Books on Russia
Update No: 309 (26/09/06)
BP/Shell's Russian setback spells trouble for all
On September 18th, Russia revoked environmental approvals for the Shell-led
Sakhalin-2 oil and gas project, sparking protests from Tokyo, Brussels and
London the next day.
Russia's ambassador to Japan said the Sakhalin-2 energy project in Russia's Far
East will be completed, though he gave no timing. He is not anyway the most
authoritative figure to re-assure foreign investors, although Japan was quick to
protest at government level.
Recent events forebode bad tidings for Western oil majors operating in Russia.
The latest tightening of the screws on them is, in part, an issue of pride, but
also an issue of money and huge oil revenues.
It all harks back of course to the break-up of Yukos and the arrest and
imprisonment of its founder and main owner, Mikhail Khodorkovsky. That was an
ominous event, whose fall-out could be seen already back then in late 2003. For
Yukos was the most efficient and profitable company in Russia. It was Russia
enacting Darwinism in reverse. Stalin had done that in extirpating the kulaks in
the 1930s, the elimination of the fittest, a disaster from which Russian and
Ukrainian agriculture have still not recovered.
The Yukos affair was seen by some as a one-off, due to Khodorkovsky's political
ambitions. That is partly true. It clearly was a very political matter,
involving the Kremlin putting pressure on the courts to bring in a stinging
verdict, totally contrary to proper legal procedure, as were the retrospective
tax demands that were deliberately set so high that they could not be met. It
was yet another sign of the slide back to authoritarianism of the time.
Putin was sending out the clear message to all and sundry in Russia: "Don't
mess with the Kremlin!" Foreigners, it might have been thought, would be
exempt from the Kremlin's clutches. Not so, even a major like Shell can face
Royal Dutch Shell's Sakhalin-2 project operates under a long-standing production
sharing agreement (PSA). These are typical of less stable regimes where foreign
operators want protection from adverse fiscal changes and terms. Many Russian
politicians feel that the oil-fuelled revival of the country's economic and
political fortunes since the crisis of 1998 means PSAs are an undesirable
anachronism. Cost overruns at Sakhalin-2 have not helped Shell's case, since PSA
terms allow for recovery of costs before the government sees a cent from the
For Russia to renege on these contracts altogether would be a big step into the
unknown. But given that its capital markets have apparently survived the
fall-out of the Yukos affair, some politicians may be feeling invincible.
Gazprom to the fore again, ie the Kremlin
More likely, however, is that the pressure is aimed at securing a bigger
role for Russia's domestic energy giants, Gazprom in particular. Gazprom was a
main beneficiary in the end of the break-up of Yukos, along with Rosneft. Both
of them are of course state-controlled concerns, that is the property of the
Kremlin, which is clawing back the hugely profitable energy industry. This has
full popular approval.
Gazprom has been in painfully drawn-out negotiations with Shell to swap part of
an onshore field for a stake in Sakhalin-2. It also knows that Shell can
ill-afford delays to its biggest source of production growth to 2010. Meanwhile,
ExxonMobil's plans to supply China from its Sakhalin-1 project - also facing
bureaucratic hassles - do not square with Gazprom's de facto role as
middleman-in-chief for Eurasian gas flows.
That probably also lies at the heart of Gazprom's rumoured interest in buying
out the financial investors who own half of TNK-BP, BP's joint venture that
holds the license for the massive Kovykta gas field in eastern Siberia. Unlike
Shell, however, BP would probably benefit from Gazprom's involvement.
As it stands, TNK-BP cannot monetise a large part of its reserves without
Gazprom's co-operation or secure stakes in new projects. BP already uses equity
accounting for its stake and, since it has already more than recovered its
outlays on the joint venture, the extra risk from partnering with Gazprom is
outweighed by the potential benefits. For Russia as a whole, however, given
Gazprom's notorious inefficiency, restoring national pride is unlikely to be
Oh, what a lovely war!
The Russians, like the Soviets before them, are nostalgic for the days when
the US was a close ally against a very tangible enemy, Nazi Germany.
Indeed, Russia and the UK are the only two European counties that still look
back with pride to that time. However, there is a difference. For the Russians
the Great Motherland War began on June 22nd 1941, when German forces invaded the
It decidedly did not begin on September 3rd, 1939, when Chamberlain finally bit
the bullet and declared on radio, after the German invasion of Poland on
September 1st, that "we are now at war with Germany."
The Russians, like the Soviets, prefer to draw a veil over the events that took
place between these two dates, in which they did not cover themselves in glory,
while the British did.
Two titans face up
On August 27th this year, Russian Defence Minister, Sergei Ivanov, and US
Secretary of Defence, Donald Rumsfeld, were in Fairbanks, Alaska, for the
dedication of a memorial to the Alaska-Siberia Lend Lease programme. The
memorial commemorates Soviet and US aviators and support troops responsible for
ferrying more than 5,000 American-built warplanes to Fairbanks, where Russian
pilots then flew them to the Soviet-German front during World War II.
Ivanov is a very significant player indeed in Russia, Putin's closest colleague
from former KGB days and presumed by many to be his chosen successor come 2008,
when his second term expires. Rumsfeld is of course known to all, to his
admirers the latter-day incarnation of Palmerston, to his detractors the
re-incarnation of devilry itself, as was Palmerston in his day.
A new agenda for the two military powers
Ivanov and Rumsfeld discussed ways of adding substance to bilateral
military-technical cooperation and the lifting of US sanctions against Russia's
Rosoboronexport state arms exporter and Sukhoi Aircraft Corporation.
But quite another matter was raised.
The international media are discussing the main result of the Ivanov-Rumsfeld
talks, namely, Rumsfeld's proposal to replace the nuclear warheads of some
Russian and US strategic missiles with conventional warheads. Rumsfeld said the
United States is studying the possibility of replacing the nuclear warheads of
some inter-continental ballistic missiles with conventional warheads and would
like Russia to do the same.
This proposal can hardly be called sensational because two former US defence
secretaries, Harold Brown (1977-1981) and James Schlesinger (1973-1975),
suggested a similar concept in their May 22nd 2006 article "A Missile
Strike Option We Need", which appeared in The Washington Post. Brown and
Schlesinger said the United States should install non-nuclear re-entry bodies on
some Trident II D5 missiles aboard operational strategic submarines. Both men
said such warheads can destroy terrorists far more effectively than cruise
missiles or aircraft bombs. Intelligence reports would make it possible to
pinpoint terrorist bases and to promptly launch devastating strikes against
them. Such inexpensive, high-precision strikes would not involve any bombers,
aircraft carrier task forces or submarines operating in direct proximity to
Military experts criticized the Brown-Schlesinger proposal and said the
installation of conventional warheads on strategic missiles cannot effectively
be used against terrorists because the latter long ago abandoned the Tora Bora
caves in favour of sprawling megalopolises, such as New York and London. Suffice
it to say that British authorities have recently arrested some dozen of
terrorists and their accomplices who planned to blow up translantic flights
arriving over American cities. One can also recall the recent commuter-train
explosions in Madrid. Does this mean that strategic missiles should be launched
against European capitals? No, because that would be both dangerous and
It would seem even less reasonable because nuclear and non-nuclear strategic
missile warheads are not only intended to hit military installations, i.e.
command centres, headquarters, ballistic-missile bases, as well as other
military bases, ports, arsenals and defence factories. Military plans also
envision the destruction of vital civilian facilities, such as electric and
nuclear power plants, hydropower dams, canals, TV centres, government buildings,
basic infrastructure and data exchange networks.
Although no strategic weapons were used against Yugoslavia and Iraq, their
infrastructure nonetheless suffered tremendous damage. Devastating air strikes
eventually forced both countries to sue for peace.
Any nuclear power would be sorely tempted to launch a retaliatory strike after
detecting incoming strategic ballistic missiles. Its leaders would have to make
a split-second decision because ballistic missiles have a short approach time
and because it will be impossible to distinguish between incoming nuclear and
non-nuclear warheads in the next fifty years. A retaliatory nuclear strike might
to be the only way to stop an all-out ballistic-missile attack involving perhaps
nuclear and/or conventional warheads.
The US is putting a lot of resources behind an ABM system which has so far been
shown to have a way to go before being regarded as proof against missile
attacks. Although the reports (see Czech Republic) say a decision about where to
station the ABMs will not be taken before the Riga meeting of NATO in November,
it implies that this is a NATO initiative whilst it seems more accurately to be
Non-nuclear warheads would make it possible to use strategic missiles more
frequently. Until now, such missiles were only fitted with nuclear re-entry
bodies and served to deter a potential aggressor. However, conventional warheads
are another matter because they can be used in conventional wars. Consequently,
"political weapons" would turn into "battlefield weapons"
with all the ensuing negative consequences for mankind. A costly and
unpredictable cold war-style arms race seems to be the least serious
This is why Sergei Ivanov said he doubts whether this is a reasonable idea.
"Russia has some misgivings about such preliminary plans. I am not ready to
say that Russia agrees to join this initiative," Ivanov told a news
conference devoted to the results of his talks with Rumsfeld.
That was as plain a prosequi non as one could have expected.
Oh for the lovely Soviet Union!
The Russians are not just nostalgic for the Great Motherland War. They are
nostalgic for the USSR, when, one must remember, they dominated nearby, not so
nearby and far-off lands - and how!
After 15 years the Russians miss their Communist Party, which actually demurely
never called itself by its true name - it was always The Communist Party of the
Soviet Union - hypocrisy to the last.
On August 24, 1991 Mikhail Gorbachev resigned as General Secretary of the Soviet
Communist Party (CPSU), spelling his demise. Fifteen years ago, the era of the
Bolshevik Party, which ruled a vast empire for a long time, came to an end with
the disintegration of the Soviet Union. The Party was doomed at the start of
perestroika, and the gradual devolution of power to the Soviets (de facto
parliamentary bodies) began in 1987.
The Party launched perestroika and glasnost, and was killed by them. Several
landmarks accompanied its final journey: the agonizing renunciation of overt and
covert Stalinism; Gorbachev's attempts to find genuine Party ideology in Lenin's
writings, which he continued reading even when the nation had given up
Marxism-Leninism in all but name; and an actual split in the Party, which became
obvious with the emergence of the democratic platform within the CPSU in 1990
and finally, the Orthodox Stalinist Communist Party of Russia. The Party was the
backbone of the Soviet Union, its brains and heart. It could not exist without
the state, and likewise, the state could not exist without the Party. Together,
they lived an unhappy life but died on the same day, as if in a fairy tale - the
failure of the coup made the death of both inevitable.
Gorbachev tried to save the Party. At its last plenary meeting on July 25-26,
1991, the Party decided to update its new program (five versions of this
document were drafted by party experts at the state dacha in Volynskoye).
Judging by the proposals for the program, it was supposed to look like a routine
report by the General Secretary. It was to start with an analysis of the
international situation entitled "The Character of Modern Civilization: An
Integrated and Interdependent World," and to be followed by an appraisal of
the road traversed called "Soviet Society: Historical Experience, the
Current Situation, and Development Trends." The third part was to deal with
Party ideology. This was the difficult bit, considering that everything was
falling apart. But oblivious of reality, the residents of the state dacha were
bogged down in Party theory. They wanted to "formulate the Party's attitude
to the legacy of Marx and Lenin, reveal the historically motivated, transient
and universal components of their teaching, ...map out methodological approaches
to the concepts of socialism and communism, ...explain what communism is all
about (a society of the future, the goal of the movement, an ideal model, or
ideology) and how close we have come to it; and show the differences between our
modern views and the prevalent opinions at the start of the century, or even 30
Needless to say, this was a purely academic discussion, which was of no interest
to anyone but the General Secretary himself and a handful of Party
intellectuals. This Marxist gibberish had nothing to do with the real interests
of society, or the processes taking place outside the green fences of the Party
The programme was also supposed to have a chapter on a renewed Union of
sovereign states. The plenum decided to convene the 29th Party Congress in late
1991 in order to adopt the updated program. However, instead of the Congress,
there came the official announcement that the Soviet Union had ceased to exist.
During perestroika, the Party was the object of universal hatred. But the
fifteen years since its collapse have drastically changed public sentiments.
First, the Party has finally receded into history - it no longer stirs emotion,
and its place is in history books.
Second, Russians' political apathy, cynicism, and fatigue have reached a point
where their attitude towards the CPSU has become stunningly positive. According
to a recent poll by the Public Opinion Foundation, 51% of Russians consider the
CPSU's role beneficial rather than harmful, and a mere 15% hold the opposite
view. The same 51% think that it is advisable to learn from the CPSU's
experience. No wonder so many Russians are ready to accept a one-party system
and a special role for United Russia, and see Leonid Brezhnev, once no more than
the butt of humiliating jokes, as the man whose rule was the strongest (after
Stalin), and under whom life was at its best.
The Soviet Communist Party cannot be resurrected. This probably explains its
nostalgic appeal to many Russians. In any event, this attitude towards the
Party, which was the backbone of the totalitarian system and remained
essentially Stalinist until the advent of Gorbachev, points to the fantastic
distortion of historical vision. This is further proof of the paradoxical maxim:
"History teaches us that its lessons are lost on us..."
Audi considering producing its own cars
Audi is considering producing its own cars at a plant Volkswagen is building in
Jaluga, Till Brauner, head of Audi Russia, said, Interfax News Agency reported.
Audi is testing such a possibility at the moment, he said. The company is
conducting preliminary research on cost benefits, however no concrete plans have
been made yet, he said.
Volkswagen is planning to start building its own plant in Kaluga region. The
company plans to produce the Polo, Passat, Touareg and Skoda at the plant. The
main plant, in the Kaluga region, will produce 115,000 cars a year. Initially,
it will assemble the Skoda Octavia, producing 20,000 of these per year. It will
start screw-drivering parts in the second half of 2007. Full-scale production,
including assembly, welding and painting, will start in the first quarter of
Peugeot hasn't made final decision on plant
Peugeot has not made a final decision on building a plant in Russia, David Rio,
the French car giant's business director for the Middle East and Eastern Europe,
said at a press conference in Moscow, New Europe reported.
He said Peugeot is considering opening a plant in Russia, but that the research
is not finished yet.
The economic development and trade ministry said recently that a draft
investment agreement with PSA Peugeot Citroen has already been sent to profile
agencies for agreement. Rio did not comment on this information. No concrete
decision has been made and I can't say when that will happen, he said.
Peugeot has increased its sales forecast for Russia to 16,000 cars in 2006 from
12,500 cars, Rio said.
AIG to open retail crediting bank
American International Group Inc. (AIG), the world's largest insurance company,
is planning to open a bank in Russia that will specialise in the issuing of
retail loans, Interfax News Agency reported on September 13th, citing a source
in banking circles.
The company's development strategy envisions the opening of such a bank in the
next three years, the source said. "Talks are already being held with the
regulator on the opening of a bank, but they're still far from being
completed," the source said, noting that the bank would work in the regions
in addition to Moscow and St Petersburg. AIG currently provides insurance
services in Russia
JP Morgan acquires more than 2% of Bank of Moscow
JP Morgan Bank has acquired more than two per cent of Bank of Moscow charter
capital, a JP Morgan representative said. It was reported earlier that the
Central Bank registered a report on an additional issue by Bank of Moscow for
560m roubles at par value. The Bank of Moscow raised 2.9bn roubles by placing
additional shares in open subscription. The bank placed 5.6m shares with a par
value of 100 roubles at a price of 519 roubles per share.
Biggest European gainer: Russian debt
Russian bonds are producing the best returns in Europe as an oil boom spurs
growth in an economy that collapsed after a debt default in 1998, the
International Herald Tribune reported on September 11th.
Rouble-denominated government debt has risen 4.8 per cent since Jan. 1st,
beating 19 European countries from Germany to Britain, according to indexes
compiled by J. P. Morgan Chase.
Turkey was the next best performer, returning 3.1 per cent, while Italy was the
laggard, declining 1.1 per cent.
A 7.5 per cent gain in the rouble, to the highest level in almost seven years,
is stoking demand for debt. The currency has gained as President Vladimir Putin
leads the economy to an eighth year of growth, driven by energy exports.
"The government bond market is a good, safe bet and one we shall certainly
be buying into," said Michael Ganske of Deka Investment in Frankfurt.
Russia will benefit from the rally when it sells 10 billion roubles of 9.5 per
cent 15-year notes.
Yields have shed about a quarter of a percentage point to 6.62 per cent since
the last sale on June 14th. The decline suggests that Russia will save 24
million roubles in annual interest payments.
Oil revenue has helped coffers overflow eight years after Russia defaulted on
US$40 billion in debt. Government revenue swelled to 3.46 trillion roubles in
the first seven months of the year, from 2.8 trillion a year earlier, the
Finance Ministry said.
The decision by Moscow to pay off US$23.7 billion in Soviet-era debt to the
Paris Club group of creditor countries prompted Standard & Poor's to raise
Russia's foreign-currency rating to BBB+, the third-lowest investment grade.
"It now only takes three weeks for a foreigner to open an account in
Russia, when before it took as long as three months," Ganske said.
"That means more foreigners are now investing."
Overseas investors now own about a quarter of the 829 billion roubles worth of
federal government bonds outstanding, according to Trust Investment Bank, an
underwriter of rouble bond sales.
Still, some investors remain wary because Putin's government has consolidated
control of the media, seized shareholdings in an oil company and filed criminal
charges against rivals.
Bonds are rallying as Russian inflation rate climbs. Consumer prices rose an
annual 9.3 per cent in July, more than four times the pace of the euro zone.
"You look at inflation and at first sight it's not great," said
Raphael Marechal at Fortis Investments in London, but "Russia is going to
attract the capital no matter what because of its surpluses, while the S&P
upgrade also freed a whole lot of investors who were previously constrained from
investing in Russia.
RussNeft eyes Zarubezhneft asset
Russian oil company, RussNeft, is holding talks with Zarubezhneft to acquire a
number of fields and oil production infrastructure in Ulyanovsk region, a source
close to the talks said, Interfax News Agency reported.
According to the source, the negotiations involve assets of RMNTK Nefteotdacha,
which is 100 per cent Zarubezhneft owned, in Ulyanovsk region. Nefteotdacha
includes the Kyrlov VNIIneft institute, Giprovostokneft,
Nizhnevartovsknefteotdacha and Orenburgnefteotdacha. Zarubexhneft refused to
comment on this information and RussNeft was not commenting for the moment.
Zarubezhneft was restructured as an open joint stick company in October last
year, and was included in the list of Russian strategic companies. The state
owns 100 per cent of Zarubezhneft.
Slowdown in Russian oil production growth
The pace of growth in oil production in 2009 will fall to 1.4 per cent,
according to a report on the main areas of budget and tax policy in 2007
prepared by the Russian Finance ministry, reported Interfax News Agency.
According to the document, oil production in 2006 will amount to 482m tonnes, up
2.6 per cent year-on-year. In 2007 growth in production will start to fall and
production will only increase 2.1 per cent to 492m tonnes, in 2008 - 1.6 per
cent (500m tonnes) and in 2009 - 1.4 per cent to 507m tonnes. According to
Finance ministry forecasts, oil exports in 2006 will amount to 255m tonnes (up
1.2 per cent), in 2007 - 264m tonnes (3.5 per cent), in 2008 - 270m tonnes (2.3
per cent) and in 2009 - 274m tonnes (1.5 per cent). Federal budget revenue from
the mineral extraction tax, according to Finance ministry estimates, will
gradually fall: in 2006 it will amount to 1.13 trillion roubles, in 2007 -
1.0377 trillion roubles, in 2008 - 906.4 billion roubles and in 2009- 806.1
Gazprom makes 1st LNG supplies to Japan
Russian gas giant Gazprom supplied its first consignment of liquefied natural
gas (LNG) to Japan on August 18th. The company said in a statement that this
operation was carried out through the British company Gazprom Marketing and
Trading Ltd, which is part of the Gazprom group, Interfax News Agency reported.
Gazprom Marketing and Trading Ltd acquired the LNG from the company Mitsubishi
Corporation, which initially bought the gas from Celt (a joint venture between
Mitsubishi Corporation and Tokyo Electric Power Inc). The LNG was then supplied
to the Chita LNG terminal belonging to Chubu Electric Power Co Inc in a
consignment of 145,000 cubic metres (about 92m cubic metres of natural gas) on
ex-ship terms. This trading operation between Gazprom and Mitsubishi Corporation
represents Gazprom's first step into the LNG market in the Asia-Pacific region.
"The Asia-Pacific market is a strategically important market for Gazprom,
therefore the company is paying particular attention to gas supplies to this
region. Gazprom plans to get a firm foothold on the Asian market both in the
area of long-term supplies of pipeline gas, and by developing a relatively new
sphere of activity - LNG trade," the Russian company said.
Rosneft's export routes to be dictated by stature
The provision of export routes to Rosneft will be dictated by the capacity of
the Transneft system, the practice of previous years and the company's stature,
the oil company said in its report for the second quarter, New Europe reported.
According to Rosneft, Transneft cannot reduce exports through the trunk pipeline
systems along various routes, the Federal Energy Agency (Rosenergo) assigns oil
companies to specific export routes.
In so doing it takes into consideration applications by companies, ownership of
refineries in the CIS, the practice of export flows in previous years and the
level of supplies reached, and also the administrative resource of a specific
The legislative base regulating access by oil production companies to the
Transneft trunk pipeline system for oil exports is the federal law on the
natural monopolies. Article 6 of this law sets down a mechanism for ensuring
indiscriminate access to trunk pipelines and terminals in seaports for oil
exports, and also establishes the organisations with right of access to these
"The so-called principle of equal access to the trunk pipeline system
presupposes the same percentage of oil produced being exported through the
Transneft system for all oil companies," The Rosneft report said.
Rosneft exports oil both through the Transneft pipeline system and by rail. At
the moment oil exports are carried out on behalf of Rosneft from its own
resources (production in Chechnya) and also from the resources of its
subsidiary, by acquiring oil from them under purchase and sale agreements,
including through RN-Trade, with the subsidiaries' pipeline quota being
transferred to Rosneft. Sakhalinmorneftegaz oil exports are carried out through
its own pipeline system through the De Kastri terminal.
IEA predicts oil production growth in Russia in 2011
The International Energy Agency (IEA) projects an increase in daily oil
production in Russia from 9.75m barrels in 2006 to 10.2m in 2008 and 11m in
2011. The IEA said in a report that this forecast is higher than that provided
by the Russian Economic Development and Trade Ministry, which is more
conservative. Although the risk of lowering the forecast does exist, especially
over possible political instability, net reserve increases will continue over
the next 20 years, New Europe reported.
Earlier reports said the economic development and trade ministry predicts an
increase in oil production to 495m tonnes in 2007 (10million barrels per day, up
2.5 per cent against 2005) and to 507m tonnes in 2009 (10.3m barrels pre day up
1.4 per cent against 2008). The IEA said the scale of exploration has been
growing, too, especially in Eastern Siberia, which is expected to guarantee
growing oil exports from Russia over the long term. The main factors that could
influence the growth are companies' access to the reserves, the expansion of the
pipeline infrastructure, and the tax regime. The agency also said that projected
investment in the Russian refining industry will make it possible to process an
additional 0.75-1m barrels of oil per day by 2011.
Russia allows independent companies to export gas
Russian agencies have allowed companies independent of Gazprom to export stable
gas condensate, a source in one of the profile agencies said, Interfax News
"The economic development and trade ministry sent a letter to the Federal
Customs Agency which said that a licence is not necessary to export stable gas
condensate," the source said. "After that, FTS sent a telegram to
customs agencies stating that condensate can be registered without a licence,"
the source said. The economic development and trade ministry and industry &
energy ministry are deciding on the situation with hydrocarbon gas and liquefied
natural gas (LNG) at the moment, the source said. After the Law on Gas Exports
entered into force, the Federal Customs Service sent a telegram to regional
management in which it pointed out that gas can only be exported with the
SOCAR to buy 4.5bcm of gas from Gazprom In 2007
Azeri state oil company is planning to buy 4.5bn cubic metres (billion cubic
metres) of gas from Gazprom in 2007, SOCAR Vice President, Elshad Nasirov, told
reporters. "We told Gazprom the maximum volume of supply is 4.5bn cubic
metres for 2007," he said. "But this is a preliminary figure and we
will know an exact figure once the contract is signed at the end of the year. By
that time, we will have determined our own production volume and gas supplies
from the Shah-Deniz and Azeri-Chirag-Gunashli fields," New Europe reported.
"It's importance is that we made this announcement early, so as not to cut
supplies later," Nasirov said. Gazprom might not increase gas prices for
Azerbaijan in 2007, he said. Gas is supplied based on a contract between SOCAR
and Gazexport. Gazexport will supply 4.5bn cubic metres to Azerbaijan in 2006.
Azerbaijan started importing gas from Russia at the end of 2000 along the
Mozdok-Kazi-Magomed pipeline. Gazexport supplied gas at a price of US$60 per
1,000 cubic metres in 2005 and at US$110 per 1,000 cubic metres in 2006. Most of
the imported gas is used for thermal power to generate electricity. Azerbaijan
estimates it needs 14bn cubic metres of natural gas a year.
Russia seeks oil and gas pipeline deals with Greece
Vladimir Putin will make Greece a tempting offer to boost its regional role, by
becoming a transit hub for Russian oil and gas exports to western markets, the
Financial Times reported on September 4th.
The Russian president's three-way talks in Athens with Costas Karamanlis, Greek
Prime Minister and Georgi Parvanov, the Bulgarian president, focus on reviving a
much-delayed project for a 280km oil pipeline linking the Black Sea with the
First mooted 12 years ago as a means of reducing tanker traffic in the crowded
Bosphorus strait, the project hung fire because Russian oil companies declined
to make a firm commitment to supply 35-50m tonnes of oil yearly to fill the
But Russia's growing ambitions as an international energy supplier brought a
policy switch. Gazprom-Sibneft, part of the state-owned gas group, is among
several potential suppliers, according to industry analysts.
The project would give Gazprom a direct outlet to the Mediterranean, with oil
being shipped across the Black Sea from Novorossiysk to Burgas in Bulgaria and
transferred by pipeline to the Greek port of Alexandroupolis.
Greek officials said the three leaders would give a political go-ahead for the
1bn Euro (US$1.3bn) project, which is being developed by Russia's TNK-BP, with
the aim of reaching a firm agreement by December.
Shareholdings in Trans-Balkan Pipeline, the project developer, are still being
negotiated, with the Russian side insisting on a controlling stake as the oil
Greek participants are Hellenic Petroleum, the state oil refiner, and
Prometheus, a joint venture between Gazprom and Kopelouzos, a private pipeline
constructor. Bulgargaz, Bulgaria's state-controlled gas company, which has close
ties with Gazprom, would be among the Bulgarian shareholders.
The second item on Mr Putin's agenda is to persuade Greece to double the
capacity of a new 300km cross-border gas pipeline from Turkey that will be
extended beneath the Adriatic to Italy, to provide an additional route for
Gazprom to export to western Europe.
The 290m Euro Greek-Turkish pipeline, due to be completed in October, will have
capacity to carry 11bn cubic metres yearly, but would be limited to 3bn cu m
yearly until the link to Italy is ready in 2008.
Greece already imports Russian gas from Bulgaria and liquefied natural gas from
Algeria to supply a growing domestic market. It plans to further diversify
supplies through buying gas from Azerbaijan that would be shipped from Turkey.
Mr Karamanlis's government is under pressure from the US to resist Russia's
offer to invest in expanding the Greek-Turkish pipeline and provide gas at
competitive prices. With Depa, the Greek state gas utility, due for partial
privatisation is not currently prepared to respond to the Russian offer,
according to Greek officials.
But in the medium term Greece wants to avoid being excluded from new pipeline
networks developed in south-east Europe.
Bulgaria, already a transit hub for Russian gas deliveries to Turkey and Greece,
is participating in the European Union-backed Nabucco project, which would
supply Azeri gas through Turkey and the Balkans and reduce Europe's dependence
Russia, Kazakstan agree terms for Orenburg venture
Russia and Kazakstan have agreed the terms of an intergovernmental agreement on
cooperation to set up a joint venture based on Orenburg Gas Processing Plant.
The Russian governments press service said that Russian Prime Minister, Mikhail
Fradkov signed the corresponding directive on August 12th. The Russian Industry
and Energy Ministry has been ordered to sign the corresponding agreement on
behalf of the Russian government. The Kazak Energy and Natural Resource Ministry
will coordinate the implementation of the agreement on the Kazak side. According
to the document, authorised organisations from both countries - Gazprom and
KazMunaiGaz - will set up a company with equal participation based at Orenburg
Gas Processing Plant, New Europe reported.
LUKoil targets 23.8m tonnes of oil in Q3
LUKoil plans to produce 23.8m tonnes of oil in the third quarter, a shade more
than the 23.7m tonnes it produced in the second quarter, the Russian oil major
said in its financial report, New Europe reported.
The company also plans to produce 2.9 billion cubic metres of gas, compared with
just over four billion cubic metres in the second quarter. Planned petroleum
product and gas product sales to Russian distributors, not including
franchising, are 1.03 million tonnes. Planned investment is US$1.85 billion,
more than 70 per cent of which will be spent on exploration and production.
Kuzbassrazrezugol to start coal supplies to Brazil
Russian coal company Kuzbassrazrezugol plans to start coal supplies to Brazil,
company Managing Director, Nikolai Priezzhev, said recently, New Europe
He said Kuzbassrazrezugol has already supplied a trial consignment of coal to
Brazil. The consignment was aimed at supplying thermal coal to the metallurgy
sector, and its volume - "a ship's consignment of about 60,000 tonnes,"
He said a delegation from the steel company Arcelor, which owns stakes in two
Brazilian companies - Arcelor Brasil and Acesita - visited Kemerovo region
recently. "They liked our coal," he said. Speaking about the
possibility of signing a contact with Arcelor, he said; "I think that this
is realistic, possibly even in 2007. Pre-contract preparations for 2007 are
currently underway." The company plans to supply coal from the Vachatsky
pit to Brazil. According to the managing director, this coal is of a very high
quality, and has an ash content of about five per cent.
Iran wants broader cooperation with Russia
Iranian Ambassador to Russia, Gholamreza Ansari, said Iran wants to cooperate
with Russia in all areas. "We are interested in further cooperation with
Russia in all areas," Ansari told local businessmen in Samara recently, New
"Starting any business in Iran, you may be sure your capital will not be
lost," Ansari said. "Throughout the 27 years of the Islamic
Revolution, Iran has invariably made due payments under contracts with all
foreign companies," he said.
Finding reliable business partners is the most important thing, he said, adding
that Iran "has no fears regarding political change or wars." An
Iranian delegation, in Samara region on a two-day visit, established contacts
with the companies Integra-S (intellectual security systems), Meta (motor
equipment), Perspektiva (the processing of organic subnstances, including
petroleum products), the Kuznetsov Research and Technological Corporation
(aircraft engines) and Elektroshchit (electric equipment and electric power
Oil income helps Russia pay off entire debt to Paris Club
Russia has paid off the last of its Soviet-era debt to the Paris Club of
creditors, a highly symbolic move that underscores how much oil and natural gas
revenues have done for the nation's economy eight years after it went into
default, the International Herald Tribune reported.
The Finance Ministry said in a statement that it had transferred the last
tranche - US$21.6 billion - to the club's 17 members.
Separately, Russia's state-owned foreign trade bank, Vneshekonombank, said it
had transferred US$23.7 billion over four days in order to convert the tranche
into nine different currencies. The higher figure includes a US$1 billion
penalty for early repayment, as well as money for currency fluctuations.
As a result, Russia stands to save US$7.7 billion in interest payments over all
from the early retirement of the debt, which the government plans to spend on
infrastructure projects. In May 2005, Russia paid back US$15 billion.
The Finance Ministry's statement trumpeted the repayment as the latest sign of
Russia's growing economic clout.
"The early settlement with creditor countries was possible thanks to the
Russian Federation's growing financial and economic might," the ministry
said. Early payment "would strengthen Russia's international
The deal itself was brokered in June - a public relations coup ahead of the
Group of Eight summit meeting, to which Russia played host in St. Petersburg in
After relying on foreign loans for much of the 1990s and defaulting on its
sovereign debt, Russia's finances are in good health, thanks to record prices
for oil and natural gas - its main exports.
In the six years since Vladimir Putin became president, Russia has earned
hundreds of billions of dollars from oil and natural gas sales.
A budget surplus of US$56 billion is projected for next year and hard currency
reserves are the third-largest in the world, after those of Japan and China, at
US$277 billion. The economy is growing at a healthy rate of 6 per cent to 7 per
cent annually, transforming the once-dour capital into a gaudy, glitzy boom
"Eight years ago, the problem was: How do you pay back the debts when you
don't have the revenues? Now the question is: How do you spend this money
without it being inflationary?" said Roland Nash, an analyst with
Renaissance Capital investment bank in Moscow.
"It's a fantastically different problem to the one they had eight years
ago," he said. "Who would have guessed they would have this
The biggest recipient is Germany, which will also receive the bulk of the US$1
billion premium Russia agreed to pay in lieu of forgone interest, with France,
Britain and the Netherlands to share the rest.
The repayment also helps insulate Russia's economy from the impact of oil export
revenues, which have increased money supply and driven up the price of property,
stocks and luxury goods.
After the sovereign repayment, Russia still has unfinished business dating back
to the Soviet era. The Finance Ministry will next month offer to swap US$600
million in debts to commercial creditors into Eurobonds.
Analysts said the repayment had strengthened an already strong case for
international ratings agencies to upgrade Russia.
"It's a very symbolic step for Russia as a country," said Zsolt Papp,
emerging markets economist at ABN AMRO in London. "It strengthens the case
for a ratings upgrade."
Standard & Poor's upgraded its sovereign rating on Russia last year to BBB
with a stable outlook. Fitch rates Russia BBB+ and Moody's Baa2, both with
An S&P credit analyst, Moritz Kraemer, said that the deal by itself would
not trigger a further ratings upgrade since considerable downside risks remained
on the fiscal and political front.
"Russia may be virtually debt-free," he said, but the risks "are
of a different kind, emanating from the political scene and predictability of
MINERALS & METALS
New wave of Russian firms seeks £3bn from UK floats
A fresh wave of Russian companies, including some of the world's biggest metals
producers, are preparing to raise more than £3 billion on the London Stock
Exchange before the end of the year, The Times reported on August 24th.
Sual, Russia's second-largest aluminium group, is understood to have stepped up
its timetable for a flotation in London and is now expected to debut in early
November. It is advised by JPMorgan Cazenove and UBS and its flotation could
raise more than £2 billion.
Chelyabinsk, a zinc producer named after the former industrial powerhouse of the
Soviet economy, has hired Credit Suisse to advise on a dual listing in London
and Moscow later this year or early in 2007. The company, which accounts for 2
per cent of world zinc production, aims to raise up to US$700 million (£370
million) to finance foreign acquisitions.
SeverStal, the Russian steelmaker, is expected to announce that it will list in
London during November at a price of about US$15 a share. The initial public
offering should raise about US$1.5 billion.
These companies are following the lead of Rosneft, the huge Russian oil group,
which raised US$10.4 billion in London last month. Last year Russian companies
raised £2.5 billion on London exchanges.
The flotation of Sual, however, may be delayed by its merger talks with Russia's
largest aluminium producer, RusAl.
The two companies have agreed in principle to merge, and Oleg Deripaska, the
oligarch who owns RusAl, met Russia's President, Vladimir Putin, earlier this
month to discuss the merger. Mr Putin raised no objection to the deal.
RusAl is also thought to be moving towards a listing in London. However, a
merger would substantially delay the timetable.
Analysts believe that RusAl has further to go than Sual in moving towards
international standards of corporate governance and financial reporting. Sual
has been adapting to the Western standard demanded by stock exchanges for the
past two years.
There is concern that Viktor Vekselberg, the oligarch and majority owner of Sual,
might not wish to wait for RusAl to catch up. A listing in London would allow
him to liquidate some of his paper wealth and transfer assets out of Russia.
Analysts believe that Sual's decision to step up its own listing timetable is an
attempt to force concessions from RusAl and Mr Deripaska.
A spokesman for Sual said: "We are considering an initial public offering
as a strategic option, but I have nothing further to add."
Steel output up 7.6% in 7 months
Russia raised crude steel output 7.6 per cent year-on-year in January-July to
40.94m tonnes, the Federal State Statistics Service (Rosstat) said, Interfax
News Agency reported.
Converter steel output rose 7.9 per cent to 24.52m tonnes and electric steel
output grew 11.7 per cent to 8.51m tonnes.
Steel production rose 11.3 per cent at Severstal, 8.9 per cent at Magnitogorsk
Iron & Steel Works, 12.1 per cent at Novolipetsk Steel (NLMK), 8.9 per cent
at Novokuznetsk Iron & Steel Works (NKMK), 5.4 per cent at Oskol
Electrometallurgical Combine, 31.4 per cent at West Siberian Iron & Steel
Works, but fell 0.2 per cent at Chelyanbinsk Iron & Steel Works, 0.4 per
cent at Urals Steel and 4.4 per cent at Nizhny Iron & Steel Works.
Russia raised crude steel output 0.8 per cent to 66.19m tonnes in 2005.