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What the Russian papers say


MOSCOW, May 21 (RIA Novosti)
Russia to use business as foreign policy tool in the CIS / Russian authorities keep badgering British Petroleum / CPC's expansion delayed indefinitely / Moscow, Belgrade to agree on duty-free car trade / Severstal to buy another American company / Moscow to have world's largest budget revenues

Nezavisimaya Gazeta

Russia to use business as foreign policy tool in the CIS

The establishment of a federal agency for CIS affairs, announced by Prime Minister Vladimir Putin, is evidence that the former Soviet republics will remain a priority of Russia's foreign policy. Moscow will focus on business and NGOs as its main tools for promoting its interests in the former U.S.S.R.
Russian diplomats were surprised by the announcement. A source of the popular daily Nezavisimaya Gazeta said: "The Foreign Ministry is not sure what to do with the new structure and where to recruit the staff for it."
There are four CIS departments in the ministry, and the idea of a federal agency for CIS affairs was proposed by Putin, the source said.
The United States provided economic and financial assistance to some CIS countries during the serious crisis that almost ruined their economies after the dissolution of the Soviet Union in 1991. This allowed Washington to assume a geopolitical role in the region while Russia was too weak to take up the challenge.
According to analysts, the Kremlin has come to see that business can be a crucial instrument in strengthening Russia's geopolitical influence and promoting its international interests.
Konstantin Zatulin, first deputy chairman of the parliamentary committee on the CIS, said: "Not all foreign policy goals can be attained through traditional diplomacy. We need other instruments here, and should follow the example of our American partners. Besides, the Foreign Ministry currently tackles only political problems, which cannot be solved without addressing economic issues. The new agency should coordinate political and economic efforts."
But some experts think the new agency will be ineffective.
"I don't think the Foreign Ministry will efficiently attain the proclaimed goals," said a source close to the Kremlin administration. "The agency's functions will be the same as those of existing bodies, such as the Russian Centre for International Scientific and Cultural Cooperation (Roszarubezhcenter) and the Russkiy Mir (Russian World) foundation. Moreover, there is a department with similar functions in the presidential administration."
In 1998-2000, Russia had a Ministry for CIS Affairs, which was terminated by presidential decree after Putin came to power. Its functions were divided between the Foreign Ministry and the Economic Development and Trade Ministry.
The problems the division created became apparent during the recent developments in Georgia, when the Foreign Ministry lifted sanctions against Abkhazia while a delegation of the Economic Development and Trade Ministry was negotiating Russia's accession to the World Trade Organization in Tbilisi.

Russian authorities keep badgering British Petroleum

Two months after Russian police searched the Moscow office of British Petroleum, it was raided again, this time by the Federal Security Service people. The case's profile must be going up as the fight for Russia's stake in TNK-BP comes close to boiling point.
Earlier this spring, the market players attributed the raid as the government's attempt to pressure the Russian-British company in Gazprom's interests. Firstly, being one of Russia's largest independent gas producers, TNK-BP tried to dispute the gas giant's export monopoly and lobbied for amendments to the gas exports law. Second, the notorious Kovykta deal has not been completed, although the field's operator, Rusia Petroleum, which is a TNK-BP subsidiary, agreed to sell the license for $1 billion.
However, analysts say the gas monopoly is now eyeing Russia's stake in TNK-BP itself. According to some estimates, Gazprom may acquire a 50% stake in the joint venture for $20 billion. As for the artificially fuelled tensions with the authorities, the purpose is to accelerate the deal, according to Ivan Andriyevsky, managing partner of 2K Audit - Business Consulting.
Dmitry Abzalov, an analyst with the Center for Current Russian Politics think tank, also thinks that the new raid was part of the campaign to weaken TNK-BP. According to him, market players have long been discussing the possibility that the purchaser of Russia's stake in TNK-BP could get a controlling interest in the joint venture.
"They expect Gazprom Neft to buy the 50% stake from the Russian shareholders, and 1% from BP," explained Abzalov, adding that BP would then lose its parity shareholder status, which enabled it to include Russian reserves in its financial statements, adding to its market capitalization.
A minority shareholder status is less advantageous, Abzalov went on to say. "The British company must be thinking Dmitry Medvedev is a milder politician than Vladimir Putin. But it looks like Medvedev is trying to protect Gazprom's interests. It is the general belief that Alexander Bortnikov was promoted to head the FSB due to the new president's support," the expert concluded.


CPC's expansion delayed indefinitely

The memorandum on the plan to expand capacities of the Caspian Pipeline Consortium from 32 million metric tons (235.2 million bbl) to 67 million metric tons (492.45 million bbl) of oil endorsed by the Russian and Kazakh oil ministers in early May was not approved by the consortium's board of directors, as foreign shareholders objected to some terms of the memorandum. If amendments are made to the new document, it will have to be agreed upon with the new Russian energy ministry, which will take time. There is no chance that the CPC shareholders will come to terms by the time of Russian President Dmitry Medvedev's visit to Kazakhstan starting on May 22.
According to a source close to Transneft, the decision on the CPC's expansion was blocked by foreign shareholders, primarily those of Chevron who disagreed with some of its terms.
Under the memorandum on understanding agreed upon on May 6-7 by the Russian Industry and Energy Minister Viktor Khristenko and the Kazakh Minister of Energy and Mineral Resources Sauat Mynbayev, the expansion should have been completed by 2012. Kazakhstan also promised to direct 17 million metric tons (124.95 million bbl) of oil to the Bourgas-Alexandroupolis pipeline which Russia could hardly fill from its own resources.
According to the source, Chevron objects to the demand to increase the investment tariff by $14-$15 per ton. Some differences arose in connection with the recalculation of interest on the consortium's debts.
Transneft is unhappy about the delays. "The minor issues which have not been settled yet are not worthy of attention compared with the idea of expansion," said Transneft's Vice President Mikhail Barkov. He also said that during the discussion of the CPC's expansion Transneft made substantial concessions to Western shareholders: it abandoned its stand to expand the CPC only after the restructuring of its debt and the increase in the tariff.
"As regards oil exports from Kazakhstan, the exporters have some time left," said Mikhail Krutikhin, an analyst at RusEnergy. "There are enough capacities; with the delay in commissioning the Kashagan pipeline, the CPC shareholders have time to talk business."
Barkov said that with the change in the structure of the Russian government, the sector's ministry has also changed, as well as its head. To amend the memorandum, it will have to be agreed again in both countries' ministries.
After the CPC board's meeting on May 20, the CPC issue (which was to become one of the main items on the agenda) will hardly be listed among Dmitry Medvedev's victories during his forthcoming two-day visit to Kazakhstan.

RBK Daily

Moscow, Belgrade to agree on duty-free car trade

The government, which invited foreign automotive giants to build car-assembly plants in Russia three years ago is now renouncing this policy. Russia and Serbia could sign a duty-free car-trade agreement by late 2008.
Italy's Fiat and German carmaker Volkswagen could also take advantage of this.
Andrei Khripunov, head of the Russian trade delegation in Serbia, said import duties for Russian and Serbian cars could be abolished by late 2008. A source in the Serbian Trade Ministry said 1% import duties could be charged on the border.
Under the bilateral agreement, no import duties should be charged on Russian and Serbian vehicles.
The new initiative would play into the hands of Fiat, which has recently signed a memorandum of understanding with the Zastava Group on buying a 70% stake in Serbia's Zastava automotive plant.
In 2007, the company assembled 12,000 vehicles to old Fiat licenses. The plant will be overhauled with Fiat's assistance boosting production to 150,000-200,000 cars per year by 2009 and to 300,000 vehicles by late 2010. A source in the Serbian Economics Ministry said it was impossible to sell all of them on the domestic market.
Severstal-Auto, the car-making division of mining and metals giant Severstal, has already invested in a Fiat car-assembly plant in Russia and is also going to market Italian cars on the local market.
If concluded, the new Russian-Serbian agreement would stipulate entirely new terms for importing Serbian Fiats and those from Italy or Turkey. Severstal would pay 25% duties and 18% VAT, as well as excise tax and other duties, on Italian-made cars whose price would soar by 60%. Moreover, the company would pay 15% duties on car-components for the local automotive industry.
Volkswagen, which wants to build a plant in Serbia, could also profit from zero import duties.
A source in a Russian automotive-industry association said the abolition of import duties ran counter to the government's plans for attracting foreign carmakers. He expressed hope that easy-term duties for Serbia would not exceed CIS levels, and that 50% of production facilities had to be relocated.
The Serbian Economics Ministry said Fiat planned to manufacture all car components, except engines, in the country.


Severstal to buy another American company

Russian metals giant Severstal said it has offered to buy U.S. steelmaker Esmark Inc, which owns the Wheeling Pittsburgh Steel plant, for $668 million plus the assumption of debt. The Russian company's offer is similar to a rival bid made earlier by India's Essar Steel Holdings and blocked by the United Steelworkers Union (USW). The news of a planned acquisition of a loss-making U.S. asset sent Severstal stocks down 4%-6%.
Severstal offered to buy all of the outstanding shares in Esmark at $17 per share in cash. Merrill Lynch and Citigroup are acting as financial advisors on the deal. Severstal's bid has the support of the United Steelworkers Union.
The Russian company can raise the money to pay for the deal through a $1.5 billion Eurobond issue it is reportedly planning to float in summer.
India's Essar, another bidder for the Esmark shares, made an offer in late April to buy 100% at the same per share price, $17.
Esmark said it agreed to the material terms of the offer from Essar, but the USW demanded that the company repudiate the deal, using its power to block any deal involving a change of the controlling shareholder. USW refused to support the Esmark- Essar deal, asserting it had no guarantee that the Wheeling Pittsburgh staff would keep their jobs. It had also earlier suggested a deal with Severstal.
Yesterday's news, which came shortly after reports of Severstal buying another U.S. company, WCI Steel, sent the company's shares down 4.38% on the RTS and 6.53% on the LSE. They plummeted despite the fact that, after Esmark's surge, the offer Severstal made contained a 6% discount rather than a market premium.
Maxim Khudalov from the Metropol brokerage said Sevestal's shares dropped due to Esmark's poor financial performance. The Russian company offered to buy it at an EV/EBITDA ratio of 48, which is ten times higher than it uses when trading its own shares.
Sobinbank analyst Nikolai Sosnovsky believes that the synergy between Severstal's two American assets will make the deal profitable in the longer run, despite Esmark's current disadvantageous condition.
If the deal goes through, Severstal's aggregate production capacity in the U.S. will exceed 11 million metric tons.


Moscow to have world's largest budget revenues

Moscow officials are set to fulfill Mayor Yury Luzhkov's promise, made in September 2007, to have the same budget revenues as New York ($60 billion).
Under a three-year municipal budget approved yesterday, the Russian capital's revenues should reach 1.37 trillion rubles, or $57 billion, next year.
However, the city would definitely lose to New York in the size of economy, infrastructure standards, or the length of roads and size of parking lots.
Since the collapse of the Soviet Union, Moscow has increased its network of roads by 15%, while the number of private cars has grown by 12 times, to 3.5 million.
According to the World Association of Major Metropolises, New York ranked second in gross regional product, GRP ($1.13 trillion in 2005), Paris was fifth ($460 billion) and Moscow - 25th ($181 billion).
But it would be nevertheless interesting to compare the budgets of New York and Moscow. Urban Institute, a nonpartisan economic and social policy research organization, reports that property tax accounted for nearly 30% and income tax for 18% of municipal revenues in New York. SME taxes provide 12%, and the city gets as much from profit tax on major companies.
In 2007, corporate profit tax, mostly collected from major Russian commodities and financial companies, made up 45% of Moscow's budget revenues and should grow to 50% by 2011. Personal income tax accounted for 36% and is to grow to 38.5% by 2011. Property tax contributed approximately 6.4%, and SME tax, 1.4% (they are expected to decrease to 3.4% and 1.2%, respectively).
In other words, Moscow plans to continue to live on contributions from major companies and rich residents.
The share of lease revenues is expected to go down from 4.3% in 2007 to 2.5% in 2011, giving the impression that all land and office premises have been privatized in Moscow and the tax rate is extremely low. Land tax contributes 25% of budget revenues in Paris.
New York, Paris and Moscow are comparable in terms of per capita budget appropriations, but New York and Paris are more comfortable for people and businesses. The 2007 Worldwide Quality of Living Survey by Mercer Human Resource Consulting ranks Moscow 171st on the 215-city list for overall quality of living. Moscow is also lagging far behind Paris and New York in per capita GRP.
So far, the rapid growth of Moscow's revenues has not increased per capita incomes or the quality of life in the city proportionately.

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