Books on Russia
Update No: 289 - (27/01/05)
Putin - the public menace
Russia's president, Vladimir Putin, is earning himself the invidious reputation
of being a public menace in 'the near-abroad' of the former USSR and in the
Middle East; but also even more tellingly at home. As we shall see, he has been
messing around in Middle Eastern affairs. His machinations nearer home failed to
prevent the challenger, Viktor Yushchenko, from winning the presidency of
Ukraine, a victory still contested by the government candidate, Viktor
Yakunovich, but increasingly obviously to no avail! This is a very major setback
for the master of the Kremlin.
The question on everybody's lips is: - "Could the same happen in
Russia?" The answer is not yet, but some day quite possibly!
Putin has suddenly begun to look vulnerable and his sky-high popularity is
slipping away. Closeted alone with his former KGB cronies in the Kremlin, he is
losing his popular touch and chose the new year of all times to douse people's
hopes of the twelve months ahead, eroding their pensions and pensioner rights,
such as free medicines and travel on public transport. He may think the old folk
don't matter and will be dying off soon. But he may be making a major
miscalculation. The young do not like to see their parents in distress, which
they are then obliged to alleviate. And, after all, they know that they will be
old too one day.
Russia has begun 2005 with some unpleasant moments. Pensioners have taken to the
streets in numbers in spontaneous protests in the "northern capital",
St. Petersburg, the central Russian cities of Vladimir and Samara, and in
Solnechnogorsk and Khimki outside Moscow. They were always suspicious of the
reform of the pension scheme - replacing benefits in-kind with cash - when
pensioners were promised increased pensions in place of their withdrawn
privileges such as free travel on city transport.
Elderly Russians kept up protests across the country on January 15th against a
recently passed law that strips them of Soviet-era benefits, pushing regional
authorities to keep some of the benefits in place and prompting legislators to
promise an increase in pensions. More than 400 retirees gathered in the centre
of St. Petersburg, Russia's second-largest city, protesting the substitution of
their long-time benefits - such free rides in public transport and free or
subsidized medicine - for cash payments.
Similar rallies took place in other Russian cities, some numbering up to 1,500
participants. Protesters complained that the cash payments are far smaller than
the benefits they are intended to substitute and that several regions have been
unable to provide them on time. They also lamented that pharmacies were short of
As protests continued throughout the second week of January, some reportedly
turned violent, with pensioners beating fare collectors. City authorities in the
city of Tula, about 200 kilometres south of Moscow, had to send policemen to
accompany fare collectors on buses, after many of them were injured by angry
retirees, the newspaper Izvestia reported on January 15th. "I was beaten up
by a passenger at 10 p.m. on the (bus) No. 8, who refused to pay for the ride
and showed me an ID of a war veteran," a Tula fare collector wrote in a
memo, according to Izvestia.
The reform was conceived to improve the lives of senior citizens, and everything
looked good on paper. But elderly Russians, with their great experience, after
listening to television speakers about the gains they were to enjoy from the
reform, and waiting for the promises to come into effect, totted up their
roubles and kopecks, and took to the streets.
Many had predicted these developments. In particular, Morgan Stanley's analyst
Byron Wien hit the mark when he drew up his "Ten Surprises of the New
Year" for 2005, forecasting all kinds of disasters for Russia, up to and
including a "second Russian revolution." Mr. Wien's list, admittedly,
deals with surprises, i.e. extreme, rather than normal, scenarios. But it is
understandable that pensioners in Russia today are very unhappy.
Meanwhile, faced with growing protests, more and more regional officials were
keeping some of the benefits - mostly free transportation - in place, at least
temporarily. Other officials, however, responded by prosecuting pensioners.
Several dozen elderly protesters have been charged with administrative
violations, police say.
In Moscow, members of the State Duma, parliament's lower house, sought to ease
tensions by promising to consider immediately a bill on raising pensions. Andrei
Isayev, head of the Duma committee on labour and social policy, said the bill
envisages raising pensions by 15 per cent instead of the planned five per cent,
and enacting the change by February 1st instead of April 1st, as had been
planned. Legislators will also consider increasing cash payments to account for
inflation starting August 1st.
Walking Without Putin?
The unpopular Kremlin-sponsored reform has taken a toll on the popularity of
President Vladimir Putin's cabinet and his own approval rating, pollsters said.
On January 15th, Deputy Duma Speaker Lyubov Sliska said she didn't rule out the
possibility of Putin firing his government, the Interfax news agency reported.
"And there would be cause," Russian agencies quoted her as saying.
The new law was cited on the same day by the head of an anti-Putin youth group
as among the reasons for founding the organization. The group, established in
January in Putin's hometown of St. Petersburg, calls itself Walking Without
Putin, a taunting echo of the nationwide pro-Putin youth group, Walking
Together. "We think the real traitors are those who have exposed Russia to
thieving reforms and have limited freedom," said Mikhail Obozov, a group
He said its approximately 100 members also object to Russia's war in Chechnya;
they say that they fear there are plans to cancel student draft deferments.
Economic reforms or regression?
Putin's motivations in introducing economic 'reforms' has a rationale all
the same. he is well aware that the economy, although growing rapidly, is
lop-sided and is only performing because of the buoyant energy sector. He knows
full well that the collapse of oil prices in 1985 led straight to the collapse
of the Soviet Union itself six years later.
The USSR was far too dependent on high-energy export revenues, which were then
squandered on costly Third World aid schemes and grandiose projects at home. The
economy certainly needs to be reformed and diversified.
It is common knowledge that President Putin's market reforms go much deeper than
anything done by his forerunners since 1992. And in macroeconomic terms the
"monetisation of benefits" is both logical and natural. The in-kind
and subsidized system, which still prevails in pensions and housing rent, for
example, is a weight on the country's entire economy. But from the
administrative perspective, this measure - remembering Russian realities - could
not have worked without any problems.
It can, of course, be said that pensioners, with their biologically checked
response to new realities, are always wrong. This can be seen in any Sberbank
office when changes are announced not only to household charges, but also even
to the forms that have to be filled in. Long lines of senior citizens, many with
sight and hearing problems, have to be told on an individual basis about the
changes and how much they must now pay.
However, it makes far more sense to consider that the pensioner is always right.
At least in Russia, where the "market" reforms of the early 1990s
deprived the older generation of all their savings, and where inflation and the
collapse of the pension system impoverished millions of elderly people. They had
to make do with US$20 to US$30 a month amidst three-digit galloping inflation.
Given this background, they have the moral right to suspect an ineffective
bureaucracy of every possible sin.
Importantly, these suspicions were well founded, as the enforcers of the laws
that looked perfect on paper have messed things up again. And they have done so
to such an extent that the pensioners' revolt was the first item taken up by the
State Duma (lower house of Russian parliament) after it resumed work after its
long New Year's recess. A plenary meeting on considered an address to the
government and the prosecutor-general concerning the non-implementation of the
law on benefit payments.
Parliamentarians largely spent their holidays in their constituencies and
brought many incidents they had witnessed to the capital. House speaker Boris
Gryzlov and the chairman of the labour and social policy committee, Andrei
Isayev, had very many interesting things to tell their colleagues. For example,
if regional budgets lack the funds for benefit payments, in-kind benefits may be
continued. But, according to Mr. Gryzlov, the regional authorities have failed
to seize this opportunity. Besides, the law prescribes that the volume of
benefit financing may not be reduced, nor the number of claimant categories,
because the point is that benefits must come in the form of cash. But the local
authorities, to all appearances, have decided to economize on the pensioners.
And that is not all. Even under liberal reforms, old people had certain rights
to receive some prescribed medicines free. No one planned to deprive them of
that privilege - but officials in the Ministry of Public Health and Social
Development had no time in the holiday rush or were unable to explain to all
pharmacies how the system would work now.
Last but not least, free travel. The Duma was told that for a mayor of a
protest-ridden town of Vladimir had cancelled free travel for pensioners,
compensating only those whose pensions were below 1,600 roubles a month, that is
just over US$50. As for the rebellious Moscow region, free travel is the issue
here, too. Elderly people living outside the capital go to Moscow in their tens
of thousands to earn something on the side or offer their wares at Moscow
markets, and without free travel their earnings, which are not nearly large
enough, have been all but halved.
'Putinomics' to the fore
Putin has blasted his government's inability to diversify Russia's economy
away from heavily reliance on the export of energy resources. Two of Russia's
leading liberal economists have spoken out as well, publicly stating where
current economic policy is leading.
In theory, Putin and the economists are correct. In practice, the Kremlin has
done everything in its power to ignore the diversification of the economy for
the better part of two years. What explains this? It is called "Putinomics."
Meeting with Internet technology experts and scientists in the city of
Novosibirsk late on January 12th, Putin said the government has failed to
diversify the economy and reduce Russia's dependence on natural resource
exports. He added: "We know that one of our main tasks is the
diversification of the economy. That it is essential to depart from a model
based on raw materials is obvious."
Unfortunately, Putin's comments in Novosibirsk and the Kremlin's extraordinary
interest in capturing Russia's energy export sectors for the state is anything
but obvious. Putin used almost exactly the same words about the need to
diversify Russia's economy in his state of nation address in 2000. However,
since then, particularly during the last two years, the Kremlin appears to have
largely abandoned any meaningful intention of economic diversification.
Putin's comment on Russia's economy is no coincidence. It was a clear response
to the events surrounding the recent forced break-up, auction and state
acquisition of what was Yukos' largest production unit, Yuganskneftegaz, as well
as the strong criticism levelled against the Kremlin by two of Putin's closest
economic advisers -- Andrei Illarionov and German Gref.
State acquisition of Yuganskneftegaz, and its future integration into other
state energy assets, will create a mega-energy entity unrivalled in the world.
This same energy entity will also dominate Russia's economy. Both Illarionov and
Gref, in sharp contradiction to the Kremlin's plans, have warned that
overwhelming state involvement in the energy sectors is an excuse to ignore
badly needed structural reform, continues Russia's over reliance on energy
sectors and slows economic diversification.
How can Putin speak of economic diversification away from the energy sectors
while at the same time pursue the creation of a state control entity that will
dwarf the rest of the economy? At face value, it would seem this is an obvious
contradiction. The answer to this question is how Putin understands the
interface of where economics and politics meet -- or what could be called "Putinomics."
"Putinomics" is a momentary hybrid of political imperatives and
economic rationality. In principle, Putin is an economic liberal and he clearly
understands Russia cannot afford to depend on energy exports to prop up the
state's budget forever. His understanding of economic liberalism and economic
diversification was made abundantly clear when announcing during his meeting in
Novosibirsk that special economic zones will be established in some of Russia's
regions to promote economic diversification and growth.
Putin said, "We came to the conclusion that we will establish such zones in
Russia." These zones will have a "favourable administrative regime,
and advantageous tax regime and a liberal customs regime."
How does creating an energy mega-giant fit into "Putinomics" when
calling for further economic diversification? Putin and the Kremlin do not see
the energy sectors as being purely economic issues. The Kremlin's control of the
energy sectors is more of a political nature and thus is an imperative beyond
strict economic rationality. While many Western commentators declare the
Kremlin's intense interest in the energy sectors as a new form of
re-nationalization of former state assets or outright theft for personal gain,
few can argue with the proposition that the politics of energy is an important
Kremlin foreign policy tool impacting national security as well as a means to
contribute to state coffers.
Is "Putinomics" by its very nature dysfunctional? In the longer term
the answer is yes. Putin has spent valuable time and expended important
resources to recast Russia's energy sectors at the expense of the rest of the
If the state's control of Russia's energy resources is efficiently utilized and
moving forward, the Kremlin will have the opportunity to focus its attention
elsewhere. On the other hand, if the Kremlin rests on its laurels in the wake of
its gains in the energy sectors, the medium and long-term prospects for Russia's
economy is bleak.
And if Putin is serious about economic diversification, sweeping administrative
reform should be at the top of the Kremlin's agenda. Setting up special economic
zones in principle is a fine idea. The most successful precedents of special
economic zones are Hong Kong and Luxembourg. Both have been successful because
each has a highly efficient administration. State administration in Russia is
anything but efficient.
The ultimate goal of "Putinomics" should be to make itself redundant.
It should be expected that the political imperative of "Putinomics"
will continued to be used, though to a lesser degree, against selected
oligarchs. Economic rationality focused on broader administrative reform coupled
with sound economic policy would likely see the economy diversify. The sooner
Putin deals with the former, the better chance the latter can be made a reality.
If Putin succeeds in both areas, "Putinomics" will be seen as a
momentary political-economic model of success. If he fails, "Putinomics"
will be remembered for how Russia's economy never truly achieved its enormous
Yukos under the hammer
In late December, a 77% stake in Yuganskneftegaz, Yukos's core production
unit, went under the hammer. As expected, a Houston bankruptcy court injunction
blocking the asset's sale did not influence the auction as American courts, just
like their Angolan or Paraguayan counterparts, have no jurisdiction on foreign
territory. In this sense, nothing unexpected happened.
However, the big surprise was the Yuganskneftegaz buyer: Baikal Finance Group.
It took the completely unknown Russian company four minutes to win the battle
against the gas giant Gazprom. In reality, there was no battle at all. From the
beginning Baikal's bid was 260,753,447,303.18 roubles, five points above the
starting price (about US$8.5 billion). Gazpromneft beat a quiet retreat.
It is hardly surprising that the main question on the front pages of Russian
newspapers concerned the origin of the mysterious buyer. Even Yuri Petrov,
acting chairman of the Russian Federal Property Fund, which organized the
auction, admitted he did not know whose interests Baikal Finance Group
represented. At present, analysts are split about who is behind the buyer: most
of them believe that its roots are still in Gazprom or affiliated structures.
Others believe that the dark horse may belong to Surgutneftegaz, Millhouse
Capital, which is the key shareholder of Sibneft, or even a Chinese company.
The political and economic communities have also opened a lively discussion
about the event. Igor Yurgens, vice president of the Russian Union of
Industrialists and Entrepreneurs, has described the outcome as
"scandalous". "No businessmen I know have ever heard of any
Baikal Finance Group," he says.
"Transactions of such importance, influencing a country's economic
integrity, receive detailed coverage in the West, but here everything is left to
guessing," believes Mikhail Odintsov, chairman of the Federation Council
committee for natural monopolies. "No analyst can now predict the
Obviously, Yukos's management is cursing the buyers. Whoever he is, Group
Menatep intends to pursue him all over the world, contesting the auction's
results in Western courts and arresting all of the company's oil exports. This,
however, can only be applied to foreign assets. Bruce Marx, a partner with the
Marx and Sokolov law firm, says Menatep will not be able to prove its claims in
Russian courts. Indeed, the auction strictly complied with Russian legislation.
If we look at the auction a little closer we may find features similar to the
so-called loans-for-share auctions popular in 1995-1996. Evidently, the price
paid for the stake in Yuganskneftegaz is not appropriate either. It is known
that Deutsche Bank recently valuated its assets at about US$18 billion. However,
the starting price of the auction was two times lower. Only two bidders finally
took part in the auction, although there had been four at the beginning. The two
others suddenly disappeared. The situation is reminiscent of past practices when
the state organized auctions pursuing only one goal, to give assets to those it
wanted rather than to the strongest player. We witnessed a similar case a few
years ago, when Slavneft was bought by the now world famous owner of Chelsea
Football Club, but then publicly inconspicuous businessman Roman Abramovich,
although a rival Chinese company offered two times as much.
This time fate played a joke on Yukos's owner, Mikhail Khodorkovsky. He bought
Yukos cheap, using state funds and the rules of the loans-for-share auction. The
conditions were approximately the same. Former Economic Minister Yevgeny Yasin
recalls that that auction was also won by an unknown company, "a firm,
Laguna, created three days prior to the auction and registered in Taldom, the
Moreover, Yukos's management stubborn search for truth in international courts
may lead to the opposite of the desired result. Meticulous Western justice will
have to denounce the auction won by the unknown Laguna as well.
A question arises: will the scandalous dismemberment of Yukos affect Russia?
Many describe this company as milk cow sent for slaughter. Vasily Solodkov,
director of the Banking Institute at the Higher School of Economics, says that
the undesirable lack of transparency in the deal may tarnish the country's image
and diminish its investment attractiveness.
However, Russia will suffer more than purely economic damage. Quite the
opposite. The state does not care who manages industry that received its last
investment in the 1980s. Even Yuganskneftegaz requires huge financial
injections. Its infrastructure, including pipelines, has been in a state of some
disrepair for some time, while its refineries are also in a poor state. No one
has explored new fields for many years. Russia has been living on reserves
discovered in Soviet times. They will soon be depleted, but what comes next? The
former owners did not invest in the industry's development. Hence the result.
TNK-BP to the rescue?
Russia needs foreign investment, as everyone knows, even the former KGB
thugs at Putin's elbow. TNK- BP, the Russian oil company, is a showcase of what
s rquired. It showed stockholders on January 14th its long-awaited plan to begin
welding its more than a dozen subsidiaries into one over-arching company. The
plan set TNK-BP's value at no less than US$18.5 billion.
Shareholders in TNK-BP, the British-Russian joint venture that is powering BP's
growth, have been anxiously awaiting details of the restructuring. They will
have a choice of swapping their shares for new stock in the umbrella company, or
being bought out.
"We're offering shareholders a fair deal, something they don't get very
often in Russia," TNK-BP's chief financial officer, Kent C. Potter, said at
a news conference.
TNK-BP's structure - a collection of more than 17 subsidiaries and about 600
legal entities like trading companies - was a legacy of Russia's 1990's
privatisations. The company was founded by the Russian billionaires Mikhail
Fridman and Viktor Vekselberg and the Russian émigré Len Blavatnik. They
bought up oil wells and operations around Russia to create the country's
third-largest oil producer. In 2003, BP purchased half of TNK in a deal blessed
by both Prime Minister Tony Blair of Britain and President Vladimir Putin of
Amid increasing Kremlin scrutiny of the energy sector and huge tax claims
against the troubled oil company Yukos, TNK-BP has also legally incorporated in
Russia, in the region of Tyumen, near the Kazakh border. TNK-BP was registered
in Cyprus and the British Virgin Islands, a sore point for Russia's government,
which wants more control over collecting taxes from oil and gas companies.
TNK-BP expects production to grow 7 per cent this year, Robert Dudley, its chief
executive, said at the news conference. TNK-BP's output grew 15.6 per cent in
2004, to 1.4 million barrels a day, making it one of the fastest-growing energy
companies in Russia last year. TNK-BP has also helped BP's fortunes, pumping
roughly a third of the British giant's oil.
The reorganization will be carried out in two stages. In the first, minority
shareholders in the company's top three subsidiaries - TNK, Sidanco and Onaco -
can swap for stock in the new TNK-BP Holding, or be bought out. TNK-BP controls
90 per cent of the shares in the three units. Shareholders of those three
subsidiaries, which produce at least 60 per cent of TNK-BP's oil, will vote on
the plan at meetings on March 1st.
The company offered a buyback price of 92.50 roubles (US$3.31) for each TNK
share, 66.50 roubles (US$2.38) for each Onaco share and 815.90 roubles
(US$29.20) for each Sidanco share.
TNK-BP also proposed swaps for 14 smaller subsidiaries scheduled to be
consolidated this year in a second phase. The restructuring does not include
some valuable assets like Slavneft, which is jointly owned with its Russian oil
rival Sibneft; some gas stations; and some operations in Ukraine. Mr. Dudley
said that going forward without them was necessary to keep the restructuring on
schedule. "It would have delayed us from moving forward" with the swap
terms, Mr. Dudley said. He did not rule out that they could be added at some
point, and he also said he expected the company to list on a Russian exchange.
Still, Deloitte & Touche, hired to do an independent valuation, said the
entire new holding company was worth US$18.5 billion, and industry analysts and
investors roughly agreed with that estimate. "The consolidation terms are
very fair," said Steven Dashevsky, an analyst at Aton Capital. Based on a
dollar value for each barrel of reserves, the company is offering the top of the
range for Russian oil companies, he said. Deloitte & Touche's equity
valuation for TNK-BP, he said, "is roughly in line with our US$20 billion
to US$25 billion estimated market value, which assumes TNK-BP becomes a normal
publicly traded company."
Ian Hague, co-founder of Firebird Management, a hedge fund in New York, owns
shares in the TNK-BP units and said the deal was appealing. "TNK-BP will
now assume the mantle of Yukos - a Western-style Russian operating company, and
after the whole Yukos affair, that's extremely valuable," he said.
New Russian missile could threaten most of Israel
Putin has had the tactlessness at the same time as the Yukos scandal came to
its denouement to isolate himself from the West, or rather from the US and
Israel, on another even graver issue - by meddling in Middle Eastern affairs. A
crisis in Israeli-Russia relations has blown up, first linked to charges of
Israeli interference in the controversial Ukrainian elections, but also to the
Kremlin's plans to sell Syria missiles capable of striking nearly any target
After Ha'aretz first reported a sudden rift between Jerusalem and Moscow in
early January, Israel TV Channel 2 claimed January 12th that Russian President
Vladimir Putin was annoyed with the Israeli government for allowing certain
local Jewish figures to finance the successful campaign of the pro-Westerner
Yuschenko for president of the Ukraine.
But the Moscow Daily Kommersant reported on January 13th that the falling-out
centres on a Russian sale of advanced missiles to Syria that could evade Israeli
missile defences (including the Arrow) and threaten nearly the entire country.
Israeli officials confirmed the report later the same day.
Senior Israeli leaders have briefed Washington on the crisis without asking for
intervention and hoped to come up with a strategy to block the sale before
Syrian dictator Bashar Assad visits Moscow on January 24, where it was to be
clinched. Latest reports indicate that Russia's Deputy Foreign Minister
Alexander Saltanov arrived in Israel for urgent discussions with government
officials to resolve the behind-the-scenes crisis.
Russia hopes for early delivery of three Il-76DRLDN aircraft to India
Russia will launch full-scale implementation of the contract for the supply of
three Il-76RDLDN AWACS planes to India in early 2005, Viktor Livanov, director
general of the Ilyushin aircraft corporation, said, Interfax-AVN Military News
Agency web site reported.
"The Tashkent aircraft plant will make three new IL-76 airframes and supply
them to Russia for replacing their engines with new PS-90A-76 ones. The
replacement will be performed by the Ilyushin aircraft corporation at the
Voronezh aircraft plant. The planes will subsequently be delivered to Taganrog
for installing additional equipment and then to Israel for installing the
radio-technical system," Livanov told Interfax-Military News Agency.
He recalled that the Russian contractors are the Taganrog-based Beriyev aircraft
research and technical corporation, which is organic of the Irkut corporation,
the Ilyushin aircraft corporation, and the Vega research and production
Russia making components for Ukrainian military transport planes
Omsk's Polet factory began to assemble the middle section of the fuselage of the
Russian-Ukrainian AN-70 military transport aircraft recently, ITAR-TASS News
The company won a tender to make the aircraft for Russia two years ago. In
Ukraine, the Aviant factory in Kiev has already begun to make its first two
Polet told ITAR-TASS that the assembled part of the fuselage is intended for
Ukraine, which has earmarked US$25m for this purpose.
Two transport aircraft are planned to be assembled in Ukraine in 2005. Voronezh
and Novosibirsk enterprises may be involved in this cooperative effort. Nikolay
Kalyagin, Polet deputy head engineer for aviation, said the first middle section
of the fuselage will go to Kiev in the second quarter of 2005; the second in the
fourth quarter. "If Russia makes the decision to make its own AN-70's, our
fuselage production will be up and running," said Kalyagin.
Russian aircraft plant steps up production
For the first time over the past 10 years the Voronezh aircraft plant (VASO) has
developed a five-year programme to build aircraft, Vyacheslav Salikov, the
company's general manager, said, ITAR-TASS News Agency reported.
VASO is to launch the production of Il-112B, a new military transport aircraft
for the Russian air force, this year. The presentation and approval of draft
design of the new plane has taken place at the Ilyushin aircraft corporation,
Salikov said. A decision was taken to build the aircraft in Voronezh. The
Russian air force is to receive the new plane in 2007. Also, the company is
upgrading transport aircraft Il-76 and replacing engines.
VASO, in cooperation with Ukrainian colleagues, has started mass production of
the regional [passenger] aircraft An-148, which is to replace well-known An-24
and Tu-134 planes. The enterprise is also expanding the production of the
airliner Il-96 and its cargo version for Russian carriers.
Standard & Poor's lowers CGS on 6 Russian telcos
Standard & Poor's Governance Services lowered its corporate governance
scores (CGS) on 6 Russia-based fixed-line telecommunications service providers
controlled by the state-owned holding company Svyaz-invest, S&P said in a
statement released on December 25th, New Europe reported recently.
The CGS on Central Telecommunications Co JSC was lowered to CGS-4+ (CGS-4.8
Russia national scale) from CGS-5+ (CGS-5.8 Russia national scale). The CGS on
Dalsvyaz JSC was lowered to CGS-4+ (CGS-4.8 Russia national scale) from CGS-5+
(CGS-5.8 Russia national scale). The CGS on North-West Telecom JSC was lowered
to CGS-5 (CGS-5.0 Russia national scale) from CGS-5+ (CGS-5.9 Russia national
The CGS on Sibirtelecom OJSC was lowered from CGS-5+ (CGS-5.7 Russia national
scale to CGS-4+ (CGS-4.7 Russia national scale). The CGS on southern
Telecommunications Company PJSC was lowered to CGS-4 (CGS-4.4 Russia national
scale) from CGS-5 (CGS-5.2 Russia national scale). The CGS on Volga Telecom OJSC
was lowered to CGS-5 (CGS-5.1 Russia national scale) from CGS-5+ (CGS-5.9 Russia
The scores were lowered in connection with the governance situation at
Uralsvyazinform OJSC, also controlled by Svyazinvest. The CGS on Uralsvyazinform
was lowered on December 23rd, 2004, owing to concerns about the process by which
certain decisions were taken by the controlling shareholder and the lack of
consultation with minority shareholder representatives.
Svyazinvest's influence on the decision not to renew the contract with
Uralsvyazinforms CEO lacked articulated motives and was successful despite the
objections of independent directors.
Standard & Poor's said this unilateral action by Svyazinvest is a practical
example of the risks that arise when the interests of a controlling shareholder
are not necessarily in alignment with minority shareholders and where full
consultation does not take place.
These potential risks were previewed in Standard & Poor's analyses of
corporate governance at Svyazinvest controlled companies.
"The action by Svyazinvest was directly responsible for Standard &
Poor's review of the risks associated with the holding company's influence at
all interregional telecoms where it has majority ownership," said Standard
& Poor's governance specialist Oleg Chvyrkov. "A major negative factor
in the review was the limited ability of a board of directors dominated by
representatives of Svyazinvest to act effectively and in the interest of all
Yuganskneftegaz to be 100 per cent state-owned - Russian minister
The assets of Yuganskneftegaz will be transferred to a separate company that
belongs 100 per cent to the state, the public relations centre of the Russian
Ministry of Industry and Energy has said in a statement, quoting the industry
and energy minister, Viktor Khristenko, Interfax News Agency reported.
According to the minister, 20 per cent of Yuganskneftegaz shares may be offered
to the China National Petroleum Corporation (CNPC).
LUKoil to up hydrocarbon reserves 30% in 2005
Russian oil major LUKoil has set a target of increasing hydrocarbon reserves by
an amount equal to 130% of crude production, which should be no less than 90.2m
tonnes in 2005, Interfax reported recently, citing a company statement. The
statement said the main challenge in oil refining would be to increase the
relative value of crude by optimisation of capacity load at the company's
Russian refineries and by raising the share of high value-added products.
LUKoil's main financial objective in the medium term is to achieve return on
invested capital comparable with its main international competitors, despite
increasing tax burden, the statement said. In the field of corporate governance,
further steps will be taken to implement principal conditions of the planned
strategic partnership with ConocoPhillips, which is a priority for LUKoil. The
company's restructuring programme will also be continued in 2005. This programme
will optimise company activities, with significant reduction of the number of
legal entities in the group.
Rosneft purchases 40% more shares in Tuapse refinery
Russian oil company, Roseneft, acquired an additional 40% stake in OAO
Rosneft-Tuapse Oil Refinery in December 2004, the company said in a statement,
New Europe reported recently. The statement said this deal was part of the
ongoing consolidation of capital by Rosneft subsidiaries. According to
information on the company's Web site, the company previously owned 39.53% of
Tuapse Oil Refinery. The capacity of the plant amounted to 3.9m tonnes and in
the first 11 months of 2004 the refinery handled 3.733m tonnes of oil, which was
1.28% more than in the same period in 2003.
Tatneft mulls new Tupras tender participation
Russian oil company Tatneft may take part in a new tender for the state stake in
Turkish refiner Tupras, Tatarstan President, Mintimer Shaimiyev, said in a
statement, distributed by his press service.
"It is possible that a repeat tender will be called. We will look at the
conditions that will be offered this time. The initial conditions for the
tender, its costs, the level of Tupras capitalisation are not known exactly.
Therefore, if we consider the new conditions favourable for us, we will take
part in the tender," Shaimiyev said.
The Tatarstan president said the deal to sell the Tupras shares to a consortium
including Tatneft fell apart due to a political squabble with Turkey. Shaimiyev
also said that the deal was hindered by its size. "Our deal, together with
a Turkish company, to buy Tupras - is more than 80% of all oil refining in the
country, and we are becoming its owners, in addition to another petrochemical
plant. Therefore the difficulties that arose are understandable to a certain
extent. This is a very large deal," he said.
This theme was discussed everywhere as part of a bloc of economic issues during
a visit by a Russian delegation to Turkey at the start of December, headed by
Russian President, Vladimir Putin, he said. Shaimiyev was also part of the
TNK-BP wins bigger market share
Anglo-Russian oil major TNK-BP was Russia's third biggest producer behind YUKOS
and LUKoil oil giants but on December 3rd, Vedomosti business daily reported,
citing November production figures. In the first 11 months of the current year
YUKOS produced 78.6m tonnes of oil, LUKoil - 76.8m tonnes, while TNK-BP produced
74.1m tonnes, including 50% produced by Slavneft Oil Company. TNK-BP owns
Slavneft on a parity basis with Roman Abramovich's Sibneft. However, in November
the Anglo-Russian oil major moved up to second place (6.95m tonnes of oil),
behind YUKOS, which produced 7.02m tonnes, and pushing aside LUKoil with 6.93m
Russian government chooses Nakhodka route for Far East oil pipeline
The government of the Russian Federation has signed a decision on the
construction of a pipeline to Nakhodka, a source close to the government said
recently, ITAR-TASS News Agency reported
The decision was signed on 30th December and presupposes the construction of a
pipeline with a capacity of 80m tonnes.
The decision does not specify what stages the oil pipeline will be built in. Nor
does it contain any mention of subsidies for [Russian pipeline operator]
Transneft, which is to implement the project to build the oil pipeline to
The pipeline, which is expected to have an annual throughput capacity of 80m
tonnes, is to be built by state oil pipeline monopoly Transneft.
The pipeline is to connect the town of Tayshet in Eastern Siberia with the town
of Skovorodino on the Chinese border in the Russian Far East and from there
continue to Nakhodka, Deputy Foreign Minister, Aleksandr Alekseyev, said. He
said that the key goal of this project is "speedy development of Eastern
Siberia and the Russian Far East. Russia will be happy to cooperate with
partners in Japan, China and other Asia-Pacific countries."
Russian oil will be transported via the Nakhodka pipeline to Japan, the US,
China, South Korea and other countries, Russian officials said, adding that
Russia's own economic interests had been the main factor in choosing the route
of the pipeline. Russia's oil major Yukos initially proposed that a pipeline
should be built from Angarsk to China's Daqing. But Transneft proposed an
alternative route to Nakhodka.
The Russian government has been considering the two pipeline routes for the last
two years. It is not clear whether the government is still considering building
a branch pipeline to Daqing. It is also not clear whether Russia has enough oil
to fill the pipeline. Japan has offered Russia about US$6bn in untied loans to
build the pipeline while Russian officials said earlier US$10bn was needed.
Russia-Vietnam firm aims to pare down oil production in 2005
The joint Russian-Vietnamese oil firm Vietsovpetro extracted 12.22m tonnes of
crude oil in 2004, Russian ITAR-TASS news agency reported on 11 January.
It aims to produce 11.64m tonnes of crude in 2005, the news agency said. The
Russian side of the joint venture made a profit of US$548m in 2004, the agency
FOOD & DRINK
Baltika to boost profit in 2004
Baltika Brewing Company is targeting net profit of US$150m this year, Taimuraz
Bolloyev, the company's president, said at a press conference in Rostov, cited
by Interfax recently.
Baltika had US GAAP net profit of US$123m in 2003, which was 10.2% less than in
2002. Regarding investment plans for 2005, Bolloyev said: "There are
circumstances that depend not on internal decisions but on the situation as a
whole. The stance that the legislators have taken against brewers is well-known.
The Duma, by motivating its decision by protecting minors, is calling for
serious restrictions on the sector's development, so our plans will depend on
legislative initiatives and the laws that are passed." According to him,
"Since technical progress is not standing still, we will sustain and
develop the technical level of our enterprises irrespective of what the
legislators decide." But "whether or not output and capacity will
increase will depend not on us," he added.
InBev improves Russian brew
InBev, the Belgian brewer, recently said it was buying the stake held in its
Russian subsidiary by Mikhail Fridman's Alfa-Eco investment company. The brewer
is paying what some analysts judged to be a high premium in order to end an
uneasy relationship with a powerful Russian shareholder, the financial Times has
InBev will pay €260m (US$350m) for the stake held by Alfa-Eco, leaving it with
almost full control of SUN Interbrew, one of the leading brewers in the
fast-growing Russian market.
The transaction will lead to a one off charge of €100m for InBev, which will
be booked in 2004.
The deal leaves Alfa-Eco with a large profit on its six-month investment in SUN
Interbrew and removes a potentially troublesome minority shareholder. Alfa-Eco,
the investment capital arm of Mr Fridman's Alfa Group, bought more than 15 per
cent of SUN Interbrew in July and said it intended to buy more shares, as well
as asking for a seat on the board of directors.
Mr Fridman indicated Alfa was interested in buying a controlling stake if the
price was right. But he also then said that there were "different
options" for its stake, prompting speculation that the investment might be
In august, InBev agreed to buy the 37 per cent held in the Russian subsidiary by
its Indian joint venture partner SUN Trade for €530m, a significant premium to
the market value. Analysts saw the move as a defence against any attempt by Alfa
to gain control of the venture.
InBev recently valued the Alfa-Eco transaction at €25.51 per SUN Interbrew
share, compared with the €27.35 per share agreed in August with SUN Trade.
Belarusian diplomat hails closer cooperation with Russia
In 2004 trade turnover between Russia and Belarus "grew by 40 per cent and
totalled US$16.5bn," the Belarusian ambassador to Russia, Uladzimir
Hryhoryew, announced recently in Moscow. According to him, this testifies to the
fact that "a good economic foundation is being developed in our relations
and the economy will also dictate other essential decisions." According to
the ambassador, "the amalgamation of our countries' economies will form the
basis for serious political decisions."
Hryhoryew emphasized that Belarus' main foreign policy priority in 2005 will be
the course towards closer relations with Russia. "There will be no changes
of course next year. Our main task remains unification with Russia, not just in
word but in deed." "Russia also supports Belarus in the international
arena and we are grateful to her for this," Hryhoryew noted. "Without
Moscow's authority and support, things would be much more complicated for
us," he said, ITAR-TASS News Agency reported.
Commenting on the Russian-Belarusian agreement on the principles of collecting
indirect taxes on the import and export of goods, Hryhoryew emphasized that
"an encouraging prospect for increasing the integration of the economies of
the two countries has opened up within the framework of the formation of a
single economic space in a union state."
"For the first time in CIS history the principle of collecting indirect
taxes in the destination country under conditions of reduced customs formalities
and inspections at internal borders can be implemented," the ambassador
"Belarus has a multi-pronged policy intended to develop relations with many
countries, including the USA," Hryhoryew said. "The main condition for
this is non-interference in our internal affairs. We want to solve our problems
Commenting on the Ukrainian election results, Hryhoryew noted that Minsk
"will work with any president elected by the Ukrainian people."
Russia, Turkey keen on developing high-tech projects, energy cooperation
At the start of 2005, Russia and Turkey are doing extremely well in
bilateral trade. The two countries' annual trade turnover stood at over US$10bn
in 2004 and is likely to reach US$15bn in the near future, Russian Industry and
Energy Minister, Viktor Khristenko, said at a joint meeting of the
Russian-Turkish and Turkish-Russian business councils at the Russian Chamber of
Commerce, Prime-TASS News Agency reported.
He noted that energy and fuel make up 72 per cent of Russian exports to Turkey.
He stressed that cooperation between Russia and Turkey in development of the
fuel and energy complex will be seen as a priority in the near future.
According to Khristenko, there is a brilliant potential for developing trade, in
particular, in exporting Russian gas to Turkey, investing in Turkey's power
engineering and high-tech industries. The Turkish prime minister was quoted as
inviting Russian businessmen to invest in Turkish power engineering, banking and
the textile industry and to look into developing joint Russian-Turkish ventures
in Iraq. The report also quoted president of the Russian Chamber of Commerce,
Yevgeniy Primakov, as saying that the two countries should focus on changing the
structure of trade by paying more attention to high-tech projects and
invigorating regional contacts.
Russia's Putin ratifies strategic partnership treaty with Uzbekistan
Russian President, Vladimir Putin, has signed the federal law "On
ratification of the strategic partnership treaty between the Russian Federation
and the Republic of Uzbekistan," which was adopted by the State Duma on
22nd December and approved by the Federation Council on 24th December, the press
service of the head of state said, ITAR-TASS News Agency reported.
The treaty determines priority areas in cooperation between the Russian
Federation and the Republic of Uzbekistan in the political, military,
military-technical, trade and humanitarian spheres.
MINERALS & METALS
Alrosa to reduce sales of Russian natural diamonds
Russia's Alrosa diamond company has agreed with De Beers to reduce sales of
Russian diamonds to US$275bn by 2010, Itar-Tass News Agency reported.
The agreement is coordinated with the European Commission, Alrosa President,
Alexander Nichiporuk, said.
Alrosa will sell US$650m in uncut diamonds to De Beers in 2004, Nichiporuk said.
He noted that the company would export another US$400m in uncut diamonds on top
of that in 2004.
He said domestic market sales would be around one billion roubles in 2004.
The News Agency quoted him as saying that De Beers would buy US$700m worth of
rough diamonds from Alrosa in 2005 and the quota would reduce to an annual
US$275m by 2010. This is still a lot, and De Beers "will remain a large
buyer of Russian natural diamonds," he said.
Alrosa has been selling Russian rough diamonds to other companies for the past
two years. The sales are more modest, about US$400m a year, Nichiporuk said.
This year Alrosa will sell US$650m worth of rough diamonds to De Beers, and the
deal was approximately the same in 2003.
Alrosa "is considering other partners, companies with a solid financial
status and width to have sustainable supplies of a certain range of Russian
natural diamonds form such a well-known company as De Beers," he said.
Alrosa aims at the equality of the domestic and foreign market in its dealings,
he said. It is working with the government on the lift of limits in natural
diamond exports in line with the Russian policy of rapprochement with the World
Trade Organisation (WTO).
International rating agency Standard & Poor's (S&P) announced recently
that its rating and rating outlook on Alrosa (B, outlook stable) will be kept as
they are, despite Alrosa's suggestion that the European Commission gradually
reduce the sales of De Beers diamonds in response to continued anti-trust
investigation. S&P said it is not expecting that the proposed schedule to
reduce sales will impact on Alrosa earnings
EvrazHolding gains major loan for plant revamp
EvrazHolding, Russia's largest steel producer, will use a 42.7m Euro (US$57m)
loan from Bank Austria Creditanstalt, obtained through a Cyprus-based company,
to finance an upgrade at one of its plants, Bloomberg reported recently.
EvrazHolding will use the loan to build a continuous slab-casing machine at its
West Siberian Metallurgical Combine (ZSMK) in Novokuznetsk, EvrazHolding's press
Oesterreichische Kontrollbank Aktiengesellschaft (OeKB) and ZSMK itself are
guaranteeing the 10-year loan. Austria's Voest-alpine Industiranlagenbau GmbH
& Co is supplying and installing the equipment for the slab machine, which
is an element of a strategic programme to convert ZSMK to continuous cast
Norlisk starts merger talks with Gold Fields, Harmony
Russia's largest metals producer Norlisk Nickel and two South African gold
mining companies, Gold Fields and Harmony Gold Mining Co Ltd, began preliminary
talks to explore alternative ways of merging Harmony and Gold fields that could
be mutually acceptable and beneficial to all parties, Norlisk Nickel said in a
statement recently, Interfax news Agency reported.
The three companies "have engaged in preliminary communications in order to
explore alternative transactions, which could be mutually acceptable and
beneficial to all parties, relating to the current offer by Harmony for Gold
Fields," the statement read. Dmitry Usanov, director of the investor
relations department at Norlisk Nickel, said that Norlisk Nickel was satisfied
with the results of the talks that were held recently.
In March Norlisk Nickel bought a 20.03 per cent stake in Gold Fields, thus
becoming a major shareholder in the company. Later in the year Norlisk Nickel
was considering buying all Gold Fields assets outside South Africa.
However, Gold Fields wanted to merge its assets outside south Africa with
Canada's IAMGold Corp (IAG), though Norlisk Nickel said it was against the deal.
On October 18th, Harmony Gold announced it had launched a takeover bid of more
than US$8.2bn for Gold Fields, attempting to better the offer that Gold Fields
had agreed with IAMGold.
On October 18th, the Press Service of Norlisk Nickel reported that Norlisk
Nickel was set to vote in favour of Gold Fields merging with Harmony Gold and
against it merging with Canada's gold producer. Gold Fields and Harmony Gold
Mining occupy fourth and the sixth places, respectively, in the world in terms
of gold production. If the companies merge, they would create a company capable
of producing 7.5m ounces of gold per year, rivalling the world's largest gold
producer, Anglo American Gold.
Alrosa boosts profits 59% in 2004 Q1-Q3
Alrosa boosted net profit to international accounting standards (IAS) 55.6%
year-on-year to 9.228 roubles in January-September 2004, Interfax reported
recently, citing the Russian diamond monopoly. Profit from core activity soared
to 15.83bn roubles from 8.766bn roubles and revenue increased to 56.589bn
roubles from 44.206bn roubles. Alrosa mines around 23% of the world's diamonds.
The Alrosa Group mined US$1.649bn in diamonds in 2003. Core product sales were
US$1.821bn, including US$123.4m in cut diamonds. Revenue if forecast to exceed
US$2.4bn in 2004. Alrosa also said it boosted revenue nearly 40% year-on-year in
January-November. The revenue was US$2.141bn, Olga Lyashchenko, the Russian
diamond monopoly's head accountant, told Interfax. Alrosa's revenue was
US$1.821bn in January-November 2003. Revenue grew 39.8% in the 11 months of
2004. Lyashchenko said revenue would be US$2.473bn in 2004 as the whole compared
with US$1.049bn in January-November 2004. This included US$621m in sales to De
Beers. Domestic rough diamond sales came to US$1.081bn.
UGMK copper holding ups cathode copper output by 15%
Urals Mining and Metallurgical Company (UGMK), Russia's second biggest copper
producer, raised cathode copper production 14.7% year-on-year to 311,154 tonnes
in January-November 2004, Interfax reported recently, citing the UGMK's press
office. Uralelektromed, UGMK's core enterprise, produced the cathode copper.
Steady raw material supplies - which grew 16.6% year-on-year in the 11 months -
and a set of upgrades were behind the increase in output, Viktor Ashikhin,
Uralelektromed's chief engineer, was quoted as saying. In addition, 99.4% of the
cathode copper that the smelter produced in November was top grade copper.
Ashikhin said "it is expected the plant will produce a record 340,000
tonnes of cathode copper last year." UGMK's Katur Invest unit produced
231,833 tonnes of copper wire-rod, up 50.6% year-on-year and 7,504 tonnes of
copper wire, up 45.4%.
MTS spends US$6.2m for 52.5% of Telesot-Alania
Russia's largest cellular operator Mobile TeleSystems (MTS) bought 52.5% of the
stock in Telesot-Alania for US$6.2m from Southern Telecommunications Company,
Interfax reported recently, citing the MTS press service. Telesot-Alania offers
GSM cellular services to 54,000 subscribers in Northern Ossetia, its operating
area. Telesot-Alania's revenue for January-September 2004 was US$5.2m to Russian
accounting standards, operating profits US$3m and net profit US$2m. The
company's debts are not significant, the press service said. Average (monthly)
revenue per user (ARPU) for the period was around US$15.5.
Russian government gives go-ahead to construction of toll road
The Russian Transport Ministry has received government permission to build toll
roads, ITAR-TASS News Agency reported.
In accordance with an instruction signed by Prime Minister, Mikhail Fradkov,
from now on "the Federal Roads Agency has the right to develop preliminary
documentation for the construction of the first toll high-speed highway in
Russia - Moscow to St Petersburg - the central ring road in Moscow Region and a
road linking the Moscow ring road to the Moscow-Minsk highway."
A belt of land 650 km long will be set aside to build the high-speed toll
highway from Moscow to St Petersburg (going on to Helsinki). Thus, the
construction of road and railway will be carried out within a single corridor.
There will be 10-lane traffic at the exit from the Moscow ring road, eight-lane
traffic in Leningrad and Moscow Regions, and six-lane traffic on the main
Klin-Tosno section. According to Transport Minister Igor Levitin, it will cost
around R150bn to build the Moscow-St Petersburg toll highway. He added that the
length of time it takes to recoup the cost will depend on the volume of traffic.
The Transport Ministry predicts that this will take 15 years.