Business Watch: September 23, 2003

Unified Energy Systems (EES) CEO Anatolii Chubais regaled journalists at a 17 September press conference with "aggressive" expansion plans that will see the utility broaden its involvements from Europe to Japan, "Izvestiya" reported the next day. He presented a long list of countries where EES intends to acquire assets: Latvia, Lithuania, Bulgaria, Slovakia, Armenia, Belarus, Ukraine, Moldova, Tajikistan, and Kyrgyzstan. Chubais also has high expectations for Georgia, where EES recently purchased a substantial chunk of the country's generation assets from U.S.-based AES. "We got into Georgia for a fantastically cheap price and we hope to obtain superb results," "Nezavisimaya gazeta" reported Chubais as saying. Most of the countries earmarked for EES expansion are rife with political and economic risks, however. Brunswick UBS analyst Fedor Tregubenko told "Vremya novostei" on 18 September that the utility's plans to acquire generation assets in Belarus to export power to Poland, for example, might not be as profitable as the company hopes. At least one project stands out for its sheer scale: the idea of building a 4,000-megawatt steam-and-gas power plant on Sakhalin to supply electricity to Japan's Hokkaido Island, and even Tokyo. Deputy CEO Andrei Rappaport told reporters that the project could cost up to $10 billion, "The Moscow Times" reported on 18 September. Despite the price tag, Chubais exuded resolve on the land of the rising sun, saying, "Our arms are long. We'll reach," "Nezavisimaya gazeta" reported. DK

BP chief executive officer John Browne and top Tyumen Oil Company (TNK) shareholders Viktor Vekselberg and Mikhail Fridman held a news conference on 12 September to showcase the immediate future of their new TNK-BP oil company, Interfax reported the same day. According to Brown, TNK-BP will boost production by 12 percent in 2003 to pump 1.2 million barrels of crude a day. The company will add an extra 160,000 barrels per day of capacity when it absorbs a 50 percent stake in Slavneft. Despite the powerhouse production plans, the press conference likely failed to assuage unease over the merger's lack of a clear policy on minority shareholders' rights. Browne told journalists, "We will do what is equitable for all shareholders taken together. We might not necessarily give them what they ask for," "Nefte Compass" reported on 16 September. Vekselberg echoed the thought, saying, "We expect certain problems with minority shareholders," "Vedomosti" reported on 15 September. Harvey Sawikin, co-founder of the U.S.-based Firebird Management fund, told "The Moscow Times" in a 15 September interview, "TNK-BP negotiated the largest deal in Russian corporate history and when it was announced they made no provision at all on how minority shareholders would be treated." Sawikin concluded, "They want to get us out as cheaply as possible and take away the growth potential we have." DK

State-run gas monopolist Gazprom successfully placed a 1 billion euro ($1.138 billion) bond offering on 16 September, Rosbalt reported the next day. The seven-year offering, priced at par with a coupon of 7.8 percent, is the first part of a $5 billion loan-participation notes program. According to a 16 September Gazprom press release, the offering represents the "largest ever euro-denominated corporate bond by an emerging markets issuer." Additionally, a 16 September meeting of the Gazprom board decided to increase the financing of the company's 2003 investment program by more than 10 billion rubles ($327 million), RIA-Novosti reported the next day. In a final borrowing-related note, on 16 September international agency Fitch Ratings raised Gazprom's long-term and local-currency long-term ratings to BB with a "stable" outlook, RosBusinessConsulting reported. DK

LUKoil will build 50 filling stations in the Moscow suburbs in 2004 even as it studies the possibility of constructing an oil refinery near the capital, ABN reported on 17 September. Company President Vagit Alekperov signed a cooperation agreement with Moscow Oblast Governor Boris Gromov on 15 September to invest $60 million in 50 filling stations and possibly build as many as 300 in the future, "Vremya novostei" reported the next day. A LUKoil spokesman told "Vedomosti" that a new refinery is needed to replace the outmoded Moscow oil refinery that currently serves the region. According to the newspaper, the proposed facility, with a capacity of 9 million tons of oil per year, will cost $1.1 billion to build. Reactions to the plan were mixed. Georgii Sergienko, head of the Moscow Fuel Association, told "Kommersant-Daily" on 16 September that a similar project fell by the wayside in 1999, and the new plan will likely meet the same fate. But Shalva Chigirinskii, head of the company that runs the Moscow oil refinery, told "Vedomosti," "This market is bottomless. There's space for everybody. They can build the refinery in five years, but by that time gas consumption will have risen more than 100 percent." Other analysts queried by the newspaper, however, were skeptical that such a costly endeavor would break even quickly. DK

Sberbank's Moscow ATM network lurched to a halt on 16 September, leading some to question the state-owned savings behemoth's technical preparedness and commitment to customer service. Cardholders were unable to withdraw cash, and some ATMs added insult to injury by informing customers -- incorrectly -- that their account balances stood at zero, "Kommersant-Daily" reported on 17 September. (Andrei Sobolev, director of card services at Sberbank, told the newspaper that the problems affected only holders of cards issued by other institutions; reports elsewhere did not confirm this.) A 17 September Sberbank press release explained that the bank's processing center experienced difficulties in the course of a switch to a new, more powerful server, gazeta.ru reported the same day. The press release went on to note that the problem affected less than 1 percent of all transactions, adding that Sberbank account holders would regain access to their money in three to four days. The incident troubled some observers, however. An anonymous source in a large bank told "Vedomosti" on 17 September, "A glitch like that in the acquiring network indicates big problems with Sberbank's processing center." Commentary by RosBusinessConsulting the same day took Sberbank to task for a cavalier attitude toward customers: "For a moment, the real face of Russia's largest bank peeked out from beneath its civilized-westernized mask." DK

A 17 September cabinet meeting agreed to move back a slew of pension-reform deadlines to give tardy officials time to catch up on their paperwork, "Vremya novostei" reported the next day. The Russian Pension Fund (PFR) will now have until 1 November (instead of 1 August) to tell citizens how much money has accumulated in their individual pension accounts; citizens will have until 31 December (instead of 15 October) to select either PFR or one of 55 private managing companies to invest their money; PFR will have until 1 March 2004 (instead of 1 December 2003) to process the requests citizens send in, and until 31 March 2004 (instead of 31 December 2003) to transfer the money. The postponement comes with PFR lagging far behind its original deadline, having sent out only 47 percent of the 38 million pension-account statements it was supposed to have mailed by 1 August, "Kommersant-Daily" reported on 18 September. Fund managers welcomed the decision. Pavel Teplukhin, president of Troika Dialog Management Co., told "The Moscow Times" on 18 September, "The government was absolutely right [to extend the deadlines]." The director of another fund told gazeta.ru that the decision, though sound, is not without its downside: "We paid for advertising, and now we're going to have to do the ads all over. This means huge losses for us." DK

Metals giant Norilsk Nickel put in the winning bid of $152 million -- more than four times the $35 million starting price -- for a 44.9 percent stake in Siberia's Lenzoloto gold mine in a 17 September privatization auction, "Kommersant-Daily" reported on 18 September. (A dark-horse firm called Prospekt actually lodged the top bid, but Norilsk representatives later admitted the company was acting in their interests.) The acquisition gives Norilsk a 50.5 percent stake in the mine and 65.8 percent of its voting shares. Norilsk deputy CEO Maksim Finskii described the purchase in glowing terms: "With a company producing around 10 tons of gold [a year] and with reserves of 200 tons, our total annual production will rise to 40 tons and we will become one of the 10 largest producers in the world," "The Moscow Times" reported on 18 September. Observers were less certain. One industry source told "Vremya novostei" on 18 September, "The fact that [Norilsk] initially distanced itself from Prospekt might mean that the final price took them aback, and they weren't sure whether or not to pay. After meeting with management, they made a political decision." Analysts told "Gazeta" that Norilsk probably paid twice as much as it should have; they chalked up the bidding frenzy to the participation of serious competitors such as Basic Element and SUAL. DK

Mobile TeleSystems (MTS) announced in a 17 September press release that it paid $107 million for 47.3 percent of Kuban GSM to bring its share in the regional cellular operator to 100 percent. MTS bought into Kuban GSM in April 2002, when it paid $71.4 million for a 51 percent stake. The higher price tag for a non-controlling stake has a simple explanation: Kuban GSM has embarked on an aggressive development plan, more than doubling its subscriber base to 1.2 million users since MTS's original acquisition, Regnum reported on 17 September. Kuban GSM posted revenues of $64.7 million in the first half of 2003, earning a net profit of $7.8 million. Dmitrii Ankudinov of Renaissance Capital, which advised MTS on the deal, told "The Moscow Times" on 18 September that with MTS now occupying strong regional positions, Kuban GSM will probably be its last big purchase. DK

The Royal Dutch/Shell Group announced in a 16 September press release that it has approved a $1 billion budget to develop the Salym oil field in Western Siberia. According to the press release, West Salym, the largest of Salym's three fields, will start pumping oil in late 2005 and reach peak production of 120,000 barrels per day in 2009. Shell is developing Salym, which has an estimated 880 million barrels of reserves according to the "Financial Times," through Salym Petroleum Development (SPD), a 50-50 joint venture with Russia's Evikhon. (Evikhon, in turn, is owned by Moscow oilman Shalva Chigirinskii's Sibir Energy, "Kommersant-Daily" reported.) News of the investment is likely to smooth ruffled feathers at the Natural Resources Ministry, which had charged that SPD was moving too slowly to develop Salym and initiated proceedings in June to pull SPD's license for the field. Aton analyst Steven Dashevskii told "Vedomosti" on September 17 that the $1 billion budget meant that "the authorities got what they wanted and the ministry will probably remove its objections." Even that might not be enough, however. Troika Dialog analyst Kakha Kiknavelidze told "The Moscow Times" on 17 September that the project could require up to $2 billion. DK

For a business that is supposed to be about making communication easier, the Russian telecom sector has been sending a lot of mixed signals lately. The trouble began on 5 August, when Alfa Echo announced that it had purchased LV Finance. Alfa Echo is the telecom wing of Alfa Group, the financial-industrial group that already owns a blocking stake in second-ranked Russian cellular operator VimpelCom. The acquisition of LV Finance gave Alfa Group a 25.1 percent blocking stake in MegaFon, the country's third-ranked cellular operator and one of VimpelCom's two biggest competitors. (The other is Mobile TeleSystems, the country's biggest cellular operator.) The result has been chaos and rancor in the upper echelons of the industry.

As soon as Alfa acquired LV Finance and its stake in MegaFon, MegaFon's other shareholders began to huff and puff, arguing that all MegaFon shareholders were party to an agreement that prohibited the sale of their shares without the consent of other shareholders. Although the structure of the deal sidestepped the agreement -- Alfa Echo bought the company that owned the company that owned the shares -- the tone was set: Alfa was not welcome. When Alfa tried to call an extraordinary shareholders' meeting to elect a new board for MegaFon and oust Director Sergei Soldatenkov, Alfa's fellow shareholders simply ignored the meeting, denying it a quorum.

Meanwhile, observers tried to figure out the logic behind Alfa's move into MegaFon. Was the idea to merge MegaFon and VimpelCom to create a new telecom giant to rival top-ranking MTS? Or did Alfa plan to use its stake in MegaFon to gain leverage for the upcoming privatization of national fixed-line operator Svyazinvest?

The Antimonopoly Ministry, which gave its blessing on 5 September to Alfa's purchase of LV Finance, appeared ready to head off further consolidation at the pass. On 15 September, Antimonopoly Minister Ilya Yuzhanov called the idea of a VimpelCom-MegaFon merger "madness," gazeta.ru reported the same day. The same report suggested that Alfa's real interest was Svyazinvest. According to the online newspaper, Alfa was ready to sell its newly acquired quarter of MegaFon to Telecominvest "if an analogous [25 percent] stake in Svyazinvest would be sold on conditions favorable to Alfa." (Telecominvest is a St. Petersburg-based holding company with strong ties to government; it owns a 31.3 percent stake in MegaFon.)

If a play for Svyazinvest is in the cards, however, it might require some patience. Economic Development and Trade Minister German Gref announced on 15 September that the privatization of Svyazinvest, which had been scheduled for 2003, will instead take place no earlier than 2005. (Twenty-five percent of Svyazinvest is already in private hands; the state controls the remaining 75 percent.) Few doubt, however, that the jockeying for pole position is already under way. As an unnamed analyst for a Moscow investment bank told "Vedomosti" on 16 September, "[The government] hasn't decided yet which one of the financial groups Svyazinvest will be sold to." In any case, the official privatization date might not be crucial. Svyazinvest is a holding company, and its real assets are concentrated in seven regional telecoms. "Izvestiya" reported on 16 September that an alternate privatization model would sell off stakes in the regional telecoms rather than the holding company, possibly providing an alternative set of deadlines as well.

The next act in the telecom drama came on 18 September, when IPOC International Growth Fund, a Bermuda-registered fund that owns 6.5 percent of MegaFon, announced that it had filed suit to block the transfer of MegaFon shares to Alfa Echo, "Vedomosti" reported the next day. IPOC contends that it had a prior agreement to purchase the 25.1 percent stake and had already paid LV Finance $74 million for the shares when LV Finance's founder, Leonid Rozhetskin, decided to unload his business to Alfa. Alfa Echo Vice President Igor Baranovskii shrugged off the news that IPOC had won decisions from courts in the Bahamas and British Virgin Islands freezing the disputed 25.1 percent stake in MegaFon. "Court decisions on the Virgin Islands don't have any force here [in Russia]," he told "Kommersant-Daily" on 19 September, "For us, it's the same thing as a note from a Siberian shaman." NIKoil analyst Vladimir Bogdanov backed up Baranovskii, telling "Gazeta" of 19 September, "It seems to me that filing this suit is probably a PR move to make Alfa's life more difficult."

As if the waters weren't muddy enough already, Alfa Echo's vice president for finances, Vadim Kucharin, told gazeta.ru in a 22 September interview that Alfa plans to merge MegaFon and VimpelCom. According to Kucharin, the merger will produce synergies to the tune of $750 million. Kucharin also had answers to some of the big questions surrounding a possible merger. Antimonopoly Ministry objections? Alfa is counting on limitations and conditions, but expects eventual approval. Legal challenges from IPOC? The British Virgin Islands and the Bahamas are not parties to the convention on legal cooperation and decisions by their courts are not binding in Russia.

Despite the fluidity of the situation, there is every indication that Alfa Group -- which has money to burn after selling a 50 percent equity stake in Tyumen Oil Company to BP -- is ready to make a serious commitment to the telecom business. The maximum program could very serious indeed, with a VimpelCom-MegaFon merger creating a new cellular giant to challenge first-place MTS and the privatization of Svyazinvest eventually adding a fixed-line component.

And why not? Oil is fine, but finite. People, on the other hand, never seem to run out of things to say to each other. DK

What started out as the "Yukos scandal" in early July with a flurry of arrests and investigations had faded to a familiar backdrop by September. Platon Lebedev, who heads the Menatep Group that controls Yukos, remained in jail awaiting trial on fraud charges stemming from a 1994 privatization deal. Numerous other cases plodded along as well. Elsewhere, however, it was largely back to business as usual for Yukos, which has pushed ahead with its merger with Sibneft and seen its capitalization return to pre-scandal levels.

But the "Yukos situation" began to show signs of life again in mid-September. On 15 September, "The Wall Street Journal" reported that U.S.-based ExxonMobil and ChevronTexaco were gearing up to submit competing bids for a 25 percent-plus-one-share stake in YukosSibneft. "International Oil Daily" noted the same day that ChevronTexaco Vice Chairman Peter Robertson had told the publication recently that he considered acquiring equity in a Russian company "a viable option, provided the terms are right." Further fanning the flames, ChevronTexaco CEO David O'Reilly told the "Financial Times" on 15 September that the former Soviet Union and Russia are "areas of opportunity and of focus for us."

The speculation was sufficiently intense to elicit a response from Yukos, which issued a carefully worded statement on 16 September denying everything specific without really denying anything specifically. And the speculation continued. The "Financial Times" boiled it down on 19 September: "ExxonMobil and ChevronTexaco are in advanced negotiations that could lead one of them to purchase about a quarter of the equity in YukosSibneft for up to Dollars 11bn."

Meanwhile, presidential chief of staff Aleksandr Voloshin chimed in on 16 September with a rare public statement. Speaking at a news conference in Baku, Azerbaijan, Voloshin told journalists that no wholesale reversal of 1990s-era privatizations was in the works, "Kommersant-Daily" reported the next day. Voloshin warned, however, that law-enforcement authorities could not be expected to sit by idly in the face of "blatant" violations.

In his first real public comment on the Yukos affair, President Vladimir Putin echoed his chief of staff in a meeting with American journalists on 20 September. "Nobody can be free from complying with the law," "The New York Times" quoted him as saying, "even those who have amassed billions." Putin downplayed the political and stressed the criminal in his remarks, reminding reporters that the investigations focused on "assassinations or murders in the merger of companies." "The New York Times" telegraphed the message in its headline: "Putin Portrays Yukos Inquiries As An Isolated Criminal Matter."

Former President George W. Bush met with President Putin in Sochi on 14 September. The second U.S.-Russia energy summit took place in St. Petersburg on 22-23 September. And Putin flies to the United States on 23 September for a four-day visit that includes two days at Camp David with President Bush. If the Yukos affair is to gain a U.S. component -- and there is, of course, no guarantee that it will -- the least one can say is that the stage is certainly set. DK