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RUSSIA


  
  

 

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

Books on Russia

REPUBLICAN REFERENCE

Area (sq.km)
17,075,400

Population
143,782,338

Principal 
ethnic groups 
Russians 82%
Tatars 3.3%
Ukrainians 2.7%

Principal towns 
Moscow (capital)
St Petersburg
Novosibirsk 
Nizhni Novgorod 
Yekaterinburg 
Samara 

Currency 
Rouble

President 
Vladimir Putin



Update No: 305- (30/05/06)

The geopolitical conundrum
There are several reasons for being concerned about Russia. To a total outsider visiting this planet for the first time it would seem that Russia is obviously the number one country, encompassing the heartland of the largest area by far, Eurasia, a compound continent in fact.
Russia has, nevertheless, proved to be aberrant in world history, an eternal outsider itself. The mainstream of its course has, instead, been dominated by two powers of eccentric geography, first the United Kingdom and now its effective successor, the United States. 
The first is the main off-shore island of the westernmost continent of Eurasia, Europe. The next occupies the heartland of the northern half of the bi-continental mass that makes up the Americas.
Eccentricity, indeed ex-centricity, is an advantage. But so above all is being a maritime power, even in this age of air power and space. Russia's lack of a proper outlet to the world's oceans, anywhere adjacent to its main population centres had always been a crippling handicap. 

The St Petersburg clan
Hence why Peter the Great thought that it was so vital to found St Petersburg and make it Russia's capital and its 'Window on the West.' 
The Bolsheviks shifted the capital back to Moscow, which of course does have a certain geographical, and therefore geopolitical, logic to it. It is likely to remain the capital for good.
But it is highly noticeable that the St Petersburg moment remains dominant, with Putin being very much an offspring of the city and its politics. He was a lieutenant of Mayor Anatoly Sobchak, a key figure in the opening up of the city to the world after the frost of Bolshevism. Putin was put in charge of foreign investment in the early 1990s, making great friends with a certain Italian entrepreneur, Silvio Berlusconi, who invested US$900m no less in Fininvest in St Petersburg, forging a relationship that still endures.
Another henchman of Sobchak's, Anatoly Chubais, went to Moscow and prospered in the Yeltsin years, becoming a top Kremlin intimate. He was too intelligent to imagine that he could ever be the boss himself, unlike Michael Khodorkovsky. He realized, unlike the latter, that being Jewish ruled that out. Russia is not yet ready for its first Disraeli.
Chubais saw Putin as the ideal candidate to succeed Yeltsin, bringing him to Moscow. Later he was appointed by Yeltsin into the utterly key post of head of the Federal Security Bureau, ie the KGB, in 1998. The next year he became Yeltsin's last premier, clearly the heir-apparent. In 2000 he became president. 

The energy nexus
Everything in Russia hangs on the energy sector, its one indisputable advantage, the source of its long economic recovery in the 2000s. With by far the world's largest gas reserves, nearly all owned by Gazprom, and huge oil reserves, which certain Western oil experts think could be bigger than Saudi Arabia's, Russia is in a commanding position so long as fossil fuels remain king.
Chubais, not a rich man, unlike Khodorkovsky, was rewarded with the chairmanship of United Energy Systems, the largest energy utility in Russia. Another scion of St Petersburg, Alexei Miller, was given the even more vital job of heading Gazprom, whose vast assets make it now the fourth largest company in the world. 
There is no question that nowadays Gazprom is very strong indeed. At the end of trading on April 26, the stock market value of Gazprom was US$267 billion, more than BP, Europe's largest energy company. The value puts Gazprom in second place among energy companies after Exxon Mobil of the United States. Gazprom is now the fourth-largest company in the world after Exxon, General Electric, and Microsoft.

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The plot thickened in the spring of the year, as is appropriate. Several seemingly disparate events that occurred in the last week of April the U.S. Secretary of State Condoleezza Rice's talks in Greece and Turkey, Russian President Vladimir Putin hosting the German Chancellor Angela Merkel in the Siberian city of Tomsk, Azerbaijani President Ilham Aliyev's visit to Washington, and the discussions at the Russian Economic Forum in London -- were in fact intimately interrelated, as they revolved around one vital issue: energy and, more specifically, Russia's role in global fuel supplies. 
Moscow's growing energy clout appears to make the West jittery and prompts it to seek ways to curtail Russia's leverage as the key world supplier of hydrocarbons. For its part, the Kremlin leadership accuses Western partners of unfair competition and hypocrisy. 
As many analysts have noted, Russia's muscular international behaviour and geopolitical assertiveness are currently being driven not so much by the country's military might, which remains relatively weak, as by its booming energy sector. The latter famously finds itself under state control and is collectively known as "Kremlin, Inc." The peculiar nature of Moscow's newly emerged "energy empire" was aptly described recently by a person who is extremely knowledgeable in this tricky sphere -- namely, Gazprom Deputy CEO Alexander Medvedev. "There are two concepts available to the world: a weak Russia or a strong Russia," the gas giant's boss told the audience at the London Russian Economic Forum on April 25. And the same, he added, is applicable to Gazprom. "A strong Gazprom is good for the world," Medvedev confidently asserted. 
No wonder that, seeing the company awash in fuel money, top Gazprom executives are unable to restrain their swagger. Speaking with the BBC's "Hard Talk" about Gazprom's ambitious acquisition plans in Europe, Medvedev said, "It is hard to find a company we are not interested in." Asked how many companies Gazprom was looking at, he said he did not have enough fingers to count.
But it is exactly Gazprom's might -- coupled with its effectively being a tool of the Russian state -- that make Western policymakers shudder at the prospect of the Russian energy behemoth establishing a monopoly on gas supplies to Europe. 
Thus, it was clearly the intent to prevent such a supply-side monopoly from taking place that guided Secretary Rice's efforts to convince Greek and Turkish politicians to reject a Gazprom proposal to participate in a new gas pipeline under construction between the two Mediterranean neighbours. The US$746 million pipeline project is a joint venture between the Greek and Turkish state-owned gas companies, Depa and Botas. During a recent visit to Athens, Alexei Miller, Gazprom CEO, offered to invest in tripling the capacity of the Greek-Turkish pipeline and to provide long-term supply agreements. At the same time, energy-rich Azerbaijan has also stated its interest in participating in the project. Neither Athens nor Ankara has made a decision about whether to accept the Russian or Azerbaijani bid.
During her April 25 stopovers in Greece and Turkey, Rice made it clear that Washington wants to see both countries reduce their reliance on Russian gas supplies. This, naturally, means excluding Gazprom from the new project, whether as a shareholder in the pipeline company or as a gas supplier. Instead, Washington suggests, Greece and Turkey should make a long-term deal to buy Azeri gas supplied by an international consortium led by BP and Norway's Statoil, which is due to come on line in 2007.
It is quite symptomatic that America's top diplomat raised the issue of European energy security at a time when the White House was preparing to host Azerbaijan's President Ilham Aliyev. According to U.S. administration officials, the Azerbaijani leader, whose democratic credentials are shaky at best, was finally invited to Washington in order to prevent the South Caucasus country "from coming under Russia's sway and eliminating … the last chance to give European countries an alternative route for energy."
It would then appear that bringing Chancellor Merkel to Siberia on April 26 was President Putin's strategic countermove in the ongoing "energy battle," as Germany is the biggest customer of Russian gas. Indeed, German companies E.On and BASF signed a new natural gas deal with Gazprom at Tomsk. However, well aware that, outside of Germany, Gazprom's business is not progressing very smoothly due to Western restrictions, the Kremlin leader accused Western countries of trying to block access to their markets and urged Europe to agree on common rules of the game.
Putin dismissed the alleged threat of an expansion of Russian energy companies and Europe's dependence on them. "What about globalisation and freedom of economic relations then?" he asked, adding that despite the great demand for energy resources, "All sorts of excuses are being used to limit us to the north, to the south, and to the west."
For their part, European energy officials called on Russia to abolish what they term "economic nationalism" and ratify the Energy Charter and Transit Protocol, thereby ensuring a level playing field for all energy players. 

Kremlin plans to halve size of Rosneft's London float as City doubts persist
The Russian oil giant, Rosneft, the heir to most of Yukos's vast assets, is set to slash back dramatically the size of this summer's planned London flotation amid City concerns about Russian corporate governance standards. 
The oil giant was expected to sell up to £11bn of shares through an initial public offering that would have seen up to 49% of the company's equity offered to investors but is now planning to reduce the figure to about £4bn-£5.5bn, according to reports this weekend. 
The Kremlin is expected to sell only sufficient shares to cover the £4bn cost of its purchase of a controlling stake in another Russian energy group, Gazprom. It is believed it took the decision to limit the size of the flotation because of the positive impact of the high oil price on Rosneft's finances. 
Rosneft is expected to publish its offer-for-sale prospectus next month before an late July flotation that will see its shares listed in London and Moscow. 
London has become a destination of choice for an increasing number of Russian companies keen to cash in on investor enthusiasm for the natural resources sectors. However, there is concern about corporate governance standards and the way foreign investors are treated. 
It was revealed that the head of the London Stock Exchange, Clara Furse, had written to Russia's president, Vladimir Putin, in support of William Browder, the head of Hermitage Capital Management, the largest foreign investor in Russia. Mr Browder, a critic of Russian corporate governance, has been barred from entering Russia since late last year. 
Ms Furse warned that the exclusion could do "significant damage to Russia's reputation" and that it could have "a negative impact on the ability of Russian companies to raise capital outside Russia". 
Her warnings have been reflected in comments from one of the City's leading investors, F&C. It has cautioned that the Rosneft flotation raised serious questions of governance and legal risk. "The Russian legal regime is opaque and difficult to navigate," said Karina Litvack, F&C's head of corporate governance and socially responsible investment. "We don't pretend to understand it, and if we cannot understand something we won't invest in it." 
George Soros is another disapproving voice. In an article published in the Financial Times, the billionaire investor wrote that Rosneft's float "raises serious ethical and energy security issues". 
One area of concern is Rosneft's acquisition of the assets of Yukos, which were seized by the Russian government from the now-jailed oligarch Mikhail Khodorkovsky in lieu of allegedly unpaid taxes. 
Governance is not the only corporate issue straining relations between the Kremlin and London. The deputy head of Gazprom, Alexei Miller, delivered a pointed warning to European Union ambassadors last month that any attempts to block the company's expansion in Europe would "not lead to good results". His comments followed reports that the British government was concerned about a possible bid from the Russian energy group for Centrica, the parent company of British Gas. The British government has since made it clear that it would expect any approach from Gazprom to be dealt with by the competition authorities, not by ministers. 
Centrica has shrugged off a report that it was holding talks with Gazprom about a deal that would see it take a stake in the Baltic pipeline project, which will bring more Russian gas to western Europe, in exchange for a stake in the British company. A spokesman declined to comment on the report of the asset swap, reports the Guardian. "If you are trying to secure gas supplies for the UK you have to talk to every company out there," he added. "We are talking to Shell, to BP, to all the big players."

Steel matters too
There is a major development in the offing in the steel industry, always a key sector in modern Russia. Not for nothing did Stalin adopt the pseudonym he did ('stalin' means steel in Russian). To be a man of steel was an obvious persona to assume; and it was what earned him the admiration of Mao and Saddam amongst others, including not a few luminaries in the world's intelligentsia.
In a huge operation, indicative of the shape of things to come, Arcelor, the Luxembourg-based steel company, has agreed to buy most of Russia's Severstal, a major competitor. This would involve a 13bn Euro deal to create the world's biggest steelmaker and thwart rival Mittal Steel's hostile 22.8bn Euro bid. However, Arcelor's latest attempt to see off Mittal, owned by the UK's richest man, Lakshmi Mittal, is likely to go right down to the wire.
Arcelor shareholders vote on the Severstal deal, announced on May 28th, on June 28th. If approved, the deal will be completed in the middle of July - just days before Arcelor shareholders vote on Mittal's bid.
Arcelor is effectively drafting in Severstal's owner, Alexey Mordashov - a billionaire businessman with close ties to the Kremlin, as a white knight shareholder to block Mittal. If the deal goes through, he will become by far the largest single investor with 32pc of the enlarged group, which will rise to 40pc after a planned share buyback. He says he seeks 45% after a four year contractual pause.
Arcelor claims that 15pc of its existing share base, comprised mostly of its "stable" shareholders such as the Luxembourg government, already object to Mittal's offer. Once diluted, they will have 10pc, which - when added to Mr Mordashov's holding - will make it impossible for Mittal to win the 50pc shareholder approval needed to secure victory.
Mittal's cash-and-share bid is back in the hands of the European regulators, having been improved to 35.62 Euro a share. Mittal had expected to complete on June 29th, but has said clearance for the revised bid may now take ten days longer. Last time a target date was set, it was missed by about a month.
In a controversial and highly unusual move, more than half of Arcelor's total shareholder base will have to vote against the Severstal deal for it be blocked. A normal arrangement would be for 50pc of those voting to support the deal for it to be cleared. Its best turnout for a shareholder vote in the past has been 35pc. If that is repeated, the Severstal deal will automatically be cleared.
In its statement, Arcelor stated that "unless more than 50pc of the currently outstanding shares oppose [Severstal], the transaction will go forward."
Mittal has been incensed by Arcelor's decision to reverse the normal voting procedure. In a statement, it said: "The vote to veto is unprecedented and prevents the shareholders from having a real choice in the future of their company. 
"Arcelor's shareholders are being forced to hand over control of their company, whilst being denied a premium. Yet again the Board appears to be manipulating its shareholder base to its own ends. The result would be a second class combination. Only the Mittal/Arcelor combination, which is superior in every way, offers true step-change consolidation."
Arcelor argues that the combination will create synergies of 590m Euro, create a company focused on high-margin products, and add value from 2006. It would give the enlarged group 20pc of the global automotive steel market and the leading presence in the fast-growing emerging markets of Russia, where Severstal is the largest operator, and Brazil.
The enlarged Arcelor would also become the world's biggest steel company, with 46bn Euro in sales, 9bn Euro in earnings before interest, tax, depreciation and amortisation and 70m tonnes of production, using 2005 numbers. Currently, it is second largest in terms of steel production after Mittal.
Under the agreement, Mr Mordashov will contribute all of his economic interests in Severstal, of which he owns 89.6pc, and Italian steelmaker Lucchini in return for Arcelor shares.
Mr Mordashov will also pay 1.25bn Euro in cash in exchange for more Arcelor shares at a price of 44 Euro a share, giving him a total of 32pc of the enlarged Arcelor. Existing shareholders will see their stake diluted by almost a third to 68pc as 295m new shares are issued to Mr Mordashov.
Arcelor also still plans to press ahead with its planned 5bn Euro share buyback and increased dividend, announced as part of the original defence against Mittal's unsolicited bid.
Arcelor claims that the arrangement values it at 44 Euro a share, but there is some confusion as to how that figure is calculated. Severstal has a market worth of US$11.2bn, valuing Mr Mordashov's stake at US$10bn. Added to the 1.25bn Euro he is paying in cash and his 500m Euro stake in Lucchini, he appears to be paying about 33 Euro a share - below Mittal's offer. 
However, the shares he is buying in cash are being paid for at 44 Euro a share.
Arcelor has objected to Mittal's bid in part because it will leave founder Lakshmi Mittal as the principal shareholder, with 45pc of the enlarged group. He will also be head of the company and have the right to appoint half the members of the enlarged group's board.
Mr Mordashov will own a similarly substantial stake but will not be in charge of executive decisions, taking the role of non-executive president and the right to nominate six of Arcelor's 18 directors. But with such a holding that can be expected to change over time. (He is only 40 years old).
Mittal is still thought to be confident its offer will win over shareholders, about 20pc of whom are short term hedge fund investors who bought before the bid was raised.

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For a highly critical view of the proposed deal, see the following:-

Arcelor's Russian deal reeks of double standards 
Richard Wachman, Sunday May 28, 2006, The Observer 
The putrid stink of hypocrisy hangs in the air following the disclosure that the Luxembourg-based Arcelor is planning to merge with Severstal, its Russian competitor. 
Ever since Mittal Steel launched its hostile bid for Arcelor nearly four months ago, the Luxembourg camp and its allies in France and Belgium have poured scorn on the offer by attacking Lakshmi Mittal, the chairman and main shareholder, for slack corporate governance and a lack of transparency about his past business dealings, casting aspersions on his worthiness to lead a major international steel group. 
So what has Arcelor come up with? A deal with a Russian steel company, headed by Alexei Mordashov, a 40-year-old Russian oligarch, who has doubtless received the backing of the Kremlin, which keeps a close, Soviet-style watch on the activities of its former state-owned utilities. 
How Mordashov came to prominence in Russia is unclear, but he is said to be a friend of President Vladimir Putin and to have pulled off a number of complex financial transactions to secure ownership of Severstal in the Nineties. 
Whatever reservations people may have had about Mittal's takeover plans, they pale into insignificance when you consider the continental stitch-up designed to keep Mittal out of the Europeans' backyard. The merger is a complete nonsense as it hands effective control over to Mordashov by diluting the value of the shares held by Arcelor's stockholders and puts a lower price tag on the company than the terms being offered by Mittal. 
Nor does Arcelor/Severstal tick as many boxes: it will produce about 50 million tonnes less steel than a merger with Mittal - which is ludicrous, as this is an industry where everyone agrees scale is of critical importance. And tying with the Russians would deprive Arcelor of the chance to tap into Mittal's sizable operations in the booming markets of China and India. Arcelor's shareholders should turn up in force at the emergency shareholder meeting next month and boot this contemptible plan into the long grass.
                                              ******

Putin Focuses on Domestic Issues in Major Speech
In his annual state-of-the-nation address in Moscow, Mr. Putin said the United States has done a good job of turning its homeland into a fortress, thanks to a military budget that is 25 times larger than Russia's.
The Kremlin leader says Russia must modernize its army, so that its defences are stronger and more reliable. But the thrust of Mr. Putin's speech was largely domestic, with a focus on his vision of Russia's economic and political development, in particular social problems.
Speaking on live television from the Kremlin, Mr. Putin acknowledged that government and business have fallen short of fulfilling the hopes of Russia's people. He said many seek wealth and power by taking shortcuts, a reference to top businessmen who have become rich largely through their government connections. He added that corruption remains a serious obstacle to development. But overall he said the state of the country is positive.
Mr. Putin did not mention the current stand-off with Iran over its nuclear program.
Russian diplomats are engaged in delicate negotiations with other major powers about how to deal with Iran.
Mr. Putin also said Russia will continue its role as a major supplier of energy to Europe and other countries. But he did not address concerns about the increasing role the state-run monopoly Gazprom plays in the sector.
Mr. Putin's critics say the Kremlin is using its vast reserves of oil and gas as a political weapon, especially with its nearest neighbours in East Europe that were once in the Soviet bloc.

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AUTOMOBILES

Rolf Group to sell cars from China


Russia's largest car dealer is negotiating with Chinese manufactures about setting up sales networks in Russia to take advantage of booming demand for foreign vehicles, the Financial Times reported on May 1st.
Rolf Group, which sells one in five foreign-branded cars in Russia, has a shortlist of four Chinese producers and has already visited two of their plants, according to Matthew Donnelly, chief executive.
However, he is trying to persuade potential partners to delay their launches to ensure they can sell upmarket models, competing with western Japanese and Korean brands rather than cheap local Ladas.
"We are very keen to be part of the Chinese invasion," Mr Donnelly said in an interview. "But we don't want the Chinese to come too soon with poor quality products."
Great Wall, a Chinese manufacturer, has already introduced its sport utility vehicles to Russia but small engines and low quality have hurt China's reputation in the country.
"China's going to take a couple of years to hit the Russian market because they need Great Wall to stop messing with the brand," Mr Donnelly said.
The negotiations come as Chinese carmakers gear up to sell vehicles in the US and Europe. But manufacturers appear to have learnt from the experience of Great Wall in Russia and Jiangling, another Chinese producer, in Europe.
Jiangling has suspended imports of the Landwind, an SUV similar to the discontinued Vauxhall/Opel Frontera, after it received the lowest score ever in safety tests by Adac, the German automobile club.
Peter Nijvelds, who imports the Landwind into Europe, is in China overseeing changes designed to meet European crash tests and so to secure a European Union-wide sales approval, rather than the individual country approvals he had been using. The car passed all required crash tests for the individual country approvals, but generated a storm of negative publicity when it performed so badly in the unofficial Adac tests.
"It is not that we were not okay - it is completely okay," Mr Bijvelds said. "It is just, better safe than sorry."
Two Chinese producers, Shanghai Automotive Industry Corp and Nanjing Automobile, are building factories to make variants of the Rover 75, a classy model designed by the now defunct British carmaker when it was owned by BMW. Both hope to export back to Europe and sell in China

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AVIATION

Aviastar-SP constructs first Tu-204 for China 

The Aviastar-SP enterprise has constructed the first of five Tu-204-120 for Chinese state air companies, Interfax News Agency reported. 
The aircraft is to fly certification tests, including according to European JAR-25 standards with the participation of Western European test pilots. The aircraft will be delivered to the customer in August or September. "This is linked to the necessity to obtain an international certificate for the aircraft and to settle all procedural issues with the Chinese air authorities," the information centre said. "As yet we do not know to which of the Chinese state air companies the first aircraft will be allocated, China is to decide on the issue," the centre said. 
The Tu-204-120, designed by the Tupolev design bureau as a variant of the Tu-204-100 aircraft, with British Rolls-Royce engines costs US$36-38 million. An agreement on delivering five Tu-204-120 aircraft for the Air China and China Eastern Airlines was signed in late 2001. Two aircraft are expected to be delivered to China in 2006, with the remaining three to be delivered in 2007.

Russia's Aeroflot joins SkyTeam Alliance 

Russia's semi-state airline, Aeroflot, has joined the SkyTeam Alliance of carriers grouped around Air France after two years of negotiations, senior officials announced in Moscow, Deutsche-Presse-Agentur (dpa) reported. 
The enlarged alliance will now convey some 380 million passengers annually, Air France chief, Jean-Cyril Spinetta, told journalists. SkyTeam is the second largest airline alliance in the world behind Star Alliance, and also includes KLM Royal Dutch Airlines, Delta Airlines and Korean Air.
The Russian company, which is 51 per cent state-owned and ranks among the 25 largest airlines, brings almost seven million extra passengers. Aeroflot was founded in 1923, and 90 of its aircraft today operate in 47 countries. It also accounts for 39 per cent of Russian international flights and 11 per cent of domestic flights. SkyTeam now aims to make further additions in the former Soviet republics and Eastern Europe, Spinetta said.

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BONDS

Russian bond market seen poised for growth

Russia's domestic bond market may more than double in the next three years as the Kremlin scraps restrictions on foreign investment, the International Herald Tribune reported on April 25th.
Russian Railways, in the state-owned operator of the Trans-Siberian railroad, and MiG, the fighter-jet maker, are among more than a dozen companies whose bond sales may swell the bond market from 470bn roubles, or US$17bn, to US$26bn just this year, according to estimates by Trust Investment Bank in Moscow.
International investors searching for higher yields want more Russian company debt as record oil prices increase the country's reserves and bolster economic growth to the fastest pace in three years. Gazprom's rouble bonds maturing in 2010 yield 7.35 per cent. Gazprom, the world's largest natural gas producer, also has euro-denominated bonds maturing the same year that yield 4.62 per cent.
"Foreign investors' risk tolerance is increasing," said Alexander Krapivko, a fund manager at Alfa Capital Asset Management in Moscow. "The rouble bond market will more than double in three years, and could grow even more than that," he said.
Russia is opening its markets as part of a plan to make its currency fully convertible.
The government restricts international investors by requiring a one-year deposit with the central bank equivalent to 2 per cent of rouble-denominated corporate bond holdings. A 15 per cent deposit is required to buy the government's rouble debt. The limits will be halved on May 1st and eliminated on January 1st, according to the central bank.
Some investors may resist buying bonds of Russian companies in roubles because the currency can not be freely converted yet and because they remember what happened in 1998, when the government's default on US$40bn of domestic debt helped send world markets into a tailspin.
Still, increased foreign demand is already helping reduce yields on Russian corporate bonds, making it less costly for those companies to raise money for growth and investment.
Novatek, Russia's No 2 gas producer, "would certainly consider a rouble bond" as the government lifts restrictions, the company's chief financial officer, Mark Gyetvay, said during an interview recently. Novatek has 1bn roubles of bonds due in November that yielded 7.79 per cent when the debt was sold in December 2004, according to Trust Investment Bank prices.
MiG plans to sell its second rouble-denominated bond later this year, Vyacheslav Tishchenko, head of corporate finance, said recently. MiG in June 2004 sold a 1bn roubles of 10.5 per cent five year bonds at 16.6 per cent. The yield has since declined to about 9.65 per cent.
Russia and its companies benefited from a 3 and a half year rally in emerging market debt as rising commodity prices buoyed exports. Reflecting investors' confidence in emerging market bonds is now around 1.84 percentage points more than US Treasury securities, compared with 10.41 percentage at the end of September 2002.
Oil has been the catalyst for Russia's gains. Its economy expanded 7.9 per cent from October to December, the most since the second quarter of 2003. Gross domestic product increased more than 6 per cent the past three years, the longest period since the Soviet Union fell in 1991.

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CREDIT RATINGS

Intergovernmental system risk remains high - S&P 

The recently announced proposals of the Russian Duma's majority United Russia party to introduce amendments to local self-governance legislation shows that intergovernmental system risks are still high for local and regional governments (LRGs) in Russia, a report published by Standard & Poor's Ratings Services read. The report highlights the fact that future development of the intergovernmental system remains difficult to predict. Contrary to Standard & Poor's earlier expectations, increased predictability in intergovernmental relations that the reforms were meant to bring about is now under risk, as important proposed revisions create uncertainty and could potentially reverse the direction of previously implemented policies, New Europe reported. 
As a consequence, the overall predictability of the public finance environment in Russia remains very low and will continue to weigh on the creditworthiness and borrowing capacity of the municipal sector. "Proposed changes to the intergovernmental system will continue to constrain LRG ratings in Russia for the foreseeable future and may slow down LRG rating growth, especially for regional administrative centres," said Standard & Poor's credit analyst Boris Kopeykin. The draft proposals give regional governments the right to take over important expenditure responsibilities of their administrative centres. If implemented as currently proposed, the criteria for such involvement in local government affairs and details of the actual procedure will be defined on a region-by-region basis. "The proposals are in line with the recent trend in Russian intergovernmental relations observed by Standard & Poor's, which has enabled more ad-hoc non-transparent and centralised decision-making, instead of creating an autonomous and more predictable environment for LRGs," said Kopeykin. "To some extent, the trend and the new proposals counterbalance the goals of the earlier implemented reforms to provide more financial flexibility and predictability to local governments and to clearly separate responsibilities between different levels of government." The proposed transfer of expenditure responsibilities to regional authorities from municipalities will also mean that regional authorities gain additional control over municipal revenues.

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DEFENCE

Russia to deliver Tor M1 missiles to Iran 

Russian Armed Forces General Staff Chief Gen. Yury Baluyevsky said that Moscow will execute a contract to deliver Tor M1 anti-missile systems to Iran despite the fact that the situation surrounding the Iranian nuclear issue has been aggravated. "I do not doubt that the contract will be fulfilled, taking into consideration all of Russia's international obligations in the non- proliferation area. Russia will execute the contract within the framework of military and technical cooperation," Baluyevsky said in Moscow, New Europe reported.
Equipment delivered to Iran is purely a means of air defence. "I am sure that this equipment is non-strategic," Baluyevsky said. At the same time, there will be no military deliveries to Tehran in the near future, he said. "I don't think that (the equipment) will be delivered to Iran either tomorrow, or the day after tomorrow," Baluyevsky said.

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DIAMONDS

Alrosa ups world diamond market share to 25% 

Alrosa sold just over US$3.1 billion in rough diamonds in 2005 and increased its share of the world's rough diamond market to 25 per cent from 18 per cent, Alexander Nichiporuk, the head of Russia's Yakutia-based diamond monopoly, said at a meeting of company officials in Mirny, Yakutia, recently, Interfax News Agency reported.
Nichiporuk said Alrosa had revenue of 77.949 billion roubles to International Accounting Standards (IAS) in 2004. That is equivalent to US$2.832 billion at today's exchange rate. Alrosa mines 23 per cent of the world's diamonds. It increased mine production 4.2 per cent to US$2.259 billion in 2005. Core sales were US$2.86 billion, not including diamonds mined in Africa. Alrosa sold 56 per cent of its export diamonds on the free market. Nichiporuk said worsening mining and geological conditions for operating fields and the switch to underground mining, as well as a stronger rouble were affecting the company's business at present. Alrosa aims to bring costs down five percent in 2006. Financing for geological work grew 17 per cent in 2005 to 2.53 billion roubles, Nichiporuk said. Capex came to 14.113 billion roubles. Nichiporuk also said that Mak-Bank, which is buying up shares on Alrosa's behalf from Alrosa employees, would consolidate a planned 10 per cent of the shares by the deadline of April 28. The bank is buying the shares at 338,000 roubles each. Nichiporuk said that Alrosa executives who own shares in the company had decided to sell their own blocks of shares to the bank. The bank plans to spend US$240 million on the buy-back. The federal government is seeking to increase its stake in Alrosa to 50 per cent plus one share, from 37 per cent at present.

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ENERGY

Moscow may halve size of Rosneft flotation to US$10bn

Rosneft's contentious initial public offering could be cut to no more than US$10bn (£5.5bn) from the US$15bn-US$20bn the Russian government had indicated it wanted to raise, the Financial Times reported on May 1st.
But people familiar with preparations for the listing of the oil company, expected in Russia and London as early as July, insisted any reduction would result from changes in the company's financing needs, and not from the growing controversy around what was to have been the world's biggest IPO.
F&C Asset Management, one of the UK's biggest investment institutions recently threatened to boycott Rosneft's planned IPO unless it was satisfied that the company had made adequate provisions for liabilities stemming from Yuganskneftegaz, which was acquired in questionable circumstances from Yukos, the company built by Mikhail Khodorkovsky.
Other UK investment institutions have expressed concerns over the Rosneft flotation. George Soros, the billionaire financier said that the planned IPO raised serious ethical and energy-security concerns.
The Rosneft flotation could be discussed by directors of the London Stock Exchange in the near future, Clara Furse, chief executive, has written to Vladimir Putin Russian president, on behalf of William Crowder, Russia's largest foreign investor.
Mr Browder, a corporate governance champion, has been barred from re-entering Russia. UK investors look on his situation as an indication of attitudes to shareholder rights in Russia.
Peter O'Brien, who joined Rosneft recently as chief financial officer from Morgan Stanley, said the final decision on the IPO size would be taken by the Russian government. He said continued high oil prices had altered the company' requirements from when IPO discussions began last autumn.
"The company is growing production at an industry leading rate, generating substantial free cash flow, and our borrowing costs have come down three-fold in the last six to nine months," Mr O'Brien said.
Other people familiar with the listing plans said there was little need to raise more than required to pay back a US$7.5bn loan taken out by Rosneft's state parent company last year to buy a controlling stake in Gazprom, the energy company.

Gas production a promising area for LUKoil - Alekperov 

LUKoil President, Vagit Alekperov, believes gas production to be a promising area for the company. "This year we could bring our first field - the Nakhodkinskoye field in Yamalo-Nenets autonomous district, to target capacity. This year it will give us 12 billion cubic metres of gas and we will become a major producer of natural gas," Alekperov said at a press conference in Khanty-Mansiisk on April 14th, Interfax News Agency reported.
He said that at the moment the company's potential at a number of fields is estimated at 30-35 billion cubic metres per year.
"Here there are questions connected with economics, gas supplies, relations with Gazprom, which we need to regulate soon. I am sure that we will find understanding. This will create conditions for independent producers to supply their gas at fair prices," Alekperov said. 
He said that at the moment LUKoil is building a platform to work at fields in the Caspian Sea, which will allow the company to produce about 15 billion cubic metres of gas by 2010-2011.
"In 2007 we will launch a new field in Uzbekistan with large gas reserves, which will mean that we will be not only the LUKoil oil company, but also the LUKoil oil and gas company. At the moment the company's gas potential is quite good," Alekperov said.
LUKoil plans to invest five billion roubles in completing work at the Nakhodkinskoye field in 2006. This year the company plans to sell Gazprom over 10 billion cubic metres of gas from the field. In the summer period Gazprom is not able to buy this gas, as the oil company does not have cooling units. In Uzbekistan LUKoil is taking part in the Kandym oil and gas project, for which a production sharing agreement was signed with Uzbekneftegaz in 2004.
The agreement lasts for 35 years. Capital expenditure on the project is forecast at about one billion Euro. The Russian side owns 90 percent in the consortium. Confirmed geological reserves of natural gas at the contract zone amount to 283 billion cubic metres.
The largest of the fields - the Kandym field - has over 150 billion cubic metres of gas reserves. Maximum annual production is expected to amount to about nine billion cubic metres, and total accumulated production at the project may amount to 207 billion cubic metres of natural gas. The start of commercial gas production is planned for 2007 and the gas will be sold through the Gazprom gas transport network.

Tatneft net profit increases 50% in 2005 

Net profit at Russian oil company Tatneft to Russian accounting standards increased 49.75 per cent in 2005 to 36.87 billion roubles from 24.52 billion roubles in 2004, the company said in a statement, New Europe reported.
Growth in the company's profit was due to favourable prices on the fuel markets. Tatarstan Prime Minister, Rustam Minikhanov, said earlier that the republic's government recommended to Tatneft shareholders to approve dividends for 2005 amounting to 20 per cent of net profit. If this recommendation is approved, dividends for last year will amount to 7.37 billion roubles. Tatneft produced 25.3 million tonnes of oil in 2005, in seventh place among Russian companies. Tatneft's charter capital is 2,326,199,200 roubles, consisting of 2,178,690,700 common and 147,508,500 preferred shares, par value one rouble each. The company paid 0.9 roubles per common and one rouble per preferred share in 2004, totalling 2l1 billion roubles.

Rosneft to consolidate all its subsidiaries 

Rosneft President, Sergei Bogdanchikov, has reported to the Russian president that recently the company's board of directors and the boards of its subsidiaries approved a decision to consolidate, New Europe reported.
"A very important decision has been reached to consolidate the subsidiaries. This means that all assets and all licences will be transferred to the Rosneft balance sheet, which means that Rosneft's capitalisation will automatically increase by US$10 billion," Bogdanchikov said during a meeting with Russian President, Vladimir Putin, recently. Asked by the president when Rosneft plans to carry out an IPO, Bogdanchikov said that "this will take place in the middle of the year, and the exact date will be decided by the board of directors." "This is a major contribution to the further liberalisation of the Russian economy," because every Russian citizen will be able to buy Rosneft's shares, Bogdanchikov said.

Gazprom and BASF agree asset swap

BASF, the German chemicals company, and Russian gas monopoly Gazprom have agreed to an asset swap that will give BASF a stake in a new Siberian gas field, the Financial Times reported recently.
In exchange Gazprom will increase its stake in Wingas, the companies' joint-venture European gas distributor.
The deal strengthens ties between the businesses and comes only days after Alexei Miller, Gazprom chief executive, warned European nations not to block its international ambitions. Many in the European Union questioned the wisdom of relying heavily on Russian energy sources.
Mr Miller said the state-controlled company's cooperation with the world's largest chemicals company was "one of a kind" and that the deal would "open up further opportunities for a long-term and reliable supply of Russian natural gas in Europe to competitive conditions."
The announcement of tie-up was timed to coincide with a German-Russian business forum held recently in Siberian city of Tomsk, attended by Germany chancellor, Angela Merkel, and Russian president, Vladimir Putin.
Gazprom's 35 per cent stake in German gas distributor Wingas will rise to 49 per cent and it will receive a full 50 per cent of Wingas Europe, a spin-off that is meant to further expand gas sales outside of Germany. 
BASF subsidiary, Wintershall, will receive just under 35 per cent of shares in Gazprom's Yuzhno Russkoye gas field in Western Siberia, with voting rights of just below 25 per. The companies estimate the field, expected to begin production in 2008, has recoverable reserves of more than 600bn cubic metres, about three times the size of Achimgaz, their first Siberian joint venture.
Gazprom was expected to announce a similar pact with Eon, Germany's largest energy company, but the two sides were unable to reach an agreement in time for a recent meeting in Tomsk.
Interfax reported that Alexander Medvedev, Gazprom deputy chief executive, believed the companies would reach a deal within the next three months.
Yuzhno Russkoye is expected to be the primary source for the controversial North European Gas Pipeline, which will run between Russia and Germany via the Baltic Sea, bypassing Germany's eastern European neighbours.
The pipeline is a joint venture between Gazprom, which will have a 51 per cent stake, and BASF and Eon which will each have a 24.5 per cent share.
Former German chancellor Gerhard Shroeder caused a stir when, less than a month after losing his post, Gazprom announced he would become chairman of the North European Gas Pipeline Company.

LNG plant construction in Leningrad at US$1.5bn 

A project to build a liquefied natural gas (LNG) plant in the Leningrad region, which is planned to be jointly carried out by Gazprom and Petro-Canada, would cost about US$1.5 billion, Petro-Canada Vice President, Graham Lyon, told the sixth international forum on the Russian fuel and energy complex in St. Petersburg. Lyon said US$1.5 billion would need to be invested solely in the construction of the plant. Once the plant reaches its projected production capacity, which he did not specify, the company could have profit of at least US$40 million per year, he said. Russian LNG, which was expected to be delivered to a regasification terminal in Quebec in eastern Canada, will cost US$18.36 less per 1,000 cubic metres than gas delivered to the North American market by other means, he said, New Europe reported.
Lyon said this was an advantageous opportunity for the Russian fuel and energy complex to penetrate into the North American energy market. Gazprom plans to ship LNG from the Leningrad region plant to Petro-Canada's regasification facility in Gros-Cacouna in Quebec. Petro-Canada intends to build the facility in partnership with the pipeline company TransCanada Corporation.
The project for this terminal is currently being agreed upon with Canadian officials. Gas from this terminal, which is expected to be launched in 2009, would be sold on the Quebec and Ontario markets, and in the US.

ConocoPhillips puts LUKoil's Q1 profit at US$1.5bn 

US oil company ConocoPhillips, which has a 17.1 per cent stake in Russian oil major LUKoil, estimates the net profit of the latter in the first quarter 2006 at US$1.5 billion. ConocoPhillips said in a statement that its net income from its LUKoil stake was US$249 million, up from US$189 million in the previous quarter and US$110 million in the first quarter of 2005. This represents ConocoPhillips' estimate of the company's 16.6 per cent weighted-average equity share of LUKoil income for the first quarter, based on market indicators and historical production trends for LUKoil, the company said, New Europe reported.

Putin orders pipeline to be built 40 km from Lake Baikal 

Russian President, Vladimir Putin, has ordered the East Siberia-Pacific Ocean oil pipeline to be built more than 40 kilometres from Lake Baikal, New Europe reported.
Speaking to Russian Academy of Sciences Vice-President, Nikolai Laverov, at a session on Siberia's socioeconomic development in Tomsk recently, Putin asked: "Does this mean that if anything happens, the pollution will not get into Baikal, but will go to the north?" Laverov answered that this was the case. "The pipeline will be built to the north of the zone indicated by Academician Laverov. That is settled then," Putin said. At the start of the discussion Transneft President, Semyon Vainshtok, reported to Putin that the project to build the eastern pipeline meets the strictest ecological standards. Vainshtok said that the system will rule out accidental oil spills. There will be more than a 1,000 seismic sensors, which will stop the oil pumping in the event of danger. As a result, the technology "will totally prevent oil from getting into Baikal," he said.

TNK-BP net profit increase yields 2% in Q1… 

The BP share of net profit at Russian-British oil company TNK-BP, of which the British company owns half, amounted to US$418 million in the first quarter 2006, compared with US$411 million in the same period last year, up two per cent, according to a BP report. As a result, net profit for all of TNK-BP in the first quarter this year, according to BP, amounts to US$836 million. The report said that in the first quarter BP received US$771 million in dividends for 2005. Total dividends for 2005 amounted to US$2.721 billion, of which US$1.95 billion was received in the last reporting period. The BP share in TNK-BP profit, not including interest and tax payments in the first quarter amounted to US$852 million, up 39 per cent from US$615 million in the same period last year, the report said. Tax payments in the last quarter amounted to US$350 million, compared with US$167 million in the first quarter 2005. The BP share in TNK-BP production in the first quarter, according to adjusted figures, amounted to 994,000 barrels of oil equivalent per day, which is 2.8 per cent more than in the first quarter last year. The BP share in oil production last quarter amounted to 896,000 barrels per day (875,000 bpd in the first quarter 2005), and natural gas - 567 million cubic feet (527 million cubic feet in the first quarter 2005).

Total to pay Russia 14.5m Euro for share in Kharyaga 

The company Total Exploration and Production Russia, the operator for the Kharyaga production sharing agreement, is to pay Russia 14.5 million Euro for the first quarter this year for its share in profitable production at the field, the company said in a statement, Interfax News Agency reported.
According to the procedure for calculating profitable oil approved in March, the first payment to Russia will be made in mid-May. The operator will pay the state a share of profits on a quarterly basis in cash, the statement said. In February 2006 the project reached the point of full reimbursement of expenditure carried out by the investors in previous periods. At the moment the volume of investment in the project amounts to 450 million Euro, and the next phase of development involves investment of 800 million Euro. Participants in the Kharyaga project are France's Total (50 per cent), Norway's Hydro (40 per cent) and Nenets Oil Company (10 per cent). In 2002 an agreement was signed for LUKoil to receive a 20 per cent stake in the project, but this has not yet come into effect.

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FOOD & DRINK

Danone increases share in Wimm-Bill-Dann to 9.9% 

The Danone Group increased its share in the charter capital of Wimm-Bill-Dann Food Products to 9.9 per cent as of December 31, 2005, Interfax News Agency reported citing a company's release. Danone previously had a 9.46 per cent share in Wimm-Bill-Dann.
Wimm-Bill-Dann, which was founded in 1992, now has 30 plants in Russia and other parts of the CIS, as well as trade branches in 26 cities. The company increased net profit 31.7 percent to US$30.3 million in 2005, revenue amounted to US$1.4 billion, up 17.7 per cent and EBITDA amounted to US$140.9 million, up 45.4 per cent. Wimm-Bill-Dann's main shareholders are Gavril Yushvaev (19.45 per cent), Sergei Plastinin (10.75 per cent) David Yakobashvili (10.12 per cent), Mikhail Dubinin (6.52 per cent) and Alexander Orlov (3.99 per cent).
About 30 of the company's shares are in circulation on the New York Stock Exchange. The company's shareholder capital amounts to 44 million common shares with par value of 20 roubles each on December 31, 2005. France's Danone Group produced more than 13.7 billion Euro worth of products in 2004. The company sold 123,398 tonnes of dairy products in Russia in 2004, up 44 percent from 2003.
Output at the company's plant in the Moscow region town of Chekhov totalled 84,303 tonnes, while the Danone plant in the Samara city of Togliatti produced 20,940 tonnes. The company has yet to publish its 2005 results. Danone also owns the Bolshevik Confectionery Plant in Russia, which sold 35,877 tonnes of products in 2004, up 19 percent from 2003. In addition, Danone has a plant that produces Chock and Rolls biscuits under the Tornado trademark in St. Petersburg. Danone bought the plant from Chupa Chups.

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MINERALS & METALS

Polymetal silver output down 9%, gold up 13% in Q1 

Polymetal, Russia's biggest silver producer and second biggest gold producer reduced silver production nine per cent year-on-year in the first quarter of 2006 to 4.261 million ounces. The company said that gold production rose 13 per cent to 58,000 oz. Silver production fell because the company mined lower-grade ores at the Lunnoye field. Gold production grew with the launch of the second stage of the Vorontsovskoye mine.
Gold sales rose 13 per cent to 53,000 oz at an average realized sale price of US$ 550/oz including a discount against LME prices. Silver sales fell 9 per cent to 4.16 million oz at US$ 8.2/oz. Ore extraction decreased eight per cent to 596,000 tonnes as open-cast mining fell 11 per cent while underground mining rose four percent. The company expects underground mining to increase in tonnage and as a share of total ore mined. Only the Dukat mine currently extracts deep-mined ore at present.
Polymetal's recovery plants processed 444,000 tonnes of ore, up nine percent year-on-year, as capacity at the Khakandzhe and Vorontsovskoye fields increased.
The company aims to increase production of silver and gold 20-30 per cent by 2008 from the 18.9 million ounces of silver and 243,000 ounces of gold it produced in 2005. This growth is expected with existing assets.
Polymetal plans to carry out an initial public offering on the London Stock Exchange in November 2006. The company has said it may hire Deutsche Bank and Merrill Lynch as lead managers. Polymetal is the world's fifth biggest silver producer. It operates in Russia's Khabarovsk and Krasnoyarsk territories, and Sverdlovsk, Magadan and Chita regions. Nafta Moskva is the company's sole owner.

RusAl yet to decide on Australian smelter 

RusAl, one of the world's top three aluminium companies, has yet to decide whether to build a smelter in Australia, Alexander Livshits, the company's deputy general director said, Interfax News Agency reported.
Livshits said RusAl had not decided how big the smelter might be, and that there were "very many sites in the world and the smelter doesn't necessarily have to be built in Australia." Livshits said the smelter construction also depended on electricity supplies, and whether the Australian government privatises power generating assets. "Otherwise it will be impossible for us to expand our business there," he said. Livshits also said that RusAl intended to redirect the main flows of alumina produced by the Queensland Alumina Mill to Russia in 2008.

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NUCLEAR ENERGY

Atomenergomash to supervise nuclear machine building 

TVEL Corp. has founded a 100 per cent subsidiary to supervise nuclear machine building in Russia, Federal Atomic Energy Agency spokesman Sergey Novikov said, Interfax News Agency reported.
Atomenergomash, the new company was registered on March 29th and TVEL Vice-President, Kirill Komarov, has been appointed as Atomenergomash CEO.
Novikov denied claims that the agency is negotiating the acquisition of Silovye Mashiny. "The agency is considering a mechanism of control over nuclear machine building plants, but it is not holding negotiations on the acquisition of Silovye Mashiny stock," he said.
As for other machine building plants of interest for the agency, Novikov said that "negotiations are underway." It was earlier reported that the agency would buy out the largest nuclear machine building plants, including ZiO-Podolsk and Izhorskiye Zavody.

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