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In-depth Business Intelligence

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

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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: 302- (27/02/06)

Whence Putinism?
Gorbachev wanted to create communism with 'a human face.' Putin is well aware that this is an utterly impossible project and that Soviet communism is a thing of the past. His one known witticism is: "anyone who does not regret the passing of the Soviet Union has no heart; but anyone who thinks it can be recreated has no head."
Yet his recent actions could lend themselves to the interpretation that that is exactly what he wants to do. 'All power to the Kremlin,' as his current deeds exemplify, is but a whisker away from 'All power to the Soviets,' which carried the early Bolsheviks to the Kremlin, indeed, the empty throne of the Tsars. A replica of totalitarianism is under creation, but a project of retro-Stalinism, than recidivist communism. 'Stalinism with a human face' is the formula closer to encapsulating Putinism than aught else. Or is it?
History never repeats itself, even with an air-brush. Stalin, as it so happens, was very fond of air-brushes himself. Photographs of the early Bolshevik leadership were re-issued without Trotsky, a non-person in the Stalinist prism, with his "beautiful uselessness…a champion with fake muscles," so Stalin said.
Actually, Trotsky did more than anyone else to enact the October Revolution and then win the ensuing civil war, during neither of which events did Stalin cover himself with glory, but rather abundant gore, as was his subsequent wont. 
Yet he had the huge advantage of being non-Jewish and, unlike the brilliant Trotsky ("a god-damn son of a bitch," said US Colonel North in 1919, "but the greatest Jew since Jesus Christ"), a master operator in the political game, full of low-grade animal cunning. There is no doubt on which of the two Putin has modelled himself. He has finished off his own Jewish potential rival, Mikhail Khodorkovsky, and rules the roost indisputably in the Kremlin, just as Stalin did.
There is one big difference, however. Putin has ditched the communist hostility to capitalism. But he wants it to be a state capitalism in the hands of his former KGB chums, the soloviki. 'Stalinism with a state capitalist face' fills the bill better, but even better does 'Stalinism with a soloviki face-lift.' 

Whither Putinism?
Lenin defined communism as "Soviet power plus electrification of the entire country." Vladimir Putin takes a similar view. An updated slogan for Putin's regime might read "Kremlin power plus control of the oil and gas industry." Nemesis for Khodorkovsky after the hubris of his Yukos; the Kremlin has the kudos and the clout. 
Europe received a taste of how the Kremlin might wield that power at the start of the new year when Gazprom, the world's biggest gas company, reduced the pressure on pipelines carrying gas through Ukraine to western Europe. The decision to end subsidies to Ukraine and other former Soviet bloc states may have been Russia's legitimate right. But the take-it-or-leave-it style, the fivefold price hike and the accompanying threat to cut off supplies raised questions about the reliability of Gazprom as a growing supplier of Europe's gas - including to Britain as North Sea supplies run down.
Whichever way you look at it, this was not just the action of a big gas company seeking to maximise profits - it was the Kremlin flexing its political muscles. Not quite the same, perhaps, as Khruschev rattling his nuclear rockets in Cuba, but a recognisable move from the same thuggish political repertoire.
It should not have come as a surprise. Gazprom, which was semi-privatised in the early 1990s by senior managers of the former Soviet ministry of gas, is no stranger to a "Bolshevik" style of negotiation. Its former boss, Viktor Chernomyrdin, was appointed prime minister by Boris Yeltsin and used Gazprom money to fund a political party called Nash Dom-Rossia - "our home is Russia." Wags quickly renamed it "Nash Dom-Gazprom."
In recent years, Gazprom has often cut gas supplies to Georgia, at the Kremlin's request, and built an expensive and ecologically risky gas pipeline under the Black Sea rather than pay transit fees through the Caucasus, or indeed anywhere near Chechnya. It is planning to build a similar pipeline under the Baltic to Germany rather than pay transit fees to the Baltic states and Poland and there is no danger of guerrilla sabotage from them.
When President Putin succeeded in persuading Gerhard Shroeder to take a lucrative, high-profile job as chairman of the supervisory board of this 1,200-km long Baltic pipeline, dark historical memories were reawakened in some. The pipeline agreement was quickly dubbed the "Shroeder-Putin pact" - a bitter reference to the 1939 Molotov-Ribbentrop pact whose secret provisions led to the division of Poland and Soviet reoccupation of the Baltic states.
The compromise which ended the long-simmering Ukrainian "crisis" was also more revealing about Russian energy policy than the Kremlin perhaps intended. Ukraine agreed to pay a higher "European price" for its Russian gas. But Gazprom sweetened the pill by offering additional Central Asian gas for a much lower price through an obscure operating company controlled by Gazprom, with mysterious minority shareholders.
Gazprom's compromise with Ukraine came at the expense of Central Asia, whose gas can only reach western Europe through Gazprom's Russian pipelines. While Russia is no longer subsidising Ukraine, the Turkmens and Kazaks are. Thanks to its monopoly power, Gazprom was able to reduce the average price of gas supplied to Ukraine to around US$95 per thousand cubic metres - nearly double what it paid before, but less than half the US$230 it now pays for Russian gas.
This low price is part of the hidden cost of Moscow's political support for Central Asia's authoritarian regimes and for allowing millions of "gastarbeiter" - mainly Uzbeks-to work on Russian construction sites, farms and factories. They send back remittances which keep their families alive and help dictators like Uzbekistan's Islam Karimov and Turkmenistan's Saparmurat Niyazov remain in power.
The entire Soviet economy rested on a deliberate network of mutual dependency of this kind - with little thought to economic efficiency. What Putin has done is to claw back Kremlin ownership of key energy assets, and use the bargaining power of energy ownership to reinforce the concentration of political power in the Kremlin.
This may not bode well for the future democratic development of Russia - if that is what Russians desire - but it has not harmed Putin's abiding popularity in a country which has traditionally respected a "firm hand" in the Kremlin and likes being respected, and if possible feared, abroad. Under Putin, the Duma and other democratic institutions have lost control over budgets while big foreign and local companies need Kremlin approval for their investment projects, especially in the natural resource sector.
For all Boris Yeltsin's faults, his presidency saw the rebirth of civil society institutions and attitudes. These green shoots have now been covered back up with snow. But the men in the Kremlin still act as if they were under constant threat - even though opinion polls indicate that, for now at least, most people are happy enough to leave politics to them so long as high energy prices are fuelling strong economic growth and wages and pensions are paid on time.
This also seems to be the view of foreign investors. Gazprom became the new star of the Moscow stock exchange last year - nearly tripling in value against the background of an oil-induced boom in Russian stock prices generally. The boom continued into the new year following Putin's decision to abolish the "ring fence" which restricted foreigners to no more than 20 per cent of the company's shares.
Abolition is a smart move. It only became possible after Putin had built up the state's holding to a demonstratively controlling 51 per cent. Foreign investors are now welcome to buy as many of the remaining shares as they like. Their money is needed to buy the future equity issues needed to finance badly needed investment. They invest in the knowledge that the Kremlin holds the whip hand, but thus far the prospect of future growth and higher revenues, including from Ukraine, has outweighed perception of political risk.
Like a second marriage, however, the current investor love affair with Gazprom could well turn out a triumph of hope over experience. Gazprom is a bureaucratic monster employing over 330,000 people, many of them holdovers from the Soviet ministry of gas. Despite efforts to rein in corruption, the company has been a legendary sieve - as well as a cash cow for the state, providing nearly 20 per cent of tax revenues and subsidising gas prices.
Gazprom's share price was so low until last year's buying frenzy because profits were low and existing gas reserves were running down after decades of forced production and under investment. Up to US$100bn will need to be invested over the next decade or so to build huge new offshore projects, such as the Shtokman field in the Barents sea, on and around Sakhalin island, and up north in the frozen Arctic and eastern Siberia.
But Gazprom has changed a lot over the last two years and high oil and gas prices are only one factor. It is no longer "just" the world's biggest gas company with over 114billion barrels of oil equivalent in reserve. After its Kremlin-sanctioned US$13bn purchase of Sibneft, Russia's fifth largest oil company, from Roman Abramovich last year, it is now both an oil and gas company - with ambitions to become a Russian Exxon or BP.
The big question now is whether the Kremlin, having reorganised Gazprom and oil company Rosneft into big state-owned energy corporations, will find the managerial and other skills needed to run them as efficiently as private companies seeking profit - rather than end up as dismally as their bureaucratic Soviet counterparts. 
Andrei Illarionov, Putin's outspoken former economic adviser, fears the latter. He warned a year ago of the "monstrous incompetence" of the plotters behind the virtual confiscation of a majority stake in oil company Yuganskneftegaz from oligarch Mikhail Khodorkovsky in lieu of arbitrary back tax payments. In January Ilarionov resigned in protest against the resurgence of big state corporations run by such men.
Putin has a cold-eyed attitude to foreign investors, especially in this era of high-energy prices. His self-confidence has been strengthened by the inability of the international business community - not to speak of the G8 of which Putin is now chairman - to register an effective protest over the expropriation of Yuganskneftegaz. A flurry of personal diplomacy by Putin in Asia in recent months also reflects confidence that the Kremlin will be able to gain from the new competition for Russian resources from China and India.
Reinforcing this new-found confidence is the sterling performance of the Russian stock market. Ironically, share prices started to take off within days of a Moscow court sentencing Khodorkovsky, once Russia's richest man, to nine years in jail nearly 18 months ago. "Markets hate uncertainty," explains Al Breach, a leading Moscow-based analyst. "Once the sentence was read out, the uncertainty evaporated, and the market took off against a background of high oil prices, record reserves, rapid growth and rising profits." For the Kremlin this must have seemed further proof of Lenin's dictum that "the capitalists will sell us the rope by which we'll hang them."
It is hard to remember that only a year ago Putin appeared to have been knocked off course by the orange revolution in Ukraine, a pensioners' revolt at home and the emergence of a potential challenger in Mikhail Kasyanov, the former prime minister. Since then the pensioners have been quietly paid off, Kasyanov's credibility has been undermined by allegations of alleged corruption, and Ukraine has been forced to accept a politically unsettling gas price hike which strikes a severe blow at the country's traditional gas-intensive heavy industries. It is hard to imagine a more effective way of making life difficult for President Viktor Yushchenko only months before Ukraine's highly charged general elections in March.
But it remains to be seen whether, in the longer term, the Kremlin has been wise to reveal the snarling bear image to its closest neighbours, when a good-neighbour policy would probably offer greater long-term security and economic gains to both sides.
Putin's tactical dexterity also masks deeper rooted problems. These include instability in the Caucasus which spreads beyond Chechnya, a deeply worrying but largely ignored Aids pandemic, and a demographic implosion. These are some of the long-term, indirect consequences of the terrible upheavals and bloodletting of the Soviet years, which the state-controlled media prefer to ignore. Corruption is another systemic problem - and surveys show that it has increased dramatically since the Kremlin undermined the trend towards greater transparency and rule of law by its targeting of Khodorkovsky.
Barred by the constitution from standing for a third term, Putin is now focused on the succession issue. The Kremlin's control over Gazprom and Rosneft and their huge cash flows have raised the stakes. The aim of the current masters of the Kremlin is to secure the succession for a man unquestionably loyal to them in 2008, not only to ensure continuity but also the tranquillity in which to enjoy the fruits of power.
For many close to Putin, the ideal solution would be to simply bypass the constitution and for their man to stand again. An alternative would be to build up Gazprom, put Putin in charge and allow him to continue to rule Russia by proxy. Recent events indicate that this is the way things are going. But two years is a long time in politics - especially in a country where even the past is so difficult to predict.

Gazprom Part Three - Squeezing Out The Middle Men 
In the third article on Russia's oil and gas industry oilbarrel.com looks at the Kremlin's strategy for Gazprom and Rosneft
Squeezing out the foreign middleman, capturing transit revenues and a new emphasis on refining and exporting LNG and other higher value products are key elements of the Kremlin's overall energy strategy for Gazprom and Rosneft. Another is gradually raising domestic energy prices to levels where they at least cover costs. This will only happen however once the 2008 presidential elections are over. Then the way will be clear for both Gazprom and the by-then privatised electricity industry to raise domestic energy tariffs. In Gazprom's case this means reducing the 28 billion rouble (nearly US$1billion) loss it incurred last year selling over 70 per cent of its gas to domestic consumers. 
But revenue gains from the politically sensitive raising of domestic tariffs will always be less significant than maximising profits from gas exports. This year Gazprom expects to rake in US$27 billion from higher export sales of around 150 billion cubic metres (5.2 trillion cubic feet) - a 40 per cent income hike on last year's US$19.2 billion.
Looking forward, a series of major export-orientated projects will sharply raise export capacity both for traditional gas exports and LNG by the end of the decade and beyond when big new fields like Shtokman in the Barents sea are scheduled to come on stream, followed by new projects on Sakhalin island and elsewhere in Eastern Siberia and the 

Russian Far East
In the meantime Gazprom is raising investment in land-locked central Asia and increasing the volumes it takes from Turkmenistan, Uzbekistan and Kazakstan. This is a cheaper, easier and quicker way to boost volume than huge and distant Arctic, Siberian and offshore projects. 
Foreign investors, including Indian, Chinese and other energy hungry Asian oil and gas companies, will provide much of the financial and technological impetus. But this is something which the Kremlin feels it can now afford to be relaxed about given its controlling 51 per cent stake in Gazprom, similar control over Rosneft, and the ease with which it was able to dismantle Yukos and eliminate its main domestic political challenger, Mikhail Khordorkovsky, without significant foreign or domestic opposition. 
Way before the new projects come onstream, however, Russia's former Soviet satellites will be paying the same price as west European consumers for gas. With central Europe, Baltic and Balkan states paying the same rates as traditional west European customers, and overall western demand rising steadily as the UK joins the list of major gas importers, Gazprom is well placed to benefit from higher volumes at rising prices. But this puts big pressure on the company to press on with big new projects, such as Shtokman in the Barents sea and a proposed new LNG plant near Murmansk to process Arctic gas for the North American market.
At the same time however both Gazprom and Rosneft are planning big expansion in the east, especially on Sakhalin island which is the ideal location for supplying oil and LNG to nearby Asia markets and the West Coast USA. The two big projects currently underway on Sakhalin, the Exxon-led Sakhalin 1 oil project and the Shell-lead Sakhalin Energy Consortium's hugely complex, US$20 billion oil and LNG Sakhalin-2 project, tap little more than 15 per cent of the island's on and offshore potential.
Exxon was deeply disappointed to lose its development licence for the potentially much bigger Sakhalin-3 project two years ago. Now, this mainly offshore project is likely to become to become the classic showcase for Putin's new energy strategy. 
Gazprom, in line with current Kremlin doctrine, will probably insist on a 51 per cent controlling stake in the gas side of the project, with Rosneft taking a similar stake in the oil operation. Finance for the mega-billion US dollar project is likely to come mainly come from potential consumers in Japan, Korea, China and the US. Offshore and LNG technology will be provided by selected international majors who are also likely to be offered minority equity stakes in the project. Similar stakes will be offered to the national oil companies of China and India, the rising stars of the east. And if the Kremlin's plans for post-2008 Russia come true, Mr Putin himself will do the constitutional thing and give up the presidency, while still remaining in charge by taking over as head of Russia's biggest, most profitable and most powerful company. 

Putin, Merkel discuss Iran, Middle East
There is one Western leader who does not mind mincing words with Putin, namely German Chancellor Angela Merkel, a fluent Russian-speaker. She telephoned Russian President Vladimir Putin on February 14th, and the two leaders discussed the Iran issue, the Israeli-Palestinian conflict, and other matters, the Kremlin said. 
"As part of a regular exchange of opinions on issues in bilateral and international relations, Putin and Merkel discussed the situation surrounding the Iranian nuclear problem and the state of affairs in the Middle East settlement process. Satisfaction was expressed on both sides with a high degree of mutual understanding, and stressed the intention to continue close coordination," the Russian president's press service said. 
Putin and Merkel also expressed approval of work that has been done in preparing a planned Russian-German summit in April, the service said.

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AVIATION & SPACE

Kazakstan, Russia cooperate in space projects 

Kazakstan will launch its first two telecommunications satellites later this year. The first Kazak telecommunications satellite, KazSat, that is produced by Russian specialists will be launched before June 20th 2006 while KazSat 2 will be in orbit before the end of the year, head of the department in the Federal Space Agency, Alexander Martynov, said at a roundtable meeting on the prospects of development of Kazak satellites on January 26th.
The launches of Kazak telecommunications satellites KazSat and KazSat-2, the use of the space monitoring system for the prospecting of hydrocarbon deposits of the Caspian shelf were discussed at a meeting of Kazak Prime Minister, Danial Akhmetov, and head of the Federal Space Agency, Anatoly Perminov, on January 25th.
According to Martynov, the agency was actively looking at ways to compress the time frame as Kazakstan develops plans to eventually have four communications satellites in orbit along with four smaller imaging satellites that will be developed in cooperation with Russia and will be used to explore for energy and monitor oil pipelines.
"Kazakstan is planning to launch four communications satellites and four earth distant probing satellites jointly with Russia before 2011-2012," chairman of the national company Kazcosmos board, Serik Turzhanov, said. 
"We are planning to invest in this field about 400 million Euro for the next two or three years," he pointed out.
Russia and Kazakstan also prepared a joint statement on cooperation in the peaceful use of nuclear energy.
This announcement was the outcome of a meeting between the president of Russia Vladimir Putin and president of Kazakstan Nursultan Nazarbayev in St. Petersburg, Russian, New Europe reported.
Both sides also stressed the efficient Russian-Kazak cooperation in the implementation of space projects. 
Russia and Kazakstan are also creating the rocket-and-space complex, Baiterek, at the spaceport Baikonur.
Putin said that Russia and Kazakstan could take a step in boosting bilateral cooperation. He said, "As it has been agreed in Astana we can make the steps forward, reflect on what has been done and plan prospects of development in vital directions." 
Putin expressed gratitude to Nazarbayev for persistent efforts in the development of integration processes on the territory of former USSR. For his part, Nazarbayev also noted that mutual relations are adequately developing. "We are to accept the final report on the border of Northern Caspian Sea which will start a joint work on Kurmangazinskiy, Central, Hvalynskiy - three largest deposits," Nazarbayev said and added that the Russian and Kazakstan companies will work on these deposits by the principle on a 50:50 basis.
Both presidents signed the protocol on amendments to the protocol as of May 13th, 2002 to the Agreement between Republic of Kazakstan and the Russian Federation on delimitation of the bottom of the northern part of the Caspian Sea with a view to exercise sovereign rights on subsurface use as of July 6th, 1998.

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ENERGY

Gazprom profit increased 29% in third quarter

Russian gas monopoly, OAO Gazprom, said net profit rose 29% in the third quarter, largely through a one-off gain and some discretionary accounting in operating costs, the Wall Street Journal reported.
Analysts had expected the usual seasonal decline in sales volumes of natural gas to result in a rise of only 2.7% but were surprised by an extraordinary gain generated by the sale of over four billion cubic meters of gas in storage in Ukraine, at prices three times the contract level for deliveries to the country. By comparing nine-month net profit with what Gazprom reported in the second half, net profit in the quarter, ended Sept 30th, was 79.32bn roubles (US$2.83bn), up from 61.6bn roubles a year earlier.
Gazprom's contract price for deliveries to Ukraine last year was US$50 per 1,000 cubic meters, although a large barter element in the agreement makes exact calculations difficult. Gazprom said it had sold gas then in Ukrainian storage at a price US$150 per 1,000 cubic meters to RosUkrEnergo. RosUkrEnergo is half-owned by a unit of Gazprom, and the identities of the owners of the remainder, held by a unit of Austria's Raiffeisen Bank, remain secret.
RosUkrEnergo serves as an intermediary as Russia and Ukraine haggle over the price at which Ukraine buys Russian gas.
Kaha Kiknavelidze, an analyst at UBS in Moscow, said the results were "marginally positive" for the stock. However, he said operating costs exceeded expectations and were aided by the reversal of a US$113 million charge for impairment of assets.
Revenue rose to 291bn roubles from 211.86bn roubles a year earlier.

LUKoil to boost oil production 4% in 2006 

Russian oil major LUKoil plans to increase oil production 4 per cent in 2006, LUKoil vice president, Leonid Fedoun, said at a meeting in Moscow. Fedoun said that the company expects a significant increase in gas production also, Interfax News Agency reported.
The LUKoil Group raised oil production 4.5 per cent to 90.1 million tonnes in 2005, the company said in a press release following a meeting of its board of directors. Oil production increase in 2005 amounted to 4.5 per cent against 2004. Western Siberia remains the largest oil production region, the release said. "LUKoil's gas production rose 17 per cent to 7.6 billion cubic metres (bcm) last year. "Gas production in 2005 increased by 17 per cent against the previous year and exceeded 7.6 bcm. In 2006, LUKoil plans to increase gas production by more than 40 per cent, with most natural gas to be produced at the Nakhodka field," the release said. LUKoil said the group's oil exports in 2005 rose by 2.3 per cent to 46.6 million, including 40.7 million tonnes to non-CIS countries and 5.9 million tonnes to CIS countries).

KazTransGaz plan to invest 80m Euro in Tbilgaz 

Kazakstan's state gas transport company KazTransGaz is planning to invest some 80 million Euro in Tbilgaz, Georgia's gas transportation company, KazTransGaz deputy director general, Dani-yar Berlibayev, said, Interfax News Agency reported.
"According to preliminary estimates, Tbilgaz needs more than 80 million Euro to be invested in primary steps to rehabilitate the gas transport systems of Tbilisi. This would enable the company to break even in 2-3 years," Berlibayev said. KazTransGaz will also make efforts to ensure that payments for its services are made. "For this, we'll use the company's successful experience in the gasification of Kyzylorda where the level of dues collected currently stands at 100 per cent taking into account pre-payments," he said. However, the Kazak company, does not plan to revise the existing tariffs for gas consumption during the first stage of reviving Tbilisi's gas systems, he said. "There are high tariffs in the Georgian capital right now of 120 Euro-150 Euro per 1,000 cubic metres. In accordance with the memorandum we signed with the government, we will leave the tariff unchanged until we receive mass investment and then we'll reconsider it," Berlibayev said.

Gazprom wants to expand to UK energy market 

Russia natural gas giant Gazprom is planning an expansion to the UK power market with plans to provide 20 per cent of Britain's gas by 2015, possibly through the takeover of a company such as Scottish Power, the Guardian reported recently.
"To start from scratch in retail would be impossible - but through acquisitions, yes, we do not rule this out," the newspaper quoted Alexander Medvedev, deputy chairman of Gazprom, in an interview.
Medvedev said one way of speeding up this expansion process would be to acquire an existing energy supply business such as that of Scottish Power which was recently in takeover talks with German energy group E.ON. "We are looking at such opportunities now. We are not afraid of such size as Scottish Power but we have no concrete plans at this moment," Medvedev added. 
The newspaper also said the purchase of a big oil company in Britain or elsewhere has not been ruled out either by Gazprom which has already acquired Russian rival Sibneft.
Gazprom, whose capitalisation had topped US$200 billion, ranks seventh among the world's major public companies and fourth among oil and gas companies in terms of capitalization, Gazprom CEO, Alexei Miller, said on the Vesti Nedeli programme on Rossiya television January 15th.
"It was an absolutely predictable result for us. Gazprom set itself the task of becoming a global energy company a few years ago. What we are witnessing on the stock market provides proof that Gazprom is indeed, becoming a company of such standing The company's capitalisation has exceeded US$200 billion. It is a historic mark for our country and, of course, for Gazprom," he said.
"Gazprom ranks seventh among the world's top ten companies and fourth on the chart of the world's major oil and gas companies. So, we are just centimetres away from the second and third places," said Miller.
Gazprom is only behind the American ExxonMobil, British-Dutch Royal Dutch Shell and British-American BP. "Yes, we are slightly behind BP and Shell, but it's only a matter of time," he said.
Miller also said he met with German Economics and Technology Minister, Michael Gloss, in Berlin, and "informed him that work on the North European Gas Pipeline project is proceeding strictly according to schedule." "We have no doubts that gas will reach Germany directly from Russia in the middle of 2010," Miller said.
Reports circulated earlier said that the German concerns BASF and E.ON on September 8th signed a basic agreement to build the North European Gas Pipeline. 
The partners set up a joint venture, the North European Gas Pipeline Company, in which Gazprom holds a 51 per cent stake, and its German partners hold 24.5 per cent each.
Meanwhile, Standard & Poor's Ratings Services raised its long-term corporate credit rating on Gazprom to BB+ from BB, in view of an increase in state support, and following the US$7 billion purchase of the company's treasury stock by the Russian state-owned special-purpose vehicle Rosneftegaz. The outlook is positive, the agency said in a release.
The rating upgrade reflects the cash payment from Rosneftegaz, which, together with higher export prices, has allowed Gazprom to limit increases in year-end parent debt to about US$23 billion (closer to US$28-30 billion including subsidiary debt). In particular, this helped the company to prepay US$8 billion of the US$13 billion loan raised to finance the acquisition of Sibneft by the end of 2005, the release read.
"We also expect Gazprom to benefit from a greater degree of state support as its links with the government become stronger, and in view of recent improvement in the sovereign credit quality," said Standard & Poor's credit analyst, Elena Anankina. 
The foreign currency ratings on the Russian Federation were raised to BBB/Stable/A-2 on December 15, 2005.
As the key government-related entity in Russia's strategic oil and gas sector, Gazprom enjoys a strong hold on new hydrocarbon projects in the country; and substantial bargaining power in structuring consortiums for oil and gas projects with international partners, as well as negotiating gas supply and transit contracts.
The Russian government has demonstrated a policy of increasing its presence in the country's key oil and gas sector through state-owned entities - a position illustrated by the increase of its holding in Gazprom to 50 per cent from 39 per cent, in 2005, the agency said.
The situation with regard to the recent dispute on gas transit and supply terms with Ukraine (foreign currency BB-/Stable/B; local currency BB/Stable/B) also evidences the close links with, and support from, the Russian government. Accordingly, our corporate credit rating on Gazprom currently includes one notch of state support, the press release read.
Gazprom remains subject to general political and emerging market risks related to Russia, however. 
The unpredictable nature of Russian government policy, potential investment mandates and still very low regulated domestic gas prices, together with substantial financial debt levels, remain key constraints on the rating on Gazprom.

Pyaterochka revenue grows 23% in 2005 - analysts 

The Irkutsk branch of Siberian Coal Energy Company (SUEK) plans to produce 20.12 million tonnes of coal in 2006, which is three per cent more than in 2005, the company's press service said in a statement, Interfax News Agency reported.
Overall production will increase due to growth in production at the Tugnui mine in Buryatia. Production here is planned at 5.5 million tonnes in 2006, up 15 per cent from 2005. Coal production in the China region will also grow. However, production in Irkutsk region itself is set to fall three per cent to 10.88 million tonnes. According to Vladimir Smagin, managing director of the Irkutsk branch, the drop in production in Irkutsk region is due to a drop in demand for coal at Irkutskenergo. At the end of 2005 the energy company has unprecedented coal reserves in its warehouses - 3.036 million tonnes, compared with 2.376 million tonnes at the same time in 2004. In 2006 SUEK will halt exports of Cheremkhovo coal concentrate. These exports amounted to 330,000 tonnes in 2005. According to the statement, these exports are now unprofitable - due to growth in rail and port tariffs and a drop in the export price this coal is losing its competitiveness on the export market. SUEK plans to invest 543 million roubles in its companies in Buryatia and Irkutsk and Chita regions in 2006, up 180 per cent from 2005, the press service said. 
In particular, the company plans to acquire new equipment for the Tugnui coalface in Buryatia - bulldozers, dump trucks, drilling units. Spending on capital construction this year will amount to 100 million roubles, including on an 18-apartment house in the mining village of Sagan-Nur, and the reconstruction of the Tatarsky Klyuch station in Tugnui. Buses, drilling units, equipment and software for mining surveyors are to be bought for the Mugun mine in Irkutsk region, and 12.8 million roubles have been earmarked for the construction of rail links to mine faces in the Eastern block. 
Significant investment is planned for the Azeisk section in Irkutsk region, including on the acquisition of a TM-7 diesel train, the construction of engineering infrastructure, the first phase of a technical service block and the reconstruction of the Algatui station. SUEK invested 192.85 million roubles in it's Irkutsk branch coal companies in 2005. These funds were spent on acquiring equipment and on construction: on dump trucks, the construction of a train-dump car depot at the Tugnui mine, construction of an oil produce warehouse, an emergency water supply system in the event of fire, a heating system for the Mugun mine, an excavator and the construction of Kasyanovsky beneficiation plant in Cheremkhovo. The SUEK Irkutsk branch controls 15 companies in Irkutsk and Chita regions and in Buryatia. These companies increased coal production 2.6 percent to 19.56 million tonnes in 2005.

Total, Gazprom chiefs discuss cooperation in other countries 

Gazprom CEO, Alexei Miller, and Total President, Thierry Desmarest, discussed cooperation in oil and gas projects in other countries at a meeting in Moscow, in light of proposals from the French company for the development of the Shtokman field, Interfax News Agency reported.
Gazprom said in a press release that the participants at the meeting discussed the possibility of jointly developing the Shtokman field, the production of liquefied natural gas as part of this project and setting up supplies of LNG to the US market. "The sides discussed cooperation to explore and develop new difficult oil and gas fields. One possible area of cooperation noted was joint work in projects to produce oil and gas in third countries," the press release said. Gazprom and Total also talked about possible development of technical-economic cooperation in acid gas deposits with the aim of improving development indicators and lowering production costs. Particular emphasis will be placed on mutually advantageous use of both companies' accumulated experience and technology for the most efficient and environmentally safe use of gas in energy. 
Miller and Desmarest praised the results of joint construction work within the project to implement phases two and three of the South Pars (Iran) deposit in the Persian Gulf. A priority LNG project for Gazprom is the development of the Shtokman gas condensate field. Five companies have been shortlisted as potential partners to develop the first phase of development at Shtokman, which includes construction of an LNG plant. The companies are Statoil and Hydro of Norway, Chevron and ConocoPhillips of the United States and Total. Gazprom will in the first quarter of 2006 select two to three partners to form a consortium for the Shtokman gas condensate field project.

MOL to expand oil production in Russia 

Hungarian oil and gas company MOL plans to expand its oil production business in Russia, and is not ruling out cooperating with RussNeft, which is already one of the company's partners, and also with LUKoil, MOL managing director, Sandor Fasimon, said, Interfax News Agency reported in Moscow. 
"Yes, we have plans for the Russian Federation, I do not rule out that this may be with RussNeft, with LUKoil. Let's see what opportunities there will be," he said. Fasimon said that the company's strategy is to work in other countries with local partners. He said that Russneft has been the company's partner in the Zapadno-Malobalykskoye oil production company in Khanty-Mansiisk autonomous district since last September, having acquired a 50 per cent stake from YUKOS. 
"We have established good, normal relations with RussNeft and are working together," he said. He said that the purchase of the Russneft stake is not being discussed. MOL PR director, Denis Mohorovic, told Interfax that no proposal has been received from RussNeft either to buy the MOL stake in the joint venture. Fasimon would not disclose the volume of investment in the joint venture planned for next year, but said that MOL has good financial possibilities. He also said that MOL has good business ties with Russia's LUKoil, and in particular has a long-term contract to supply oil. "Talks are being held with LUKoil, but we have not had talks about assets," he said. He said that the company's strategy until 2010 is to increase MOL's upstream sector, including in Russia. He said that at the moment Russia accounts for 50 per cent of the company's overall oil production. MOL also plans to take part in the consolidation of the oil refining and marketing sector in Central Europe. According to Mohorovic, MOL is interested in taking part in the privatisation of Serbia's Naftna Industrija Srbije (NIS). He said that the Serbian government has not yet announced the tender conditions and the stake that may be sold. The tender is expected to take place in 2006. LUKoil vice president, Leonid Fedoun, said earlier that LUKoil plans to take part in this tender together with its strategic partner ConocoPhillips. 

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JOINT VENTURES

Russia, US set up JV for investment projects in Russia 

The Exim Development Corp. of the United States and the Kazan-based Elemte investment company have set up a joint venture - the Exim Elemte Development Corp. - to organize and help investment projects in Russia, Zakiya Shafikova, the president of the joint venture, said recently, Interfax News Agnecy.
The partners registered the Exim Elemte Development Corp. in Florida on December 27th 2005 with charter capital of US$ one million, she said. Exim owns 51 per cent of the shares and Elemte has 49 per cent. The two companies are planning to pay in charter capital soon and get all the necessary licences for the joint venture to work in the US, then get everything necessary for Russia. The joint venture will select investment projects for the parent companies, supervise and analyse their implementation. The joint venture will invest resources in these projects from the State of Florida's budget. The joint venture will initially conduct four projects for Exim Development Corp in Russia with total investment of US$350 million. These include the construction of a hotel in the resort of Dombai, in Karachaevo-Cherkesia at a cost of US$128 million, building a waste treatment plant and a children's hospital in the Krasnodar territory, and supply municipal equipment for these regions. The joint venture is also planning to start selecting investment projects in the Far East Federal District in the near future, which are of great interest to Exim, Shafikova said. The new company will also have the task of "working on the issue of a Russian bank buying Exim Development Corp," she said.

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MINERALS & METALS

Norilsk, Alrosa shareholders discuss merger - Khloponin 

Shareholders in Arctic mining and smelting giant, MMC Norilsk Nickel and Alrosa, Russia's Yakutia-based diamond monopoly, have discussed a possible merger, Alexander Khloponin, governor of the Krasnoyarsk territory, said on local radio, Interfax News Agency reported. 
"There was a meeting at which the idea of a merger between Norilsk Nickel and Alrosa was discussed, but no concrete decisions have yet been reached. The issue has been discussed once, at the level of shareholders," said Khloponin, a former top-manager at Norilsk Nickel. "These are absolutely different companies, and one of them must go through the international standards compliance procedure. So there's no prospect of a merger in the near future," Khloponin said. Khloponin unveiled a possible merger scheme. "Shareholders of Alrosa, on the one hand, and Norilsk Nickel, on the other, are discussing, at various levels, including at the levels of the companies themselves, possible approaches to a merger in which 25 per cent of the merged company would remain state-owned and the shareholders would own the other 75 per cent," Khloponin told the radio station. Khloponin later adjusted his statement. A source at the Krasnoyarsk territory's administration told Interfax merger talks were not currently in progress because the companies were being reorganised and that the idea that the state should own 25 per cent and investors the other 75 per cent was floating on the market. "There can't be any negotiations because the companies are being reorganised and are not ready (for a merger)," the administration told Interfax, quoting Khloponin. "But if a merger were possible, then I think it could go along those lines, with the state owning 25 per cent and investors 75 per cent, especially given that this idea is circulating on the market," Khloponin was reported as saying. 
He said he thought that was the right idea because it would encourage investors to develop the company and the state to exercise financial and social control. Norilsk Nickel's share prices started to grow within minutes of the news that the merger discussion took place. This was the first official acknowledgement of rumours of a merger, which have been circulating on the market for several months. Neither company was willing to make official comment on the information. "This information is in the rumour category and we don't comment on rumours," Leading rating agencies have said that an upgrade in Norilsk's ratings is still being hampered by long-term political (in other words oligarch-related) risks. Experts have said they think that the state, which owns Alrosa, could gain control of Norilsk Nickel in a year or two, when the company has been reorganised.
The federal government is increasing its interest in Alrosa to controlling, and expects to accomplish this by the fall of 2006. Britain's Times newspaper quoted unnamed sources recently as saying the state could buy back Norilsk Nickel in the next two years via a leveraged buyout, using Alrosa. The Times quoted the head of investment banking at one Moscow bank as saying that "very senior levels at Alrosa are considering the acquisition." The paper also quoted Charles Ryan, chief executive of Deutsche Bank UFG, as saying: "(Vladimir) Potanin (one of Norilsk's two biggest shareholders) might well think it's time to invest his money elsewhere." Ryan noted that Norilsk is being split into two companies, the nickel company and a separate gold company called Polyus, which has assets abroad, the newspaper said. Ryan suggested that Potanin could choose to concentrate on the latter concern, the paper said. Norilsk, the world's biggest nickel and platinum-group metals producer and Russia's biggest gold producer, had IAS revenue of US$7.03 billion and net profit of US$1.83 billion in 2004.

MMK's costs jump 17% in 2005 to 15.5 billion roubles 

The cost of making steel at Magnitogorsk Iron & Steel Works (MMK) jumped 17 per cent in 2005 to 15.5 billion roubles, MMK said recently, New Europe reported.
The company said iron ore costs alone rose almost 10 billion roubles, or 11 per cent. But MMK only saw prices for its steel rise in the first quarter of 2005. World steel market trends started to deteriorate in the second quarter, and prices fell on MMK's export markets and at home.
The sale prices of MMK's steel fell 19 per cent in the second quarter and beginning of the third quarter. Raw material prices also grew considerably: iron ore rose just two per cent in the year, accounting for the drop that followed a sharp increase at the start of 2005, but coal prices shot up 45 per cent, zinc 61 per cent and scrap metal 11 per cent.
Coal concentrate prices alone increased MMK's production costs by six billion roubles or seven per cent, iron ore added 2.7 billion roubles, scrap metal 800 million roubles, zinc 300 million roubles and natural gas 700 million roubles. MMK managed to balance these negative tendencies to some extent by modernising production facilities and optimising technological processes. 
It reduced coke consumption per tonne of pig iron by six kilograms, coke crushing losses by six kg/tonne and coal feed consumption per tonne of coke by 10 kg. This saved MMK 751 million roubles.

Norilsk Nickel, Rio Tinto to form JV 

Norilsk Nickel, the world's biggest nickel and palladium producer, and Rio Tinto, the world's third-largest mining company, agreed recently on a joint venture to develop mineral resources in Russia in the first link-up between the two miners, the Russian Natural Resources Ministry said in a press release. The ministry said that the joint venture would prioritise geological exploration at mineral deposits in the Far East and southern Siberia, Interfax News Agency reported.
The companies will sign a protocol on cooperation and the formation of the joint venture at the natural resources ministry. Russian Natural Resources Minister, Yury Trutnev, Interros chief, Vladimir Potanin, Norilsk Nickel's Director General, Mikhail Prokhorov, Rio Tinto CEO, Leigh Clifford, and the British ambassador to Russia, Tony Brenton, will attend the ceremony. This will be Norilsk Nickel's first joint venture with a foreign company. A source at Norilsk Nickel told Interfax that the content of the agreement would be unveiled at a press conference on the companies' plans to invest in the Russian economy.
The source declined to give further comment. Rio Tinto representatives in London declined to comment. Norilsk Nickel is the world's biggest nickel and palladium producer and a major producer of platinum, copper, cobalt and gold. The company is spinning its gold mining assets off to a company called Polyus Gold. The Far East includes the Kamchatka region, where 51.8 per cent of Russia's probable P1 nickel resources are concentrated. Russia's biggest polymetallic ore reserves are located in the Far East and Eastern Siberia. 
MMC Norilsk Nickel and the world's No. 3 mining company Rio Tinto might have decided to form a joint venture to bid at an auction for Udokan copper field in the Chita region, market sources told Interfax. The sources also said that the joint venture, on which an agreement is due to be signed at the Russian Natural Resources Ministry, might also be used as a vehicle to bid a for the rights to the giant Sukhoi Log gold field in the Irkutsk region.

Maxi Steel Group plans US$600m steel mill 

Yekaterinburg-based Maxi Steel Group is planning to start building a mini-steel mill capable of producing 2.5 million tonnes of sheet annually at a cost of US$600 million close to the city of Alapyevsk in the Sverdlovsk region in 2008, the company's PR department said, Interfax News Agency reported.
Maxi Steel Group gave the mayor of Alapayevsk a declaration of intent to build the plant.
Eduard Rossel, the Sverdlovsk region's governor, came up with the idea to build the mill. The mill would be built on a 90-hectare site over a period of two years and would create 2,000 jobs. It would use technology provided by Italy's Arvedi to make high-grade steel sheet between one and 12 millimetres thick and up to 1,850 millimetres wide. 
Only one steel mill in the world uses that technology at present. The new mill will use state-of-the-art equipment, including a gas scrubber and waste recycling and treatment facilities. It will cut the sheet and apply coating to it. Siemens-VAI will supply most of the equipment. 
Maxi Steel Group is a vertically integrated group of more than 20 enterprises in the Urals, Volga Region and Siberia which stockpile and process scrap metal and produce value-added steel products.

SUAL to launch 75mn Euro aircraft plate factory 

SUAL plans at the end of 2007 to commission a unit costing 75 million Euro at its Kamensk-Uralsky Metallurgical Plant (KUMZ) to produce plate for the aviation industry, SUAL Holding First Vice President, Vladimir Skornyakov, said recently, Interfax News Agency reported. 
Skornyakov said the future plant should be certified in 2008. KUMZ will host it.
"The legal status of the new factory has yet to be defined. This will depend on forms of financial support for the project and on our partners," Skornyakov said. 
He said foreign companies were showing a lot of interest in the aircraft plate project. SUAL said in a press release that the Kamensk-Uralsky plant on January 26th launched two state-of-the-art melting and moulding units.
The company has invested 133 million roubles in modernizing its foundry operations. Leading European and US producers took part in designing and manufacturing the equipment.

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