Books on Russia
Update No: 301- (30/01/06)
Three remarkable events have just happened in Russia. The first is the
assumption of the rotating presidency of the G8 by Russia for the first time,
exercised by Putin. The second is the resignation of Andrei Illarianov, the
close Kremlin aide who had acted as 'sherpa' to bring Russia into the
organization, in protest at the increasing authoritarianism of the regime. The
third is the crisis in gas supplies to the Ukraine, set off by a two-day
stoppage. All three events occurred on or just either side of the New Year.
Illarianov's resignation was actually sparked by the sudden squeeze in gas flows
about to take effect on January 1st, after the refusal of Kiev to accept a more
than fourfold jump in prices by Gazprom for strictly 'commercial reasons.'
The puzzle is why Putin sanctioned the rise by Gazprom, now 51% owned by the
state, on the day he assumed the G8 chair, when the outcry that ensued in the
West was also utterly predictable.
It appears that he expected, along with his advisers, that the West Europeans
affected by any reduction in supplies in transit would blame Kiev rather than
Moscow. An uncompromising statement from Berlin criticizing the squeeze was
instead their lot. Angela Merkel is a very different kettle of fish than her
predecessor, Gunther Shroeder, always cosying up to Moscow as chancellor and now
on the board of the Gazprom venture constructing a Baltic Sea gas pipeline from
Russia to Germany, by-passing Ukraine, which at present takes 80% of Russian gas
Merkel despised Shroeder already for many reasons, not least his gracelessness
in defeat in clinging onto power. But the immediate acceptance of the Gazprom
job by him after quitting office was the last straw; it was brazen in its
refusal to belie the growing Kremlinophilia that characterized his period in
office, despite hardening Russian policies, and had a whiff of corruption about
That appointment now looks to have already backfired for the Russians and the
German Christian Democrats.
Putin at least had the sense to back down immediately. He hardly wanted the
first stage of his presidency to be dominated by him being berated by Germany's
new 'Iron Lady' for allowing Russia to break faith with Ukraine. For that she
could have easily done, primed with ammunition by a statement of Illiaronov's on
January 2nd. He pointed out that, far from the price hike to world levels being
for commercial reasons, it was actually in breach of a contact made in the
summer of 2004, just before the presidential elections in Ukraine, to keep a
price of US$50 per 1,000 cu m for five years until 2009. The Ukrainians
curiously did not mention the matter, preferring that a Russian source should
raise it first. Curious also is since this was whilst the Kuchma government
before the Orange Revolution, presumably intended as an election 'bribe' to the
Ukrainian elections, who nevertheless voted in a pre-western government.
The Orange Revolution then ensued, enraging the Kremlin. The political
motivation of the move, revenge for the humiliation of Russia, could not be
clearer. With the high-octane relentlessness characteristic of Thatcher, Angela
Merkel could have shown up her male colleagues for their fawning on Putin
previously, Bush, Blair and above all Berlusconi. But Putin had the sense to
back off straight away; Germany is too important as a customer and investor to
Merkel is anyway the great winner from the crisis so far, showing up her
predecessor and gaining stature by the day. She had just resolved the UK budget
rebate dispute that concluded the UK presidency of the EU in the second half of
2005. Europe has a new stateswoman to contend with.
In fact a compromise deal was patched up on January 5th, whereby Ukraine agreed
to pay US$95 per 1,000 cu m, up from the US$50 previously, but short of the
US$220-230 demanded by the Russians. The payments are to be via an intermediary,
RosUkrEnergo, a rather mysterious entity. It is a little-known Swiss-based joint
venture owned half by Russia's gas monopoly Gazprom and half by Austria's
Raiffeisen Zentralbank, whose directors prefer to remain anonymous, thus giving
off the stench of corruption.
Former premier Julia Timoshenko refers to them as corrupt. When in office, she
castigated RosUkrEnergo as a "criminal canker on the body" of the
state energy firm, Naftogaz. As a poacher-turned-gamekeeper herself, she may
well know what she is talking about.
Gazprom is to sell gas to the firm at near market rates over US$200 per 1,000 cu
m, but it is allowing Turkmen gas to continue to flow to Ukraine through its
pipeline system, that is to RosUkrEnergo, at the much lower previously agreed
prices. The resultant mix permits the rise to be kept under double, while
greatly increasing Gazprom's take.
Gazprom has also jumped its prices to Georgia, while needless to say, keeping
them at US$47 per 1,000 cu m for its docile client-state, Belarus, all for
strictly 'commercial considerations' of course.
Off the record
"In many capitals, officials were quite surprised, to put it
mildly," said an EU diplomat who was not authorized to speak on the record.
"People were expecting, on the first day of its chairmanship, another
attitude regarding relations with its neighbours and the West, particularly with
regards to this commodity, energy, that's making Russia a world power."
To many people in Western Europe, the business rationale Gazprom cited for its
decision was a thin disguise for political action, punishing a new Ukrainian
government for its policy of pursuing membership in the EU and NATO.
Russia's membership in the G-8 has been controversial since its entry in the
late 1990s. Recently, the issue has come back to the fore with the government's
legal assault on the oil giant Yukos and a new measure that would bring
grass-roots activism under greater government control.
"Putin has shot himself in the foot," said Margot Light, a Russia
specialist and professor emeritus of international relations at the London
School of Economics, after the gas skirmish. "It has tarnished Russia's
reputation both as chair of the G-8 and as a reliable energy supplier."
Merkel adopts hardline approach to Russia
Ms Merkel flew into Moscow for the first time since becoming Chancellor on a
visit on January 16th, but did not waste too much time on pleasantries. The
German Chancellor, as we have seen, has radically altered the course of her
country's foreign policy after confronting Russia's Putin on a range of
difficult issues that her predecessor had studiously avoided.
A fluent Russian speaker, thanks to her education in what was then Communist
East Germany, she was the best-placed of Western leaders to take a tough line.
She tackled Mr Putin on the sensitive subject of Moscow's nuclear co-operation
with Iran, on the state of Russian democracy, and on the behaviour of Russian
forces in Chechnya, as well as on the reliability of Russia's enormous gas
Her forthright approach could not have been more at variance with that of her
predecessor, Gerhard Shroeder, who counted Mr Putin as a close personal friend,
called him a "flawless democrat", and who took a highly paid job with
the Russian energy giant Gazprom after he left office. Ms Merkel has made it
clear she wants to be different and did not shy from raising international
concerns about a controversial new law that would strictly regulate the
activities of foreign human rights organisations in Russia. She called it an
"irritation" and promised she would monitor the law's effects,
prompting Mr Putin to assure her in public that the lawful activities of foreign
human rights group would be unaffected.
On the subject of Chechnya and alleged human rights abuses being perpetrated by
Russian forces there, Ms Merkel said that the two leaders had found "no
common ground," but was nevertheless upbeat about prospects for the two
Ms Merkel had been under serious pressure from nearly all the parties in
Germany, including her own, to adopt a more critical stance on Russia that meant
distancing herself from Mr Shroeder's informal relations with the Russian
leader. Critics alleged that Mr Shroeder's cosy relationship with Moscow meant
he remained uncritical of Russian human rights abuses while allowing Berlin's
foreign policy to be dominated by Russia at the expense of Eastern Europe and
German public opinion was shocked recently by Mr Shroeder's decision to accept a
key post with Gazprom. The ensuing row between Russia and Ukraine over gas
supplies exacerbated German misgivings about the reliability of Moscow as an
energy supplier. But Germany has little room for manoeuvre. Almost one-third of
its gas is Russian and it is set to start importing even more, meaning that Ms
Merkel will have to tread carefully when it comes to criticising Moscow.
Her decision to meet Russian citizens' rights groups, opposition MPs, and church
leaders, at Germany's Moscow embassy was, however, an obvious attempt to show
she viewed Russia differently from Mr Shroeder.
She made it clear during her visit to Washington earlier in January that she
wanted to restore the TransAtlantic relationship and put an end to
Russian-dominated German diplomacy.
Klaus Mangold, chairman of Germany's East-West Industry Committee, said Ms
Merkel's visit was likely to bring about a key shift in Russian-German
relations. "Freedom is at the centre of her political beliefs," he
said. "Coming from the East, she has a different view of Russia."
Russia; the energy power of Eurasia
The energy crisis has revealed Russia's strategy for the next decades.
Russia is well placed to dominate the Eurasian energy industry for the rest of
the century. It has 38% of the world's gas reserves, compared with 35% in the
Middle East, while it is second only to Saudi Arabia in oil.
The first years of the century have seen a rapid energy-led boom, with GDP
growth of 5% per annum sustained on average. If this is to continue, new markets
must be found and old ones expanded. Gazprom is looking further afield than
Ukraine to export its gas. The Baltic Sea pipeline, ready by 2020, could serve
an energy-hungry Northern Europe. The UK, which now hardly takes any Russian
gas, is by 2020 going to have to import 90% of its supplies, as North Sea
reserves run out. A spur of the pipeline to the UK is already being envisaged.
But it is in the central and southern countries of Europe that expansion should
be the greatest. France, Italy and the various Balkan states will all require
more oil and gas from Russia. The Blue Stream gas pipeline project across the
Black Sea to Turkey offers a paradigm here. A spur from Blue Stream westwards or
another pipeline to Bulgaria and onwards will be needed.
But in Southern Europe Russia faces tight competition from the Middle East. It
is in the vast easternmost reaches of Eurasia that Russia has a huge competitive
edge over anyone else, including even Kazakstan. Reserves in the Far East are
not known as yet, although BP surmises that they could be so large as to make
Russia the number one in reserves world-wide, with around 280bn barrels. The
Chinese colossus is the obvious market, but Japan is in fierce contention to
secure its vital energy resources from Siberia, both Sakhalin Island and the
The Khodorkovsky affair gave the Japanese a boost. Yukos had been right behind a
private deal with the Chinese. Indeed, it was this that was the last straw for
the Kremlin. Since its former boss has been in prison and Yukos has been
dismembered, it has been on the backburner, although China is far too big to
ignore. The Japanese are tilting for a £3.2bn 2,200-mile pipeline from Angarsk
to Nakhodka, from which oil could be exported at up to 1 million barrels per day
to Japan, Korea, China and the US. The Japanese, who have only invested £550m
so far in Russian oil and gas, are willing to invest another £1.1bn in
exploration for more and £2.7bn in the pipeline to Nakhodka. High-tech Japanese
exploration could make for a better estimate of the size of Russia's reserves.
The Chinese scheme is for an estimated £1.5bn, 1,400-mile pipeline from Angarsk
to Daqing, shipping 600,000 barrels per day. It would feed the Mao-era
industrial complex there. Russia produced about 8m barrels per day in 2003. It
is reckoned to be able to double that within a decade, in which case both the
Chinese and the Japanese markets could be satisfied.
The case of Illarionov - key Kremlin adviser
A strong advocate of free markets and fan of Ayn Rand who once had Putin's
ear, Illarionov saw his influence diminish over the past two years. Holding on
to his diminishing position, he said, "I considered it important to remain
here at this post as long as I had the possibility to do something, including
But he finally resigned in frustration at the Putin administration's
increasingly authoritarian direction, which included a sharp turn away from
economic liberalization. Free marketers saw Illarionov's influence as a beacon
of hope for Russia's future. His departure may indicate that things in Russia
have gotten worse -- but some good may yet come from it.
The 1998 rouble collapse brought Illarionov notoriety as the first analyst to
sound the alarm. He argued unsuccessfully for the government to undertake a
controlled devaluation of the currency to avert a crash and warned against
policy advice from the International Monetary Fund, which, he argued, set
"unrealistic targets" regarding inflation, GDP growth, and trade
balance. Further, "unearned financial assistance" in the form of IMF
loans, he argued, created an environment of moral hazard which led the Russian
government to spend and borrow excessively.
In 1999, Illarionov joined the Centre for Strategic Planning, an economic policy
think tank set up by Putin. In December of that year, the Centre released its
Strategy of Development for the Russian Federation to the Year 2010, co-authored
by Illarionov. The document endorsed wide-ranging market reform, including
deregulation of the economy and strengthening of property rights. In April 2000,
Putin named Illarionov as his top economic adviser and endorsed Illarionov's
proposal for a 13 per cent flat tax -- which was enacted -- and his goal of
doubling the size of Russia's economy in 10 years.
To achieve the latter, Illarionov argued, Russia would need to reject the Kyoto
Protocol, which would stifle Russia's economic growth by limiting the country's
use of energy. Illarionov had reason to be optimistic. In December 2003, he
announced that Russia would not ratify Kyoto; President Putin did not contradict
this public statement. And why tamper with success, especially if economic
reform's results were starting to show -- with Russian GDP growth of 9 per cent
in 2000, 5 per cent in 2001, and 4 per cent in 2002? But in November 2004,
Russia ratified Kyoto in exchange for European Union support of its entry into
the World Trade Organization. For Andrei Illarionov, it was a major defeat.
And then came the Yukos affair. In October 2003, members of the FSB security
force -- the successor to the KGB -- stormed the private jet of Mikhail
Khodorkovsky, at the time head of oil giant Yukos and Russia's richest man. He
was arrested and later charged with fraud and tax evasion. Found guilty, he was
sentenced last May and is currently serving a nine-year sentence in a Siberian
Critics of Putin saw Khodorkovsky's arrest and prosecution as punishment for his
financial support of opposition parties. Moreover, the arrest came shortly after
he acquired the publishing rights to the prestigious Miskovskiye Novosti
newspaper and hired an investigative journalist critical of Putin, the BBC
Assessing the merits of the case would require another article, and Khodorkovksy,
as a well-connected oligarch, hardly made for a sympathetic dissident figure.
But it would be difficult for any disinterested observer to consider the Russian
government's handling of the case anything but heavy handed.
In August 2004, the state seized Yukos's biggest asset, its Yuganskneftegaz oil
production unit -- which at the time accounted for 60 per cent of Yukos's daily
production of 1.7 million barrels -- under the justification of settling
exorbitant back-tax claims which came to total over US$27 billion. In December
of that year, Yukos was forced to sell Yuganskneftegaz to state-owned oil
company Rosneft for US$9.4 billion.
The assault on Yukos became part of a larger trend of greater state involvement
in the economy, especially in the energy sector, as state-owned companies moved
to acquire more assets. The Russian state now controls around 30 per cent of the
nation's oil industry.
Economically, the Yukos takeover gained the government little. Growth in oil
production has slowed from an average of 9 per cent during the early years of
Putin's government to around 3 per cent this year, Valery Nesterov, an energy
expert with the Russian investment bank Troika Dialogue, told The Christian
Science Monitor. And Illarionov notes that Yuganskneftegaz, which once pumped 1
million barrels a day, saw its production drop by at least 15 per cent between
2000 and 2003, observing that this "staggering drop in proceeds…merits
being entered in the book of anti-records."
Yet for the Kremlin, there may be significant political gains form its energy
sector meddling. First, the Khodorkovsky prosecution rid Putin of a powerful
In addition, Illarionov has decried what he calls the "selective use of
energy as a weapon outside Russia." Russia has used its dominance of the
former Soviet energy infrastructure, such as pipelines and pumping stations, as
leverage over its neighbours.
Illarionov's public reaction to these developments was unlikely to raise his
status inside the Kremlin. He was openly critical of the Khodorkovsky trial. In
December 2004, he called the government's intervention into the energy sector --
including the forced sale of Yganskneftgaz and state-owned energy giant
Gazprom's US$13.1 billion acquisition of the then-independent oil company
Sibneft -- the "scam of the year." Days after making these remarks,
Putin stripped Illarionov of his duties as Russian representative to the G8. And
over the past year Illarionov found himself less listened to by Putin as the
latter went in a more authoritarian direction.
"It is one thing to work in a country that is partly free," said
Illarionov on the day of his resignation. "It is another thing when the
political system has changed, and the country has stopped being free and
democratic. I did not sign a contract with such a state, and therefore it is
absolutely impossible to remain in this post." Economic freedoms may not be
the only ones threatened. On December 27th, Russia's upper house approved new
controls on non-governmental organizations (NGOs), including human rights
So is Russia crawling back to its Soviet past? Not really. Illarionov recently
said that Russia is descending into a "corporate model ruled by state
corporations," in which some private firms continue to thrive, but where
the state controls the economy's commanding heights. Recognizing the importance
of energy to a country's future led Illarionov to oppose the Kyoto Protocol.
Unfortunately, the Putin government also recognizes energy's importance, and is
now seeking to utilize it for illiberal ends -- and that is bad enough.
For Putin, it may have been better politically to keep Andrei Illarionov 'within
the tent' in the hope that he would not take sides, in Michael Corleone's words,
"against the family." Yet Illarionov was never afraid to criticize the
president he served. It will be interesting to see how his criticisms of the
Putin government shape up now that he is outside of it.
AVIATION & SPACE
Russia agrees to transport US astronauts to ISS
Russia and the United States agreed to transport US astronauts to the
International Space Station (ISS) in exchange for payment, Russian Space Agency
(Roskosmos) head, Anatoly Perminov, said. The outgoing agreement to transport
the astronauts free of charge was replaced by the new agreement which was signed
by Roskosmos and the US space authority, NASA, New Europe reported.
The agreement deals with flights on board Russian spacecraft for US astronauts
travelling to the ISS and back and the transport of NASA goods to the station.
"A seat will be reserved on every Soyuz rocket in 2006 for a US
astronaut," Perminov said without naming concrete figures for the deal.
"We have our own commercial secrets," he said.
The two sides planned to finalise a comprehensive agreement in the first half of
2006 to continue the ongoing ISS programme that is scheduled to end in 2011.
Before the new agreement, US astronauts were able to fly gratis on Russian
spacecraft. The arrangement ends at the end of 2005.
S&P raises Interfin Trade Financial Company's ratings
Standard & Poor's Ratings Services raised its long-term counterparty credit
rating on Russia-based Interfin Trade Financial Company (IFT) to CCC from CCC-,
and affirmed its C short-term counterparty credit rating on the group, New
The outlook is stable, the agency said in a release. At the same time, Standard
& Poor's raised its Russia national scale rating on IFT to ruB- from ruCCC+,
the release said. "The upgrade reflects IFT's closer integration with
parent Unicor Managing Co. and low leverage, as well as the consistent growth of
the Russian securities market," said Standard & Poor's credit analyst
Irina Penkina. "The ratings remain constrained, however, by IFT's narrow
related-party customer base, small size, and short track record, as well as by
the high sensitivity of its financial performance to the volatile domestic
S&P calls 2005 successful for Norilsk Nickel, Alrosa
International rating agency Standard & Poor's (S&P) considers 2005 to
have been a successful year for MMC Norilsk Nickel and diamond monopoly Alrosa,
but also notes that risks remain that are holding back the ratings of these
companies, Interfax News Agency reported.
Among companies working on the nickel, copper, precious metal and diamond
markets in Russia, only these two companies have a rating from the agency:
Norilsk Nickel - BB+ with stable outlook, and Alrosa - B also with stable
S&P credit analyst, Yelena Anankina, told Interfax the market conditions in
2005 resulted in an improvement in the cash flows of both companies, however an
upgrade in their ratings is still being hampered by long-standing risks: for
Norilsk Nickel this is the risk of doing business in Russia, common to all large
private companies in Russia; and for Alrosa - the high level of debt and low
level of available cash flow after capital investment. Recently another rating
agency, Fitch, assigned Norilsk Nickel an investment rating. According to
Anankina, S&P is not yet ready to do this due to the main risk mentioned
above. "If it wasn't for the country risk, the financial situation of the
company and its position on the markets, its expenditure compared with
competitors - all of this is deserving of a higher rating," she said.
Speaking about the upcoming spinning off of Norilsk Nickel's gold business into
the independent company Polyus, she said that this program is not likely to be
significantly reflected in the diversification of the group. Commenting on what
rating the future independent Polyus might receive, if its wants to receive one,
Anankina said that it is difficult to estimate, however it will be significantly
lower than the Norilsk Nickel rating, given the different scale of operations
Speaking about the Alrosa business, she said that the situation on the diamond
market in the past year was good, which should result in an improvement in the
company's cash flows and profits. "However, its rating is currently at
quite a low level because, despite growth in profitability, the company is
implementing large capital investment, which is leading to growth in debt,"
Anankina said. Asked whether the Alrosa rating would be increased if Yakutalmaz
property is included in its charter capital, she said that "everything will
depend on the nature of future cash flows: social obligations taxes, rent
payments." At the moment Alrosa pays Yakutia US$350 million a year for
using the Yakutalmaz property.
Norilsk Nickel took steps to increase transparency in 2005 as part of the
liberalization of its markets.
Due to the liberalisation of regulation in the sector, the company disclosed
information on PGM production and planned to disclose information on platinum
reserves by the end of the year, and also present a strategy for developing
production, however, this work has been put back until next year.
In the past year Alrosa took steps to reduce debt, at the end of 2006 its credit
limit should amount to not more than US$998.6 million. The volume of investment
should also fall. In addition, the company is currently starting to implement a
new sales system, which will diversify exports. This program will replace export
quotas for diamonds, which will be done away with, along with quotas for PGM
exports, at the start of 2006.
Gazprom soars ahead of major listing
The market capitalisation of OAO Gazprom smashed through US$200bn as the Russian
gas giant prepared to list it shares on a major Moscow exchange, the Wall Street
Gazprom shares, which have so far been freely available only to local investors
on small exchanges, have surged 26% this year after Russia lifted restrictions
imposed during the chaotic post-Soviet period to protect the state-controlled
company from a foreign takeover.
A recent dispute with its Ukrainian counterpart has further underpinned the
investment case for Gazprom, which provides a quarter of Europe's gas and
controls 15% of the world's proven reserves, as it presses Russia's ex-Soviet
neighbours to pay market prices.
Gazprom shares rose 10%, hitting a record 244.70 roubles (US$8.61), after
Moscow's Russian Trading System, or RTS, said it would list Gazprom, making it
accessible to more investors.
RTS previously partnered with the St Petersburg exchange to offer rouble-denominated
shares in Gazprom, but trading will be conducted directly by RTS on its main
The RTS benchmark index ended 3.2% higher recently, posting a new high of
1255.92, though Gazprom shares aren't likely to be included before an index
re-weighting, due in March. Each stock is limited to a 15% weighting, and that
means Gazprom, with a value roughly as much as Russia's next four-biggest
companies combined, won't dominate.
By contrast, Gazprom is expected to make up more than 40% of Morgan Stanley
Capital International's Russia index, a key benchmark for emerging-market
Gazprom also plans by the end of the month to list on Russia's other main stock
market, the Moscow Interbank Currency Exchange, or Micex, and has said it may
seek a New York listing and issue second-level American depositary receipts as
it targets a market capitalisation of US$300bn, surpassing that of BP PLC.
Gazprom to buy 30 bcm of Turkmen gas in 2006
Turkmen President, Saparmurat Niyazov, and Russian gas giant Gazprom's CEO,
Alexei Miller, on December 29th in Ashgabat signed an agreement on Turkmen
natural gas shipments to Russia in 2006, Interfax News Agency reported.
According to the agreement, Gazprom is to buy 30 billion cubic metres of gas
from Turkmenistan in 2006 at 65 Euro per 1,000 cubic metres. "The operating
conditions for 2007 onward will be defined in the second half of 2006 as implied
by the effective contract until 2028," the release said. Earlier the price
of Turkmen gas was set at 44 Euro for 1,000 cubic metres. In their statements
following the signing ceremony, Niyazov and Miller stressed the importance of
this document not only for the successful partnership in the gas field but for
Turkmen-Russian relations as a whole and for strengthening ties of friendship
and cooperation between Turkmenistan and Russia.
The Russian delegation also discussed aspects of bilateral cooperation in the
gas sector in 2006 and onward. "Participants in the meeting were satisfied
with the dynamic development of cooperation and the implementation of all
previous understandings. The sides acknowledged the significant rise in prices
on the market of fuel, materials and equipment for the oil and gas sector and
agreed to adjust the price of Turkmen gas sold to Gazprom, with due
consideration of these factors," a Gazprom release read.
Niyazov also thanked the Russian leadership and Gazprom for the efforts to
develop relations between the two countries and said Turkmenistan would always
adhere to this partnership. "We are ready to jointly access the world
markets and develop energy resources," Niyazov said.
He added, "We recently signed a contract on the delivery of 40 billion
cubic metres of gas to Ukraine. The deal envisions a slightly lower price, but I
think that it is just a matter of time," The government
Turkmendovletkhabarlary agency quoted Niyazov as saying.
Russia, South Korea to sign gas deal soon
Gazprom expects that Russia and South Korea will sign a gas cooperation soon,
the Russian gas giant's press office said after the third session of a joint
working group between Gazprom and the KOGAS corporation in Seoul, New Europe
The companies discussed Russian-Korean cooperation in the gas industry,
especially preparation for and subsequent implementation of Russian natural gas
supply projects and reached an understanding on priority steps for organising
"Both parties said they hoped their governments would soon sign the
relevant intergovernmental agreement to speed up the start of full-scale
commercial negotiations and the signing of contracts on deliveries of Russian
natural gas to Korea," Gazprom said.
"The project to set up a unified gas production, transportation and supply
system in Eastern Siberia and the Far East, which the government has appointed
Gazprom to coordinate, envisages development of off-shore Sakhalin deposits,
creating favourable conditions for natural and liquefied gas supplies to
Korea," Gazprom deputy chairman and co-chairman of the working group,
Alexander Ananenkov, said.
Rosneft to invest US$17.4bn by 2010
Russian oil company Rosneft plans to invest US$17.4 billion in oil and gas
production, oil refining and oil product trading in the period from 2006 to
2010, a source familiar with the company's production plans said, Interfax News
He said the company plans to invest US$14.7 billion in existing oil and gas
production projects over the five-year period.
Most of these funds will go towards financing new projects, particularly the
development of the Vankor group of fields in Krasnoyarsk territory. According to
company calculations, investment in this project will amount to US$4.2 billion
Investment in the company's main oil production company - OAO Yuganskneftegaz -
will amount to US$6.8 billion by 2010. Investment in 2005-2009 is planned at
US$1.4 billion per year, and in 2010 - US$1.2 billion.
With the implementation of the investment program, Rosneft oil and condensate
production will reach 105.5 million tonnes by 2010, with natural gas production
reaching 23.1 bcm, the source said.
He said that investment of US$2 billion is required in oil refining by 2010,
particularly in Komsomolsk Oil Refinery (RTS: KNPR) - US$730 million, and in
Tuapse Oil Refinery - US$1.36 billion. The high level of expenditure is due to
Rosneft's plans to increase the volume and depth of refining at its refineries -
at the Komsomolsk and Tuapse refineries yield from crude is to increase to 95%
and 95.6 per cent respectively. Investment in oil product trading in 2006-2010
will amount to US$700 million.
MINERALS & METALS
Norlisk Nickel schedules 1st Polyus gold meeting
MMC Norlisk Nickel's board of directors has scheduled the founding meeting of
OJSC Polyus Gold, the company into which Norlisk's gold mining assets will be
spun off, for March 3rd, Norlisk Nickel said recently, New Europe reported.
The agenda will include electing a board of directors for Polyus Gold,
appointing a director and audit commission and approving the company's charter.
The meeting will also approve statutes on the board of directors and
shareholders' meeting and name an external auditor. Shareholders registered as
of January 1st 2006 will be entitled to participate in the meeting.
Meanwhile, shareholders in MMC Norlisk Nickel will hold an extraordinary meeting
on February 17th, the Arctic mining and smelting giant said in a press release.
Norlisk Nickel said that the shareholders would vote on charter amendments
needed to reduce charter capital by approximately 11 per cent. Charter capital
will be reduced by a block of approximately five per cent of the shares that the
company bought back from shareholders who did not vote on or who voted against
spinning the company's gold mining assets off (these shares have already been
cancelled de facto); and 5.8 per cent which the company bought back earlier in
the year. Shareholders registered as of January 1st 2006 will be entitled to
Shareholders voted at a September 30th EGM in favour of spinning off gold
production assets in order to consolidate Norlisk Nickel's gold assets as well
as its 20 per cent share in Gold fields into a separate company. Shareholders
with 65.25 per cent of total voting shares took part in the meeting and 99 per
cent of them backed the spin-off. The Law on Joint Stock Companies entitles
shareholders who did not vote or who vote against to tender their shares for
buy-back. Norlisk Nickel bought the shares for 1,855 roubles per share or a
total of 20.03bn roubles between November 24th and December 14th.
Norlisk Nickel also bought back 12.5m shares or 5,8 per cent of its stock at
1,680 roubles a share from shareholders at the start of 2005.
Four companies with Interros chief Vladimir Potanin and Norlisk Nickel CEO,
Mikhail Prokhorov, as their beneficiaries sold 1.22 per cent of Norlisk Nickel
each or a total of 4.88 per cent of the stock as part of the buy-back.
In addition, Prokhorov sold some of the shares that he owned direct back to the
company, reducing his directly owned stake to 0.296 per cent from 0.374 per
cent. Interros participated in the sale of the remaining 0.92 per cent (or the
5.8 per cent) sold under the buy-back offer. Norlisk Nickel's charter capital is
currently 213.9m roubles and consists of 213,905,884 shares with par value of
Irkutsk gold production down 2.3% in 2005
Russia's Irkutsk region produced just over 15.2 tonnes of gold in 2005, down 2.3
per cent from 2004, a source in the regional administration said, Interfax News
The source said that production fell due to a drop in production of placer gold,
unfavourable weather conditions and the depletion of reserves. The Lenzoloto
holding company, a placer gold producer which is part of MMC Norilsk Nickel's
Polyus gold mining division, mined 7.012 tonnes of gold. Lenzoloto's Svetly and
Lensib units mined 2.059 tonnes and 1.363 tonnes respectively.
The Lena and Vitim mining cooperatives produced 881.6 kilograms and 2.735 tonnes
of placer gold respectively.
The Irkutsk region produced a total of 12.686 tonnes of placer gold in 2005. The
region doubled lode gold production to 2.498 tonnes in 2005. ZAO Sukhoi Log, a
subsidiary of Lenskaya Gold Company, another Polyus unit that produces lode
gold, mined 420 kilograms of gold at the Zapadnoye field. Lenskaya subsidiary
ZAO Tonoda mined 50 kilograms of lode gold. Sukhoi Log fell short of its quota
to produce 800 kilograms in 2005 because the recovery plant at Zapadnoye was
stopped for technical reasons in October.
But the company hopes to be producing 1.3 tonnes of gold in 2006 as its recovery
plant goes back on stream.
Lode gold producer OAO Vysochaishy, which is controlled by Moscow-based Lanta-Bank,
produced 2.028 tonnes of gold in 2005. The region reduced gold production 6 per
cent to 15.555 tonnes in 2004. The region's overall quota to produce gold was
19.51 tonnes in 2005.
MMK to launch air separator in spring 2007
OAO Magnitogorsk Iron & Steel Works plans to launch a new air separator in
spring 2007, the company's press service said recently, New Europe reported.
The company is currently preparing a site for the new unit, which will be the
company's tenth such unit and the best in the company's oxygen plant. The Moscow
region company Kriogenmash, with which Magnitogorsk energy companies have been
working for many years, won a tender to supply equipment and signed a contract
in March this year.
The statement said the "Kriogenmash equipment matches its foreign analogues
as regards its technical parameters, but is significantly cheaper." The
unit will have a capacity for 35,000 cubic meters of oxygen and 30,000 cubic
meters of nitrogen per year. The unit will also produce argon, demand for which
is growing in the metallurgy industry every year. With the launch of the ninth
block, the oxygen saturation of new MMK production will increase. The air
products will primarily be supplied to the electric steel smelting complex. At
the moment up to 45 cubic meters of high-quality oxygen is required to produce a
tonne of electric steel, the press service said.
Novoship plans to raise net profit 42% in 2005
Novorossiisk Shipping Company (Novoship) is planning for its consolidated net
profit to grow 41.9 per cent to US$230 million in 2005, a source in the
company's board of directors said, Interfax News Agency reported.
Based on preliminary forecasts, the company expects revenue to grow to more than
US$330 million. Novoship forecasts that it will have shipped 58 million tonnes
of goods by the end of 2005.
The Novoship board of directors on December 23rd approved a programme for
renovating its fleet by 2008, the source said. Between now and 2008, the company
will acquire 18 more ships, including 10 ships in 2006 alone.
Novoship said earlier that it would receive US$250 million in profit from
operational activities in 2005 and US$260 million in 2006.
The company had consolidated net profit to International Accounting Standards (IAS)
of US$162.9 million in 2004. Novoship doubled its net profit to IAS in the first
half of 2005, bringing it to US$176 million after it sold 10 tankers.
The main shareholders in Novoship are the Federal Property Agency (Rosimushchestvo)
with 60.73 per cent, the Russian Federal Property Fund with 6.4 per cent, OAO
Novoshipinvest with 8.49 per cent and Intrigue Shipping with 14.41 per cent.
Russia's high hopes for ski resort
From mid-December through to the end of May, the picturesque slopes not far from
Russia are typically caked with a generous layer of white power perfect for
downhill skiing, and the lift tickets are only US$25, the Wall Street Journal
Unfortunately for foreign ski buffs, all the signs are in Cryrilllic and it is
about 180 miles away from a festering civil war.
The slopes, in a sleepy southern village known as Krasnaya Polyana, have long
been popular with Russian skiers. Now, eager to share in the tourism riches that
go to alpine nations, Russian investors are trying to transform Krasnaya Polyana
into the country's first world-class ski resort. They are in the process of
adding new slopes, lifts and luxury hotels and plan to add a lot more of each
over the next decade.
It is also a pet project of Russian President, Vladimir Putin, who often stays
at a dacha, or country home, in the area and skis at Krasnaya Polyana every
year. He is, in fact, planning to make the resort a centrepiece of a Russian bid
for the 2014 Winter Olympics.
The quest to become a prestige skiing destination mirrors Russia's broader
ambition to show the world that it is back as a global power. In July it will
for the first time host the G-8 meetings, an important showcase event. And,
instead of going around the world looking for loans and other assistance, as it
has in past years, Russia, now rich with oil, is aggressively paying off its
On another level, the ski-resort idea is part of Russia's effort re-build its
tourism industry, which thrived during the soviet era, when people weren't
allowed to travel to the West, but has withered as the country has opened up.
With Russia now in its sixth straight year of economic growth, more people here
are taking overseas trips.
Sochi, the Black Sea summer resort town about an hour from Krasnaya Polyana, has
long been a destination for the country's movers and shakers - going back to the
tome of the czars. Every winter, thousands of Russians from Moscow and St
Petersburg, often clad in massive fur coats, conspicuous jewellery and the other
totems of the country's young nouveau riche, fly in to schmooze and hit the
slopes at Krasnaya Polyana. But noticeably absent are the foreign ski
vacationers who are a staple at resorts like Tahoe or Chamonix.
Kremlin-friendly tycoons and companies have taken the hint and are now pouring
money into the area. Roman Abramovich, the governor of a Russian province and
owner of the high-profile Chelsea soccer club in England, is building a US$100m
ski resort. Another resort in the works will include 20 ski lifts ascending to a
2,400-metre peak, about 69 kilometres of trails, and accommodation for around
6,000 people. Ultimately, the larger Krasnaya Polyana development will cost more
than a billion dollars. Among the other investors are the Canadian based Ecosign
Mountain Resort Planners, which currently is working on more than 10 different
resort projects in Russia, and Interros, a group controlled by tycoon Vladimir
For foreign tourists, Russia is in some ways an easy sell. It is a trove of art
and culture, from Lenin's tomb and the Hermitage to the czar's Winter Palace,
and the top hotels and restaurants in Moscow are now on par with their peers in
Europe. But that's only part of the story. Outside the top cities, the
infrastructure tends to be creaky and the service nonexistent.
Some restaurants that have credit-card signs on their doors announce only after
the bill has arrived that credit cards aren't, in fact accepted. Major streets
are often without lights and museums are known to close without warning - for
"repairs." Then there are the visa requirements: You have to go
through the extra step of getting an "invitation" letter - the cost
differs widely, depending on how fast you need it and where you get it but is
often in the neighbourhood of US$40 - to get a visa.
The idea with Krasnaya Polyana is to create an oasis from these hassles. The
lure: glitzy new resorts, challenging slopes (many of which have been newly
clear-cut) and affordable prices for everything from fine dining to lift
tickets, especially when compared to resorts in the US and Western Europe.
Despite Russia's size, this slice of land next to the Black Sea is the country's
only serious spot for downhill skiing - the Ural Mountains, for example, are
more akin to hills. But Russia's southern Caucasian border is a long way from
Munich or London, not to mention Chicago. And it is only 180 miles from
Chechnya, the site of a long-simmering civil war.
The nearest airport to Krasnaya Polyana is in Sochi, where dogs snooze on the
runway and taxi drivers crowd in the exit. The regional government says that a
new state-of-the-art airport, under construction for a decade and dogged by
delays, will finally open.
In the summer, Sochi's verdant parks and pebble beaches teem with sun
worshippers who crowd the many pleasant outdoor restaurants and reserve every
last room in the city's dozens of high-rise hotels.
Stalin's famous forest-green dacha is in Sochi, and by spring, the fortress home
where Stalin ruled the Soviet Union fro three decades will become a luxury
hotel, restaurant and in a tiny corner, a museum.
Polymetal receives prospecting licence
MNPO Polymetal, Russia's biggest silver producer and second biggest gold
producer, has received a licence to prospect and appraise reserves of the
Galkinsky lode gold section in the Sverdlovsk region, the company said recently,
New Europe reported.
Polymetal itself asked the local natural resources department to list the
property as being available. Polymetal's North Urals Gold subsidiary received
the licence, which is valid until December 1st 2010, as the only contender.
The reserves contain a probable 15-20 tonnes or 480,000640,000oz of gold with
ore graded at 4 g/t got AU.
The property measures 3.5 square kilometres and is 26km from North Ural Gold's
Vorontsovstkoye gold mine.
Polymetal aims to have the new property's reserves appraised by 2008. Polymetal
thinks the field could be mined by the open cast method and processed by cyanide
"Obtaining the licence to the Galkinsky section is an important aspect of
the company's development strategy, to bolster and increase its resource base
and form a new generation of assets," Polymetal said.
"Given the availability of developed infrastructure and the successful
experience of work in the Sverdlovsk region, we expect that Galkinsky will in
time serve as a supplementary resource base for the Vorontsovskoye mine and
produce a major synergic effect," the release quoted Viktor Nesis, general
director of Polymetal Management Company, as saying. Polymetal aims to expedite
exploration under existing licences and to bid at tenders for new licence in the
regions in which it operates today.
Polymetal, established in 1998, includes the Polymetal Management Company,
Polymetal Engineering, four mining enterprises and four geological enterprises
in Buryatia, the Khabarovsk territory, Sakhalin Irkutsk, Chita and Magadan
regions. Polymetal holds nine precious metal mining and exploration licences.