Books on Russia
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
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
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
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
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
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
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
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
"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
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
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
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
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.
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
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.
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
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
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.
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.
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
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.
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
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.
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
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
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
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
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
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.
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
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$140.9 million, up 45.4 per
cent. Wimm-Bill-Dann's main shareholders are Gavril Yushvaev (19.45 per cent),
Sergei Plastinin (10.75 per cent) David Yakobashvili (10.12 per cent), Mikhail
Dubinin (6.52 per cent) and Alexander Orlov (3.99 per cent).
About 30 of the company's shares are in circulation on the New York Stock
Exchange. The company's shareholder capital amounts to 44 million common shares
with par value of 20 roubles each on December 31, 2005. France's Danone Group
produced more than 13.7 billion Euro worth of products in 2004. The company sold
123,398 tonnes of dairy products in Russia in 2004, up 44 percent from 2003.
Output at the company's plant in the Moscow region town of Chekhov totalled
84,303 tonnes, while the Danone plant in the Samara city of Togliatti produced
20,940 tonnes. The company has yet to publish its 2005 results. Danone also owns
the Bolshevik Confectionery Plant in Russia, which sold 35,877 tonnes of
products in 2004, up 19 percent from 2003. In addition, Danone has a plant that
produces Chock and Rolls biscuits under the Tornado trademark in St. Petersburg.
Danone bought the plant from Chupa Chups.
MINERALS & METALS
Polymetal silver output down 9%, gold up 13% in Q1
Polymetal, Russia's biggest silver producer and second biggest gold producer
reduced silver production nine per cent year-on-year in the first quarter of
2006 to 4.261 million ounces. The company said that gold production rose 13 per
cent to 58,000 oz. Silver production fell because the company mined lower-grade
ores at the Lunnoye field. Gold production grew with the launch of the second
stage of the Vorontsovskoye mine.
Gold sales rose 13 per cent to 53,000 oz at an average realized sale price of
US$ 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.
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.