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RUSSIA


  
  

 

Key Economic Data 
 
  2003 2002 2001 Ranking(2003)
GDP
Millions of US $ 433,491 346,520 310,000 16
         
GNI per capita
 US $ 2,610 2,140 1,750 97
Ranking is given out of 208 nations - (data from the World Bank)

Books on Russia

REPUBLICAN REFERENCE

Area (sq.km)
17,075,400

Population
143,782,338

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: 307- (27/07/06)

The big event for Russia of course of late is that it hosted the latest meeting of the G8 for the first time - in St Petersburg in mid-July. 
The G8 comprises the members of the Group of Seven and Russia. The G7 members are Canada, France, Germany, Italy, Japan, the United Kingdom and the United States, which together account for about two-thirds of the world's economic output. Russia officially became the eighth member of the grouping at the 1997 Denver, Colorado, "Summit of the Eight." 
But while Russia is a G8 member, it does not participate in financial and economic discussions, which continue to be conducted by the G7. Russia has the G8's smallest economy.
It was admitted with the idea that this would make it behave better - a delusional notion if ever there was one. It is better to continue to dangle the carrot than to wield the stick, especially when it turns out to be made of papier machee. Russia should have always have been offered G8 membership as a potential reward, not given it as a bribe in advance of good behaviour.

Banter at the St Petersburg party
Ever since the famous "fireplace discussion" at the Chateau de Rambouillet outside Paris in 1975, where the club currently called the Group of Eight was first formed, the world has come to expect a certain predictability in the outcome of its annual summits, the recycling of current commonplaces. Dennis Healey, the former UK Chancellor of the Exchequer, and a habitué of international conferences, called one of them held in Venice on The Grand Canal in the late 1990s 'Le Grand Banal.'
The summits are largely of a symbolic nature - formalizing the drafts painstakingly worked out by "sherpas" scaling summit slopes in the preceding weeks and months in full public gaze. No earth-shaking decisions are to be expected. Yet the world has kept looking on in the belief that the G8 can flash re-alignments in international politics.
This year's summit in St Petersburg in mid-July was in some ways no exception. There was, however, a certain novelty in that the meeting coincided with the fresh crisis in the Middle East and in a certain new acerbity of manner and exchanges between Putin and his Western interlocutors.
Hitherto the tone between Putin and Bush had been one of joviality and even camaraderie, both being acutely conscious of being the two most powerful men on Earth, Russia still counting as a nuclear missile and energy superpower. When they first met in Ljubljana in June 2001 Bush said that he had looked into Putin's eyes and seen his soul and liked what he saw. They discoursed on what the future would make of their role in history and sundry matters.
He can have liked neither what he heard at the press conference after the meeting from the Russian leader nor the reaction of the audience to it. After gently chiding Russia in a circumlocutory way for backsliding on democratic reforms, whereas Iraq was moving towards them, he got this blunt response: "To speak plainly, we in Russia do not want an Iraqi-style democracy." At which point the entire press corps erupted into laughter.
When Putin was told of Blair's recent remonstrance about Russia's retreat from such reforms, he replied (referring here to the Blair-ennobled buddy who allegedly acts as the mediator between those who wish to buy a peerage or honour in exchange for contributions to the Labour Party's funds): "We do not regard Lord Levy as a model of democratic governance." He is nothing if not pungent in repartee.
Clearly Putin is fed up with being preached at by people whose own record is far from impeccable, whether abroad or at home. He has a very difficult job, far more so than any other world leader. He feels he needs their support rather than carping about democracy, a phenomenon that took centuries to develop in the West. Rome was not built in a day. Neither will the successor Rome of Russian democracy.

The Russian colossus cometh
Three things became apparent at the summit. First, Russia has unmistakably re-emerged as one of the geopolitical poles in the world. 
No matter the daunting problems besetting Russia - large-scale poverty, derelict infrastructure, neglected social sectors, regional imbalances, nascent political institutions - Moscow is determined to play a significant role in international affairs. 
This was starkly evident in an article by Russian Deputy Prime Minister and Defence Minister Sergei Ivanov, entitled "The triad of national values," featured in Izvestia on July 14, coinciding with the arrival of Bush in St Petersburg. 
In hard-hitting language, Ivanov declared that the days were gone when Russia could be pushed around, and that the Kremlin was fed up with the West's double standards on democracy whereby "a hysterical atmosphere was being artificially created and a political environment that was favourable for launching a process of overthrowing legally constituted governments was being formed." 
What was extraordinary was that Ivanov offered no explanations for what Russia was about - no apologies, no long-winded justifications. He came straight to the point: "The practice of interstate relations where Russia incurred substantial economic losses as quid pro quo for gaining the friendliness of the leaders of certain foreign countries is a thing of the past." 
Ivanov continued, "Today we not only have the means to defend ourselves but also - and this is far more important - something to defend. To an increasing degree, we are beginning to understand that Russia can only be a sovereign democracy; otherwise, we will be left with neither democracy nor Russia." 
It was significant that the Kremlin resorted to such blunt talk on the eve of the G8 summit. It was deliberate. In the preceding weeks already, a certain "hardening" of the Kremlin stance was perceptible. To be sure, the Kremlin carefully weighed the factors at work, while setting the tone for the G8 summit. 
The US campaign over President Vladimir Putin's "authoritarianism" reached such a high pitch that the Kremlin had no choice but to call the bluff. In retrospect, Washington overreached when US diplomats participated in the theatrical show in Moscow, "Another Russia," parodying Putin's leadership. 
Putin told the Canadian Television (CTV) network, "These issues [democracy] are being used as an instrument to intervene in our domestic and foreign policy in order to have an influence on it ... Only those who themselves have a spotless human-rights record have the right to point a finger at others." 
Putin told the US National Broadcasting Co (NBC) network that Washington manipulated the US media except that it was a "lot more sophisticated." If the US intention behind the calibrated propaganda barrage against Moscow was aimed at pressuring the latter into making concessions on other issues, especially economic matters (a familiar US ploy against Russia), this time it didn't work. 
The Russian position, in fact, toughened on the Iran nuclear issue and on energy security. Putin also revived the sharp criticism of the invasion of Iraq. 
Washington miscalculated by hosting Georgian President Mikheil Saakashvili - expressing solidarity with Saakashvili at a time of rising tensions over South Ossetia and supporting Georgia's bid for membership in the North Atlantic Treaty Organization (NATO). It was crude meddling - awkwardly timed. 
The result was the Russian position visibly hardened on the question of "frozen conflicts." Moscow suggested that Abkhazia, a breakaway region in Georgia, should be given the floor at the United Nations Security Council to present its case against Tbilisi. It warned Tbilisi against attempting to resolve the South Ossetian problem through force. Moldova's separatist region of Transnistria announced a referendum on September 17th to decide whether the pro-Moscow enclave should "freely unite" with Russia. Abkhazia began mulling over a similar referendum. 
At the same time, Moscow correctly assessed its factors of advantage. The political crisis in Ukraine and conclusive collapse of the "orange alliance" constituted a serious setback to US strategies. 
Other factors that worked in Moscow's favour were: the dramatic turnaround of the security situation in Chechnya after the killing of Shamil Besayev; the successful launch of Rosneft's initial public offering; and the overall boom in the Russian economy - as evident in the decision to clear all debts with the Paris Club by August 21st and full convertibility of the rouble and the follow-up decision to trade energy and other strategic goods in roubles. Most important, Putin was riding a phenomenal wave of popular support over 70 % (as against Bush's 30% popularity rating). 
Thus the first striking thing about the G8 summit was that the Kremlin put on display the unquestionable and rapid strengthening of Russia's independence and its return to the international scene and in the global economy. Those who were scornful about the weak sides, small sins and oddities of Putin's Russia were reduced to stunned silence. 
The Economist weekly, a consistent critic of Putin's Russia, poignantly asked: "So, what can the West do? The short answer is, not a lot. In the 1990s, an economically enfeebled Russia needed help from abroad. Unless the oil price unexpectedly collapses, no such leverage will be available in the near future. 
"Politically, too, pressure from outside is likely to rebound. With the Kremlin once again firmly in control, Russia will almost certainly change only from within - or not at all ... The best policy now is not containment but 'wary engagement'." 
Indeed, Bush echoed the same thought, though in colloquial idiom, in the northern German town of Stralsund, en route to St Petersburg: "My own view of dealing with President Putin is that nobody likes to be lectured a lot, and if you want to be an effective person, what you don't do is to scold the person publicly all the time; that you remind him where he may have a difference of opinion, but you do so in a respectful way, so you can then sit down and have a constructive dialogue. And that's exactly how I'm going to continue my relations with President Putin." 
Despite Washington's "wary engagement" of Russia within the G8, a contradiction exists culturally, politically and strategically, which will be difficult to overcome in the near future. Curiously, it was left to a Chinese scholar to dwell on this paradigm. 
People's Daily front-paged on July 17th an article by Ruan Zongze of the China Institute of International Studies exploring an answer to the question as to how China should "get along" with the G8. 
Ruan concluded, "Judging from current conditions, it is in Chinese interests to keep a convenient distance from the G8. It is quite unlikely that China will join this group in the short term. China is a developing country for which G8 as a club of the rich hasn't apparently kept reserved a comfortable seat. Moreover, G8 has its own set of political and economic standards, which China finds unacceptable at least for the present stage. 
"Russia, for example, does not mix well with the group. It joined the club in 1998 out of political needs, but was reduced to a second-class citizen, and has had little say on economic questions. So Russia is eager to establish itself as an equal member of the group by taking the role of a host." 
An unresolved riddle, therefore, remains as the residue of the St Petersburg summit. Russia on its part would appear to anticipate the problem and to signal that it got its priorities all right. No sooner had the G8 summit ended than Putin meaningfully invited the heads of state of the Commonwealth of Independent States countries for an "informal summit" in Moscow on July 21st-22nd. He had already met the Chinese leader, Hu, in Moscow on July 17th. Putin has his Western face in St Petersburg - and his Asiatic one in Moscow!
But in any discussions over Russia's partnership with the West, it may be improper to club all Western nations together in the same breath. Actually, this also happens to be the second conspicuous vector to emerge out of the St Petersburg summit. Its significance is no less important than Russia's resurgence on the world stage. 
While the focus understandably is on the resurgence of Russia and on the cooling of relations between the United States on the one side and Russia on the other, the primary reason the US dealt from such a patently weak hand at St Petersburg was the disunity within the trans-Atlantic camp. 
Europe does not lack ambition, but it is in disarray - unable even to give itself a constitution. Certainly, it lacks a common foreign policy. With the exception of Britain, Europe views with uneasiness the US attempts to establish dominance over the Middle East and Central Asia. And despite Washington's recent charm diplomacy in the European capitals, the European public regards US policies with distaste. And with Bush's attempt to revive the US-German axis, France is once again edging toward an independent opinion. 
And finally, the US has failed to establish commonality of interests with its Western partners (including Japan) in the policy of "tough love" toward Putin's Russia. Many European countries feel troubled about the ever-expanding balloon of hot air that NATO has become. 
Europe feels dismay over the destabilization of Ukraine thanks to Bush's "colour revolution." An economy with the highest growth rate in the post-Soviet space just two years ago is today crawling on its knees. 
On the vital question of energy security, Europe's interests cannot be harmonized with the US strategies toward Russia. Russia quietly made a point by timing two energy mega-deals with Japan and Germany just ahead of the G8 summit. 
On July 12, Sakhalin Energy, which operates the Sakhalin-II energy project and is developing two vast fields in Russia's Far East with estimated recoverable reserves of 150 million tonnes of oil and 500 billion cubic meters of gas, signed a deal to supply half a million tonnes of liquefied natural gas annually to Japan for a 15-year period. 
As, Russia's Gazprom and Germany's E.ON AG signed a framework agreement to swap assets in production, trade and sale of natural gas and relating to power industry. Gazprom will acquire the German company's stakes in gas companies in Hungary as well as in regional electricity and gas companies in return for Russia providing access to E.ON AG to Russia's Yuzhno-Russkoye deposits in the Tyumen region, which holds more than a trillion cubic meters of natural gas and will be the source for the US$10.5 billion North European Gas Pipeline project. 
Putin had every reason to express satisfaction over the G8's final document on energy security. He asserted, "Until recently, energy security was understood as meaning stable energy supplies. Now we have convinced our partners that energy security is a far broader notion, including production, transportation and sale on the markets." 
The G8 statement shows that the US game plan aimed at establishing its trans-Atlantic leadership in the energy dialogue with Russia is no longer viable. 

International repercussions of the summit
A third aspect of the St Petersburg summit regards its "take" on the international scene. From this angle, Iran and the Middle East by far stole the show. All other issues previously bandied about as solid pressure points on Russia at St Petersburg - democracy and "frozen conflicts" in the post-Soviet space; Russia's policy toward its smaller neighbours - receded into the background. 
Interestingly, Russia was not the only power at the G8 that found it difficult to go along with Bush when he laid full blame for tensions in Lebanon at the feet of Hezbollah - and with Syria and Iran. Other leaders, while condemning the kidnapping of Israeli soldiers, also criticized the disproportionate Israeli response. 
Putin indirectly drew attention to the US isolation when he said Russia's advantage was that it did not close its doors to any parties to the Middle East conflict. Putin asserted that Russia's "regular contacts" with Hamas and Hezbollah actually helped to work on the G8's Middle East resolution. If this in itself wasn't an extraordinary statement, Putin rubbed it in: "Iran, of course, is an influential country in the region and its interests must be respected so as to prompt it to use its influence to change the situation [in Lebanon] for the better." 
Putin also said Israeli military operations were pursuing a larger agenda than obtaining the release of the kidnapped soldiers and that Israel's confidence in its "military capabilities" would prove to be misplaced. The most significant point made by Putin was that the deployment of any international force in Lebanon must be on the basis of a mandate from the UN Security Council and that Russia would participate in any such operations, but "we first need to get the agreement from all the sides involved in the conflict." 
Again, the G8 helped clarify the alchemy within the so-called "Iran Six," the five permanent members of the UN Security Council, plus Germany. The G8 statement on Iran endorsed the Iran Six decisions calling for a halt to Tehran's nuclear-enrichment activities in return for a package of incentives, but at the press conference that followed the summit, Putin cautioned, "It is too early to speak about sanctions against Iran. We have not reached that stage yet ... I would rather not speak about this [sanctions] because raising this issue may create unfavourable conditions for the talks." 
All in all, the G8 revealed the erosion in the United States' ability to bend the world to its will. The US exposed itself as having very little leverage in the Middle East situation. It seemed a shadow of what it used to be in that highly strategic region. It failed to get the G8 to fall in line on energy security or the Iran nuclear issue. 

An echo from the past
In the final analysis, what insight does the St Petersburg summit provide into the world of tomorrow? What comes to mind is an incident narrated by former Soviet president Mikhail Gorbachev during an interview on July 14th regarding the summit. He said former US president Bill Clinton asked him when he first visited Moscow what advice he could give. 
Gorbachev replied that he would give one important bit of advice, namely, to treat Russia with respect because Russians did not like being patted on the back. Gorbachev said he told Clinton, "Today we have one kind of situation and tomorrow it may be something different. But we will certainly rise, as we have done so many times before. We keep all that in our Russian memory." 

Venezuelan leader Chavez stops in Russia, Belarus during tour
The maverick Venezuelan leader Hugo Chavez, anathema to Washington, visited Russia and Belarus during a two-week overseas tour that started on July 19th. 
The Venezuelan leader was in Russia on July 25th-27th. Chavez, an outspoken leader who will be seeking re-election for another term in December, focused on military cooperation, including possible sales of Sukhoi aircraft to Venezuela. 
Military-technical cooperation between Moscow and Caracas has been increasing since Russia's state-controlled arms exporter, Rosoboronexport, and the Venezuelan government signed contracts on arms supplies in 2005. 
The two countries have been negotiating the sales of 24 Su-30MK Flanker C air superiority fighters to replace the Venezuelan contingent of US F-16 multi-role fighters after Washington imposed an embargo on arms sales to the country in May. 
The US State Department voiced concerns about the prospective purchase of Russia's latest interceptors by Venezuela, whose left-wing president has moved to curb Washington's influence in the region and consolidate ties with other South American nations since he came to power in 1998. 
Russia delivered three out of 15 Mi-17 V5 Hip-H multipurpose helicopters to Venezuela in March 2006 and supplied the country with the first 30,000 of 100,000 Kalashnikov assault rifles under a US$54 million contract in early June. 
The Venezuelan president is also reportedly seeking to build a Kalashnikov factory in his country. 
During his tour, Chavez also made an official visit to Belarus on July 22-24 at the invitation of President Alexander Lukashenka, the Belarusian Foreign Ministry reports. 
It was the first meeting between the two countries' presidents. Last October, Venezuela's foreign minister visited Belarus, also meeting with the Belarusian leader. In 2005, Belarus' trade with Venezuela was worth US$15.6 million. 

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AUTOMOBILES

Nissan signs agreement for St Petersburg assembly plant 

With global auto giants moving to cash in on Russia's rapidly emerging car sector, Japanese carmaker Nissan signed an agreement recently to build a new plant in Russia near St Petersburg. Nissan president, Carlo Ghosn, and the Russian Economics Minister, German Gref, signed the agreement, which provides for the development of a factory producing up to 50,000 cars a year, New Europe reported. 
The new plant is the latest sign of the growing strength and foreign interest in Russia, which has helped to turn the country into a major new hub of the world auto industry. 
"There is a chance for three to five more contracts to be concluded before the end of the year," said Gref. 
Apart from low labour costs and a new fast growing prosperous middle class, car ownership in Russia is still relatively low.
According to the World Bank there are currently only 147 cars for every 1,000 people in the country. Nissan sold 46,500 passenger vehicles in Russia last year. 
Together about 1.64 million new cars were sold in Russia in 2005 with the numbers expected to rise to 1.8 million by 2010. 
In signing the agreement, Nissan also joins international rivals that have begun carving new business empires in Russia. 
This includes Toyota as well as Germany's Volkswagen and DaimlerChrysler and the world's biggest carmaker, US-owned General Motors.

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AVIATION

UTair to increase 2005 dividends by 20% 

Shareholders in UTair Airlines, which is based in the Khanty-Mansiisk Autonomous District, voted at an annual shareholders meeting on June 15th to pay dividends for 2005 in the amount of 6.7 kopecks per common share with par value of one rouble, the company's press service said, New Europe reported.
UTair paid out dividends of 5.6 kopecks per common share in 2004. Thus, the 2005 dividend payments increased by 19.6 per cent. The shareholders also approved a new supervisory council at the AGM. The council now includes Lyudmila Belogurova, head of property management at Surgutneftegas, Andrei Kuivashev, deputy director general at Surgutneftegas Insurance Company, Svetlana Kukotina, head of the planning and economic department at Surgutneftegas, Lyudmila Loginovskaya, head of legal affairs at Surgutneftegas, Andrei Martirosov, UTair director general, Sergei Savin, UTair deputy general director, and Vyacheslav Novitsky, first deputy chairman of the Khanty-Mansiisk Autonomous District, who was once again elected chairman of the council.
UTair had net profit to Russian Accounting Standards of 128 million roubles in 2005, up 20 percent from 2004.
UTair is one of the five largest airlines in Russia in terms of the number of passengers carried and has one of the world's biggest helicopter fleets. The airline has 117 fixed-wing aircraft and 184 helicopters.
Central Surgut Depositary is UTair's largest nominal shareholder with 75.64 percent. This share package is reportedly owned by structures affiliated with Surgutneftegas. Other shareholders do not own more than five percent of the company. UTair Airline has charter capital of 577.208 million roubles, which is divided into 557.208 million common shares with par value of one rouble each.

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CREDIT RATINGS

Sovereign ratings unaffected by Paris Club deal 

Standard +ACY- Poor's Ratings Services said the Russian government's plan to prepay debts owed to the Paris Club was not a credit event that would in itself lead to a change in the ratings on the sovereign, the ratings agency said in a press release.
On June 22nd 2006, the Russian Federation (foreign currency BBB/Stable/A-2+ADs- local currency BBB+-/Stable/A-2+ADs- Russia national scale ruAAA) announced that it had reached agreement on the prepayment of the remaining US$22 billion of Soviet-era Paris Club debt, the release read. In practice, however, the government's firm intention to repay the remaining Paris Club debt has been well known for some time now, and the latest deal follows a similar transaction last year. Although the sovereign gross debt ratio will fall following the prepayment, the government's assets held in its stabilisation fund will fall by about the same amount, leaving Russia's net asset position almost unchanged. That said, the government's interest outlays will decline in future years, affording it with additional fiscal flexibility.
Nevertheless, improvements in the ratings on Russia will depend more critically on the government's ongoing commitment to pursue a sustained prudent fiscal policy, to strengthen institutions and governance structures, and to reform the economy with a view to preventing an increasing dependence on the volatile energy sector.
The run-up to the parliamentary and presidential elections in late 2007 and early 2008, respectively, with the concomitant rise in demands for politically motivated spending increases, will provide valuable insights into the degree of policy predictability and consistency in Russia.

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ENERGY

Gazprom and E.ON to swap assets

Gazprom, the Russian natural gas monopoly, signed a deal with the German energy company E.ON to swap a stake in a Siberian natural gas field for assets owned by E.ON in Hungary, the companies said recently, the International Herald Tribune reported on July 14th.
The deal was announced two days before Russia hosts a summit of the Group of 8 industrial democracies in St Petersburg, where energy policies are at the top of the agenda as world prices soar. European leaders are expected to press Russia to open its energy sector to foreign investment.
While accepting a German partner in its gas fields, the deal also marks the latest corporate manoeuvre by Gazprom, already the world's largest natural gas producer, to expand its operations in the retail side of the business in Europe.
At the heart of this strategy has been the cooperation of German partners, including E.ON, that already have many assets in Eastern and Western Europe that operate on Russian natural gas. The deal announced recently came as the second portion of a larger agreement with two German energy companies that is related to building and supplying natural gas to the planned North European Gas Pipeline, which is to run under the Baltic Sea from Russia to Germany.
In April, Gazprom signed the first portion of the deal with BASF, the German chemicals giant, which was also for a stake in the Siberian field. In that swap, the German company gave Gazprom exploration fields in Libya and a minority stake in Wingas, an energy trading operation in Western Europe. 
Now, E.ON will acquire just under 25 per cent of the Yuzhno-Russkoye field in Siberia in exchange for minority stakes in two gas companies and a utility in Hungary: Foldgaz Storage, Foldgaz Trade and E.ON Hungaria.
If the swap is approved, German companies will own almost 50 per cent of the Yuzhno-Russkoye field. The exchange is subject to approval by regulators in Hungary and at the European Commission.
The companies did not reveal the value of the trade, which would include an unspecified cash payment by E.ON. analysts have previously said a 25 per cent stake in the Yuzhno-Russkoye field would be worth about US$500m.
The deal, meanwhile, will entrench Gazprom's position in energy sales in Eastern Europe, where the company is already dominant.
While such moves toward expansion have sparked opposition in Europe, Gazprom has said that the reciprocity implicit in swap agreements rather than acquisitions is intended to address the growing protectionism in European energy markets.
Gazprom said in a statement that it is open to foreign investment in its reserves, so long as other companies are willing to offer assets "equivalent in value and strategic attractiveness" in stock swaps.

Shell, Gazprom plan to build 12 bcm GTL plant 

Gazprom and Shell are planning to build a plant to process 12 billion cubic metres of gas a year according to gas-to-liquid (GTL) technology near Nadym, Gazprom Deputy CEO, Alexander Ryazanov, said at the Renaissance Capital annual investors' conference recently, New Europe reported.
Implementing the project could become one of the ways to resolve problems with using low-pressure gas in the region, he said. Ryazanov told reporters later that the economics of the said project is dependent on transport tariffs for railway freight. Gazprom held talks recently with Russian Railways (RZD) on favourable tariffs for the long-term, or "at least for the project's recoupment period," he said. Investment in the project could be US$ seven-eight billion, Ryazanov said.

Gazprom to sell gas to Britain from Ormen Lange field 

Gazprom Marketing and Trading (GMT) signed a contract with DONG Energy on June 16th according to which GMT will start selling gas from the Ormen Lange field in the North Sea to Britain in 2007, Gazprom said in a statement, New Europe reported.
The agreement is for 15 years and production will be 600 million cubic metres a year. The gas will be transported along the Langeled gas pipeline that connects the Norwegian Ormen Lange gas field to Britain. It was reported earlier that HydroWingas Limited, a joint venture between WINGAS and Hydro ASA, would become the main supplier of gas to Britain produced by Hydro at Ormen Lange.

Gazprom buys stake in gas producer

Gazprom, the Russian state-controlled gas monopoly, recently extended its reach over the country's independent producers with an agreement to buy 19.9 per cent of Novatek, Russia's largest independent gas producer that has a secondary listing in London, the Financial Times reported on June 27th.
The move to buy a stake, for US$2.5bn (£1.4bn), is a sign of Gazprom's growing appetite for gas from outside sources as it seeks to compensate for its sluggish production levels.
Gazprom, the world's largest gas producer, dominates the Russian gas market by controlling access to the country's vast pipeline system. But its own production output has been stagnating, forcing it to buy in gas from central Asian producers to cope with rising demand. The group supplies almost a third of western Europe's natural gas.
Gazprom said the deal would lead to greater cooperation between the companies and accelerate the growth of Novatek. Global depository receipts in Novatek rose US$3.85, or 9.6 per cent, to US$966m with its London initial international public offering a year ago.
Novatek would be supported in field development and exploration work, Gazprom said, as well as coordinating with Gazprom over supplying gas to Russian regions.
The deeper working relationship between the two companies should reassure Novatek investors over the company's continued access to distribution networks.
By working with Novatek, Gazprom argued it would be able to raise its reserve levels and production targets.
Gazprom will buy the stake at market rates from two holding companies controlled by Novatek's management, Levit and SWGI Growth Fund Limited. After Novatek floated last year the groups respectively held 46.6 per cent and 18.5 per cent.
The deal would be completed in August, Gazprom said. As part of the agreement, Gazprom will take two of the eight seats on Novatek's board. Gazprom, which said its stake would not rise about 19.9 per cent, has been at the centre of speculation about a takeover of Centrica of the UK.

Gazprom's grip on Western Europe tightens with pipelines to Hungary

Russia and Hungary have joined forces to build new natural gas pipelines and underground gas storage facilities in the heart of Central Europe. The pipes would allow Russia to weaken its dependency on Ukraine as a transit country for its gas exports and could undermine the European Union's plans to build a different pipeline that is supposed to reduce Europe's own dependency on Russian gas, the International Herald Tribune reported recently.
Mol, Hungary's oil and gas company said that its chairmen, Zsolt Hernadi, had signed an agreement with Aleksei Miller, chairman of Gazprom, Russia's state-owned energy giant, to extend the Blue Stream pipeline up through the Balkans to western Hungary. Gazprom already sends gas to Turkey in the pipeline under the Black Sea. 
The deal signals Gazprom's intention to gain as much market share as possible in the European gas market. The pact was struck hours before President George W. Bush arrived in Budapest to commemorate the 50th anniversary of the 1956 Hungarian uprising, which was crushed by Soviet troops.
Once complete, the deal would allow Hungary to become a hub for South-eastern Europe, while Gazprom would get access to large gas storage facilities in Hungary and would further reduce its dependence on Ukraine as its main transit route to Western Europe.
In Budapest, Miller said, "The signed agreement will promote further development of stable and reliable partnerships between Gazprom and Mol and open new possibilities for long-term supplies of Russian gas to Europe."
The project between Gazprom and Mol was first raised in March when President Vladimir Putin of Russia visited Hungary. That was a month before the parliamentary elections in Hungary which were won, for the second time, by the Socialist prime minister and former communist Youth activist, Ferenc Gyurcsany.
During his visit, Putin made two unusual gestures as part of Russia's policy to improve relations with its former satellites. He apologised for Soviet Army actions in the 1956 revolt and he returned a valuable book collection which the Red Army had taken back to Moscow when it occupied Hungary in 1945.
The cost of extending the Blue Stream pipeline to Hungary would amount to 5bn Euro, or US$6.29bn, and take five years to build, according to Janos Koka, Hungary's economy minister, who spoke after announcing the deal with Miller.
The Blue Stream pipeline, which is the world's deepest undersea pipeline, pumps less than 3bn cubic metres of gas a year. Gazprom recently acknowledged that that was well under capacity. In contrast, a double-barrelled Baltiv Sea pipeline would be able to pump more than 55bn cubic metres a year.
That pipeline, which would allow Russia to send gas directly to Western Europe, is being built by Gazprom and two German companies, Wintershall and E.ON Ruhrgas.
Koka said the extension of the Blue Stream pipeline was only part of a bigger project. Mol and Gazprom were looking at ways to increase underground storage capacity in Hungary to 10bn cubic metres.
While the deal would give Hungary more direct access to gas supplies from Russia, energy experts said it could also make Hungary, and Europe, even more dependent on Russia.
"In terms of security of supplies, the deal could have some relevance," said Peter Kadarjek at the Corvinus University in Budapest. "It will also contribute to Hungary's and Europe's dependence on Russian gas supplies even though the EU speaks about more diversification of resources."
Russia supplies a quarter of the EU's gas needs, but 80 per cent of that of Hungary, which only joined the EU in 2004.
At the same time, the pipeline would give Gazprom a head start over the EU's Nabucco pipeline project.
That 4.5bn Euro project is backed by Botas, a Turkish energy group, OeMV of Austria, Bulgargaz of Bulgaria and Romania's Transgaz. The plan is to skirt Russia, bringing natural gas to Europe from Iran, Azerbaijan, Kazakstan, Turkmenistan and Egypt, despite fears caused by Iran's nuclear program.
Miklos Losoncz, an energy analyst at the independent GKI Economic Research Company in Budapest, said Russia wanted to circumvent Ukraine as a transit country but also compete with the EU's Nabucco pipeline project.
Putin's determination to find other ways to ship its gas to Europe was strengthened after the Orange Revolution in Ukraine, when pro-democratic forces seeking a closer relationship with the EU won the presidential elections.
Russia said it cut off energy supplies to Ukraine in January because Ukraine would not agree to pay world market prices. The dispute forced the EU to consider speeding the Nabucco project to diversify its energy imports.

Russia tightens its oil sector grip with BP asset

BP's joint venture in Russia announced recently that it would sell a mid-sized oil production unit to the Chinese company, Sinopec, marking the first direct sale of Russian oil fields to the Chinese, the International Herald Tribune reported on June 21st.
Within hours of the announcement, however, Roseneft, the Russian state oil company, said it would buy 51 per cent of the asset from Sinopec according to an option agreement reached before the sale, in May.
As a result, a majority of the BP asset will pass to the state-owned company, further tightening the government's control of the oil industry. The sale also conforms to a pattern of Russia's balancing energy deals between China and the West.
The companies involved did not disclose the pricing, though TNK-BP joint venture had earlier estimated the unit's value at US$3bn.
TNK-BP has been hemmed in by state pipeline monopolies since its creation in 2003.
Yet company managers have repeatedly said they had not been under pressure to sell the production unit, called Udmurtneft, in the upper Volga River basin about 950 kilometres, or 600 miles, east of Moscow.
In a speech recently to investors, Robert Dudley, TNK-BP's chief executive, said the fields were a poor fit in the company's portfolio.
"This is a positive development - it brings another major international investor working with a strong Russian partner into the country's oil and gas sector," Dudley said in a statement.
"It reinforces Russia's pivotal role in global energy markets," he said.
With the purchase, the Chinese company is little more than wetting its feet in the Russian market.
The Udmurtneft fields are mature, meaning much of the oil has already been pumped out, and they are small by Russian standards.
Since production began in 1973, roughly 1.4bn barrels of oil have been pumped from the site; the current proved and probable reserves are 994 million barrels, according to an audit by Degolyer & MacNaughton cited by Rosneft. In other words, about half of the oil is gone.
Rosneft, in its statement, praised the transaction as a first step in cooperation with Chinese companies such as Sinopec, China's largest refinery operator. China is the world's second-largest oil consumer, after the United States, while Russia is the second-largest producer, after Saudi Arabia.
China has been seeking investments in oil around the world to meet surging demand at home, colliding at times with US companies doing the same.
Last summer, the US Congress passed a resolution opposing a bid by the Chinese oil company Cnooc for Unocal of California; ChevronTexaco bought the company instead.
"The Chinese and Rosneft are on very good terms," said Eric Kraus, portfolio manager of the Nikitsky Russia Fund said. "This was clearly a political deal."

Pennine puts backbone into Gazprom

For months, rumours have swirled that Gazprom was about to storm into the UK energy market with a bid for Centrica, the owner of British Gas and the largest supplier of household gas in the UK, the Financial Times reported recently.
Now Gazprom has arrived in a manner that few could have predicted.
Far from battering down the ramparts, the Russian energy giant crept into the market via the back door.
It is buying the supply businesses of Pennine Natural Gas in Wilmslow, Cheshire - a town better known as a footballers' favourite than as a centre of energy trading. 
From offices opposite an Aston Martin showroom, Pennine has, since 1996, built a gas supply business with annual sales of about £10m and about 600 industrial and commercial clients. It has no domestic customers.
The company describes itself as the largest privately owned gas supplier in the UK with a philosophy of "exceptional service at the very keenest prices."
"There are no answer-phones or voicemail messages at Pennine," the company's website says. "If our customers have a problem we want to sort it out; quickly and efficiently."
Pennine thus becomes a small - but Gazprom insists important - part of a sprawling energy empire.
"When we began looking at this, it made really good sense," says Keith Martin, head of trading at Gazprom Marketing and trading, the group's UK subsidiary.
Pennine's owners are Arthur Tait and Jon Feingold, who worked together for Mobil in Cheshire in the 1990s before setting up on their own when the company retrenched its regional operations.
Mr Tait and Mr Feingold also own natural Gas Shipping Services, which GMT has also acquired an option to buy and where Mr Martin will become a director.
NGSS will administer the supply businesses bought by Gazprom.
NGSS has annual sales of about £15m, according to Mr Feingold, who called the deal with Gazprom "a match made in heaven." He says: "As a small supplier, we were finding it very difficult. We were looking for someone to come in and supply us on good terms. Gazprom was looking to enter the market, so it was a natural progression." Talks began around January.
Terms have not been disclosed, but Mr Feingold says: "It looks like a great deal for us." 
GMT has been in the UK since 1999.
Vitaly Vasiliev, chief executive, says the company plans to concentrate on industrial and commercial customers "at the present time" but will keep its options for entering other UK markets - specifically, the domestic gas market and the electricity market - under review.
Mr Martin says Pennine is an efficient and profitable company with a good IT structure and owners who are well respected within the industry.
"It is small at the moment but it is excellent in terms of saleability - there is nothing stopping it growing rapidly," he says. "This gives us a complete new class of market overnight when to build it would take a couple of years.
"We have a ready-made management team who have been smart enough to grow their business through tough times." 
Gazprom says this year that it would like to take a 20 per cent share of the UK gas market by 2015.

Bovanenkovskoye field development approved 

The main Russia state expert commission Glavgosexpertiza has approved a basis for investment in the development of the Bovanenkovskoye field on the Yamal peninsula and the transportation of gas, Gazprom Deputy CEO Alexander Ananenkov said at a press conference in Moscow last Tuesday. He added that this year Gazprom would reach an investment decision on fields on the Yamal peninsula.
Ananenkov said that onshore Yamal fields may provide 250 billion cubic metres of gas per year, and together with offshore fields this figure may increase to 500 billion cubic metres of gas. He said that supplies of gas from the Bovanenkovskoye field are realistic from 2011 and the launch of the remaining fields on Yamal would depend on market requirements.
Asked whether Gazprom plans to invite foreign partners to develop the Bovanenkovskoye field, Ananenkov said that this would involve "modernised but traditional technology" and that Gazprom has no need to invite foreign partners for this project. "At the moment, in any case, this is not being considered," he said.

LUKoil eyes stake in Kharyaga PSA 

Russian oil major LUKoil is again thinking of exercising its option to a 20 per cent stake in the Kharyaga production sharing agreement (PSA), a company source said, Interfax News Agency reported.
The source said LUKoil had at one time wanted to exercise the option, "and even made an advance payment," but had then changed its mind. "Now we are thinking about this again," he said. 
French oil and gas company Total and LUKoil could select projects for joint participation over the next few years, Christophe de Margerie, Total President of Exploration & Production, said in February this year. "I wouldn't be surprised, and that would be my wish, if concrete projects with LUKoil took shape over the next few years," he said. He did not reveal the projects that the company is thinking about, but said that Total and LUKoil are close in their approaches to work. "We are using similar work methods concerning both oil and gas," de Margerie said.
A check carried out by the Russian Natural Resource ministry and natural resource watchdog, Rosprirodnadzor, indicates that France's Total has not met production and drilling targets at the Kharyaga oil field in Nenets autonomous district, the ministry said in April. The statement said that Kharyaga operator, Total Exploration and Development Russia, is worsening the selective nature of the field's development, causing losses for the state, which is the owner of the subsurface resources. 
The Russian Natural Resource Ministry then said it would support cooperation between France's Total and Russian companies. Russian Natural Resource minister, Yury Trutnev, spoke of these plans at a meeting with Total president, Thierry Desmarest, in Moscow on April 24th.
"Cooperation with foreign companies - is an opportunity for Russian companies to develop also, as a result of competition, the use of new technology and additional investment. The Russian Natural Resource ministry will support Total's cooperation with Russian companies," the minister said.
LUKoil is one of the biggest oil companies operating in the Timan-Pechora oil and gas province, where Kharyaga is located. Total is developing the Kharyaga field under a production sharing agreement signed in 1999. Participants in the Kharyaga project are France's Total (50 per cent), Norway's Hydro (40 per cent) and Nenets Oil Company (10 per cent).
In 2002 an agreement was signed for LUKoil to receive a 20 per cent stake in the project, but this has not yet come into effect. A total of 45 million tonnes of oil should be produced in the 33 years the agreement is in effect. A+B+C oil reserves in the contract area are estimated at 97 million tonnes. There was a running dispute between Total and Russia over the project for several years. The dispute arose because Russia refused to accept the French company's investment costs for 2001-2002, considering them to be too high. 

Russia plans nuclear plant to float at sea

An Artic military shipbuilding plant and Russia's Atomic Power Agency signed a contract to build the world's first floating nuclear reactor, the International Herald Tribune reported on June 16th.
The 9.1bn rouble, or US$336m, reactor will be built by the Sevmash plant in the Artic port of Severodvinsk beginning next year, and will be commissioned in October 2010, said Sergei Obozov, head of the consortium, which is in charge of nuclear power plants.
He said that the reactor - to provide heating and electricity to Sevmash - was the perfect solution for supplying energy to remote Artic sites, and that Russian authorities were looking at 11 other possible sites for such reactors.
The head of the Atomic Power Agency, Sergei Kiriyenko, denied that the reactor would pose a security or safety risk, saying that the Sevmash plant - the only Russian plant where atomic submarines are manufactured - was sufficiently well guarded.
"There will be no floating Chernobyl," Kiriyenko said, ITAR-Tass News Agency reported.
Environmental groups have sharply criticised the plan. "Floating nuclear power plants are absolutely unsafe, inherently so. There are risks of the unit itself sinking, there are risks in towing the units to where they need to be," said Charles Digges, editor of the Web site for Bellona, an environmental protection group based in Norway.

Rosneft IPO tempts big rivals despite political risks

When Rosneft announced it planned to hold what could become one of the world's largest initial public offerings in years, it was met with scepticism by global investors, the Financial Times reported on July 6th.
So much so that there was concern that the debt-laden Russian oil giant's plan to raise up to US$11bn (£6bn) was in danger of becoming an embarrassing flop.
That was until the state-owned company began enlisting the support of its peers for the planned Moscow and London listing.
Bankers familiar with the sale process believe Rosneft is likely to earmark no more than US$4bn of the offering for strategic investors, which in addition to the Asian companies will also include some big western oil companies.
But a commitment from some of Asia's largest and most powerful companies and possibly BP, is expected to act as a strong vote of confidence in the IPO.
There are reasons to doubt the company's prospects.
It faces lawsuits from claimants who dispute its right to own its main assets, which it controversially seized in 2004. Also, the board includes government officials, who the company itself admits, could put the national interest ahead of that of minority investors.
For some big western oil companies, the investment in Rosneft will evoke memories of when they bought stakes in Petrochina and Sinopec, China's largest state-run oil companies, a few years ago.
The conditions were similar - the state-controlled companies were privatising too small a stake to allow foreign investors any management say. But the foreigners were lured nonetheless by the promise of the country's giant market.
A lack of management authority is deterring Japanese oil companies and trading houses, such as Inpex, Mitsui and Mitsubishi, from expressing any interest in Rosneft. "It wouldn't be in our interests to buy a non-controlling stake of a company because we would be unable to wield any influence," says one official at a Japanese trading house. "Politically, it wouldn't make sense either because there would be absolutely no guarantee that our interests would be represented." The same goes for any investor in Rosneft. But for the Chinese, any chance of accessing the Russia's enormous oil and gas reserves, second only to Saudi Arabia's is hard to resist.
Chinese oil companies have become some of the most aggressive buyers of international oil and gas assets in recent years on the back of the country's fast-growing economy and limited domestic resources.
Moscow has long been wary of allowing Beijing control of its valuable resources. But in June Sinopec's parent company announced it would buy Udmurtneft, a Russian oil company, in cooperation with Rosneft, in a deal seen as a breakthrough in the two countries' energy relations.
This was followed by news that CNPC and Sinopec Group might become strategic investors in Rosneft. The pair are expected to be given some guarantees they will be given some access to the country's energy resources - a key condition of most oil deals involving the Chinese.
Petronas, Malaysia's state energy company, has also been invited to take up a stake in the Russian oil firm, people close to the company say. The investment would make sense for the cash-rich Petronas, which reported a record profit of US$11.6bn for the year ended March 31st from its increasingly global business.
Less than one-quarter of its revenue cam from the Malaysian domestic market following an aggressive overseas expansion programme over the past decade.
But it still does not have any exposure to Russia.
Other potential Asian investors include Temasek, Singapore's investment company. For Temasek, Rosneft would represent an important diversification of its rapidly expanding overseas portfolio.
ONGC, India's largest oil company, is also believed to be interested. It sees a stake in Rosneft as a way of "piggy-backing" into Russia, analysts say. It also has its eye on central Asia, where the Russian company is influential. For several years, ONGC has been trying to build on its only asset in Russia, a 20 per cent stake in the vast Sakhalin-1 concession in Siberia.
But the company remains a modest operator alongside big western energy companies and lacks financial bargaining power. Bankers doubt it would be prepared to take the risk of investing in a company like Rosneft. 
The same risk has to be borne by the other potential investors. Shell, ExxonMobil and BP were lucky when they invested in Chinese companies. They were not granted the special access they had hoped for but they made a hefty profit when they disposed of their Sinopec shares a few years later after oil prices soared.
BP is looking at Rosneft closely but is thought to be concerned both about price and about finding itself the only strategic investor in the company.
But, for BP as for other strategic investors, price is not everything. The decision on whether or not to invest is also a political one.
As Vladimir Putin, Russia's president, has tightened his grip on his country's energy industry, the position of TNK-BP, the 50-50 Russian joint venture - the biggest of its kind - has become increasingly precarious.
The investment has proved vital for BP, saving the company's ailing oil production growth picture. But to keep up the pace, BP needs to develop Kovykta, a big Siberian gas filed.

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FOREIGN COOPERATION

NATO-Russia cooperation 

Expanding cooperation within the NATO-Russia Council format meets the interests of both Russia and the alliance, State Duma Deputy Speaker and head of the State Duma's delegation at the NATO Parliamentary Assembly, Lyubov Sliska, has said. "We are glad to notice the dynamically expanding interaction within the Russia-NATO Council format and in the response to common challenges in the area of security. We believe that this meets the long-term interests of both Russia and the countries in the alliance," Sliska said at the 63rd Rose-Roth seminar, which looks into security in the South Caucasus, in Sochi. Russia and NATO are expanding practical cooperation on antiterrorist measures, peacekeeping operations, the improvement of interoperability, missile defence, air traffic control, military- technological ties, defence research and technology, and the handling of emergencies, Sliska said. Russian Black Sea Fleet ships will be engaged in joint operational patrolling together with NATO vessels within the framework of Operation Active Endeavour this year, Sliska said. "Russia intends to move ahead in combining the potentials of our country and the alliance in confronting new challenges and threats," she said, New Europe reported.

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FOREIGN DEBT

PM signs decree on Paris Club debt repayment 

Russian Prime Minister, Mikhail Fradkov, has signed a decree, endorsing accords, reached in Paris on June 15-16th 2006, on repaying Russia's debt to the Paris Club, amounting to about US$22 billion, Interfax News Agency reported.
Russia and the Paris Club of Creditors signed a multilateral protocol on the full repayment of Russia's debt to the club ahead of schedule, an Interfax correspondent reported from the finance ministry, where the document was signed. Deputy Finance Minister, Sergei Storchak, signed the protocol on Russia's behalf.

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INVESTMENT PROJECTS

Siemens ready to participate in TGK-8 projects 

Siemens is ready to take part in the implementation of investment projects at Southern Generation Company - TGK-8 (YuGK TGK-8), Siemens in Russia President, Dietrich Moeller, said at a meeting with YuGK TGK-8, the generation company said in a press release, New Europe reported.
At the meeting, which was requested by Siemens, YuGK TGK-8 director general, Viktor Gvozdev, presented the company's investment programme to 2030. It proposes the renewal of up to 65 per cent of the southern region's generating capacity and spending is forecast at 19.8 billion roubles. Among the most important parts of the programme is the construction of a 450 megawatt combined-cycle plant (CCP-450) at Krasnodar TETs, CCP-220 at Volgograd power plant, and CCP-110 at Astrakhan power plant. All these projects are efficient and advantageous for the regions, the release said.
Electricity is one of the main directions for Siemens, Moeller said. Siemens sees great potential in the Russian regions and plans to work closely with such major and high potential companies as YuGK TGK-8, the release cites Moeller as saying. Potential partners are ready to supply YuGK TGK-8 with gas turbines for power stations and implement telecom and information technology projects.

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MINERALS & METALS

Norilsk Nickel to invest US$3 billion by 2011 

OAO MMC Norilsk Nickel plans to invest up to US$ three billion in developing production by 2011, and nickel production will increase seven per cent in this period to 260,000 tonnes, the company said in a press release in which it announced the main points of its long-term production strategy, New Europe reported.
Following the implementation of this program, platinum group metal and copper production will be practically unchanged from current levels. Implementation will form the base from which to increase the company's metal production based on improvements to its ore beneficiation technologies that it is currently pursuing, as well as processing additional stockpiled materials, the release said. Targeted nickel output by the world's biggest producer of the metal is 243,000-248,000 tonnes in 2006.

GidroOGK discusses projects with aluminium producers 

GidroOGK, set up during energy reforms, is holding talks on implementing joint projects with the four biggest aluminium producers in Russia - Russian Aluminium, SUAL, Alcoa and Hydro Aluminium, Vyacheslav Sinyugin, head of the energy company, said, Interfax News Agency reported.
"We are seeing strategic interest from consumers to develop hydro generating capacity. We are in a dialogue with them and are discussing possible acquisitions in specific regions," he said. There isn't any concrete agreement with these companies yet, he said.
RusAl is the first partner of GidroOGK. The company signed an agreement in May to implement a project to set up the Boguchany Energy Metallurgical Union (BEMO) on an equal basis for about US$3.6 billion. The project will involve completing the Boguchany plant with design capacity of 3,000 MW on the Angara River and construction of a smelter to produce 600,000 tonnes of primary aluminium per year.
Cooperation between GidroOGK and RusAl will not be restricted to the BEMO project, Sinyugin said. "RusAl has plans to expand aluminium production in Russia. They are asking where we are thinking about building energy sources," he said.
Norway's Hydro Aluminium is considering several sites to build aluminium smelters in Russia, including in the northwest and the Far East, and it could enter into a partnership with SUAL. In answer to a question about Alcoa's plans, Sinyugin said the world's biggest aluminium company "is still looking at Russia on the whole" and hasn't yet determined its geographic priorities.
In commenting on the possible cooperation schemes with aluminium companies, Sinyugin said that this doesn't mean that it will be similar to the BEMO construction. He used a simple example when GidroOGK builds a hydroelectric plant and an aluminium producer builds a smelter and they have a long-term contract for energy deliveries between themselves. "This will be allowed under new market rules (that haven't been approved yet), so I think we'll look at this scheme as the base one," Sinyugin said.

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