serving with truth for prosperity serving with truth for prosperity by yaosaigeng

VIEWS: 24 PAGES: 65

									                                                    www.therussiajournal.com




Published in Moscow & Washington D.C. since 1998.       serving with truth for prosperity   August 2003, Vol. 6, No 82
    PUBLISHER AND EDITOR-IN-CHIEF:
    Ajay Goyal (publisher@russiajournal.com)
                                                     Editor’s note
                                                     F
                 PRESIDENT:                              or the second month in a row now,
     Sandeep Goel (sdg@russiajournal.com)                the summer heat seems to be
        CHIEF OPERATING OFFICER:                         affecting the minds of members of
  Alexander Yakutov (alex@russiajournal.com)         the government, raising doubts among
                                                     the Russian public as to the former’s
                   EDITORIAL
                                                     ability to do math. Discussions are con-
Managing Editor: Oksana Bogatyreva
                                                     tinuing on doubling Russia’s GDP in a
    (oksanab@russiajournal.com)
                                                     decade and on how to calculate the
Contributing Editor: John Helmer
                                                     size of the country’s economy, and
Special Reports Co-ordinator:
                                                     politicians have changed their fore-
    Maria Matskovskaya
                                                     casts five times in public addresses
Chief Business Correspondent:
Christopher Kenneth (ChrisK@russiajournal.com)
                                                     over the last four to five weeks alone.
Copy Editor: Chris Doss                                 This constant revision of the eco-
Contributors: Oleg Anisimov, Sergei Smirnovsky,      nomic outlook and the frequency with which the figures
Ivan Vorontsov, Dmitry Afonin, Maxim Markov,         change mean either that the official forecasts are completely
Galina Anni, Mikhail Makarov, Katherine Dolan        worthless, or that the government has little influence over
                                                     economic development.
          ADVERTISING AND SALES                         President Vladimir Putin found the previous official GDP
Senior Accounts Manager: Tatyana Popova              forecast of 3.5-4 percent growth for 2003 to be too “lacking
    (tatianapopova@russiajournal.com)                in ambition” and said as much in his annual address to the
Sales Managers: Nina Polyakova,                      Federal Assembly. Thus began a national “battle for the GDP,”
    Alexander Jurbenko, Elena Sever,                 reminiscent of Soviet campaigns to bring in a bumper har-
    Maria Kanygina, Irina Penkova                    vest or fulfill the Party’s plan for doubling milk production.
                                                        One of the basic rules that any future manager in devel-
Production: Sergey Milenko
                                                     oped countries learns is that all objectives should be SMART —
Design & Layout: Oleg Fomin
                                                     Specific, Measurable, Achievable, Realistic and Timed.
Photo Designer: Sergey Zhurko
                                                     Compared to the Soviet-era goals, the aim of doubling GDP
Advertising Designer: Alexander Voronin
                                                     by 2010 is definitely more specific, eminently measurable and
Photographers: Gleb Shchelkunov,
                                                     long-term in scope. All that’s missing is the A and the R for
   Sergey Lyalyakin
                                                     it to be a really SMART objective.
           Data and charts produced by                  In this issue’s main feature, Christopher Kenneth examines
            www.businessfinder.ru,                   just how politicians and economists are trying to find the
  the source for business information from Russia.   economic basis needed to make Putin’s call to double GDP
                                                     a reality and how they are developing various means of cal-
Photos: AP, The Russia Journal, UPS,
                                                     culating it — quite a task in a country where precise eco-
        Skoda Autocenter
                                                     nomic figures are hard to get.
Cover: photo by Gleb Shchelkunov
                                                        Just as many questions and ambiguities surround the process
Some data and statistics that are used in the mag-   of unifying railways tariffs. The perfectly reasonable proposal
azine are from the State Statistics Committee,       to unify and harmonize tariffs for export and internal freight
Interactive Research Group, Finance Ministry,        transport has dragged on for over two years now and led to a
Economic Development and Trade Ministry,             conflict of interests between the Railways Ministry and the
Standard&Poor’s, Institute for Agricultural Market   country’s ports. Manufacturers say that, if tariffs stay at their
Studies, RMBC, Russian Managers Association,         current level, export profits and volumes will decrease. Sergei
Information Center Rating, Expert Ra, ROMIR,         Smirnovsky analyzes the situation with tariff unification today
Prime-Tass, RTS, Rosbalt.ru, RBC.ru, Cnews.ru,       and tries to find out just who stands to benefit from this tariff
Regnum.ru, Comcon, Utro.ru, Interfax and carleas-    scale that has created so much controversy.
ing.ru.                                                 To get away from the problems of the Russian economy, check
                                                     out the LifeStyle section and visit the Moscow restaurant Goa, where
                                                     you’ll enter a world beyond the conventions of modern civilization
     The Russia Journal is a supplement
     to The Russia Journal newspaper,
                                                     in which the ancient Indian art of vastu fills the place with positive
         published by Norasco Media
                                                     vibrations. If you’re yearning for some mel fei with baby shrimp or
      Registration PI # 77-14755 license.
                                                     leg of lamb marinated with papaya and baked in a tandoor, then
 The Russia Journal is simultaneously published
                                                     this is just the place. Lie back on a comfortable
     by The Russia Journal Publishing Co.,
                                                     divan, smoke a fragrant hookah and let a for-
             Washington D.C., U.S.A.
                                                     tuneteller decipher the runes and reveal the
           www.therussiajournal.com
                                                     future. Ask her to tell you what the GDP will
                ISSN: 1728-7995                      be in 2010. Who knows — maybe it will be
                                                     the most accurate forecast of all.
                                                                                                          Managing Editor
          Printed at OOO Media Pressa
    24, Ul. Pravdy, Moscow 125993 (Russia)
www.therussiajournal.com
  Where to invest in the Russian economy?

  What are the risks for foreign capital?

  What are the prospects for the various sectors?

  Who is who in Russian politics and business?

  What are the short− and long−term political and economic prospects?


For answers to these and a thousand more questions, refer to The Russia Journal.
With unmatched depth, insight and foresight, it is the only source of independent
business reporting from Russia.
                    Vol.6, Number 82
                    published since 1998




         ON THE COVER

18 ARE GDP GROWTH PLANS TOO
         BIG — OR TOO SMALL?
         The Kremlin wants to double the country's GDP by
         2014 — but no one really knows how large
         Russia’s economy is today, let alone in
         10 years’ time.
         By Christopher Kenneth



23 A MEATIER BUSINESS IN THE CARDS
         Russia looks to boost domestic meat production.
         By Dmitry Afonin




                                                                    7   INDEX

                                                                    8   TRANSITIONS

                                                                    10 INTELLECTUAL CAPITAL
                                                                        Worries about the Yukos affair are much ado about
                                                                        nothing, says Ajay Goyal — there is much more to
                                                                        Russian business than just a few oligarchs.
29 RAILWAY TARIFFS STILL
         CONTENTIOUS                                                12 DANCES WITH BEARS
         The Railways Ministry says its policy on transport tar-        If Sergei Glazyev keeps mum about Norilsk Nickel's
         iffs is a fair one — but industry says it doesn't agree.       labor dispute, John Helmer asks, is he really the sav-
         By Sergei Smirnovsky                                           ior of the political left everybody says he is?

4   •   The Russia Journal        August 2003
14 QUOTES                                                    R E A L E S TAT E

16 GUEST COLUMN                                           47 LIVING THE HIGH LIFE
   Russia's banks are still closely tied to the govern-      Moscow's elite-housing market is setting new
   ment — but that doesn't mean things will always be        records — but space for building is scarce in an
   that way, says Oleg Anisimov.                             already-crowded city.
                                                             By Galina Anni

   TRANSPORT

32 EXPRESS DELIVERY ON THE
   WAY UP
   Companies that can get things from point A to point
   B in a twinkle still have a lot of room for
   growth in Russia.
   By Maxim Markov

                                                          50 PAYING THROUGH THE NOSE FOR
36 AUTO CENTERS REV UP
   Car dealerships are getting bigger and better.            A NICE PLACE TO LIVE
   By Dmitry Afonin                                          Apartments in Moscow are getting pricier and pricier.
                                                             By Ivan Vorontsov



                                                             L AW O F T H E L A N D

                                                          54 THE LEGAL TANGLE OF EMPLOYING
                                                             FOREIGNERS IN RUSSIA
                                                             Law firm Avenir & Partners gives you the lowdown
                                                             on what it takes to hire a foreign national in Russia.


                                                          56 RATINGS

                                                             LIFE STYLE

                                                          59 A BIT OF INDIA IN THE HEART
   L E G A L A N D C O N S U LT I N G                        OF MOSCOW
                                                             Goa brings the heat of Delhi to the Russian capital.

39 THE ERA OF CORPORATE LAW
   The new wave of Russian business demands a fresh
   breed of corporate lawyers.
   By Christopher Kenneth/Ivan Gnuni



44 RUSSIAN AUDITORS GET UP
   TO SPEED
   Mikhail Makarov interviews Moscow Audit
   Chamber head Vladimir Kolbasin on the state of
   Russian audit companies and whether they meet
   Western standards — or, in some ways, exceed them.     64 ECONOMIC FACTORS
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6   •       The Russia Journal                                                                                  August 2003
                                                                                                                                                                                                      INDEX
  Companies                             Each reference is to the page of the story on which the company first appears.

  A, B, C                                             DHL . . . . . . . . . . . . . . . . . . . 32                         M, N, O                                         Russian Union of
Aeroflot. . . . . . . . . . . . . . . . . 34          DIM+Ko . . . . . . . . . . . . . . . . 38                          ME100 Consulting Co.. . . . . . . . 27              Industrialists and
Agency for Special Studies . 30                       Domodedovo                                                         Meat Union . . . . . . . . . . . . . 25             Entrepreneurs . . . . . . . . . 21
Agros . . . . . . . . . . . . . . . . . . 24            Airlines . . . . . . . . . . . . . . . 34                        Metallurgtrans . . . . . . . . . . . 29           Russky Standart . . . . . . . . . . 38
Andrei Gorodissky &                                   Economist Intelligence                                             MIAN . . . . . . . . . . . . . . . . . . 48
  Partners. . . . . . . . . . . . . . . 40              Unit . . . . . . . . . . . . . . . . . . 22                      Miel . . . . . . . . . . . . . . . . . . . . 53     S, T, U
Armadillo Business Parcel . 32                        Elf-91. . . . . . . . . . . . . . . . . . . 33                     Mikoyanovsky . . . . . . . . . . . 26             Samara . . . . . . . . . . . . . . . . . 34
Association of Sea                                    EMC . . . . . . . . . . . . . . . . . . . 32                       Moscow Center of the                              SAS . . . . . . . . . . . . . . . . . . . . 34
  Trading Ports . . . . . . . . . . 30                FedEx . . . . . . . . . . . . . . . . . . 32                        EastWest Institute . . . . . . 18                Sibir. . . . . . . . . . . . . . . . . . . . 34
Audit Chamber . . . . . . . . . . 18                                                                                     National Investment                               Sibneft . . . . . . . . . . . . 19, 24, 40
Austrian Airlines . . . . . . . . . 34                   G, H, I                                                          Council . . . . . . . . . . . . . . . 18         Skoda Autocenter . . . . . . . . 36
Autodom . . . . . . . . . . . . . . . 38              Garantpost . . . . . . . . . . . . . . 32                          National Reserve Rank . . . . 21                  Slavneft . . . . . . . . . . . . . . . . . 19
AutoVAZ . . . . . . . . . . . . . . . 36              GAZ . . . . . . . . . . . . . . . . . . . 36                       Novy Mir . . . . . . . . . . . . . . . 47         Smolmyaso . . . . . . . . . . . . . . 25
Avenir&Partnrs . . . . . . . . . . 55                 Ilyingorsky Co. . . . . . . . . . . 25                             Omsk Bacon . . . . . . . . . . . . . 24           SPSR . . . . . . . . . . . . . . . . . . . 32
Avtomir. . . . . . . . . . . . . . . . . 37           Ilyushin Finance Co. . . . . . . 21                                OTEKO . . . . . . . . . . . . . . . . . 29        Stoilenskaya Niva Co. . . . . . 24
Bangot-Electronics . . . . . . . . 38                 Institute for Agricultural                                                                                           Suzuki Car Center . . . . . . . . 36
Base Element . . . . . . . . . . . . 33                  Market Studies . . . . . . . . . 24                               P, Q, R                                         Tagansky Meat
Baut-L . . . . . . . . . . . . . . . . . . 47         Interactive Research                                               Parnas-M Processing Plant . 25                      Processing Plant. . . . . . . . 25
Binetsky & Partners . . . . . . . 41                     Group . . . . . . . . . . . . . . . . 18                        Pepeliaev, Goltsblat &                            TIAN Legal Center . . . . . . . 41
British Airways . . . . . . . . . . 34                Interrepublican                                                      Partners. . . . . . . . . . . . . . . 40        TNT Express. . . . . . . . . . . . . 32
British Petroleum . . . . . . . . . 40                   Collegiate of Barristers . . 40                                 Perm Meat Factory . . . . . . . 24                Transaero . . . . . . . . . . . . . . . 34
Businovsky Meat                                       Interros . . . . . . . . . . . . . . . . . 25                      Planeta Management . . . . . . 24                 Tyumen Oil Co. . . . . . . . . . . 40
  Processing Plant. . . . . . . . 25                                                                                     Pony Express . . . . . . . . . . . . 32           UAZ . . . . . . . . . . . . . . . . . . . 36
Cherkizovsky . . . . . . . . . . . . 24                  J, K, L                                                         Pravovoi Tsentr Zhilya . . . . 52                 UPS . . . . . . . . . . . . . . . . . . . . 32
City Express . . . . . . . . . . . . . 32             Kalinka Realty . . . . . . . . . . . 48                            Prodimex . . . . . . . . . . . . . . . 25
                                                      KampoMos . . . . . . . . . . . . . . 26                            Protein Product . . . . . . . . . . 26              V, W, X, Y, Z
  D, E, F                                             Krasnoyarsk Airlines . . . . . . 34                                Rosprom Financial-Industrial                      Vnukovo Airlines. . . . . . . . . 34
DaimlerChrysler . . . . . . . . . 38                  Kvartal . . . . . . . . . . . . . . . . . 52                         Group . . . . . . . . . . . . . . . . 24        Wimm-Bill-Dann . . . . . . . . . 26
Darya . . . . . . . . . . . . . . . . . . 24          Lufthansa Cargo . . . . . . . . . 34                               Rusco . . . . . . . . . . . . . . . . . . 32      Yukos. . . . . . . . . . . . . . . . 22, 40



  People
Aaltonen, Rauno . . . . . . . . . 38                  Hellevig, Jon. . . . . . . . . . . . . 55                          Lebedev, Alexander . . . . . . . 21               Tariko, Rustam . . . . . . . . . . . 38
Akhmadulina, Alyona . . . . . 27                      Illarionov, Andrei. . . . . . . . . 21                             Mamikonyan, Musheg . . . . 25                     Terterian, Ruben. . . . . . . . . . 30
Aleshin, Boris . . . . . . . . . . . . 21             Kapranov, Nikolai . . . . . . . . 19                               Mozharovsky, Vitaly . . . . . . 39                Tinkov, Oleg . . . . . . . . . . . . . 27
Angelov, Valery . . . . . . . . . . 41                Kekis, Laza . . . . . . . . . . . . . . 22                         Nazarenko, Natalya. . . . . . . 38                Utochkin, Alexander . . . . . . 19
Babenkov, Sergei . . . . . . . . . 38                 Khudokormov, Igor . . . . . . . 25                                 Oliyanchuk, Pavel . . . . . . . . 25              Vasyunin, Vasily. . . . . . . . . . 26
Babyev, Igor . . . . . . . . . . . . . 24             Klen, Nikolai . . . . . . . . . . . . 40                           Potanin, Vladimir . . . . . . . . 24              Volkova, Natalya . . . . . . . . . 37
Baigushev, Alexander . . . . . 52                     Klyuka, Fyodor . . . . . . . . . . 24                              Proskuryakova, Olga . . . . . . 33                Yakimov, Mikhail . . . . . . . . . 47
Balyshev, Vladimir. . . . . . . . 38                  Kochetkov, Yury. . . . . . . . . . 52                              Putin, Vladimir . . . . . . . . . . 18            Yasin, Evgeny. . . . . . . . . . . . 21
Binetsky, Alexei . . . . . . . . . . 41               Kokh, Alfred. . . . . . . . . . . . . 22                           Reznitsky, Alexei . . . . . . . . . 30            Zavgorodnaya, Yulia . . . . . . 36
Cheplanov, Igor . . . . . . . . . . 30                Kolbasin, Vladimir. . . . . . . . 44                               Rylko, Dmitry. . . . . . . . . . . . 24           Zhingan, Andrei. . . . . . . . . . 53
Fadeev, Gennady . . . . . . . . . 29                  Korbut, Maria. . . . . . . . . . . . 32                            Sidorov, Alexander . . . . . . . 36               Zhusupov, Serik . . . . . . . . . . 30
Gamov, Ilya . . . . . . . . . . . . . 27              Kuznetsov, Dmitry. . . . . . . . 48                                Sidorov, Alexei . . . . . . . . . . . 48          Zubkov, Dmitry . . . . . . . . . . 24
Gorodissky, Andrei . . . . . . . 40                   Lakeyev, Yury. . . . . . . . . . . . 47                            Stepashin, Sergei . . . . . . . . . 18            Zyuzin, Maxim. . . . . . . . . . . 32



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Industrial growth at 4.7 percent for 2003                  not taken into account. This all makes for a GDP of
   he Economic Development and Trade Ministry              $490 billion-$500 billion.
T  has revised its official industrial-growth forecast
for 2004 upward from 3.6 percent to 4.7 percent.
                                                             Overall, Goskomstat assesses the shadow economy as
                                                           accounting for 20-25 percent of GDP. IRG’s analysts say
These figures are included in the socioeconomic-           that it accounts for more like 45-50 percent of GDP.
development forecast through to 2006.
                                                           Russians don’t like oligarchs
                                                                             study               by ROMIR-
                                                           R esults of ashow thatcarried out very negative
                                                              Monitoring            Russians are
                                                           about oligarchs and support revising past privatiza-
                                                           tion deals, including through criminal prosecution.
                                                             The survey of 1,500 Russians shows that people are
                                                           becoming more negative about oligarchs. Of respon-
                                                           dents, 74 percent viewed oligarchs’ role in Russian
                                                           history over the last decade as negative or totally
                                                           negative, and 77 percent said their role is just as neg-
                                                           ative today. Only 19 percent said that the oligarchs’
                                                           role in the 1990s was positive, and only 17 percent
                                                           said it is positive today.
                                                             In response to the question “Should the state
                                                           resort to criminal prosecution of major capitalists in
  The revised forecast was approved by the Finance         connection with past privatization deals?” the fol-
Ministry and will be taken into account in work            lowing results were obtained:
on the 2004 budget. The government has also                  Yes, it should:                           57 percent
revised the industrial-growth forecast for 2005 from
4 percent to 5.2 percent and from 4.4 percent to             It should in exceptional circumstances:   31 percent
5.4 percent for 2006.                                        No, it shouldn’t:                          8 percent
  Fixed capital investment from all sources of               Don’t know:                                4 percent
financing is expected to grow by 6.6 percent to 8
percent in 2004. The ministry has also revised               Overall, 88 percent of those surveyed said that all
upwards its forecast for fixed-capital-investment          big capital in Russia was earned through dishonest
growth from 8.2 percent to 9.2 percent in 2005 and         means, and only 6 percent believed that large for-
from 7.8 percent to 9.1 percent in 2006.                   tunes were amassed through honest means. Even
                                                           among entrepreneurs, 72 percent believe that
Western analysts say they know                             Russian big capital has dishonest origins.
how to double Russian GDP
     arketing agency Interactive Research Group            Moscow smokers asked to cough up
M    (IRG) says that Russia could double its GDP
more quickly than President Vladimir Putin wants it        M    oscow city Duma deputies have discussed a draft
                                                                law that would establish fines for smoking in
to. IRG says that the Russian State Statistics             the workplace, public transportation and medical
Committee (Goskomstat) greatly underestimates              and education institutions and in the elevators and
the size of the shadow economy. According to IRG,          entrances of apartment buildings. People caught
Russia’s GDP last year was not $347 billion, but           smoking       outside
more like $500 billion, and it could grow to $1 tril-      specially designated
lion over five years.                                      smokers’ areas would
   IRG’s findings are based on its own surveys of          be    fined    100-200
companies and consumer-market research (alcohol,           rubles. The deputies say
household electronics and appliances, tobacco,             that the law’s aim is to
mobile telephones, transport services, pharmaceuti-        protect non-smoking
cals and perfumes, etc.).                                  Muscovites.
   Official statistics put Russia’s GDP at $347 billion      Despite active anti-
in 2002. Of this, $175 billion was household spend-        smoking campaigns
ing, $60 billion state spending, $74 billion savings       in the city, the num-
and investment and $37 billion net exports.                ber of smokers con-
   IRG says that Russians really spent $290 billion-       tinues     to     rise.
$310 billion in 2002 and that investment came to           Russia now has 42
around $100 billion.                                       million      smokers,
   Net exports are in fact lower than the statistics say   including 8 million
because of imports of around $25 billion that were         women.

8   •   The Russia Journal   August 2003
INTELLECTUAL CAPITAL


   Prophecies of gloom and doom be damned — the Yukos scandal will
   not make a dent in Russia's investment potential

   I
          can claim the



                            The worse,
          sad distinction
          of having made
   a correct — and
   dark — prediction
   in 1996. As Russia’s



                             the better?
   “market” boomed, I
   packed my bags,
   cashed out and ran.
      Despite the exu-                                                                                 By Ajay Goyal
   berant atmosphere
   generated by pundits exhorting the faithful to plunge         Khodorkovsky’s financial mothership, Menatep, was
   into the abyss, the bleak reality had a stronger hold on      not. Khodorkovsky’s and Platon Lebedev’s Menatep
   me than the pull of false euphoria.                           Group has the blood and grue of some rough deals in its
      Today, we have a different, almost inverted, kind of       claws, and cleaning it up will cost a lot of money. But,
   hysteria that has been whipped up by the political and        eventually, Yukos’ owners will work out a political com-
   prosecutorial pressures on Mikhail Khodorkovsky’s             promise that might see some additional cash outflow
   Yukos: Many are calling it an end to Russia’s economic        from the company or its offshore subsidiaries this year
   renaissance.                                                  — but no more.
      But there can be no better time to invest in Russia           It is important for the prospective investor to remem-
   than in this window of opportunity, only a year away          ber that there are few large Russian companies that
   from what seems like a near-certain re-election of            deserve his or her money. One has to look for the rare
   President Vladimir Putin.                                     enterprise that managed to fall into the hands of true
      Returning in the aftermath of the 1998 crash, I knew       entrepreneurs. Few of these companies are on investors’
   it was a great time to invest. Now, things are even better,   radar screens, unfortunately, because they are well-run
   because what is bad for the oligarchs is good for the         small- and mid-size industries — and Western money
   markets, just as what is bad for the people is good for       has been following the blood trails of privatization, not
   them.                                                         its success stories. Real entrepreneurs are too busy doing
      If I were an equity investor, now is when I would          business to bed image-makers.
   invest, and, yes, I would buy into Yukos. The current             If the Kremlin has decided to clip the political ambi-
   scandal will serve to inject some sense into the young,       tions of some members of the oligarchy, it can only
   brash owners of the company and make them focus on            benefit the market, economy, foreign investors and
   business, build value and stay away from political games.     consumers. The chaebolization of the Russian econo-
      But Yukos is an exception among listed Russian com-        my has hindered the development of new industry.
   panies as a long-term prospect for investment. I would        Oligarchs have been able to keep protectionist policies
   stay away from buying into most of them: There are            in place, forcing poor-quality goods on Russian con-
   better catches out there.                                      sumers. But, in the last three years, Putin’s administra-
      The Russian oligarchs are used to attaining                  tion has made very decisive steps towards creation of
   ownership of whatever effectively free-of-charge                  a civilized legal space. With a good economic and
   privatized industry comes their way by means of                        legal framework already in place, the Russian
   politicking, bribery, embezzlement and back-                              economy is ripe for investment, and great
   room deal making. Then, they usually control the                           opportunities lie with new industrial enter-
   company as long as it is possible to manage its                             prises — not in cavorting with thieves.
   cashflow, do transfer pricing and move capital                                No foreign venture or unpoliticized busi-
   into offshore accounts. The minimum amount of                               ness has seen any signs of a shift away from
   money necessary to keep the industry afloat is                              the generally amiable business atmosphere
   brought back in, but that’s about it — there is no                          that the government has been working
   attempt at real value-building.                                             toward. It would be silly to let the paid-for
      Yukos has been one of the dozen or so excep-                             hysteria of a few pundits wean business away
   tions among the oligarch-controlled businesses:                            from the remarkable opportunities presented
   It is a genuinely well-run enterprise. But                                 by the Russian market.

   10   •   The Russia Journal    August 2003
DANCES WITH BEARS

        Glazyev’s star is rising on the political left — but you wouldn’t know
        it from his silence on Norilsk Nickel’s labor dispute

   Russian workers
   ask if Glazyev is
   too busy to lead                                                                                By John Helmer



   I
         t is recorded that, in April of
         1794, when Georges Danton,                                     leftward swing by such generally non-Com-
         the     French      revolutionary                               munist groups as trade unionists, profession-
   leader, was awaiting the guillotine                                      als (teachers, doctors) and young voters
   at the foot of the scaffold, he re-                                       looks to be the most likely outcome of the
   marked, “Ah, better to be a poor                                           Duma election in December. But for Glaz-
   fisherman than muck about with                                              yev to say nothing to them, his core con-
   politics.” No fisherman is re-                                                stituency, is a curious way of kicking off
   ported to have been present                                                   the campaign.
   to nod his head. Just how                                                        To say nothing when, despite the oil
   penniless a man should                                                      boom, the real value of wages is no high-
   become before he can                                                      er than it was a decade ago, when a new
   afford to risk his life in pol-                                         round of corporate infighting and asset
   itics, Danton did not have                                                 carve-ups is looming, when public fund-
   time to discuss.                                                             ing for health, housing, utilities and wel-
      Sergei Glazyev — at 42, a                                                   fare will be cut as soon as the election
   little older than Danton                                                      period is over and when workers in the
   was when he made his                                                       metal and mining industries face massive
   last remark — may                                                      job cuts — for Glazyev to say nothing about
   prove to be the man                                         these things is not to campaign at all.
   who risks himself for                                          Valery Melnikov, union leader and candidate for
   the highest political of-                                   mayor of Norilsk, is the most militant union figure in
   fice in the land. But, for the                              Russia today. Since last December, he’s been waging a
   time being, he is signaling he is                           campaign against Norilsk Nickel, Russia’s largest min-
   uncomfortable risking anything. That                        ing company, and the two oligarchs who own it —
   is to say, he is saying next to nothing. If                 Vladimir Potanin and Mikhail Prokhorov. Well-paid
   he were a poor fisherman, metalworker or                    though Norilsk Nickel’s workers are compared with
   miner, maybe Glazyev could afford to take Danton’s          other Russian workers, their share in the company’s
   sharp advice. But he’s been a professional politician for   expanding profits has been declining.
   a decade, starting as a liberal reform minister under          As management has cut jobs and reduced benefits,
   then-President Boris Yeltsin and, then, his critic and      Melnikov’s union has also been shut out of the collec-
   opponent on the left side of the Duma.                      tive-bargaining process that is written into Russian
       Ever since he polled a surprisingly strong 21 percent   labor law. Prokhorov, the chief executive officer of the
   in last year’s Krasnoyarsk Krai gubernatorial race —        company, has signaled his intention to destroy inde-
   against the combined resources of two of Russia’s met-      pendent union representation altogether. When
   als oligarchs — Glazyev has demonstrated the poten-         Melnikov turned to politics, running against the com-
   tial to lead a nationwide swing to the left of voters       pany-backed candidate for mayor, he won the first
   who balk at supporting the Communist Party, with            round but was forced off the second ballot. A compa-
   which Glazyev is in alliance. At least for the moment, a    ny political assessment admitted that the town voters

   12   •   The Russia Journal   August 2003
were more opposed to the company than the man-                                     them: “I haven’t met or talked to Glazyev, and I have
agement anticipated — or Prokhorov cared. A compa-                                 no idea what his position could be.” Melnikov added,
ny veteran has been put in charge of the city as acting                            charitably, “he is probably busy with other things.”
mayor, and he is likely to be the candidate when the
election is rerun in October.                                                         What could they be?
  Glazyev ought to be the natural ally of any advocate                                According to Mikhail Tarasenko, the chairman of
for the Norilsk Nickel workers. In 1996, when he                                   the Mining and Metallurgical Trade Union of
became head of economic security on the Kremlin’s                                  Russia — which doesn’t include Norilsk Nickel’s
Security Council, he publicly called Potanin’s and                                 workers and doesn’t share Melnikov’s militancy —
Prokhorov’s takeover of Norilsk Nickel “illegal” and                               the current prospects for his members are far from
proposed reprivatization. Within weeks, he was                                     good. The trade unions, he said recently in Moscow,
forced to retract and, shortly afterward, to resign.                               “are worried by the employment situation. In 2002,
Glazyev cannot have forgotten.                                                     the number of employees in metallurgy decreased
  His run for governor in Krasnoyarsk Krai last year                               by 65,000. So far, the decrease occurred without
was against Alexander Khloponin, the former chief                                  any significant social conflicts, because the market
executive officer of Norilsk                                                                                   was able to absorb the workers
Nickel. Khloponin’s victory in the SERGEI GLAZYEV was born in 1961. He graduated from                          that leave the metals sector.
regional race has made it easy for Moscow State University with a degree in economics and cyber− However, in some regions, there
the company to keep Melnikov netics and started his work at the Central Economics and                          are problems with finding new
out of the running for the munic- Mathematical Institute. Then, he became first deputy chairman                employment for workers leaving
                                            of the Russian Federation Committee for Foreign Economic
ipality, at least so far. In the Duma                                                                          metallurgical plants.”
                                            Relations and first deputy minister of foreign economic relations.
election this December, Potanin                                                                                  There are other problems too.
                                            1992-1993 — First deputy minister of foreign economic rela−
has publicly promised to back the tions                                                                        Attrition by early retirement is
Kremlin’s candidates, and Khlo- 1994-1995 — State Duma deputy, chairman of the Duma                            slowing down. After a brief pick-
ponin certainly won’t be helping Committee on Economic Policy                                                  up in payroll numbers in 2001,
the Communists or Glazyev. 1996 — Head of the Security Council’s economic−security                             worker numbers in steel fell 6
                                            department
What, then, does Glazyev have to                                                                               percent in 2002, and workers in
                                            1996-1999 — Head of the Federation Council apparatus’
lose by backing Melnikov in a test information and analysis department                                         the non-ferrous-metals industries
of strength a few weeks ahead of From January 2000 — State Duma deputy (member of the                          fell 3 percent. At the same time,
the Duma poll?                              Communist Party) and, from November 2002, member of the            union data suggest that worker
  Glazyev himself will not respond Duma Committee on Lending Organizations and Financial                       productivity jumped 27 percent in
                                            Markets
to this question. His assistant, Anna From March 2003 — Chairman of the Congress of Russian                    steel and 10 percent in non-fer-
Gorbatova, was able to say only Communities                                                                    rous metals. Raising output while
that this silence is not accidental.                                                                           cutting jobs, Tarasenko admits, is
“In the recent past,” she said, “Glazyev has not made                              the way productivity will be raised in the future.
any statements concerning the Norilsk elections or the                                This isn’t beneficial for those who manage to hang
possibility of reprivatization of Norilsk Nickel.”                                 on to their jobs, either. “Regarding salaries,” Tarasenko
Because some uncharitable Russian reporters have                                   said, “we must admit that, in spite of the growth of
intimated that this might be because the oligarchs                                 average salaries in metallurgy in the past several years,
have been paying Glazyev on the sly — in order to split                            we still haven’t reached the 1992 level in terms of aver-
the left vote — Gorbatova added that “Glazyev didn’t                               age salaries and purchasing power. At the same time,
get any financial or other support from Interros                                   different social benefits that existed in the past, such as
[Potanin’s and Prokhorov’s holding company] or                                     free housing provided to workers, are non-existent
Norilsk Nickel during the election campaign for gover-                             now, and pensions are lower than in Soviet years.”
                        nor of Krasnoyarsk Krai. Glazyev                              Glazyev is a highly skilled economist by training. He
                            doesn’t deal with any financial                        knows the numbers. As chairman of the Duma
                               matters related to the elec-                        Committee on Economic Policy in the second half of
                               tion campaign of the left                           the 1990s, he was a frequent critic of the Y       eltsin model
                               opposition.”                                        of economic development. So, if Russian metalworkers
                                   This is reassuring: Glaz-                       are facing a future in which they will grow poorer
                                 yev is keeping his hands                          while the corporations they work for grow more prof-
                                clean. But, if he also insists                     itable, what is the cat that has caught Glazyev’s tongue?
                               on keeping his head empty                              Union man Tarasenko isn’t a militant in the
                                 and his voice mute, the                           Melnikov mould. “I think that the 10 percent person-
                                    effect is the same — he                        nel decrease at Rusal is a realistic figure,” he says,
                                     plays into the hands of                       adding that he hopes management will be humane.
                                       those he purports to                        “There needs to be a thorough program for each indi-
                                       oppose. According                           vidual enterprise. I hope that, given Rusal’s social
                                  to Melnikov, there has                           responsibility, everything can be done properly.”
                                            not even been a                           When facing the chop, it’s human to hope. In Russia,
                                            conversation                           if opposition leaders like Glazyev can’t provide hope,
                                       between the two of                          there won’t be any.
On capital flight:                                            will ruin the Russian economy, which was just
    he prosecutors’ actions with regard to Yukos              beginning to recover gradually over the last few
T   have provoked capital flight from Russia.
Russian companies — and not just Yukos — are
                                                              years. So, which is better? Whoever can answer
                                                              this question and provide a universal solution
suffering serious losses. The economic damage                 will have a prize waiting for him.
is in the billions of dollars, reliability ratings are              – Josif Skokovsky, member of the St. Petersburg
falling, and investors are losing confidence. All                               section of the Union of Right Forces
this is going on as the world gradually gets its
confidence back in the dollar. Clearly, we are                On suicide:
going to have to travel a difficult road again,                    ccording to the World Health Organization,
like after the 1998 default.
            – Vagif Guseinov, director of the Institute for
                                                              A    Russia is now the leading country in num-
                                                              ber of suicides. This misfortune seems to strike
                      Strategic Assessments and Analysis      all countries going through transition periods
                                                              when conditions and way of life change sud-
On what is to be done:                                        denly. Previously, though we were all poor, there
      e are in a latent rev-                                  was stable law and order. Wages were small,
W     olutionary situation.
Up to 90 percent of
                                                              but they were stable. Now, we have various
                                                              rights and freedoms, but we also have unem-
people support nati-                                          ployment and more homeless people. It’s good
onalization and re-                                           that the Iron Curtain came down, but, at the
distribution of assets.                                       same time, our country is now being flooded
To change the situ-                                           by drugs. So, unfortunately, these [suicide] sta-
ation, we first need                                          tistics are quite explicable.
to end monopolies.                                                  – Mikhail Mityukov, presidential representative
Second, we need to                                                                     in the Constitutional Court
fight poverty. Third,
we need to do all we                                          On purges in the police:
can to create a massive                                           o one has the strength to seriously purge
middle class in Russia.
         – Alexander Livshits, deputy
                                                              N   the police’s ranks, and there’s no one to
                                                              replace today’s police anyway. I think the
                            director of Russian Aluminum      “purge” of the Moscow police is just a PR
                                                              stunt. Probably, it’s an attempt to undermine
On games in the oil industry:                                 Moscow Police Chief Vladimir Pronin by sin-
    apital won’t flee the oil industry. On the                gling out and punishing a few people and
C   contrary, investment will just keep flowing
in, all the more so as there’s not much else to
                                                              then complaining that Pronin is the boss but

invest in here. All this looks to me like it could
be a game — someone just very much needs to
bring Yukos’ share price down. These kinds of
games have always been around, here and abroad.
All this talk about the Yukos affair being of
state importance and that Russia is going down
the drain and so on is just blackmail by
Khodorkovsky. As a reasonable person, he is fully
aware that nothing catastrophic will happen to
the market. What’s more, Yukos is buying up its
own shares on the cheap. Did Yukos maybe
organize all this hullabaloo in the first place?
                   – Sergei Kazenov, sector head of the
           Russian Academy of Sciences’ Institute for the
             World Economy and International Relations

On the FSB and the economy:                                   isn’t doing anything. This could be added to
    ur democracy allows the oligarchs to buy                  previous events such as the riots by skinheads
O   anyone they need and lobby their interests,
but, at the same time, if the government beats
                                                              and soccer fans on Manezh Square in Moscow
                                                              and everything held against him. What can you
the businessmen, the security services will again             do? He just doesn’t suit the authorities.
get uncontrolled power and will control all the                                    – Igor Turov, president of the
draft laws going through the Duma. The FSB                             Law Enforcement Agency Development Fund

14   •   The Russia Journal     August 2003
21-29 September days of Spanish cuisine
                 Sea food
                 15, Bolshaya Spasskaya (Большая Спасская) str.
                 Metro station “Syharevskay”
                 Phone: 208-1412, 208-0200.
                 From: 12 a.m. till 12 p.m. VISA, AmEx, EC/MC, DC.
                 http://sirena.su
GUEST COLUMN


  Russian banking is dominated by a few relative
  giants linked to the government

 State-owned banks
 may face foreign                                                                               By Oleg Anisimov
                                                                                  Chief editor of the magazine Finans.

 challengers
  E
                conomists, the gov-       close to the inflation rate (that is,     it even harder for private banks
                ernment and bankers       with zero real revenue — cheap-           to compete.
                have long been say-       er than what other banks can                 In third place, with assets of $6.3
                ing that the Russian      get). This allows Sberbank to fol-        billion, is Gazprombank. This
                banking system is         low a dumping policy that essen-          bank is fully controlled by gas
  distorted and in need of seri-          tially gives it control over the          giant Gazprom, the policy of
  ous reform. But for all the talk,       major lending market. Other               which, in turn, is decided by state
  reform has been slow. As a result,      banks can attempt to compete in           officials, who hold more than half
  competition within the banking          the lending market only by build-         the company’s shares.
  system suffers, as do the inter-        ing up relations of trust with big           The Top 50 Russian banks also
  ests of bank clients, both com-         clients and opening their doors           include Bank of Moscow, which
  panies and individuals.                 en masse to small ones.                   has assets of $3.4 billion and is
     A glance through banking-sec-          In second place, with assets            controlled by the Moscow City
  tor rating lists will reveal that the   of $6.7 billion, is Vneshtorg-            Hall; Evrofinance, which has assets
  first three places are consistently     bank, which is fully under state          of $660 million and is controlled
  taken by institutions directly or       control. Plans are being con-             by organizations close to the state,
  indirectly linked to the state.         sidered to sell a stake in Vnesh-         including Eurobank, the Central
     At number one, with sizeable         torgbank to the European Bank             Bank’s Paris-based subsidiary; and
  advantages and assets of $40 bil-       for Reconstruction and Develop-           Transkreditbank, which has assets
  lion, is Sberbank, the state sav-       ment (EBRD), but the state will           of $620 million and services the
  ings bank. True, it is a joint-         nevertheless retain its influence         Railways Ministry.
  stock bank, but the Russian             over the bank.                               The list also includes private
  Central Bank holds more than              Historically, Vneshtorgbank’s           banks that have assets formed to a
  60 percent of its shares, and,          job has been to service foreign           large extent through money from
  more importantly, it is the only        economic operations, but, over            organizations linked to the state
  bank in which household de-             the past few years, it has pro-           that have privileged relations with
  posits are guaranteed by the            moted itself as a universal lend-         government officials.
  state. This, coupled with its net-      ing institution. Its state ownership         We can also throw in the
  work of more than 20,000 bran-          gives some distinct advantages:           Mortgage and Housing Loan
  ches around the country, gives          Companies are more willing to             Agency, an organization that is 100
  it such an advantage that it is         entrust money to Vneshtorgbank            percent owned by the federal gov-
  a wonder other banks in Russia          than to a private bank. The bank’s        ernment. It seeks to establish a
  manage to function at all.              recently announced plans for a            monopoly on the mortgage market
     Through state guarantees, Sber-      large-scale move into the regions         and gives house-purchase loans at
  bank attracts deposits at rates         and into retail banking will make         the lowest ruble-interest rate.

  16   •   The Russia Journal   August 2003
  This all adds up to a clear                         Russia is set to become one
picture of the state taking
control over more and more
                                 The only possible    of    the   most    attractive
                                                      prospects for banking capi-
of the country’s main pools                           tal. In addition, Russia’s
of financing.                    source of new        desire to join the World
  Against this state-dominat-                         Trade Organization means
ed background, the only pri-
vate banks of any real size are
                                 banking capital in   the government and Central
                                                       Bank will not be able to
the captive banks — that is,                           raise protectionist barriers
the financial branches of the    Russia is money       to keep this capital out.
major       financial-industrial                         It looks to be a safe bet,
groups. These include Ros-
bank (Interros/Norilsk Nic-      coming in from        then, that the share of for-
                                                       eign capital in the Russian
kel), Trust and Menatep St. Pe-                        banking system will increase,
tersburg      (Yukos),   Petro-
kommerts and Nikoil (Lukoil),
                                 abroad                both through the creation
                                                       of new banks and pur-
Surgutneftegazbank (Surgut-                            chasing already-developed
neftegaz), Zenit (Tatneft), Alfa                       lending institutions from
Bank and MDM Bank (Alfa                                Russian oligarchic groups.
Group and MDM Group) and                                 There is no danger that
a handful of others.                                   foreigners will not be up
  What this shows is that                              to the task of developing
there is no banking capital of                         the Russian banking sys-
any importance in Russia                               tem. Russian banks’ total
independent of the state or                            assets come to only just
of non-financial-sector big                            over $150 billion — five to
business. The same is true of                          seven times less than the
the insurance sector.                                  assets of any one of the
  The only possible source                             world’s banking leaders.
of new banking capital in
Russia is money coming in from abroad. A hand-
ful of foreign banks have already made suc-
cessful inroads into the Russian market: The
country now has 29 banks fully owned by for-
eign capital and another nine in which more
than half the capital belongs to non-residents.
But, so far, most of these banks have no real-
ly large-scale operations in Russia.
  Only eight of the foreign-controlled banks
operating in Russia make it onto the list of
the Top 50. These are International Moscow
Bank (main shareholders: Hypovereinsbank and
Nordea Group), and the Russian subsidiaries of
Citibank, Raiffeisenbank, Commerzbank, ING,
ABN Amro, Deutsche Bank and Credit Swiss
First Boston.
  On the whole, these foreign-controlled banks
are performing well in Russia, with profitability
levels significantly higher than those of Russian
banks. Citibank’s Russian subsidiary, for exam-
ple, made profits of about $60 million in 2001-
02, and, in the first quarter of 2003, it earned
nearly $40 million.
  Raiffeisenbank’s Russian branch made nearly as
much in the first quarter of 2003 as it did in the
whole of 2002 ($46 million), and Deutsche Bank’s
Russian subsidiary saw its assets grow by 70 per-
cent to $750 million between April and June.
  With the banking sector in developed eco-
nomies sinking into stagnation, the experience
of these foreign-controlled banks in Russia sends
a signal to the banking community abroad that
SPOTLIGHT




                                                                                        By Christopher Kenneth
            Can Putin’s plans
            to double the
            economy in
            a decade
            really be
            fulfilled?
                                                        GDP planned in 2010: over $ 690 bln




            E
                         ver since President        It was organized by the Moscow       not been gathered since the col-
                         Vladimir Putin or-         center of the EastWest Institute     lapse of the Soviet Union, lead-
                         dered his cabinet in       (EWI), the Audit Chamber and         ing him to call for a re-evalua-
                         May     to   double        the National Investment Council      tion of the country’s assets.
                         Russia’s GDP in a          (NIC) — a union of big busi-           The State Statistics Committee,
            decade, economists have flood-          nessmen bent on creating a           or Goskomstat — the federal
            ed the media and economic               friendly business and investment     agency in charge of compiling
            symposia with proposals to              environment in Russia and pro-       statistical data — is of little help,
            meet the goal.                          moting the country’s corporate       according to researchers. They
              However, even as the search for       interests abroad.                    say that most of its economic
            solutions to the problem goes on,         Participants urged a reap-         reports are heavily doctored to
            there is no clear picture of the        praisal of the nation’s resources    conform to certain requirements
            exact nature, size and value of         before any effort is made to         handed down from the nation’s
            Russia’s economy, making it diffi-      reform the economy.                  political establishment.
            cult to come up with any effective        Sergei Stepashin, chairman of        In its “Russian Economic Over-
            long-range economic planning.           the Audit Chamber, the federal       view Report,” released in July, the
              In July, a conference address-        watchdog on state budgetary          Interactive Research Group (IRG),
            ing the subject — Valuation and         expenditures, noted at the con-      an international research firm, cast
            Management of Russia’s National         ference that accurate data on the    serious doubts on Goskomstat’s
            Wealth — took place in Moscow.          size of the Russian economy have     official GDP statistics: It claimed

            18   •   The Russia Journal   August 2003
          GDP in 2002: $ 346.6 bln




that the 2002 figures were heavily      ported GDP by about 40-45 per-         because of self-interest, includ-
underreported.                          cent of its real value — estimated     ing because of tax evasion.
  “Re-evaluation of Russia’s gross      at between $480 billion and $500
resources in order to know their        billion — with the gray sector          Scrutinizing Goskomstat’s
exact values ought to be seen as        coming to 45-50 percent of GDP.         stats
a priority assignment for the             Stepashin also stated that the          Alexander Utochkin, a senior
country’s political and economic        widespread practice of under-          analyst at IRG’s Moscow office,
leadership,” said Nikolai Kap-          valuing Russian assets, especially     told The Russia Journal that an
ranov, Moscow center national           in the business community, usu-        analysis of four components in
director at the EWI.                    ally casts doubts on the authen-       Goskomstat’s GDP data —
  Figures on Russia’s GDP vary          ticity of declared values.             domestic consumption, state
depending on the sources of               He cited as an example the           spending, savings and net
information.                            Sibneft purchase of a 74.95 per-       exports — revealed that each
  For instance, Goskomstat puts         cent stake in Slavneft for a           was heavily underestimated in
the country’s nominal 2002 GDP          “token price of $1.86 billion” in      its evaluation of the 2002 eco-
at $346.6 billion and estimates the     2002. That cost the government         nomic performance.
“gray,” or unregulated, sector of the   at least $1 billion, Stepashin said,      He explained that a study of
economy to make up 20-25 per-           adding that government assets          eight market segments of the
cent of that figure. But the IRG        have been consistently under-          domestic-consumption sector re-
asserts that Goskomstat underre-        valued over the past decade            vealed that the “real market value”
            of each was significantly higher                                                               GDP growth
            than the official one.                                     (taking into account seasonal effects, in percentage points for the first quarter of 1995)
               “For this reason,” he said, “we
            believe that the domestic-con-
            sumption sector, which con-
            tributes most to the country’s
            GDP, was underreported by at
            least $100 billion-$120 billion, or
SPOTLIGHT




            by about 70-80 percent less than
            its real value, in 2002.”
               Goskomstat put the sector’s
            share of GDP at 50.9 percent in
            2002, but IRG claimed it was about
            60 percent.
               Official investment data, ac-
            cording to IRG reports, were also
            underreported by at least 30-40
            percent, due to omission of some
            small- and mid-sized-enterprise                        the economy’s size will help in                  some order to the drive to double
            (SME) capital expenditures and                         understanding Russia’s real posi-                the size of the GDP.
            individual spending on housing.                        tion in the global economy and its                 However, the various partisan
            The official estimate of private                       real potential for growth.”                      and economic leanings of the
            expenditures was $2.7 billion, but                       Stepashin said that a thor-                    group’s members — especially
            the IRG noted that about $6 billion                    ough re-evaluation of Russia’s                   ahead of the upcoming parliamen-
            was spent in Moscow alone on res-                      national wealth, including pri-                  tary and presidential elections,
            idential expenditures in 2002.                         vate-sector assets, would defi-                  when populist slogans may well
               Goskomstat officials could not                      nitely boost the country’s polit-                translate into votes — may hinder
            be reached for comment.                                ical and economic status.                        the group from reaching a consen-
               IRG and other researchers said                        “These will lead to significant                sus on how to accelerate growth
            the oft-repeated assertion that                        improvements in its financial and                and wind up doing more harm
            SMEs produce only about 10 per-                        creditworthiness ratings. This, in               than good.
            cent of GDP is “ridiculous,” as                        the long term, will bring [Russia] to              But Putin urged some of
            studies over the past years have                       a qualitatively higher position on               Russia’s top businessmen and
            clearly shown that at least 30-35                      the global arena,” he said.                      politicians at a recent Kremlin
            percent of GDP comes from them.                                                                         meeting to strive “to reach
               In its report, the IRG recom-                         The Kremlin’s task force                       agreements on common basic
            mended that the government                               on GDP                                         approaches to solving certain
            revise the official value of GDP                         The Kremlin has set up a work-                 problems… if we really want to
            because “an accurate evaluation of                     ing group tasked to help bring                   develop our own country.”


                            Dollar exchange rate and amount of bank                                                            ECONOMIC OVERVIEW
                                    disposable ruble resources                                                        ➧ By the end of 2003, dollar GDP will
                                                                                                                        have increased by 24−25 percent; in real
                                                                                                                        terms, GDP will grow between 8−9 percent

                                                                                                                      ➧ By 2008, Russia’s GDP will exceed $1
                                                                                                                        trillion

                                                                                                                      ➧ The IRG estimate of Russian GDP was
                                                                                                                        $500 billion in 2002; the share of the
                                                                                                                        gray, unobserved economy was pegged
                                                                                                                        at over 45 percent

                                                                                                                      ➧ Economic growth is driven by the
                                                                                                                        domestic consumer−oriented sector,
                                                                                                                        which has strong competitive advantages
                                                                                                                        and attractiveness for investors

                                                                                                                      ➧ To guarantee the doubling of GDP, the
                                                                                                                        state should radically improve the institu−
                                                                                                                        tional environment and investment cli−
                                                                                                                        mate; above all, this includes further
                                                                                                                        reducing tax rates
                        Source: Ministry of Economic Development                                                      Sources: IRG

            20   •   The Russia Journal            August 2003
  One of the first issues on the group’s agen-             “The government hugely subsidizes products and
da, which will also test its readiness to avoid          services in these sectors, thus helping local com-
politics, is to determine areas technically called       panies to stay afloat on the internal market. This
“focal points for growth” — sectors that are like-       practice, however, slows down the process of the
ly to facilitate a positive growth in GDP if appro-      natural selection of the most-competent compa-
priate measures are taken.                               nies and, consequently, reducing the overall speed
  Deputy Prime Minister Boris Aleshin listed             of modernization of the whole economy,” he said.
some of these “focal points”: The space indus-             He proposed withdrawing support to these “inef-
try, the energy sector, metallurgy and the nuclear-      fective” sectors and paying normal wages to enable
power industry.                                          citizens to afford increasing bills without any reliance
                                                         on subsidies as ways of boosting the competitiveness
  Different models for increasing GDP                    of the economy and accelerating its growth rate.
   Speaking about the “problematic” aviation industry,     In a petition to Putin in early July, the Russian
Alexander Lebedev, chairman of the National Reserve      Union of Industrialists and Entrepreneurs (RSPP) —
Bank and president of the NIC, called for a radical      often referred to as the oligarchs’ business-lobby
overhaul of the nation’s industrial potential as a       group — specifically proposed, among other things,
means of boosting GDP to a higher level within two       reinstating previously withdrawn investment conces-
to three years.                                          sions on profit tax, speeding up repatriation of value-
   Lebedev said the government will have to refocus      added tax on major construction projects and free-
its policy on reorganizing the sector, specifically in   ing new production facilities from taxation until they
Avialeasing — a program aimed at helping to reani-       recoup their invested capital as another way of
mate the Russian aviation industry with financial        boosting GDP.
infusion from state and private sources — and set up
programs similar to ones in Brazil that completely         Experts divided over feasibility of the
exempted that country’s aviation industry from taxa-       Kremlin’s plans
tion for a long period.                                    Despite the declarative tone of the presidential
   “Given the current rate of depreciation in the        address, not much in the way of concrete actions
industry — and that some companies have been             have been taken so far in reforming structural eco-
idling for over five years — the government’s plans to   nomic, administrative and other important areas.
reorganize the industry in 2006 might be too late to
save it from total degradation,” he warned.
   Lebedev’s bank is a major shareholder in Ilyushin
Finance Co., a leasing company in the aviation indus-
try, and he said he sees the key to all growth in the
economy as lying in production and leasing of
domestically produced aircraft.
   Andrei Illarionov, economic adviser to the presi-
dent, in a paper with the title “How to Double the
GDP: The First Step Toward a Russian Economic
Wonder,” proposed a drastic reduction of govern-
ment expenditure as a sure way of increasing GDP.
   Arguing that government expenditures in excess of
40-50 percent of GDP are harmful to economic
growth, he prescribed reducing the amount to 20-22
percent, which, in turn, would supposedly stimulate a
growth rate of over 8 percent per year.
   Between 1992-94, when Russian government                   DirectNet     Telecommunications     -   оператор     связи
expenditures were over 50 percent of GDP, there               специализирующийся на предоставлении уникальных решений
                                                              для корпоративных клиентов и операторов связи на базе
was no growth, and average annual-growth rate                 собственной сети Москва – Лондон – Нью-Йорк:
was negative, at minus 12 percent per year, he                    организация выделенных каналов различной емкости
noted. “The best results so far were achieved                     построение корпоративных сетей для передачи голоса и
between 1999-2001, when expenditures fell to 33                   данных
percent of GDP, and the economic growth rate                      постоянный доступ в Интернет, возможность размещения
                                                                  оборудования клиента в операционных центрах в Лондоне и
soared to over 7 percent per year.”                               Нью-Йорке (co-location)
   In a paper on doubling GDP, “Structural                        услуги телеконференции, позволяющие сократить время на
                                                                  переговоры и совещания и минимизировать расходы на
Maneuver,” Yevgeny Yasin, former economic minis-                  международную связь
ter under then-President Boris Yeltsin, called for a              полный спектр телефонных услуг, включающий
comprehensive structural reform of what he termed                 предоставление в Москве линий с номерами Нью-Йорка,
                                                                  Лондона, а также с номерами бесплатного доступа из США
“non-free-market sectors,” such the budgetary                     и Европы (800) и корпоративные телефонные карты
sphere, natural monopolies, housing, utilities and
                                                                        Tel. (+7 095) 755−77−50
other areas of the economy directly or indirectly
                                                                            www.directnet.ru
subsidized by the state.
               Besides, reforms that will require streamlining
            social expenditures and, therefore cause social prob-                            GDP BY COUNTRY, 2002
            lems, are likely to be put on hold, until well after the
                                                                         Country                    GDP, $ billion               Per capita GDP, $
            parliamentary and presidential elections, giving the
            Kremlin strategists even less time to implement the          United States                  10,457                        36,445
SPOTLIGHT




            necessary radical changes.                                   Japan                           3,991                        31,448
                                                                         Germany                         1,993                        24,313
               With these and other problems unresolved, experts
                                                                         United Kingdom                  1,560                        25,937
            wonder how the Kremlin plans to reach its goal.              France                          1,429                        23,865
               Even some experts expressing belief in the                China                           1,306                         1,017
            Kremlin’s prognosis contend that such goals would            Italy                           1,182                        20,362
            require a higher GDP growth rate than the official 5.9       Canada                            737                        23,479
            percent in the Economic Development and Trade                Spain                             654                        16,138
            Ministry’s latest updated forecast for 2003.                 Mexico                            630                         6,193
                                                                         India                             500                           478
               Deputy Premier Aleshin conceded that such plans
                                                                         Russia                            500                         3,465
            are “rather highly ambitious.” He, however, qualified        Brazil                            439                         2,499
            by saying that Russia has all the resources for dou-         Poland                            188                         4,924
            bling its GDP within a decade, and, therefore, the           Portugal                          122                        12,167
            plans “are realistic. The country cannot make any            Czech Republic                     72                         7,020
            progress without such ambitious plans.”
                                                                        Source: The Market Information and Analysis Section; DFAT using the latest
               Many experts are skeptical, arguing that Putin’s         data from ABS, the IMF and various international sources; Russia−IRG
            plans are unrealistic, given the persistent political
            wrangling within the Cabinet, the Kremlin’s unclear
            stand on whether or not to revisit the privatizations        “Also, the salary tax, currently fixed at a nominal
            of the “wild era of Russian capitalism” and other          rate of about 33 percent, should be reduced to about
            unresolved problems.                                       20 percent, while value-added tax should be
               Alfred Kokh, one of the ideologues of privatization     decreased from 20 percent to about 15 percent. Such
            in the 1990s, was blunt: “The Kremlin should decide        lower taxation rates will help increase the taxable
            first what it wants — either attack the oligarchy” —       base in the economy by encouraging companies and
            referring to the on-going attack on oil major              consumers to move out of the shadow,” he said.
            Yukos — “or double GDP. It simplify can’t achieve            Utochkin added that the EIU’s Kekic, like most
            both given prevailing circumstances,” he said.             other foreign analysts of the Russian economy,
               Laza Kekic, an expert on foreign direct investment      has put too much importance on the role of
            and economic-growth trends with the Economist              natural resources. “Export-oriented companies —
            Intelligence Unit (EIU), told the Moscow conference        which sell mostly natural resources and basic
            that Russia is unlikely to meet these goals, consider-     industrial commodities — and their suppliers
            ing the present situation.                                 make up, at most, only about 30 percent of
               The EIU prognosis puts Russia’s economic growth         GDP, while the rest comes from companies tar-
            rate for 2003 at 4.8 percent, driven by domestic con-      geting the internal market,” he explained.
            sumption and investments, but forecasts that it              “But companies targeting the internal market,
            would taper off to 4 percent in 2004 as oil prices fall.   and especially, the consumer market, are the
            “No country relying mainly on natural resources has        most prospective, as shown by our ‘Top 100
            been able to sustain a growth rate of more than 4          Emerging Companies of the Russian Consumer
            percent per annum for a long time in the past 50           Market Report’. These companies posted an aver-
            years,” Kekic noted.                                       age growth rate, in dollar terms, of 25-30 per-
               However, the IRG’s Utochkin said that, not only is      cent, with plans to outperform these results in
            Putin’s plan feasible, but that a much larger GDP —        2003,” Utochkin added.
            about $1.025 trillion, approximately three times the         He further argued that state expenditures should
            current value — could be attained by 2007.                 not be reduced in the long term, at least not to
               According to the IRG report, average annual GDP         the levels recommended by Illarionov, because of
            growth over the next five years is expected to be over     “their social and welfare-oriented impact.”
            15 percent — comprising 7-8 percent in real growth         However, the government might have to stimulate
            and appreciation of the ruble at 7-8 percent — with        economic growth in the short term by cutting taxes,
            the highest increase of 24-25 percent in dollar-           which will require certain reductions in the gov-
            denominated GDP and 8-9 percent in real term               ernment’s share in the economy, he noted.
            expected in 2003.                                            Refering up experts’ opinions, which by and large
               When asked what the government should do to hit         run counter to Kremlin expectations, a govern-
            this target, Utochkin said that the state should radi-     ment official said that “Economics is a social sci-
            cally improve the institutional environment and            ence that studies alternatives, not a rigid natural
            investment climate in Russia, with an emphasis on          science that offers one specific solution to a spe-
            removing excessive administrative barriers, property-      cific problem. Everything is, therefore, possible,
            rights risks and ineffective regulations that create       including doubling, or even tripling, our GDP with-
            “unequal conditions” on the market.                        in a decade.”

            22   •   The Russia Journal   August 2003
                                                          Import limits,
                                                          higher duties
                                                          look to boost
                                                          domestic
                                                          producers



Meat producers
hoping for
juicier profits
                                                                                  By Dmitry Afonin




R
              ussian meat producers are hop-            Poultry products were also the target of
              ing new customs duties will help        an import quota — they are now limited
              boost the domestic market out of        to 1.05 million tons a year, with a limit
              its recent slump. The tariffs, set by   of 714,000 tons for the first year. This is
              the government in March, have           down from poultry imports of 1.3 million
helped to drive down imports on almost all            tons last year.
types of meat products — red meat, frozen and           Meat imports in excess of the limits will
cooled beef and pork.                                 be subject to prohibitive import duties of
  Beef imports are limited to 315,000 tons            60 percent for beef and 80 percent for
a year. Pork imports are restricted at 335,000        pork. Analysts say the size of the quotas
tons over the first year, then 420,000 and            is only slightly below the volumes cur-
450,000 tons over the second and                      rently imported, so there should not be
third years.                                          any real shortage on the market, and
           domestic producers will step in
           to fill the gap.
              After the 1998 financial
           default, there were good times
           for Russian meat-product pro-
           ducers, as imports were priced
           out of the market. However,
           over the past two years, prof-
           its have dropped sharply as
           imports again gained big shares
           of the market.
              “Now that the effect of the
           default has worn off and prof-
           its are lower, some players are
           leaving the market, realizing that
           one-off financial investments are
CONSUMER




           not enough,” said Fyodor Klyuka,
 MARKETS




           president of the Stoilenskaya
           Niva Co. “Agriculture is a mar-
           ket for investors willing to make
           long-term investments, and, so,
           there will be a redistribution of
           assets in the sector in the near
           future, and only the strongest
           will remain.”
              Consumption of all types of
           meat, including poultry, sausage,       over the same period of 2001, and     Planeta Management, another
           processed products and con-             sausage production was up 17.5      big player, is financed by the
           serves, is increasing at a per          percent, according to the State     Sibneft oil company’s share-
           capita rate of one to two kilo-         Statistics Committee. Processing    holders. The company began its
           grams a year and came to 47-            factories are the main consumers    meat-market      activities   with
           48 kilograms per capita last year.      of imported meat. The Russian       Omsk Bacon and, then, acquired
              Nevertheless, analysts say, Rus-     Meat Union estimates that Russian   Perm Meat Factory and the
           sians still eat less meat than          producers could cover only 40       Darya company. The company
           people in most developed coun-          percent of the processing indus-    has not divulged what these
           tries and less even than they           try’s needs — and only if all the   deals cost, but analysts think
           did during the end of the Soviet        meat they produced were to go to    Omsk Bacon cost $3 million-$5
           period (75 kilograms per capi-          the processing factories.           million, while Darya had a price
           ta in 1990). That means that              The meat sector is undergo-       tag of $10 million-$30 million.
           there is plenty of potential in         ing an intensive assets-consoli-    Planeta Management said it is
           the market as the overall eco-          dation process that is seeing the   still looking at regional meat-
           nomic expansion widens.                 emergence of large integrated       processing plants and could
              “A 4 percent rise in GDP in          holding companies. The biggest      soon challenge Cherkizovsky for
           Russia leads to a 5 percent             companies on the Russian mar-       market leadership.
           increase in meat consumption,”          ket are Cherkizovsky, Planeta         Analysts say that Agros, a com-
           said Dmitry Rylko, head of the          Management, Agros, the Ros-         pany belonging to Vladimir
           Institute for Agricultural Mar-         prom financial-industrial group     Potanin and his partners, could
           ket Studies.                            and a handful of others.            become the third-largest play-
              Russians eat mostly processed          Over the past five years,         er in the sector. Agros was
           types of meat. Sausages and pel-        Cherkizovsky has become the         established in 2001 as a hold-
           meny, the little meat-filled            market leader. President Igor       ing of the Interros company for
           dumplings, are staple dishes for        Babayev built up his holding        investment in the agribusiness
           the average Russian family at           on the ruins of the country’s       sector and has charter capital
           every meal, regardless of the           agribusiness industry, buying up    of $100 million. The company
           time of day. Demand for                 loss-making enterprises and         has stakes in more than 40
           processed meat products con-            getting them on their feet          agricultural and food-process-
           tinues to rise, and Russian             again. Dmitry Zubkov, Cher-         ing enterprises in Moscow,
           sausages have overtaken imports         kizovsky’s chief spokesman,         Kabardino-Balkaria, Stavropol
           on the market.                          said the company has made all       Krai and Voronezh and Smo-
              During the first nine months of      the acquisitions that it wants      lensk Oblasts.
           2002, production of processed           and, now, that it is focusing         According to the company’s
           meat products rose 15 percent           on the retail sector.               estimates, it is Russia’s number-

           24   •   The Russia Journal   August 2003
two poultry producer. It owns                  The Meat Union’s Mamikonyan       Mamikonyan, the owners of the
controlling      stakes   in     the        had a different opinion, how-        Klinsky Meat Processing Plant,
Tagansky and Businovsky meat-               ever, saying that the $100 mil-      which Agros tried to buy last
processing plants in Moscow                 lion “could be used to buy two       year, wanted $60 million for the
and the Smolmyaso company in                or three pork-processing plants,     enterprise. Mamikonyan evalu-
Smolensk. At the end of last                and it might not even be enough      ates the Parnas-M processing
year, Agros sold one of its biggest         for a large plant,” he said. “In     plant in St. Petersburg at more
meat-sector       assets,                                                        than $100 million, and Cher-
the Ilyingorsky com-                                                             kizovsky estimates its worth at
pany.                                                                            at $400 million-$500 million.
  Interros has allo-                                                                According to Cherkizovsky,
cated $100 million to                                                            Agros’ aggressive expansion plans
Agros this year to                                                               will not affect the company and
fund an aggressive                                                               its place on the market. “The
meat-processing as-                                                              assets remaining on the market
sets-acquisition cam-                                                            were of no interest to us four
paign.                                                                           years ago when we were also
  Dmitry Rylko of the                                                            building up our own agribusiness
Institute for Agri-                                                              holding,” Cherkizovsky’s Zubkov
cultural Market Stud-                                                            said. “To buy the 10 percent of
ies said he could not                                                            available processing plants that
remember such a                                                                  still have some investment
large       investment                                                           attractiveness, Agros might not
being made in the                                                                even need $100 million. These
sector over the course                                                           companies all together cost less
of a year. Musheg                                                                                than that sum
Mamikonyan,          the                                                                         of money.”
head of the Meat                                                                                   Managers        of
Union, agreed, saying                                                                            some agribusiness
that “none of the                                                                                companies        are
current players in the                                                                           now     reluctantly
sector ever spent so                                                                             admitting       that
much       money      at                                                                         they are not man-
once.”                                                                                           aging to keep up
  “This money will go                                                                            with their care-
toward buying up                                                                                 fully      planned
meat-sector       assets                                                                         development pro-
that     have      been                                                                          grams. The effect
undervalued. The list                                                                            of devaluating the
is currently being                                                                               ruble gave the sec-
finalized,” said Pavel                                                                           tor what seemed
Oliyanchuk,       Agros’                                                                         like very favorable
chief spokesman.                                                                                 conditions       for
  But analysts say it                                                                            growth, but it has
will not be easy for                                                                             turned out to have
Agros to spend the                                                                               a down side. The
money        it      has                                                                         post-crisis effect
received. Rylko said                                                                             continued      long
that, with $100 mil-                                                                             enough to draw
lion,    a    company                                                                            businesspeople
could buy almost a                                                                               into the agribusi-
dozen      small    and                                                                          ness sector and
medium-sized meat-                                                                               see     companies
                           Source: Institute for Agricultural Market Studies
processing plants in                                                                             buying up high-
the regions. Rylko said that the            the regions, there are, of course,   quality cattle and poultry.
average processing plant would              meat-processing plants that the         “Those who had alternative
cost a little under $10 million,            local authorities are willing to     sources of revenue are the best
though the need to modernize                sell for $20,000-$40,000, but they   off,” said Igor Khudokormov, the
equipment, pay off the plant’s              are of no use to anyone.”            head of Prodimex. “We make
debts and develop the raw-mate-                A meat-processing plant with      our profits from trading sugar,
rials base would push the acqui-            a good position on the market        and we invest these profits in
sition cost over $10 million.               costs much more. According to        agriculture. We’ve been invest-
           ing for three years now, but we still can’t see     almost all the well-known companies are now
           the light at the end of the tunnel, and I don’t     involved in this.
           think we will make a return on our proj-                    Consumers also made a link between the
           ects for another six or seven years.”                          product and the producer. This is still
             So far, the Russian meat-pro-                                   noticeable on the regional mar-
           cessing industry has not come                                        kets, where consumers associate
           up with a real brand of its                                            a product’s quality with par-
           own. The local brands                                                   ticular local enterprises that
           known to every Russian                                                    cover most of the market’s
           consumer are either taken                                                   needs. In some regions,
           from company names,                                                          locally made products ac-
           such as Mikoyanovsky,                                                          count for up to 80 per-
           Cherkizovsky, Kampo-                                                           cent of all meat prod-
           Mos and others, or are                                                         ucts on the market.
           Soviet-era names like                                                            For a long time, there
           Doktorskaya, Krakov-                                                           were no large meat-sector
CONSUMER




           skaya and others. Only                                                         holdings encompassing
 MARKETS




           now are real Russian                                                           several processing plants,
           brands beginning to                                                            and individual companies
           appear.                                                                        did not have the money
             The view elsewhere in                                                        to promote a particular
           the world is that con-                                                         brand at the national
           sumers have no need to                                                         level, as, say, dairy com-
           know the name of the                                                           pany     Wimm-Bill-Dann
           plant that produces their                                                      did for its Domik v
           favorite sausages or sala-                                                     Derevnye dairy products.
           mi. In Russia, the situ-                                                       Large holdings began to
           ation has been the                      ‘The best option for                   appear only last year
           opposite, with no brands                                                       when the largest players
           for particular types of                                                        on the market, created
           products. Only produc-              producers is to produce                    with money from other
           ers of frozen goods have                                                       economic sectors, began
           come up with brand                                                             actively buying up region-
           names for their pelme-                  only premium-class                     al meat-processing plants.
           ny and meatballs.                                                                An Agros representative
             This situation came                                                          said that the company
           about because the com-               products to ensure that                  has already begun pro-
           panies that had bought                                                        moting several brands at
           up the meat-processing                                                       the national level. But the
           plants    in   the   1990s           their quality stays at a               first company to abandon
           sought to promote the                                                     its own name and promote
           whole product range rather                                              a product under a new one
           than particular types of prod-              high level’               was Cherkizovsky, with its
           uct. This led to brands based                                       Imperiya Vkusa ham.
           on plant names such as Mikoya-                                     “We came up with this brand after
           novsky,     Cherkizovsky,   Tushinsky,                        we bought four ham-production lines,”
           Tsaritsynsky and others. These plants would            said Cherkizovsky’s Zubkov. “These produc-
           open their own shops, and the assortment of         tion lines are unique for Russia, and we are the
           products they sold differed little from one         only company to use whole pieces of meat. So
           shop to another.                                    far, we are selling the Imperiya Vkusa product
             Vasily Vasyunin, commercial director of con-      range only in the regions.”
           sulting company Protein Product, said that the        At the moment, the brand covers only ham.
           factors that determined this strategy are now       “Once we’re sure that there is consumer demand
           beginning to weaken in influence. Consumers         for this product, we will bring the brand to
           were for a long time loyal to traditional prod-     Moscow and add sausages to the product range,”
           ucts such as Doktorskaya, Krakovskaya and Mo-       Zubkov said.
           lochniye sausages, that were produced over            Marketing specialists say that this is not the
           many years and certified by the state. Therefore,   best promotion strategy. “People prefer to buy
           it was risky to introduce a completely un-          their sausages from one producer and their ham
           known brand to the market. Vasyunin said that       from another,” said a manager of consulting
           now there is a great deal more advantage to         company ME 100 who asked not to be named.
           be had out of promoting new brands and that         “This means it’s best to create mono-brands —

           26   •   The Russia Journal   August 2003
 Import of main types of agricultural production                                           for pelmeny and frozen meat
                                                                                           products in Moscow and 15
Production                                1993     1995    1997    2000    2001    2002    percent of the St. Petersburg
Meat (thousand tons)                          85     730   1,166     598     820   1,065   market. In 2001, it had sales
Poultry (thousand tons)                       74     826   1,147     687   1,330   1,350   of $33 million. This year, the
Milk (thousand tons)                          15      86     127     112      42      11   company plans to increase sales
Butter (thousand tons)                        70     241     170      54     108     103   to $50 million by opening a
Sunflower oil (thousand tons)                109     283     322     149     180     170   new processing plant in the
Sugar (thousand tons)                      1,667   1,252   3,485   4,818   5,519   4,605   town of Pushkin.
Grain crops (thousand tons)               11,120   2,712   3,344   4,602   1,500     276     Ilya Gamov, Darya’s marketing
Flour (thousand tons)                         50     569     465     175     100      80   director, said that, since the change
Fish: Raw (fresh), frozen (thousand tons)    226     314     496     321     413     400   of ownership, the company’s strat-
Vodka ($mln)                                  47     206      10       6       5       5   egy has become more logical.
Wool (thousand tons)                           −       7      10      25      18      20     The first sign of this was the
                                                                                           appearance of the Lyogkaya Zhizn
                                                                                           subbrand for a product line of
brands for a specific product —                    that come in the same pack-             fagottini and meatballs made of
rather than for various prod-                      aging but are produced on dif-          “an ideally balanced range of
ucts or for the whole product                      ferent days,” said Protein Pro-         products with added vitamins.”
range of a plant.”                                 duct’s Vasyunin. “The best option         Darya is promoting its new
  This manager said that con-                      for producers, then, is to pro-         brand through a promotion
sumer preferences form in the                      duce only premium-class pro-            campaign associated with fit-
processed-meat sector the same                     ducts to ensure that their qual-        ness and sports. Designer Alyona
way they do in other sectors,                      ity stays at a high level.”             Akhmadulina has designed cos-
but that it is harder to create                      This is just the plan that            tumes for the brand promoters.
and promote a brand.                               Planeta Management has for the          The company invested $150,000
  “In this sector, it’s very hard                  Darya company it acquired from          in creating the brand in 2002,
to ensure that the quality is                      brewer Oleg Tinkov. Darya con-          and this investment will rise to
always the same for products                       trols 20 percent of the market          $1.5 million in 2003.
Seven Russian defense companies make                       move fast to get private-sector managing companies
world’s Top 100                                            into the new pension system, as the funds it generates
    ccording to a rating by the weekly Defence News,       will be invested in the real sector of the economy.
A   aviation holding Sukhoi is the leader among
Russian defense companies, coming in at 38th               Severstal wants to be a blue chip
place on the list (24 last year). NPK Irkut took                lexei Mordashov, the owner of the Severstal steel-
58th place (92 last year), Aerokosmicheskoye
Oborudovaniye was in 62nd place, and last
                                                           A    works, wants to turn his company into a blue-chip
                                                           stock by listing its shares on international stock mar-
year did not figure in the rating at all, nor              kets. The company plans to launch a global depository
did Ufa Engine Building Co., which took                    receipts (GDR) program for 12-15 percent of its shares
85th place this year. MMPP                                 by the end of the year. To attract investors, Severstal is
Salyut moved up from 90th to                               promising to devote 25 percent of its net profits, as cal-
87th place, Uralvagonzavod                                 culated according to international accounting stan-
dropped from 88th to 95th                                  dards, to paying dividends and will cut the payment
place, and MiG, also not in                                time from 530 days to nine months.
the ratings previously, took                                  Under the planned GDR program, portfolio inves-
96th place.                                                tors, who now own around 8 percent of Severstal’s
                                                           shares, will be able to convert their stakes into GDRs.
Transneft looking to buy                                   Later, the company’s main owners plan to increase the
Ventspils Nafta                                            number of shares on the market by selling 4-7 percent
    ransneft is the main contender for buy-                of their stake. This stake has a current value of $68 mil-
T   ing Latvian oil terminal Ventspils Nafta, Khaim
Kogan, chairman of the board of Lukoil Baltija, a sub-
                                                           lion-$119 million and is expected to be placed on the
                                                           London Stock Exchange.
sidiary of Lukoil, told Latvian business newspaper
Business & Baltija.                                        Privatization, Bashkortostan-style
  “It’s Transneft that draws up the timetable for access      n the run-up to the presidential elections in Bashkor-
to the transport pipelines,” Kogan said when asked
whether Lukoil or Yukos would buy Ventspils Nafta.
                                                           I  tostan, the republic’s oil industry is being quietly pri-
                                                           vatized. According to the Audit Chamber, controlling
Kogan said that it did not make sense for Lukoil or        stakes in Bashneft and five other local petrochemicals
Yukos to buy the terminal if it wasn’t possible to ship    companies with total turnover of more than $1.5 billion
a lot of oil through it.                                   a year have come under the control of obscure private
  At the moment, the Ventspils port is not getting any     firms. The auditors have accused the Bashkir authorities
oil through the pipeline. This is why some say that the    of theft of state property and are threatening to turn to
terminal should be sold to a Russian oil company that      the Prosecutor General’s Office.
would get the pipeline operating again and increase           Bashneftekhim, created in 1993 by decree of the pres-
the port’s capacity.                                       ident of Bashkortostan, united the state’s stakes in the
                                                           Ufimsky oil refinery (74.88 percent), Novoufimsky oil
50 billion ‘pension’ rubles to be                          refinery (85.4 percent), Ufaneftekhim (60.63 percent),
invested in 2003                                           Ufaorgsintez (71.76 percent) and Bashkirnefteprodukt
    he Finance Ministry plans to invest                    (57.4 percent).
T   around 45 billion-50 billion
rubles of pension savings in state
                                                              In 1999, the Bashkortostan Property Ministry trans-
                                                            ferred 93.4 percent of the shares in Bashneftekhim to a
securities this year. Investment of                            new energy holding, Bashkir Fuel Co. (BTK), which
pension money came to 40 bil-                                   also took over state stakes in Bashneft (63.72 per-
lion rubles in 2002. A tender to                                 cent) and Bashkirenergo (32 percent). Bashneft
choose a private-sector com-                                     produces around 12 million tons of oil a year. It had
pany to manage the pension                                        earnings of $1.3 billion in 2002 and net profits of
money will take place at the                                      $184 million.
end of August and the begin-                                          On April 12, BTK and Bashneftekhim trans-
ning of September. During                                           ferred the controlling stakes in Bashneft, four
the first year the new indi-                                        petrochemicals plants and Bashnefteprodukt to
vidual-account pension sys-                                        seven little-known private companies, most of
tem will be in place, pen-                                         which are registered in Bashkortostan. The com-
sion-fund investments in the                                      panies’ founders are 19 private individuals. Ac-
private sector are expected                                        cording to the Audit Chamber, the new owners of
to come to 1.5 billion-2 bil-                                      Bashkortostan’s oil sector decided on June 24 to
lion rubles, with an eventual                                      use the companies they had just acquired to form
increase to 10 billion rubles.                                    the charter capital for a new private holding,
The Finance Ministry wants to                                    Baskirsky Kapital.

28   •   The Russia Journal   August 2003
Rail-transport tariff-unification
                       plan off track
                                                                    Shipping by rail to foreign
                                                                      ports still costs several
                                                                           times more than to
                                                                                  Russian ones
                                                                                        By Sergei Smirnovsky




T
            he Railways Ministry has announced             depending on whether the freight is going to
            that the latest stage of railway-tariff uni-   a Russian port or crossing a land border.
            fication has been completed. But you             Russian companies still face the choice, then,
            would have a hard time convincing              of either delivering their goods quickly through
            industry leaders of that.                      Baltic and Finnish ports but paying the rail-
   The new railway freight-transport price list            ways three to four times as much, or waiting
came into force on Aug. 1, essentially keeping             their turn in the crowded Russian ones. With
in place the difference between internal and               the economy so dependent on the world situ-
export freight-transport costs. For the industry,          ation, time is often of the essence — getting
this means lower profits from sending goods
outside of the country.
   Until the price list was officially approved,
freight senders were hopeful that export-import
freight tariffs across Russia via land border-cross-
ings and Russian ports would be unified with
internal tariffs, which would optimise freight
flows between Russian and foreign ports and
keep export operations profitable.
   The problem is that freight transport to, for
example, ports in the Baltic states costs Russian
companies three to four times more than to
Russian ports. That leads to overloading at
Russian ports, and companies have to wait in
line to get goods through to them. Tariff uni-
fication would relieve the burden on Russian
ports by diverting some goods to ports abroad.
But the Railways Ministry has kept the differ-
ential in place with its latest tariff plan.
   The first stage of the unification program
involved synchronizing internal and import-export
tariffs for transport to Russian ports. The sec-
ond stage was supposed to unify internal tariffs
and tariffs for transport across land border-cross-
ings, but that portion had been delayed. A meet-
ing of the Federal Energy Commission finally
approved a unified tariff price list in June, and
Railways Minister Gennady Fadeyev announced
that the unification program was complete.
   But neither transport companies nor freight
senders were enthusiastic about the new price
list, as the real costs of export-import freight
transport through Russia remain different,
            exports to global markets while world prices               42 percent, in Kaliningrad by 70 percent and
            are high is crucial.                                       in Murmansk by 33 percent.
              “Yes, the unification is complete, but we are               If conditions were more equal, some of this
            not happy with it,” said Igor Cheplanov, deputy            freight would have gone instead to Baltic and
            general director of Metallurgtrans, which rep-             Finnish ports, where freight-handling conditions
            resents the interests of metals companies. “It is          are more attractive.
            more than twice as cheap to send freight to                   Realizing this, the Association of Sea Trading Ports
            Russian ports now. This discriminates against              even asked the government last year to postpone
            the senders because the ports can’t handle this            the plan until this year. Serik Zhusupov, chairman
            flow, and the freight owners end up incurring              of the association’s working committee on eco-
            extra expenses because of delays or failure to             nomic and social issues, said at that time that, if
            meet contracts.”                                           this wasn’t done, “35 percent of the freight that
              “This situation is to the Railways Ministry’s advan-     currently goes through Russian ports will go to the
            tage,” said Alexander Reznitsky, marketing director        Baltic states, Ukraine and China.” The government,
            at freight-transport company OTEKO. “Their earn-           it seems, took heed and delayed the issue until the
            ings from freight transport are still rising, so they’ve   middle of this year.
            been delaying unification since 2001.”                        Ruben Terterian, director of the St. Petersburg-
              Reznitsky said the Railways Ministry agreed to           based Agency for Special Studies, said that there
            complete the unification only because it does              is no reason to maintain incentives for Russian
            not really change the situation.                           port development through railways tariffs.
              Analysts say that the Railways Ministry is keep-            “There is not so much sense anymore in
            ing the differentiated tariffs in place because            increasing the freight flow to the ports,” he
            the state wants it to help encourage the devel-            said. “The October Railway is already having
            opment of Russian ports. Indeed, ports have the            trouble handling the flow because of bottle-
            most to gain from preventing the second stage              necks at the entrances to the ports and insuf-
TRANSPORT




            of the unification program from going ahead.               ficient trains.”
            In 2002, for example, the volume of freight                   Freight senders are having increasing trouble meet-
            coming through the St. Petersburg port rose by             ing their delivery contracts on time as a result. On a




                        Analysts say that the Railways
                     Ministry is keeping the differentiated
                       tariffs in place because the state
                        wants it to help encourage the
                        development of Russian ports




            30   •   The Russia Journal   August 2003
number of occasions in the
spring, the Railways Ministry
                                          The tariff-unification program                      tribution to developing the
                                                                                              economy by encouraging
had to put temporary bans on                                   AIM                            freight exports to Baltic
unloading freight in Russian         To even out the cost of internal and export              ports, relieving the load on
ports because they were so                                                                    the St. Petersburg port.
                                     freight transport
clogged.                                                                                         “There was a very favor-
  “It’s not that there are real                 FIRST STAGE: 2001-2002                        able situation for a lot of
breakdowns in the work, but          Internal freight−transport costs in Russia and           types of goods last year and
the time it takes to ship the                                                                 at the beginning of this
                                     the costs of transporting export deliveries to
freight      is    increasing,”                                                               year,” said Metallurgtrans’
Terterian said. “It should be        Russian ports were brought into line with                Cheplanov. “This was the
possible to send more freight        each other.                                              case for metals, oil and
through the ports, but rail-                                                                  petroleum products, for
                                             SECOND STAGE: 2002-2003
ways and customs-handling                                                                     example. Also, last year,
time keep increasing. That’s         Internal freight−transport costs and costs for           there was a big grain harvest.
why there is a trend now to          exporting freight from Russia to foreign ports           This forces freight senders to
send large shipments out of          or directly to European consumers were                   look for new ways of export-
St. Petersburg.”                     brought into line with each other.                       ing their products.”
  Some of this freight ends                                                                      But one Russian analyst,
up going to small Russian                                    RESULT                           who wished to be anony-
ports that still have room           The Railways Ministry says that this process is          mous, said that the fact that
to increase their freight            complete, but so far only the international−             tariffs     remain     different
capacity. In June, for exam-                                                                  means that delivery routes
                                     transport tariff has been abolished, and the new
ple, the Arkhangelsk port                                                                     are more expensive and
announced plans to increase          price list still has differentiation between tariffs.    export-import operations
export shipments of coal                                                                      much less profitable.
and metals. However, after                                                                       “Some       exporters     are
standing idle for some years                                                                  even       deciding     against
and seeing their infrastructure fall into disrepair,                  shipping goods altogether,” the analyst said.
the small ports offer limited capacity.                               “Oil and petroleum products, for example, are
  Difficulties in the ports are pushing some                          very sensitive to freight tariffs at the moment
freight onto land transport instead. According                        because of the imminent downturn on the
to Agency for Special Studies, the rapidly increas-                   world oil market.”
ing flow of container goods tends not to go to                           The state has not made any gains from the
the railways, as it is cheaper to send a con-                         Railway Ministry’s tariff policy, as, even though
tainer to Moscow and back by truck. Using the                         freight flows through the ports are increasing,
railways takes longer, and there is always the                        they are not paying more taxes than they were
risk of not getting the container back on time,                       before. “Tax-minimization schemes make it pos-
which means having to pay a large fine.                               sible to reduce taxes a great deal,” said Terterian.
  Freight senders say the Railways Ministry could                        So far, then, the new tariff price list seems to have
increase its revenue and make a positive con-                         benefited no one but the Railways Ministry.
                                     Getting things
            T
                   he express-delivery busi-
                   ness in Russia, which basi-
                   cally started from scratch in
            the 1990s, is today growing by
            leaps and bounds: It’s still only
            revving up its engines, with plenty
            of room for growth, according to
            industry players.
              Alongside the big international
            companies — DHL, UPS, TNT Ex-
            press and FedEx – hundreds of
            Russian firms are making their
            presence felt throughout the
            country. Maxim Zyuzin, marketing
            director at UPS, said that domes-
            tic companies now account for up
            to half of all cargo shipped
TRANSPORT




            through the Sheremetyevo airport
            cargo terminal.
              Western companies continue to
            dominate the global-delivery mar-
            ket, while domestic companies are
            making inroads on the home front,
            say experts, who point to compa-
            nies such as EMC, Garantpost, Pony
            Express, City Express, Rusko and
            Armadillo Business Parcel as the
            leading Russian firms.
              The situation is a big change
            from the Soviet days, when there
            were only two specialized express-




                                                                                                                              Provided by UPS
            delivery agencies, both owned by
            the state — the dispatch service
            and Spetssvyaz, or special-delivery
            service. The few express deliveries
            for Russian organizations were
            carried out by a special depart-
            ment of Soyuzvneshtrans.                Russia’s express-delivery market,
              Today, many Russian companies
            concentrate on express deliveries
            within a particular region or even
                                                    experts say, is nowhere near the
                                                    saturation level By Maxim Markov
            in a specific city. According to
            Zyuzin, the sector is growing so
            fast that companies do not really
            feel the competition.
              “There is growth of dozens of
            percentage points a year, and, obviously, there is still   there are many Russian companies working nation-
            enough work for everyone,” he said. “There are             ally or in one region or town, the market is still
            probably more than a hundred companies doing               far from saturated. “This has led to state organiza-
            express delivery around the country, and some pro-         tions and big Russian holding companies joining
            vide unexpectedly good service. Many use the rail-         the act,” she added.
            ways or road transport for their deliveries.”                “The Communications Ministry transformed Spets-
              Maria Korbut, marketing and business-develop-            svyaz into a new delivery company, SPSR. The postal-
            ment director at TNT-Express, said that, although          system-reform program makes development of this

            32   •   The Russia Journal   August 2003
there in a flash
 sector one of its priorities for profitable develop-               The fight for clients
 ment, and [industrial holding] Base Element last year              When choosing express-delivery companies,
 acquired three Russian courier companies — Rusko,                most clients look at the price-quality ratio, a
 Pony Express and Elf-91 [the acting agent for                    company’s reputation and the range of services
 FedEx],” Korbut said.                                            provided. As customers become more demand-
    Olga Proskuryakova, an executive at DHL, said                 ing, delivery companies say they have to become
 that, even with the upsurge in the number of                     increasingly competitive.
 Russian companies, it is still too early to speak of               “Clients are becoming more demanding with
 real competition for the global players. Russian                 every passing year,” Proskuryakova said. “They
 firms still need time to develop and make invest-                want a delivery company with a full range of
 ments in staff training and developing networks                  services — from express delivery of freight and
 and infrastructure, she added.                                   mail to logistics schemes drawn up individual-
    “Of course, the level of service these companies              ly for specific companies.”
 provide can’t be compared to that in the global com-               This is a boon for consumers, as companies are
 panies,” she said. “But they can be an alternative for           introducing new services in an attempt to differenti-
 clients for whom price is more important than speed              ate themselves from the competition. Last year, for
 of delivery and other aspects bearing on quality.”               example, DHL introduced several new services,
    The big players acknowledge, however, that compe-             including delivery by a specific time for European
 tition leads to improved customer service in any indus-          cities and help with customs formalities. This year,
 try. So, the giants say, they cannot afford to rest on their     the company extended its specific-delivery-time
 laurels and must continue to improve their services.             service to Russian cities.




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              TNT-Express’ Korbut said that reliability, speed       Transport: The key to success
            and price — in that order — are the keys to suc-          It does not yet make sense for express-deliv-
            cess. “This is confirmed by our surveys every year,”   ery companies to maintain their own fleets of
            she said. “The only exception was the period from      cargo planes, given the still-small overall vol-
            the end of 1998 to the beginning of 2000, when         ume of deliveries in Russia. Some companies
            price became more important than reliability and       have tried but were unable to operate aircraft
            speed for Russian companies                                                   profitably. The most signifi-
            and individuals.”                                                             cant problem with deliveries
              TNT-Express was the first                                                   in Russia, however, is getting
            company on the Russian mar-                                                   them to remote areas where
            ket to offer services such as                                                 transport infrastructure is
            9.00 Express and 12.00 Express,                                               poorly developed.
            which guarantee delivery to the                                                 Most express-delivery com-
            main European cities by 9 a.m.                                                panies use commercial air-
            and to other main world cities                                                lines and, so, are dependent
            the following day, plus auto-                                                 on how much luggage pas-
            matic confirmation of delivery.                                               sengers have, the work sched-
            If a delivery is late, even by a                                              ules of airport cargo ware-
            few minutes, TNT returns the                                                  houses and other factors. DHL,
            customer’s money.                                                             for example, works with
              UPS’ Zyuzin said that the only                                              Lufthansa     Cargo,     British
            way for express-delivery com-                                                 Airways and Austrian Airlines
            panies to raise their profit mar-                                             and Russian airlines, such as




                                                                                      Provided by ups
            gins is to cut costs and offer                                                Aeroflot, Transaero, Samara,
            extra, exclusive services.                                                    Sibir, Domodedovo Airlines,
TRANSPORT




                “Modern technology is a                                                   Krasnoyarsk     Airlines    and
            help here,” he said. “It’s not                                                Vnukovo.
            for nothing that UPS has spent more than $1               The problem is that no airline carrying out
            billion a year in developing new technology over       domestic flights can guarantee that the cargo
            the past decade.                                       will go on the next one, and, so, companies
              “Using systems based primarily on the latest         have to find other solutions.
            innovations in information technology has                 “From May 2003, DHL has begun using an
            enabled us to greatly increase the throughput          additional charter flight with a Tu-204 plane
            capacity of our operations centers and assure          on the Moscow-Brussels-Moscow route,” DHL’s
            multilevel constant control of deliveries.”            Proskuryakova said. “This cuts the transit time
              He added that this has also reduced the amount       a great deal and makes it possible to deliver a
            of labor involved. “There are plenty of similar        lot of the documents coming to Moscow on
            examples, and they all show that intelligent use       the next day.”
            of the latest technological developments can              UPS has long been using charters and was the
            help reduce delivery costs considerably and            first of the four market leaders to use its own
            improve service at the same time,” he said.            charter to link Russia to the world. “This makes
                                                                   it possible for us to control each step of the
                                                                   deliveries’ movements from Moscow,” Zyuzin said.
                                                                   “By using our own charter, we can guarantee
            ‘Clients are becoming                                  that documents and cargo handed in before 4
                                                                   p.m. will be sent the same day. There is a spe-
            more demanding with                                    cial tariff for documents in envelopes and pack-
                                                                   ets. The cost for A4 format documents in a UPS
            every year. They want a                                Express Envelope doesn’t depend on the weight
                                                                   or the number of sheets of paper and is paid
            delivery company with a                                for according to a preferential tariff.”
                                                                      TNT Express has its own land- and air-transport
            full range of services.’                               network in Europe, but does not use it in Russia. “For
                                                                   air transport into and out of Russia, we use commer-
                                                                   cial flights through the main airports in Europe, and
                                                                   our own Moscow-Belgium charter,” said TNT
                                                                   Express’ Korbut. “We also work with leading Russian
                                                                   airlines — Aeroflot, Sibir, Krasair — and with inter-
                                                                   national companies — Lufthansa, British Airways,
                                                                   SAS. We have partner relations with all these airlines,
                                                                   because they help us develop our business and are
                                                                   the key to our joint success.”

            34   •   The Russia Journal   August 2003
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8:30 a.m.
UPS customer enjoying breakfast
after a good night’s work.


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                                                                                           Car centers are
                                                                                           increasing not just
                                                                                           in terms of
                                                                                           numbers; they are
                                                                                           now providing a
                                                                                           bigger and better
                                                                                           range of services
TRANSPORT




                                By Dmitry Afonin    year ever for the foreign-made car        For Russian cars, the situation is
                                                    market in Russia.                       far from ideal. Production levels


            S
                   ales of foreign-made cars          American and German carmak-           for cars, off-road vehicles and
                   came to just under 80,000        ers still enjoy a solid footing on      minibuses remained stable last
                   units for the first half of      the Russian market, while Korean        year, but there are few reasons for
            2003 — more than the usual annu-        and most Japanese car manufac-          optimism. Demand has fallen for
            al figure just a couple of years ago.   turers continue rapid expansion.        cars from AvtoVAZ, GAZ and UAZ,
              Yulia Zavgorodnaya, head of           Thus far, companies using dollars       the three largest Russian manufac-
            advertising at the Skoda car center,    as their payment currency have          turers. But dealers selling Russian
            said there was a boom in foreign-       had no problems, but the situa-         cars hope that introduction of
            made car sales at the beginning of      tion was not so simple for play-        customs duties on secondhand
            this year. As soon as dealers           ers from the euro zone.                 foreign-made vehicles will soon
            received their deliveries of new          “Many Russians are encouraged         help increase their sales.
            cars, they would have to start          to visit car dealers by the load of
            ordering new shipments just to          dollar savings they’ve accumulated        Trade-ins more popular
            keep up with demand, she said.          that look superfluous now that the        Among the services car dealers
              If the demand continues, and if       euro is strengthening,” said Alex-      provide, trade-ins are now almost
            analysts’ warnings of a possible        ander Sidorov, sales director at the    as popular today as loan schemes
            crisis in September-October do          Suzuki car center. “Sales are also      for purchasing automobiles. How-
            not come true, then this could          helped by the attractive loan pro-      ever, while today’s loan schemes
            turn out to be the most profitable      grams most dealers now offer.”          are more-or-less clear, few in the

            36   •   The Russia Journal   August 2003
business seem to be able to explain how trade-ins         valuing and accepting your car. The sales manager is
actually take place, whether they are worth it, what      also human and can make mistakes sometimes,
their benefits are and what ordinary customers should     sometimes even in your favor. The main thing is to
know in order to get something out of the scheme.         talk the right way.”
   Trade-in schemes are a relatively recent phenome-
non on the Russian car market. As a rule, cars              How often should you get your car serviced?
accepted as trade-ins cannot be more than seven             One of the requirements of guaranteed car service is
years old. Demand and supply, age, make, model,           regular checkups at a garage certified by the car’s
state of repair and kilometers driven are the main        manufacturer.
factors that determine a trade-in’s value.                   Toyotas, for example, have to go through check-
   In many dealerships, clients do not have to bring      ups after every 10,000 kilometers. For Corolla mod-
their car to the center to get its worth evaluated.       els, the first checkup costs around $125, the second
Instead, they fill out a form by e-mail or do the same    $160, the third $125 and the fourth (at 40,000 kilo-
procedure over the phone.                                 meters) $375. (There is also a checkup after 1,000
   But trade-in schemes also give rise to certain prob-   kilometers that the seller pays for.) After the fourth
lems. For example, car owners and car dealers do not      checkup, the cycle repeats itself.
always manage to find a common language. Car                Russian Audi dealers recommend going through a
dealers do not want to run trade-in schemes work-         checkup after every 15,000 kilometers, though in
ing with very old cars and completely new ones,           Europe Audi lets drivers do 20,000 kilometers before
while car owners are often reluctant to trade in a car    getting a checkup. Audi owners generally pay around
that is not very old and still in decent condition.       $212 a year in maintenance costs over the first two
   “We are consistent in our support for civilized        years after purchase.
methods of car dealing, and trade-ins are one,” said        But there are also cars with average mainte-
Natalya Volkova, project manager at Avtomir. “That        nance costs of only $163.50 a year. This is the
is why we try to avoid methods that could perhaps         case of Peugeot, for example. A Peugeot with a
figure in an encyclopedia on divorce, but are not         gas engine can clock up to 30,000 kilometers
worthy of civilized people.                               before it needs to be serviced.
   “You need to really have a heart-to-heart talk with      Not all dealers agree with the idea of letting cars
the sales manager. This is the person responsible for     clock up a good run before getting serviced, however.



                                                                               Rentals Short terms
                                                                                Sales Investments




                                                                  Tel: 363-4435, 505-2957
                                                                   e-mail: info@flatlink.ru
                                                                        www.flatlink.ru
                                                                    Among the services
                                                                    car dealers provide,
                                                                            trade-ins are
                                                                            now almost
                                                                            as popular
                                                                            today as loan
                “I don’t think it’s
                                                                            schemes for
            acceptable to let cars
            have such a long run
            between servicing,” said
                                                                            purchasing
            Vladimir Balyshev, gen-
                                                                            automobiles
TRANSPORT




            eral director of Bangot-
            Electronics, Kia’s official dealer in
            the Northwest District. “You must-
            n’t forget about our climate, the       also been an official subdeal-        classes for non-professionals and
            state of our roads and the quality      er for Peugeot cars.”                 courses for professional drivers.
            of our gas. In Europe, where the          Avtodom, an official dealer for
            gas is very clean, 30,000 kilome-       BMW and Mini, puts the empha-           Elite Maybach finds its niche
            ters is acceptable, but it is too       sis on trying to stand out among        For those looking for — and who
            much for our conditions. Over           other car dealers that often offer    can afford — a little something
            that time, the engine oil loses a lot   the same list of services. Sergei     extra, the exclusive Maybach may
            of its functions. And it’s not just     Babenkov, Avtodom’s marketing         be just the thing.
            the oil that’s the problem. You also    and advertising director, said that     According to the Moscow Daim-
            need to get the suspension and          clients can take part in what he      erChrysler house, customers want-
            other parts of the car checked          called a “Mini-trip.”                 ing to buy a Maybach are first invit-
            from time to time.”                       A team of specialists headed        ed to the Maybach studio, in a sepa-
                                                    by Rauno Aaltonen has devel-          rate room, where the lengthy
                 The most common services           oped a training program for           process begins of personalizing the
              “On the basis of a contract with      active drivers. Aaltonen won a        car — choosing the additional fea-
            the plant, our dealership offers        Monte-Carlo rally in a Mini in        tures, interior and extra options.
            servicing to get cars ready for         1967 and knows more than any-           Customers are also introduced to
            resale, repair and guaranteed           one about driving this car in all     a personal manager whom they
            repair,” said Natalya Nazarenko,        kinds of situations.                  can consult and who can perform
            manager of the DIM+Ko car salon.          The training program for            a number of other services on
               ‘To encourage sales, we have         would-be Mini drivers takes           request — for example, visiting the
            loan programs — from 9.9 per-           place at the BMW driving school       Maybach factory, planning a serv-
            cent — leasing and trade-in             at the Munich airport. The stu-       icing timetable or booking tickets
            schemes. The company is always          dents learn the basic principles      for upcoming Formula-1 races.
            developing new ways of attract-         and essentials of driving tech-       Customers can get in touch with
            ing clients, such as bonus books,       nique. Customers who buy a            their personal managers at any
            discounts, discount cards and           Mini at Avtodom before Aug. 31        time by pressing a button on the
            special joint programs with the         will get the chance to do the         telephone in their car.
            avto.ru system. Now we can              course for free.                        The Moscow DaimlerChrysler
            also offer armored Skoda Su-              Skoda’s Zavgorodnaya said that,     house’s first client was Rustam
            perb cars and special-purpose           as well as having its own sports      Tariko, chairman of the board of
            cars (traffic-police cars, taxis)       team that takes part in Russian       directors of Russky Standart, who
            for federal programs. Since the         rallies, the Skoda dealership also    bought two cars for a total of more
            beginning of 2003, we have              has a driving school offering         than $1 million.

            38   •   The Russia Journal   August 2003
A maze of legislation can pose quite an obstacle to
doing business in Russia — but a new breed of
legal professionals aims to help



The era of
corporate law
            By Christopher Kenneth and Ivan Gnuni


C
        orporate law, in the contemporary sense of
        the term, first saw the light of day in the
        Soviet Union in the late 1980s, when the
government began to allow its citizens to form busi-
ness co-operatives.
  Previously, the concept of “corporate law” exist-
ed only in theory: Most disputes and deals
between state-owned enterprises were solved
arbitrarily by the country’s political leadership.
  Then came Perestroika, which eventually intro-
duced radical changes and opened society up
for business and more international contacts.
  These changes, along with the “co-operative
movement” in the legal profession, laid the foun-
dation for real corporate-law practice, as lawyers
found themselves with the new job of handling
deals involving Russian businesses not owned by
the state.

 The beginning of a new profession
  But corporate lawyers got their real career
starts after the liberalization of the economy in
1992, when legal private commercial activities
really began to take off. Until Perestroika, almost
every sort of private business was illegal.
  Faced with a number of problems — from
new business legislation to contractual terms on
                                                       AP




goods supplies and deliveries and issues of high
customs fees and hazy taxation laws — some
business pioneers turned to lawyers for help in             foreign and domestic corporations are turning
order to avoid difficulties.                                to Russian corporate lawyers to help them nav-
  Today, the profession is blossoming: A whole              igate the maze of laws and address issues like
new breed of corporate lawyers has emerged                  hostile takeovers or premeditated bankruptcies.
that is capable of providing global corporations              Russian corporate-law practice has come a
with the legal services they need to run their              long way since the 1980s, said Vitaly
businesses smoothly in Russia. More and more                Morzharowski, a partner overseeing corporate-
             law issues at Moscow-based law firm Pepeliaev,        ital as tax payments to the government.
             Goltsblat & Partners.                                    Nowadays, corporate lawyers are kept con-
               “In the Soviet era, there were no private com-      stantly on their toes. As the State Duma and
             panies, no real taxation and no aspects of busi-      government fortify the legal foundation for civ-
             ness life that needed to be regulated by cor-         ilized private entrepreneurship, even specialists
             porate law. Today, there are thousands of pri-        are finding it hard to catch up with some of
             vate companies and a number of corporate-law          the legislation and its often-ambiguous inter-
             firms capable of providing legal services to          pretation.
             them,” he said.                                          Since the 1998 crisis, demand for corporate
               Nikolai Klen, chairman of the Interrepublican       lawyers has shot up: They are used by Russia’s
             Collegiate of Barristers, a Russian business organ-   chief executive officers to help them navigate
             ization for the legal profession, agreed, saying      the sometimes contradictory laws governing
             that “there are now lawyers capable of han-           business practice.
             dling every aspect of any big deal.”                     Meanwhile, with the oil-export-fueled cashflow
               “In the West, no step is made in any busi-          into the country over the past three years, mergers
             ness deal without the involvement of a cor-           and acquisitions are especially in vogue among cor-
             porate lawyer. In Russia, the need for business       porations in the energy sector — the latest being
             lawyers in corporate issues is even greater,          the British Petroleum/Tyumen Oil Co. and Yukos-
             because our laws are mostly unstable and con-         Sibneft deals. This requires skilled corporate
             stantly changing,” he added.                          lawyers to ensure the legality of such transactions.
                                                                      Morzharowski said that, with respect to corporate-
              Baptism by fire                                      law applications on business policy and regulation,
                The real baptism of Russian corporate lawyers      Poland and the Czech Republic are ahead of Russia
             came about in 1998, when the country was hit          because they had a more favorable initial environ-
             by a financial crisis that almost wrecked the         ment for introducing corporate-law practice after
             national economy.                                     the fall of communism.
                Russian corporate lawyers at that time had their      “Starting points for reform there were dif-
             hands full, helping clients recover multimillion-     ferent, because in these countries, unlike in the
             dollar deposits from troubled banks in a “civi-       Soviet Union, some forms of quasi-private entre-
             lized” way — which means without resorting to         preneurship existed alongside state-run enter-
             protracted court procedures or hiring thugs to get    prises,” he said. “Their proximity to better-devel-
             their assets back — and help transfer frozen cap-     oped Western countries such as Germany also
                                                                   had a great positive influence on their economies
                                                                   and rate of reform.”
CONSULTING




             More and more Western
 LEGAL AND




                                                                      Meanwhile, Andrei Gorodissky, chief partner at
                                                                   Andrei Gorodissky & Partners, said that, for some-
                                                                   one to be successful in corporate law, it is not just
                 and Russian                                       enough to have a sound legal background and be
                                                                   up to speed with the legislation: It is also very im-
                                                                   portant to understand what is going on in society
                    corporations turn                                                  as a whole — in politics, the
                                                                                             economy and the business

                    to local corporate lawyers                                                community.
                                                                                                Gorodissky added that
                                                                                              serious corporate clients
                     to help them navigate the                                                do not just need some-
                                                                                             one who can give a pro-
                                                                                                     fessional analysis of
                       minefield of Russian                                                                legislation —
                                                                                                           that can be

                       laws and issues like                                                                done by the
                                                                                                           company’s
                                                                                                           own lawyers.
                       hostile takeovers                                                                  “They
                                                                                                     someone who can
                                                                                                                      need

                                                                                                  read between the
                        or premeditated                                                           lines and figure out
                                                                                                  who or what is

                        bankruptcies                                                              behind which events,
                                                                                                  identify trends and
                                                                                                  forecast the future,”
                                                                                                  he explained.

                                                                           AP
                                                                             territory. Their duties can in princi-
                                                                             ple range from giving legal advice
                                                                             on tax-payment minimization,
                                                                             keeping clients out of prison and
                                                                             helping them launder their money
                                                                             to threatening their adversaries.
                                                                               It is therefore not surprising that
                                                                             some local lawyers, especially cor-
                                                                             porate ones, have found themselves
                                                                             the targets of business-related vio-
                                                                             lence in Russia, the lawyer with the
                                                                             U.S. firm said.
                                                                               He clarified by saying that “this
                                                                             usually means either that such
                                                                             lawyers have overstepped the
                                                                             boundaries of just being a lawyer
                                                                             for businesspeople who has
                                                                             important information about a
                                                                             company’s state of affairs and
                                                                             development strategy, or have

                                                        AP
                                                                             made such a bad choice of client
                                                                             that their lack of professionalism
                                                                             warranted such a harsh fate.”
 Unwritten code of etiquette                                   To avoid being caught in such a crossfire,
  “It is fashionable nowadays in Russia to get               Morzharowski said, lawyers in general, and cor-
corporate lawyers involved as early as possible              porate lawyers in particular, should get involved
in business negotiations,” Valery Angelov, direc-            only in cases where all parties involved “are
tor of the TIAN legal center, noted.                         interested only in finding legal resolutions to
  Angelov added that there is an unwritten etiquette         their conflicts.”
that every corporate lawyer tries to follow during
such negotiations. “This is because a corporate
lawyer is like the face of a company, portraying its
image at the negotiating table. He should arrive in a
good car and make his entrance in a calm fashion.
He shouldn’t rush to take a seat — but, on no
account, should he remain standing,” he said.
  This also partly explains why law firms are so
demanding about the image of their lawyers, said
Alexei Binetsky, senior partner at Binetsky &
                                                             Originally specializing in the creation of legal systems, Garant−Service
Partners. “In the West, there are high demands on a          was a pioneer in this sector of the software market. For more than 11
lawyer’s ethical qualities — everything has to corre-        years we supply legal information forming Russian legislation both in
spond to the rules of the establishment. The West is         English and in Russian.
an example for us in this sense,” he said.                   At the present time the only way for getting access to present−day
  Exact data on corporate lawyers’ earnings in               edition of a legal document is a computerized database using.
Russia are hard to come by. But, according to                Having our system will be provided you with next services
a Moscow-based corporate lawyer with a U.S.                  • Professional, judicially accurate translations, worked on by native
law firm who requested not to be identified,                 English speakers.
the minimum fees for overseeing a deal start                 • Every feature of legislation arising from torts will be discovered by
at $15,000 per case, while the average fee on                Garant’s lawyers to be reflected in comments.
sizeable deals ranges from $60,000–$300,000 to               • It’s possible just to get documents assigned to your situation.
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                                                             You may work with the Demo−version of our system on the website
 Interplay of business and crime                             www.garant.ru, English version, Free online demo.
  The rapid growth in the application of cor-
porate law has not always had a smooth ride                  NPP Garant-Service
in Russia. One reason, according to legal prac-              Telephone: (7- 095) 930-8603
titioners, is that business and crime, as a rule,            Facsimile: (7- 095) 930-8411
are so intertwined that most people simply                   e-mail: gareng@garant.ru
equate the two.                                              Internet: www.garant.ru
  Consequently, an in-house or independent cor-
porate lawyers’ job can take them into dangerous
     Tracking listed Russian companies                        EQUITIES
LUKoil (LKOHG)*                                                                            Mcap     52 wk    52 wk    Avg daily
  U.S. transport company General Maritime Corp.
                                                              Market data                  $mln     high     low       4 wk vol
and LUKoil have signed a contract to charter tankers                                                                      $mln
to ship oil from Black Sea and Mediterranean ports.
                                                              RTS Index                             518.07   313.99     498.70
The contract gives General Maritime Corp. priority
                                                              LUKoil                       14,460   20.53    13.77       41.21
rights to ship LUKoil oil from the Russian port of
                                                              Surgutneftegaz, ord.         8,629    0.53     0.29        10.12
Novorossiisk, Ceyhan in Turkey and Supsa in                   Surgutneftegaz, pref.                 0.29     0.19         1.01
Georgia. General Maritime Corp. is one of the largest         Sibneft                      10,169   2.78     1.72         2.52
companies in the world using medium-sized tankers.            Tatneft                      1,926    1.20     0.56         1.83
                                                              Yukos                        25,441   14.55    8.45        94.85
Sibneft (SIBNG)                                               Bashneft, ord.               562      3.85     2.41         0.03
   Shareholders in Sibneft will be asked to decide on         Bashneft, pref.                       1.80     1.29            −
payments of interim dividends for the first half of           Transneft, pref.             2,169    445.00   325.00       0.17
2003 totaling about 30.5 billion rubles ($1.006 bil-          Gazprom, local               25,772   1.33     0.64        45.97
lion) at an extraordinary shareholders’ meeting on            Gazprom, ADS                          21.00    10.25       14.26
Sept. 15. The earnings per share is 6.44 rubles ($0.21).      UES, ord.                    11,572   0.29     0.08       203.67
Sibneft President Yevgeny Shvidler said that paying           UES, pref.                            0.26     0.07         1.52
sizeable dividends is part of the company’s share-            Mosenergo                    1,733    0.08     0.02         7.83
holder policy and meets the best corporate stan-              Lenenergo                    400      0.48     0.24            −
dards. “Sibneft aims to provide its shareholders with         Bashkirenergo                244      0.25     0.10            −
maximum earnings once investment programs and                 Samaraenergo                 186      0.05     0.03            −
financial commitments have been fulfilled,” Shvidler          MTS, ADS                     5,405    62.45    23.95       13.25
said.                                                         VimpelCom, ADS               2,382    48.97    21.91       13.10
                                                              Rostelecom, ord.             1,384    1.93     0.98         8.88
Golden Telecom (GLDN)                                         Rostelecom, pref.                     1.20     0.53         0.20
  Preliminary data forecast that Golden Telecom’s             Golden Telecom               725      30.09    10.28        4.60
earnings in 2003 will increase by 20 percent to $320          MGTS, ord.                   665      7.58     5.93            −
million-$340 million, while earnings before interest,         MGTS, pref.                           4.80     2.61            −
taxes, depreciation and amortization would double             Central Telecom, ord.        546      0.31     0.19         0.02
to $120 million. The company plans to invest $55              Central Telecom, pref.                0.20     0.10         0.01
million in developing its networks in 2003.                   Northwest Telecom, ord.      304      0.44     0.35            −
                                                              Northwest Telecom, pref.              0.24     0.17            −
Volga Telecom (NNSI, NNSIP)                                   Volga Telecom, ord.          556      1.99     0.81         0.02
  The Samara branch of Volga Telecom invested                 Volga Telecom, pref.                  1.28     0.48            −
                                                              South Telecom, ord.          307      0.10     0.05         0.01
329.2 million rubles in developing communications
                                                              South Telecom, pref.                  0.07     0.04            −
networks in Samara Oblast in the first half of 2003 —
                                                              Ural SI, ord.                817      0.03     0.01         0.84
up 16.7 percent on the result for the first half of 2002.
                                                              Ural SI, pref.                        0.02     0.01         0.02
  The company increased the number of fixed-line
                                                              Siberian Telecom, ord.       404      0.03     0.02         0.02
telephones by 13,700 in the first half of 2003, includ-
                                                              Siberian Telecom, pref.               0.02     0.01         0.01
ing 9,800 in Samara itself and 1,400 in rural areas. The
                                                              Far East Telecom, ord.       102      0.96     0.53         0.01
number of telephones per 100 people for the first
                                                              Far East Telecom, pref.               0.63     0.32            −
half of 2003 was 20.18 in Samara and 13.68 in rural           RosBusinessConsulting        130      1.45     0.50         0.04
areas.                                                        Norilsk Nickel               8,018    38.00    16.50       15.88
                                                              Severstal                    1,808    83.00    47.00        0.01
Tatneft (TATNG)                                               Sberbank                     4,740    284.60   137.25       3.83
  Tatneft paid out 4.667 million rubles on its fifth          Baltika                      1,635    15.40    11.80        0.03
coupon of second-series bonds. A sum of 46.67 rubles          Sun Interbrew GDR, Class A   577      5.92     3.25            −
was paid per bond with a nominal of 1,000 rubles.             Sun Interbrew GDR, Class B            6.50     3.25         0.02
Bank Zenit acted as underwriter and payments agent            Wimm−Bill−Dann, ADS          869      21.70    16.35        1.41
for the bond issue. Tatneft issued the second series of       36.6 Pharmacy                78       12.36    0.03            −
bonds for a total of 100 million rubles on April 24,          Aeroflot                     394      0.39     0.28         0.04
2002. The coupon period of the bonds is three                 OMZ                          264      7.20     4.10         0.04
months. The number of coupons is eight, and the               AvtoVAZ                      631      33.13    18.73        0.33
coupon earnings rate is 18.72 percent for each                GAZ                          88       27.50    14.00           −
coupon. The bonds will circulate for two years.

* Registration numbers of shares on the RTS securities list

42   •   The Russia Journal            August 2003
The Russia Journal óñïåøíî èçäàåòñÿ óæå íà ïðîòÿæåíèè 5 ëåò è ÿâëÿåòñÿ â íàñòîÿùåå âðåìÿ
ñàìûì ÷èòàåìûì àíãëîÿçû÷íûì èçäàíèåì èç Ðîññèè è î Ðîññèè. Âëèÿíèå
The Russia Journal íà ïðèíÿòèå ðåøåíèé â ñôåðàõ áèçíåñà è èíâåñòèöèé è äëÿ ôîðìèðîâàíèÿ
èìèäæà ðîññèéñêîãî áèçíåñà è ðîññèéñêèõ êîìïàíèé â ìèðå òðóäíî ïåðåîöåíèòü. The Russia
Journal ÷èòàþò áîëåå 250 òûñÿ÷ èíîñòðàíöåâ, è â ÷èñëî íàøèõ ïîäïèñ÷èêîâ âõîäÿò ñàìûå
èçâåñòíûå ïðåäñòàâèòåëè äåëîâûõ êðóãîâ ÑØÀ, Åâðîïû è Ðîññèè.
СОДЕРЖАНИЕ
                                                                áèçíåñ−àññîöèàöèÿìè è èññëåäîâàòåëüñêèìè èíñòèòóòàìè;
Æóðíàë The Russia Journal Magazine ÿâëÿåòñÿ íåçàìåíèìûì         àíàëèòèêàìè ðîññèéñêèõ è çàðóáåæíûõ èíâåñòèöèîííûõ è
èñòî÷íèêîì ñàìîé ïîäðîáíîé èíôîðìàöèè î äåëîâîé                 êîíñàëòèíãîâûõ êîìïàíèé.
àêòèâíîñòè â Ðîññèè, âêëþ÷àÿ, ïîìèìî òðàäèöèîííî
îñâåùàåìûõ îñíîâíûõ êîðïîðàöèé, àíàëèòèêó ìàëîãî è              Миссией The Russia Journal Magazine является:
ñðåäíåãî áèçíåñà, ðåãèîíàëüíûå ñïåöèàëüíûå âûïóñêè, à òàêæå
ðåãóëÿðíûå îáçîðû ðîññèéñêîé ïðîìûøëåííîñòè è ñôåðû             • ïîâûøåíèå äîâåðèÿ ê ðîññèéñêîìó áèçíåñó íà Çàïàäå;
óñëóã. Ýòà èíôîðìàöèÿ áåñöåííà äëÿ èíâåñòîðîâ, àíàëèòèêîâ,      • ïîêàçàòü ïðèâåðæåííîñòü ðîññèéñêèõ êîìïàíèé ê îòêðûòîé è
ìåæäóíàðîäíûõ þðèñòîâ, òðåéäåðîâ, ìåæäóíàðîäíûõ                 ïðîçðà÷íîé ïðàêòèêå âåäåíèÿ áèçíåñà;
ãîñóäàðñòâåííûõ ó÷ðåæäåíèé è êîìïàíèé, êàê óæå ðàáîòàþùèõ       • ñîäåéñòâèå ñîçäàíèþ áëàãîïðèÿòíûõ óñëîâèé äëÿ ðàçâèòèÿ
â Ðîññèè, òàê è ïëàíèðóþùèõ âñòóïèòü íà ýòîò ðûíîê â áóäóùåì.   òîðãîâî−ýêîíîìè÷åñêèõ, ôèíàíñîâûõ è íàó÷íî−òåõíè÷åñêèõ
                                                                îòíîøåíèé ñ èíîñòðàííûìè ïàðòíåðàìè;
Ðàçíîîáðàçíûå ìàòåðèàëû, ñíàáæåííûå êàðòàìè, òàáëèöàìè,         • ñîäåéñòâèå ïðèâëå÷åíèþ èíîñòðàííûõ èíâåñòèöèé â ýêîíîìèêó
ðåéòèíãàìè, äèàãðàììàìè, ðàññêàçûâàþò î ãëàâíûõ âîïðîñàõ        Ðîññèè;
ðàçëè÷íûõ ñåêòîðîâ ðîññèéñêîé ýêîíîìèêè è áèçíåñà.              • ñîäåéñòâèå ðàñøèðåíèþ ýêñïîðòà ðîññèéñêèõ òîâàðîâ è óñëóã;
Ìàòåðèàëû ãîòîâÿòñÿ ïðèçíàííûìè ñïåöèàëèñòàìè â äàííûõ          • ìåäèà ïîääåðæêà ðîññèéñêèõ îðãàíèçàöèé è ïðåäïðèíèìàòåëåé
îáëàñòÿõ, ðîññèéñêèìè è èíîñòðàííûìè æóðíàëèñòàìè,              â óñòàíîâëåíèè äåëîâûõ ñâÿçåé ñ èíîñòðàííûìè ïàðòíåðàìè, à
ñïåöèàëèçèðóþùèìèñÿ íà ðàçëè÷íûõ ñåêòîðàõ ðîññèéñêîé            òàêæå çàùèòå èíòåðåñîâ ðîññèéñêîãî ïðåäïðèíèìàòåëüñòâà çà
ïðîìûøëåííîñòè è áèçíåñà, ïðåäñòàâèòåëÿìè èíäóñòðèè,            ðóáåæîì.




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   Tel.: (095) 959−2345, Fax.: (095) 959−2348
   http://www.trj.ru, e−mail: advt@trj.ru
        Auditing companies
                                                                 has made great strides in its development, and many




        take off
                                                                 Russian auditors have been using international stan-
                                                                 dards in practice for some time now.
                                                                   The Finance Ministry, along with the help of pro-
                                                                 fessional auditing associations, has prepared new
                                                                 standards. Six of these new requirements were
                                                                 approved in September 2002 and are being success-
                                                                 fully implemented by our auditors. Work is near
                                          By Mikhail Makarov     completion on a number of other basic standards.
                                                                 Once they are approved, this will regulate the basic




        T
                     he Moscow Audit Chamber, established        audit procedures.
                     following a presidential decree on audit-     TRJ: How do companies choose an auditor?
                     ing activities in Russia, celebrated the    Do the various ratings of auditing companies
                     first decade since its founding last        play any part in this, and can companies real-
                     autumn. From the start, its goal has been   ly use these ratings to objectively assess audi-
        to improve auditing practices and protect the rights     tors’ work?
        and interests of auditing organizations, independent       VK: I don’t think that ratings can play a major role
        auditors and chamber members.                            in choosing an auditor. For a user of auditing services,
          Vladimir Kolbasin has headed the chamber since         what is most important is the quality of service, the
        1993. He is also a member of the expert and con-         qualification level of the people providing it and their
        sultative council attached to the chairman of the        experience at carrying out audits in similar enterprises,
        Russian Audit Chamber and first deputy chairman          and you can’t get this information from ratings.
        of the Moscow mayoral commission on co-ordi-
        nating auditing activities.
          Kolbasin spoke to The Russia Journal about the
        development of auditing activities in Russia.
          The Russia Journal: Common auditing stan-
        dards are an essential part of organizing
        domestic capital flows and attracting invest-
        ment from abroad. What is the Finance
        Ministry doing to
        draw up auditing
        standards for Russia
        that meet interna-
        tional ones?
                                       Domestic audi-
AUDIT




          Vladimir Kolbasin:
        Everyone involved in
        auditing in Russia real-
                                       tors are often
        ized that the old stan-
        dards approved by the
        Presidential Commis-
                                       better-equipped
        sion on Auditing Ac-
        tivities needed to be
        thoroughly reworked
                                       for conditions in
        and brought into line
        with      international
        standards and that
                                       the Russian busi-
        there had to be a clear-
        er distinction between
        compulsory require-
                                       ness world than
        ments and recommen-
        dations. Over recent
        years, Russian auditing
                                       foreign ones
        44   •   The Russia Journal   August 2003
   This was illustrated by one tender for an audi-               I think that representatives of the professional
tor for state-owned or partially state-owned enter-            community are best-qualified to carry out checks
prises. As one of the professional audit associ-               according to the procedures set by the Finance
ations accredited with the Finance Ministry, the               Ministry and carry out informal analyses of the con-
Moscow Audit Chamber sent representatives to                   trol systems of the companies in question.
more than 170 tender commissions. The ratings                    But it would be good to set up independent expert
results played no substantial role in deciding the             bodies within these auditors’ associations that would
winner at any of these tenders.                                be headed by authoritative figures without their own
   This doesn’t mean that the idea of compiling rat-           business interests in the audit sector.
ings is wrong in principle. They are a part of auditing          TRJ: How justifiable is it to compare the
companies’ image policies and an indicator of stabil-          activities of Russian and international com-
ity in auditors’ work over the long term.                      panies on the Russian market? Is there com-
   TRJ: Most audit companies are set up to pro-                petition between them? Do foreign compa-
vide accounting and auditing services, but,                    nies that require audit services tend to use
sooner or later, end up focusing more and                      foreign auditors?
more on consulting. What do you see as the                       VK: It is entirely possible to compare Russian and
main problems between clients and the com-                     international companies providing auditing services
panies providing consulting services?                          on the Russian market. Some Russian companies
   VK: If we’re looking at accounting and tax con-             have already become members of international con-
sulting, this is an integral part of auditing activities,      sulting- and auditing-company associations, and
and all auditing companies are to a greater or lesser          Moscow auditors are opening their offices in Europe.
degree involved in it.                                           Today, the market is not divided into segments
   Consulting on corporate and financial manage-               that are accessible or inaccessible to Russian audi-
ment, information technology, marketing and hu-                tors, as was the case in the early 1990s. The largest
man-resources management is something that only                and best-known Russian auditing companies now
large, multiprofile auditing companies can get into,           have sufficient authority to carry out audits of even
taking their activities beyond the framework of                the largest Russian clients.
auditing and accounting alone.                                   There are cases when Russian companies use the
   For most auditing companies, accounting and tax             services of both foreign and Russian auditing com-
consulting account for a not-very-large share of their
earnings — 10-20 percent — but management con-
sulting accounts for up to 70-80 percent of the earn-
ings of large auditing and consulting companies.
This is because these services are highly complex and
costly and because these companies shift their focus
from routine auditing and accounting services to
more creative consulting.
   If the rules of professional and business ethics are
adhered to, then the clients of auditing companies
should have no problems in their relations with them.
The only thing to keep in mind is that you can’t get a
company to help you organize your accounting and
have that same company carry out an independent
audit of your firm.
   Problems arise if the client starts to see the consul-
tant’s advice as a panacea for all his problems and
loses sight of the fact that the effectiveness of pro-
posed solutions depends to a large extent on how
well they are implemented.
   TRJ: Public auditors’ associations are tasked
with monitoring the quality of work of audit-
ing companies. What do you think of the fact
that these public professional associations are
headed by people who have their own busi-
nesses in the audit sector?
   VK: Control over the quality of auditing companies’
work is above all the purview of the Finance Ministry.
The ministry sets the rules for checks into whether
audit companies and individual auditors meet the
requirements of the law. I think it is perfectly justifiable
for the Finance Ministry to delegate the right to carry
out checks of self-regulating auditors’ organizations.
        panies. This happens in cases when an interna-         think it’s more of a rhetorical question. The director
        tional audit is necessary for relations with foreign   of a large Russian company who decides to use an
        investors, but when, for the purposes of making a      international auditor will have carefully weighed up
        management decision, it is better to work with         the economic opportunities to be gotten out of get-
        Russian auditors who know the specifics of the         ting a costly report — attracting additional invest-
        Russian legislation and mentality.                     ment, for example — and the cost of the service.
          The difference in quality of service provided by       TRJ: What is the aim behind the idea of
        Russian and international auditing companies has       creating a union of auditing companies?
        been virtually eliminated by this point. Of course,    Which companies have already joined, how
        this goes above all for large and medium-sized         will it get bigger, and which companies
        companies that already have some experience on         are set to join it?
        the auditing market. Leading Russian companies           VK: Looking at the mergers of the largest auditing
        find themselves in constant                                            organizations that have gone through
        competition with the Big Four                                          the accreditation process, I think it’s
        companies nowadays, and, if         ‘[Y]ou can’t get a company         too early to talk about this.
        they’ve been managing to do                                               For a start, any monopolization
        this for several years now, that    to help you organize your          removes the competition factor and
        says something in itself.                                              leads to stagnation of development.
          TRJ: Most market play-            accounting and have that              Second, hasty mergers, like any
        ers say that the majority                                              radical      organizational         change,
        of Russian companies will           same company carry out             could destroy auditing organiza-
        have to implement inter-                                               tions’ already-formed teams and
        national financial-report-          an independent audit of            their traditions.
        ing standards over the                                                    Finally, is it really necessary to
        next few years. What are            your firm’                         break apart what has been created
        the prospects for Russian                                              with no little effort, especially as we
        auditing companies in                                                  have not yet even really had the
        this respect? Will the big                                             chance to work in the new legal
        Russian companies be                                                   environment and use all the possibil-
        able to compete with the                                               ities that the new law on auditing
        Big Four?                                                              activities gives?
          VK: Of course they will.                                                Our Western colleagues, by the
        For a start, the question of                                           way, prefer to break up monopo-
        bringing reporting into line                                           lies. In France there are two such
        with international standards                                           organizations, and in Britain there
        is more of an organization-                                            are six, while the United States
        al issue. First, we need to                                            has more than 20 different asso-
        train the accountants, then                                            ciations, and they all coexist and
        train the auditors.                                                    co-operate when necessary.
          Many Russian auditing com-                                              The most effective means of co-
        panies already provide services                                        operation for the auditing communi-
        to help companies bring their                                          ty, as I see it, is for large auditors’ asso-
        reporting procedures up to                                             ciations to get together to solve spe-
        international standards on the                                         cific problems, not a hastily carried-
AUDIT




        request of directors who have                                          out organizational merger.
        long-term vision and want to
        get a picture of their business                                        TOP RUSSIAN AUDITING AND
        in accordance with them.                                               CONSULTING GROUPS
          Also, the international ac-
                                                                             Company name     Revenue, thousands of rubles
        counting and reporting stan-
        dards that are to be intro-                                      1  BDO Unikon Ruf                265,303.0
        duced here soon will be above                                    2  Rosekspertiza                 258,042.0
        all for internal use. The ques-                                  3  FBK (PKF)                     145,914.8
        tion of competition should be                                    4  Top−Audit                      94,922.5
        asked from a different angle,                                    5  Rusaudit Dornkhof,             83,969.1
        then. It’s more about whether                                       Yevseyev & Partners
        the international auditing                                       6 Finekspertiza                    78,225.0
        companies, with the “interna-                                    7 Gasaudit                         76,461.0
        tional pricing policy” they                                      8 Gorislavtsev and Co.             76,001.1
        practice, will be able to com-                                   9 Auditinform                      65,088.0
        pete with Russian companies                                      10 Marka Audit                     63,641.7
        on the domestic market. I

        46   •   The Russia Journal   August 2003
        Elite housing could be
                   running out
                      of space

Prices are rising, but where will the new
buildings go up?
                                          By Galina Anni


 T
         he real-estate market is experiencing its sec-
         ond summer of big sales, with prices of               The House on Ozerkovskaya
         top-level houses continuing to rise —
 although space may be running short for elite
 units in the most desirable areas.                                 «It is not shameful to show this
                                                                    house to the foreigners...
   Prices for Class A housing have broken the psychologi-           It is nice, very nice»
 cally important $10,000 per-sq.-meter barrier, according to                          Peter the Great
 Yury Lakeyev, general director of Baut-L, and prices in the
 sector could soon hit $15,000 per sq. meter. Meanwhile,
 Class B housing goes for about $4,000 per sq. meter, and
 Class C housing costs about half that much.
   Mikhail Yakimov, marketing director at Novy Mir, said
 that, as far as location for exclusive housing goes, the
 best bets are within or close to the Garden Ring. The
 Plyushchikha or Botanichesky Sad districts are also
 desirable sites for top-level housing.
   “Prices for Class A housing are growing faster than
 prices in other market segments,” Yakimov said. “We
 predict a price rise of 20-25 percent this year, while           Your home in Zamoskvorechye
 we think prices in the Class C segment will increase                   52, Ozerkovskaya Embankment
 by not more than 15 percent.”
   Lakeyev said that Class B and C housing, however, are                  959 49 29
 where investors stand to make the most profit at the                   ÎÀÎ Ôèíàíñîâàÿ ãðóïïà «Íîâûé ìèð» – èíâåñòîð è çàêàç÷èê ñòðîèòåëüñòâà.
                                                                           Ïðåäëàãàåòñÿ ó÷àñòèå â ñòðîèòåëüñòâå. Ëèçåíöèÿ ¹ ÌÑË 029310−2

               ou
 moment. “Y can expect at least a 30 percent per                                    www.new−world.ru
 annum increase in value for the investor at the initial
 investment stage,” he said.
            One reason for this is that there are few opportuni-      at Patriarshy Prudy. The Eliton penthouse features
         ties for developers in the elite-housing sector, with lit-   a unique view out over the Christ the Savior
         tle space remaining available in the popular districts       Cathedral and central Moscow. The penthouse is
         for new projects, experts say.                               selling for $9,000 per sq. meter. In the second build-
            “The problem today is that there is hardly any suitable   ing, at 1/14 Bolshoi Palashevsky Per., where the
         space for building comfortable housing,” Yakimov said.       average price is $4,000 per sq. meter, the pent-
         “Ostozhenka, the only district with more-homogenous          house is selling for $8,000 per sq. meter.
         type of housing throughout, has been almost totally             There is also the new exclusive residential com-
         developed now, and so construction is moving into            plex Vyensky Dom, being built by an Austrian com-
         other districts. In the other central districts, though,     pany in a historic part of old Moscow on 1
         exclusive housing will have to be placed near less-elite     Neopalimovsky Per. between Smolensky Blvr and
         buildings, which some people may not be happy about.”        Plyushchikha. The 400 sq.-meter penthouse has ceil-
            In Zamoskvorechiye, for example, it is possible for a     ings higher than three-and-a-half meters, large
         new, exclusive building to end up a stone’s throw            arched windows and an exit to the roof. The average
         from an old five-story and anything-but-exclusive            price in the building is $4,000 per sq. meter, but the
         apartment block.                                             asking price for the penthouse is around $6,000 per
            Lakeyev said the big problem now is that there            sq. meter. Construction has also begun on two other
         are too many Class A buildings and not enough                exclusive buildings in this district — one on the
         Class Bs, a state of affairs confirmed by sales trends.      intersection of Truzhenikov Per. and Savvinskaya
         Previously, Class A buildings would be entirely sold         Nab. and the other on Olsufyevsky Per.
         off before construction was completed, while,                   Things may be changing soon in the sector, accord-
         today, completed buildings tend to have a fair num-          ing to some market participants.
         ber of unsold apartments.                                       “The luxury market has a clearly defined investment
            About 90 percent of customers interested in the           cycle,” warned Alexei Sidorov, a consultant at Kalinka
         upscale-housing market are looking for Class B hous-         Realty. “We’re right at the end of this cycle. Most of the
         ing, realtors say. This is driving up prices in the cate-    completed buildings will be sold this year. This means
         gory: It is now virtually impossible to find a Class B       that, next year, it will be hard to find something ready
         apartment for $3,000 per sq. meter.                          on the new housing market.”
            One segment that stands out within the exclusive-            That might make it more difficult for realtors to
         housing sector is penthouses, with prices about 50           make sales as quickly as before.
         percent higher than the rest of the units in any partic-        “Not so long ago, it was normal to have a kind of
         ular building. Penthouses are larger and feature high        aura of silence surrounding buildings under con-
         ceilings and an entrance to the roof that provides           struction,” said Lakeyev. “Now, this no longer works.
         even more usable space — and, above all, they offer          As a PR tactic, it doesn’t get people excited the way
         the best views from their large windows.                     it could before. Now, we have to use the available
            Dmitry Kuznetsov, the new real-estate depart-             advertising techniques — Internet advertising, ban-
         ment director at MIAN, said that, among the most             ners in the street and, of course, the specialized real-
         expensive offers on the market at the moment are             estate magazines. It’s essential to advertise offers in
         the 150 meter-high penthouse in the Eliton build-            the press; then, the potential buyers know where
         ing in Ostozhenka and a 250 meter-high penthouse             they can call and get a qualified consultation.”
                                                                                             As well as using tried-and-test-
                                                                                           ed advertising methods, realtors
                Prices for exclusive                                                       are also looking for new ones.
              apartments in Moscow                                                         “We are always trying out differ-
                       (per sq. meter)                                                     ent ways of working with poten-
                                                                                           tial clients,” said Kalinka Realty’s
                       Average price
                                                                                           Sidorov. “We make statements to
                         $4,000                                                            the press, send out information
                        Ostozhenka                                                         to targeted recipients and hold
                  (the most popular district)                                              presentations and other informa-
                         $6,000                                                            tional activities. We’re going to try
                     Zamoskvorechiye                                                       organizing an auction, too.”
                         $5,000                                                               Sidorov complained that there
ESTATE
 REAL




                                                                                           have been no technological inno-
                  Central (Patriarshy Prudy,                                               vations since 2001 that would
                     Tverskaya, Arbat)                                                     make buildings safer and improve
                   $3,000−$4,000                                                           service. “We’re waiting for a new
              West (Kuntsevo, Krylatskoye,                                                 breakthrough,” he said. “Perhaps
                    Vorobyovy Gory)                                                        there will be a few new projects
                  $2,000 (average)                                                         that will set the tone. We’re hop-
                                                                                           ing to see them take shape by
                                                                                           this autumn.”

         48   •   The Russia Journal            August 2003
         Apartment
           Moscow
         T
                      he chances of finding
ESTATE
 REAL




                      cheap housing are dis-
                      appearing fast in Mos-
                      cow. Yes, there are still
                      units such as a ground-
         floor apartment in a Khrushchev-
         era five-story block on the outskirts
         of town that you can get for about
         $30,000. But, mainly, you are talk-
         ing $50,000-$80,000 to get a rea-
         sonably sized apartment anywhere         Kurkino sells for an average of $815, while in Mitino, which offers mostly
         near the city center.                    two- and three-bedroom apartments, a sq. meter costs $890. Kurkino
            Even though the supply of units       offers not only apartments, but also three-, four-, five- or six-bedroom
         is increasing, getting anything          townhouses that sell for from $820 per sq. meter.
         below $800 a sq. meter is becoming          Building housing in areas with developed infrastructure networks is the
         impossible, real-estate agents say.      dominant trend today. Construction is going ahead on plots of land still
            Some residents are perplexed,         available or on the site of old demolished buildings. Most of the housing
         saying developers are pushing rates      is panel or brick buildings. This kind of construction lacks the advantages
         up unfairly. But, many experts say,      of being part of an entirely new district in that it usually means ending up
         “welcome to the real world.”             in an area without modern infrastructure.
         Property in any capital city doesn’t        The cheapest housing is concentrated on the outskirts of town, in dis-
         come cheap.                              tricts such as Birulyovo-Zagorye or Ochakovo-Matveyeskoye. Next up in
            The only two relatively cheap         the price range are individual buildings here and there in outlying areas.
         districts offering standardized          There is a brisk trade in apartments in P44-T panel buildings around the
         panel housing in Moscow now are          Shchyolkovskaya metro station, for example.
         Lyublino, which developers say has          There are also plans to build a large number of these panel buildings
         the cheapest three-room apart-           around the Rechnoi Vokzal metro station. Prices in this area are still mod-
         ments in its micro-district 39a, and     erate. Large apartments here sell for $670 per sq. meter, and one-room
         Maryino. Standardized brick build-       apartments start at $850 per sq. meter. Prices for panel and large brick
         ings are going up in the districts of    buildings around the Prazhskaya and Yuzhnaya metro stations are similar.
         Kurkino and Mitino, but they are            Construction is underway on a 30 story brick building on Prospekt
         not cheap. A sq. meter of space in       Vernadskovo with a two-level underground parking facility. Three- and

         50   •   The Russia Journal   August 2003
prices in
still high
As any Muscovite knows,
apartments are only getting
more expensive. And
although there are a few
indicators that prices may
stabilize, the future is far   By Ivan Vorontsov
from clear
         four-room apartments without finishing work and                            for $1,100-$1,200 per sq. meter, which is on the same
         with areas of 114-157 sq. meters are already on sale.                      level as prices in panel buildings. This was the same
         The apartments have ceilings more than three                               price as 18 months ago. This store of unsold apart-
         meters high, triple-glazed windows, and German                             ments is stopping prices from rising, but it isn’t likely to
         radiators with temperature regulation. These apart-                        make prices fall.”
         ments, which are considered business-class housing,                          Alexander Baigushev, deputy general director of
         sell for $1,140 per sq. meter.                                             Kvartal, said that consumers have become more
            Business-class housing can be found not only in                         rational in their preferences. Previously, it was con-
         the brick buildings around town, but also in panel                         sidered prestigious to own a palatial apartment, but
         buildings in the more prestigious locations. There is                      now customers are more interested in how to make
         business-class panel-building housing on Rubtsov-                          the best use of their living space.
         skaya Nab., for example, and around the Prof-                                “The clients have changed,” said Yury Kochetkov,
         soyuznaya metro station. This housing sells for                            marketing director at the Pravovoi Tsentr Zhilya
         $1,000-$1,500 per sq. meter. Many of the brick proj-                       real-estate law center. “Most of the clients before
         ects have a similar price range.                                           were businessmen, while now there are more mem-
            Apartments in brick buildings do not all get                            bers of the intelligentsia. Also, people have become
         bought up immediately. Each of these buildings,                            more familiar with all the different nuances. People
         built a couple of years ago, still has apartments to                       know the rules of the game on the market, and they
         offer. This could have an impact on prices, given                          know how important it is to have developed infra-
         that supply will further increase this year.                               structure and an underground garage.”
            “The fact that apartments in finished buildings                           Kochetkov said the only niche that is still not filled
         remain unsold has an impact on new projects,” said a
         representative of one real-estate

                                                                          There are clients who
         agency who wished to remain
         unnamed. “If there are a lot of
         unsold apartments, it becomes
         hard to keep raising prices. After
         all, apartments in every new proj-
         ect cost a little more than apart-                               come looking for an
         ments in already finished buildings
         — the price growth on the market
         is always fuelled by new projects.
         Now that there’s a supply of apart-
                                                                          apartment in Moscow
         ments in finished buildings, apart-
         ments in brick buildings are going                               and end up buying one
                RUSSIAN HOUSING CONSTRUCTION DYNAMICS
                                         Total area,            % compared to
                                                                              in the oblast instead
                                   millions of sq. meters    corresponding period
                                                               of previous year
              January                       1.3                       134.1
              February                      1.2                       132.8
              March                         2.3                       106.8
              First quarter                 4.8                       119.3
              April                         1.5                       125.9
              May                           1.5                       117.4
              June                          3.4                       103.2
              Second quarter                6.4                       111.0
              July                          1.7                       119.8
              August                        1.9                       125.3
              September                     3.7                       103.1
              Third quarter                 7.3                       111.9
              October                       2.3                       112.8
              November                      2.9                       109.3
              December                     10.1                        94.7
              Fourth quarter               15.3                        99.6
              January-December 2002        33.8                       106.7
              January                       1.7                       136.3
ESTATE
 REAL




              February                      1.5                       121.5
              March                         2.4                       104.4
              First quarter                 5.6                       117.3
              April                         1.7                       117.6
              May                           1.7                       109.3
              June                          3.7                       109.0
              Second quarter                7.1                       111.1
              January-June 2003            12,.7                      113.7

              In June 2003, construction companies built 44,400 new apartments.
              In the first half of 2003, they built 138,100.
              Source: Goskomstat




         52    •   The Russia Journal                       August 2003
is for good-quality apartments not far from the city
center at a price of $2,000-$3,500 per sq. meter.
There are few projects in this price range, and, when
they appear on the market, the apartments sell very
fast. The other trend that Kochetkov notes is
demand for small apartments from people not look-
ing specifically for upscale housing. No one needs a
one-room apartment of 60 sq. meters or a two-room
apartment of 90 sq. meters. The optimum size for
apartments in brick buildings is 45-50 sq. meters for
a one-room apartment, 60-70 sq. meters for a two-
room and 80-90 sq. meters for a three-room.
   Many buyers are now turning to the closer towns
in Moscow Oblast in search of cheaper apartments.
Realtors say that all the nearby towns, such as
Lyubertsy, Mytischy, Balashikha, Krasnogorsk, Odin-
tsovo, Vidnoye and Khimky, are popular — as is even
Troitsk, which is farther away but, as a former scien-
tific town, is still home to a large number of mem-
bers of the intelligentsia and academics.
   There are clients who come looking for an apart-
ment in Moscow and end up buying one in the oblast
instead, so long as it is not far from the city. Some-
times, it takes as long to get to the southwestern out-
skirts of the city as it does to reach some of the closer
Moscow Oblast towns. For example, it takes 20 min-
utes to get from Yuzhnoye Butovo to the nearest
metro station at Yasenevo, and it takes 25 minutes to
get from the Moscow Oblast town of Solntsevo to the
Yugo-Zapadnaya metro station. Most of these nearby
towns can be reached by public transportation from
the nearest metro station in 10-15 minutes.
   The other factor fuelling demand for apartments in
Moscow Oblast is that prices are 20-30 percent lower
than in the city: Apartments sell for an average $500-
$600 per sq. meter. “Apartments in standardized
panel buildings are especially popular,” said a repre-
sentative of Miel. “They attract buyers because they
are not too big and are relatively inexpensive.”
   But prices in satellite towns like Khimky, Mytischy,
Krasnogorsk, Odinstovo, Reutov and Dolgoprudny
are already almost on a par with those in Moscow
itself. However, this is not true of brick housing,
which is sometimes even cheaper than panel hous-
ing if it is not the right class and not built in the right
location. Apartments in Moscow Oblast brick build-
ings sell for $650-$700 per sq. meter, a price range
unseen in Moscow.
   Realtors do not foresee any large price fluctuations
this year, either on the new housing market (MIAN
forecasts a monthly price growth of 1-1.5 percent)
or on the secondary market.
   On the secondary market, there is always strong
demand for good apartments in the west and south-
west, mostly for two- to four-room apartments at a
price of $1,000-$1,400 per sq. meter.
   “Prices on the secondary market have grown
somewhat more slowly in the first half of this year
than they did last year,” said MIAN PR Director
Andrei Zhingan. “The balance today between supply
and demand lays the ground for stability on the real-
estate market in [the rest of] 2003.”
     The legal tangle of employing
                                        The steps in the process are:




P
              rior to employing a
              foreign national, a       1) Registration of the employer with
              Russian     company           Interior Ministry departments
              must apply for per-       2) the OVIR and UVIR. The com-
              mission to employ           pany may initiate the applica-
foreigners (a work permit).               tion for the quota parallel with
Accredited employees of repre-            the registrations with OVIR and
sentative offices are no exception        UVIR. The application for the
to this rule.                             quota or the general permit to
   A foreign citizen is also not          employ a foreign citizen (or a
allowed to engage in any business         Russian without formal residen-
activities (e.g., as a consultant or      cy) is done by obtaining a con-
entrepreneur) without prior re-           clusion regarding the necessity
ceipt of a work permit. Work per-         to employ a foreigner from
mits are issued within a national       3) the local (regional) Labor
quota for foreign labor set annual-        Agency with
ly by the Russian government            4) confirmation by the Central
(530,000 for 2003).                        Labor Agency. Upon receipt of
   In many countries, work per-            the conclusion, the employer
mits are issued as rights for an           files with
individual to work. In Russia, this     5) the local Migration
is not so. The work permits and            Department, after which
the corresponding confirmations            the company can file for      The June edition of The Russia Journal
are related to the company in              permission with               provided information about visas for foreign
whose name they are issued.             6) the Federal Migration         nationals wishing to enter Russia. This time
   This, in turn, means that the           Department.
foreigner will have to leave                                                around, we talk about work permits
Russia upon termination of              The company will then
employment.         However,     the    receive a permit to employ foreign-
employer has the right to               ers. The employer may now invite a        ➡ paying for deportation of the
replace a person within a given         specific person for a specific posi-        employee, if needed
time limit. The permits are non-        tion as detailed in the permit.           ➡ notifying the Interior Ministry
transferable and allow for only           The employer assumes the fol-               about breach by a foreigner of the
one employment.                         lowing obligations in connection              terms of the agreement or early
   If a person takes up positions       with employing a foreigner:                   termination of the agreement
in two or more separate legal                                                     ➡   notifying the Interior Ministry
entities, a separate work permit        ➡ ensuring that the employee                  and the FSB about the foreign-
and confirmation are needed for             (or contractor) has a valid               er’s absence from work or place
each one.                                   work permit                               of residence
   When applying for a work per-        ➡    depositing the necessary
mit, the employer has to undergo            amount to cover the cost of           Certain categories of foreigners
submissions to six different autho-         return transport to the foreign-      are exempt from the requirement
rities in sequence. The company             er’s home country                     to receive a work permit:
can include more than one posi-         ➡    undergoing registration of the       ➡  Foreigners with temporary or
tion in the applications. According          foreigner at his or her place of        permanent residence permits
to current practice, a company is            residence                            ➡  Diplomats (and foreigners with
allowed to file for work permits        ➡    notifying the local tax inspec-         similar status, as detailed in law)
only once a year. This means that           torate about hiring a foreigner       ➡  Accredited journalists
the company has to foresee all its          in specific cases                     ➡  Foreigners working under con-
needs to employ foreigners and          ➡    facilitating departure of the           tract in the assembly and
apply for permits for all of them           foreigner upon termination of            installation of imported
simultaneously.                             the agreement                            machinery and equipment

54   •   The Russia Journal   August 2003
foreigners in Russia
                                             The Russia Journal answers readers' visa questions
                                                                                                              By Jon Hellevig
                                             Q: My employer is a foreign-owned company registered in
                                             Moscow. I have a work permit, but now I have received infor-
                                             mation from the Moscow city government that my visa cannot
                                             be registered there because I live in Moscow Oblast. I tried to
                                             register the visa in the oblast, but was refused because my
                                             employer is registered in Moscow. Is this correct, and what can
                                             be done about the situation?
                                             A: In your situation, the employer is registered in a different city from
                                             where you live. We have come across such issues earlier in our practice.
                                             According to the law, the foreigner has to register within three days after
                                             arrival with the authority that has issued the visa. A visa is connected to the
                                             work permit; thus, the visa will have to be registered at the location of
                                             issuance of the work permit. For registration of the visa, in turn, you need
                                             to have a valid apartment (housing) lease agreement or a guarantee letter
                                             from the landlord, all with a notary's confirmation. If you live in a hotel, you
                                             can register through it (note that hotel registration might not be sufficient,
                                             for example, if you later want to register your car). In practice, the authori-
                                             ties require that the accommodation be located in the same region as
                                             where the employer is registered.
                                             Q: When I entered the Russian Federation two months ago, I
                                             filled in a migration card. However, recently I lost it. Will I be
                                             allowed to leave Russia without this card?
                                             A: In accordance with the legislation of the Russian Federation, foreign cit-
                                             izens should keep the exit stub of their migration papers with entry and
                                        AP




                                             residential registration stamps during their stay in the Russian Federation,
                                             and these documents are to be returned to border officers when leaving
     (assembly, installations, super-        the country. Therefore, it is obligatory to have the card in one's hands when
     vision, servicing, warranty or          leaving the Russian Federation. If it has been lost, it is necessary to report it
     post-warranty repairs)                  to a local Internal Affairs Ministry office at one's residential registration
 ➡   Students and teachers, in spe-          address within three days. The agency will examine an applicant's passport
     cific cases                             data and issue a duplicate of the card with a stamp confirming registration.
 ➡   Citizens of Belarus                     Q: I employ a number of non-Russian citizens who have yet to
                                             receive work permits, though I am working on the process. My
 Employing a foreigner without the           business cannot just pack up and leave while the process is being
 receipt of a work permit is subject         completed. Is the government aware that it will take time to
 to sanctions as detailed in the             comply with the new laws? Is there some kind of grace period?
 Administrative Violations Code              A: Unfortunately, the new law on visas was ill-prepared and came into
 (fines according to Article 18.10).         effect quite abruptly. Nobody seems to have thought about the practical
                                             consequences of in effect bringing already existing businesses to a standstill.
 This information was provided               So, the answer is that there is no grace period for anybody. Each person
 and sponsored by Avenir, the lead-          working in Russia without a work permit is in violation of the law. From a
 ing visa and work-permit consult-           practical standpoint, Avenir thinks that it is worthwhile to show goodwill
 ing company in Russia. You can              toward the authorities and initiate the process as soon as possible, even
 find more information either by             with the knowledge that the work permits will take some time to arrive.
 writing to legalfactor@russiajour-
 nal.com or by contacting Jon                Jon Hellevig is a partner with consulting firm Avenir & Partners, specializ-
 Hellevig at Avenir &                        ing in accounting, law and human-resources. The second edition of the
 Partners directly at                        "Avenir Guide to Russian Taxes," of which he is a co-author, is due out soon.
 www.avenir.ru.
            Russia's top leasing
          Place            Company name          Volume of leasing credits extended in   Volume of leasing credits     Volume of
                                                     the first nine months of 2002           extended in 2001        completed deals

            1     RTK-Leasing
                                                                  94,000.0                  60,000.0                  31,027.4

            2     Avangard Leasing
                                                                  41,079.3                  47,976.2                   6,955.9

            3     Promsvyazleasing
                                                                  32,129.5                  31,129.2                  12,265.0

            4     LeasingPromHold
                                                                  38,245.7                  35,076.3                   6,592.2

            5     Kelvin (Rolf Leasing)
                                                                   8,640.0                  13,000.0                  15,802.3

            6     RMB-Leasing
                                                                   7,700.0                  23,300.0                  16,965.5

            7     Ilyushin Finance & Co.
                                                                  90,000.0                  90,000.0                         -

            8     Globus-Leasing
                                                                  21,088.4                  13,697.0                     700.6

            9     Russian-German Leasing Co.
                                                                   6,930.0                    5,800.0                110,268.0

            10    Yugorsk Leasing Co.
                                                                  10,667.6                  50,381.7                     209.4

            11    DeltaLeasing
                                                                  14,655.4                    7,979.0                  3,483.0

            12    Baltinvest (St. Petersburg)
                                                                   5,014.5                  14,003.5                   5,109.9

            13    Moscow Leasing Co.
                                                                   5,570.0                    7,500.0                 26,162.0

            14    LeasingBusiness
                                                                   9,598.6                    5,483.3                  2,926.9

            15    Raiffeisen-Leasing
                                                                  17,660.2                  20,480.0                         -

            16    Interleasing
                                                                  13,650.0                    3,960.0                  1,006.0

            17    S.A. Leasing
                                                                   4,314.3                    4,906.8                  5,401.4

            18    Stone XXI
                                                                   7,180.0                    7,810.0                     53.5

            19    Industrial Leasing Co.
                                                                   7,871.1                    3,449.6                    638.6

            20    Aviation Leasing Co. Tupolev
                                                                  17,157.0                    4,056.0                        -
                                                                                                                                       Source: www.carleasing.ru




            21    KNK-Leasing
                                                                   2,666.4                    6,536.0                  2,222.6

            22    Alenir
                                                                   5,600.0                    4,500.0                    721.0

            23    Sakhalin Leasing Co.
                                                                   1,433.0                  10,127.7                     433.7

            24    Carcade
                                                                   2,200.0                    2,300.0                  5,300.0

            25    Rosagroleasing
                                                                145,500.0                            -                       -

56   •   The Russia Journal        August 2003
companies
 Place         Company name
                                                       (in $1,000)

                                   Volume of leasing credits extended in   Volume of leasing credits     Volume of
                                       the first nine months of 2002           extended in 2001        completed deals

   26    Sial-Leasing
                                                      4,068.4                   4,868.1                     73.7

   27    Leasing-Finance
                                                      1,449.8                   3,394.8                  6,300.5

   28    Euro Leasing
                                                      9,400.0                   1,800.0                         -

   29    Petroleasing-Management (Petrocommerz Bank)
                                                      4,285.7                   4,621.3                         -

   30    Petersburg Leasing Co.
                                                      1,236.6                   2,250.4                  2,512.5

   31    DeltaLeasing DV
                                                      2,340.5                   1,611.1                    258.6

   32    Tyumen Agroindustrial Leasing Co.
                                                        397.0                   2,695.9                  2,006.1

   33    Siberian Leasing Center
                                                      1,800.0                   1,000.0                    500.0

   34    Volga Leasing House
                                                        970.0                     650.0                    890.0

   35    KMB-Leasing
                                                      3,056.5                     400.5                     64.0

   36    Volga Leasing Co.
                                                      3,500.0                     500.0                         -

   37    Khanty-Mansiiskaya Leasing Co.
                                                      1,078.1                   3,140.0                     23.9

   38    Mosoblleasing
                                                          45.0                    705.0                  6,180.0

   39    Geoleasing
                                                      2,013.5                     987.9                         -

   40    Rosstro-Leasing
                                                        179.4                     511.7                    899.0

   41    Voronezh Leasing Co.
                                                        110.4                     905.8                     29.9

   42    Yakov-Semyonov Leasing Co.
                                                        184.1                     245.6                  1,320.7

   43    Volga-Vyatka Interregional Leasing Center
                                                        543.5                     592.8                    180.2

   44    Kupol-Leasing
                                                        250.0                     550.0                    680.0

   45    Uralleasing
                                                        700.0                     300.0                    100.0
                                                                                                                         Source: www.carleasing.ru




   46    Avtoleasing
                                                      1,900.0                        6.0                        -

   47    Global Leasing Invest
                                                             -                  1,580.0                         -

   48    Pharmleasing
                                                        741.9                          -                        -

   49    Grinleasing
                                                          25.0                    300.0                     55.0

   50    Leasing Co. for Small Business of Tatarstan
                                                          75.0                      85.0                   110.0
      Wear a boa
                                   to Goa                    Indian food to die for in the
                                                             heart of Moscow
                                                             for main-course items was from 230 to 3,900 rubles,
                                                             and an average dish cost about 400. A separate menu
                                                             listed a wide range of drinks, including many cocktails
                                                             and liqueurs, and, among the non-alcoholic beverages,
                                                             there were some interesting iced teas. It took some
                                                             flipping through the menus to find the beer section
                                                             but, at last, we ordered glasses of Gosser all round.
                                                             They were frothy, and, although they were colder than
                                                             room temperature, they weren’t “summer cold.”
                                                                Our companion, who was born in Nantes, decided
                                                             to be patriotic and order a French dish. His salad of
                                                             oakleaves, rocket and Parmesan cheese (330 rubles)
                                                             wasn’t especially French, though, and could have
                                                             been improved with less oil — but it was fresh and the
                                                             Parmesan of rare quality.
                                                                My husband and I decided to go-a Indian: Vegetable
                                                             biryani (380 rubles) for him and dal makhany (230
                                                             rubles) for me. We each also ordered a cheese nan (90
                                                             per piece). The biryani met with my husband’s
                                                             approval. Served on an oblong dish, this was a type of
                                                             Indian fried rice with peas, fried cubes of cottage
                                                             cheese, cardamom seeds, roasted cashews and carrots.
                                                             It came with a small side salad of tomato and cucum-
                                    By Katherine Dolan       ber, along with a small bowl of yogurt sauce. It was so
                                                             rich that he couldn’t finish it. My dal was a creamy


O
          n one side of the lane stood an orange mar-        lentil concoction without a hint of spice, and beside it
          quee. On the opposite side was a restaurant        lay a pile of rice that had somehow been colored
          with tinted windows. Two red-coated                green, yellow and pink. It all tasted good, and I ate it
guards stood at the door, looking out at a herd of           quickly, but my lips felt very greasy afterward.
BMWs. This was Goa, a fashionable Indian restaurant             Meanwhile, our friend received his second course, a
on Myasnitskaya Ul., right in the center of Moscow.          pasta dish consisting of the soft belly of a salmon and
Deciding to sit in the restaurant rather than in the         turbot on Tuscan fettucine with eggplant and puline
open-air tent, we glided past the guards and fol-            sauce (400 rubles). It was presented beautifully, with
lowed the waitress to a table.                               strips of salmon and turbot woven in a trellis pattern.
   We sat down and took in the scenery. Wooden               Around the fish lay eggplant and green sauce. Again,
planks stood at the entrance, strung with a web of fairy     there was too much oil, and all of the vegetables were
lights. Next to this strange construction stood a statue     overcooked. That said, the dish was nice and hot, the
of Ganesha the Indian elephant god. On my right was a        pasta of bite-worthy consistency and the sauce a
screen of sticks and plastic roses. On my left was a ‘50s-   delectable combination of rosemary and cream.
type American-style bar. The bathrooms, as I found out,         At the end of the meal, we all felt pleasantly full and
were fitted for Louis XIV, with a gigantic mirror and        drowsy. The waitress brought gum with the check,
recordings of birdsongs playing in the air.                  demonstrating the same promptness and efficiency
   The waitress handed us large menus. Each dish was         she had employed throughout the meal. As we left, I
photographed and described in English. There were            thought that I needed to visit again because I hadn’t
three cuisines: French, Indian and Japanese. The price       yet tried the sushi.
CHARITY
E
        very home does not have to
        have a child, but every child
        needs a home. No one
would really argue with this asser-
tion, but it is hard to find a place
in the world that does not have its
share of orphans who have some-
how missed out.
   No one would really argue,
either, with the idea that the state,
society and the world communi-
ty in general should do what they
can to take care of children who,
for whatever reason, do not have
a home. Many people are willing
to help out as much as they can.
But when it comes down to mak-          seems little alternative to this sys-
ing donations to this or that par-      tem. But there are alternative sys-      One orphange,
ticular charity, people start to        tems of care for orphans —
have doubts, asking themselves if       orphanages run by monasteries,           run by a convent in
the money they donate really will       for example. Is there any real dif-
reach the children for whom it is       ference, though, between these           Kostroma, offers
intended.                               church-run institutions and other
   Unfortunately, these doubts are      orphanages?                              many things that
often not unfounded: All around           Obviously, monasteries could
the world, there have been cases        not run orphanages during the            government
where greedy officials and social       officially atheistic Soviet era, but,
workers have become involved in         with the collapse of the Soviet          facilities cannot
financial scandals. The problem is      government, monasteries became
that, for many of these people, the     active again and returned to their       By Alexei Rekut
charity work they are involved in       charity work of old.
is just a job. Almost all of them         The oldest of the orphanages           teachers work with them in small
have their own homes, families and      that emerged at the beginning            groups of three to six children,
lives, and, naturally enough, they      of the 1990s are now celebrat-           thus ensuring that each girl gets
put their own children first, rele-     ing their first decade. This June,       individual care.
gating care for their charges strict-   the Pravedny Ioann Kronstadtsky             As the convent is where the
ly to working hours.                    orphanage for girls at the St.           children and the nuns who look
   Given that people, in general, do    Anastasii convent in the town            after them live, there is no risk of
not like to work for free, there        of Kostroma celebrated its 10th          theft or negligent management,
                                        anniversary.                             and this encourages people to
                                          The convent’s orphanage serves         make donations. For example, the
                                        as a good example for illustrating       convent was given a computer at
                                        the difference between a church-         Christmas, and, by Easter there
                                        run home and state institutions.         were enough for a computer class
                                        For a start, the nuns do not have        to begin at the orphanage.
                                        the concept of a working day, and        Another donation consisted of a
                                        the convent is their only home.          dentist’s drill, and this summer
                                        The children, therefore, are not         the convent will open a dentist’s
                                        their job but members of their           office for the orphanage. Every
                                        family. Like real mothers, they          donation is received with gratitude
                                        look after them 24 hours a day for       and always finds an immediate use.
                                        free, giving the children the love,         Thus, there are cases where the
                                        care and family they need.               person making a donation can be
                                          The orphanage provides a safe          sure that the assistance is reaching
                                        and protective environment for           its intended recipients, as the
                                        the children that shelters them          example of this convent-run or-
                                        from potential abuse by adults or        phanage shows.
                                        stronger peer members.                      The convent’s fax number is 8
                                          The convent is home to some            (0942) 313-486. Address to
                                        30 girls of varying ages, and            Igumenya Inokentia.


60   •   The Russia Journal   August 2003                           This article was published by The Russia
                                                                   Journal free of charge as a public service.
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      GDP volume                                                                             GDP production and gross
                                                                                             added−cost production
                                           Percent in comparison with   First half of 2003
                                                                        (percent in com−
                              June 2003
                                            June              May       parison with first


     GDP
                                            2002              2003        half of 2002)
                                                                                             per industry in current
 billion rubles                2,900.4       106.8
     Production and services
                                             107.3             105.6           107.2
                                                                                             prices
     Volume of industry production
 billion rubles                  674.7       107.0             100.9           106.8
                                                                                                            First quarter 2003               First quarter 2002
     Investment in fixed capital
                                                                                                  Billion rubles   Percent in comparison   Billion rubles   Percent in comparison
 billion rubles, estimation      181.5       112.0             113.3          111.9
                                                                                                                         with total                               with total
     Agricultural production
 billion rubles                   71.3        97.6             123.1            99.7         GDP
     Freight turnover                                                                         In market prices
 billion kilometer−tons          344.8       107.1              97.3          107.1                2,900.4                                  2,267.7
       Including railway transport                                                            In basic prices
                                 133.4       109.7              95.8           113.0               2,548.6                100               2,046.3                  100
     Retail turnover                                                                          Including
 billion rubles                  356.5       108.8             100.5           108.9          Production of goods
     Foreign-trade turnover                                                                          951.7                 37.2               756.4                    36.9
 billion of dollars           36,417         120.5              97.7           126.6             Including
       Including Export                                                                          Industry
                              36,169         119.2              99.2           129.0                 720.4                 28.2               565.7                    27.6
       Including Import                                                                          Construction
                              36,376         123.0              95.0           122.3                 153.3                   6.0              118.2                      5.8
     Real disposable monitory income                                                             Agriculture
                                             113.0             103.2           114.6                  56.3                   2.2                55.9                     2.7
     Average monthly wages per employee                                                      Production of services
      Nominal                                                                                      1,596.9                 62.8             1,289.9                    63.1
     rubles                    5,591         125.7             107.1           125.4          Market services
       Real                                                                                        1,317.8                 51.8             1,060.9                    51.9
     rubles                                  110.3             106.3           109.7             Including
     Number of unemployed                                                                        Transport
 million persons (estimation) 36,165         111.8              99.0           109.9                 211.7                   8.3              176.0                      8.6
     Number of officially registered unemployed                                                  Communications
 million persons              36,280         105.0              96.9           109.5                  49.2                   1.9                37.1                     1.8
     Index of consumer prices                                                                    Trade (wholesale, retail, foreign trade, catering)
                                             113.9             100.8           107.9                 611.5                 24.0               481.1                    23.5
     Index of industry-production prices                                                     Non-market services
                                             113.6             100.7           105.1                 279.1                 11.0               229.0                    11.2

                                                                                                             Source: Goskomstat (State Statistics Committee)
64    •    The Russia Journal              August 2003

								
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