Books on Russia
Update No: 294 - (28/06/05)
Gazprom's rising costs raise concerns
Gazprom is in a league of its own when it comes to opacity and incompetent
management. It is reminiscent of what Aneurin Bevan, health minister at the
time, said of his own Labour government in 1947 in the UK when there was a fuel
crisis and a scarcity of fish simultaneously: " This island is richer in
coal than any country in Europe (it then was) and is surrounded by seas full of
fish (it then was). It takes genius in bureaucracy to produce a shortage of both
at the same time."
Gazprom has the highest reserves of natural gas of any concern in the world,
well over 50 trillion cu m. Yet it has engendered a situation where its costs
are growing faster than its revenues, despite the highest world prices ever.
This is posing a major challenge for the world's largest gas producer, as it
scrambles to make up for declining output at its main fields, according to a new
"In order for Gazprom to become a world-class company and meet growing
demand for gas, they've got to bring these costs under control," said
William Browder, chief executive of Hermitage Capital, a Moscow-based investment
fund with a substantial share of its US$1.7bn (1.389bn Euro) in assets in
Gazprom stock. Hermitage is running for a seat on Gazprom's board and using its
new study to campaign for support among other shareholders.
Gazprom's financial health is important not only to investors. Controlling about
a quarter of world gas reserves, Gazprom accounts for nearly a third of all the
gas produced in the world and is the main supplier for Europe, mainly for power
generation. As demand for the clean-burning fuel surges, Gazprom will be a key
source for the global market. With its main Siberian fields in decline - most
were first developed in the Soviet era - the company needs tens of billions of
dollars in new investment during the coming years just to keep production
Russian officials worry that the inefficient gas giant could fall short.
Domestic consumers would get squeezed, since Gazprom would ensure supplies to
export customers, who pay higher prices. "Our forecasts show that as soon
as 2006-2007, we'll face a shortage of gas in the domestic market," said
Kirill Androsov, an Economy Ministry official responsible for regulating Gazprom.
Shades of 1947 in the UK.
"We are coming to the end of the era of cheap gas," he added, noting
that Gazprom hasn't provided the government a detailed plan for how it will
maintain and increase production.
The gas giant rejects those worries, promising a small increase in output this
year with more gains in the future. Gazprom has consistently lobbied for
double-digit increases in domestic gas prices to help cover its rising costs.
Regulators have obliged, boosting domestic prices sharply during the past few
years. But they have grown more reluctant recently as Gazprom's costs have
"Operating costs are rising faster than revenues even in the current
favourable price environment," Androsov said. "These figures are
Gazprom officials say a new cost-cutting programme has helped slow the
increases, saving 40bn roubles (1.15bn Euro) last year. The target for 2005 is
only 13,8bn roubles, however. "We've had some success, but we understand we
need to work now to make cost-reduction more systematic," said spokesman
The Russian government is in the process of acquiring an additional 10.7% stake
in Gazprom, which would raise its total stake to more than 50%. But it also
plans to loosen restrictions on foreign investment in Gazprom shares, which
could lead to more pressure from private shareholders.
The Hermitage study, based on Gazprom's own financial and regulatory
disclosures, as well as government and other data, provides a detailed look at
the challenges. Staff costs have gone up about 50% a year during the past two
years, according to the study, making Gazprom's salaries among the highest in
Kuprianov said Gazprom needs to pay well to attract employees, particularly in
its remote Siberian production units. He said average wages are about 25,000
roubles or about 720 Euro, a month, only slightly higher than in the oil
Materials costs jumped 82% in the first nine months of 2004, the latest period
for which detailed data are available, according to Hermitage. Gazprom blames
much of the increase on a surge in prices for steel used in pipes.
But Hermitage said that the gas giant relied on an unknown Russian trading
company for a large share of its purchases of pipes in 2004 and was paying 35%
more for pipes from main supplier Ukraine that year, even though market prices
rose only 1%. Kuprianov said Gazprom is looking into the trading relationship.
An aura of corruption is all over this story as in all matters pertaining to
In previous years, Hermitage has exposed similarly unusual financial
arrangements that allegedly cost Gazprom billions. The company has since
eliminated many of those. But what about new 'financial transactions?'
Hermitage's Browder said Gazprom's apparent overspending on capital projects is
particularly alarming, given the company's huge need for investment. His study
cites the example of one 2,700km pipeline Gazprom is building from a field in
the Arctic to European Russia. According to a recent regulatory disclosure, the
project cost US$9bn, or US$3.3m per kilometre, more than double what similar
projects in the rest of the world cost. Gazprom officials said recently the
actual cost was about US$6bn, which still is well above the competitive levels.
Hermitage also criticised Gazprom for spending more than US$1bn last year to buy
shares in Russian electric utilities, even as it was borrowing heavily to fund
capital spending. Gazprom executives say they want to expand into electric power
to increase profits, but both Hermitage and Androsov of the Economy Minister
argue that the company should focus on its core business. "We don't
understand Gazprom's expansion into the electricity sector," Androsov said,
noting that the share-purchase decisions were made without the approval of
Gazprom's board - an incredible situation given the cost in excess of US$1bn.
Long term, he said, the only way to improve Gazprom's efficiency is to boost
competition in the sector. So far, however, the government has postponed most
efforts to restrict Gazprom's monopoly position.
Operating a sort of Darwinism in reverse, the government has shut down its most
transparent and efficient energy giant, Yukos, the creation of its most
brilliant businessman and greatest philanthropist, Mikhail Kodorkovsky, now
langushing in jail, while it turns a blind eye to opacity and shenanigans of
Russia's largest company by far. hardly surprising that, despite soaring energy
prices word-wide, the Russian economy is slowing down and growth prospects are
Russia lowers 2005 GDP forecast to 5.8%
The Russian Economic Development and Trade Ministry revised downwards its
2005-2008 GDP, industrial output and investment forecasts, Andrei Klepach, head
of macroeconomic forecasting at the Russian Economic Development and Trade
Minister, said recently.
Klepach said the GDP forecasts were lowered to 5.8% from 6.5% for 2005, to 5.6%
from 5.9-6.1% for 2006, to 5.8% from 6.2% for 2007 and to 6.0% from 6.2% for
2008. He said the industrial output forecast was lowered to 4.6% from 5.2% for
2005, to 4.6% from 5.5% for 2006, to 4.7% from 5.5% for 2007 and to 5.2% from
5.5% for 2008.
The capital investment forecast was lowered to 5.9% from 10% for 2005, to 9.8%
from 11% for 2006, to 9.1% from 9.6-9.7% for 2007 and to 9.3% from 9.6-9.7% for
2008, Klepach said.
The main reason the macroeconomic figures were lowered was because there was a
significant slowdown in growth in the oil and gas sector, especially in the oil
sector, where the growth in oil production was 3.4% in January-April 2005, which
is lower than the forecast and the 8% growth in 2004, according to him.
Oil exports practically did not grow in the first quarter, he said. Even the
current forecast is based on improvements in the oil sector, Klepach said. The
lowered forecast for 2005 was also due to weak first quarter results, when GDP
growth, according to economic development and trade ministry forecasts, was 5%.
"It's clear that we are not reaching the high rate of growth envisioned
earlier. One could suggest that the connection between high oil prices and the
rate of growth has disappeared," Klepach said.
The tax burden has already reached its limits in the oil sector and it is
necessary to consider proposals that it will fall, he said. In order to
stimulate investment in the oil sector, the Russian government has tasked the
interested agencies work out a complex plan to increase oil production,
including by changing taxes, Klepach said.
Nevertheless, the dynamic of rising prosperity will remain in place, he claims.
Real incomes of the population are expected to grow by 9.4% in 2005 and by
almost 40% by 2008 compared to 2004. Time will tell about that.
According to a presidential instruction, public sector employees' salaries will
grow 50% in 2008 compared to 2004, which corresponds to an increase in nominal
terms by 110%, Klepach said. Cushier and cushier jobs for the boys, notably in
the largest cash cow of all, Gazprom.
When one day the full story comes to be written - as it will, it may well be the
case that Gazprom will be shown to be the greatest 'porkbarrel' corporation of
all time making more crooked millionaires than any corporation in the history of
IFC to invest in Russian sector
The International Finance Corporation (IFC), the World Bank's financial arm, for
the first time is investing in Russia's gas sector. A recent IFC statement said
the bank signed an agreement to purchase 1% of the stock in Novatek, Russia's
largest independent gas producer. The size was not disclosed. This deal is part
of the IFC's efforts to support independent gas producers. According to IFC,
these investments will help to stimulate more money into that sector, Director
of Oil, Gas, Mining and Chemicals Department at the IFC, Rashad Kaldany, said in
Novatek's main production units are Yurkharovneftegaz, Tarkosaleneftegas and
Khancheineftegaz, in which it holds 100%. Proven reserves at Novatek fields top
580bn cubic metres of gas and 50m tonnes of liquid hydrocarbons to SPE
classification following the consolidation of production assets in late 2004.
The IFC has put 1.9bn Euro from its own pocket into roughly 100 projects in
Russia since 1993.
Sakhalin inks LNG contract with Tohoku Electric
Sakhalin Energy and Tohoku Electric Power Co Inc signed a deal on the supply of
up to 420,000 tonnes per year of LNG for a period of some 20 years, with
deliveries expected to commence in 2010, Sakhalin Energy said in a statement,
Interfax News Agency reported.
Sakhalin Energy and Tohoku Electric will now continue discussions to finalise a
full sales and purchase agreement. LNG will be supplied from Sakhalin Energy's
9.6m tpy LNG plant, which is under construction at Prigorodnoye at Aniva Bay on
the southern tip of Sakhalin, where overall design, procurement and construction
work is now more than 65% complete. The plant will have two gas liquefaction
process trains, each with a capacity of 4.8m tpy. The Sakhalin-2 production
sharing agreement covers the Piltun-Astokhskoye and Lunskoye fields that hold a
recoverable 150m tonnes of oil and 500bn cubic metres of gas. Sakhalin Energy is
owned by Royal Dutch/Shell (55%), Mitsui (25%) and Mitsubishi (20%).
Russian oil investments to reach 270bn Euro
Total investments in the Russian oil and gas sector will be worth 270bn Euro in
the coming decade, Vladimir Sayenko, head of the department of the state energy
policy at the ministry of industry and energy, announced on May 30th at an
international conference on mergers in the oil and gas industry of Russia,
Interfax News Agency reported.
This information comes from the investment plan of the Russian oil and gas
development strategy for the period until 2015, Sayenko added.
The ministry drafted the strategy under governmental instruction in 2004.
According to him, the production of hydrocarbons would increase in the coming
decade but the growth rate will be smaller as compared to now. He predicted that
oil output might reach 530m tonnes in 2015 while gas output may amount to 740bn
The growth of expenditures in the oil and gas sector in the period 2010-2015
could lead to a dearth of the industry's own resources which Sayenko believes
could reach 50% in the gas sector. He underlined the need for searching outside
sources of financing of the oil industry. As for the gas sector, he favours the
balanced implementation of a number of measures, like the growth of forecast
dynamics of gas prices and the speeding up of institutional transformations.
Sayenko said that overall investments in the raw materials complex of Russia had
doubled over the past five years and had amounted to 1.3 trillion roubles.
This was due to a favourable situation on the world market and a high
profitability of the oil and gas sector. Russia exported about 100bn Euro worth
of oil and 32% of the gas it produced in 2004.
Rosneftegaz to buy shares from Gazprom
Russia's Rosneftegaz, which will absorb 100% of Russian state-owned oil company
Rosneft, will buy the Gazprom shares from subsidiaries after borrowing money
from leading world financial institutions abroad, the Russian Economic
Development and Trade Ministry recently announced on its website, Interfax News
Interfax quoted the ministry as saying that the format by which the state will
consolidate the controlling stake in Gazprom in fulfilment of a presidential
decree on the liberalisation of the gas giant's share market had been finalised.
In the first phase, 100% of Rosneft would be privatised by entering the shares
in the charter capital of the Rosneftegaz company. Rosneftegaz will buy as many
Gazprom shares as is necessary to give the state control from Gazprom's
subsidiaries at their market value.
During the initial stage, the state will gain control of Gazprom by placing the
controlling interest in Gazprom's issued shares with the Russian property agency
or Rosimushchestvo, which is the main shareholder of Rosneftegaz and
After this, Gazprom's share market will be liberalised, to remove the so-called
ring dual market for shares in the company. The government is preparing an IPO
by Rosneft to raise the money to repay the banks that are financing the purchase
of Gazprom shares, the ministry said. The ministry predicted that the first
stage of the effort to increase the state's interest in Gazprom will be
completed by June 24th at Gazprom's annual shareholders' meeting.
The ministry added that the second phase involves floating some of Rosneft's
shares on the open market in order to raise the capital needed to pay off
existing debt and increase the joint stock company's capitalisation that would
lead to creation of a public and attractive oil company for investors.
Rosneftegaz will be liquidated once the Rosneft shares have been floated.
The state will become the direct owner of the controlling interest in Gazprom
and in Rosneft. The investment bank Morgan Stanley is expected to soon submit a
final opinion on the value of Rosneft and Gazprom to Rosimushchestvo, the
ministry said. Dresdner Kleinwort Wasserstein (DrKW), which has been hired by
Gazprom, will submit its opinion on the value of the Gazprom share package on
the same date.
Meanwhile, an official with the China National Petroleum Corporation (CNPC)
refused to be drawn on media reports suggesting that his company would acquire a
49% stake in Rosneft. However, CNPC was interested in acquiring Russian energy
assets, he said.
"CNPC is interested in the acquisition of Russian oil and gas assets,"
the official, who wished to remain anonymous, said, but he expressed doubts
about the possibility. "Will Russia sell them to China?" he asked.
Liu Weijiang, another CNPC official, told Interfax that he was unaware that CNPC
was planning to make the purchase. He added that he had noticed far too many
Zhongguo Zhengquan Bao (China Securities Journal), citing Russian news reports,
reported on May 17th that the Russian government plans to sell up to a 49% stake
in Rosneft to CNPC. CNPC was said to have been involved in the auction of
Yuganskneftegaz, the main production asset of the troubled Russian oil firm
Yuganskneftegaz was eventually bought by Rosneft. The report said that the
Russian government was looking to sell the stake for at least US$7.5bn in cash,
which would allow it to boost its stake in the Russian natural gas monopoly,
Gazprom, from the current 38% to over 50%. Russian Energy Minister Viktor
Khristenko will visit China later this month and discuss the sale with CNPC,
according to the report.
EU and Russia sign cooperation treaties
The leaders of the European Union and Russia met in Moscow recently to finally
ink cooperation documents that cement key areas of cooperation and boost
economic and political ties, New Europe reported.
After two years of work fraught with disagreements on points like travel visas
and illegal migration, the sides agreed on the areas that will provide the
framework of relations for the coming years.
These are foreign security; freedom, domestic security and justice; science,
education and culture; and economic cooperation, including energy which remains
the lynchpin in trade, constituting more than half of EU imports from Russia.
The adoption of the treaties "will enable serious progress in the
construction of the unified great Europe we have talked about," Russian
President Vladimir Putin said at the one-day summit.
At the same time, European Commission President Jose Manual Barroso stressed the
necessity of democracy and human rights in Russia for the expansion of the
cooperation. The partnership was "founded on recognition of democratic
principles and human rights and freedoms," he said.
Bilateral relations should rely not on agreements alone but also actions, said
Barroso, who was accompanied by EU foreign and security policy chief Javier
Solana and Luxembourg's Prime Minister Jean-Claude Juncker. Luxembourg is the
current president of the 25-nation EU.
The economic track envisages the creation of an open and integrated market
between Russia and the union, covering areas such as telecommunications,
transport and energy, space and environmental protection. Cooperation in justice
and domestic security is aimed at countering common threats like organised
crime, terrorism and other cross-border problems like drugs- and
Foreign security agreements focus on strengthening international law and
stability in accordance with the United Nations Charter and efforts to ensure
overall joint security for Russia and the EU.
The practical implementation of the agreements would occur over a longer period
as problems get ironed out, Juncker said.
Solana spoke of "enormous progress" with the Russian leadership at the
Negotiations have been complicated by a number of issues including Russian
demands for Siberian overflight charges and easier access for its citizens to
European travel visas.
The EU insists the latter must go hand in hand with Russia signing an agreement
committing it to readmit any Russian nationals illegally resident in the
The EU was trying to reduce the barriers for people and goods but it remained
concerned about the illegal migration problem, Barroso said.
The sides agreed at the recent summit to keep working on the visa and
The EU is also seeking cooperation with Russia to resolve what officials
describe as "lingering frozen conflicts" in Europe, including
Transdniestria, Abkhazia, South Ossetia and Nagorno-Karabakh.
EU leaders had also been expected to insist on the need for free and fair
parliamentary elections in Chechnya in autumn.
Other moot points have included Russia's relations with the 3 former Soviet
Baltic republics which are new members of the Union.
The republics demand formal acknowledgement of their brutal subjugation by the
Soviet Union after 1939. Moscow in turn says the republics agreed to their
annexation by the USSR and accuses them of persecuting ethnic Russians living on
their territory today.
In a testy exchange with an Estonian journalist after the summit, President
Putin ruled out a formal apology for the period of Soviet rule. "We regard
the matter as closed and will not return to it," he said.
FOOD & DRINK
BBH to merge Baltika, Vena, Pikra Breweries by 2006
Baltic Beverages Holding will complete the operational merger of the St
Petersburg-based groups Baltika Brewery and Vena, and Pikra at Krasnoyarsk by
2006, Baltika's President, Anton Artemiev, said, Interfax News Agency reported
The operational merger will take place by January 1st, 2006, he said. The 3
companies' marketing, distribution and sales systems will be consolidated. The
companies' shareholders will decide on merging the legal issues, which will take
longer than the operational merger, Artemiev said. The companies will be united
at OAO Baltika, he said. This was decided because of the geographical location
of the Baltika Brewery and the wide distribution network. In addition, the name
Baltika is similar to the name of Baltic Beverages Holding. Yarpivo, also part
of BBH, is in the process of merging with Voronezh Brewery, therefore "it
can't merge into one structure yet with other enterprises in the holding,"
Artimiev said. It will take a year to merge Yarpivo and the Voronezh Brewery, he
Russia, India deepen global, high-tech partnership
Russia and India will boost cooperation in high-technology fields while mounting
a united front against common dangers, Presidents Vladimir Putin and APJ Abdul
Kalam said recently after historic talks at the Kremlin in Moscow, Deutsche
Presse-Agentur (dpa) reported.
"We agree on the need to combine forces against global and regional
threats," Putin said at the meeting which marked the first visit by an
Indian head of state since the 1991 break-up of the Soviet Union.
"Russian-Indian ties are developing steadily, becoming richer in content
and more dynamic," the Russian leader commented after they examined joint
prospects in power generation, metallurgy, railroad and water transport and
Space cooperation under agreements signed last December was also a topic.
"Several satellites will be launched in India, several others in Russia,
and we will have a very good network," said Kalam, who arrived in Moscow on
The presidents discussed Indian proposals to boost bilateral trade turnover from
US$3bn in 2004 to US$25bn over 10 years.
Energy is a lynchpin of cooperations, with emphasis on oil and gas. Key projects
include the US$12bn Sakhalin-1 development off Russia's Far Eastern Sakhalin
Island, where the Roseneft and ONGC state oil companies of Russia and India both
hold a 20% stake.
Agreements had been reached on large Indian investments in the work, while ONGC
is also likely to be a major player in the future Sakhalin-3 explorations in the
area, according to Kalam.
Meanwhile, work proceeded as planned in Russia's construction of two nuclear
reactors at Kudankulam in southern India. The Russian-made reactor blocks are
due to come online on schedule in 2007 and 2008. "There are excellent
prospects for cooperation in nuclear energy," Kalam said.
There was no information about plans to expand military technical cooperation.
India is Russia's second largest customer for military hardware after China.
Paris Club welcomes Russia's debt prepayment offer
The Paris Club of creditor nations said recently that it "welcomed"
Russia's offer of a prepayment of US$15bn of its debt to the group, New Europe
"The prepayment offer is the largest ever made by a Paris Club debtor
country to its Paris Club creditors and will translate into major savings for
the Russian Federation in the years to come," the group said in a statement
issued in the French capital. In October, Russian President Vladimir Putin had
said that his government was prepared to repay its debts to 17 of the other 18
Paris Club members before they come due. According to the Russian Finance
Ministry, as of January 1st, 2005 Russia owed the Paris Club US$43.1bn. "An
overwhelming majority of creditors have indicated that they are likely to accept
Russia's offer," the Paris Club said.
FOREIGN ECONOMIC COOPERATION
Russia, Kazakstan discuss cooperation
Russian President Vladimir Putin and his Kazak counterpart Nursultan Nazarbayev
briefly discussed bilateral relations during a meeting recently, New Europe
"Cooperation on border issues, in the customs sphere, and in matters
concerning the Caspian Sea were discussed," Russian presidential aide
Sergei Prikhodko told reporters. The two leaders agreed to attend ceremonies
marking the 50th anniversary of the Baikonur space centre in early June.
They also discussed cooperation within the framework of the Shanghai Cooperation
Organisation and the Eurasian Economic Community. At a joint meeting with the
heads of border regions, Putin said that he and Nazarbayev would sign a joint
statement later in the day on visa-free cross-border travel for Russian and
Kazak citizens. Internal passports and birth certificates for children are the
only documents that will be needed to travel between Russia and Kazakstan.
A protocol was signed on March 24th, 2005 in Astana, under which documents
mentioned in an intergovernmental agreement between Belarus, Kazakstan,
Kyrgyzstan, Russia and Tajikistan on visa-free travel, which was signed on
November 30th, 2000, will also be accepted.
The decision stems from the historical, economic and cultural bonds between the
2 countries and will strengthen friendship and mutually profitable cooperation,
the presidents said in a joint statement.
China to inject US$12bn into Russian economy
By 2020 China plans to increase the sum of its capital investment in the Russian
economy to US$ 12bn, a Kremlin source said recently, RIA Novosti reported,
following a meeting of Russia's President, Vladimir Putin, and China's
President, Hu Jintao. According to the agency's source, trade and economic
cooperation between the two countries is developing successfully.
The source noted that in 2004, trade turnover between Russia and China was the
highest in the history of bilateral relations. According to the data provided by
Russian statistics, the volume of trade turnover amounted to almost US$15bn,
while Chinese statistics show a figure of US$21.2bn. Based on the results of
last year, Russia became China's ninth largest trade partner.
The source also recalled that the Russian and Chinese governments have agreed to
increase the volume of bilateral trade to US$60bn by 2010.
Russia resolves border dispute with Estonia
Russia and new European Union member Estonia signed an agreement on their shared
border recently as the enlarged union resolves the final remaining problems over
its outer boundaries, Deutsche Press-Agentur (dpa) reported.
The treaty drafted in 1999 was inked in Moscow by Russian Foreign Minister
Sergei Lavrov and his Estonian counterpart Urmas Paet. It leaves the dispute
between Russia and neighbouring Latvia the EU's last outstanding border issue.
The 3 Baltic republics Estonia, Latvia and Lithuania were admitted to the
European Union last year.
A treaty with Latvia can only be signed if the government in Riga relinquishes
territorial demands dating to 1920, the Foreign Ministry in Moscow says. At the
centre of the dispute is the Russian Pytalovo region, which Latvia calls Abrene.
Russian President Vladimir Putin has dismissed the Latvian land claims as
"idiotic." Border issues coupled with demands for Russia to
acknowledge an illegal Soviet occupation of the Baltic republics in 1940 clouded
recent World War II 60th anniversary celebrations in Moscow.
MINERALS & METALS
EvrazHolding records 420% net profit surge in 2004
Russia's biggest steel producer EvrazHolding increased its net audited profit to
international accounting standards (IAS) by 420% to US$1.083bn in 2004, with
revenue up 180% to US$5.925bn, the company said, Interfax News Agency reported.
In a statement, Evraz said 2004 profit soared almost fivefold and revenue more
than doubled as it prepares to sell shares to the public for the first time.
Net income rose to US$1.1bn from US$207.9m in 2003 on improved efficiency and
lower costs, Evraz said in the statement. Gross profit last year increased 330%
to US$2.434bn and according to adjusted figures EBITDA (earnings before
interest, taxes, depreciation and amortisation) increased 320% to US$2bn. The
company's total assets as of December 31st 2004 amounted to US$4.03bn compared
to US$2.15bn a year earlier.
Commenting on the results, Senior Vice President, Alexander Frolov, said:
"The results are the reflection of a very successful year for the group. We
managed to significantly improve profitability indicators thanks to measures to
increase operational activity and an ongoing programme to cut production
EvrazHolding produced 13.7m tonnes of steel last year. The group includes the
Nizhny Tagil, West Siberian and Novokuznetsk iron and steel plants and the
Nak-hodka seaport in Russia's Far East. Coal producers, Yuzhkuzbassugol,
Neryungriugol and Raspadskaya are also part of the Evraz umbrella as are a
number of major Russian iron ore producers.
The group produces 70% of its own iron ore and all of its coal. The
Luxembourg-registered Evraz, formerly called EvrazHolding, makes so-called long
steel products at home, export more semi-finished products and increased its
share of the iron ore and coking coal markets. "We have significantly
improved our margins through operational improvements and our continued focus on
lowering costs of production," Frolov was quoted as saying.
Ministry to extend LUKoil division's diamond licence
A Russian Natural Resources Ministry commission on the observance of mineral
licences decided to extend the licence held by LUKoil subsidiary
Arkhangelskgeoldobycha (AGD) to the Verkhotina diamond field in the Arkhangelsk
region, the ministry's press office said recently, Interfax News Agency
Nikolai Gudkov, the ministry's chief spokesman, said that AGD had started work
at Verkhotina without agreeing the terms and had therefore breached one of the
licence's main conditions.
"So we decided to start re-registering the licence and to supplement
it," Gudkov said. Rospirodnadzor, the resources watchdog, referred the
issue to the commission because "work was being conducted at Verkhotina in
breach of the terms for the use of subsurface resources and environmental
LUKoil's Dmitry Dolgov said the oil company did not think there were sufficient
grounds to revoke the licence. He said the company was prepared to correct any
breaches of the licence.
AGD and Canada's Archangel Diamond Corporation (ADC) signed an agreement on
November 24th, 1993 when AGD was state-owned and ADC was known as Canmet
Resources Limited for the joint evaluation of the Verkhotima tenement with a
view to mining any reserves of commercial value on the basis of a licence issued
At the start of 1996, the Grib diamond pipe was discovered. Then, ADC demanded
that the licence be transferred to the joint venture on the basis of a signed
memorandum. AGD refused and, in 1998, the Canadian company tried to sue for
US$4.8bn in the Stockholm arbitration court.
But in March 2001, the Stockholm court decided that it did not have the
jurisdiction to deal with the case. Russian laws say that disputes connected to
mineral development on Russian territory must be dealt with by Russian courts.
On August 15th 2001, AGD petitioned the Arkhangelsk court to invalidate the
ADC has had several law-suits against AGD thrown out by American courts, but
LUKoil said in its financial report for the first quarter of 2005 that the State
of Colorado Supreme Court granted a petition by ADC to evoke the case on January
De Beers Consolidated Mines Ltd, who prepared a technical report on the Grib
pipe seam and have explored to a depth of 500 metres, announced reserves of
kimberlite amounting to 98m tonnes, containing about 67m carats of diamonds
worth US$79 per carat.
The average diamond content of the rock is 69 carats per 100 tonnes.
Norlisk Nickel buys CITY shares
Companies hired by Norlisk Nickel have consolidated more than 50% of shares in
the CITY company, managing the construction of the Moscow International Business
Centre "Moscow City," RBC reported recently.
The companies have not revealed information on the total amount of funds spent
on this acquisition. However, experts say the expenses might have reached
US$100m, taking into account the acquisitions of a 32% stake from SPI in March
Polyus confirms merger talks with Kinross
Polyus Gold Mining, the umbrella company for MMC Norlisk Nickel's Russia-based
gold mining assets, is discussing a possible merger with Canadian gold major
Kinross, said Yevgeny Ivanov, the head of Polyus at Troika Dialog's mining and
metals conference in London, New Europe reported.
Ivanov said Kinross was one of many companies that Polyus was talking to. Ivanov
has said Polyus was mulling over two options for entering the international
markets after 2007.
Either Polyus would be listed separately or it would merge with a foreign
company, but preserving Russian share-holder influence. The priority stock
exchanges for a listing would be New York or Toronto. Sources have said Kinross
is one of the companies Norlisk Nickel is discussing a possible merger with.
Kinross, Canada's third biggest gold producer, already operates in Russia's
Norlisk Nickel, one of the world's largest nickel and platinum group metals
producers, intends to spin off its gold extraction assets into Polyus, along
with Norlisk's 20% of South Africa's gold Fields, which is traded on the NYSE.
Expectations are that the new company will have been set up by April 2006.
Analysts suggest it could be the world's sixth-largest gold producer. Each
Norlisk Nickel shareholder will have the right to swap a share in the MMC for a
share in the new company. MMC Norlisk Nickel plans to see the new company listed
on Russian and other trading floors "as soon as possible upon the
completion of reorganisation."
Alrosa to become open joint stock company
The Russian diamond company Alrosa will acquire the legal status of an
"open joint stock company" within one to one and a half years, Alrosa
President Alexander Nichiporuk said recently, New Europe reported.
"I don't think it's a point of essence whether a company is open or closed
because it's the market that values it. But there is Russian legislation, and
the company must become an open joint stock company. I think that all problems
will be eliminated within one to one and a half years," Nichiporuk told
reporters in Moscow.
Alrosa, which commands 23% of the world diamond market, is looking to increase
product sales to US$3bn this year.
Company President Alexander Nichiporuk told reporters recently that the increase
reflected a plan change on the strength of expanded sales. "There will be
net profit, most likely more than the company's supervisory board
endorsed," Interfax quoted Nichiporuk as saying.
The board had earlier endorsed sales revenue for this year at US$2.792bn and net
profits at 13.210bn roubles.
Meanwhile, The Russian justice department is investigating Alrosa for
embezzlement on a massive scale, a spokesman for the public prosecutor's office
in Moscow said recently.
The state-controlled monopoly ran up a debt of 153m roubles (US$5.5m) through
"unfavourable financial transactions," the spokesman said.
Severstal Avto acquires 99.6% of ZMA
Severstal Avto has acquired 99.6% of the Subcompact Car Plant (ZMA), in
Tatarstan, Vadim Shvetsov, general director of Severstal Avto, said at a press
conference in Moscow, New Europe reported.
Investments to acquire ZMA were in the region of US$50m, he said. The purchase
agreement has been signed and the accounts will be finalised, Shvetsov said.
Severstal Avto acquired 74.3% of ZMA from Kamaz and the rest from the Tatarstan
government. The plant currently makes Oka cars.
The company does not plan to stop producing Okas without a reason, Shvetsov
said. Severstal Avto has already signed contracts to supply new equipment to
refurbish ZMA. The equipment will cost at least US$25m and will be able to
produce off-road Rexton vehicles and subsequently South Korea's SsangYong Motor
Severstal Avto and SsangYong Motor signed a strategic partnership agreement in
2004. Resources recently attracted as a result of a Severstal Avto Initial
Public Offer (IPO) were invested in the acquisition of ZMA, Shvetsov said. Kamaz
concentrates on truck production and for it ZMA was a non-core asset, he said.
ZMA made 46,000 Okas in 2004
Severstal Avto plans to increase production at SMA to 80,000 cars a year over
the next 3 to 5 years, Shvetsov said. This will include four SsangYong models,
including 3 off-road models. In answering a question on what other models will
be produced at the plant, Shvetsov said that the agreement with SsangYong was
not signed on an exclusive basis and "we might work with other
Phelps Dodge acquired Russian copper rights
ZAO Shilko Mining, a subsidiary of the world's No 2 copper producer Phelps
Dodge, won a May 5th auction for the rights to explore and mine the Lazurnoye
copper-porphyry field, thought to contain 155,000 tonnes of copper, Interfax
News Agency reported.
The Phelps Dodge subsidiary, which is registered in Chita in Russia's Far East,
bid against companies associated with Dalpolimetall, a mining enterprise from
the Primorye territory, for the 25-year licence, a source at Primornedra, the
local branch of the Federal Subsurface Resources Agency, was quoted as saying.
The Lazurnoye field is in Primorye's Chuguyevka district. Exploration at the
deposit, which is also thought to contain 7.7 tonnes of gold and 2,580 tonnes of
molybdenum, must begin by the fourth quarter of 2006 and be completed by the
middle of 2008. Depending on the geological findings, the first stage of a mine
capable of producing 300,000 tonnes or more of ore per year must be up and
running by the second quarter by 2010. By the end of 2011, the mine must be
producing at least 1m tonnes of ore per year. Construction of the mine's
infrastructure must begin by the second quarter of 2009. Lazurnoye contains
probable P1 reserves of 155,000 tonnes Cu, 7.7 tonnes Au and 2,580 tonnes Mo.
Alcoa to invest US$37m in BKMPO restructuring
Aluminium giant Alcoa has announced plans it will invest US$37m in upgrading
production at OAO Belaya Kalitva Metallurgy Production Association (VKMPO,
Rostov region), which it owns, Interfax News Agency reported.
This money will be used to improve the plant's sheet roll production capacity.
Alcoa said in a statement that the company has already started to supply
hardened discs for the automobile industry to the United States.
This investment of US$37m is part of an overall investment programme for 2005
amounting to US$80m, including funds and the transfer of technology.
The aim of this programme is to increase the competitiveness of the company's
produce on the world market.
Alcoa CEO Alain Belda visited the plant recently. Alcoa acquired BKMPO and
Samara Metallurgy Plant from OAO Russian Aluminium for US$275m in 2004.
MTS boosts Q1 net profit to US$232m
Mobile TeleSystems (MTS), Russia's largest cellular operator by subscriber
numbers, turned net profits to USGAAP of US$232m for the first quarter of 2005,
a 12% increase year-on-year, the company said in a statement, Interfax News
These are un-audited figures, the statement read. MTS's consolidated revenues
for the quarter were up 32% year-on-year at US$1.057bn, operating income before
depreciation and amortisation (OIBDA) was up 22% at US$537m and the IOBDA margin
was 51%. Analysts had expected MTS net profits to increase 6-35% to US$221-280m,
revenues 35-41% to US$1.095-1.140bn, OIBDA 24-34% to US$548-591m and the OIBDA
margin was predicted at from 50% to 53%.
"MTS's main strategy for this year is a balanced approach to investing in
the acquisition of new subscribers with increasing current-client loyalty.
During the first quarter, we demonstrated significant revenue growth as compared
with the same period the previous year.
"The effect from marketing activity with the awarding of bonus minutes in
combination with negative seasonal factors at the end of 2004 led to a drop in
quarterly earnings as compared with the fourth quarter of last year. We expect
revenue and net profit growth to resume in the second quarter of this
year," MTS President, Vasily Sidorov said in the statement.
Sistema telecom profit up 57% in 2004
Consolidated net profit at the large Russian private telecommunications holding
company Sistema Telecom increased 57% to US$1.1bn in 2004, New Europe reported.
The company said in a statement that consolidated revenue increased 52% to
US$5bn. EBITDA (earning before interest, taxes, depreciation and amortisation)
increased 55% to US$2.48bn. Companies in the group have about 45m subscribers.
ZAO Sistema Telecom was set up on July 1st, 1998 as a subsidiary of AFK Sistema
to effectively manage the corporation's telecoms assets.
RZD, Siemens agree on most requirements for trains
Russian Railways, or RZD, and Germany's Siemens have agreed on 90% of the
technical requirements to set up high-speed trains between Moscow and St
Petersburg, RZD's public relations department said recently, New Europe
RZD President Gennady Fadeyev and Siemens-Transportation Systems President Hans
Schabert discussed implementing the high-speed project recently, the release
read. RZD and Siemens specialists held consultations from April 26th to May 14th
on repairing and servicing trains, on a foreign and Russian train car design
concept and on safety requirements.