Business Watch: May 7, 2002

With the aim of increasing its interests in Russia, French oil giant TotalFinaElf is holding talks with Anglo Siberian Oil to develop the Vankor oil field in eastern Siberia, which is estimated to hold 900 million barrels of reserves. TotalFinaElf already produces 12,000 barrels per day (bpd) in Russia under a production-sharing agreement for the Kharyaga field in the Timan Pechora region, but a second development phase will more than double this to 30,000 bpd before the end of the year. Anglo Siberian Oil, which owns a 59 percent stake in the license rights to the Vankor field, said this month it was planning to let TotalFinaElf acquire a 52 percent interest in the Vankor license and take over as operator, Reuters reported. It also said it would give TotalFinaElf the option to take over as operator and acquire a 60 percent stake in the North Vankor license. Anglo Siberian held an extraordinary general meeting on 24 April about proposed board changes and plans for Vankor. (JMR)

TotalFinaElf and Russian state oil firm Rosneft signed an agreement on 24 April for exploration of the Russian sector of the Black Sea near Tuapse. TotalFinaElf has also signed a deal with Russia's second-largest oil producer Yukos to explore the Shatskii block in the Black Sea, Reuters reported. Reuters also reported on 23 April that it had received information that the January deal between Yukos and TotalFinaElf was disappointing, as no viable oil reserves have been found in the Black Sea over the last century. Yukos sources have said preliminary studies show that several blocks in the Black Sea might be very lucrative. TotalFinaElf is also looking to acquire a 25 percent stake in the Shtokman offshore gas project in the Barents Sea, which is operated by Gazprom and needs $20 billion in investment. Industry sources also said TotalFinaElf was considering other joint projects with Russian firms, including a joint venture with Yukos in one of the French company's European refineries. (JMR)

A commission headed by Deputy Prime Minister Viktor Khristenko approved on 24 April a plan to build a major new petroleum-product export pipeline to the Baltic Sea. The plan, proposed by Transnefteproduct, is to build the new link by 2004 or 2005. An anonymous commission official said the project to build a 1,200-kilometer pipeline to the northern port of Primorsk, near St. Petersburg, where an oil export terminal was brought on stream in 2001, could cost up to $750 million, Reuters reported. Transnefteproduct plans to borrow money from domestic and Western markets to finance the link, which will have the capacity to transit 10 million tons of petroleum products a year. Russian Prime Minister Mikhail Kasyanov has, however, still not given final approval to the plan. Transnefteproduct controls almost all major petroleum-product pipelines in Russia, but ships abroad only 25 percent of Russia's total petroleum-product exports. The remaining 75 percent reach major export ports by rail. Transnefteproduct exported 3.99 million tons of petroleum products in the first quarter of 2002, down from 4.30 million in the first quarter of 2001. The company's current shipments are made mainly via the Latvian port of Ventspils and Russian ports. Russia exported 70.43 million tons of petroleum products in 2001, up from 60.82 million tons in 2000. (JMR)

(26 April) Kraft Foods announced on 26 April that its international business has consolidated strategic media-planning and media-buying activities in Eastern Europe with the appointment of Starcom as its agency of record in Russia, Lithuania, and Latvia. Ann Daw, senior vice president of strategy and marketing development, Kraft Foods International, said in a press release: "This agreement extends our Central European relationship with Starcom across additional countries in Eastern Europe. By working with one agency in this region, we are better able to leverage scale across our business areas, as well as provide a more streamlined and effective approach towards developing integrated communications plans that take advantage of the exciting new mix of advertising possibilities." She added, "This move will add further value as we integrate a consolidated approach to media buying and planning across our recently acquired Stollwerck confectionery businesses in Russia and Poland." Kraft Foods produces and markets many of the world's leading food brands, including Kraft cheese, Jacobs and Maxwell House coffees, Nabisco cookies and crackers, Philadelphia cream cheese, Oscar Mayer meats, Post cereals, and Milka chocolates, in more than 140 countries. (JMR)

Russian fixed-line telecoms and Internet service provider Golden Telecom reported its first net profit since its 1999 initial public offering (IPO), Reuters reported. The company, Russia's largest provider of Internet access, posted a $6.2 million net profit the first quarter of 2002, at the high end of analysts' expectations, compared with a net loss of $29.7 million in the fourth quarter of 2001. Revenues fell, however, to $36.4 million from $36.7 million in the previous quarter. Golden Telecom Chief Executive Aleksandr Vinogradov said in a statement that, "Less than three years has passed since our IPO, and the fact that we achieved profitability in such a short time emphatically demonstrates that we chose the right direction for our core strategic business." The telecoms company said it had 191,688 Internet subscribers at the end of the first quarter of 2002, up from 185,628 at the end of the fourth quarter of 2001. He pointed out that a deal to acquire Rostelekom's half of Sovintel and consolidate it with its own half would close in the second quarter of 2002. Analysts have said the move would provide a huge boost to both Golden's revenues and its earnings. (JMR)

Vimpel-Communications (VimpelCom) announced on 29 April that it raised $250 million in debt financing through the issue of notes in international bond markets. The notes, which are listed on the Luxembourg Stock Exchange, bear an annual interest rate of 10.45 percent and are due on 26 April 2005. VimpelCom is a leading provider of telecommunications services in Russia, operating under the "Bee Line" family of brand names. (JMR)

Sistema Telekom President Aleksandr Goncharuk said Russian cellular firm Mobile TeleSystems (MTS) could use privatizations in Ukraine, Bulgaria, and Moldova to expand abroad, Reuters reported. "Ukrtelekom will soon be privatized. We will take part in the privatization," Goncharuk said. Goncharuk did not clarify whether MTS, in which Sistema is a major shareholder, would participate in the auctions directly or if Sistema would be the bidder. "Any cellular assets that we acquire are acquired for MTS," Goncharuk said. The Ukrainian, Bulgarian, and Moldovan governments are all planning to privatize state telecoms monopolies this year. Bulgaria has already invited bids for Bulgaria Telecom, while the privatization of Ukrtelekom has been held up over the size of the stake to be put on the block. Goncharuk said MTS was also working on deals to expand in Russian regions where it does not yet operate. MTS is also preparing to develop a recently acquired license in Belarus. (JMR)

Russian Central Bank Chairman Sergei Ignatev said at a meeting of the Association of Russian Banks that the 2002 targeted average ruble rate was 31.50 per U.S. dollar and predicted the inflation rate would be in line with official estimates. The ruble has been depreciating in nominal terms but at a slower pace than the rate of inflation, and effectively firmed almost 10 percent in 2001. Russian financial officials have pledged to contain real ruble appreciation at 3 percent this year. Ignatev said the Central Bank was getting ready to use more instruments to impose its monetary policy and he reiterated his stand in favor of a gradual easing of hard-currency regulations that require exporters to sell 50 percent of their hard-currency earnings to the Central Bank. He also said the 2002 annual inflation target of 12-14 percent was sustainable, though some analysts believe it is too optimistic. Inflation did not exceed 6.5 percent in the first four months of 2002 after spiking to 9 percent in the corresponding period of 2001. (JMR)

In an interview with Reuters, Russian Central Bank First Deputy Oleg Vyugin said the bank predicts the Russian economy will grow approximately 4 percent this year, compared to a 5 percent expansion in 2001. The ruble is expected to firm against the dollar at 5 percent in real terms in 2002. The government forecasts economic growth of 3.5 to 4.3 percent this year, but in his state-of-the-nation address to parliament on 18 April, President Vladimir Putin slammed the cabinet for failing to set an "ambitious" growth target. Vyugin also predicted that the ruble exchange rate will hover around 33 rubles per U.S. dollar, "or a bit more" by year-end. The country's budget assumes the ruble's average annual rate will be 31.50 against the dollar this year and hit 32.90 by the end of 2002. (JMR)

The Lithuanian Statistics Department announced that the country's gross domestic product increased by a preliminary 4.1 percent on the year in January-March to 11.055 billion litas ($2.89 billion) at current prices. The increase was most heavily influenced by growth in the agriculture, electricity-distribution, domestic-trade, and insurance sectors, the department said in a statement. It said the early estimate of first-quarter GDP was based on data reported by companies in a variety of sectors, as well as flows of exports and imports. The Finance Ministry has forecast that GDP for all of 2002 will increase by 4.4 percent on the year, following annual growth of 5.9 percent in 2001. (JMR)

Russian Finance Minister Aleksei Kudrin said that effective 1 June Russia will more than double the export tariff on crude oil from the current $9.20 per ton to $20.40 per ton. The government's Commission for Protective Measures in Foreign Trade, which is headed by Kudrin, made the decision. Reuters reported that Prime Minister Kasyanov still has to approve the measure before it will come into effect. The government sets the maximum crude-oil export tariff rate as a percentage of the customs dollar value of Urals, Russia's main crude export blend. Kudrin said the average Urals price stood at $22.96 per barrel in March or $167.60 per ton in March-April. Under the current system, when the Urals price is in a range of $109.50-$182.50 per ton, a tariff of 35 percent is imposed on the sum exceeding the level of $109.50. When Urals crude is below $109.50 per ton, no tariff is collected. When the price rises above $182.50 per ton, exporters pay a combined tariff comprised of $25.53 per ton plus a tariff of 40 percent on the sum exceeding the level of $182.50. The commission also decided to lower export duties on liquefied gas from 40 euros ($36.16) to 20 euros per ton, RIA-Novosti quoted commission secretary Andrei Kushnerenko as saying. (JMR)

The Commission for Protective Measures in Foreign Trade decided to drop the 5 percent export tax on steel to offset new U.S. import tariffs, Reuters reported. Finance Minister Kudrin said, "Given the introduction of restrictions in the world steel market, it is necessary to support our producers." The United States imposed tariffs of up to 30 percent on some steel imports starting 20 March to protect its ailing steel industry. At the time, the Russian government estimated the hefty tariffs could cost the country $400-$500 million a year in revenues. In 1999, Russia entered into a voluntary restraint agreement on steel exports to the United States. The move came after U.S. threats to introduce strict quotas because of alleged dumping of certain types of steel on its market. The agreement means Russia now exports only a tiny fraction of its steel production to the United States. (JMR)

Russian President Putin met with Mikhail Fradkov, head of the Federal Tax Police, at the Kremlin on 29 April to review the results of the Tax Police's work in the first quarter of 2002. In addition, they discussed ways of improving interactions between the Federal Tax Police and the Tax Ministry for monitoring the observance of tax legislation and combating tax violations, RosBusiness Consulting reported. Putin entrusted the Tax Police with improving the efficiency of work at the newly established main departments of the Federal Tax Police in the seven federal districts of Russia. They also considered the possibility of raising salaries to impove the lives of Tax Police officers. (JMR)

The Russian State Duma on 24 April confirmed Central Bank deputy chairmen Oleg Vyugin and Andrei Kozlov to the Central Bank board, Reuters reported. Both were named deputy heads of the Central Bank by new chief Sergei Ignatev. The confirmations by the State Duma follow the sudden departure of former Central Bank chief Viktor Gerashchenko, who was accused of dragging his feet on banking reform. Vyugin is a former deputy finance minister who previously served as an economist at Troika Dialog brokerage, and Kozlov, who ran a private financial consultancy, held the No. 2 post at the Central Bank until 1999 and helped found the domestic T-bill market. Vyugin has been assigned the task of formulating monetary policy, while Kozlov is to oversee banking reform. (JMR)

"Trud" reported on 23 April that statistical data show that the number of extremely poor people in Russia decreased by 16 million in the first quarter of this year, compared with the same period in 2001. There are still more than 40 million poor people in Russia. The per capita cash income of Russians, according to the State Statistics Committee, amounted to 3,295 rubles ($105.54) a month, ITAR-TASS reported. The average monthly wage grew to 4,172 rubles ($133.63) or by 20.6 percent (taking into account inflation adjustments). The cash income of Russians in real terms, i.e., with inflation adjustment, has grown by 10 percent during the past two years. Last February, the government increased the average size of pensions to slightly more than 1,322 rubles ($42.34) per month and the subsistence minimum to 1,313 rubles ($42.06) per month. The average February 2002 income of Russian citizens was still below the 1997 level (by 16 percent) and the 1998 level by 9.5 percent. The further growth of wages and incomes, "Trud" points out, should proceed in parallel with a corresponding growth of labor productivity. (JMR)

Estonia's Eesti Telekom reported a 9 percent drop in first-quarter earnings on 25 April, but pointed out that the decline it had been experiencing since its monopoly ended last year had finally ended. The company indicated the next challenge may lie in the mobile market, which seems tapped to its potential. Analysts told Reuters they were heartened by Eesti Telekom's rising margins, which were boosted by a jump in profitability of its fixed-line business. "The improved profitability of the group is coming from [fixed-line arm] Eesti Telefon," said Veikko Maripuu, Suprema's head analyst. "The surprise improvement in Eesti Telefon's EBITDA [earnings before interest, taxes, depreciation and amortization] came as it was able to slash costs, while revenues, especially in data communications, rose as well, helped by a tariff increase in the first quarter," he added. The company said that net and pre-tax earnings, which were identical due to a zero corporate tax rate on reinvested profits, fell to 16 million euros ($14.4 million) from 17.6 million in the same period a year ago. (JMR)

Russian Aluminum (RUSAL), the world's second-largest primary aluminum producer, announced its production results for the first quarter of 2002 increased across all major product types, according to a company press release. Alumina production increased by 1.57 percent (not including the Cemtrade Refinery), reaching 529,300 tons, compared to 521,100 tons in 2001. While overall production at the Nikolaev Alumina Refinery dropped slightly (by 17,600 tons to 275,000 tons of alumina, its annual production target) compared to the same period last year, 100 percent of production during the quarter was in the form of the premium-quality G-00 alumina, compared with 36.5 percent last year. The introduction in 2001 of new furnaces at the Achinsk Alumina Refinery led to the most notable production increase, reaching 253,800 tons compared to 228,000 tons for the same period last year. Production increased at all of RUSAL's aluminum smelters. Bratsk Aluminum Smelter produced 226,906 tons of commodity aluminum during this period, compared to 225,953 tons in 2001; Krasnoyarsk Aluminum Smelter produced 212,420 tons, compared to 208,728 tons in 2001; Novokuznetsk Aluminum Smelter produced 70,341 tons, compared to 69,221 tons in 2001; and Sayansk Aluminum Smelter produced 99,307 tons, compared to 99,190 tons in 2001. Rolling production (not including the Krasnoyarsk Metallurgical Plant) increased by 4.1 percent, producing 58,087 tons, compared to 55,781 tons in 2001. Samara Metallurgical Plant produced 43,734 tons, compared to 42,501 tons in 2001. Belokalitvinsk Metallurgical Plant, RUSAL's second-largest facility, produced 7,256 tons, compared to 9,203 tons in 2001. Production of foil and cold-rolled tape increased by 13.5 percent, reaching 8,617 tons, compared to 7,587 tons in 2001. Rostar produced 170.1 million beverage cans, an increase of 50.7 percent compared to 2001 when it produced 112.8 million. The Dozakl plant output reached 18.2 million cans, an increase of 16.9 percent compared to 2001 when it produced 15.6 million. (JMR)

According to the Russian Public Center for Internet Technologies, the number of Internet users in Russia almost doubled last year to more than 18 million, including a regular Internet audience of about 8 million people. Along with overall growth in the number of users, there was an increase in the proportion of corporate Internet users. The ratio of corporate-to-private users was 63 percent to 37 percent last year, compared to 60 percent to 40 percent in 2000, and is forecast at 65 percent to 35 percent for this year. Growth rates for the Internet audience are slowing, however, which the center said was typical for any service market when demand is being met, Interfax reported. Internet users between the ages of 16 and 34 make up 64 percent of users. The majority of users are also men, who make up 59 percent of the total. Regionally, the Russian Internet audience is concentrated in Moscow and St. Petersburg, which together account for 66.3 percent of the country's Internet users. The most advanced regional cities last year in terms of Internet use were Yekaterinburg, Novosibirsk, Krasnodar, Vladivostok, Irkutsk, Nizhnii Novgorod, and Samara. (JMR)

Vladimir Kogan, known as the banker of Russian President Vladimir Putin, is one of the oligarchs from St. Petersburg to emerge with close ties to the president. A self-made man who began his business career in retail sales and trading in St. Petersburg, he quickly developed a number of important connections, which led to his appointment on the board of directors of Promstroibank (PSB). Some Russian media outlets have speculated that these connections include links to organized crime. It was during this period in St. Petersburg that he made and earned the confidence of Putin. This relationship has continued under Putin's presidency, with its most visible sign being the installation of PSB automated teller machines (ATMs) in Russian government offices after Putin became president.

Kogan typifies the Putin-era oligarchs' style of operation. Like Sergei Pugachev, he denies any overt interference in politics, as was the trait of well-known magnates of the Boris Yeltsin-era, Boris Berezovskii and Vladimir Gusinskii. He has, at least publicly, taken part in the more formalized interactions between Russia's "vlast" (authorities) and big business.

Kogan, who is frequently portrayed as an influential player in Putin's Kremlin, is widely viewed as an important figure in the St. Petersburg "liberal" political faction. Russian media have linked him to such luminaries as Anatolii Chubais, Sergei Stepashin, Aleksei Kudrin, German Gref, and Ilya Klebanov. Kogan's low-key style, however, does not necessarily mean that the essential nature of the business-vlast relationship has changed under Putin. Moreover, many observers have pointed to Kogan's reported ties to St. Petersburg organized-crime groups -- and alleged involvement in contract murders -- as evidence that new style or not, Russian big business, bureaucracy, law enforcement, security agencies, and organized crime remain intimately connected.

Kogan is president of the St. Petersburg Banking House holding company and chairman of St. Petersburg-based Promstroibank's oversight board, as well as the bank's major shareholder. The St. Petersburg Banking House has many impressive acquisitions, including VITA Bank, Vyborg-Bank, and the International Industrial Bank of St. Petersburg, according to a report in "Trud" on 27 September. He is a member of the bureau (Russian media have dubbed it the "politburo") of the Russian Union of Industrialists and Entrepreneurs (RSPP), a body many observers see as a mechanism for formalizing relations between big business and the authorities. Russian media have cast Putin's public meetings with RSPP members to discuss the government's economic policy, strategic development of Russia's economy, and integration into international bodies such as the World Trade Organization as evidence that the era of "wild capitalism," of backroom deals between "oligarchs" and bureaucrats, Kremlin influence peddling, and contract killings of "businessmen" is over. Indeed, the Kremlin's moves against Berezovskii and Gusinskii, especially efforts to wrest control of the NTV and TV-6 television networks away from the Yeltsin-era oligarchs, the reformation and inclusion of the oligarchs in Arkadii Volskii's RSPP, previously seen as the vehicle of Soviet-era "red directors," and Kremlin pledges to keep the tycoons equidistant from vlast appeared to support such a view.

The Russian press has noted Kogan's tendency to avoid public appearances and that the St. Petersburg banker has eschewed the brazen style of Berezovskii and Gusinskii, setting the tone for Russia's "industrialists," who have reportedly disavowed the "oligarch" label that Berezovskii, for one, embraced. "Novaya gazeta" on 25 August 2000, for instance, pointed out that Kogan avoided "TV cameras" and considered himself "terribly nonphotogenic." "Versiya" on 3 October 2000 claimed that the low-key tone of the initial RSPP meetings was set by the not-too-well-known Kogan, who nevertheless sat next to Economic Development and Trade Minister German Gref -- and closest of all the magnates to Putin. "Where did they get him?" the paper wondered. "Argumenty i fakty" on 10 October 2000 reported that Kogan's low-key style -- also displayed by the "re-educated" and "cautious" magnates of the Yeltsin era who hoped to maintain good relations with Putin's Kremlin -- was indicative of a new relationship between vlast and big business. Putin, the paper claimed, had decided to "sort out" the "harmful" oligarchs from the "useful" ones, the "noisy and arrogant" ones from the "nonpublic and loyal ones." Henceforth, the "industrialists" could not make demands on the state or lobby their interests through informal channels.

Nevertheless, early in Putin's presidency, some observers dubbed Kogan the "most equidistant oligarch" and, noting Putin's long relationship with the St. Petersburg banker, as well as the president's reported PSB accounts and ownership of PSB shares, as "Putin's banker," claiming that Kogan had become a fixture in the Kremlin. "Moskovskii komsomolets" on 27 September 2000 was skeptical that the "sunset of the oligarchs" had arrived, maintaining that the "reclusive" Kogan's behavior was merely indicative of a new style for Putin-era magnates, one that would not "flaunt" their "privileged status." One observer asserted that Putin had a "KGB approach" to big business, requiring only that the magnates, "not draw attention to themselves," "Business Week" reported on 4 December 2000.

Kogan was born in Leningrad on 27 April 1963. Both his parents were reportedly engineers. According to "Versiya" on 3 October 2000, young Volodya was raised by his grandmother while his parents worked long hours in a "closed" facility in the city. The "Versiya" account claims Kogan's grandmother, Stella Yefimovna, was disturbed by the boy's "weakness" for hanging cats and sought to put the boy on the "right path." Whatever "weaknesses" the young Kogan displayed, however, he was reportedly quite intelligent, learning to read before he went to school.

"Versiya" claimed Kogan subsequently attended the "celebrated" Leningrad School 239 and easily entered the Leningrad Polytechnic Institute. The young Kogan was reportedly bored by the course work, however, and dropped out after one year. Kogan then did military service in the Air Defense Forces, enrolling in the Leningrad Engineering-Construction Institute afterward, where he was trained as an auto mechanic (some accounts have him as an "automotive engineer"). Kogan reportedly worked briefly as a mechanic before turning to the "shuttle" trade business, bringing in household equipment from the Baltics, then acquired his own second-hand store, followed by retail stores and a computer sales firm. One of his computer firm's customers was PSB.

Kogan began acquiring shares in PSB, a move that "Moskovskii komsomolets" on 4 April 2001 called "fatal" for the bank's old leadership. The paper claimed that by the time PSB officials, "accustomed to a Soviet lack of haste," understood what was happening, Kogan had acquired complete control of PSB. From there, Kogan built a business empire, expanding his influence in St. Petersburg banking and reportedly acquiring interests in, among other things, commodities trading, defense industries, auto manufacturing (Ford Motor Co.'s St. Petersburg plant was a PSB client, eventually selling a stake in the plant to the bank), newspapers, telecommunications, construction, pulp-and-paper enterprises, and metallurgy.

"Business Week" on 4 December 2000 rated PSB as the 15th-largest bank in Russia, and, following the inauguration of Vladimir Putin as Russian president, reported that PSB began installing ATMs in Russian government offices and the State Duma. Meanwhile, various sources reported that PSB and Kogan's related businesses were using the St. Petersburg banker's "administrative resources" -- his political connections -- to further their own business interests. As in the case of St. Petersburg City Hall employees of the early 1990s, the sources claimed, Kremlin employees were now being paid via PSB.(PJ)

In a surprise, reverse announcement, LUKoil Vice President Jevan Cheloyants told reporters on 25 April that the company will not join the sponsor group to build the planned Baku-Tbilisi-Ceyhan (BTC) export pipeline for Azerbaijan's Caspian oil.

LUKoil President Vagit Alekperov, while visiting Baku late last year, expressed interest in acquiring all or part of the remaining 7.5 percent share in the sponsor group, the BBC reported on 28 February and the "Financial Times" reported on 6 March. He said the bid to participate in the project would have to be approved by LUKoil shareholders. The Russian government owns a 15 percent stake in LUKoil, providing it serious leverage in the oil company's activities and investments. However, Russian First Deputy Property Minister Aleksandr Braverman said the government plans to proceed with a delayed sell-off of 5.9 percent of its stake in LUKoil, in June or July, Reuters reported. LUKoil's competitor, No. 2 oil producer Yukos, which is fully privatized, has also expressed an interest in joining the BTC project. It has already drafted a proposal whereby it would finance a 12.5 percent share of the $2.8 billion project.

The pipeline, running 1,600 kilometers from Baku, Azerbaijan, via Tbilisi, Georgia, to Turkey's port of Ceyhan, with BP Amoco as the largest private investor, is one of several planned for the region. Construction of the $2.8 billion pipeline is scheduled to begin this summer. David Woodward, president of BP-Azerbaijan, said the detailed engineering studies of the BTC pipeline would be completed and presented to the consortium in May. A final decision concerning the construction of the BTC pipeline is expected around 22 June, according to the 21 February issue of the "Financial Times." LUKoil and the State Oil Company of Azerbaijan (Socar) held talks in March and April to confirm a verbal agreement. At that time, many believed that the greater involvement of Russian companies in pipelines and other businesses throughout the Caucasus could positively contribute to the resolution of many simmering conflicts. The surprise withdrawal of LUKoil from the BTC project is a blow to those hopes.

The BTC pipeline bypasses Russia and is strongly supported by the United States, which may be part of the reason Russian officials claim the Baku-Ceyhan project is financially unfeasible. Russian Deputy Foreign Minister Ivan Ivanov said: "We say that the line is not economical. You can go on with the construction of the pipeline. Our firms are ready to take part in the construction. And we will not assert any political conditions for this." In December 2001, Russia's Caspian envoy, Deputy Foreign Minister Viktor Kalyuzhnyi, denied in an ANS interview that he had spoken against Baku-Ceyhan during a State Duma session, when the pipeline was reportedly criticized for running counter to Russian national interests. BTC will compete with the Russia-backed Baku-Novorossiisk and the Caspian Pipeline Consortium routes, particularly for the export of Kazakh oil. In December 2001, Cheloyants told a press conference in St. Petersburg that a new feasibility study showed an increase in the pipeline's profitability from 16 percent to 24 percent. However, these figures may not be enough to tempt the government as a shareholder in LUKoil.

Intercon sources cautioned, however, that LUKoil was not free to act on its own. It was required to obtain a license from the Russian government to participate in BTC. It could not be determined whether this license was granted or promised before the announcement was made by LUKoil to withdraw. Confidential sources indicated that, while likely, "When it comes to Russia you can never be too sure that politics will not intervene at the last minute to ruin the best-laid plans of business or men" (see "RFE/RL Business Watch," 26 March 2002).

There is also the question of rival interests to consider. Some experts believe that LUKoil withdrew its interest due to its failure to receive a license from the Russian government. Opinions differ on whether this was the product of politics or rivalry with Transneft, the Russian pipeline monopoly. Intercon sources claim that this issue will be broached at the U.S.-Russia summit in Moscow on 23 May. Discussions are underway to obtain a joint statement similar to the one issued in 1998 by then-U.S. President Bill Clinton and then-Russian President Boris Yeltsin, endorsing the multiple pipeline approaches. Sources also indicate that one of the main opponents within the Russian government of LUKoil's involvement in BTC is Semen Vainshtok, president of Transneft, who has an ambitious plan to build a pipeline to China and to the Baltic states. Vainshtok is determined to maintain Transneft's pipeline monopoly by preventing the involvement of LUKoil in BTC.

Cost-cutting measures appear, however, to be the major reason behind the LUKoil turnaround on BTC. LUKoil is planning a major company-wide overhaul. LUKoil Vice President Leonid Fedun said that the oil company plans to make drastic cuts to its investment programs and operating costs by up to 30 percent. "From the overall investment plans of $2.5 billion, it will be [a cut of] about $700 million to $800 million," Fedun said. LUKoil will also trim its workforce, shut down wells, and cut production costs, the Associated Press reported. The company believes the plan will boost its annual net profit by $500 million over the next two to three years. (PJ)