing in the Lithuanian economy, Russia gets access for its goods to the internal market of the EU, which has more than 450 million consumers."
The Lithuanian prime minister said that over 1,000 Lithuanian-Russian joint ventures had been registered in Lithuania to date and that their number was constantly growing.

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FOREIGN INVESTMENT

Russia records 50% rise in H1 foreign investment

The overall volume of foreign investment in the Russian economy in the first 6 months of 2004 amounted to US$19bn, which is 49.9% more than in the same period of 2003, Interfax reported recently, citing figures published by the Federal State Statistics Service.
Albeit this robust growth may suggest Russia overcame the speculation on confidence crisis due to the YUKOS financial scandal problems, the main investors seemed to be Russians, not foreign companies. The greatest amount of investment came from Luxembourg, followed by Britain and Cyprus, according to AFP.
Capital from Luxembourg and Cyprus consists essentially of the repatriation of funds that were originally Russian, the news service noted. The volume of direct foreign investment amounted to US$3.427bn, which is 18% of the total. As compared to the same period last year the growth amounted to 35.3%. That included capital input of US$2.273bn (12% of overall investments), up 160%; US$867m in credits received from companies' foreign co-owners (4.5%), up 0.6%; and US$269m in other direct investments (1.4%), up 33.7%.
Portfolio investments increased more than 3-fold (3.4) to US$129m compared to the first half of 2003. All other investments amounted to US$15.427bn. Among them were trade credits for US$1.639bn and other kinds of credits for US$13.586bn. Germany remains the leading foreign investor, followed by the United States, Cyprus, Britain, France and the Netherlands. The share of these countries in the overall volume of accumulated foreign investments amounts to 68.6% and they have supplied 74.3% of the total amount of direct investments.
At the end of June, total foreign investment since 1994 came to US$66.1bn, an increase of 36.7% from the same period of 2003. Last year foreign of 2003. Last year foreign direct investment in Russia reached US$6.781bn and Prime Minister Mikhail Fradkov said in June he expected that figure to exceed 8bn this year.

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FREE TRADE ZONE

Ukrainian premier promises free trade with Russia in 2005

Ukraine's trade with Russia has increased by 35 per cent this year alone, while exports to Russia have gone up by 50 per cent, Ukrainian Prime Minister, Viktor Yanukovych, said during a visit to Zaporizhzhya Region. He also said that a free trade zone with the Russian Federation will be finally created in 2005, ITAR-TASS news agency reported. 
"Russia was the first to meet us halfway by cancelling VAT on fuel. This is a serious step which will allow us to improve price policy on many commodities," the Ukrainian prime minister said. He believes Ukraine will not only manage to maintain the present growth dynamics, but also even to improve on it. The prime minister promised the government would closely monitor foreign markets in order not only to maintain the levels of foreign trade but also to increase them with countries like Russia.

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MINERALS & METALS

Norlisk Nickel to increase Polyus charter capital

Gold extraction company, Polyus, which manages Artic smelting giant MMC Norlisk Nickel's gold assets, plans a US$500m additional stock issue that Norlisk Nickel will buy, Polyus board of directors chairman, Valery Rudakov, said, Interfax News Agency reported.
Commenting on the gold market, Rudakov said that gold prices "will be from US$375-400 per troy ounce" in the next few months, and will not fall below US$390 in the near future. Lenzolto has finished making its 2003 dividend payments, Polyus, reported. There was 1.154m roubles paid on the Lenzoloto preferred stock (6.9 per cent of net profit), at 3.32 kopecks per share.
The company's net profit for 2003 was 16.723m roubles. The company put 11.388m roubles into paying off losses from previous years and 4.181m roubles into its reserve fund (25 per cent of net profit). Lenzoloto paid 11 roubles per preferred share and 3.3 roubles per common share for 2002.
In another development Norlisk Nickel, considered the world's top nickel miner, ordered a 14,500 tonne Artic container ship from a unit of Norway's Kvaerner recently as the company starts to replace existing cargo ships built in the 1980s, according to Bloomberg financial news agency.
The contract price of an Artic container ship is about 70m Euro (US$84.7m), Moscow-based Norlisk said in a statement.
The ship will be built by Kvaerner Masa-Yards Inc, in Helsinki and should be ready in 2006, the company said. "The new ship will be the first in a possible series of several vessels that will replace the CA-15 cargo ships that were built in Finland at Vartsila and Valmet in the 1980s and have worked successfully on the northern route for the past 20 years," Norlisk said.

IFC, EBRD offer US$150m credit deal to SUAL

The Siberian-Ural Aluminium (SUAL) group, one of the world's top 10 aluminium producers, has signed a credit agreement worth US$150m with the International Finance Corporation (IFC), member of the World Bank Group and the European Bank for Reconstruction and Development (EBRD), Interfax reported recently.
The credit will be used for increasing (in the course of four years) the annual extraction of bauxites at the Sredne-Timan deposit from 1m tonnes to 6m tonnes and also for supporting the first phase of the SUAL's "Komi Aluminium" project, that is the construction of an integrated alumina complex in the north of the Komi Republic, an autonomous republic in the north of the European part of the Russian Federation, according to Ria Novosti, citing a company's press release.
The IFC and EBRD will each provide US$45m for 10 years in equal proportions. The other US$60m will come in the form of a 7-year syndicated foreign bank credit at Libor+3.25%. "This is the 'longest' credit ever extended by credit organisations to finance projects in the Russian metallurgical and raw materials sector," the SUAL statement said.
SUAL Holding's board of directors Chairman Viktor Vekselberg said, "the scale and terms of this loan set a new benchmark for Russia, demonstrating the confidence of world credit institutions in the Russian metallurgy sector and economy in general." A total of US$100m will be used for expanding the extraction of bauxites, the rest 50m - for financing the work on the construction of an alumina plant in Sosnogorsk, and also for assessing the possibilities of building a plant for producing primary aluminium in Pechora, according to Ria Novosti.
"In fulfilling certain conditions, the IFC and the EBRD are ready to consider the possibility of taking part in these stages of the project," said the joint statement.

Alrosa to put Lomonosov field on stream in 2005

Alrosa, Russia's Yakutia-based diamond monopoly, intends to put the Lomonosov diamond field in the Arkhangelsk region commercially on stream in the first quarter of 2005, said Vladimir Kalitin, the company's president, cited by Interfax recently. "Work at the field is going according to schedule. The question is the construction of the ore mill," Kalitin said at a meeting with officials from the Arkhangelsk region. He said equipment for the mill was being manufactured in a number of countries including Finland, Sweden, the United States and South Africa.
The equipment will be ready and installed according to the approved schedule, Kalitin said. "The ore mill will be assembled in the first quarter and diamond production in the Arkhangelsk region will begin," Kalitin said. Then, it will be possible to obtain an accurate assessment of the diamond content of the ore, its value and other parameters of the mining operation. "The ore is already in the open pit, it needs to be processed," he said. The Arkhangelsk regional administration has said more than 600 people are working at the site. It said 402 of them are specialists of Alrosa's subsidiary Severalmaz, which will mine the field.

MMK steel mill pays €10m in bonds

Magnitogorsk Metallurgical Combine (MMK), Russia's biggest steel mill, recently paid €10m on the first coupon of a Eurobond issue at 10% annually, Interfax reported, citing MMK's public relations department. MMK paid the coupon via the Frankfurt division of Deutsche Bank, which is the payments agent. MMK Finance SA, a vehicle set up by the steel company in Luxembourg, placed €100m in three-year bonds in February 2002. The bonds carry three annual coupons at 10%, the news service noted. Rosbank and MMK's Settlement and Stock Centre acted as financial advisors to the issue. Moody's has rated the bonds Ba3, S&P has assigned B outlook stable and the national-scale rating is RuA+.

Norilsk Nickel can sell more nickel

Norilsk Nickel could slash nickel sales 18% this year to 252,000tn, but still 1,000-2,000tn more than planned, said Viktor Sprogis, the Arctic mining and smelting giant's deputy director general, quoted by Interfax recently. "This year could see a slight upward change for nickel (compared with planned sales)," Sprogis said, adding that the copper sales target remained unchanged. Norilsk Nickel earlier said it intended to reduce nickel sales to 250,000tn in 2004 from 307,000tn in 2003. It said 240,000tn would be exported and 10,000tn sold to domestic market consumers. The company said it would keep copper sales flat at 467,000tn. Norilsk Nickel is the world's biggest producer of nickel and platinum-group metals.

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NUCLEAR ENERGY

Russian nuclear power plant starts using new fuel

Fuel of a new type has been uploaded to the Unit No 5 of the Novovoronezh nuclear power plant, where planned maintenance works are under way. The so-called uranium gadolinium fuel has been used at the plant for the first time ever, the unit's head, Viktor Boldyrev, said, ITAR-TASS News Agency reported.
Gadolinium crystals have been embedded in the uranium instead of special absorber rods, which are usually used to control the heat release, Boldyrev said. The new material allows achievement of a more balanced distribution of energy in the core. As a result, the usage of gadolinium allows extension of its non-stop run from 270 to 300 days.
"On the whole, the ultimate task for the unit's personnel during maintenance works was to work to increase its safety," Boldyrev said. A new fuel control system and new filter elements for emergency systems have been installed. All these measures are aimed at increasing the unit's planned service life, which ends in 2010. Similar kind of work was conducted at units No 3 and 4, which will extend their service life by 15 years.
At present two of the power plant's units are operational. The radiation situation at the plant and the surrounding area is not higher than the background radiation.

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TELECOMMUNICATIONS

Alfa Group, Tele2, Alcatel may bid for 3rd GSM licence

Russian holding Alfa Group, Sweden's Tele2 and France's Alcatel may bid in the tender for Belarus' third GSM licence, Interfax News Agency reported recently.
"These companies have purchased the documentation for the tender, but this does not necessarily mean they will submit bids. As a rule, participant bids are made at maximum one day before the tender commission's bid-acceptance period expires," a ministry source said. An unnamed Western European company has also bought the documentation, the source said, and another two companies have submitted applications to do so. Their names were not given, either. The ministry announced the open international tender for the GSM-900/1800 licence in June 2004. The licence will be for 5 years with a possible five-year extension

VTB to finance telecoms projects with Chinese credit lines

Vneshtorgbank (VTB) will disburse tens of millions of dollars to Russian telecoms companies in the next few months with credit facilities opened by Chinese banks, Boris Abramov, VTB's representative in Beijing, said recently, Interfax News Agency reported.
VTB has already financed the purchase of US$16m worth of equipment for Megafon, Russia's second biggest cellular provider, from Chinese manufacturers, Abramov said.
VTB received the funds from Industrial and Commercial Bank of China in 2002. The credit facility could be worth up to US$200m over a period of 10 years. "Credits worth tens of millions of dollars for telecoms are in the pipeline. I can't be certain, but I think these will be delivered during the half, that is by the end of the year," Abramov said. VTB has signed framework credit agreements worth a total of US$700m with Industrial and Commercial Bank, China Construction Bank, Bank of China and Ex-Im Bank of China. The credits, which are intended to finance import contracts by VTB clients, are not covered by sovereign guarantees.

Transtelecom to boost network

TransTeleCom, the operator of the Russian Railways Company's (RZD) telecommunications network, will invest around US$100m to increase the throughput capacity of the Russian section of the Eurasian information corridor, Interfax reported recently, citing an RZD statement. The Eurasian information corridor is a transcontinental fibre optic network linking Europe, Russia, Mongolia and China (ERMC), the news service noted.

Alfa Telecom gets 25% plus 1 share in Vimpelcom

Investment holding Alfa Telecom, a member of the Alfa Group, acquired a 25% plus one share stake in Russia's second largest mobile operator Vimpelcom from another group member Eco Holdings in a US$1.43bn deal, Vimpelcom said recently in a statement. The deal was sealed on August 19th and foresees Alfa Telecom acquiring the rights to the Eco Telecom company, which owns the Vimpelcom shares. Alfa Telecom is to pay US$988.4m in cash and waive a US$441.6m Eco Holdings debt to Alfa Telecom, Prime Tass news service said. Alfa Telecom is registered in the British Virgin Islands, whereas its majority shareholder CTF Holdings is registered in Gibraltar. CTF Holdings is fully owned by Liechtenstein's Crown Finance. As of August 24th, Vimpelcom provided services under the BeeLine brand name in 70 of Russia's 89 regions. The company's subscriber base stood at 17.3m users as of July 31st, as calculated by ASM consulting. The company's 2003 net profit rose 80.6% on the year to US$233.962m under US GAAP.

Russian fixed-line shakeout looms

Russia's largest private telecommunications groups, having cornered the wireless market, are battling for position in the fixed-line areca as market liberalisation approaches.
Golden Telecom and Comstar Unified TeleSystems, backed by financial holding companies Alfa Group and AFK Sistema, respectively, are among the most active fixed-line acquires. Golden Telecom recently bought operators in the Don region, while Comstar is completing the three-way merger that created it. OAO Telecominvest, in which Nordic operator TeliaSonera AB has a 26.1% stake, is expected to be a major challenger when the scramble for assets intensifies with the privatisation of telecom holding company OAO Svyazinvest, which is 75% state-owned.
Alfa, Sistema and Telecominvest, which own OAO Mobile TeleSystems, known as MTS, OAO VimpelCom and OAO MegaFon have already taken control of the wireless market: MTS has a 37% share, VimpleCom 33%, and MegaFon 19%.
Sales in the mobile business in Russia grew 80% last year; the fixed-line business is growing at half that pace. But Alfa, Sistema and Telecominvest aim to exploit growth in Russia's US$15bn-a-year (€12bn) telecom market across the board, rather than focusing on one segment.
By bulking up now, companies such as Goldne and Constar will be ready for liberalisation in 2007 or 2008, when Svyazinvest's OAO Rostelecom unit will lose its monopoly in key areas. Currently, Svyazinvest has a stranglehold on the last-mile connection to homes, and Rostelecom a monopoly on long-distance and international calls.
"If liberalisation is on our doorstep, we should really make an effort to prepare ourselves - there isn't that much time left," said Viktor Ratnikov, first vice president at Transtelecom, a network operator owned by OAO Russian Railways.
Only 27% of Russians own a fixed-line phone, compared with a 90% penetration rate in Germany. Russia has about 50,000 towns without a single fixed-line phone and an official queue of four-million people waiting to have one installed.
While many consumers will opt for just a mobile phone, demand for corporate networks and Internet services is expected to help raise total fixed-line revenue 18% to US$7.7bn in 2004 from US$6.5bn in 2003, market research agency iKS-Consulting said.
Tatiana Tolmacheva, chief consultant at iKS-Consulting in Moscow, expects growth to be boosted by the introduction of Internet-based services such as text messaging on a fixed-line phone. "The fixed-line market is far from reaching its potential, it will get a real boost as a result of the Svyazinvest privatisation," Ms Tolmacheva said.
"In the current situation it's impossible to achieve market leadership by means of organic growth only," said Comstar Chief Executive, Semyon Rabovsky. Constar, a product of the merger of ZAO Constar, ZAO Telmos and ZAO MTU-Inform, is one of the strongest players in Moscow, which accounts for about one-third of Russia's telecom market.
The privatisation of Svyazinvest, which owns seven regional operators, as well as Rostelecom and a stake in MGTS, could offer private telecom companies the best chance to bolster their position.
Domestic players are unlikely to have the field to themselves. Deutsche Telekom AG, which is expanding in Eastern Europe through its Hungarian unit, Matav RT, France Telcom SA, which already has operations in Russia through its Equant NV unit, and TeliaSonera have all expressed interest in expanding in Russia once telecom liberalisation goes ahead.

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TRANSPORT

New railway section connects republic in Far East with rest of Russia

A new section of railway between Tammot and Berkakit has been opened in the Republic of Sakha-Yakutia. It has connected Yakutia with the rest of Russia, with the help of the Baykal-Amur Railway [Russian acronym BAM] and the Transsiberian Railway, Radio Russia reported.
It has become possible for citizens of the republic to reach Moscow and other cities of Russia and abroad by train. 
Presidential envoy to the Far Eastern Federal District, Konstantin Pulikovskiy, has described this as the most significant event of 2004 in Russia's Far East.

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