NoD: Tehran proposes Russia to make 'gas OPEC'

Russia spent last year strenuously denying reports that it was participating in the creation of a cartel of gas suppliers to the EU. Now, however, the idea has received an unexpected boost from Iranian leader Ayatollah Ali Khameni at a recent meeting with Russian Security Council secretary Igor Ivanov.

Commenting on the message sent to him by President Putin and the idea of partnership between Russia and Iran, the ayatollah unexpectedly initiated a discussion of creating a "gas OPEC ." "Our two countries, in helping each other, can create an organization based on cooperation in the gas sphere, along the lines of OPEC," the Iranian state news service IRNA quoted Ayatollah Khamenei as saying. IRNA did not report Mr. Ivanov's answer, and there is a reason for that. The idea of a "gas OPEC" is explicitly Russia's, but Russia consistently denies reports that the Kremlin has plans to create a cartel uniting the countries that supply gas to the EU .

A cartel would be minimally profitable for both parties, especially for Gazprom. At the present moment Iran supplies practically no gas to the countries of the European Union and to the EU's neighbors; the only country in the region currently receiving minimal supplies from Iran's gas network is Turkey. The majority of Gazprom's supply links with key countries in the EU, including Germany, France, and Italy, are through long-term contracts in which the price of the gas is pegged to the price of oil. Controlling gas prices through a pricing cartel would be effective only if the EU follows through on its threat to limit future long-term contracts.

An energy union cum geopolitical alliance of Russia, Iran, and Algeria does appear to be in the works. The possible liberalization of the EU's gas market has the potential to be used to exert pressure on Russia, in which case Russia could hit Europe back with the threat of a gas cartel as a warning not to step too far out of line in its struggle against the westward expansion of Russia's gas empire.

Why it is important:
1. A potential for powerful restructuring re one of the most important fuels of 21st century.
2. Potential closer alliance between Russia and Iran, which is geopolitically important in the view of unfolding conflict between the US and Iran.

CoD: Corruption in Russian Central Bank

Kommersant, Russia's leading paper last week published a letter in which a Russian banker Alex Frenkel, charged with ordering the killing of a senior Central Bank regulator, accused the CB of accepting bribes for entering banks into the deposit insurance system.

Frenkel accuses that the Central Bank has been abusing law on protection from money laundry and terrorist financing. The main statements of Frenkel are that:
1. Central Bank of Russia (CBR) differentiates between various commercial banks, selectively including some of them into the national system of deposit insurance and effectively eliminating others.
2. Doing so, CBR acts highly selectively, using the vague legislative grounds. Moreover, CBR disregards higher authorities, e.g. decisions by the court, when applying money laundry law to eliminate lawful banks that attempt to go against its authority. Central Bank argues that other authorities are ‘insufficiently competent’ to understand its grounds for judgment.
3. Thus, CBR actually only imitates fighting with ‘money laundry’.
4. This situation has been created by CBR on purpose. It is a consequence of illegal activities of certain CBR personnel.
5. In the short term, CBR officials are interested to control markets that very much specific to Russia, e.g. market for ‘cashing’ (converting money from accounts into banknotes).
6. In the long term, the scheme may also be inspired by foreign banks that interested to seize Russian banking market. In order to ‘clean up the space’ for their entry in the next few years, CBR has to make global impression that Russian banks are generally ‘dirty’. This will allow Central Bank to keep the society and the government out of its activities

Russian banking system is one horrible place. In 1990s, it served mostly as ‘deep pockets’ of then oligarchs that wanted to transfer money more securely from/to their industrial assets. In 2000s it started slowly to build up its retail services, although the progress was slowed down by definitely low trust of population (resulting from poor experiences in 1992, 1998, and 2004, years of banking crisis). However, competitive-wise, the banking system hardly stands the chance against large international banks.

Notably, many of my familiar bankers confirm that allegations of Frenkel are mostly true, at least in terms of the way in which scheme is crafted. The market for specific transactions such as money transfers abroad or ‘cashing‘ is enormous. There are parties that would be interested to control such markets. Of course authorities in charge know everything, and of course they understand that many of these activities are not really illegal, they are just poorly regulated. Being concerned more with personal well-being than with public good, and operating in the sphere that is poorly understood by common public, such authorities would use

However, the statement that the scheme is truly inspired by Western banks is doubtful. This is a risky move (in terms of reputation) for foreign bankers that will be able to capture this market anyway within next few years, as Russia will join WTO.

An interesting aspect: could this set of allegations come not as a banker’s protection, but as an attack on the Central Bank? Many of current events in Russia can be seen in terms of battle for power between different ‘clans’ from St. Petersburg. Sergei Ignatiev, head of CBR, belongs to the same group as Anatoly Chubais – and it may well be that other parties would like to weaken their position and take over the strategic spot in the Central Bank. This could be especially important in the view that the Central Bank controls an enormous US$ 90 bln Stabilization Fund of Russia – and it is more than simply a political question where the money could be invested.

NoD: Russia will eliminate intermediates in energy supply

Russia will expand its oil-and-gas transporting network to reduce its dependency of energy-transiting countries, President Putin said after his meeting with German Chanceller Angela Merkel. Conflict with Ukraine over price of gas in late 2005, and conflict with Belarus concerning gas and oil transition and gas prices in 2006, have put under threat the provision of secured energy sources from Russia to Europe. Russia will speed up in laying underwater pipes to Germany and pipelines to the Pacific ocean that will allow it to ship fuels directly to its consumers. Germany, which is also a Chairman in EU and G8 this year, confirmed that it is ready to support these projects to eliminate dangers related to renegotiation of supply terms with countries such as Belarus.

Further last week, Tranneft claimed it is ready to build an oil pipeline bypassing Belarus with an annual capacity of 50 million tonnes. The proposals were submitted to the government in early January, when Russia stropped transporting oil via Belarus. Last year, 78.8 million tonnes of oil was piped via Belarus to Europe, while another 20 million tonnes were supplied to Belarusian oil refineries. From Russia, oil passes to Belarus via the Unech station on the two countries' border. According to Transneft source, the company offers to build a northbound oil pipeline from Unech along the Belarusian border via Velikie Lugi and then to Primorsk. According to industry watchers, the project cost will be around $2-2.5b.

Why it is important: Russian expansion to foreign energy markets will not be contingent upon its closest neighbours. For the sake of its energy security, the EU is ready to leave Russia with larger lever upon Ukraine and Belarus.

CoD: Gazprom pushes TNK-BP out of Kovykta

Russia's environmental watchdog has found violations by a subsidiary of oil major TNK-BP that controls the licence for the massive Kovykta gas field in Siberia, the Kommersant daily reported. Last year, TNK-BP subsidiary RUSIA Petroleum extracted only 33.8 mln cubic metres of the nine bln cubic metres of annual gas extraction required by its licence, Kommersant said. TNK-BP is 50-pct owned by British oil major BP and 50-pct owned by Russia's Alfa Access Renova. The paper cited a source close to the deal as saying that Gazprom wants to acquire a 74.4 pct stake in RUSIA Petroleum. Currently RUSIA Petroleum is 62.4 pct owned by TNK-BP, 25.8 pct owned by the Russian group Interros, and 11.2 pct by the administration of Irkutsk province, where the field is located, the paper said. Kommersant said TNK-BP wanted to retain 33 pct of RUSIA Petroleum.

Environmental allegations have become a powerful tool for Russian authorities, used as a leverage when ownership is renegotiated. The recent acquisition of control stake in Sakhalin-2 from Shell and Japanese companies was one example when this tool was applied succesfully.

There are several issues which I would say are is problematic in this respect.

First, real concerns for environment are undermined by this practice. Technologies, whether in energy, mining, or processing industries, were always environment-unfriendly in Russia. By closing eyes on most environment damaging cases such as in plants across Ural, and applying environmental laws selectively whenever the government wants to get its share in energy-related projects, the Russian government shows that environmental problems are interesting only whenever they can be used as casus belli, as a reason to wage war. Any actions of environmentally concerned activitists will be seen in this frame.

Second, just because 'everyone is guilty' in terms of environmental violations, the government shows that it can find its reasons to renationalize any asset it finds interesting. Practices applied selectively, such as with Yukos blamed for tax payment violations, or with Shell and TNK-BP blamed as environment law violators, will act to the further detriment of trust in Russian business environment. It appears that robber entrepreneurs of 90s had the most appropriate strategy for Russia, stripping assets of anything valuable and rarely investing.

Finally, as I already have suggested, this is just another evidence that Gazprom becomes more powerful than the government itself. Acts pushing foreign investors so violently out of most profitable projects may be to the company's current interest, but obviously against the interest of the country. That Russian authorities are not concerned with country's reputation and perception of such deals inside the country itself is to me a sign that the state is getting run in the interest of Russian energy giant, not vice versa.

CoD: Day of Terrorism Threat

On January 16 the National Anti-Terrorist Committee warned that Russia is under the threat of a possible terrorist attack on public transportation. Officials announced broad, unprecedented security measures in Moscow and around the country on Wednesday. Security remained high in Moscow and other big cities on Thursday, even though a nationwide security alert had been called off after one day.

Police with sniffer dogs could be seen guarding Moscow metro stations. Mobile phone service have been shut off in the metro all day Wednesday as a security provision, and was restored on Thursday. Mayor Yury Luzhkov also ordered the police presence boosted on streets and near electricity, water-supply and gas-distribution facilities.

The unusual efforts taken to inform the public of the possible security threat resulted in 72 reports from citizens of suspicious activities and items left in public places on Wednesday, almost four times more than on regular days, a Moscow police said.

When they say 'national security', I would reach for the Code of Human Rights. 'Security' has become a very nice reason to deprive people of some of their freedoms, whether in Russia, the US, the UK, or anywhere else in the world. Restriction of movement, restriction of communication, interventions into private life... Unprecedent security measures in airports led one of my friends to suggest we will all soon fly naked in transparent overalls, just for the sake of being 'secure'.

Publically reported violence is convinient because people don't trust each other anymore. And as communal links are broken, and level of trust towards stranges falls, people become more dependent on their government - for the provision of security, for the provision of information, for resolution of their fears.

There must be some good measure to security measures - but there is none. Measures become more and more tense. In Russia, they are surprisingly unbalanced with the demand of situation: e.g. after the tragedy in Beslan, President Putin decided to remove election of governors Russia-wide, as if it has anything to do with terrorist attacks. In the same manner, in 2008, for the sake of national security, President elections can be cancelled, keeping Putin in his place as long as security concerns demand.

The main problem is that, despite all the efforts, Russia has not become a more secure place, and Moscow a safer city. People know that terrorists will have no significant problem infiltrating any big city, getting near any large infrastructural site. People know that freedom of movement, freedom of communication, freedom of anything can be bought - and those who arrange terrorist attacks will have money to buy that. Finally, from contacts between authorities and radical North Caucasian leaders (typical organizers of such attacks) people can guess that some attacks can be run in the interest of authorities, or be blessed by authorities, or be used by authorities as an excuse for their actions.

So what was going on in Russia? Was there a real threat that was heroically prevented? Was it a nation-wide security excercise? Was it an excercise of the state of emergency that could be introduced by present authorities if 'something goes wrong' during the upcoming elections? The question remains open.

CoD: IFC research on energy saving

Recent research by IFC suggests that Russian enterprises are not ready to invest into energy saving technologies yet. Energy accounts for 13% of their costs, the survey said. They also believe that they can reduce no more than 5% of energy costs can be cut by these measures.

Russian enterprises are characterized by two main features.

First, as they were build in the times when engineers were not concerned with limitation of resources. That said, all technologies are low efficient, with high rate of wastes, low output per KWh ratio.

Second, they tend to highly underestimate possibilties of modern cost-cutting technologies. Especially, energy cutting measures are very simple (e.g. switches that cut energy at night, lamps that use lower energy etc.) and can reduce energy costs dramatically - but most enterprises are simply ignorant of them.

From this perspective, two issues are required.

1. Russian business community must recognize that period of low prices for resources is over. You cannot introduce efficiency at the government level, it must be raised from below. Introduction of gas price increase schedule was a compromise between Gazprom's greed and authorities' pressure for appropriate national policies - but it was a necessary measure. Some industries (coal, steel, etc.) are already living international prices. So the proper pressure is being created.

2. Russian authorities could help national competitiveness by increasing business awareness of resource economizing. Information flows have to be established, that support this process. National institutes, research programs and competence centres can be established. Educational and training programs for industry people can be launched, that will take them abroad for learning. Energy saving pilot projects can have attention for spillovers. Economizing attitude can be promoted in state-owned mass-media. National awards can be set up. etc. etc.

The issue of resource efficiency is an issue of national competitiveness, especially in the view of WTO joining. Low attention to this issue is surprising.

CoD: Migrant issue

The Russian society is stuck between the hammer and anvil.

As freedom of moving was restricted in the Soviet Union, all migrations in the SU were under state planning and control. This way, the country rulers could spread competent working resources more evenly.

In 1990s, with the removal of propiska and other restrictions, some regions of Russia experienced the inflow from neighbouring FSU republics. Migrants from Central Asia and Caucaus came as a surprise. As these migrants were unwelcomed, they relied on their ethnical peers, creating powerful (and sometimes crime-oriented) ethnic communities in Russian megapolises. Domestic population was completely unprepared for this process - unlike in Europe, it took not generations but mere years.

Obviously, migrants are there for a reason. They wouldn't come if there were no place for them. Migrants took work that was unwanted by locals: garbage workers, loaders, shiftmen, builders etc. Migrants are cheap, they have no rights, they have few connections, they can be deceived easily, so they are more convinient in a way. On the other hand, they see domestic culture as hostile and bring their own culture as a part of protection - increasing hostility of locals because they do not want to integrate. Migrant ethnical mafia is another logical consequence - since these people have no rights, they are marginalized, they can easily be made involved into criminal affairs, or become a subject of such affairs...

Now the backlash from domestic communities comes. They want Russia for Russians. They want jobs for locals and not for migrants. They want migration under control. Those who speak of 'Russian fascism' are tremendously stupid (or cunning enough to manipulate the term) - national socialism in Germany and Italy has completely different roots. You must blame modern Holland and France if you blame Russia for 'fascism' - the anti-migrant stance could be clearly expected.

Few days ago a new regulation entered into power, limiting number of work permits to 6 mln and share of foreigners trading in indoor/outdoor markets to no more than 40 percent. A populist move obviously will be welcomed by public - but will it resove the problem? German Gref already called to delay this new law, and said the government may introduce changes to the law.

My own consideration is that, indeed, these measures are double-edged. There are positive sides: for instance, but introducing this law the government will show its radical critics it is up to handle the problem. On the other hand, outlawed migrants will further be marginalized and criminalized. Especially - because some industries are substantially formed by migrants, this law is lileky to introduce distortions: higher prices, less competitive environment, lower quality...

So the hammer is economic pressure for what migrants bring in - cheap and qualitative workforce. Anvil is reaction of society to what migrants bring with them - their own culture, their ethnical community, their hostility towards locals, their criminal activities...

There is no simple solution to this situation. You need education, you need integration programs, you need nurture of multi-culturalism attitude etc etc. It is a big issue whether slow-reacting, poor-qualified, corrupted and overconfident Russian authorities can really handle the problem.

NoD: FAS paves the way for world largest aluminium company

The anti-monopoly regulator has approved a three-way merger that would create the world's biggest aluminum producer, the Federal Anti-Monopoly Service said. The tie-up will see RusAl, the country's biggest aluminum producer, absorb rival SUAL as well as the aluminum assets of Swiss-based commodities trader Glencore, creating a global giant with smelters and refineries across Russia and facilities on four continents. Company officials have said they hope the deal will be completed by April. Under the terms of the agreement, RusAl will issue new shares to acquire SUAL, which is controlled by metals and oil tycoon Viktor Vekselberg, as well as the Glencore assets. SUAL and Glencore will hold 22 percent and 12 percent stakes respectively in the new company, a $30 billion giant that will produce nearly 4 million tons of aluminum per year.

Why it is important: Last barrier to the formation of the national champion (and world largest company) in aluminium industry is removed. This could be expected though.

NoD: CBR participation in Sberbank IPO

The participation of the Central Bank's (CBR) would smooth the process of selling Sberbank pending IPO and prevent the overly rapid reduction of the state's stake in Sberbank. If approved, CBR participation would improve the prospects of the issue and for increasing Sberbank's capital base. The CBR will directly participate and buy RUR70 bln of the roughly RUR200 bln is shares expected to be issued, media speculated. Sizable participation of the CBR in the offering would reduce 'privatization' rational of the deal, but create additional support for the placement - independent of current market situation - by guaranteeing demand for the shares. At the same time, government control over Sberbank would remain strong at least for a time being.

Why this is important: In the view of forthcoming WTO joining, the Russian state maintains it wants to retain control over the key banking assets.

CoD: Toyota plans for a Russian 'popular car'

Toyota says it is going to develop a compact and inexpensive model for the Russian market, that will start production in 2010. The model will have 1 l engine, and its price will be US$6,000-7,000. Earlier, Nissan also said it considers to develop an inexpensive car for BRIC countries. Renault's Logan is already a success.

As markets of developed countries are near saturation, their growth rate is very low, and competition fierce, producers look more attentively to fast-growing emerging markets. However, consumer budget in these countries are significantly lower, calling for simpler, less spatious, less safe, but cheaper, models.

At the moment, demand for these models creates a market taken by domestic producers. Their production is cheap (and therefore affordable), but definitely lagging in quality and safety - and so local producers hardly stand a chance in global competition. What is more important, they lack sufficient financial resources and R&D capacities to develop anything comparable to production of world-leading concerns.

If these world leaders of automotive industry bring their engineering effort into building inexpensive, reliable (very important!) and nicely looking models, domestic producers in BRIC will likely be squeezed out of the market.

That said, we see the concrete wall ahead, that Russian automotive sector is running into - very soon. Already this year sales of new imported cars almost hit 1 mln. If Toyota, Nissan, and Renault bring models for the segment with less purchasing power, AvtoVAZ has nothing to do but to vanish. Producers of special and commecial vehicles - GAZ with Gazel, UAZ and KAMAZ - may stay a bit longer. However, their production facilities are outdated, and their market is shrinking (consumers would prefer to buy more expensive but more reliable trucks in the future).

The only chance for domestic producers is to help foreigners enter the market, and to shapeshift from market owners into 'mom's little helpers'. And even this is unlikely - big players prefer to go alone rather than take crippled on board.

NoD: Gazprom endorses investment program

The Board of Directors of Gazprom has approved the company's investment program for 2007 in the amount of RUR529.38bn (approx. USD19.93bn). This includes capital investment of RUR360.56bn (approx. USD13.58bn) and long-term financial investment of RUR168.82bn (approx. USD6.36bn). The Board of Directors also took note of the holding's investment program forecast of RUR623.73bn (approx. USD23.48bn) for 2008 and RUR702.95bn (approx. USD26.47bn) for 2009.

Why this is important: Gazprom foresees increasing investment annually (inevitable yet confirmed).

CoD: Gazprom free to buy gas producers

Yesterday's decision of the Russian Federal Anti-Monopoly Service released Gazprom from prohibition to acquire gas producers. It is not clear what can prevent Gazprom from completely monopolizing the industry now. Novatek and Itera remain two major independent producers, but it is likely that Gazprom will target gaining control over them before the Putin's election.

It seems that Gazprom tries to resolve its major problem with production capacity by acquiring indep producers. This is a viable strategy on the company level, but it is hardly such on the country's level. In December, the government agreed on the energy strategy that required substantial increase of production from government independent companies even before 2010.

As Gazprom increases in size, it may pass the point of no return to make Russian gas industry competitive in the long-term. The company is not able to control its operating costs, and suffers from the lack of CAPEX. Going on acquisition spree, the company both increases its debt burden, reduces its manageability, and decreases incentives to become more fit.

The decision to expand Gazprom is dangerous, but it seems that nothing can be done about it. The company seems to become more powerful than the government itself, using the government as a tool, and not vice versa.

NoD: Evraz gets Oregon Steel

Evraz Group has purchased nearly all shares of Oregon Steel Mills Inc. and will soon take over the Portland company. The Russian steelmaker said it has received 91.5 percent of the nearly 36 million shares of Oregon Steel stock. The deal got U.S. regulatory approval on Jan. 10 and has enough shares to fast-track the purchase and bypass a shareholder vote. Evraz said it would complete the merger in a few days. When the deal is complete, Oregon Steel will become a subsidiary of Evraz in one of the largest investments ever in the U.S. economy by a Russian company.

Why this is important:
1. Succesful acquisition evidences that US authorities were unable to confirm Evraz-Kremlin connection.
2. Another case of Russian company expanding abroad and penetrating into the US market.