MOSCOW, July 30 (RIA Novosti) Russian market becomes more civilized, but property rights remain unstable/ TNK-BP continues selling its oil subsidiaries in Russia/ Scania expands its business in Russia/ Interros selling Power Machines/ Russian government will pay officials not to take bribes
Russian market becomes more civilized, but property rights remain unstable
The situation with RussNeft, one of Russia's top ten oil and gas producers, which Oleg Deripaska's asset management company Basic Element plans to buy, demonstrates that not all mergers and acquisitions in Russia, especially the large ones, are prompted by market considerations.
Huge sums of money, which change hands during the acquisition of oil and gas assets, can be viewed as investment in the redivision of property, which delays investment in development.
The Russian government has clearly shown investors that strategic assets should have the "right" owner, as those in the hands of the "incorrect" owners, lose capitalization only regaining its true value and creditors' trust when the "right" holding company buys it.
Oil companies RussNeft, Rusia Petroleum, Sakhalin Energy, and Yukos tried to resist tax, environmental and other charges and subsequent requests to sell, but eventually succumbed to them (or disappeared from the market, like Yukos). The majority of assets were bought by companies closely connected with the government at a substantial discount.
In all, the above four assets were sold for $56.7 billion.
The sale of Yukos's property raised about $33 billion and the sale of Yuganskneftegaz, its main production unit, in 2004 brought in $9.37 billion.
TNK-BP sold its stake in Rusia Petroleum, the operator of Siberia's Kovykta gas condensate deposit, for some $800 million.
Gazprom bought a stake in the Sakhalin II oil and gas offshore project in Russia's Far East for $7.45 billion.
RussNeft may be sold for $6.5-$7 billion.
Rosneft's debts amount to some $36 billion, and Gazprom owes about $50 billion. The Russian Central Bank is worried over the scale of state companies' borrowing abroad and the inflow of significant funds into the country. These funds are loaned to state-controlled companies because the market believes their solvency is very high.
The battle for RussNeft also demonstrates that although the Russian market is becoming more civilized, property rights remain unstable and even conditional here.
In this situation, it would be naive to expect business to invest in modernization, innovation, and accelerated development. Businesses are making only short-term plans now, fearing a potential redivision of property.
TNK-BP continues selling its oil subsidiaries in Russia
Buguruslanneft is the fifth subsidiary Russian-British holding TNK-BP has put up for sale in the last 18 months. Robert Dudley, company president, said the reason for selling a medium-size production unit in the Orenburg Region was optimizing the asset portfolio. However, it is difficult to imagine who will buy such an unprofitable holding.
The company's management has repeatedly said its oil-producing sector has been stagnating for some time. Only two or three years ago, the holding recorded steady production growth of 6%-8%. However, last year production rose by only 2%, to 73.2 million metric tons.
Robert Dudley said July 27 that keeping production at the same level until 2009 will take much effort and expense.
TNK-BP has the most depleted assets in Russia. It takes six to seven years to launch production on new fields, which the company is exploring now, he said. The company had to pay dearly for the new projects. The general investment plan for 2008 has been increased from $4 billion to $4.5 billion, with 70% assigned to the development of existing fields.
TNK-BP does not intend to follow the example of LUKoil, which announced its plans to spin off its unprofitable assets into a separate company so as to efficiently manage such assets while not paying mineral tax.
In June Sergei Brezitsky, in charge of exploration and production, said such a move did not help to harmonize the company's integrated operations in the fields and regions. As a result the holding is selling its unprofitable assets.
It remains unclear whether Buguruslanneft will attract buyers, because the new owners of TNK-BP's unprofitable assets have many problems of their own.
Rosneft, which together with its partner, China's Sinopec, bought Udmurtneft in June last year, is up to its neck in debt (at present its debt exceeds $25 billion; and recently the company took out a loan of $3.5 billion) after it acquired the majority of Yukos assets. It is unlikely to show any interest in the depleted Buguruslanneft.
RussNeft, which bought into Saratovneftegaz, the Orsk oil refinery and Orenburgnefteprodukt, is offering its core assets to Oleg Deripaska, the owner of Basic Element.
Business & Financial Markets
Scania expands its business in Russia
Swedish automotive company Scania is planning to build a plant in Russia to manufacture 10,000 heavy trucks a year. This is the third project announced over the past three months after similar plans were made public by Volvo and DaimlerChrysler. Sales of imported trucks in Russia have already shot past those of the KamAZ auto giant.
The company said the plant would turn out both trucks and buses. It is expected to go into production in four to five years' time.
Scania already runs a bus production operation in St. Petersburg with an output of 400 vehicles a year. The new plant will mainly make trucks. This segment of the Russian market is most promising, the company believes. In 2006, Scania led the truck market among foreign manufacturers, having sold 2,820 vehicles in Russia.
Scania is not the first foreign company to announce its intention to produce trucks in Russia. In April, Sweden's Volvo Group unveiled plans to build a plant in Kaluga. The enterprise will produce 10,000 Volvo trucks and 5,000 Renault vehicles a year.
In the opinion of Yevgeny Bogdanov, head for engineering and transport in Russia and the CIS at A. T. Kearney, these are the plant's maximum production capacities, and initial capacity will be lower. Scania will make mainly trucks, which will account for 80% of all output, the expert said.
However, Sevastyan Kozitsyn, an analyst with Otkrytiye banking house, believes that it would be quite realistic to sell 25,000 new foreign-made trucks in Russia in four years' time.
Currently, truck sales are growing very fast, which is due, above all, to increased construction volumes. "Construction companies have enough money to buy high-priced European trucks, and Scania can expect high demand on their part," Kozitsyn said.
"Scania trucks made in Russia can compete not only with Volvo, but also with KamAZ vehicles," he said. The production costs of Russian trucks will grow, whereas that of Scania will go down thanks to production localization, Bogdanov said. This will not pose a direct threat to KamAZ, but increase competition in the segment, the expert said.
Interros selling Power Machines
Interros has announced that it has found a buyer for a 30.4% stake in Power Machines, the leading heavy machine producer, but is refusing to name it. Most likely, these are Alexei Mordashov's plants, which have already applied to the Federal Anti-Monopoly Service for clearance to buy the company. But national power grid Unified Energy Systems, or UES, and Siemens (each has a 25% plus one share stake) may torpedo the deal because they have a preferential right to buy out the partner's shares.
Recently, organisations of Severstal's main owner Alexei Mordashov have applied to the Federal Anti-Monopoly Service for permission to buy a 100% stake in the company. A source close to UES said that Interros had most likely reached an agreement with him.
Interros has long been trying to sell Power Machines. In 2004, it negotiated the sale of a 74% stake in the company to Siemens, but the Federal Anti-Monopoly Service blocked the deal. Under the terms of a shareholders' agreement, UES has a priority right to buy the company out, said a source close to Interros. The energy holding has 30 days in which to do so. Should it refuse, the right will pass to Siemens.
UES and Siemens cannot buy Power Machine shares at a price below the one Interros agreed with an unnamed purchaser. The company is not disclosing the price. The source said that it was close to "the company's current market price." On Friday, Power Machine's capitalization on the RTS was $1.31 billion. Before the deal is clinched, Interros will spend 2.13 billion rubles ($83.53 million) to buy out part of Power Machine's additional issue, the source said.
Troika Dialog analyst Gennady Sukhanov doubts that UES will claim the priority right. "Most likely, the candidacy of the buyer chosen by Interros has already been agreed with the government," he said. Perhaps, the reason behind sale of the Interros stake is to reduce competition for the asset which might have unfolded, because UES is promising to sell the Power Machine stake at auction, he argued. Sukhanov thinks the probability that Siemens will want to exercise its preferential right is high, but "such a deal is unlikely to get official approval," he said.
A source close to the Kremlin agreed.
Russian government will pay officials not to take bribes
The Russian government will conduct an anti-corruption experiment in 18 regions this year on the initiative of a governmental commission on administrative reform led by Deputy Prime Minister Sergei Naryshkin. If the experiment, which will cost 227 million rubles ($8.9 million), proves successful, it will be used as the basis of a new federal anti-corruption campaign.
Payment under short-term contracts will be the main element of monitoring officials holding corruption-prone posts. Currently, the majority of state officials work under open-ended contracts. It is extremely difficult and expensive to fire them, with the exception of indisputable breaches in the law.
Another shocking innovation is the provision of a "compensation package" to potential bribe-takers, which includes partial budgetary compensation for refusing to take bribes. This package is made up of employment benefits and a special payments procedure taking into account potential bribes. The sum of the compensation should be proportionate to corruption risks.
Control measures are not new and include inspections and videotaping in officials' rooms. Their employment contracts may also include the possibility of tapping their telephones without a court warrant.
The new elements request officials disclose all information about their official contacts and only carry a specified sum of money on them during working hours.
Igor Yurgens, deputy president of the Russian Union of Industrialists and Entrepreneurs, said about the project that the state should not adopt new punitive measures against officials, but reduce its involvement in the economy and establish a multiparty system.
Georgy Satarov, president of the Indem foundation which regularly publishes corruption figures, said: "The goal [of the new project] is to solve the problem of conflicts of interest; it does not consider such issues as the merger of power and business."
However, the government may use Naryshkin's project as a reply to the international charges of failure to fight corruption in the executive branch. In its June report, "Governance Matters, 2007: Worldwide Governance Indicators 1996-2006", the World Bank assigned Russia six marks on a one-to-seven scale of corruption control.
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