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In-depth Business Intelligence

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: 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scheme - replacing benefits in-kind with cash - when pensioners were promised increased pensions in place of their withdrawn privileges such as free travel on city transport.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 subsidized medications. 
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 organizer. 
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 economy.
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 potential. 

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 outcome." 
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 Moscow region." 
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 Russia. 
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 within Israel.
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.

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AVIATION

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 association.
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 Agency reported.
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 AN-70's.
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.

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CREDIT RATINGS

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 scale).
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 national scale).
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 shareholders."

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ENERGY

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 delegation.

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 tonnes.

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 Nakhodka.
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 said.

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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 reported.
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 short-term.
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.

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FOREIGN COOPERATION

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 said.
"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 ourselves." 
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.

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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 office said.
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 products.

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%.

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TELECOMMUNICATIONS

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.

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TRANSPORT

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.

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