Business Watch: July 22, 2003

Natural-gas monopolist Gazprom announced the publication of its 2002 financial results to international accounting standards in an 11 July press release. Net profit rose 120 percent year-on-year, from 13.2 billion rubles ($435 million) in 2001 to 28.95 billion rubles ($953 million) in 2002; sales fell 9.6 percent to 644.69 billion rubles; operating costs were reduced 2 percent to 496.7 billion rubles; and pretax profit dropped 28 percent to 165.75 billion rubles. Gazprom attributed the sinking sales figures to lower gas prices and reduced exports to Europe. Analysts explained the robust net profit increase as the result of lower deferred taxes, Reuters reported on 14 July. "Vremya novostei" noted on 14 July that the Gazprom's financial results are of less interest to potential investors than the precise nature of the reforms that await Russia's largest company. As quoted by the newspaper, Gazprom auditor PricewaterhouseCoopers commented, "it does not appear possible to assess the substantial influence that government initiatives can exert on the companies in the group." On the reform front, representatives of Gazprom and the Russian Union of Industrialists and Entrepreneurs met on 18 July to kick off their joint Gas Market Coordinator project, "Kommersant-Daily" reported the next day. The project, which marks an unusual collaboration between private business and state-run Gazprom, aims to speed the reform of the domestic gas market, where regulation keeps prices artificially low and forces the gas giant to incur losses. DK

Economic Development and Trade Minister German Gref announced on 11 July that industrial production posted an impressive 6.8 percent year-on-year increase in the first half of 2003, "Nezavisimaya gazeta" reported on 14 July. GDP rose 7.2 percent in the first five months of 2003, and investment was up 11.8 percent in the same period, spurring the minister to conclude that "the investment drop-off has been overcome." Inspired by the results, Gref's ministry bumped up its 2003 economic-growth estimate from 4.6 percent to 5.7 percent, Reuters reported on 16 July. Valerii Mironov of the Center for Macroeconomic Analysis told "Vedomosti" on 14 July that current growth levels could double GDP in six years. The goal of doubling the GDP has been much in the news since President Vladimir Putin made it the economic centerpiece of his state-of-the-nation address in May, albeit with a 10-year deadline. To that end, presidential adviser Igor Shuvalov set about forming a working group on 15 July to facilitate GDP growth, "Kommersant-Daily" reported the next day. The group will include representatives from ministries, the presidential administration, and leading political parties. DK

Aeroflot announced in a 17 July press release its financial results for 2002 to international accounting standards, as well as preliminary results for the company's work in the first half of 2003. Net profit jumped more than fourfold in 2002, from $20.1 million to $89.3 million, while revenues remained virtually unchanged at $1.563 billion. Analysts received the news with cautious optimism. Yelena Sakhnova of United Financial Group told "The Moscow Times" of 16 July, the day before the official announcement, "They look better than our forecast [of $15 million net profit], but we have to see...what they are based on." The airline noted in its press release that it took "swift measures" to counteract the negative effects of the war in Iraq and the worldwide severe acute respiratory syndrome (SARS) outbreak in the first half of 2003. Even so, the company revised its 2003 net-profit estimate down to $98 million from $114 million, "Vremya novostei" reported on 18 July. Gazeta.ru reported on 17 July that Aeroflot Director Valerii Okulov appeared less than satisfied at a news conference the same day. Dragging down Okulov's mood were the high cost of Russian-made aircraft, strained relations with board Chairman Aleksandr Zurabov, and deadlocked efforts to build a new terminal at Moscow's overburdened Sheremetevo Airport. DK

The ministries of Economic Development and Trade, Property Relations, and Transport have submitted their conditions for the tender to manage Sheremetevo Airport and construct a new terminal, "Gazeta" reported on 17 July. Described as "harsh but objective" by the Transport Ministry, the conditions require that potential bidders eschew offshore registration, have no more than 25 percent state involvement, and boast a minimum of $500 million in capital and $2 billion in assets. The idea of calling in an outside company to run Sheremetevo was suggested by Alfa Group President Mikhail Fridman, and observers were quick to note that the tender conditions suit Alfa to a tee. A government official told "Vedomosti" on 16 July, "One gets the impression that these conditions were written for Alfa." A manager at an Alfa subsidiary confirmed to the newspaper that the company provided consulting services to the officials who drew up conditions for the tender. Nonetheless, National Reserve Bank (NRB) head Aleksandr Lebedev told Prime-TASS on 17 July that the NRB plans to enter a bid as well. The conditions "seem to be oriented toward Alfa Group, which has not tried to hide this, but that doesn't scare us," Lebedev claimed. The final conditions are likely to be announced within three weeks, with the tender likely to be held before year's end. DK

Gazprom stepped up its efforts to regain control of wayward subsidiary Azot on 17 July, informing President Georgii Briling of his dismissal as of 15 July and sending court officers to seize the company's shareholder register, "Kommersant-Daily" reported on 18 July. (Gazprom sales subsidiary Mezhregiongaz lost control of Azot, Russia's largest producer of nitrogen fertilizer, earlier this year in a disputed share transfer.) Briling told "Kommersant-Daily" that a Mezhregiongaz representative presented him with documents alleging that Mezhregiongaz and its allies together have a controlling stake in Azot, and held a shareholder's meeting on 15 July to remove Briling. For his part, Briling disputes the legitimacy of the 15 July shareholder meeting, claiming that structures friendly to him control 53 percent of the company. Meanwhile, Boris Titov, a minority shareholder in Azot who also chairs the ethics committee at the Russian Union of Industrialists and Entrepreneurs, told "Vedomosti" on 18 July, "The position we maintain jointly with Gazprom remains unchanged: the shares that belonged to Mezhregiongaz were sold illegally and we have to try to return them using legal means." With neither side ready to compromise, the conflict appears likely to continue. DK

Russian Aluminum (Rusal), the world's second-largest producer of primary aluminum, plans to ax 10 percent of its 69,000 employees by the end of 2003 as part of a cost-cutting program, Interfax reported on 15 July. Rusal Human Resources Director Viktoria Petrova told a videoconference for regional media that neither the quantity nor the quality of Rusal's staff matches the company's goal of becoming the world's largest aluminum producer. Petrova told RTR-Vesti on 15 July that a retraining program will be available for workers whose positions are being eliminated. Rusal spokeswoman Vera Kurochkina noted that only 600 positions will be pared from actual production, while 6,000 workers employed in noncore areas will simply be removed from the company's structure as it sheds noncore assets. Sixty percent of staff cuts will affect management. Brunswick UBG analyst Fedor Tregubenko told "Vedomosti" on 16 July that Rusal has reason to be dissatisfied with the "quantity and quality" of its staff, since the company's workers are only 50 percent as productive as those employed by Rusal's Western competitors. DK

A 17 July cabinet meeting approved the state's draft privatization plan for 2004-06, the government announced in a press release on its website (http://www.government.ru) the same day. The state, which hopes to earn at least $1 billion a year from privatization, plans to get rid of most stakes of less than 25 percent in 2004, followed by stakes of less than 50 percent in 2005. The state's remaining 7.6 percent stake in LUKoil, now worth approximately $1.1 billion, is likely to be sold off in 2004. Off the list for now is a 40 percent stake in Siberian utility Irkutskenergo, in which aluminum producers Rusal and Sual already hold a controlling stake. The state might be looking to exchange some of its stake for the utility's grid holdings, "Vedomosti" reported on 18 July; grid assets nationwide are slated to become part of the Federal Grid Company in the course of ongoing energy reforms. Troika Dialog analyst Lauri Fillantano told "Gazeta" of 18 July that Rusal and Sual are likely to strike a deal with the state, with the only question being how much of its stake the state surrenders in exchange for Irkutskenergo's grid holdings. The privatization discussion took place amid unease over the results of privatizations past, with the Prosecutor-General's Office currently holding a top Yukos shareholder on charges involving a 1994 privatization deal. Clearly mindful of the controversy, Prime Minister Mikhail Kasyanov stated, "The results of the privatization of past years are unshakable and will not be reviewed," "Kommersant-Daily" reported on 18 July. Deputy Property Minister Aleksandr Braverman added an asterisk, however, telling journalists on 17 July that "individual privatization deals" could be open to review, RosBusinessConsulting reported the same day. DK

Tear gas billowed and water cannon roared at the Korshunovskii Mining and Enrichment Plant (GOK) in Siberia as the Federal Financial Recovery Service (FSFO) attempted to wrest control of the debt-ridden enterprise from the Mechel Steel Group last week. The FSFO claims that current plant Director Igor Pomelnikov has mismanaged Korshunovskii's 1 billion-ruble ($33 million) debt to the state budget. The FSFO also rejects a May deal in which the Mechel Steel Group purchased a 60 percent stake in the plant, including its debts, "Russkii kurer" reported on 16 July. Mechel's counterclaim is that the FSFO is trying to bankrupt the plant for subsequent cut-rate sale to rival industrial group Evrazholding, "Kommersant-Daily" reported on 15 July. The FSFO won a June court ruling removing Pomelnikov and appointing Sergei Rozhkov to run the plant. Mechel and Pomelnikov dispute the ruling, however, and continue to maintain physical control over the enterprise despite numerous attempts by the FSFO to install Rozhkov. An 18 July report on television network NTV described the conflict as turning into an "armed confrontation." FSFO spokeswoman Natalya Kotsyuba told reporters at a 16 July press conference that Pomelnikov and his allies will be dealt with by law-enforcement authorities, "Nezavisimaya gazeta" reported on 17 July. DK

The Russian Telecommunications Development Corp. (RTDC) announced on 14 July the creation of Sky Link, a company to develop CDMA-450 cellular communications in Russia, Interfax reported the same day. (CDMA-450 makes possible data transmission speeds of up to 153 kilobits/second.) Sky Link will act as a holding company to operate RTDC's telecom assets, which consist of noncontrolling stakes in Moscow Cellular (22 percent), Delta Telecom (42.5 percent) and Uralwestcom (49 percent), "Vedomosti" reported on 15 July. Sky Link Director Yurii Dombrovskii told "Vedomosti" that the company is ready to attract $250 million in investment to build networks over the next two years. No sooner had RTDC announced the formation of Sky Link, however, than questions began to crowd the horizon. "Kommersant-Daily" noted on 15 July that Sky Link's "ambitious statements...sound rather strange," given the holding's minority stakes in three operators. Moreover, ComNews.ru reported on 18 July that several cellular operators controlled by state-run megaholding Svyazinvest are also gearing up to move into the CDMA-450 market. DK

Fears of a campaign against big business sent the Russian Trading System (RTS) stock exchange into a nearly weeklong tailspin, with the benchmark index slipping 5.41 percent to close at 437.20 on 18 July. The only bright spot was a 18 July upswing that saw the market regain 2.24 percent of its value. Some glimpsed light at the end of the tunnel, however. Web-invest Bank analyst Mikhail Zak told "Kommersant-Daily" of 18 July, "The situation will calm down in 2-3 weeks, and by the end of summer we'll be back at the 500 level." Citibank also saw buy opportunities, upgrading Russia from "overweight" to "neutral," "The Moscow Times" reported on 18 July. Others were less sure. Troika Dialog trader Aleksei Dolgikh told "Vedomosti" on 18 July, "Share prices will obviously continue to fall in the near future; a lot depends on how the situation around Yukos develops." DK

With a fog of unexpected investigations, probes, and criminal cases rapidly thickening into a storm cloud over the Russian business world's supposed standard-bearer, all the usual suspects are asking all the usual questions: Why Yukos? Why now? What does it all mean? The most popular explanations revolve around the excessive political ambitions of Yukos CEO Mikhail Khodorkovskii, unknowable Kremlin intrigue, or some combination of the two. With major Yukos shareholder and Group Menatep Director Platon Lebedev still jailed and the Prosecutor-General's Office now confirming seven outstanding cases that somehow involve the oil company, it is probably too early for definitive answers. It might, however, be just the right time for one more question: What can reactions to the Yukos scandal tell us about business and society in Russia in 2003?

A 17 July poll by the Public Opinion Foundation -- sometimes described as "Kremlin-friendly" -- indicates that the most common reaction is simply a furrowed brow and a quizzical stare. Fifty-three percent of respondents to the poll, which was conducted among 1,500 people across Russia on 12-13 July, had heard nothing about any unusual events surrounding Yukos. Only 13 percent of those who had heard something about Yukos correctly identified Khodorkovskii as the oil company's CEO. Another question began by noting that Khodorkovskii "heads" Yukos and went on to inquire about attitudes toward him: 53 percent "indifferent," 10 percent "negative," 8 percent "positive," and 29 percent unsure.

A poll commissioned by business daily "Vedomosti" took a step back to examine general attitudes toward the moneyed and propertied. Conducted among 1,500 respondents on 9-14 July, it revealed deep-seated hostility toward "capitalists" as a class and extreme skepticism about the legitimacy of their wealth. More than 70 percent of respondents see the "oligarchs" as having played a "negative" role in Russia's history in the 1990s. Seventy-seven percent support a "full or partial" review of the results of privatization, and 88 percent feel that large fortunes in Russia were acquired "dishonestly." "Vedomosti" summed up the grim results in an 18 July editorial: "The oligarchs have no base in the country other than a financial one."

(Igor Yurgens, vice president of the Russian Union of Industrialists and Entrepreneurs, underscored the depth of division in society even as he tried to play down the results of the "Vedomosti" poll. He shrugged off popular Russian attitudes with a telling comparison, explaining to the newspaper on 18 July: "Class hatred has existed and will exist. I think that if you asked the same questions in the black neighborhoods of American cities, the answers wouldn't be much different.")

Some even saw class anxiety in press reactions to the scandal, which have been largely sympathetic to Yukos and critical of official actions. (State-run television, the source of information for the bulk of the population, has soft-pedaled the issue, which might explain why so few respondents to the Public Opinion Foundation poll had heard of it.) An anonymous "PR specialist" told "Kommersant-Daily" of 21 July, "What we're observing now is the uncoordinated, chaotic hysteria of the liberal part of the political elite, which sees in the situation around Yukos a threat to its privileged position in modern Russian society."

These are anything but new issues. ("Vedomosti" headlined its article about the poll results "The People's Hopes Have Not Changed In 86 Years.") The wave of speculation about a possible knock-down-drag-out fight over a decade-old privatization has merely dredged them up anew. They serve to remind us that the dramatic events of the last several weeks are unfolding not only around Russia's largest private company and richest man. They are also unfolding in a society that is -- as Yurgens's striking comment suggests -- made up of separate and unequal parts, still lacking a basic consensus on the epic redistribution of property that privatization unleashed in the 1990s.

Virtually anyone who does business, and especially big business, in or with Russia is carefully watching events around Yukos, for the outcome might have far-reaching implications for how business is done. For good or ill, a resolution will emerge. Conclusions will be drawn.

The conflicted attitudes toward property and wealth that pervade Russian society admit no quick or easy resolution, promise no impending "outcome" from which to draw conclusions. They point only to an absent consensus, with implications that could extend far beyond how business is done. DK