NovemberJuly 27,11, 20102009

This is bne's weekly newsletter covering FDI and investment plans in Eastern Europe. You can receive the list as a plain text or html email or as a pdf file. To manage your delivery options: http://businessneweurope.eu/users/subs.php

TOP STORY INVESTMENT 1. Gazprom the world's most profitable company 2. Aeroflot BoD approves plan to replace Boeing with Airbus planes 3. Anti-monopoly service begins proceedings against coal and steel giants 4. China to extend energy resource tax nationwide 5. Food retail sector: defensive and untapped growth potential 6. Comment: Gas glut reaches Europe 7. Influential neighbors drag heels on sharing land with Skolkovo 8. Labour market revives quickly 9. Mobile giants ask for transparency in 4G frequency allocation 10. OGK3's missing cash: A crucial test for government 11. Putin offers mild punishment for Kremlin offenders 12. Putin outlines new strategy for North Caucasus 13. Retail Sales Forecast in Central and Southeast Europe for H2/2010 14. Russia becoming major oil supplier to US 15. Russia boasts quickest business set up time amongst Brics 16. RussiaBelarusKazakhstan customs union now operational 17. Russian residents have started to spend more than they save RUSSIA-FOREIGN INVESTMENT 18. First deputy PM to discuss pipeline, NPP projects in Bulgaria 19. Gazprom neft considering downstream expansion in Bulgaria 20. Mechel strengthens steel division's sales arm with Turkish acquisition 21. Medvedev to hold energy talks with Vietnamese leader 22. Putin calls for restoration of production ties between Russia and Ukraine 23. Russia to lend Kazakhstan $700 mln for power plant 24. Severstal ups Crew Gold stake to 36.22% RUSSIA-RUSSIA INVESTMENT 25. Auctions for oil & gas deposits fail 26. Gazprom plans RUB1.7 trln in CAPEX in 2011; production still below 2008 levels 27. Moscow to spend $12.8 million on youth business by 2012 28. Russia to invest $40 million in developing AIDS, cancer treatment SECTOR Gas 29. Azerbaijan offers to double volume of natural gas export to Russia 30. Bulgaria agrees to host South Stream Pipeline 31. Bulgaria refers Gazprom contracts to prosecutors 32. Gazprom mulls gas condensate liquefying plant on Novaya Zemlya 33. PM says Bulgaria seeks cut in price of Russian gas supplies 34. Russia's natural gas exports up 56.4% on year in January -May 35. Russian gas output - strong against low base, weak versus pre__crisis 36. South Stream road map to be coordinated on July 8 - Bulgarian PM SECTOR Oil

37. C.A.T. Oil Wins Two Hydraulic Fracturing Tenders Totalling € 55mn 38. Chevron to get 33% stake in Black Sea project with Rosneft 39. Court suspends Environmental Protection Ministry order against Regal Petroleum 40. Gazprom gives TNK-BP more pipeline access 41. June oil output hits record high 42. LUKoil wins exploration rights Offshore Romania 43. Medvedev to hold energy talks with Vietnamese leader 44. Novatek acquires 100% of Tambeyneftegas at below market price 45. Oil companies might create compensation fund to prevent offshore accidents 46. Oil output resumes growth in June, up 2.9% y__o__y in 1H10 47. Putin sees Rosneft investing RUB17bn in Chechnya refinery 48. Russia becoming major oil supplier to U.S. - WSJ 49. Transneft to Increase Transportation Tariffs by 3.3% in August and 10% in December SECTOR High Tech 50. City govt sees high-tech park in St Petersburg constructed by 2015 51. Enel may take part in Skolkovo project 52. Enel may take part in Skolkovo project 53. International Modernization Week to open in Moscow 54. Microsoft allows Russia broader access to source codes 55. Russians ready for introduction of online public services - Medvedev 56. Russia's Innovation city legislation moves ahead SECTOR Metals and Natural Resources 57. Anti-monopoly service begins proceedings against coal and steel giants 58. Mechel starts importing coking coal from Bluestone 59. Petropavlovsk launches 3rd stage of gold mill at Pioneer mine 60. President Medvedev visits Petropavlovsk operations in Amur Region SECTOR Nuclear 61. Iranian official sees launch of Russia-built nuke plant August - September 62. Russia, Kazakhstan sign deals on nuclear power cooperation 63. Russia, Kazakhstan to sign nuclear marketing agreement in 2 months SECTOR Power 64. Enel holds investor day in Moscow 65. June 2010: Pressure on Electricity Prices is Building 66. MRSK North Caucasus Meets With Investors 67. MRSK Siberia gives reasons for RAB tariff implementation delay 68. Russia Electricity reform - More clarity, please! 69. Russian power consumption in June up 4.7% y-o-y SECTOR Retail, FMCG, Phrama 70. Bosch und Siemens Hausgeraete launches plant near St Petersburg 71. Castorama to build 15-20 stores in Moscow, Moscow Region 72. Rusnano to help develop new medicines 73. Russia to invest $40 million in developing AIDS, cancer treatment 74. Russia's antitrust starts probe against Novo Nordisk unit SECTOR Telecom, Internet 75. Medvedev threatens action over unpaid internet bills 76. MegaFon to invest RUB1bn in 3G development in Tatarstan 77. Mobile giants ask for transparency in 4G frequency allocation 78. MTS's retail chain increases retail-market share 79. Vedomosti speculates that new internet search engine is to be set up SECTOR Transport 80. NCSP cleared of breaching anti-monopoly regulations 81. NLMK adds to its rail-car fleet NLMK 82. Putin seeks private Airport investors 83. Russian Railways to up 2011 invest to RUB315bn SECTOR Agriculture 84. Ag min sees Russia's annual grain exports up to $5bn by 2013 85. Drought destroys nearly 9mn hectares of grain crops in Russia 86. Grain harvest forecast downgraded 87. Ministry lowers Russia's 2010 grain harvest forecast by 5.6% 88. Raw sugar advances on speculation Russia may increase purchases 89. Russian deputy PM calls for measures to boost bovine meat output SECTOR Automotive 90. Car market to grow 15% in 2010 from 'cash for clunkers' plan - ministry 91. Car sales in Russia up 3% on year in January-June 92. Car sales jump 46% in June 93. Citroen to start assembling cars in Russia on July 20 94. Customs union keeps foreign cars expensive 95. GAZ to sell 50,000 LCVs, 10,000 MCVs in Russia in 2010 96. GM-AvtoVAZ vehicle output up 58% on year in January-June 97. More cash for clunker program 98. New Cars Sales in June: Strong MoM growth 99. Peugeot's sales in Russia down 19.9% on year in January-June 100. Russia's car market to grow 15% in 2010 from 'cash for clunkers' plan 101. Russia's car imports down 15% on year in January-May 102. Russia's Sollers sales rise 29% on year in January-June 103. Toyota to recall 4,000 Lexus vehicles in Russia - company SECTOR Aviation and defence 104. Aeroflot: Boeing 767s to be replaced with Airbus A330s 105. Antonov, U.S. firm to bid for tanker deal 106. "Flying" Russian battle tank can penetrate all types of armor 107. Israel ready to produce drones jointly with Russia 108. Putin outlines proposals on developing Russian airport sector 109. Russia in airlines boom, passengers up 32% in 5 months 110. Russia needs more flying tankers for its Air Force 111. Russia set to buy Mistral with transfer of French technologies 112. Russia to test-launch 10-12 ICBMs a year through 2020 113. Russia to upgrade 200 Soviet-era tanks for Libya 114. Russian combat aircraft makers fear competition with China 115. Sukhoi Superjet's engines fail certification test - paper 116. UAC ready to resume An-124 production if 40 planes ordered SECTOR Media 117. CTC Media's June audience share driven by successful investments into Domashny's new content SECTOR Coal 118. Coking coal on the Russian spot market appreciated by 28% to USD 193 per ton, following the global trend and a coal deficit 119. EVRAZ plans to launch production at Mezhegey in 2015 SECTOR Chemicals, Fertliser 120. Chemicals: Monthly surveillance 121. Sibur JV to start building PVC plant in Nizhny Novgorod Region soon GOVT REFORMS, REGULATIONS, ECONOMICS, REGIONS 122. Auto producers to benefit from customs union 123. Government approves commissioning of 28.3 GW of new capacity through 2017 under CSA 124. Government extends 'last mile' agreement between MRSKs and FSK 125. Putin proposes canceling property tax on airports UKRAINE INVESTMENT 126. Ukrainian cabinet proposes 840 projects to foreign investors 127. Agricultural Ministry to subsidize sugar beet farmers at UAH 1,000/ha 128. Astarta increased number of cows by 10% to 11 thsd head 129. Azovmash increases its railcar casting capacities 130. Bohdan increased its output of buses and trolleybuses by 175% 131. Coking coal output down, coke production up 132. Court suspends Environmental Protection Ministry order against Regal Petroleum 133. DTEK Trading wins auction for coal supply to Zakhidenergo 134. Iron ore output up 36% y-o-y in 1H10 135. MHP to build breeding farm in Donetsk region 136. MMK Ilyicha to increase output 25% in July 137. Oranta Insurance reports $0.2m net profit for 1Q10 138. Steel prices stabilize, input costs dropping 139. Thermal gencos' output up 10.1% in 1H10 140. Ukraine decreased June coke output by 15.3% MoM 141. Ukraine decreases coke output by 15.1% 142. Ukraine in talks with Russia, EU over building gas pipeline 143. Ukraine's Fuel and Energy Ministry assesses realization of oil and gas extraction projects at $842mn 144. Ukraine's parliament adopts law on public-private partnership 145. Ukrzaliznytsia railcar procurement tenders coming soon KAZAKH INVESTMENT 146. Eurasian Devt Bk, VEB ink deal on loan for Kazakh power plant 147. Industry Ministry to consider Pavlodar regional investment projects 148. Kazakhstan approves first Business Road Map- 2020 project 149. Kazakhstan expects 2010 grain harvest to drop by third after record 2009 150. Kazakhstan hopes to complete WTO accession talks by end of year 151. Kazakhstan suspects over-extraction by Chevron-led venture 152. Kazakhstan to build Central Asian telecoms satellite 153. Kazakhstan to harvest just 15 million tonnes of grain in 2010 154. Russia to lend Kazakhstan $700 mln for power plant 155. Russia to lend Kazakhstan $700 mln for power plant CENTRAL ASIA INVESTMENT 156. Czech retail sales came out better than expected 157. Iran-Turkmenistan-Kazakhstan railway to open in 2011 158. Turkmenistan: Russia ratifies investment protection agreement 159. Uzbekistan: LG to increase refrigerator production BELARUS INVESTMENT 160. WB's IAB 2010 report ranks Belarus #1 by ease of starting foreign business in region 161. Belarus to increase prices of dairy product supplies to Russia 162. Huawei plans to open laboratory in Belarus to develop, adapt software 163. Ukraine, Belarus to sign deal on Venezuelan oil transit this week EURASIA INVESTMENT 164. Armenia: 12,1% growth of total investments in construction in Armenia in Jan- May 2010 165. Armenia: 31,4% reduction of business activity index in Armenia over II quarter 166. Armenia: ANELIK expanding geographic presence 167. Armenia: Ararat Group Company to invest $27 million in production of mineral water and soft drinks in 2010 168. Armenia: EU interested in expanding trade with Armenia 169. Armenia: Government of Armenia allocates 3.5 billion drams for restoration of roads 170. Armenia: In 2001-2009 ArmRosgazprom invested over $700mln in Armenia's gas sector 171. Armenia: In Jan-May 2010 fish production in Armenia grew by 2.4% 172. Armenia: Over 1.1bln RUR invested in the development of the South Caucasus Railway in 2009 173. Armenia: Wine production in Armenia up 30,8%, brandy - 45,9%, and beer - 50% in Jan-May 2010 174. Armenia: Yerevan Brandy Company intends to strengthen ARARAT brand 175. Azerbaijan intends to conduct geological exploration works in Mediterranean and Red Seas 176. Azerbaijan to produce 52 mln tonnes oil this year 177. Azerbaijan: Compliance schedule of motor vehicles’ release date to Euro-2 standards explained 178. Azerbaijan: SOCAR and BP-Azerbaijan to sign contract about exploration of prospective structures in autumn 179. Azerbaijan: Ultra company intends to put up its productions in European market 180. Georgia in Investing Across Borders 2010 – World Bank’s Report 181. Georgia: 2010 First Quarter Recorded Rise in Milk Production and Drop in Egg and Meat Production 182. Georgia: Ardi Group Insurance Company to Intensify Business Activity starting September 183. Georgia: Authorities to Ease Legislation to Promote High-Quality Cement Production for Hydro-Engineering Construction 184. Georgia: Chamber of Commerce and Industry Resumes Issuing Certificates for Indication of Origin 185. Georgia: First Half of 2010 Recorded 20.4 percent Rise in Investments in Achara compared to First Half of 2009 186. Georgia: Fly Dubai Airline to Launch Operation in Georgia 187. Georgia: Government Develops Bill on Information-Technology Zones 188. Georgia: Registration of Foreign Company Subsidiaries in Georgia Takes less than One Week vs. Six Months of Angola, says World Bank Report 189. Georgian Government Plans to Hand over Management of State-owned Hospitals to International Companies 190. Georgian Railway: Caspian oil on the move 191. Georgian Railway and EBRD Announces Tender for Drawing up Tbilisi Center Development General Plan 192. Moldova to pay $265 per 1,000 cubic meters of Russian gas in 3rd quarter 193. Moldovan wine should be used to paint fences - Russia's chief sanitary official SOUTHEAST INVESTMENT 194. Banca Transilvania co-financed EUR150m projects eligible for European funds in H1 195. Bosnia FDI shrinks by 45.5% y/y in Q1 196. Bulgaria agrees to hhost Russia's South Stream gas pipeline 197. Bulgaria still pays for Belene NPP without strategic investor 198. Bulgarian PM to discuss energy projects with Russian Deputy PM 199. CEZ to decide on new power plants in Romania 200. E.ON Ruhrgas becomes new partner in Trans Adriatic Pipeline project 201. East Gate Export 202. EPS, Seci Enegia sign JV contract for building ten hydro-power plants 203. Islamic Development Bank express interest in boosting presence in Albania 204. Kraft Foods to sell Cadbury Romania, Poland units 205. MOL was granted exploration permits in three blocks in Romania 206. No new concession contracts awarded to Petrom 207. Raiffeisen International's Annual General Meeting Approves Merger 208. Tender for new block at Bosnia's Tuzla power plant attracts only Swiss Alpiq 209. Turkey aviation market takes off in first 6 months 210. Turkey eyes share in Iraqi construction pie 211. Turkish investors complain about stifling red tape in Bosnia CENTRAL EUROPE INVESTMENT 212. Czech MinFin excludes PPF consortium from environment clean-up tender 213. FAW enters Turkey's auto market 214. Latvia expects to agree on lower price for Russian gas by 2011 215. Polish gas firm PGNiG to launch project to guage unconventional gas deposits 216. Unconventional hopes in Poland OTHER COUNTRIES 217. Mongolia and China to cooperate on fighting corruption 218. Mongolia: EBRD invests in coal washing plant 219. Mongolia: Hindustan Copper interested in Mongolian mines 220. Mongolia: Parliament approves TT resolution

TOP STORY INVESTMENT 1. Gazprom the world's most profitable company bne July 9, 2010

Russia's state own gas monopolist Gazprom is the world's most profitable company, reports US business magazine Fortune.

Despite the international economic and financial crisis that lead to a dramatic fall in both the demand and price for gas, the Russian company still earned a net profit of $24.56 billion in 2009, down 17.8% on the previous year, Fortune said.

Gazprom has overtaken Exxon Mobil which has held the top slot on the list for the last five-years. The Russian company is also ranked in the top 50 largest companies in the world in terms of revenue that were $94.472 billion in 2009, the magazine said. The biggest company in the world in terms of revenue is American shopping giant Wal-Mart Stores that took in $408.214 billion in sales last year.

Five other Russian companies made it into the list of 500 largest companies in the world: oil companies Lukoil, Rosneft, and TNK-BP, state-controlled Sberbank, and private industrial and banking group AFK Sistema.

2. Aeroflot BoD approves plan to replace Boeing with Airbus planes Alfa Bank July 6, 2010

Aeroflot's BoD has approved the purchase of 11 Airbus-330-300 planes under finance-lease terms with delivery in 2011-13. The catalogue price of each plane is approximately $200 mln. The new Airbuses will replace the company's 11 Boeing 767s. The lease for the Boeings expires over the same period when the company will receive the Airbuses.

Overall, we welcome the deal, as it will allow Russia's flag carrier to unify its fleet. However, it does not mean that Aeroflot Group will not have Boeings in the longer- term. Rostekhnologii has an option to deliver 50 Boeings to Aeroflot Group in the near term. Boeings will also be purchased for Rostekhnologii's former airline assets (Rosavia), which Aeroflot is to acquire. We therefore qualify the news as slightly POSITIVE for the stock, as the synergy with Aeroflot's future subsidiaries will be limited. We do not have a recommendation on Aeroflot, though we note that the company trades at a 20% discount to EM peers.

Georgy Ivanin

3. Anti-monopoly service begins proceedings against coal and steel giants RIA Novosti/UralSib July 9, 2010

The Antimonopoly Service has started proceedings against steel and mining company Evraz, the Raspadskaya Coal Company and the Severstal steel giant over differences in export and domestic coal prices, the service said on Thursday.

"The instances of violations can be seen in economic, technological and in other forms by the unreasonable price setting when signing contracts to supply close- burning coking coal...to Russian and foreign consumers," the service said in a statement.

The Antimonopoly Service added that the difference between the prices could not be explained by volumes or transportation costs.

Additionally, the service suspects the companies of "discriminating against Russian consumers in relation to foreign clients".

The Antimonopoly Service said it had conducted a study of the companies in January-March of 2010.

The service also said that its experts, at the request of the Russian government, were analyzing the cost of the basic conversion of metallurgical products, starting with coking coal all the way through iron ore and metal.

A Evraz official told RIA Novosti that it had not received any documents from the Antimonopoly Service. Severstal also declined to comment, while the Raspadskaya management was unavailable. UralSib writes: FAS opens case against Evraz, Raspadskaya and Severstal. Yesterday, the Russian Federal Antimonopoly Service (FAS) opened an investigation into the coking coal pricing of the largest domestic producers of fat semi-hard coking coal grades (Zh, Gzh), including Evraz (EVR LI – Buy), Raspadskaya (RASP RX – Buy), and Severstal (SVST LI – Hold). The regulator suspects these companies were discriminating against Russian consumers in favor of foreign customers. According to the FAS, the companies are suspected of setting different contract prices for coking coal concentrates supplied to Russian and foreign customers "by eco- nomic, technological or other means, without justification," adding that the difference in prices did not depend on the volume of supplies or transportation costs. The case follows an analysis of the coking coal mar- ket, conducted by the FAS in January-March 2010.

Following orders. As we understand, in April 2010, Russian Prime Minister Vladimir Putin asked the antimonopoly watchdog to investigate the pricing mechanism throughout the steel production chain, starting with coking coal and iron ore and ending with rolled steel producers. In our view, the current FAS probe is simply following government instructions. We note that the above-named companies are the major Russian producers of fat coking coal (Zh, GZh grade), and the FAS may have started its investigation following the accident at Raspadskaya, which resulted in a deficit of fat coking coal on the domestic market.

Immaterial impact for the sector. We note that in 2Q10 Evraz, Ras- padskaya and Severstal stopped export supplies and redirected export vol- umes to the domestic market, given the tight supply situation after the Ras- padskaya accident. We do not believe this coal investigation has anything to do with Mechel's case in 2008 and should not have any negative long-term impact on the industry. In the worst case scenario, the FAS may fine the companies 1-15% of revenues from fat coking coal sales for the period, which is equivalent of $8–120 mln in total for the three companies. While the initial reaction to the news in the names may be negative, we believe any potential fines from the investigation will be insignificant and should not have any material impact on the companies’ financials.

4. China to extend energy resource tax nationwide Alfa Bank July 8, 2010

A representative of the China National Development and Reform Commission stated in a press briefing that the resource tax introduced last month in one province will be rolled out nationwide. The tax applies to oil, gas and coal. It is not clear whether it also covers iron ore, copper and other metals. The tax, we believe, is set at a flat 5% of sales revenue.

This tax raises the effective tax rate by a substantial margin. Coking coal production in China has not kept up with rising demand following the forced closure of thousands of small mines in 2007-09, making China a substantial net importer as of early 2009. This resource tax will further constrain output growth, in our opinion, because marginal reserves are now less likely to be developed. This may support the coking coal price long-term. On the negative side, the introduction of such a large tax in China increases the likelihood of a similar move in Russia. We thus qualify the news as NEUTRAL.

Barry Ehrlich

5. Food retail sector: defensive and untapped growth potential UralSib, Russia July 11, 2010

Double-digit growth fueled by food retail growth and consolidation. We reinitiate coverage on Russia's retail sector. The four traded food retail chains will grow at a 2010-17E aggregate revenue CAGR of 22%, and increasingly consolidate the still fragmented regional food-retail market. Retail trade, boosted by consumer spending, will still outperform Russian GDP at 2010-17E CAGR of 14%. Russian food retailers outperformed Russian GDP and industrial output during the 2009 crisis, posting a 1.6% YoY drop compared to 7.9% and 10.8% respective drops for the other two. Defensive during downturns, the food retail chains in Russia offer double-digit revenue gowth potential over the long term.

Buy X5, Magnit, and Dixy. X5 and Magnit in some ways complement each other's exposure to Moscow and St Petersburg and the regional growth stories, while Dixy appears as a cheaper alternative of X5, with its multiformat, multiregional exposure. Magnit is a regional growth power-house with a 2.8% market share, and expected 2010-17 revenue CAGR of 26%, delivered by economy-class regional formats. X5 is the largest player in Russia's food retail market with a 3.1% share, and is a growing M&A expert in a full spectrum of formats, albeit it grows its revenues slower (at a still strong CAGR of 21%) and more expensively than Magnit.

Strong 1Q10 IFRS results reflect the margin turnaround and growth acceleration of Dixy. Coming from a lower base, Dixy, which we expect to show the fastest EBITDA expansion at 2010-17 CAGR of 24%, trades at a 35-45% discount to the leaders.

FOOD RETAIL - HIGH GROWTH STORY AND CRISIS HEDGE Food retail chains to consolidate. We project traded food retailers to grow dollar sales at a 2010-17 CAGR of 11-26%, and their market share within Russia's food retail segment to increase 2.9 ppt to 6.7% by 2017.

Recovering consumer spending to boost volume and margins. Defensive during downturns, food retail will enjoy a recovery in consumer confidence and boost margins and traffic, particularly in premium stores in Moscow.

Regions hold best growth potential, but logistics are key. We expect regional sales of traded retailers to expand at 2010-17 CAGR of 28% via consolidation.

ATTRACTIVE CONSUMER-BOOM-DRIVEN UPSIDES Increasing spending power to drive retailers' revenues and margins. We expect X5 and Magnit to more than double their market shares by 2017.

Valuation is DCF based. Applying WACC of 11.6-13.4% and terminal growth of 3%, returns fair values comparable to EM peers on forward multiples.

X5 - Buy the market consolidator. X5 trades almost in line with peers on 2011E multiples, and at 46% upside to our target price.

Magnit - Buy the growth champion. Enjoying the cheapest and fastest growth in the defensive regional markets, Magnit's high multiples and 44% upside to our target price are justified.

Dixy Group - Buy cheaper, high growth reassessed. Despite growth and a positive margin turnaround in 1Q10, Dixy trades with an unjustified 24% discount to EM peers and holds 82% upside to our target price.

Seventh Continent - Hold. Although 40-58% cheaper than emerging market peers on 2010 multiples, an unclear strategy warrants a Hold at $8.9 /share.

HIGH SECTOR VALUATIONS IMPLY RISKS Internal and external threats. Russian retailers face the challenge of maintaining growth from a higher base, competing with multinational retail chains in larger cities and contending with property market developments.

Food retail chains to consolidate

Traded food retailers to outperform food-retail market. We expect traded Russian food retailers' aggregate revenues to grow at a 2010-17 CAGR of 22%, fueled by 2010-17E food retail market CAGR of 13%, and consolidation of the overall food retail market, and also other food retail chains. Traded retailers are set to outperform the retail market as they win market share from the still-substantial number of smaller players (i.e., individual shops and smaller, local chains). Thanks to access to low-cost financing and economies of scale, traded retailers will squeeze and consolidate many smaller regional retail chains. In 2002-09, large food retailer chains grew at a 48% CAGR, and outperformed the food-retail market, which grew at 2002-09 CAGR of 22%. Nevertheless, due to the significantly lower (than in western countries) retail trade per capita, food retail in Russia retains strong growth potential.

Strong growth driven by continuing retail-trade expansion. Our macroeconomist forecasts a 2010-17 Russian retail market CAGR of 14% in nominal dollars, and we expect food retail (net of restaurant-accounted sales) to grow at a 2009-17 CAGR of 13%. The retail market in Russia has historically seen very strong growth, with a 2002-09 CAGR of 21% (22% for food retail) in nominal dollars to $412 bln (including $255 bln for food). In comparison, the highly developed US retail market's CAGR for the same period was only 2.2% (3.2% for food retail; remarkably, food retail in the US outpaced the aggregate retail market on the back of an increasing share of higher value-added sales in restaurants and other food & drink service establishments). Coming from a lower base and fuelled by increasing disposable income and consumer spending, the Russian retail market's growth is expected to continue at a noticeably higher pace than in developed markets.

Russian retail market highly fragmented: much room for consolidation. The market leaders retain large consolidation potential, as they squeeze-out or acquire market share from a vast number of smaller players, including regional retail chains/organized formats, old fashioned standalone stores, kiosks, and markets. For example, the ten-largest food-retail chains in Russia occupy some 11% of the food retail market compared to roughly 33% in the US (net of restaurants and food service establishments). We expect that in the next few years, the leading retail chains in Russia will gain more domestic market share and that the structure of the retail market will gradually approach those of developed countries (we believe the US market to be the best western proxy for Russia due to its comparable size and population).

Modern retail chains to squeeze-out traditional formats. We estimate that by 2017, the modern formats (convenience/discounters, supermarkets, hypermarkets) will have increased their share of the food retail market to 69% from the current 44%, translating into 2010-17 revenue CAGR of 19% within the modern segment of retail. In 2002-09, the modern retail formats quadrupled their share from 11% to 44% of the total food retail trade in Russia, resulting in a CAGR of 49% over the same period. Several factors, such as greater product choice and quality assurance, lower prices, and shopping convenience, ensure that modern retail chains will continue to prevail over traditional formats (kiosks/pavilions, open markets, traditional grocery shops). Open markets and traditional groceries will continue to lose ground to modern retail formats or simply close due to being uncompetitive.

Leaders set to consolidate modern retail format. We expect X5 and Magnit to consolidate the market visibly within the modern format. In 2006-09, X5 and Magnit improved their respective retail-market shares from 1.1% to 1.9% and 0.8% to 1.2% (from 2% to 3.1% and from 1.4% to 1.9% of the food-retail market). Thanks to access to cheaper and longer-term capital, the market leaders are able to gain market share from faster (than the market in general) organic growth and market consolidation. The more the leaders grow, the more the competitive advantage they gain over local chains thanks to increasing economies of scale, improving logistics, and better supplier terms. Even during the crisis in 2009, X5 and Magnit gained 0.3 ppt and 0.2 ppt market share (to 3.1% and 1.9%) from their competitors in the food retail market. While nervousness persists about the macroeconomic situation, many investors see global food-retail stocks as a safe defensive bet.

Retail market defensive during downturns, food retail the best bet.

Retail trade in Russia outperformed both GDP and industrial output during the crisis. At the bottom of the crisis in 2009, the food retail trade lost only 1.6% YoY in real ruble terms (total retail trade was down 4.9%) compared with 7.9% and 10.8% YoY drops in GDP and Industrial output. During the crisis in Russia in 1998, retail trade lost only 3.8% YoY compared with 5.3% and 5.2% YoY drops in GDP and Industrial output. The trends in the Russian retail market fit well into the general global retail picture in challenging times. While nervousness regarding the macroeconomic situation persists, many investors worldwide see food-retail stocks as a safe bet for defensive cash flows.

Demand for hypermarkets and discounters well hedged. The structure of Russia's retail sector more-than-ever resembles that of western markets. The retail trade, especially food sales, appears defensive during general market downturns, when consumers have more spare time but less money to spend. While consumers can avoid purchases of property and luxury items, new cars, furniture, electronics, and clothing, they have to buy food on a regular basis and short-duration non-food items. Demand during the crisis shifted towards lower value-added basic-need items and hypermarkets, soft discounters, and economy supermarkets turned out to have been the best hedged, capturing traffic from premium stores and more expensive formats.

Recovering consumer spending to boost volumes and margins Higher spending on food to boost average check. The shift towards more expensive food will support all formats, where the increase in the average check will support LFL sales in 2010-11. Along with hedging against downturns, stocks of Russian food-retailer offer direct exposure to the economic recovery through accelerated revenue growth and stronger margins.

Premium formats to recapture traffic and boost margins. If the economic recovery continues, Seventh Continent and, to some extent, X5 Retail Group should see traffic and gross margins fuelled in the near-term by the return of consumer confidence. Seventh Continent sources most of its revenues from middle (convenience and supermarket format) and middle-high (premium supermarkets) class customers. Seventh Continent, which had the highest margins amongst public Russian retailers before the crisis, had to cut prices, but still lost significant traffic during the 2009 downturn, as many customers switched to cheaper discounters and hypermarkets. X5, to a lesser extent, should benefit from rebalancing its premium client base towards its Perekrestok and Perekrestok Green supermarkets, which target middle and upper-middle class consumers.

Regions hold highest growth, but logistics are key

Regions: more fragmented markets see higher growth rates. Magnit, X5, and Dixy have the biggest expansion potential due to the regions having higher volume growth and lower competition. We expect the regional retail trade to grow at a 2010- 17 CAGR of 14%.

The retail trade in the regions (excluding the Moscow region and the northwest) grew at a 2002-09 CAGR of 23%, and regions' share in total Russian retail turnover improved from 59% to 67% over the period. The higher availability of suitable land and property in the regions than in Moscow and St Petersburg enabled these three retailers to expand in the regions more quickly and at lower costs.

Magnit, X5, Dixy equipped for regional expansion. Thanks to its 100% exposure to multiple high-growth regions in Russia and its sophisticated logistics network, Magnit should continue to enjoy very strong organic expansion into regions via its discounter and hypermarket formats. X5 has an increasing regional outlook and developing regional distribution network. X5 will boost its growth by acquiring and merging regional chains of suitable formats. Dixy is well set to source growth from expanding into the densely populated Central (including the Moscow region) and Urals regions.

St Petersburg: high growth, high competition. We expect the retail trade in the St Petersburg area, which benefits from large state infrastructure projects, to continue growing at an above-average pace until 2017. At a 2002-09 retail turnover CAGR of 24%, the St Petersburg region delivered the highest figure in Russia, backed by significant economic growth and net immigration. However, the formatted retail market in St Petersburg is already saturated due the presence of several regional and national chains. The rapid expansion of hypermarkets in the region is depressing margins at more expensive supermarkets and convenience/discount stores, and resulting in negative LFL traffic for most local stores. This limits organic store expansion potential. In addition, the recently adopted law regulating the retail trade in Russia limits further expansion via M&A among the largest players, such as X5, which already has a market share more than 25% in certain administrative districts of St Petersburg. We see X5's market share declining marginally in the St Petersburg retail market, and Dixy's improving somewhat, albeit from a low base.

Moscow: strong margins, solid retail spending. The Moscow market should continue to deliver strong margins for X5, Seventh Continent, and Dixy, thanks to strong consumption power and high barriers for new entrants (due to lack of suitable property in the central areas of the city). We expect the solid growth to continue in the Moscow area, which remains by far Russia's strongest economic area and notable population inflow. Although from a significantly higher per-capita retail trade base, the total retail trade in Moscow and the Moscow region grew at a below-average though solid CAGR of 16% in 2002-09.

Hypermarkets to drive space growth. Thanks to its strong consumer spending, the Moscow market is set to continue to attract newer entrants (both international and large St Petersburg based retailers). We expect the main increase in trading space to come on the back of large hypermarkets located in Moscow's outskirts, thanks to the higher availability of land and parking there. Meanwhile, smaller convenience/discounter stores will remain the best-suited format to expand in the metropolitan area of the city. We expect X5 and Dixy to continue to increase their market shares in Moscow, while Seventh Continent's share will gradually decline due to its slow expansion.

6. Comment: Gas glut reaches Europe Deutsche Bank, Josef Auer et al July 8, 2010

Major impact on prices, security and market structure

A gas glut is heralding the dawn of a new era. This new era is marked by technological progress, greater convergence between global gas markets and the declining relevance of established pricing patterns in the continental European pipeline business. The areas concerned are the typical large-scale projects, the international supply relationships and the downstream trading and usage levels.

The free-market price of gas will become the new benchmark and will be the guide for the price of pipeline gas. We expect a pronounced buyers_ market to develop in the European gas sector by 2013, with North America dictating the price trend. Following the end of the low-price phase from around 2014 onwards we do not expect to see a renaissance of the longstanding link with the oil price.

The gas glut is bringing opportunities for domestic customers to benefit from pricing changes and providing greater flexibility for industrial users. Traditional municipal utilities and regional energy suppliers are coming under pressure. By contrast, major opportunities are opening up for independent distributors, independent traders and newcomers. Power plant operators should review their procurement strategies. New challenges face gas producers and importers; they will not be in the same boat for much longer, as they will be competing against one another for tighter margins in future.

The security of supply in Europe is improving. The battle for unconventional gas deposits is in full swing. New pipelines and gas storage facilities currently appear to be less urgent. Nevertheless, there is a need to press ahead with the projects in the longer-term interest. Gas market liberalisation, the basis for the new competitive situation, must not under any circumstances be allowed to stagnate. The "Gas OPEC" is currently toothless, but its time will come. Europe should therefore invest in more open structures, globally diversified sources and new technologies - and also trust in the creative vigour of market participants.

Beginning of stage four of the European gas market

There are strong indications at present that, half a century on from Groningen, the fourth stage is just getting underway, bringing with it many changes and challenges for all market players. At least three observations argue in favour of this theory, pointing on balance to the dawn of a new era.

First, towards the end of the third phase gas prices for private households, SME businesses and industry surged massively up to mid-2008 in the wake of exploding oil prices. A major driver of this trend was that gas prices in important western European buyer countries such as Germany are indexed to oil prices. This contractual arrangement, which has hitherto been regarded as sacrosanct across broad sections of the gas industry and was undeniably useful to both sides while the market in gas was starting up, has come to be regarded in recent weeks as at least partially and temporarily dispensable - even in Russia, the dominant source of supply.

Second, there are strong signs that North American and European gas markets in particular, and also some Asian gas markets, after having previously existed separately are now growing closer together. Price trends in recent months are the most powerful indicators of this. The relevance of liquefied natural gas (LNG) in this context will be discussed later.

Third, technological advances play a key part, indeed they are probably the major driving force behind the two trends previously mentioned. New gas extraction technologies are suddenly turning gas deposits not deemed commercially viable until now (unconventional natural gas) into economically interesting options, paving the way for expansion in gas supplies on a scale not previously anticipated, chiefly in the US. What is more, instead of coming from the established gas producing regions the new volumes are widely distributed around the world.

On balance the new fourth phase on the gas market is hallmarked by technological progress, greater convergence between global gas markets and the declining relevance of established pricing patterns in continental European pipeline business (oil price formation). All this is radiating onto the big-ticket investment typical of the industry, onto international supply relationships and onto the downstream trading and consumption stages. The fourth stage just unfolding on the European gas market holds out many opportunities for market participants, but it also entails risks. Since these are closely related to current and probable medium-term price developments, it seems appropriate briefly to outline these and their causes.

From market balance to global gas glut

Price trends over the past ten years have played out against a background of gradual transition from a world gas market broadly in equilibrium in terms of volume to a global gas glut. In the early years of the previous decade, the virtually balanced market situation steered market participants_ expectations in approximately the same direction. Up to the middle of 2008 it was thought that global growth in demand for energy necessitated a marked step-up in the supply of gas. Steep increases in the prices of fossil energies since the beginning of the decade made building up and expanding the necessary gas infrastructure profitable. Consequently, financing for these capital-intensive projects was not usually a problem. Moreover, at least up to the middle of the decade many market observers expected that the launch of trading in emission certificates in Europe would make natural gas significantly more competitive vis-à-vis fossil alternatives, it being widely accepted that the combustion of natural gas emits less CO2 than hard coal and lignite. Going forward, this effect was expected to become more pronounced as heightened climate change hazards seemed inevitably to signal rising prices for tradeable pollution rights. All in all, this triggered a burst of gas-related investment, ranging from the development of new deposits through the construction of additional pipelines to additional LNG infrastructures. This investment boom - with the long time-lags typical of gas projects - is currently having the effect of pushing up the volumes of pipeline gas and liquefied natural gas available around the globe. The situation is now being heightened by the development of unconventional gas, holding out the prospect of substantial additional quantities. The gas glut we are seeing at the moment looks set to persist for some time to come, with severe repercussions on pricing.

LNG spurring international gas price convergence

Since its early days natural gas trading in Europe has essentially been based on physical deliveries through pipelines. The increased emergence of LNG has added another means of transmission. In terms of quantity, however, pipeline gas continues to dominate trade, above all in mainland Europe. In 2009 LNG accounted for 10% of gas supplies in the EU-30.

The uptrend in prices for practically all fossil energy alternatives has enhanced the competitiveness of LNG and made infrastructural investment in the value chain (such as modern vessels to carry LNG and off-loading and regasification terminals) worthwhile around the globe. LNG has injected new flexibility and fresh impetus into the international gas trade. The new transmission vehicle has provided the world regions of particular relevance to the gas trade, i.e. the countries forming the triad, Europe, North America and Asia, which were previously practically unconnected on the gas market, with additional gas trading potential.

Research does indeed show that LNG has paved the way for intercontinental arbitrage, elevating gas trading to a new level at which natural gas prices are becoming more closely linked even between continents. Particularly in the Atlantic area, LNG transmissions have tended to nudge price movements in the same direction on what were previously highly segmented markets for natural gas.4 Up to the end of the latest energy price boom the causal relationship was by no means unidirectional, with for example one region - North America, say - setting a price trend which another continent - in our case Europe - followed. In actual fact the impetus was more or less evenly spread.5 Also important to an understanding of trading activities is that neither the US nor the European side possess the liquefaction and loading infrastructure necessary for exporting LNG. This technical shortcoming is preventing loading at low-price locations and off-loading at high-price locations that would enable brisk physical trade in gas across the Atlantic. Moreover, liquefaction is too expensive for arbitrage trading. That is why liquefaction plants are not built for arbitraging purposes. The only suitable cargoes for deliveries triggered by arbitrage are therefore those already being shipped by LNG tankers from other production areas (e.g. Africa, Qatar). If the price difference offers a great enough inducement, LNG shipments floating in the Atlantic can simply be redirected and regasified at the high-price location. Arbitrage is thus ultimately limited to cargo management (as with many other durable and non-durable consumer goods). Comparatively "small volumes" therefore balance out the regional markets all round the world.

Free US prices put pressure on pipeline gas prices in Europe

In the past months some completely novel developments have occurred in the global gas trade. Key to this were technological breakthroughs with huge economic implications. Two particular features are apparent. First, in the present market situation many determinants are working in the same direction. Second, the convergence of natural gas prices is following a new pattern. It seems as if recently parameters from the US are setting the trend and European prices adjusting within a relatively narrow impact channel.

What does this process look like in detail? The real cause of the gas glut we are currently seeing is the rise in gas prices since the beginning of the last decade. This has suddenly turned the recovery of natural gas from many unconventional sources previously deemed unprofitable into an economically viable option. While it was known that the US and many other countries possessed more or less large unconventional deposits of gas in impermeable shale and coal seams (also called tight gas), the technologies required to extract this only became profitable as gas prices climbed. Essentially these enhanced gas recovery methods revolve around horizontal drilling and a hydraulic fracturing process called fracking or hydrofracking.

The innovative high-tech combination of horizontal drilling and multi-stage fracturing systems is the actual technical reason behind the creeping revolution currently taking place on the gas market.6 The US Department of Energy estimates that America alone possesses sufficient recoverable unconventional gas deposits to supply the entire country for the next 90 to 120 years. Conversely, of course, this means that the United States will become less dependent on imported gas than previously assumed. The large shale gas finds in North America mean that the role played by the US on the global LNG market will have to be redefined.

Genesis of a new LNG world

Until now practically all medium and long-range LNG scenarios have been based on the assumption that going forward the US would have to import ever larger amounts of energy as its domestic fossil energy resources were depleted. Most importantly, it was believed America would absorb much of the additional new supply of LNG set to flood the world market over time. America_s appetite for energy thus held out the promise of keeping the global LNG market in equilibrium for the foreseeable future and ensuring that surpluses did not arise.

In reality matters have turned out differently. Already, the rise in the production of unconventional gas is shaping pricing in the US. Whereas in 2000 just 30% of US gas production came from unconventional sources, the expansion in the volume of shale gas has since pushed this figure above the 50% mark.7 The new amounts enabled the spot price at the Henry Hub8 pipeline, which is the pricing point for the US, to disconnect early on from the other international regional markets.

The gas price on the free market becomes the benchmark and points the way The consequence of this development is that LNG volumes originally scheduled for the US are no longer required there. Redirection of these volumes and their sale on the spot markets in Europe and Asia has caused gas prices to collapse there, too, as in America before them. In 2009 this trend was shored up by two factors which pushed prices in the same direction. First, the global economic recession subdued energy consumption, with the result that global demand for gas was lower than expected. Second, more and more LNG projects launched when prices were riding high (as already discussed) are recently becoming relevant to market activity. Both these drivers are of course ramping up the pressure on prices from the supply-side.

That this price trend has crossed the Atlantic from America to Europe is due chiefly to the free gas market in the UK, which is acting as something of a "release valve" for oversupply. Oversupply of LNG is ousting Norwegian gas in Britain and this is moving on to Germany instead. In north-western Europe gas from Norway is therefore increasingly coming up against gas supplies from Russia, and the prices of both are competing with production from domestic sources. The gas glut drove down spot prices at the end of 2009 to around 1 ct/kWh (i.e. below long-term averages), while the prices at German border crossings calculated by the Federal Office of Economics and Export Control (BAFA) were roughly twice as high.9 To put it another way, the Henry Hub spot price points the way for the spot price at the UK National Balancing Point, to which in turn the Title Transfer Facility futures market is aligned. And this price for free quantities then radiates onto all gas prices on the Continent. This also applies to prices for pipeline gas, because following liberalisation of the European natural gas market gas consumers are at liberty to choose the suppliers from whom they purchase their gas. Corporate clients and regional distributors have recently been making increasing use of this option, with the result that even long- term contracts for district gas with "take-or-pay clauses" have been affected. Ultimately, price pressures are obliging suppliers to be rather more open-minded on long-term contracts whose prices are indexed to that of oil. On balance the new- found flexibility on the part of even the major Russian gas producer signals a sea change in the gas industry.

The new international gas cosmos is thus characterised by a situation in which, unlike the previous decade, there is a unidirectional price correlation between North America and Europe (and also Asia, with certain reservations). The direction is flagged up by the Henry Hub spot price, which gas prices in Continental Europe then follow via the NBP. Whilst the price for pipeline gas previously determined events in Europe, the free gas price is now the new benchmark.

7. Influential neighbors drag heels on sharing land with Skolkovo RIA Novosti July 6, 2010

Russia's Skolkovo innovation hub may soon face problems because its influential neighbors, including tycoon Roman Abramovich, do not intend to share land with it, the Vedomosti daily said on Tuesday.

The research hub requires some 600 hectares of land in total. President Dmitry Medvedev has already ordered that the 375 hectares necessary before construction can begin be allotted to Skolkovo by the end of the year.

Skolkovo is being built from scratch 20 km (12.4 miles) outside of Moscow. The center will focus on research in five priority spheres: energy, information technologies, communication, biomedical research and nuclear technologies.

However, much of the territory that the Kremlin would like to use for the realization of its pet project is owned neither by the state, nor by state entities, the paper said.

A substantial part of the land in question belongs to the Gloria company, owned by Abramovich. A golf course is currently being constructed on the land and there are no plans to involve it in Skolkovo's development project, said John Mann, a representative of the London-based Millhouse Company which manages Abramovich's assets.

Another 15.4 hectares are owned by the Zarechenshkiye Dachi Company which is believed to be a part of Zarechye Development, which belongs to Olga Shuvalova, wife of First Deputy Premier Igor Shuvalov and another businessman, Vedomosti reported.

"Zarachenskiye Dachi are implementing their own project on the territory and are not considering any proposals from Skolkovo," Zarechye Developmnt's CEO Yekaterina Muratidis said. She refused to comment further.

Owners of the other neighboring parcels of land have heard nothing about plans to expand Skolkovo's territory, the paper said.

The land will only be able to taken away from its current owners if a special federal law is adopted, lawyer Ilya Sviridov said, commenting on the situation for Vedomosti.

8. Labour market revives quickly VTB Capital July 9, 2010

News: An article in today's Vedomosti suggests that the labour market is experiencing a boom, despite the summer traditionally being a quiet period. The number of vacancies placed on some of the largest internet jobs portals keeps growing, often exceeding the number of CVs by a factor of two or more. Salaries on offer are also increasing, exceeding the pre-crisis levels of mid-2008.

Our View: We find the latest labour market statistics highly encouraging as they support our view that economic growth is sustainable. However, we note that internet portals statistics are more representative of the situation in Moscow and several other big cities, so the situation in the regions might be less vibrant.

Sharply rising demand for labour has its drawbacks: the quick rise in wages which often accompanies it (and real wages were up 7% in May) can easily add to cost pressures, eventually resulting in higher inflation. This is yet another factor that underpins our expectations of an acceleration in prices growth towards the end of the year.

Aleksandra Evtifyeva

9. Mobile giants ask for transparency in 4G frequency allocation RIA Novosti July 9, 2010

Russia's largest three mobile operators have asked the Communications Ministry to ban the non-competitive distribution of next-generation LTE technology 4G frequencies to companies which might acquire them for further sale, Kommersant business daily said on Wednesday.

Kommersant quoted a letter signed by MTS President Mikhail Shamolin, MegaFon Chief Executive Officer Sergei Soldatenkov and VimpelCom CEO Yelena Shmatova as saying that they have information on "a number of initiatives to distribute LTE frequencies to smaller companies, which will lead to negative consequences for our users, our companies and the state on the whole." Kommersant said that the smaller companies are Voentelecom and its subsidiary Osnova Telecom which belong to the Defense Ministry. The ministry, which already owns the bulk of Russian frequencies, has requested surplus frequencies so that it could resell them to other companies or offer services to households.

The letter said that even if the small companies decided to build 4G networks, it would take them much longer than the top three cell operators. They estimate spending on building the 4G network at $5-7 billion within 5-7 years.

10. OGK3's missing cash: A crucial test for government

OGK3 to fund Interros? In our view, the long-running saga concerning $820mn of cash passed from OGK3 to Interros at the height of the credit crunch has reached a critical stage, with the suggestion by Vladislav Nazin, OGK3's deputy CEO, that the missing cash could be raised by OGK3 taking on debt or issuing new primary shares. If these proposals were to be acted upon, we believe investors would conclude that the Russian authorities were prepared to overlook the cynical removal of cash from a major public company, operating at the forefront of a national strategy of infrastructure renewal, in order to prop up the presumably ailing finances of a private individual.

No justification for acquisitions. We have analysed the circumstances of the Oct 2008 purchase by OGK3 of a 25%-minus-one share stake in Rusiya Petroleum from Interros for $576mn and conclude that there was no justification for OGK3's board to approve this transaction. Furthermore, we conclude that in the circumstances that prevailed at the time, an independent valuation of the Rusiya Petroleum stake, used to justify the purchase price, was meaningless. We also see no justification (other than to prop up Interros' finances) for OGK3's purchase of other assets from Interros, or for OGK3's purchase of a large tranche of Norilsk Nickel shares.

Substantial corporate governance threat. Senior government ministers, including Prime Minister Vladimir Putin, have criticised the OGK3/Interros transactions and characterised them as misuse of investment funds. The energy ministry has give OGK3 until the end of the year to recover the funds to the capex account. We believe the investment community has welcomed this political intervention and continued to buy the shares of Russian power sector companies in the expectation that the government's demand will be met.

However, if OGK3 shareholders had, themselves, to replace the missing cash, we foresee a new corporate governance crisis that would push up the already- high cost of capital in the Russian power sector. For a sector where capital costs typically constitute around 60% of end-user tariffs, the consequences for Russian consumers would be very negative, in our view.

11. Putin offers mild punishment for Kremlin offenders bne July 08, 2010

Kremlin spokeswoman Natalya Timakova has said that Russian Prime Minister Vladimir Putin has issued reprimands to six deputy ministers, all of whom answer for bureaucratic discipline within their ministries, for not fulfilling presidential orders in a timely fashion, reports The Moscow Times.

The newspaper report quoted Dmitry Peskov, Putin's press secretary as saying that reprimands are included in a public servant's records and can be used to revoke bonuses.

12. Putin outlines new strategy for North Caucasus Ria Novosti July 6, 2010

Russian Prime Minister Vladimir Putin outlined on Tuesday a new strategy for the North Caucasus intended to boost its economic development and stem the cause for rising violence in the region.

Economic goals Putin said that the regional economy must achieve a growth rate of about 10% per year. Putin made the statement at a plenary session during the interregional conference held by the ruling Untied Russia party on the strategy of the North Caucasus social and economic development by 2020 and the program for 2010-2012.

"Today the region lags considerably behind in terms of basic social and economic indicators. We need to reduce and in the future overcome this gap," Putin said.

The North Caucasus should be included in the system of interregional and international economic ties and large strategic projects, the prime minister said.

Namely, Putin said, the North Caucasus could become a part of the international North-South transit transport corridor.

"We see a real perspective of building the North Caucasus into a North-South international transit corridor that would link Russia and Europe with the Persian Gulf and Central Asian states," he said.

He added that Makhachkala, the capital of the republic of Dagestan, could become a major Russian merchant port on the Caspian Sea.

Russia is ready to support the Cherkessk-Sukhumi highway construction project to link the North Caucasus region with the former Georgian republic of Abkhazia. The republic was recognized by Russia as independent in 2008, after a brief war with Georgia over South Ossetia.

"We are prepared to use the advantages of cooperation in the sphere of transport and promote jointly with our Abkhazian partners the project of building the Cherkessk-Sukhumi highway," Putin said.

The prime minister said a promising area was the establishment of building materials enterprises in the North Caucasus.

"We need to build a lot in the North Caucasus, both housing and social facilities, and such large-scale tasks will require a boost to the building materials industry and related sectors," Putin said.

The prime minister said the oil refinery, to be built in the republic of Chechnya by the Russian state-controlled oil company Rosneft, would be open in 2014. The project, worth 17 million rubles (about $550,000), will make the republic a leading center of Russia's oil and petrochemical industry.

Government support and investment Putin called on regional authorities to use all possibilities to attract investments to the region. Each investor should be hosted by the North Caucasus republics' governments as "a family member," he said.

The country's government has spent a total of 800 billion rubles ($25.7 billion) for the development of the North Caucasus over the past 10 years, with donations rising 12 times compared with 2000. However, this was apparently insufficient, the premier said.

"Despite a respectively good economic growth and budget provision rates, we have failed to dramatically change the nature of the regional economy. State investments and direct federal support alone are insufficient here, no matter how large they are," Putin said.

He said it was difficult, sometimes impossible to launch a new business in the region and called on the republics' authorities to improve the situation.

Putin said that government guarantees for loans to finance projects in the North Caucasus would amount to 70%.

"This substantial level of guarantees, as I expect, will help reduce risks and, therefore, the cost of borrowing," he said.

Unemployment The Russian premier said unemployment was the region's "most sharp social and psychological problem." He said the country's authorities must create at least 400,000 new jobs in the North Caucasus over the next 10 years.

The problem of unemployment is seen as a major reason for local residents to join militant groups.

Presently, Putin said, every fifth regional resident cannot find a job. In the republics of Ingushetia and Chechnya, the situation is even worse, with every second and almost every third employable resident remaining unemployed, he said.

Tourism Putin said the Russian government intended to further support the development of tourism in the region. He said it was necessary to create a high-tech resort industry of a national scale in the North Caucasus.

"Almost each of the North Caucasus regions has something to propose in such a prospective sphere as tourism," he said.

The first project to be implemented in the region is the creation of an alpine ski zone between the Caspian and the Black seas, which would eventually be able to host up to 100,000 tourists.

The development of tourism will help create an additional 160,000 jobs in the region, Putin said.

Public dialogue Putin called for closer cooperation between the people and the authorities in the region.

"We need a permanent, substantial dialogue with public and rights organizations," he said.

"Residents should have a real opportunity to send signals to the authorities. Only then will they believe that the state understands their needs and is able to find ways to solve the existing problem," he said.

The premier said the improvement of local residents' attitude to the authorities was a major task for the United Russia party.

Improving regional image Putin said it was necessary to change the public atmosphere both in the North Caucasus itself and around it.

"It is necessary to overcome phobias and stereotypes, dramatically improve the region's image in Russia and in the world," he said.

The prime minister said extremists and gangs in the North Caucasus are often doing their job under the guise of political slogans.

"But their time is running out," Putin said.

"We should use all forces to protect the lives, rights and security of our citizens. We will never allow the invasion into our internal affairs, or any attempts against our territorial integrity and Russia's sovereignty," he said said.

Youth policies Putin said the Russian government will allocate 10 million rubles ($320,000) for the best regional youth projects in 2010, with the figure rising to 100 million rubles ($3.21 million) next year.

The premier also said Russia's leading universities would take on some 1,300 students from the North Caucasus a year.

Medical care Putin said a major task for the regional authorities was to improve the medical care system in the North Caucasus. He said the republics were able to attract investments of up to 15 billion rubles ($482 million) for this goal.

The premier brought up the example of the republic of Chechnya, where 35 hospitals, as well as 53 schools, were built over the past two years using federal funds.

KISLOVODSK, Russia, July 6 (RIA Novosti)

13. Retail Sales Forecast in Central and Southeast Europe for H2/2010 Candole Partners July 8, 2010

Prague-based economic and regulatory consultants Candole Partners releases today its report on the retail sector in central and south east Europe. Candole forecasts retail sales across the region as below.

14. Russia becoming major oil supplier to US RIA Novosti July 7, 2010

Russia is becoming a key oil supplier for the United States, the Wall Street Journal said Tuesday.

"Imports have gone from zero to an estimated 100,000 barrels a day in a matter of months since a pipeline bringing crude from deep inside Eastern Siberia came online," the newspaper wrote.

The paper said the increase in oil supplies is thanks to the Eastern Siberia - Pacific Ocean (ESPO) pipeline system, which is designed to export Russian crude to the Asia-Pacific markets.

Amrita Sen, a commodities analyst for British investment bank Barclays Capital in London, said the United States is diversifying its oil sources because OPEC members, who "historically have been key suppliers to the U.S., are sending more of their oil to Asia." She said production from other U.S. suppliers, like Mexico, is declining at "hefty" rates, and added that "Russian crude will be important."

15. Russia boasts quickest business set up time amongst Brics bne July 10, 2010

It is easier to set up a new business in Russia than in any of the other Bric countries, says the World Bank's Investing Across Borders (IAB) 2010 Report.

It takes 31 days to registered a new business from scratch in Russia, against 46 days in India, 99 days in China and a staggering 166 days in Brazil. Still, this is pretty poor when compared to the 7-14 days it takes in the UK or USA.

Russia also scores best in terms of the number of procedures a would-be companies has to complete: Russia has 10, India 16, China 18 and Brazil 17.

The IAB report found the global average for days and number of procedures were 42 days and 10 procedures putting Russia in front on the first score and on a par with the rest of the world on the second.

Russia scores less well on leasing land owned by the state which takes 231 days vs 295 days in India, 129 days in China and 180 in Brazil.

16. RussiaBelarusKazakhstan customs union now operational Bank of Finland July 10, 2010

The trination customs union established at the start of this year, began operations on July 6 after the member countries ratified a customs code setting out the union's principles. It was touchandgo to the last minute as to whether Belarus would ratify the code as it continued to dispute Russia's terms for the customs union. Indeed, even after signing, Belarus continues to dispute Russia's insistence on collecting export tariffs on crude oil it delivers to Belarussian refineries. Belarus most probably will pursue its demand for a rule change even as the union gets underway.

The customs union details are fuzzy as preparations are still in progress and many national regulations defining customs procedures are missing. For example, Russia's new customs regulations act, which will add needed detail to the customs union's customs code, is still under Duma consideration. Meanwhile, old customs rules remain partly in force. With the situation up in the air, companies involved in foreign trade may again encounter problems as it is difficult to know what regulations apply in a particular instance.

In early July, the member countries adopted common import duties that had been negotiated over the past six months. The customs codes of Belarus and Kazakhstan have been more liberal and the countries have generally had lower import tariffs than Russia. The common external duties of the customs union are mainly based on Russian duty rates, and as a result, Belarus and Kazakhstan faced hikes in many of their customs tariffs. Some of the hikes will enter into force only after a transition period, during which Belarus and Kazakhstan will keep their lower import duties on e.g. passenger cars. If lowtariff goods are brought into Russia, the tariff difference must be paid at the Russian border.

In principle, border inspections shifted from the common borders between Russia and Belarus to their outer borders last week. Inspections at the RussiaKazakhstan border will shift to Kazakhstan's outer border on July 1, 2011, as the control of Kazakhstan's outer borders has still to be strengthened. However, customs union members will continue to conduct border inspection between their countries as long as national duties on certain products remain lower than common customs union duties.

Contrary to a custom union's general principles, in the RussiaBelarusKazakhstan union goods imported to the customs union can be declared for customs clearance only in the domicile country of the importing firm. The regulation will be in force for an unknown period.

From July, private individuals may bring in customsfree goods worth €1,500 and weighing up to 50 kilograms. Before the change, Russia allowed dutyfree imports worth up 65,000 rubles (nearly €1,700 at the current exchange rate) and weighing up to 35 kilos. Kazakhstan, in particular, pushed for laxer regulations.

Since July 1, the parties divide the import duty take in the following shares: 88 % to Russia, 4.7 % to Belarus and 7.3 % to Kazakhstan.

The next step in regional integration will be the inauguration of the RussiaBelarusKazakhstan common economic space, currently set for 2012.

17. Russian residents have started to spend more than they save bne July 07, 2010

According to the results of the latest sociological studies, Russian residents have started to spend more than they save,

Reports suggest that the poll held by ROMIR Company shows that 49% of Russian residents save money.

RUSSIA-FOREIGN INVESTMENT 18. First deputy PM to discuss pipeline, NPP projects in Bulgaria RIA Novosti July 6, 2010

First Deputy Prime Minister Viktor Zubkov will visit Bulgaria on Tuesday to discuss the uncertain future of two joint energy projects - the South Stream gas pipeline and the nuclear power plant construction in Belene.

Zubkov's visit to Bulgaria for detailed negotiations on the issues was agreed by the premiers of the two states last Friday.

Bulgarian Prime Minister Boiko Borisov announced shortly after taking office last summer that his country suspends several energy projects with Russia.

This June he announced his country's withdrawal from the Burgas-Alexandroupolis oil pipeline project with Russia and Greece and froze the construction of the Belene NPP, citing a lack of investment for the nuclear power plant and environmental concerns for the pipeline.

Later, Borisov said he was misunderstood by media and an assessment on the environmental impact of the Burgas-Alexandroupolis pipeline would decide whether the project goes ahead.

Russia's gas monopoly Gazprom said in mid-June it was likely to replace Bulgaria with Romania in the South Stream pipeline network since Bulgaria halted the other two projects.

19. Gazprom neft considering downstream expansion in Bulgaria Renaissance Capital July 9, 2010

Event: Today (9 July), Kommersant reported that Gazprom neft may purchase 200 petrol stations in Bulgaria from local chain Petrol. According to Dow Jones Newswires, the deal could be announced within a year and the size of the deal could be in the range of EUR200-300mn. However, other media sources suggest that Gazpom neft is not willing to pay more than EUR100mn. LUKOIL (with about 300 filling stations and a refinery in Bulgaria) has not commented on whether it is interested in these assets.

Action: We believe this news is neutral for the company, and reiterate our HOLD rating on Gazprom neft.

Rationale: The news was not unexpected, in our view, given that Gazprom neft had announced plans to expand in the downstream segment in Europe. Gazprom neft owns a 51% stake in Serbian refinery NIS, with a capacity of 7 tpa, and 475 petrol stations in Serbia. The deal could make Gazprom neft the third-largest player in the Bulgarian market, with about a 7% market share, after LUKOIL (10% market share) and Petrol (9% market share). If completed, this deal could increase the total number of petrol stations operated by Gazprom neft 13%, we estimate.

Ildar Davletshin

20. Mechel strengthens steel division's sales arm with Turkish acquisition Renaissance Capital July 8, 2010

Event: Yesterday (7 July), Mechel announced the acquisition of a 100% stake in Turkish steel-trader Ramateks Group, located in Istanbul. The purchase price is $3mn (equity value) plus $13.8mn in debt. The main activity of the Ramateks Group is the distribution of steel products, including construction and stainless steel long products. The company owns10k m2 of warehouse capacity and leases a further 4.5k m2, which is enough for the storage of 21kt of steel products.

Action: The news is positive for Mechel, in our view, as the company is continuing to strengthen its sales arm, Mechel Service.

Rationale: Mechel Service owns and operates more than 75 service and distribution centres in the CIS and EU. Mechel is the second-largest producer of long steel and the top stainless steel producer in Russia, with an approximate 80% market share in stainless steel. The company is currently focused on upgrading and developing its portfolio of high-value-added products.

Boris Krasnojenov

21. Medvedev to hold energy talks with Vietnamese leader RIA Novosti July 9, 2010

Russian President Dmitry Medvedev will discuss cooperation in oil and gas with Vietnam's leader, a Kremlin source said on Thursday.

Communist Party Central Committee Secretary General Nong Duc Manh will pay an official visit to Russia on July 8-12, on an invitation from the Russian president.

The two leaders are expected to discuss the Russian-Vietnamese joint oil venture Vietsovpetro, which has proved to be one of the largest and most effective joint ventures in Vietnam, accounting for about 65% of the country's oil production.

Vietsovpetro, in operation from 1986, has produced over 185 million tons of crude oil, bringing a profit of some $8.1 billion to the Russian side.

"They are also expected to discuss measures to boost cooperation... in prospecting and producing natural gas," the source said.

The Russian and Vietnamese leaders will also discuss joint projects in machine building, mining and telecommunication industries.

Bilateral trade between the two states grew 8.2% last year, to $1.56 billion.

Duc Manh's previous official visit to Russia was held in October 2002.

22. Putin calls for restoration of production ties between Russia and Ukraine RIA Novosti July 5, 2010

Russian Prime Minister Vladimir Putin has called for the restoration of production ties between Russia and Ukraine, and spoke out on Monday in favor of creating integrated structures.

"Our enterprises have a lot in common, and for dozens of years they worked as part of one production chain, and these ties need to be restored," Putin said at a cabinet meeting.

He noted that Russia was ready to use the capabilities of Ukrainian machine building plants to fulfill building and modernization contracts for atomic power stations, both in Russia and in other countries.

Putin also reiterated that Russia and Ukraine had agreed on the establishment of joint aircraft construction enterprises.

"When it comes to shipbuilding, Russia is interested in using Ukrainian shipyards, not only for repair, but also for building ships together," added Putin.

Russian-Ukrainian relations have warmed in recent months, after Viktor Yanukovych replaced strongly pro-Western Viktor Yushchenko as president.

Putin expressed hope that the emerging Russian-Ukrainian interregional economic forums "will become platforms for discussion and cooperation, where direct contacts will be established."

23. Russia to lend Kazakhstan $700 mln for power plant RIA Novosti July 5, 2010

Russia will lend Kazakhstan $700 million to build the third energy block of the Ekibastuz power plant, a loan agreement signed on Monday by the Russian and Kazakh presidents said.

The power plant's installed energy capacity is 1000 MW, with its two energy blocks producing about 12 percent of all Kazakh electricity. The third block will increase the plant's installed capacity by 50 percent.

The two units of the Ekibastuz power plant in Kazakhstan's northeastern Pavlodar Province were built in the late 1980s-early 1990s. Construction of the plant's third unit began in 1990 but was subsequently frozen.

The power plant has the world's tallest 420-meter (1,380-feet) high flue gas stack, which is some 38 meters (125 feet) taller than the Inco Superstack in Canada's Sudbury.

On Monday, Russian President Dmitry Medvedev and his Kazakh counterpart Nursultan Nazarbayev also signed an agreement on cooperation in the peaceful use of nuclear energy.

The two presidents met during a session of the member states of the Eurasian Economic Community (EurAsEC) in Astana.

24. Severstal ups Crew Gold stake to 36.22% Renaissance Capital July 8, 2010

Event: Yesterday (7 July), Severstal acquired a 9.63% stake in Crew Gold, bringing Severstal's total stake in the company to 36.22%. Severstal bought 206mn common shares of Crew Gold at a price of NOK1.7475/share, paying NOK360mn (approximately $56mn). Crew Gold is located in Guinea. FY09 output was 179k oz of gold. According to a press release, "Severstal is at present a control person of Crew Gold Corporation and exercises influence over Crew Gold through representation on the board of directors."

Action: The news is neutral for Severstal, in our view.

Rationale: The current deal values Crew Gold at $539mn, or at more than $3,000/oz of FY09 production, we estimate. In Feb 2010, when Severstal acquired a 15.7% stake in Crew Gold, the asset was valued at $325mn ($1,800/oz of FY09 production). In terms of ownership structure, Endeavour Financial Luxembourg currently owns about 43% of Crew Gold (click here to read our article "Severstal faces competition for gold asset in Guinea" in the CIS Morning Monitor dated 9 Mar 2010). We believe that Severstal may face serious competition if it decides to seek a controlling stake in Crew Gold. The price paid for this additional 9.63% stake already looks quite high to us. Since mid-2007, Severstal has built up a portfolio of gold production and development assets. The asset base comprises the gold assets of Celtic Resources, based in Kazakhstan; two producing assets of private Russian group Arlan, in Yakutia and Chita; and a 68.9% stake in High River Gold, which has two operations in Russia (Buryatia) and one in West Africa (Burkino Faso), plus advanced- stage exploration assets in Russia and Africa.

Boris Krasnojenov

RUSSIA-RUSSIA INVESTMENT 25. Auctions for oil & gas deposits fail RIA Novosti July 9, 2010

The Federal Subsoil Resources Management Agency said on Thursday that auctions for the development of two oil and gas deposits in central Russia have failed due to the lack of bids.

The agency has auctioned the Medveditsko-Karamyshskoye and Perelyubsko- Rubezhinskoye fields in the Saratov region getting only one bid for the Perelyubsko- Rubezhinskoye field, it said in a statement.

The initial payment for the Medveditsko-Karamyshskoye field amounts to 207 million rubles ($6.65 million). Oil and gas resources total 11.918 million metric tons and 17.439 billion cubic meters respectively.

The initial payment for the Perelyubsko-Rubezhinskoye field is around 20 million rubles ($646,000). Oil and gas resources total 1.6 million tons and 13.4 bcm respectively, while oil and gas condensate resources amount to 4.7 million tons.

26. Gazprom plans RUB1.7 trln in CAPEX in 2011; production still below 2008 levels Alfa Bank July 5, 2010

Gazprom's 2011E CAPEX plans call for more than doubling spending compared with 2010E to RUB1.7 trln, according to RBC Daily. The figures for 2012-13E in the company's preliminary budget are RUB1.2 trln and RUB1.4 trln. At the same time, Gazprom plans dividend growth of a similar magnitude, putting the 2011E figure at RUB97 bln, almost double the 2009E number of RUB57 bln. The figure is then expected to increase to RUB107 bln and RUB122 bln in 2011E-2012E. The company is expected to invest almost RUB1 trln in 2011E in transportation projects, with upstream CAPEX expected to stay roughly flat at RUB300 bln.

We find these figures unexpectedly high, as Gazprom had previously said it planned to limit CAPEX to a maximum of RUB1 trln per year. We find it difficult to justify the acceleration in infrastructure projects because of the unclear global demand situation and Gazprom's own forecasts, which do not see full demand recovery until at least 2013E. On the other hand, Gazprom may be artificially inflating its CAPEX program to support its position that MPT indexation is premature.

Gazprom managed to increase June production by 19.8% y-o-y, while Russia's gross production grew 22.2%. Gazprom's production, although recovering, is still affected by the aftermath of the crisis. The June figure was around 8% lower than the average pre-crisis level for the month, largely owing to a slower-than-expected recovery in European and domestic demand.

27. Moscow to spend $12.8 million on youth business by 2012 RIA Novosti July 8, 2010

Moscow authorities are planning to spend some 400 million rubles ($12.8 million) until 2012 on the development of youth business, a Moscow official in charge of small and medium business development said on Wednesday.

"Moscow plans to allocate up to 133 million rubles ($4.27 million) in 2010-2012 to maintain and develop youth entrepreneurship, and some 266 million rubles ($8.55 million) could be taken from the federal budget," Alexander Karpov said during a Moscow city government meeting.

He also said youth business entrepreneurship centers may be opened at some 30 Moscow universities.

"At least 750 small enterprises may be formed within these centers. We can create 1,800 new jobs," he said, adding that the businesses in question could see profits of 1.7 billion rubles ($54.6 million).

Karpov said the Moscow authorities were also planning to attract children to business activities. Some of the capital's secondary schools have already launched business seminars, he added.

28. Russia to invest $40 million in developing AIDS, cancer treatment RIA Novosti July 6, 2010

Russia's state-run, non-profit Rosnano will invest some 1.2 billion rubles (about $40 million) in developing treatment for AIDS, hepatitis and cancer of the pancreas, the corporation said on Tuesday.

"Reviving the country's pharmaceutical industry...is a difficult task. But the country has no choice. It's a matter of state reputation and national health. This is a chance to attract 'smart money' to our country's economy," Rosnano head Anatoly Chubais said.

Russia's President Dmitry Medvedev earlier urged scientists and businessmen to take steps to redevelop the industry. More than 200 innovative drugs are planned to be designed by 2020.

Tatyana Nikolenfo who heads Rosnano's infrastructure programs, said that Russia had for a long time been a kind of "Eldorado for clinical tests" for Western pharmaceutical companies, "It all has been very cheap here. Western firms tested their projects in Russia and later they returned here in the capacity of expensive imports. We want to change the situation," she said.

SECTOR Gas 29. Azerbaijan offers to double volume of natural gas export to Russia APA-Economics July 7, 2010

Azerbaijan is expected to double the natural gas export to Russia from next year, SOCAR president Rovnag Abdullayev told APA.

According to him, SOCAR has already sent the offers to Gazprom. We offered to double the volume of gas export to 2 bln cubic meters to Russia from the next year.

Note that, Azerbaijan started to export 1 bln cubic meters natural gas to Russia from January, 2010.

30. Bulgaria agrees to host South Stream Pipeline bne July 06, 2010

Bulgaria ended a yearlong timeout Tuesday and agreed to move forward on hosting a stretch of the Gazprom-backed South Stream pipeline, a deal Prime Minister Boiko Borisov said would be two or three times more profitable for his country than first estimated, reports The Moscow Times.

The newspaper report quoted an analyst as saying that Borisov may have exaggerated the potential benefits to glean political support for the project's smooth development.

31. Bulgaria refers Gazprom contracts to prosecutors bne July 06, 2010

The Bulgarian government has referred Russian gas supply contracts signed by the previous Cabinet to the chief prosecutor's office after a jump in domestic prices, reports The Moscow Times.

The newspaper report quoted Economy and Energy Minister Traicho Traikov as saying that Gazprom's export chief, Alexander Medvedev, and its chairman, First Deputy Prime Minister Viktor Zubkov, are expected in Sofia on Tuesday to discuss the contracts and other energy projects.

32. Gazprom mulls gas condensate liquefying plant on Novaya Zemlya bne July 06, 2010

Russian natural gas company Gazprom is considering building a plant to liquefy gas condensate on the Arctic Sea's Novaya Zemlya archipelago, which is part of Russia's Arkhangelsk Region, reports Prime-Tass.

Citing the regional government's press service, The news agency says that gas condensate is expected to be supplied to the plant on Novaya Zemlya via a pipeline.

33. PM says Bulgaria seeks cut in price of Russian gas supplies bne July 07, 2010

Bulgaria is seeking a cut in the price of Russian natural gas supplies, reports Prime- Tass.

The news agency quoted Bulgarian Prime Minister Boiko Borissov as saying that Germany buys gas from Gazprom at almost half the price Bulgaria pays . . . so does Turkey.

34. Russia's natural gas exports up 56.4% on year in January -May bne July 07, 2010

The Federal Customs Service says that Russia's natural gas exports rose 56.4% on the year to 67.4 billion cubic meters in January-May, reports Prime-Tass.

The news agency says that in monetary terms, gas exports rose to $18.7bn in January-May from $12.914bn a year earlier.

35. Russian gas output - strong against low base, weak versus pre__crisis Troika Dialog July 5, 2010

Russian gas output expanded 26% y__o__y in 2Q10 and 23% y__o__y in June. The trends remain the same: while output is strong against the crisis to 2009, it remains rather sluggish versus the levels of 2004__08. Gazprom's production is behind the average five pre__crisis years by about 6% YTD and over 11% in 2Q10. The stronger figures in the beginning of the year are explained by the very cold winter in Europe that was driving residential demand for gas and is mostly influenced by the temperature. For example, the so__called heating degree day (HDD) index in Germany and Poland - two core Gazprom markets - was up over 17% against the five__year average during winter 2009__10, according to the latest study by the IEA. Hence, when the temperature factor was removed in 2Q10, Gazprom started showing sluggish figures again.

The company's old production guidance of 520 bln m3 this year will be close to impossible to achieve, as it would imply the same production in 2H10 as in 1H10, something that the company has never achieved under normal circumstances. Hence, we think that output of 510 bln m3 is much more likely. Nevertheless, the focus is on Gazprom's pricing, which we think is heavily discounted by the market. Spot prices in Europe were strongly rising, while December NBP futures are now pointing to $300 per 1,000 m3, having bottomed at about $150 per 1,000 m3 in March. If this sticks, we think that the market will, in time, become less concerned over the magnitude of Gazprom's future discounting to Italy, France, Turkey and Germany relative to the oil__linked contract. This is, in turn, the only meaningful catalyst to the stock price that we see.

NOVATEK continues to perform and we remain comfortable with output of 37 bln m3 in 2010. The company should install capacity of 51 bln m3 in autumn this year.

36. South Stream road map to be coordinated on July 8 - Bulgarian PM RIA Novosti July 6, 2010

The road map for the South Stream gas pipeline via Bulgaria will be finally coordinated on July 8, Bulgarian Prime Minister Boiko Borisov said on Tuesday.

"By agreeing on controversial issues, we raised the profitability of the South Stream project for Bulgaria two or threefold," Borisov said, commenting on talks with Russian First Deputy Premier Viktor Zubkov, who visited Bulgaria on Monday.

"On Thursday, experts will arrange the final details of the road map... and the pipeline will start work by 2015," the Bulgarian premier said.

The volume of gas to be transferred via the territory of Bulgaria was raised by 63 billion cubic meters during the talks, Borisov added.

"We will make the project profitable for both countries," Zubkov said.

Borisov announced shortly after taking office last summer that his country was suspending several energy projects with Russia.

This June, he announced his country's withdrawal from the Burgas-Alexandroupolis oil pipeline project with Russia and Greece and froze the construction of the Belene nuclear power plant, citing a lack of investment for the latter and environmental concerns over the former.

However, Borisov later said he had been misunderstood and an assessment on the environmental impact of the Burgas-Alexandroupolis pipeline would decide whether the project goes ahead.

Russia's gas monopoly Gazprom said in mid-June it was likely to replace Bulgaria with Romania in the South Stream pipeline network after Bulgaria halted the projects.

SECTOR Oil 37. C.A.T. Oil Wins Two Hydraulic Fracturing Tenders Totalling € 55mn Aton July 6, 2010

C.A.T. oil yesterday (5 July) announced that it has won two hydraulic fracturing tenders from LUKOIL. The total value of the pending contracts amounts to €55mn over a two and a half year period, and increases its 2010 order book by €12mn to €239mn. The total value of orders contracted for 2011_2012 increases by € 43mn to € 75mn.

Bottom line The news is positive for C.A.T. oil. It reflects management's strategy to boost the proportion of multi_year contracts in the order book portfolio, and enhances the visibility of long_term revenues.

38. Chevron to get 33% stake in Black Sea project with Rosneft bne July 07, 2010

Chevron will take a roughly 30 percent stake in its Black Sea oil venture with Russia's largest oil producer, Rosneft, reports The Moscow Times.

Citing an unnamed source familiar with the details of project, the newspaper report says that the ownership structure will be around one-third Chevron, two-thirds Rosneft.

39. Court suspends Environmental Protection Ministry order against Regal Petroleum Renaissance Capital July 5, 2010

Event: On Friday (2 July), the District Administrative Court of Kiev suspended a Ministry of Environmental Protection order dated 30 March 2010, which had requested the suspension of Regal Petroleum's (RPT) operations on its MEX-GOL and SV fields in Ukraine (click here to read our story "Regal Petroleum fights licence dispute," in the CIS Morning Monitor dated 29 June 2010). As a result of the court's injunction order, RPT's drilling and production operations may continue, pending a further hearing by the court.

Action: We believe this news is positive for RPT.

Rationale: We suggested on 29 June that the market had overreacted to the ministry's order, as we believe it is unlikely that this dispute will lead the full revocation of RPT's licence. Separately, it was reported on Friday that Viktor Boyko was dismissed from his post as Minister of Environmental Protection of Ukraine. Among his other decisions, Boyko signed the order requesting the suspension of RPT's operations, and therefore his dismissal could result in a change in the government's policy towards this particular issue, in our view.Alexander Burgansky

40. Gazprom gives TNK-BP more pipeline access bne July 08, 2010

Gazprom, which runs the Russian gas pipe network, agreed to let the oil producer ship more of its gas production, reports The Moscow Times

The newspaper report says that BP/TNK-BP has won approval to boost gas shipments through state-run Gazprom's pipelines, opening up fields in northern Siberia.

41. June oil output hits record high bne July 06, 2010

Russia boosted oil output to a record high in June, maintaining its position as the world's top oil producer, although analysts warned of problems ahead, reports The Moscow Times.

The newspaper report says that Energy Ministry data showed on Friday that Russia's June oil output rose 0.5 percent to 10.13 million barrels per day, up from 10.08 million bpd in May and surpassing the previous record of 10.12 million bpd, set in March.

42. LUKoil wins exploration rights Offshore Romania bne July 06, 2010

LUKoil, in partnership with U.S.-based Vanco International, won a tender to explore and develop two offshore blocks on Romania's portion of the Black Sea, reports The Moscow Times.

The newspaper report says that the two blocks, Est Rapsodia and Trident, are 60 to 100 kilometers from the coast.

43. Medvedev to hold energy talks with Vietnamese leader RIA Novosti July 9, 2010

Russian President Dmitry Medvedev will discuss cooperation in oil and gas with Vietnam's leader, a Kremlin source said on Thursday.

Communist Party Central Committee Secretary General Nong Duc Manh will pay an official visit to Russia on July 8-12, on an invitation from the Russian president.

The two leaders are expected to discuss the Russian-Vietnamese joint oil venture Vietsovpetro, which has proved to be one of the largest and most effective joint ventures in Vietnam, accounting for about 65% of the country's oil production.

Vietsovpetro, in operation from 1986, has produced over 185 million tons of crude oil, bringing a profit of some $8.1 billion to the Russian side.

"They are also expected to discuss measures to boost cooperation... in prospecting and producing natural gas," the source said.

The Russian and Vietnamese leaders will also discuss joint projects in machine building, mining and telecommunication industries.

Bilateral trade between the two states grew 8.2% last year, to $1.56 billion.

Duc Manh's previous official visit to Russia was held in October 2002.

44. Novatek acquires 100% of Tambeyneftegas at below market price Alfa Bank July 5, 2010

On Friday, Novatek announced it had acquired 100% of Tambeyneftegas for a consideration of $10 mln. Tambeyneftegas holds the exploration and production license for the Malo-Yamalskoye natural gas and condensate field, which contains 161 bcm of gas reserves (C1+C2 categories) and 14.4 mmt of gas condensate, or effectively some 1.2 bln boe in total.

Tambeyneftegas is the former license holder for the South-Tambeyskoye field, acquired by Novatek in 2009. The deal's price of less than 1¢/boe of 2P (around $0.03 per boe, if debt is taken into account) reserves looks to be favorable for Novatek, especially when compared with its recent acquisition of the South- Tambeyskoye field, for which the company paid 17¢/boe.

Given the price paid by Novatek in per-barrel terms, we regard the announcement as POSITIVE for the company, and it should be perceived as such by the market. Novatek continues to focus on Yamal as a prospective region, building up its resource base there.

Pavel Sorokin

45. Oil companies might create compensation fund to prevent offshore accidents VTB Capital July 6, 2010

News: According to RBC-Daily, the government is drafting a law to protect offshore fields in the event of pollution, which envisages oil companies creating a compensation fund, which would help the government to cope with any accidents. The paper speculates that the document does not set out any particular requirements in terms of contributions.

Our View: At the moment, only LUKOIL is developing offshore fields in Russia: the Yury Korchagin field in the Caspian Sea with an expected plateau of just 2.5mmtn (18.3mmbbl) per annum. Thus, the size of Russian offshore works is relatively small (compared with Brazil, for example). Therefore, we believe that the amount of any fund (and, consequently, contributions) will not be material for the oil companies.

Lev Snykov

46. Oil output resumes growth in June, up 2.9% y__o__y in 1H10 Troika Dialog July 5, 2010

Oil output in Russia resumed growth in June to hit 10.13 mln bpd, up 0.4% m__o__m and 2.4% y__o__y. As a result, Russia's score climbed 2.9% y__o__y in 1H10 to 10.09 mln bpd. The growth came on the back of 48% higher oil prices, which spurred producers to increase capex, as well as the effect of earlier introduced tax benefits, especially those for East Siberian crude.

The improved financial environment triggered double__digit growth in development drilling in 1H10 to be followed by the completion of more new wells with higher flow rates. Expanded application and higher efficiency of a wide range of geotechnical measures, such as oil well stock optimization and bottom hole area treatment, more than offset a slight increase in the idle well ratio and ongoing negative trend in hydrofracturing. These efforts translated into 2Q10 legacy production by brownfields somewhat stabilizing at 8.88 mln bpd, or at about the 1Q10 level, which is still roughly 2% below the 2Q09 result.

The five main greenfields (South Khylchuyuskoye, Uvat, Talakanskoye, Verkhnechonskoye and Vankorskoye) secured about 0.36 mln bpd in additional oil production in 1H10, which offset output declines at brownfields and, moreover, secured an increase in Russia's total output. However, oil yields at these greenfields have already peaked (South Khylchuyuskoye), or have been stable for several months, thus making the issue of launching new large greenfield projects in Russia an acute one.

In all, the 1H10 results are largely positive for Rosneft, the consolidated output of which spiked 8.9% y__o__y after a mere 0.1% improvement last year over 1H08. Vankorskoye will remain the company's growth locomotive. TNK__BP and Bashneft also scored substantial growth. While up to 2__3% annual growth in TNK__BP's future output is nearly certain, Bashneft will have it hard just to sustain its achieved level. Gazprom Neft also deserves praise - the parent company managed to return to positive territory after a 5.0% y__o__y production drop in 1H09. Meanwhile, LUKoil's new South Korchagin field in the Northern Caspian is not yet helping the second largest oil producer, the production of which dropped 1.6% y__o__y in 1H10, compared with 3.8% y__o__y growth 1H09 then born by South Khylchuyuskoye.

47. Putin sees Rosneft investing RUB17bn in Chechnya refinery bne July 06, 2010

Russian Prime Minister Vladimir Putin has said that Russian state-controlled oil major Rosneft is expected to invest RUB17bn in building a refinery in the constituent republic of Chechnya, reports Prime-Tass.

The news agency quoted Putin as saying that the refinery is scheduled to be launched in 2014.

48. Russia becoming major oil supplier to U.S. - WSJ Ria Novosti July 7, 2010

Russia is becoming a key oil supplier for the United States, the Wall Street Journal said Tuesday.

"Imports have gone from zero to an estimated 100,000 barrels a day in a matter of months since a pipeline bringing crude from deep inside Eastern Siberia came online," the newspaper wrote.

The paper said the increase in oil supplies is thanks to the Eastern Siberia - Pacific Ocean (ESPO) pipeline system, which is designed to export Russian crude to the Asia-Pacific markets.

Amrita Sen, a commodities analyst for British investment bank Barclays Capital in London, said the United States is diversifying its oil sources because OPEC members, who "historically have been key suppliers to the U.S., are sending more of their oil to Asia."

She said production from other U.S. suppliers, like Mexico, is declining at "hefty" rates, and added that "Russian crude will be important."

MOSCOW, July 7 (RIA Novosti)

49. Transneft to Increase Transportation Tariffs by 3.3% in August and 10% in December Aton July 6, 2010

Vedomosti reports today (6 July) that Transneft plans to increase its oil transportation tariffs by 3.3% in August and by 10% in December this year. Sources at Kommersant and Interfax have also revealed this information. We remind readers that Transneft raised its tariffs by 15.9% in Jan 2010, implying that total growth in 2010 may reach 31.7%.

For comparison, in 2009 Transneft increased its tariffs by 15.7% in January and 4.4% in June (a total hike of 20.8%) while in 2008 tariffs grew by 19.4% in January and 10.7% in August (a total increase of 32.5%).

The company has been rapidly pushing up its tariffs in order to finance its investment programme and debt repayments. However, according to Kommersant (6 July), citing a representative from the Federal Tariff Service (FTS), tariff growth is likely to slow significantly in 2011. We note that in Apr 2010 Transneft forecast its average annual tariff growth rate at 15% over 2010_14.

Bottom line Higher tariffs imply greater transportation costs for oil companies, which in turn has negative ramifications for the companies' margins. We thus view this news as negative for all oil stocks but positive for Transneft, as the company aims to shift its investment programme expenses onto oil companies.

SECTOR High Tech 50. City govt sees high-tech park in St Petersburg constructed by 2015 bne July 07, 2010

The city's economic development, industrial policy and trade committee says that the construction of St. Petersburg's Ingriya high-tech park is expected to be completed by 2015, reports Prime-Tass.

The news agency says that the committee said RUB30bn was projected to be invested in the park.

51. Enel may take part in Skolkovo project RIA Novosti July 9, 2010

Italy's largest power company Enel may take part in Russia's Skolkovo innovation hub, the company's CEO Fulvio Conti said on Thursday.

Skolkovo, dubbed Russia's Silicon Valley, is being built from scratch 20 km (12.4 miles) outside of Moscow. The center will focus on research in five priority spheres: energy, information technologies, communication, biomedical research and nuclear technologies.

Conti said Enel was highly interested in developing innovations.

"A decision on participating in the Skolkovo project would be taken after we examine all the conditions: figures, plan, profit rate," Conti said, adding that first of all the energy giant would like to see the conditions of participating and evaluate them.

Enel produces, distributes and sells electricity and gas across Europe, North and Latin America. The company has a presence in 22 countries with approximately 95 GW of generating capacity and serves nearly 60 million power and gas customers.

Russia considers the development of the high-tech and innovation sector a top priority, pledging billions of dollars to finance the sphere.

52. Enel may take part in Skolkovo project RIA Novosti July 9, 2010

Italy's largest power company Enel may take part in Russia's Skolkovo innovation hub, the company's CEO Fulvio Conti said on Thursday.

Skolkovo, dubbed Russia's Silicon Valley, is being built from scratch 20 km (12.4 miles) outside of Moscow. The center will focus on research in five priority spheres: energy, information technologies, communication, biomedical research and nuclear technologies.

Conti said Enel was highly interested in developing innovations.

"A decision on participating in the Skolkovo project would be taken after we examine all the conditions: figures, plan, profit rate," Conti said, adding that first of all the energy giant would like to see the conditions of participating and evaluate them.

Enel produces, distributes and sells electricity and gas across Europe, North and Latin America. The company has a presence in 22 countries with approximately 95 GW of generating capacity and serves nearly 60 million power and gas customers.

Russia considers the development of the high-tech and innovation sector a top priority, pledging billions of dollars to finance the sphere.

53. International Modernization Week to open in Moscow RIA Novosti July 5, 2010

Moscow will host an international Modernization Week on July 6-8, uniting a forum and an exhibition devoted to the social and economic development of Russia.

The forum, Matrix of Modernization, and the exhibition, Inter-modernization, will focus on discussing President Dmitry Medvedev's initiative on Russia's economic modernization.

"The Week aims at uniting efforts of managers, scientists and specialists, state and public figures in Russia, countries in and outside the CIS to resolve the strategic issues of Russia's social and economic development and devising the modernization's road map," the organizers said.

The forum will include such topics as energy efficiency, nuclear energy and thermonuclear synthesis, space technology and telecommunications, including Glonass, and also medical technologies and pharmaceutics.

The opening day of the Week will also see an awards ceremony, Global Modernization.

54. Microsoft allows Russia broader access to source codes RIA Novosti July 8, 2010

U.S. software giant Microsoft Corp. has agreed to provide the Russian government with source codes for the latest Microsoft products, a Russian business daily said on Wednesday.

According to the Vedomosti newspaper, the U.S. company has signed an additional agreement with Russia's Atlas Center, a state-run security software developer, to let government agencies study the source codes for the Windows 7, Windows Server 2008 R2 and the SQL Server operating systems as well as the Office 2010 software suite.

The initial 2002 agreement granted access to coding for the Windows XP, Windows 2000 and Windows Server 2000 operating systems under Microsoft's Government Security Program (GSP).

Vedomosti cited Microsoft Russia president Nikolai Pryanishnikov as saying that Microsoft was interested in expanding its business with the Russian government, whose contracts provide about 10% of the company's revenue in Russia.

The GSP provides national governments with information to help them evaluate the security of Microsoft products. The program is available to more than 65 geographic markets with intellectual property regimes that meet international standards.

Access to source codes enables programmers from the Atlas Center to develop encryption protection for Microsoft products and allows the government agencies, including those responsible for national security, to use them in their daily work.

In line with the addendum, the Russian Federal Security Service (FSB) will be able to certify entire software platforms rather than separate products for secure use of electronic document management and protection of personal data.

In addition, Atlas and the FSB will be able to share their findings about the security of Microsoft's codes with other government agencies.

55. Russians ready for introduction of online public services - Medvedev RIA Novosti July 9, 2010

President Dmitry Medvedev said on Thursday many Russians were ready to receive online electronic public services.

The Russian government aims to create an electronic public service system, intended to help fight corruption and red tape among regional officials.

"Perhaps [Russia is] less [prepared] than other European states, but we know that tens of millions of our citizens regularly use the Internet. They make a significant part of the population... If they use the Internet, then they are ready to receive such [online] services," he said.

According to a report on www.internetworldstats.com, Russia has the world's eighth largest population of Internet users of over 45 million, or 32.3 % of the country's total population.

The Russian president admitted that the introduction of a virtual government in Russia is "a separate issue, which requires attention." "It is a kind of revolution in the way people think," he said.

Medvedev, who portrays himself as a young and technologically savvy leader, made the development of science and technologies one of his top priorities.

He approved the initiative of creating a state e-mail service last year. The service, expected to be launched by the end of 2010, will provide Russians with the opportunity to apply for various documents and receive them by e-mail, without having to stand in long lines.

56. Russia's Innovation city legislation moves ahead Bank of Finland July 10, 2010

At the begin-ning of July, the Duma approved the first reading of bills to establish Skolkovo near Moscow as an "innovation city." The idea of establishing a science city dedicated to research and commercialisation of high technology emerged early this year in presidential administration as one of the means to diversify the Russian economy and reduce dependence on natural resource industries.

Skolkovo is to bring together public and private R&D efforts as well as foreign expertise. The city will pursue five research themes: energy efficiency, nuclear technol-ogy, space technology, medical science, and "strategic" IT technology and software. It is hoped the tech town will attract top researchers and innovative companies from around Russia and the world. To house the research talent and their families, a full-service community with first-class housing and research facilities for 25,000-30,000 people will be built. The first phase of construction should be finished in 2012.

The benefits for a company to operate in Skolkovo stem largely from the fact that the city is to be much busi-ness friendlier than Russia in general. The city will be administered by a non-profit organisation with certain local and state administrative authority. Immigration, tax and customs authorities as well as police will have special branches in the city with greater flexibility to operate than regular authorities. Firms establishing in the area will also enjoy major tax breaks.

Construction costs over the next two years are currently put at 50-60 billion rubles (€1.3-1.5 billion), but also higher sums have been mentioned. Construction is funded from the federal budget. Other investment may come from private sources.

Many experts have criticised the Skolkovo project for its lack of specifics. Construction of an expensive science city will be carried out without any assurances that the hoped R&D will ever occur. Furthermore, the granting of numerous administrative exemptions to one town high-lights how poor Russia's business environment is in gen-eral.

The Duma will hold its second, and decisive, vote on legislation on the innovation city this autumn. The legisla-tive package, submitted on a presidential initiative, is expected to pass easily.

SECTOR Metals and Natural Resources 57. Anti-monopoly service begins proceedings against coal and steel giants RIA Novosti July 9, 2010

The Antimonopoly Service has started proceedings against steel and mining company Evraz, the Raspadskaya Coal Company and the Severstal steel giant over differences in export and domestic coal prices, the service said on Thursday.

"The instances of violations can be seen in economic, technological and in other forms by the unreasonable price setting when signing contracts to supply close- burning coking coal...to Russian and foreign consumers," the service said in a statement.

The Antimonopoly Service added that the difference between the prices could not be explained by volumes or transportation costs.

Additionally, the service suspects the companies of "discriminating against Russian consumers in relation to foreign clients".

The Antimonopoly Service said it had conducted a study of the companies in January-March of 2010.

The service also said that its experts, at the request of the Russian government, were analyzing the cost of the basic conversion of metallurgical products, starting with coking coal all the way through iron ore and metal.

A Evraz official told RIA Novosti that it had not received any documents from the Antimonopoly Service. Severstal also declined to comment, while the Raspadskaya management was unavailable.

58. Mechel starts importing coking coal from Bluestone VTB Capital July 6, 2010

News: Interfax reported yesterday that Mechel had started importing coking coal from its US subsidiary Bluestone, aiming to ease the deficit. Also, Deputy Prime Minister Igor Sechin reiterated that Elga would be launched in November.

Our View: In 2010, Bluestone plans to produce 3.5mnt of coking coal. While the grades produced are similar to Raspadskaya's, this step clearly shows that the company is addressing the issue of a lack of high-quality coals on the domestic market.

Launching the Elga project would further help to secure domestic coking coal supplies. The first coal is expected to be produced this year, with volumes increasing to 1mtpa in 2011. Importantly, this is the first indication that the project is to be launched this year (delays from constructing transport infrastructure notwithstanding), which might affect production from Elga when it is supposed to produce higher volumes of coal (up to 7mtpa in 2014). We regard the news as neutral for the stock.

Alexander Pukhaev

59. Petropavlovsk launches 3rd stage of gold mill at Pioneer mine bne July 06, 2010

Petropavlovsk Plc, which mines gold in Russia, has launched the third stage of a gold mill at the Pioneer gold mine in the Amur Region, reports Prime-Tass.

Citing the company, the news agency says that after the launch, ore processing and gold production at the mill is expected to increase by about 80% to 5.5 million tonnes and 12.4 tonnes, respectively.

60. President Medvedev visits Petropavlovsk operations in Amur Region Troika Dialog July 6, 2010

President Dmitri Medvedev on Saturday visited the mining operations of Petropavlovsk in Amur Region as part of his official trip to the Russian Far East. Accompanied by the CEO and founding shareholder of Petropavlovsk, Pavel Maslovsky, and other executives, Medvedev visited the recently constructed $25 mln metallurgical testing plant in Blagoveshchensk. Medvedev also watched by video the commissioning of the third module at Pioneer and the second module at Kuranakh. That said, the third processing module of Pioneer was actually commissioned in April, and so the launch this time was more of a symbolic nature.

Maslovsky also explained to Medvedev the strategy of constructing the iron ore assets in the region (K&S + Garinskoye) and further expansion plans for the gold assets.

Petropavlovsk contributes 22% of all budget revenues of Amur Region and employs 9,000 people. A lot was said at the meeting about the social responsibility of the company and its aggressive investment program. Maslovsky also asked Medvedev to approve use of the State Investment Fund to finance the construction of a $500 mln railroad to the iron ore assets (Garinskoye). While the preliminary application was endorsed by the government, the process has been stalled as of late.

The fact that Medvedev decided to visit the facilities of Petropavlovsk is highly significant, in our view. We reckon that a regional company like Petropavlovsk that has built all its operations from scratch with further aggressive investment plans and substantial accumulated operational expertise should appeal a lot to the federal government. This should go a long way to mitigate the political risks of Petropavlovsk and potentially allow for the state funding of the requisite infrastructure like the railroad for Garinskoye.

Mikhail Stiskin

SECTOR Nuclear 61. Iranian official sees launch of Russia-built nuke plant August - September bne July 07, 2010

Ali Akbar Salehi, head of Iran's Atomic Energy Organization, says that the tests of equipment used in the Russian-built Bushehr nuclear power plant in Iran have been completed, and the launch of the reactor is expected to take place between August 23 and September 22, reports Prime-Tass.

The news agency says that Russian engineering company Atomstroyexport has been building the Bushehr nuclear power plant since the 1990s.

62. Russia, Kazakhstan sign deals on nuclear power cooperation bne July 06, 2010

Russia and Kazakhstan has signed several deals on cooperation in the nuclear power sector, reports Prime-Tass.

The news agency says that the two sides signed a memorandum on cooperation in the peaceful use of nuclear energy following a meeting between Kazakh President Nursultan Nazarbayev and Russian President Dmitry Medvedev.

63. Russia, Kazakhstan to sign nuclear marketing agreement in 2 months bne July 08, 2010

Russia's Rosatom corporation says that Russia and Kazakhstan will sign an agreement on marketing policy in the nuclear sector two months from now, reports Interfax.

The news agency says that the understanding was reached in Astana on Monday, where Rosatom and Kazakh national nuclear corporation Kazatomprom signed documents, including an agreement to alter then format for cooperation under the auspices of the Uranium Enrichment Center joint venture.

SECTOR Power 64. Enel holds investor day in Moscow Troika Dialog July 7, 2010

Italy's Enel hosted an investor day in Moscow yesterday, where its top management (including CEO Fulvio Conti) presented the company's outlook for Russia.

_ EBITDAguidance.EnelsetoutitsEBITDAprojectionsforEnelOGK__5in2011and2014 of $667 mln (EUR471 mln) and $1,539 mln (EUR1,077 mln), respectively, which are 6% and 42% above our corresponding projections. The 2011 guidance implies an undemanding 2011E EV/EBITDA multiple of 5.0, or a 34% discount to the genco peer group average. We maintain our forecasts for now, as we prefer to wait until capacity supply contracts (DPMs) have been signed to gain more transparency on prices for new capacity. We also prefer to stay conservative on prices for existing capacity before the first capacity auctions take place, but there could be potential upside risk.

_ EBITDA expansion - margins and output growth. Enel anticipates that EBITDA will expand thanks to an 83% increase in the spark spread (at new combined cycle gas turbine (CCGT) units) to EUR11/MWh and a 250% increase in the dark spread to EUR28/MWh in 2014 versus 2010. The company is also targeting higher electricity output: 47 TWh in 2011 (12.4% above our forecast) and 52 TWh in 2014 (18.3% above). This higher output is one reason why the company's EBITDA forecast is higher than we expect. In addition, we believe that further cost optimization should contribute to the acceleration in EBITDA growth.

_ Capex. Enel OGK__5's capex is planned at around $1,384 mln (EUR979 mln) in 2010E__14E, 6% below our projection of $1,473 mln for the period. Some 75% of the capex will be spent on the existing capacity, the main focus falling on the reconstruction of Reftinsk GRES' coal__fired units. As regards new capacity, two new 410 MW units should be completed in 2010.

_ Dividend policy. The company will consider dividend payments once the heaviest stage of the capex program has been implemented.

_ Own gas supplies. The first gas from SeverEnergia (jointly controlled by Gazprom, Eni and Enel) is expected to arrive in 2011. The aim is to provide up to 50% of gas supplies to Enel OGK__5 from this source.

Overall, we consider the comments from Enel's management as positive for Enel OGK__5 stock. The management of the latter can boast a rather strong track record of efficiency improvements to date. We reiterate our BUY recommendation on the stock and target price of $0.099 per share.

Alexander Kotikov

65. June 2010: Pressure on Electricity Prices is Building VTB Capital July 6, 2010

Tariff debates pushed utilities stock down by 7.5% in June June brought disappointing news for utilities sector when the government came out with the decision to introduce caps for tariff growth in the coming years. The negative newsflow on that side worsened sentiment around the sector, which pushed the Utilities Index (constructed by VTB Capital) down by 7.5%, and that was a deeper fall than 3.3% drop in RTS Index. Gencos and grids took similar hits of 8.0% and 7.7%, respectively. Astonishingly, FSK lost only 1.3% and the stock was even stronger compared with the market, while MRSK Holding lost more significant 21% and posted the highest drop among MRSKs.

Market statistics signal stable electricity demand. The electricity consumption in June grew 4.7% YoY, which is similar to 5.0% growth in 1H10 indicating to a sustainable recovery during the year. Electricity production on the wholesale market (excl. isolated regions) grew a lower 2.8% YoY in June and 4.4% during the 1H10.

Growth in free electricity prices was robust 27% YoY in June The growth in free electricity prices in June was robust 27%, while moderated from the exceptional beginning of the year (54% in 5mo10). YTD prices increased 49% YoY. By electricity zones free prices grew 29% YoY in Europe/Urals and 19% in Siberia. MoM free prices in Europe/Urals strengthened by 6% finding support from a solid demand, while Siberian prices slackened 14% on the back of higher share of hydro generation in the region.

Pressure on electricity prices is building The government proposed caps for electricity prices growth at 13- 15%, 11-12% and 10-11% in 2011-13. This creates the negative sentiment over the sector, while in the long run the outlook has not changed in our view. We think state-owned companies like RusHydro and Rosenergoatom to be the biggest losers from tariff cuts, while we expect MRSKs to get better and 20% cut for their iRAB is possible. We estimate that the potential impact on gencos is also limited, which might enhance profitability from efficiency improvement.

66. MRSK North Caucasus Meets With Investors Aton July 8, 2010

MRSK North Caucasus management met with investors yesterday (7 June) and we note the following key takeaways from management's comments:

1) The company plans to transfer all its regional branches with the exception of Dagestan to the RAB regulatory approach from 1 Jan 2011. Dagestan will also shift to RAB, but only from 1 Jan 2014. Management confirmed that they have already received the regional authorities' approval to transition to RAB in all regions except Dagestan, and that Federal Tariff Service now needs to make a final decision on the transition.

2) A switch to RAB would require a 20% distribution tariff CAGR in the first five years of regulation, which implies, on average, a 15% CAGR for the final consumer electricity price, according to management estimates. Consequently, it seems that tariff growth can be kept within the 15% annual growth limit imposed by the government, and therefore transition to RAB is unlikely to face serious obstacles, in our view.

3) Management sees an EBITDA CAGR of 32% and a net income CAGR of 53% in 2011_15 (as a result of RAB's introduction), which it believes should bring the company's EBITDA and net income to RUB7,529mn ($243mn) and RUB3,535mn ($114mn), respectively by 2015.

4) The company has electricity loss rates within normative levels at all regional branches except Dagestan and Ingushetia. For the latter two regional branches management has developed a programme to reduce these extra losses for which they expect to receive around RUB5bn from the state budget. The programme has been already agreed with the Ministry of Energy, and is now being considered by the government.

Bottom line We are encouraged by management statements with regards to RAB transition and its timing, which we consider the main risks to our company valuation. In our models we assume 1 Jan 2014 as the date of RAB introduction in all regional branches, and this now seems too conservative in light of management guiding for a switch to RAB in 2011 in most regions. We are also pleased to hear that MRSK North Caucasus is taking action to diminish its high electricity loss rates in the Dagestan region, for which it plans to receive government support (the programme will enable Dagestan to introduce RAB in a few years, we understand). We plan to review our fair value for the company shortly (currently $21.4 implying over 386% potential upside from current market price). Overall positive news for MRSK North Caucasus, in our view.

67. MRSK Siberia gives reasons for RAB tariff implementation delay Alfa Bank July 6, 2010

Yesterday, MRSK Siberia issued a press release announcing the reason for the delay in implementing RAB-based tariffs at two of its branches. As we expected, the company said the delay was due to technical problems with the legislation governing RAB. The main factor is the still unresolved problem with "last mile" agreements. We note that the share of throughput under "last mile" agreements at the MRSK Siberia branches that had to implement RAB-based tariffs on July 1 is a substantial 75% for Khakasenergo and 45% for Chitaenergo.

The Duma is now discussing the question of whether to keep these agreements in place until 2014. We believe the political decision has already been made but still needs to be approved and come into force. MRSK Siberia says it expects regulators to make a final decision in the near future.

As we have already said, we believe the delay in adopting RAB at MRSK branches will have virtually no effect on fundamentals. We note that the fact that the delay stems from technical causes could reduce investors' concerns that MRSKs' iRAB could be revised and tariff growth could be limited.

Alexander Kornilov

68. Russia Electricity reform - More clarity, please! Renaissance Capital, Russia Thursday, July 8, 2010

Government wobbles on liberalisation. On 4 June 2010, Moscow media sources quoted Economy Minister Elvira Nabiullina saying that the government would cap 2011 increases in the Federal Grid Company's (FSK) tariffs at 15%, rather than at 31% as was previously planned. Nabiullina went on to say that tariff increases for distribution grid companies - the MRSKs - would be similarly constrained, and that the parameters for the introduction of rate-of-return regulation would be squeezed downwards. Overall, 2011 electricity tariffs would not be allowed to grow more than 13-15%, according to Nabiullina. We now understand that the Economy Ministry's (MinEcon) proposals have gained traction. The rate-of-return principle itself is being reconsidered, with suggestions by MinEcon that some grids could get tariffs that include no cost of capital. In our view, these developments threaten a decade's worth of painstaking reform in the Russ ian power sector.

Uncertainty and confusion. We believe the sector is in a state of confusion, and that no one knows when, if, how or where the tariff caps would apply. In response to the new uncertainty, the proprietors of the generating companies are putting their capex plans on hold (apart from their obligations under the terms of privatisation). Grid companies and regulators appear to us to be in disarray, as they reconsider long- term investment plans and budgets produced by many months of intense discussion. The launch of the next phase of regulatory-asset-based tariff regulation for distribution grids - scheduled for 1 July 2010 - has been postponed.

Long-term pain for short-term gain. MinEcon's likely motive is to keep a lid on inflation, we think. However, we feel bound to ask, if Russian consumers cannot begin to pay appropriate prices for electricity when oil is steady at $72/bbl, when will they? Meanwhile, we think the recent underperformance of power-sector shares vs an already-nervous RTS Index is evidence that investor confidence in the sector has been shaken. In our view, an inevitable consequence of this confusion and the apparent policy change is that the power sector's already-high cost of capital will spiral upwards...with consumers ultimately having to foot the bill.

Private-sector funding required. Today (8 July) Interfax quotes Finance Minister Alexei Kudrin as saying that, "80% of spending on modernisation of the economy will come from the private sector." We wonder if his colleagues at MinEcon are listening.

Derek Weaving or Vladimir Sklyar.

69. Russian power consumption in June up 4.7% y-o-y Alfa Bank July 5, 2010

On Friday, the System Operator released its monthly Russian power consumption statistics, summarized in the tables below. On a y-o-y basis, power consumption rose 4.7%, continuing the upward trend seen in May (+4.4% y-o-y). Compared with May on a m-o-m basis, power demand in June was down 5.6%. We expect electricity demand to rise 2.0% y-o-y, which is much more conservative than the SO statistics. We view this news as POSITIVE for generating companies across the board (both the OGK/TGK universe and RusHydro) and for the power sector overall, since demand remains the fundamental factor concerning these stocks.

These numbers signify that electricity demand continues to recover. Looking at the figures on m-o-m basis, weather appears to have had a significant effect on power demand.

SECTOR Retail, FMCG, Phrama 70. Bosch und Siemens Hausgeraete launches plant near St Petersburg bne July 06, 2010

German household appliances manufacturer Bosch und Siemens Hausgeraete (BSH) has launched washing machine and refrigerator production lines in the Neudorf industrial zone near Russia's St. Petersburg, reports Prime-Tass.

The news agency says that BSH invested 66mn euros in 2005-2009 to organize production at the site.

71. Castorama to build 15-20 stores in Moscow, Moscow Region bne July 08, 2010

Castorama, a European home improvement retailer, plans to build 15-20 hypermarkets in Moscow and the Moscow Region, reports Prime-Tass.

Citing a statement issued by the company, the news agency says that the company did not provide total investments in the project and did not say when it planned to complete construction of these hypermarkets.

72. Rusnano to help develop new medicines bne July 06, 2010

Rusnano says that it will back a $160mn project to develop medicines for cancer and AIDS in Russia, reports The Moscow Times.

The newspaper report says that a joint venture created by Rusnano and research center Chemrar will develop five new medicines that will be brought to market from 2013 to 2016, including drugs for AIDS, pancreatic cancer and hepatitis C.

73. Russia to invest $40 million in developing AIDS, cancer treatment Ria Novosti July 6, 2010

Russia's state-run, non-profit Rosnano will invest some 1.2 billion rubles (about $40 million) in developing treatment for AIDS, hepatitis and cancer of the pancreas, the corporation said on Tuesday.

"Reviving the country's pharmaceutical industry...is a difficult task. But the country has no choice. It's a matter of state reputation and national health. This is a chance to attract 'smart money' to our country's economy," Rosnano head Anatoly Chubais said.

Russia's President Dmitry Medvedev earlier urged scientists and businessmen to take steps to redevelop the industry. More than 200 innovative drugs are planned to be designed by 2020.

Tatyana Nikolenfo who heads Rosnano's infrastructure programs, said that Russia had for a long time been a kind of "Eldorado for clinical tests" for Western pharmaceutical companies, "It all has been very cheap here. Western firms tested their projects in Russia and later they returned here in the capacity of expensive imports. We want to change the situation," she said.

MOSCOW, July 6 (RIA Novosti)

74. Russia's antitrust starts probe against Novo Nordisk unit bne July 08, 2010

Russia's Federal Antimonopoly Service has started an antitrust investigation against Novo Nordisk, a subsidiary of Danish pharmaceutical company Novo Nordisk, reports Prime-Tass.

Citing the watchdog, the news agency says that Novo Nordisk is accused of refusing to conclude contracts with some buyers and discriminating against some potential partners.

SECTOR Telecom, Internet 75. Medvedev threatens action over unpaid internet bills bne July 9, 2010

President Dmitry Medvedev on Thursday threatened to take action against governors who allow schools in their region to have their internet connection cut due to unpaid bills, ITAR-TASS reported.

Medvedev told Education and Science Minister Andrei Fursenko: "if cases of schools being disconnected from the internet (for non-payment) continue, report to me, we will talk to them (governors) in another manner ... I understand that now is not the easiest period, but funds should be found."

In late May, Fursenko reported that 98% of Russian schools were online, but promised the tech-enthusiast president that the remaining 2% in remote areas would be hooked up by the time the next school year starts on September 1. He pointed out to the president that "traffic costs quite a lot. Expenditures amount to millions or tens of millions of rubles."

76. MegaFon to invest RUB1bn in 3G development in Tatarstan bne July 06, 2010

Sergei Soldatenkov, the CEO of Russian mobile operator MegaFon, says that the operator plans to invest RUB1bn in the development of third generation (3G) mobile networks in the constituent republic of Tatarstan, reports Prime-Tass.

The news agency says that MegaFon has signed an agreement with the government of Tatarstan to cooperate in the development of information and communications technologies and services, under which MegaFon is expected, in particular, to cover the centers of all 43 districts in the region with 3G networks.

77. Mobile giants ask for transparency in 4G frequency allocation RIA Novosti July 9, 2010

Russia's largest three mobile operators have asked the Communications Ministry to ban the non-competitive distribution of next-generation LTE technology 4G frequencies to companies which might acquire them for further sale, Kommersant business daily said on Wednesday.

Kommersant quoted a letter signed by MTS President Mikhail Shamolin, MegaFon Chief Executive Officer Sergei Soldatenkov and VimpelCom CEO Yelena Shmatova as saying that they have information on "a number of initiatives to distribute LTE frequencies to smaller companies, which will lead to negative consequences for our users, our companies and the state on the whole." Kommersant said that the smaller companies are Voentelecom and its subsidiary Osnova Telecom which belong to the Defense Ministry. The ministry, which already owns the bulk of Russian frequencies, has requested surplus frequencies so that it could resell them to other companies or offer services to households.

The letter said that even if the small companies decided to build 4G networks, it would take them much longer than the top three cell operators. They estimate spending on building the 4G network at $5-7 billion within 5-7 years.

78. MTS's retail chain increases retail-market share UralSib July 6, 2010

Average handset price continues to fall. MTS (MBT - Buy) yesterday released data on the retail market for mobile handsets in Russia, which is showing signs of recovery after bottoming in 2Q09. 7.2 mln handsets were sold in Russia in 2Q10, up 27% YoY and flat QoQ, as the second quarter is traditionally the slowest. The handset market fell 6% QoQ in ruble terms, reflecting seasonal weakness, and was down 1% YoY to RUB30.9 bln ($1.0 bln), with the average price of handsets sold declin- ing (down 6% QoQ and 22% YoY to RUB4,300, or $144 per device). The price decline reflects competition among manufacturers offering low-price devices for the mass market and customers' increasing price sensitivity to additional functions.

MTS's retail chain has 14% of market, up 7 ppt YoY. MTS's mobile retail chain of 2,200 stores accounted for 14% of total handsets sold at the end of 2Q10 (up 1 ppt QoQ and 7 ppt YoY). Given the moderate rise in sales through MTS's retail chain, Euroset and Svyaznoy - the company's main competitors in that market - should remain flat. At the conference calls discussing the financials, MTS's management reaf- firmed its plans to expand the retail network. Handset sales and acces- sories should reach $1 bln in 2010 (they currently account for around 5% of sales), while EBITDA is expected to be positive, which we see as achievable.

Own retail chain allows attracting more customers. We see the Big Three's attempts to strengthen their retail chains as justi- fied. As mobile penetration comes to its physical limit (147% at the end of May), providers are switching their efforts to retaining and attracting more customers that use more available services and make higher payments per month. For instance, MegaFon's 2009 ARPU in Russia for SIM cards sold at its stores came at RUB400/mo ($12.6/mo), 25% higher than the company's aver- age. We are positive on MTS's medium-term prospects; the stock is trading at a 2011E EV/EBITDA of 3.9, offering 61% upside to its 12-month target price of $31/ADR, and we reiterate our Buy recommendation on the name.

79. Vedomosti speculates that new internet search engine is to be set up VTB Capital July 5, 2010

News: Vedomosti has quoted its own sources this morning as saying that American Arthur Hunt Group has sent letters to some employees of Yandex, Rambler, Mail.ru (Russia's largest search engines, which account for 64%, 7.6% and 2.6% of Russian search queries, respectively) offering to meet and discuss potential opportunities in a new ambitious project. According to the paper, quoting one of the interviewees, the creation of a new search engine was discussed.

Vedomosti adds that after the interview at the head-hunting agency, the candidates are being interviewed by Global Investment Group which, according to the paper, aims to create a new search engine in Russia with a total initial investment of USD 100mn.

Our View: The two key players in Russia, Yandex and Google, account together for about 90% of the context search market (in terms of both search queries and monetarily). International practice shows that in each country there are normally no more than two material internet search players with one being the leading one. In our view, it would be extremely difficult for a new player to conquer the positions held by Yandex and Google, especially in light of the unsuccessful attempts by such long-existing players as Mail.ru (which has continued to lose its positions in search since the start of the year) and Rambler.

Anastasia Obukhova

SECTOR Transport 80. NCSP cleared of breaching anti-monopoly regulations VTB Capital July 8, 2010

News: The Moscow Arbitration Court has ruled in favour of NCSP over the Federal Anti-Monopoly Service (FAS) accusations that NCSP violated anti-monopoly regulations. FAS stated in March that NCSP had abused its dominant positions on the grain handling market of the Azov and Black Seas (with a share of over 50%), by increasing grain handling tariffs.

Our View: This news is positive as it eliminates the risk that FAS will force NCSP to lower its tariffs on grain handling. We remind investors that, despite the Ministry of Agriculture recently downgrading its grain harvest forecast for 2010 because of bad weather, forecasted grain supplies are 25mn tonnes above demand. This compares with Russia's grain export capacity of 23mn tonnes of grain. So, full capacity utilisation of Novorossiysk's grain handling facilities is ensured. Grain is a highly profitable cargo and NCSP is planning to increase the throughput capacity of its grain facilities 2mn tonnes by the end of 2011.

Elena Sakhnova

81. NLMK adds to its rail-car fleet NLMK Renaissance Capital July 6, 2010

Event: According to Prime-TASS yesterday (5 July), NTK, the wholly-owned transportation-logistic subsidiary of NLMK, has acquired 10,000 gondola wagons at the Russian Railways (RZhD) auction. NLMK paid RUB300,000 ($9,600) per wagon, exceeding the initial price by 2.6x. Four major bidders took part in the auction.

Action: The news is positive for NLMK, in our view.

Rationale: NTK owns 5,000 rail-cars, including 3,267 gondola wagons. Thus, the deal significantly enhances NLMK's rail- car fleet. NLMK is currently implementing phase 2 of its technical upgrade programme, which should bring NLMK's steelmaking capacity to over 17mnt per annum compared with the current 12.4mnt per annum. NLMK's key projects include the construction of blast furnace #7 (with a capacity of 3.4mnt per annum of pig iron) and a mini-mill in the Kaluga region (with a capacity of 1.5mnt per annum of crude steel). NLMK also plans to make a significant investment in its mining segment. During a site visit last week, NLMK told us its growth capex programme envisages a 30% increase of mining capacity at Stoilensky GOK in order to maintain 100% self-sufficiency in iron ore concentrate and the construction of 6mnt per annum pelletising plant. NLMK also said it is committed to building efficient vertical-integration in its coking coal segment. Total capex for phase 2 of the technical upgrade programme may reach $4.4bn, according to the company. According to the company, the purchase of the 10,000 rail-cars is an essential step in implementing its development plans. NLMK has a very strong balance sheet with less than $1bn of net debt and 0.58 Net debt/EBITDA as at 31 Mar 2010, which should provide the company with the ability to finance its growth capex at very competitive interest rates.

Boris Krasnojenov

82. Putin seeks private Airport investors bne July 07, 2010

Russian Prime Minister Vladimir Putin says that the aviation sector needed more public-private partnerships to revamp the nation's airports, which must be able to accommodate Russia's "booming" air traffic, reports The Moscow Times.

The newspaper report quoted Putin as saying that the state has spent RUB47bn ($1.5bn) over the past two years to modernize its airports.

83. Russian Railways to up 2011 invest to RUB315bn bne July 06, 2010

Russian Railways Vice President Vadim Morozov confirmed that the company was considering increasing its 2011 investment program to RUB315bn from the initially planned RUB285bn, reports Prime-Tass.

The news agency says that the company was preparing two versions of its investment program for 2011.

SECTOR Agriculture 84. Ag min sees Russia's annual grain exports up to $5bn by 2013 bne July 06, 2010

Russian Agriculture Minister Yelena Skrynnik says that Russia plans to annually export $5bn worth of grain by 2013 compared to the current $3.5bn, reports Prime- Tass.

The news agency quoted Skrynnik as saying that Russia also plans to export grain to 20 countries, up from 15 countries presently.

85. Drought destroys nearly 9mn hectares of grain crops in Russia bne July 08, 2010

Russian First Deputy Prime Minister says that according to the Russian Agriculture Ministry's preliminary estimate, drought has destroyed approximately 9 million hectares of grain crops, reports Interfax.

The news agency quoted the minister as saying that this is a very large figure.

86. Grain harvest forecast downgraded VTB Capital July 6, 2010

News: The Ministry for Agriculture has downgraded its 2010 grain harvest forecast from 90mn tonnes to 85mn tonnes, Vedomosti reports. This is due to the abnormally severe drought in the Volga and Urals regions as well as the central part of Russia (the outlook for the southern regions remains positive).

Our View: So far, positive price trends have only been observed in those regions most damaged by the drought. In general, we do not see the difficult weather conditions creating a significant countrywide shortage or raising prices since a lower harvest would for the most part be compensated for by high grain stocks. As of 1 July 2010, stocks amounted to 17mn tonnes (which puts total supply at 102mn tonnes). The Ministry for Agriculture Domestic estimates Russia's grain needs at 77mn tonnes, which would mean that there were 25mn tonnes available for export (while Russia's exporting capacity remains limited to 23mn tonnes). We remind investors that the grain harvest in 2008 stood at 108mn tonnes, while in 2009 it was 97mn tonnes.

However, were weather conditions to deteriorate, the risks of a grain deficit and higher prices would increase. In this case, those grain producers not hit by the drought would benefit while meat producers' profitability might be at risk due to higher fodder prices.

Ivan Kushch

87. Ministry lowers Russia's 2010 grain harvest forecast by 5.6% bne July 06, 2010

Russian Agriculture Minister Yelena Skrynnik says that the Agriculture Ministry has lowered its forecast for Russia's grain harvest in 2010 to 85 million tonnes from 90 million tonnes projected earlier, reports Prime-Tass.

The news agency quoted Skrynnik as saying that the forecast was lowered due to drought in 12 Russian regions.

88. Raw sugar advances on speculation Russia may increase purchases bne July 06, 2010

Raw sugar rose to a 10-week high on speculation that Russian purchases will increase next month after the nation lowered its import tax, reports Bloomberg.

Citing the nation's sugar producers union, the wire service says that Russia reduced the duty on raw sugar by 15 percent to $203 a metric ton for August.

89. Russian deputy PM calls for measures to boost bovine meat output bne July 06, 2010

Russia's First Deputy Prime Minister Viktor Zubkov called for developing measures to boost production of bovine meat, reports Prime-Tass.

The news agency says that Zubkov was speaking at a meeting on national projects chaired by Prime Minister Vladimir Putin.

SECTOR Automotive 90. Car market to grow 15% in 2010 from 'cash for clunkers' plan - ministry RIA Novosti July 8, 2010

The Russian Ministry of Industry and Trade expects a 15% growth in the country's car market as the "cash for clunkers" program continues in Russia, Alexei Rakhmanov, director of the ministry's automotive industry department, said on Wednesday.

Under the program launched in March to support the car industry hit by the world financial crisis, a car owner can swap a car that is older than 10 years for a 50,000 ruble ($1,600) certificate to buy a new vehicle.

The car market grew 10% after the program's first stage was launched, Rakhmanov said, adding that the market might gain another 5% if the program's second stage was as efficient as the first.

He added that under the program, 230,000 cars would be sold in 2010 and 170,000 cars in 2011.

Car owners have by now received 213,600 certificates, while 148,810 cars have been sold, including 36, sold under preliminary contracts.

Prime Minister Vladimir Putin earlier said the government would invest another 10 billion rubles ($321 million) in the program and plans to end it in 2011, while initial investment amounted to 10.5 billion rubles.

91. Car sales in Russia up 3% on year in January-June bne July 08, 2010

Arnaud Ribault, a member of the Association of European Businesses (AEB) and general director of Citroen in Russia, says that sales of passenger cars and light commercial vehicles (LCVs) in Russia rose 3% on the year to 790,000 units in January-June, reports Prime-Tass.

The news agency quoted Ribault as saying that in June, sales rose 46% on the year to a little under 175,000 units.

92. Car sales jump 46% in June bne July 08, 2010

The Association of European Businesses says that Russian sales of new cars and light vehicles jumped 46 percent in June from a year earlier as the government continued its cash-for-clunkers program to stimulate demand, reports The Moscow Times.

The newspaper report says that the sale beat the average estimate of 34 percent growth in a Bloomberg survey.

93. Citroen to start assembling cars in Russia on July 20 bne July 08, 2010

Arnaud Ribault, head of French automobile manufacturer Citroen in Russia, says that Citroen plans to start assembling cars in Russia on July 20, reports Prime-Tass.

The news agency quoted Ribault as saying that the Citroen C4 is the first model that Citroen plans to start assembling at the plant based in the city of Kaluga.

94. Customs union keeps foreign cars expensive bne July 08, 2010

Higher duties on imported cars that were set to expire next Monday will now be in place until at least 2012 as part of Russia's customs union with Belarus and Kazakhstan, leaving drivers to pay a major premium for foreign autos, reports The Moscow Times.

Citing an unnamed source in the Economic Development Ministry, the newspaper report says that the increased duties on foreign-made cars are now considered permanent because the customs union's single import tariff has taken effect.

95. GAZ to sell 50,000 LCVs, 10,000 MCVs in Russia in 2010 bne July 06, 2010

Automaker GAZ plans to sell 50,000 light commercial vehicles (LCVs) and 10,000 medium commercial vehicles (MCVs) in Russia in 2010, reports Prime-Tass.

Citing a report issued by the company, the news agency says that GAZ also planned to sell 10,000 LCVs and 3,000 MCVs in other countries of the Commonwealth of Independent States (CIS) in 2010.

96. GM-AvtoVAZ vehicle output up 58% on year in January-June bne July 06, 2010

GM-AvtoVAZ, a joint venture between U.S. automaker General Motors (GM) and Russian carmaker AvtoVAZ, produced 16,454 vehicles in January-June, up 58% on the year, reports Prime-Tass.

Citing a statement issued by the joint venture, the news agency says that GM- AvtoVAZ sold 16,858 vehicles in this period, including 915 units exported to countries of the Commonwealth of Independent States (CIS).

97. More cash for clunker program bne July 07, 2010

An Industry and Trade Ministry official says that pumping an extra RUB10bn ($321mn) into the cash-for-clunkers program will boost the car market by an additional 5 percent, reports The Moscow Times.

The newspaper report Rakhmanov, head of the ministry's auto department as saying that over 213,000 vouchers have been given out already, and 149,000 cars have been purchased through the program.

98. New Cars Sales in June: Strong MoM growth Aton July 9, 2010

The Association of European Businesses in Russia (AEB) yesterday (8 July) published car sales statistics for Russia. Overall, the sales figures were relatively strong, demonstrating solid 11% MoM and 45% YoY growth. Among the Russian automakers, Sollers and GAZ showed the best performance with 22% and 19% MoM growth, respectively. AvtoVAZ was in line with the market with foreign producers lagging behind.

99. Peugeot's sales in Russia down 19.9% on year in January-June bne July 06, 2010

Cars sales of French automaker Peugeot in Russia fell 19.9% on the year to 13,548 cars in January-June, reports Prime-Tass.

Citing a statement issued by the company, the news agency says that Peugeot sold 16,918 cars in Russia in January-June 2009.

100. Russia's car market to grow 15% in 2010 from 'cash for clunkers' plan Ria Novosti July 8, 2010

The Russian Ministry of Industry and Trade expects a 15% growth in the country's car market as the "cash for clunkers" program continues in Russia, Alexei Rakhmanov, director of the ministry's automotive industry department, said on Wednesday. Under the program launched in March to support the car industry hit by the world financial crisis, a car owner can swap a car that is older than 10 years for a 50,000 ruble ($1,600) certificate to buy a new vehicle. The car market grew 10% after the program's first stage was launched, Rakhmanov said, adding that the market might gain another 5% if the program's second stage was as efficient as the first. He added that under the program, 230,000 cars would be sold in 2010 and 170,000 cars in 2011. Car owners have by now received 213,600 certificates, while 148,810 cars have been sold, including 36, sold under preliminary contracts. Prime Minister Vladimir Putin earlier said the government would invest another 10 billion rubles ($321 million) in the program and plans to end it in 2011, while initial investment amounted to 10.5 billion rubles. MOSCOW, July 7 (RIA Novosti)

101. Russia's car imports down 15% on year in January-May bne July 07, 2010

The Federal Customs Service says that Russia's car imports fell 15% on the year to 192,200 units in January-May, reports Prime-Tass.

The news agency says that in monetary terms, imports fell to $3.235bn in January- May from $3.513bn a year earlier.

102. Russia's Sollers sales rise 29% on year in January-June bne July 09, 2010

The sales of Russian automaker Sollers rose 29% on the year to 32,305 vehicles in January-June, reports Prime-Tass.

Citing the company, the news agency says that Sollers has sold 18,686 UAZ vehicles, up 41% on the year; 8,462 Fiat vehicles, up 8% on the year; and 4,939 SsangYong vehicles, up 33% on the year.

103. Toyota to recall 4,000 Lexus vehicles in Russia - company Ria Novosti July 6, 2010

Japanese auto giant Toyota Motor Corp. plans to recall almost 4,000 of its Lexus luxury vehicles in line with the company's global program of fixing a problem with faulty valve springs, Toyota Motor Corp. said on Monday.

The company said last week that it was planning to recall 270,000 vehicles due to faulty valve springs in some V8 and V6 engines. Due to slight variations during the manufacturing process, some foreign material may have damaged the valve springs resulting in potential breakage.

"Approximately 4,000 vehicles are potentially affected in Russia, including the GS450h, GS460, LS460, LS460l, LS600hl, which were on the whole produced in 2006-2008," Toyota's Russian subsidiary told RIA Novosti.

There is a remote possibility that an abnormal engine noise or idling may occur. In extremely rare instances, the engine may stop while the vehicle is in operation.

Toyota said it was moving quickly to resolve the situation and was currently waiting for replacement parts. "We are planning to launch a service program within the next several days," the company said.

The overall number of claims received by Toyota throughout the world amounts to 220, despite the fact that there were no accidents, while 44 drivers said their engines stalled while they were driving.

The overall number of Toyota's recalled has reached nine million since 2009. Toyota also stopped selling its Lexus vehicles in the United States two weeks ago due to fuel leaks.

MOSCOW, July 5 (RIA Novosti)

SECTOR Aviation and defence 104. Aeroflot: Boeing 767s to be replaced with Airbus A330s UralSib July 9, 2010

Aeroflot to purchase 11 A330s by 2013. Interfax reported that Aero- flot (AFLT RX - Buy) plans to purchase 11 Airbus A330 200 or 300s, with deliveries between 2Q11 and 1Q13. The A330 200 costs up to $84 mln, and the A330 300 up to $92 mln. According to Interfax, the total value of the deal will not exceed $1 bln. The aircraft are to be pur- chased via lease, though no exact terms are available.

Debt to increase, higher interest payments may affect net margins.

The new aircraft should replace the 11 Boeing-767s, which are to be disposed of in the next two years. This disposal is incorporated into our model. Depending on the lease terms, the acquisition of the Airbuses should increase Aeroflot's net debt in 2010-13 by $1 bln. Its current net debt is $1.6 bln (of which 46% is lease obligations). Leasing will also increase the company's interest payments and pressure its net margins, though this should partially be countered by the positive affect of the A330's better fuel efficiency versus the 767, thus improving operating income.

News should be considered positive in context of expansion program. We are not currently incorporating the lease into our model, as we are waiting for exact deal terms. If incorporated, the acquisition would increase Aeroflot's debt and thus bring its target price down by up to 10%, though this excludes the positive effect of the A330's superior fuel efficiency as well as its 17% higher passenger capacity. Overall, Aeroflot's current debt load is significantly below the industry average (2010E net debt/EBITDA of 2.7 versus 4.8). We expect its debt load to increase as a result of its aggressive expansion plans, which require fleet modernization, including at its newly acquired/yet-to-be acquired subsidiaries. The positive effect of expansion should out- weigh any negative effect from increasing lease obligations, in our view. We reiterate our Buy recommendation on the stock.

Anna Kupriyanova

105. Antonov, U.S. firm to bid for tanker deal Bank bne July 06, 2010

The small, cash-strapped firm U.S. Aerospace says that it had joined forces with Antonov, a state-owned Ukrainian plane builder, to enter the hotly contested competition to build a new generation of aerial tankers for the U.S. military, reports The Moscow Times.

The newspaper report says that it is the latest twist in a nearly decade-long, drama- filled saga likely to end with a government contract worth as much as $50bn to the winning bidder.

106. "Flying" Russian battle tank can penetrate all types of armor Ria Novosti July 9, 2010

The Russian _-90S main battle tank is often called a "flying" tank. It weighs just 46.5 tons, far less than many foreign built tanks. The T-90S is almost unique in terms of rate of fire and it is capable of destroying many types of armor at the range of up to five kilometers. _The T-90S main battle tank is equipped with an automatic fire control system capable of detecting targets even at night and regardless of the weather. The sight is equipped with a thermal night-vision camera._Reactive armor protects the _-90S from armor-piercing and sub-caliber shells. The Shtora infrared ATGM jamming system can disrupt enemy anti-tank guided missiles. It has an early- warning capability which can alert the crew to an incoming attack, and release a smoke shield, thereby rendering the T-90S invisible to enemy weaponry._Thanks to a powerful 1000-hp engine, the _-90S can attain a top speed of 60 kph on the road and up to 45 kph on rough terrain._Analysts say the T-90S has proven itself in high temperatures both in the Indian desert and in Malayan jungles._The T-90S is popular among foreign customers for its superb combat and performance characteristics. The tank serves with the armed forces of India, Algeria and Saudi Arabia.

107. Israel ready to produce drones jointly with Russia bne July 07, 2010

Israel is prepared to produce unmanned aerial vehicles jointly with Russia at Russian facilities, reports Prime-Tass.

Citing an unnamed Russian defense industry source, the news agency says that Israeli unmanned aerial vehicles were superior to Russian ones.

108. Putin outlines proposals on developing Russian airport sector bne July 08, 2010

Russian Prime Minister Vladimir Putin has outlined his proposals on developing the airport sector, reports Prime-Tass.

The news agency says that Putin instructed agencies to decide within a week on abolishing taxes on airport and airfield property.

109. Russia in airlines boom, passengers up 32% in 5 months bne July 08, 2010

Russian Prime Minister Vladimir Putin says that Russia is going through an airlines boom, with passenger numbers soaring over 32% in five months, reports Interfax.

The news agency quoted Putin as saying that Russia is going through a genuine air services boom.

110. Russia needs more flying tankers for its Air Force Ria Novosti July 9, 2010

The inter-theater redeployment of aircraft during Vostok-2010 was one of the key events of the strategic war games, which end today. The Su-24 Fencer and Su-34 Fullback tactical bombers used midair refueling to fly to the Russian Far East.

In-flight refueling, routinely used by the world's leading powers, including the United States and NATO countries, allows for the quick build-up of air power in a given zone of conflict.

To efficiently implement that maneuver, a country should have a sufficient number of flying tankers, combat aircraft equipped for midair refueling, transport planes to carry auxiliary personnel and cargo, and crews capable of fulfilling such missions.

None of these elements are sufficient in Russia.

The Il-78 (Il-78M) Midas, based on the Il-76 military transport plane, is Russia's only flying tanker. Russia has 19 such planes equipped for midair refueling of the Tu-160 Blackjack and Tu-95 Bear strategic bombers and the A-50 Mainstay early warning and control planes. This is certainly not enough.

The U.S. Air Force has 250 KC-10 Extender and KC-135 Stratotanker air-to-air tanker aircraft and there are more in-flight refueling planes in the National Guard and in reserve. This allows the United States to project its military might by quickly redeploying large Air Force units from one theater of operations to another.

Russia also lacks aircraft capable of being refueled in midair. For example, the Su-27 Flanker and the MiG-29 Fulcrum multipurpose combat planes are not equipped for this, mostly because in the Soviet era there were enough military airfields with a large number of aircraft in all the strategic locations.

Modern Russia cannot keep so many planes at so many airfields, which is why it is becoming critically important to equip fighter planes for midair refueling. All new and all modernized planes have such equipment, and some tactical aircraft can be used as flying tankers. In particular, the Su-24 Fencer has outboard fuel tanks and a refueling system.

But this is not a good solution as these planes usually have a shorter range and cannot be used as bombers, which would undermine a bomber squadron's potential.

The Tu-22M3 Backfire-C long-range bomber has no refueling equipment for political reasons: if it had a flight refueling probe, this would have made it an intercontinental plane and hence subject to START reductions.

Equipping a bomber with midair refueling equipment is fairly simple.

But the biggest problem concerns the crew. The most responsible missions in Russia are still assigned to crews led by senior officers (majors, lieutenant colonels and colonels) who have considerable practical experience. The ability of other pilots to fulfill such missions is not assured.

Another problem concerns transport planes, something the Air Force needs to support distant operations that involve the redeployment of combat planes. Russia has one of the world's largest fleets of transport aircraft, but they are still not enough given the country's huge territory and the need to transport a large amount of military cargo.

These problems can only be resolved comprehensively; a simple supply of flight refueling probes will not do. The country's leadership and military should approve the production of refueling planes and the training of the necessary crews for the Air Force. Taken together, this should increase the number of planes capable of long- range missions.

At the same time, the Il-78 Midas is too big for refueling tactical aircraft, which need a smaller, cheaper plane, possibly based on the civilian Tu-204 medium-range airliner. A few dozen such planes in the Air Force would dramatically improve its position.

Besides, the purchase of large batches of flying tankers based on the Tu-204 would save the airliner, which is breathing its last breaths.

111. Russia set to buy Mistral with transfer of French technologies RIA Novosti July 6, 2010

Russia will buy French Mistral class helicopter carriers with the complete set of navigational equipment and technical documentation, but equip the ships with its own weaponry and helicopters, a defense industry source said Monday.

Russia is negotiating the purchase of at least one French-built Mistral class amphibious assault ship and plans to build two or three more vessels of the same class in partnership with the French naval shipbuilder DCNS.

"I would like to stress the point that we are buying the Mistral with all proper navigational and technological equipment, including the fire control systems," a source close to the negotiations said.

"We will use our own helicopters on the Mistral, but we will have to raise the deck for that purpose," he said.

According to other defense industry sources, the Russian Air Force plans to buy up to 100 Ka-class helicopters, including some 70 Ka-27Ms, to equip the Mistral ships.

The Mistral class ship is capable of transporting and deploying 16 helicopters, four landing barges, up to 70 armored vehicles including 13 battle tanks, and 450 personnel.

"We are also planning to use this helicopter carrier in northern latitudes, in ice floe. For that we will need to reinforce the hull of the ship, but it will not seriously change its structure or technical equipment," the source said.

The Russian military has said it plans to use Mistral ships in its Northern and Pacific fleets.

Many Russian military and industry experts have questioned the financial and military sense of the purchase, and some believe that Russia simply wants to gain access to advanced naval technology that could be used in the future in potential conflicts with NATO and its allies.

In April, the head of the Federal Service for Military and Technical Cooperation, Mikhail Dmitriev, said the Mistral deal would be concluded by the end of the year.

112. Russia to test-launch 10-12 ICBMs a year through 2020 Ria Novosti July 9, 2010

Russia's Armed Forces will test-launch up to 12 ballistic missiles a year over the next decade, a top military official said on Thursday.

"We currently carry out 10-12 ballistic missile launches a year and we will maintain this level in the foreseeable future," Lt. Gen. Alexander Burutin, first deputy chief of the General Staff of the Russian Armed Forces, said after a meeting of the State Duma Defense Committee.

The committee advised earlier in the day the lower house of the Russian parliament to ratify a new strategic arms reduction deal with the U.S.

He said under the new treaty, Russia is to transfer to the United States telemetric data on only five ballistic missile launches a year.

He also said Russia would not destroy a single missile or launcher whose service life was not over yet.

Burutin said in previous years Russia had failed to modernize its strategic nuclear shield.

"Therefore a significant portion [of the nuclear arsenal] is in such condition that sooner or later it will be technologically unable to ensure the guaranteed use of nuclear weapons," he said.

The treaty was signed on April 8 in Prague, replacing the START 1 treaty that expired in December 2009. The document was submitted to the U.S. Senate on May 13 and to the State Duma on May 28. The Russian and U.S. presidents have agreed that the ratification processes should be simultaneous.

The new pact stipulates that the number of nuclear warheads is to be reduced to 1,550 on each side, while the number of deployed and non-deployed delivery vehicles must not exceed 800 on either side.

MOSCOW, July 8 (RIA Novosti)

113. Russia to upgrade 200 Soviet-era tanks for Libya RIA Novosti July 8, 2010

Russia will modernize about 200 T-72 main battle tanks for the Libyan Army over the next few years, a Russian defense industry source said on Wednesday.

"A 1.3-bln euro [military-technical cooperation] deal signed between Russia and Libya this year includes the modernization of about 200 T-72 tanks which have been in service with the Libyan Army since the Soviet era," the source close to negotiations told RIA Novosti.

Moscow and Tripoli have been involved in talks on the modernization of the T-72 tanks since 2006 as part of renewed efforts to revive bilateral military-technical cooperation.

Libya was one of the largest buyers of Russian-made armaments in the second half of the 20th century.

Tripoli acquired from the Soviet Union more than 2,000 tanks, 2,000 armored infantry fighting vehicles and armored personnel carriers, about 450 self-propelled artillery pieces, as well as a number of combat aircraft and large quantities of small arms since the beginning of the 1970s.

However, Russia has encountered tough competition with Western nations in arms sales to Libya since the UN lifted sanctions against the African country in 2003, after Libyan leader Muammar Gaddafi announced he would halt the national nuclear weapons program and later accepted responsibility for the 1998 terrorist bombing over Lockerbie in Scotland, agreeing to pay compensation to the victims' families.

114. Russian combat aircraft makers fear competition with China RIA Novosti July 6, 2010

Russian aircraft makers MiG and Sukhoi have spoken against the sale of RD-93 jet engines to China citing the threat of strong competition from cheaper Chinese models of fighter aircraft.

Russia's state arms exporter Rosoboronexport planned to sign a contract with China on the delivery of 100 RD-93 engines for FC-1 fighters, which are direct competitors of the famed MiG-29 Fulcrum aircraft.

Mikhail Pogosyan, the head of the MiG and Sukhoi corporations, said the re-export of technologies must be approved by the original manufacturers to avoid unfair competition.

The FC-1 Xiaolong (Fierce Dragon) is a single-engine multi-role fighter aircraft developed jointly by China and Pakistan. It is designated as JF-17 Thunder by Pakistan.

A Russian aircraft industry source said the FC-1 is inferior to MiG-29 in performance, but sells for about $10 million, while the price of a MiG-29 is about $35 mln.

MiG-29s are currently competing with FC-1s in an Egyptian tender on the delivery of 32 fighters. In addition, Egypt has launched negotiations with Pakistan on the licensed production of FC-1 aircraft.

Russian Federal Service for Military-Technical Cooperation (FSMTC) approved the re- export of RD-93 engines to Egypt as part of the FC-1 fighter package in November 2007.

Rosoboronexport has said a decision to allow the re-export of technology could be made only by the government, and the manufacturers have never been consulted on the issue.

Russian weapons manufacturers are also facing increasing competition from China on other arms markets.

Russian S-300 and Chinese HQ-9 air defense systems have been competing in a Turkish tender since 2007.

Russian and Chinese armored personnel carriers competed in an Indonesian tender in 2007.

In 2009, Myanmar chose Russian Mig-29s over Chinese J-10s and FC-1s.

Russia has also accused China of producing its own copycat versions of some Russian-made weaponry, including the Su-27SK fighter jet, in violation of intellectual property agreements.

115. Sukhoi Superjet's engines fail certification test - paper RIA Novosti July 6, 2010

Engines for Russia's new Superjet 100 airliner have failed to receive certification as they have several significant flaws, a Russian business daily said on Tuesday.

The Superjet-100 project is a family of medium-haul passenger aircraft developed by the Sukhoi aircraft maker in cooperation with U.S. and European aviation corporations, including Boeing, Snecma, Thales, Messier Dowty, Liebherr Aerospace and Honeywell.

Vedomosti said Russian Deputy Industry and Trade Minister Denis Manturov, who heads the commission to monitor Superjet's production, prepared a report unveiling the current problems and obstacles in the way of certification.

The paper quoted the report as saying certification had not yet been granted as the aircraft successfully completed only 25% of the flight tests on electronics and 60% of safety tests.

The document also said Superjet's SaM146 engines, designed by PowerJet, a joint venture by France's Snecma and Russia's NPO Saturn, had several significant drawbacks. Among them was an increased weight and excessive fuel consumption.

Sukhoi started the engine certification program in February 2009 and plans to run certification tests in line with European, the U.S. and Russian standards, which would allow the plane to operate without restrictions anywhere in the world.

The aircraft maker plans to manufacture at least 700 Superjet 100s, and intends to sell 35% of them to North America, 25% to Europe, 10% to Latin America, and 7% to Russia and China.

Currently, Sukhoi has at least 122 firm orders for Superjet 100 airliners. The first aircraft are expected to be delivered to Armenia's national airline Armavia and Russia's flagship air carrier Aeroflot at the end of the year.

116. UAC ready to resume An-124 production if 40 planes ordered bne July 06, 2010

Alexei Fyodorov, the President of United Aircraft Corporation, says that the production of the most powerful commercial freighter plane, the An-124 Ruslan, could be resumed if a starting order is placed for about 40 planes, reports Interfax.

The news agency quoted Fyodorov as saying that this will depend on the starting order and investment.

SECTOR Media 117. CTC Media's June audience share driven by successful investments into Domashny's new content VTB Capital July 6, 2010

News: TNS-Russia has released its weekly audience share estimates in the 4+ demographic for 14-20 June for the top 20 Russian FTA broadcasters. The combined audience share of CTC, Domashny and DTV in the reported week reached 12.7% (our FY10 forecast is 13%).

Our View: Domashny (which accounts for about 13% of CTC's consolidated top line) continues to keep a solid YTD audience share of 2.3%, posting a QoQ improvement to 2.4% in 2Q10 (from 2.2% in 1Q10). This was driven by the success of a number of new domestic programmes launched in late 2009-1Q10.

Although DTV's audience share improved to 1.9% in 2Q10 (from 1.8% in 1Q10), this is still behind our FY10 forecast of 2%. New content (such as the Russian Killing Force series and A Bit On The Side) as well as the long-running programme Marriage Fiction are demonstrating solid results (YTD audience shares of 4.2%, 3.6% and 2.7%, respectively), but their contribution is not enough to support overall audience strength.

As for the flagship CTC, we do not expect its audience share to outperform our FY10 expectations of 8.7% until the autumn, due to the lack of premiers in summer. On the positive side, the absence of costly content might create a cushion for the margins in 2Q10-early 3Q10.

We are reiterating our bullish view on CTC Media (Buy, 12-month TP of USD 28). It currently trades at 8.7x 2010F EBITDA, suggesting a 25-30% discount to Eastern European peers.

SECTOR Coal 118. Coking coal on the Russian spot market appreciated by 28% to USD 193 per ton, following the global trend and a coal deficit Metropol July 7, 2010

In last two weeks, "Zh" grade coking coal has appreciated on the Russian spot market by 27.8% reaching USD 193 per ton, according to Metal Courier. Domestic prices are following the global trend, on average coal of equivalent grades now costs about USD 230 per ton internationally. The last time coking coal spot prices in Russia appreciated was in April, when 2Q 2010 contracts were being negotiated price rose by 14-19%.

Steel producers are now in the process of negotiating contract prices for 3Q 2010 and contract prices are likely to follow the upward trend of the spot market. The accident at the Raspadskaya mine intensified the coking coal deficit in Russia. Mechel and NLMK have already announced that they are shipping in coking coal from the US.

At the conference call about its 1Q 10 financial statements NLMK's management said that they expect coking coal prices to weaken in the third quarter, but we believe that prices are more likely to increase further, following the domestic spot market and global trends. NLMK and MMK are not completely self-sufficient in coking coal, and so are more sensitive to price increases.

Prices on hot-rolled coil (HRC) CIS BlackSea declined from 2Q 09 highs of USD 715 per ton to USD 580 per ton, while cold-rolled coil (CRC) declined from USD 818 per ton to USD 752 per ton. Increasing prices on coking coal as on raw material for steel production should support steel prices as producers would try to cover costs and maintain healthy margins.

119. EVRAZ plans to launch production at Mezhegey in 2015 VTB Capital July 9, 2010

News: According to Interfax, EVRAZ plans to launch production at Mezhegey in 2015.

Our View: EVRAZ won the auction for the Mezhegey deposit (213.5mnt of Zh- grade coal) in February 2010, paying as little as USD 0.15/t of reserves. It is seen as a long-term project which will not require significant capex in the next two years.

While no production schedule has been announced, we expect Mezhegey to become an important alternative for the company's (now depleted) Zh-grade reserves, with production of up to 8.4mtpa. Total capex needed might amount to USD 1.5bn. As with Mechel's Elga deposit, transport infrastructure is a big issue for the project. Mezhegey is located close to the city of Kyzyl and neighbours the Elegestskoye coal deposit (owned by OPK Mining) and the Ulug-Khemskoye deposit (which has yet to be auctioned, NLMK has expressed an interest).

We believe that given Evraz's interest (and, potentially, NLMK's as well), the prospects of a railway being constructed have improved significantly. Although this is a long-term project, and therefore any news is unlikely to be price- moving, this is still a very positive development. We view coking coal as a commodity that has very strong fundamentals in the long run and welcome the company's strategy.

Alexander Pukhaev

SECTOR Chemicals, Fertliser 120. Chemicals: Monthly surveillance

_ Fertiliser prices. Over the past month, most nitrogen fertiliser prices have decreased: Yuzhny ammonia has fallen 1.7% to $290/tonne, and US ammonia has dropped 4% to $358/tonne. The exception is urea, the price of which has risen 11% to $243/tonne FOB Yuzhny, and is up 13% to $255/tonne FOB US Gulf. The prices of both Baltic and US DAP have risen 1% MoM to $447/tonne FOB. The potash price has stayed flat MoM.

_ Performance update. The best share-price performance over the past month in the global fertiliser universe has been by CF Industries, up 18%. Yara has climbed 9%, K+S has added 3% and Agrium has gained 2%. YtD, performance has been negative for the sector: Mosaic has lost 28%, with Yara down 25%, CF Industries down 23% and ICL down 18%. In the Russian fertiliser universe, Ammophos (+38%), Dorogobuzh (+24%) and Apatit (+17%) have been the best performers YtD.

_ During the low season, Russian fertiliser names will likely be flat. The reporting season starts in August for 2Q10 financials, but we do not expect very significant newsflow from the Russian fertiliser universe. Corporate events, including new appointments at Uralkali, will likely be shifted to September, we think. On the other hand, we believe positive news might come from the international fertiliser universe, which is sensitive to agricultural-sector news, including USDA statistics.

121. Sibur JV to start building PVC plant in Nizhny Novgorod Region soon bne July 06, 2010

Rusvinyl, a joint venture between Russian petrochemical company Sibur Holding and Belgian chemical company SolVin, plans to start building a RUB39bn polyvinyl chloride (PVC) plant in the Kstovo District of the Nizhny Novgorod Region on July 12, reports Prime-Tass.

Citing the press service of the regional governor, the news agency says that the launch of the plant is scheduled for 2013.

GOVT REFORMS, REGULATIONS, ECONOMICS, REGIONS 122. Auto producers to benefit from customs union Aton July 8, 2010

Vedomosti reports today (8 July) that with the formation of a customs union between Russia, Kazakhstan and Belorussia, import duties for automobiles will remain high, and their status will be changed from temporary to permanent. This should create a stable outlook for local producers, which have already benefited from the duties. Positive for local auto producers, in our view.

123. Government approves commissioning of 28.3 GW of new capacity through 2017 under CSA Alfa Bank July 9, 2010

Deputy Energy Minister Andrey Shishkin has finally signed the capacity supply agreements, i.e. the list of mandatory projects that buyers agreed to carry out during the privatization of OGKs and TGKs. According to the final document, 28.3 GW of new capacity must be commissioned between now and 2017, and the CAPEX needed for this capacity is RUB1.2 trln. According to the previous plan, GenCos were obliged to commission 24.7 GW by 2012 and 25.2 GW by 2015, which was based on an assumption of 4-5% electricity consumption growth. However, the recent government plan assumes only 2.2% average electricity consumption growth, according to the Energy Ministry.

The fact that the government has provided more clarity on new commissioning requirements and the country's total needs, along with the assumed average power consumption growth of 2.2% p.a., are good signs for generating companies across the board (both the OGK/TGK universe and RusHydro) and for the power sector overall, as demand and investment programs are the fundamental factors driving these stocks. However, we treat this news as

Alexander Kornilov,

124. Government extends 'last mile' agreement between MRSKs and FSK VTB Capital July 8, 2010

News: Yesterday, the government approved the decree which prolongs the so- called 'last mile' agreement between FSK and MRSKs until 2014.

Our View: The news is positive for MRSKs. This extension means that the risk of them losing big industrial consumers, which might have switched to FSK (because of lower tariffs), has been significantly reduced since it would now violate Russian legislation. We remind investors that this story came to the fore a while ago after some big customers (RUSAL's smelters) backed out of contracts with the MRSKs.

It had initially been planned to cancel the last mile agreement nationwide from 2011. However, given that the cross subsidy problem (which the last mile agreement is aimed to address) has not yet been solved, eliminating the agreement in 2011 would mean doubling (or even tripling) the tariffs for households. In our view, extending the agreement until 2014 will allow the government to resolve this issue without such painful tariffs hikes for consumers.

Dmitry Skryabin

125. Putin proposes canceling property tax on airports Aton July 8, 2010

Vedomosti and RBC Daily report today (8 July) that Prime Minister Vladimir Putin has proposed setting a 0% property tax rate on airports to encourage investments and further modernise airport equipment on the state's account. The Ministry of Transportation has also suggested that airports should be sold to private investors after modernisation. These suggestions may have a strong positive impact in the medium term on domestic passenger turnover, which has been lagging behind international turnover lately, particularly as a result of regional airport limitations. In our view, UTair and Sibir airlines will be the major beneficiaries.

UKRAINE INVESTMENT 126. Ukrainian cabinet proposes 840 projects to foreign investors bne July 06, 2010

Ukrainian First Vice Premier Andriy Kliuyev, says that the Ukrainian government has drawn up a list of 840 investment projects on upgrade of the Ukrainian economic sectors in order to raise foreign capital, reports Interfax.

The news agency quoted Gref as saying that they expect that large national and foreign industrial capital would pour to the country.

127. Agricultural Ministry to subsidize sugar beet farmers at UAH 1,000/ha Concorde Capital July 8, 2010

Ukraine's Agricultural Ministry plans to offer sugar beet farmers a subsidy of UAH 1,000/ha for up to 250 ha of sugar beets, according to a draft resolution published on the Cabinet of Ministers' website yesterday.

Ruslan Patlavskyy: We see a slim possibility of domestic sugar beet growers getting their hands on the said subsidies in 2010 as Ukraine's budget last year also provisioned a direct subsidy of UAH 750/ha planted with sugar beets, which was never paid out. In our view, the ~50% yoy growth in area sowed with beets to 488 ths ha implies sufficient sugar production to cover domestic consumption over 2010/11E, which might be used as another argument to skip the payments. Thus, we believe the news will have a neutral impact on listed sugar producers.

128. Astarta increased number of cows by 10% to 11 thsd head Sokrat July 8, 2010

On July 6, Astarta [AST PW, BUY], a major Ukrainian agro holding with an accent on sugar production, has launched a new milky farm with 1 thsd cows. After the launch of the farm the total number of milky cows of the Holding has increased by 10% to 11 thsd cows.

Our view: The news is MODERATELY POSITIVE for the Holding. The Holding earlier announced its plans to increase the number of milky cows to 11 thsd heads in 2010. Thus it has fully realized its intention. The production of milk is a part of the Holding's diversification strategy to lower the dependence on sugar sales. Additionally cattle segment enjoys the Cinergy effect both from sugar and crop production segments. We estimate the total sales of cattle production to grow 64% in 2010 to USD 19.1 mln and to be at 6-7% in 2010 and afterwards.

129. Azovmash increases its railcar casting capacities Astrum July 9, 2010

According to the press service of Azovmash, in July'10, the Company will complete the installa- tion of the second line for railcar casting production at the AzovElektroStal facilities.

Astrum's perspective: On the back of railcar casting deficit in the CIS that currently exceeds 15%, investments in casting facilities became attractive. An increase of AzovElektroStal casting capacities is POSITIVE for its sister companies Azovzagalmash (AZGM: U/R) and Mariupol Heavy Machinery (MZVM: U/R) that consume casting for railcar production.

Igor Bilyk

130. Bohdan increased its output of buses and trolleybuses by 175% Sokrat July 6, 2010

The Bohdan Corporation (represented on the stock market by its production division, Bohdan Motors [LUAZ UZ, U/R]), a leading Ukrainian auto producer, reported the production of 413 buses and trolleybuses in 6M2010, vs. 150 in 6M2009; thus its YoY growth was 175%.

Our view: We see this news as moderately POSITIVE for the company. It evidences the company's success with its active export-oriented policy, as 90% of all buses and trolleybuses sold during this period were export driven (core markets: Russia, Belarus, and Armenia). It seems that the predominance of export-driven sales will be the main trend of the company's development in 2010 and 1H11, and the recovery of domestic demand for buses and trolleybuses is possible after 2H11. The authorities have already shown interest in purchasing the company's machines for the EURO-2012 football championship.

131. Coking coal output down, coke production up Foyil Securities 09 July 2010

The Coal Ministry of Ukraine has reported that over the first half of 2010 the domestic production of coking coal was 12.93m tons, which was by 0.6% lower than the first half of 2009 (Source: UGMK).

Our view: The fact that during the six months of 2010 domestic extraction of coking coal fell by 0.6% y-o-y while domestic production of gross coke has risen by 12.2% suggests that Ukrainian coke-makers re a growing more dependent on coking coal imports, which is a key input material in coke production. The inability to expand coking coal output is partly explained by the limited capacity of existing mines and inefficiency of state-owned mines, which account for roughly 40% of the domestic coking coal output volume. Because imported coking coal is normally more expensive than what is produced locally and taking into account related transportation costs, we expect the prices for coking coal to remain high on the Ukrainian market, this despite the fact that domestic coke production fell by 15.3% m-o-m in June. The prices for K and G type coal has risen by 65% and 77% YTD and we do not rule out that they may rise by 5%-10% later in summer. High input costs mean lower margins for coke producers considering their limited ability to pass high costs on to steelmakers in the medium term. Furthermore, coke prices have fallen by roughly 12% since the beginning of June, reflecting weaker pig iron production that fell by 16.2% m-o-m in June. At the same time, those coke producers mostly relying on coking coal supplied by their parent companies are in a much better position than their competitors. Thus, Yasyniv Coke (YASK) and Avdiyivka Coke (AVDK), though also experiencing some negative effects of lowering coke prices and high input costs, are in a more advantageous position than their competitors.

132. Court suspends Environmental Protection Ministry order against Regal Petroleum Renaissance Capital July 5, 2010

Event: On Friday (2 July), the District Administrative Court of Kiev suspended a Ministry of Environmental Protection order dated 30 March 2010, which had requested the suspension of Regal Petroleum's (RPT) operations on its MEX-GOL and SV fields in Ukraine. As a result of the court's injunction order, RPT's drilling and production operations may continue, pending a further hearing by the court.

Action: We believe this news is positive for RPT.

Rationale: We suggested on 29 June that the market had overreacted to the ministry's order, as we believe it is unlikely that this dispute will lead the full revocation of RPT's licence. Separately, it was reported on Friday that Viktor Boyko was dismissed from his post as Minister of Environmental Protection of Ukraine. Among his other decisions, Boyko signed the order requesting the suspension of RPT's operations, and therefore his dismissal could result in a change in the government's policy towards this particular issue, in our view.

133. DTEK Trading wins auction for coal supply to Zakhidenergo Foyil Securities July 6, 2010

DTEK Trading has won the tender for supply of 350,000 tons of coal through to the end of 2010. The agreement will cost Zakhidenergo (ZAEN) UAH 260.9m. DTEK Trading is related to DTEK, which in its turn owns an 11.36% stake in Zakhidenergo.

Our view: The direct agreements with coal suppliers without any intermediary should help the Company avoid coal shortages of the sort that happened earlier this year. Supply under the tender agreement with DTEK Trading gives Zakhidenergo a 15-day need in coal. The news is moderately positive for ZAEN as the volume of coal is not very large. Also, it should be noted that the establishing of a supply chain between Zakhidenergo and DTEK suggests the latter's interest in the GenCo's eventual privatization.

Evgenia Afonina

134. Iron ore output up 36% y-o-y in 1H10 Dragon Capital July 6, 2010

Ukraine's iron ore output decreased 4% m-o-m to 6.5 Mt in June (+33% y-o-y) due to lower demand from local steel mills, bringing 1H10 production volumes to 38.3 Mt (+36% y-o-y). Pellet output was down 7% m-o-m to 1.8 Mt (+19% y-o-y) in June and up 19% y-o-y to 11.2 Mt in 1H10. (Interfax)

The sector posted 91% capacity utilization last month, with the three largest producers, Metinvest's Inguletskiy GOK [Not Rated] and Pivnichniy GOKs [Buy; FV $2.11] as well as Ferrexpo's [Buy; FV $5.18] Poltavskiy GOK [Buy; FV $8.35], operating at 95% of capacity. We maintain our positive view on the Ukrainian iron ore sector, expecting improved profitability margins in 2Q-3Q10 thanks to a 100% q- o-q (to $120/t) iron ore price surge in 2Q10 and expected further growth of 20-25% q-o-q in 3Q10. We forecast full-year iron ore production in Ukraine at 77.5 Mt (+18% y-o-y).

In June, domestic prices for iron ore concentrate and pellets remain unchanged at $87/t (+115% y-o-y) and $120/t (+120%), respectively, while export prices for iron ore concentrate stayed at $118/t (+124% y-o-y) and for pellets at $138/t (+120%).

135. MHP to build breeding farm in Donetsk region Dragon Capital July 6, 2010

LSE-listed MHP, the largest Ukrainian poultry producer, plans to build a farm for hatching eggs in Donetsk region with a total capacity of 325 million eggs p.a. by 2015. (Ukrainian News) The first production line is scheduled for launch by 2013 ($45m CAPEX) and second by 2015 ($57m). When fully operational, the new farm will be able to supply hatching eggs for the production of 420 kt of chicken meat annually. We think the farm will complement MHP's new major production facility with annual capacity of 420 kt of meat p.a. being built in Vinnytsia region. Total CAPEX for the Vinnytsia poultry complex is estimated at $1.5bn.

The news supports MHP's medium-term capacity expansion plans and bodes well for its operating and financial performance. We recommend the stock as a Buy.

Tamara Levchenko

136. MMK Ilyicha to increase output 25% in July Phoenix Capital July 7, 2010

Event: According to the Metal Courier Agency, MMK Ilyicha is planning to increase volumes of steel rolled products in July by 25%-28% M-o-M (to 410-420 kt). The bulk of the increase will come from hot rolled coil and plate production, which will increase 50%-58% M-o-M (to 195- 205 kt). Hot rolled coil and plate is steel work's high value added product, constituting 55.7% of sales in terms of volume in 2009. Anticipating future growth in production, the company plans to increase steel scrap purchases in July to around 60-65 kt.

Impact: The news is marginally positive for MMKI.

Rationale: We believe the news is marginally positive for the MMKI due to higher than expected planned output volumes in what is a traditionally weak season for steel. However, we do not see signs of a strong rebound in demand due to concerns regarding the possible further cooling of the Chinese economy.

The recent increase in hot rolled steel price on international markets was partly stimulated by Chinese producers, trying to compensate the withdrawal of a VAT rebate expected to be introduced July 15. An MMKI company representative we contacted believes that the impact of this action will be felt in several months, and the decrease of steel stockpiles is pushing customers to sign contracts on deliveries.

Roman Topolyuk

137. Oranta Insurance reports $0.2m net profit for 1Q10 Dragon Capital July 6, 2010

Oranta Insurance, one of the largest insurance companies in Ukraine, improved its bottom-line results in 1Q10, posting a net profit of UAH 1.2m ($0.2m) vs. net losses of UAH 49.7m ($6.5m) recorded in 1Q09. At the same time, its Gross Written Premiums (GWP) decreased by 13% y-o-y in hryvnia terms to UAH 163.9m ($20.5m; -16% y-o-y) and claims fell 14% y-o-y to UAH 75.0m ($9.4m; -17%) over the period, improving the Loss Ratio to 45.8% from 46.5% in 1Q09. (Company) Oranta's 1Q10 retention ratio also improved, to 89% from 79% in 1Q09. Insurance provisions were almost unchanged (-2% q-o-q) at UAH 329.6m ($41.6m); the coverage of insurance provisions by investment assets (incl. bank deposits and cash) was kept at a strong 2.4x.

The decline in Oranta's 1Q10 GWP was due mainly to a 36% reduction in motor own damage (MOD) GWP, reflecting the company's strategy to cut its exposure to this low-profitable segment (Oranta's MOD loss ratio stood at 92% in 1Q10). However, motor-related products still accounted for the lion's share of Oranta's 1Q10 GWP - OMTPL (obligatory motor third party liability insurance) for 43% and MOD for 27%. Oranta's OMTPL GWP rose by 2% y-o-y in 1Q10 to UAH 70.2m ($8.8m), making the company the No. 1 domestic insurer in this segment. However, in terms of total GWP, Oranta yielded the top spot to AXA Group.

Anastasia Tuyukova

138. Steel prices stabilize, input costs dropping Foyil Securities July 6, 2010

According to the latest steel output figures published by Metal-courier, in June Ukrainian producers decreased crude steel production volumes 14% comparing to May. The steepest fall happened at the IUD-owned plants, namely Alchevsk Steel (ALMK) and Dniprovsky Steel Mill (DMKD), where output fell 41% and 46% respectively. Other producers also cut output, but the decrease was much smaller than at their IUD-owned competitors. Specifically, Mariupol Ilyich (MMKI), Azovstal (AZST) and Evankiyevo Steel (ENMZ) shrank production by 7%, 5% and 1% respectively. However, during the 6-month period, steelmakers increased overall production by 18%, with AZST, MMKI and ENMZ raising output by 53%, 42% and 9% respectively. ALMK and DMKD decreased production by 8% and 18%. Over the latest 7-day period, steel prices did not show large changes, as prices for slabs and flat finished steel remaining stable and prices for billets and finished long steel rising by 2.62% and 2.06% respectively. Costs showed positive dynamics as domestic coke prices fell roughly 7% and iron ore prices stable.

Our view: The developments on the steel market go in line with our earlier expectations, when we predicted that steel prices, after having achieved the levels of September-August 2009, would stop falling. At the same time, we believe that the recent increase in long steel prices is not an indication that underlying global demand for long steel is now more robust, but is rather a short-term correction reflecting the decrease of traders' inventories. In terms of output figures, such sharp falls in output figures was mostly driven by the drop in output at DMKD and ALMK due to problems with iron ore supplies and gas shortages. Though these companies are now receiving gas in the proper volumes, the iron ore shortages will remain an acute problem and unless it is resolved soon, production volumes will continue to be low. At the same time, Metinvest-owned plants, namely ENMZ and AZST, did not cut output considerably, reflecting the fact that they are receiving raw materials in the amounts needed. MMKI, though getting the necessary amounts of iron ore, has experienced some gas supply problems, and this led to a slightly sharper output decrease. In addition, all steelmakers should benefit from lower coke prices, supporting their margins. In terms of iron ore costs, as we expected, the recent rise in Chinese import prices of this commodity did not inflate domestic prices in Ukraine, reflecting the lower demand from steelmakers. Overall, the recent steel market news shows that AZST remains the most robust producer and we remain bullish about the stock.

Yevhenkiy Barannikov

139. Thermal gencos' output up 10.1% in 1H10 Astrum July 7, 2010

The state-owned thermal electricity generation companies Centrenergo (CEEN: BUY), Dnipro- energo (DNEN: BUY), Donbasenergo (DOEN: BUY) and Zakhidenergo (ZAEN: BUY) increased their aggregate electricity output by 10.1% y/y to 23.3 bln kWh in 1H10.

Astrum's perspective: The gencos' output of 23.3 bln kWh in 1H10 is still 10% lower than the 26 bln kWh output observed in 1H08, which we consider as a pre-crisis benchmark. We also expect that the growth rate will subside towards the end of 2010 due to a higher base- line, leading to a 7.9% growth in gencos' electricity output in 2010 on the back of the ex- pected 6% growth in Ukraine's electricity consumption. Currently, Ukrainian thermal gencos trade at EV/Capacity of USD 74- 174 per kW compared to the USD 129-560 per kW observed for Russian OGKs. We recommend BUYing shares in all four listed gencos, which offer 36%-123% upsides.

Yan Lipchinsky

140. Ukraine decreased June coke output by 15.3% MoM Sokrat July 6, 2010

According to Ukrainian news, domestic coke output in June declined by 15.3% MoM or by 0.25 million tons to 1.36 million tons.

Our view: Generally, Ukraine's coke output moved in lockstep with domestic steel production, which dived by 13% MoM to 2.5 million tons in June. Alchevsk Coke [ALKZ UK] appeared to be among the worst coke makers as measured by output dynamics in June (-34.6% MoM). This reflects slashed coke consumption on the part of IUD's steelmakers, Dzerzhinka and Alchewsk ISW, which contracted 48% and 46%, respectively, of the steel output in June. On the other hand, Avdiivka Coke [AVDK UK], Yasynivka Coke [YASK UK], and Zaporizhcoke [ZACO UK] limited their output decline to 6.5%, 10.2%, and 0.9%, respectively, mostly in line with our expectations.

141. Ukraine decreases coke output by 15.1% Phoenix Capital July 5, 2010

Event: Ukraine's coke output was down 15.1% M-o-M in June to 1.4 MT. The main contributors to the slump were Alchevsk Coke (-34.6% M-o-M) and Evraz Group's coke plants, namely Bagliykoks (-37% M-o-M) and Dniprocoke (-39%).

Impact: The news is marginally negative for the coke sector.

Rationale: The decrease in coke production was caused by two main factors. Firstly, a downturn on the upstream steel market, followed by a lower output and a shortage in iron ore deliveries for several steel plants (due to non-payments) resulted in a decrease in coke demand. The second factor, that hampered ALKZ in particular, was that customers (ALMK and DMKD) were faced with limited iron ore deliveries and a disruption in natural gas supply for several days. The drop in output at other coke plants wasn't very significant and is within our expectations, especially taking into account fewer working days in June compared to May. AVDK lost 8% M-o-M, YASK's output was down 10% M-o-M, while ZACO's output increased 1% M-o-M.

Oleksandr Makarov

142. Ukraine in talks with Russia, EU over building gas pipeline bne July 09, 2010

Ukrainian Fuel and Energy Minister Yury Boiko has said that Ukraine is holding talks with Russia and the European Union (E.U.) over creating a joint venture for the construction of a gas pipeline through Ukrainian territory, reports Prime-Tass.

The news agency quoted Boiko as saying that they are holding an active dialogue with our partners, we plan to soon define the participants' shares in the joint venture and the amount of funds necessary for the construction of the pipeline.

143. Ukraine's Fuel and Energy Ministry assesses realization of oil and gas extraction projects at $842mn bne July 08, 2010

The Ukrainian Fuel and Energy Ministry assesses the realization of top-priority investment projects on development of Ukrainian oil and gas extraction on shelf and continental territory at $842 million, reports Interfax.

Citing a statement issued by the ministry, the news agency says that an investment project on development of Odeske and Bezimenne gas fields on Black Sea shelf, which would be realized in 2010-2039, is estimated at $365mn.

144. Ukraine's parliament adopts law on public-private partnership bne July 06, 2010

The Ukrainian parliament has adopted a draft law on public-private partnership, reports Interfax.

Citing a posting on the parliament's Web site, the news agency says that the law determines legal, economic and organization base for public-private partnership, regulates relations linked to the drawing up, implementation and cancellation of agreements signed as a part of public-private partnership and set guarantees for observation following rights of legal interests of the sides.

145. Ukrzaliznytsia railcar procurement tenders coming soon Phoenix Capital July 9, 2010

Ukrzaliznytsia (UZ) has clarified its plans to acquire new rolling stock, after initially declaring its intentions last week (see our Daily from June 30, 2010). Within the next few weeks, UZ's subsidiary South-Western will announce a tender to acquire 21 passenger cars along with two electric locomotives. We consider KVBZ (passenger car producer) and LTPL (locomotive producer) the most likely winners of these two tenders.

In addition, UZ's CEO Mikhail Kostiuk announced that the state railway monopoly is currently considering five massive investment projects that would include the modernization of 10,000 railcars within the next five years. Kostiuk mentioned that the company would like to incorporate Ukraine's business community in these investment projects.

Dmitriy Boroday

KAZAKH INVESTMENT 146. Eurasian Devt Bk, VEB ink deal on loan for Kazakh power plant bne July 06, 2010

The Eurasian Development Bank and Russia's Vnesheconombank (VEB) has signed an agreement to provide on a parity basis a 15-year multi-currency loan totaling $770mn for the construction of a third power unit at Kazakhstan's Ekibastuz GRES-2 power plant, reports Prime-Tass.

Citing a statement issued by the Eurasian Development Bank, the news agency says that the total cost of building the third 500-megawatt unit is estimated at up to $800mn.

147. Industry Ministry to consider Pavlodar regional investment projects bne July 5, 2010

Kazakhstan’s Industry Ministry is to consider 12 investment projects in the north eastern Pavlodar region.

The projects have a total cost of 61 billion tenge. The largest is the construction of a baked anode unit at an electrolysis plant in the region, which will cost around 35 billion tenge, Interfax Kazakhstan reports.

Other projects being considered including the reconstruction of the TortKudyk processing plant and setting up a plant to produce of sheet glass.

148. Kazakhstan approves first Business Road Map- 2020 project bne July 5, 2010

The first project under Kazakhstan’s Business Road Map- 2020 programme, the reconstruction of the Taldykorgan lead acid batteries plant, has been approved, Interfax Kazakhstan reports.

The plant’s management company, Kainar-AKB, will receive subsidised loans to rebuild the plant. Kainar-AKB will pay 4% interest, with the Kazakh state covering the remaining 8% through the Damu Entrepreneurship Development Fund.

Business Road Map- 2020 is a long-term programme to stimulate business activity in the post-crisis period.

149. Kazakhstan expects 2010 grain harvest to drop by third after record 2009 bne July 08, 2010

Kazakhstan expected to harvest 14.5-15.5 million tonnes of grain (gross harvest) this year, after a record 22.7 million-tonne (bunker-weight) harvest last year, says Deputy Agriculture Minister Arman Yevniyev, reports Interfax.

The news agency quoted Yevniyev as saying that last year's level is unlikely.

150. Kazakhstan hopes to complete WTO accession talks by end of year RIA Novosti July 5, 2010

Kazakhstan hopes to complete negotiations on its accession to the World Trade Organization by the end of 2010, the country's vice premier said on Friday.

"I hope that by the end of this year we will reach a consensus on major clauses with our partners in WTO accession talks," Umirzak Shukeyev told a business forum in Astana, Kazakhstan's capital.

He said that establishing a customs union with Russia and Belarus would not impede the country's accession to the global trade body.

"The WTO accession talks are being conducted simultaneously. We are convinced that the creation of a customs union and a single economic space and accession to the WTO do not contradict each other, they are complementary. And WTO accession is another additional economic priority for our states," the official added.

In June 2009, Russia, Kazakhstan and Belarus notified the WTO of their intention to join the world trade club as a customs union. Four months later, the three former Soviet republics announced they would resume talks on WTO accession separately, but from synchronized positions.

The Customs Union between Russia, Belarus and Kazakhstan formally came into existence on January 1, 2010, but is unable to start working fully until disputes are resolved and a customs code comes into effect.

151. Kazakhstan suspects over-extraction by Chevron-led venture bne July 08, 2010

Kazakhstan — Kazakh authorities suspect an oil venture led by U.S. major Chevron of extracting $1.4bn worth of oil above the level agreed with the government, reports The Moscow Times.

The newspaper report quoted Murat Zhumanbai, spokesman for the Agency for Fighting Corruption and Economic Crime, as saying that the suspicions related to alleged production by the TengizChevroil venture.

152. Kazakhstan to build Central Asian telecoms satellite bne July 8, 2010

Kazakhstan Garysh Sapary, part of the Kazakh Space Agency, is planning to build a shared telecoms satellite for the Central Asian republics.

"We will start building a regional telecom satellite for CIS member countries in 2018. This project will ensure effective use of orbit frequency resources of Central Asian states," KGS’s president Gabdullatif Myrzakulov told Interfax Kazakhstan.

The satellite is due to be completed by 2010.

153. Kazakhstan to harvest just 15 million tonnes of grain in 2010 bne July 9, 2010

Kazakhstan’s 2010 grain harvest is expected to be one third lower than its record 2009 harvest.

According to Deputy Agriculture Minister Arman Yevniyev, the gross 2010 harvest will amount to between 14.5 and 15.5 million tonnes of grain, compared to the 22.7 million tonnes (bunker-weight) harvested in 2009.

"Last year's level is unlikely. You don't get a record every year. We expect a harvest at a level of between 14.5 and 15.5 million tonnes of grain," Interfax quotes Yevniyev as saying.

Kazakhstan plans to export at least 6.5 million tonnes of grain between July 2010 and June 2011, down from 8.3 million tonnes of grain and flour in the previous agricultural year.

154. Russia to lend Kazakhstan $700 mln for power plant Ria Novosti July 6, 2010

Russia will lend Kazakhstan $700 million to build the third energy block of the Ekibastuz power plant, a loan agreement signed on Monday by the Russian and Kazakh presidents said.

The power plant's installed energy capacity is 1000 MW, with its two energy blocks producing about 12 percent of all Kazakh electricity. The third block will increase the plant's installed capacity by 50 percent.

The two units of the Ekibastuz power plant in Kazakhstan's northeastern Pavlodar Province were built in the late 1980s-early 1990s. Construction of the plant's third unit began in 1990 but was subsequently frozen.

The power plant has the world's tallest 420-meter (1,380-feet) high flue gas stack, which is some 38 meters (125 feet) taller than the Inco Superstack in Canada's Sudbury.

On Monday, Russian President Dmitry Medvedev and his Kazakh counterpart Nursultan Nazarbayev also signed an agreement on cooperation in the peaceful use of nuclear energy.

The two presidents met during a session of the member states of the Eurasian Economic Community (EurAsEC) in Astana.

ASTANA, July 5 (RIA Novosti)

155. Russia to lend Kazakhstan $700 mln for power plant Ria Novosti July 6, 2010

Russia will lend Kazakhstan $700 million to build the third energy block of the Ekibastuz power plant, a loan agreement signed on Monday by the Russian and Kazakh presidents said.

The power plant's installed energy capacity is 1000 MW, with its two energy blocks producing about 12 percent of all Kazakh electricity. The third block will increase the plant's installed capacity by 50 percent.

The two units of the Ekibastuz power plant in Kazakhstan's northeastern Pavlodar Province were built in the late 1980s-early 1990s. Construction of the plant's third unit began in 1990 but was subsequently frozen.

The power plant has the world's tallest 420-meter (1,380-feet) high flue gas stack, which is some 38 meters (125 feet) taller than the Inco Superstack in Canada's Sudbury.

On Monday, Russian President Dmitry Medvedev and his Kazakh counterpart Nursultan Nazarbayev also signed an agreement on cooperation in the peaceful use of nuclear energy.

The two presidents met during a session of the member states of the Eurasian Economic Community (EurAsEC) in Astana.

CENTRAL ASIA INVESTMENT 156. Czech retail sales came out better than expected Danske Bank July 8, 2010

Czech retail sales came out better than expected, increasing by 3.1% y/y in May, up from April's -4.5% y/y. Car sales were the main driver behind the strong figures. Despite this positive outcome, we nonetheless prefer to remain cautious, as high unemployment and further fiscal restrictions will prevent private consumption from making a full recovery this year.

157. Iran-Turkmenistan-Kazakhstan railway to open in 2011 bne July 6, 2010

A railway linking Kazakhstan and Iran via Turkmenistan is due to open in 2011, according to Fars New Agency.

The new line will cut the travelling distance between Central Asia and the Persian Gulf by over 600 kilometres, considerably reducing the cost of transporting Central Asian goods to international markets.

The 300 kilometre stretch of line between Barkat in Turkmenistan and the Kazakh border has already been built. The remaining 360 kilometres of line are due to be completed by the end of this year.

158. Turkmenistan: Russia ratifies investment protection agreement bne July 6, 2010

The Russian parliament has passed a law ratifying the agreement between the governments of Russia and Turkmenistan on mutual promotion and protection of investments, Turkmenistan.ru reports. The agreement was signed in Moscow in March 2009.

159. Uzbekistan: LG to increase refrigerator production bne July 9, 2010

LG Electronics plans to invest $8.9m to expand its refrigerator production at the Sino Joint Stock Company in Samarkand.

The South Korean company has signed a cooperation agreement with Uzeltekhprom on the project.

Production of refrigerators and freezers is due to increase from 25,000 units in 2010 to 150,000 units per year by 2013. Exports are due to increase from 2,000 units to 15,000 units.

BELARUS INVESTMENT 160. WB's IAB 2010 report ranks Belarus #1 by ease of starting foreign business in region bne July 08, 2010

The Investing Across Borders 2010 report of the World Bank published this week ranks Belarus as the region's leader by ease of starting a foreign business, says Foreign Ministry Spokesman Andrei Savinykh, reports Prime-Tass.

The news agency quoted Savinykh as saying that the report evaluates the efforts of 87 countries to foster FDI inflows.

161. Belarus to increase prices of dairy product supplies to Russia bne July 06, 2010

Belarus has reached an agreement with Russia to increase the wholesale prices of dairy product supplies to the Russian market by 5%-6% starting from Monday, reports Prime-Tass.

The news agency says that the agreement was concluded on July 2 at a meeting of a Russian-Belarusian working group on food product policy.

162. Huawei plans to open laboratory in Belarus to develop, adapt software bne July 07, 2010

Xu Zhidong, the director of Bel Huawei technologies, says that Chinese Huawei plans to open a laboratory in Belarus to develop and adapt software and products, reports Prime-Tass.

The news agency says that the decision to open such a laboratory was taken in April 2010 during a meeting between Belarusian Communication and IT Minister Nikolai Pantelei and Huawei Vice-President for the CIS region.

163. Ukraine, Belarus to sign deal on Venezuelan oil transit this week Ria Novosti July 9, 2010

Ukraine expects to sign an intergovernmental agreement with Belarus on the transit of Venezuelan oil by the end of this week, Ukraine's fuel and energy ministry said on Thursday.

Minsk and Caracas agreed on the supplies of Venezuelan oil to Belarus in March, shortly after a brief dispute over oil supplies with Russia. Venezuelan oil is delivered by tankers to the Ukrainian port of Odessa and is transported by railroad through Ukraine to Belarus.

"The Belarusian side expressed interest in further cooperation concerning oil supplies to Belarusian oil refineries through the Ukrainian oil transportation and railroad systems of Ukraine and Belarus," the ministry said.

Moscow demanded Minsk pay full import duties on crude it refines and transits to Europe, dropping considerable subsidies. Belarus requested Russia to supply up to 30 million metric tons of oil duty free, saying it would otherwise increase transit fees for Europe-bound oil from $3.90 to $45.

Some experts believe that importing Venezuelan oil to Belarus is economically unsound, but the Belarusian government insists that the project is cost-effective.

Belarus, which has little hydrocarbon resources and depends on fuel supplies from Russia, plans to buy 4 million metric tons of Venezuelan oil in 2010 and 10 million metric tons in 2011.

The first delivery of 4,400 metric tons (32,000 barrels) of crude were delivered by railway to the Mozyr refinery in Belarus in early May.

KIEV, July 8 (RIA Novosti)

EURASIA INVESTMENT 164. Armenia: 12,1% growth of total investments in construction in Armenia in Jan-May 2010 Arminfo July 5, 2010

Volume of capital investments in construction in Armenia in Jan-May 2010, as compared to the similar period of 2009, grew by 12,1%, and in May as compared to April - more than twofold to 108.8 bln drams ($282 mln).

As National Statistical Service of Armenia told ArmInfo, building and assembly work in the total volume of capital construction made up 78.5 bln drams ($203 mln) over Jan- May 2010. According to the source, 13.2 bln drams ($34.3 mln, 38.8% annual growth), or 15.6% of the total volume of spend funds were invested in capital construction in Jan-May 2010 from state budgetary funds.

Organizations directed 48.1 bln drams ($124.4 mln, 25.9% annual growth), or 44,2% of the total volume of funds invested in construction in Armenia, to capital construction. Armenia's population spent 10.6 bln drams ($27.4 mln, 58% annual fall) in this sphere, or 9,7% of the total volume of funds invested in construction. World Bank provided credits for capital construction to the sum of 10.3 bln drams ($26.6 mln, 4,3 times annual growth), or 9,5% of the total volume of spent funds, EBRD provided credits to 1.4 bln drams ($3.6 mln, 99,5% annual growth) or 1,3% of the total volume of spent funds. Asian Development Bank provided credits to 1.1 bln drams ($2.9 mln, 78,1% annual growth) in Jan-May, 2010 for construction in Armenia, building operations to 16 bln drams ($41.5 mln, 13,3% annual fall) were carried out due to credit resources by Japanese Bank for International Cooperation.

The highest volume of capital investments fell on energy, water industry and gas supply - 26,9% of the total volume or 29.3 bln drams, real estate market - 24,3% or 26.4 bln drams, agriculture -14% or 15.2 bln drams, information and communication sphere - 12,8% or 14 bln drams.

165. Armenia: 31,4% reduction of business activity index in Armenia over II quarter Arminfo July 5, 2010

Index of business activity in Armenia over the 2nd quarter, 2010, essentially reduced - by 31,4% and fixed at 107% (against the previous 138,4%).

As press service of Armenia's Central Bank told ArmInfo, consumer confidence index also reduced over the 2nd quarter - by 4% to 102,3% (against the previous 106,3%), while the index of business climate raised over 2Q by 2,3% to 108,1% (against the previous 105,8%). All composite indices raised per annum (2Q, 2010, as compared to 2Q, 2009): index of business activity - by 36,9% to 108,7%; consumer confidence index - by 20,7% to 108,4%; index of business climate - by 57,3% to 133,8%.

According to the source, respondents estimated the index of business activity in 2Q, 2010, of 67,9 points against 57,8 points in 1Q and 56,9 points - in 2Q, 2009. Moreover, sectoral respondents gave the following estimates to the index of business activity: industrial sector - 53,8 points (1Q 2010 - 55,3 points, 2Q 2009 - 50,7 points), building sector - 69,5 points (1Q 2010 - 63,9 points, 2Q 2009 - 54,1 points), trade - 60,8 points (1Q 2010 - 57,5 points, 2Q 2009 - 53,7 points), services - 61,9 points (1Q 2010 - 57,6 points, 2Q 2009 - 65,8 points). The highest estimates per quarter and annum were given by respondents from building sector (108,7 and 128,5 points, respectively), while the lowest estimate per quarter was given from industrial sector (97,2 points), and per quarter - from service sector (94,1 points).

Index of business climate was estimated in 2Q of 50,2 points against 46,5 points in 1Q 2010 and 37,6 points in 2Q 2009. Sectoral respondents gave the following estimates to the index of business climate: industrial sector - 52,5 points (1Q 2010 - 50,9 points, 2Q 2009 - 34,8 points), building sector - 49,3 points (1Q 2010 - 47,6 points, 2Q 2009 - 37,3 points), trade sector - 45,5 points (1Q 2010 - 43,8 points, 2Q 2009 - 35,3 points), service sector - 51,4 points (1Q 2010 - 45 points, 2Q 2009 - 40,6 points). The highest estimate per quarter was given by service sector respondents (114,2 points), the lowest - by industrial sector respondents (103,2 points). The highest estimate per annum was given by industrial sector respondents (151 points), the lowest one - by service sector respondents (126,7 points).

Consumer confidence index was given the following estimates: in current conditions - 37,7 points (1Q 2010 - 36,6 points, 2Q 2009 - 34,9 points), in future conditions - 56,4 points (1Q 2010 - 55,3 points, 2Q 2009 - 51,9 points). To note, consumer confidence index in 1Q 2010 was estimated by respondents of 46 points, in 2Q 2009 - 43,4 points. Quarterly and annual dynamics indicate improvement of respondents' expectations on all the three composite indices, and more essentially - on the index of business activity and business climate. Armenian CB press service says, Central Bank inquired 1808 households and 924 enterprises of industrial, building, trade and service sectors in 2Q 2010.

Moreover, the number of the inquired households over 1Q reduced by 13 (against growth by 15 in 1Q), and the enterprises of industrial, building, trade and service sectors grew by 61 (against growth by 10 in 1Q).

To recall, this inquiry of the Central Bank, having been held since 2005 among the active enterprises (in industrial, building and service sectors, including retail trade) and households, is called to estimate the current economic situation and expectations. The index calculation methods are based on the principles developed by Conference Board (USA) and IFO German Institute.

166. Armenia: ANELIK expanding geographic presence Arminfo July 5, 2010

Anelik International Money Transfer System has connected to over 100 new points in Italy, Anelik system press-service reported. NEC's partner operates centralized and recipients can apply to any of the 132 points in 53 towns in Italy to get their money. Transfers are made in terms of US dollars, but soon the system will operate with EUR transfers as well.

First Vice Chairman of Anelik Bank Board Bagrat Chzmachyan told ArmInfo Anelik ensured 13.6% growth of turnover as of April 1 2010 versus the same period of 2009. In late Q1 2010 Anelik system turnover totaled $200 million versus $176 million for the same period of 2009. Armenia's share is nearly 10% of the total turnover or $19.7 million as of April 1 2010 which was 17.2% more than for Q1 2009. Anelik international money transfer system for privates provides money transfers in the real time regime in terms of Russian rubles, US dollars and EUR (0.5% -3% commission fee) from 75,000 points in 92 countries.

167. Armenia: Ararat Group Company to invest $27 million in production of mineral water and soft drinks in 2010 Arminfo July 5, 2010

Ararat Group Company will invest $27 million in production of mineral water and soft drinks till the end of 2010, Economy Minister of Armenia Nerses Yeristyan said in the Government on Thursday.

On Thursday the Government of Armenia adopted the decision to provide the company with customs privileges and allow postponement of VAT on import of equipment till May 2014. Such privileges are granted to the companies that invest over 300 million drams ($890,000). The company has imported equipment and technologies worth $5 million in Armenia and will invest additional $22 million till the end of 2010, the minister said. He mentioned that 220 new jobs will be created thanks to the above investments.

168. Armenia: EU interested in expanding trade with Armenia Arminfo July 5, 2010

“European consumers are interested in Armenian products and Armenian businesses are interested in selling on the EU market," said Maryse Coutsouradis, Policy Officer, Export Helpdesk for Developing Countries, European Commission Directorate- General for Trade, during a seminar for producers in Yerevan on Thursday. To facilitate this exchange, the European Union Delegation to Armenia, European Union Advisory Group, Armenian-European Policy and Legal Advice Centre and SME Development National Centre of Armenia are organising two workshops to inform Armenian producers on how to export to the EU. Armenian businesses have the opportunity to learn how the Export Helpdesk functions in practice during seminars in Yerevan and Ijevan on 1-2 July 2010.

Maryse Coutsouradis said the EU is the world's largest single market and is also Armenia's leading export partner. Moreover, since January 2009 Armenian businesses enjoy preferential conditions to export to the EU that reduce significantly Ä and in some cases even totally remove Ä the import duties to be paid when entering the EU market. "Despite these advantageous trade opportunities, Armenian producers can diversify and increase their exports further. To help overcome trade challenges, the EU developed an information tool, which provides Armenian exporters with necessary information to enter European markets. The Export Helpdesk is a free internet site (www. exporthelp.europa.eu) that gives details on how to export to the European Union. Anything from product-specific standards to import tariffs and trade statistics, as well as useful links to business associations can be found there," M. Coutsouradis said.

For his part, Varos Simonyan, Head of the Department for Cooperation with the EU and International Economic Cooperation, Ministry of Economy of Armenia, said in response to ArmInfo's question that to expand the spectrum of the canned goods exported from Armenia, it is necessary to change over from government standard to European quality standards. "In this light, Armenian products must be of higher quality and safe for export to the European markets," he said. V. Simonyan highlighted that a quality improvement program has been developed in Armenia and submitted to public discussion. The program suggests a series of institutional reforms, including transfer certain certification functions to the private sector. To recall, in Feb 2009 the European Commission's fact-finding group was in Armenia to study the possible free trade agreement between Armenia and the EU. The group met with representatives of the state departments of Armenia. The plan of reforms says that the products testing and certification functions of the National Standard Institute will be temporarily left in the Economy Ministry system. Later, they will be transferred to the new state CJSC to be separated from the State Standard Institute. The proceeds from certification and testing will be spent to support also the National Standard Institute. The concession of the Institute will be transferred to a private company. In future, it will be fully privatized but the Economy Ministry will retain control over the financial activity of the Institute. In addition, a national laboratory of science is formed on the basis of the Yerevan Physics Institute after Alikhanyan. The Economy Ministry is charged to create mechanisms of communication for the authorities controlling over the market, the customs authorities and the ministries. Simultaneously, the ministry is to develop a government policy in the sphere of metrology, develop technical procedures of measuring instruments quality control. The institutional reforms will be over by 2011. In the period from 2012-2016 the new system will be developed and in 2016-2020 the system will be introduced internationally. Till the end of 2012 Armenia is expected to apply for membership of the ILAC - the International Laboratory Accreditation Cooperation, Meter Convention and other organizations. At least 30% of the national economy sectors will meet ISO standards till 2012. At least 20% of standards of the International Telecommunication Union will be applied in Armenia till 2012. By 2016 100% European quality standards will be applied in Armenia. As regards the outdated standards, there are nearly 17.5 thousand and till 2016 all these standards will be removed. A total of 5 laboratories of national standards issuing internationally recognized certificates will be created till 2020 (there are no such laboratories at present).

To recall, Armenia has already joined the EU GSP+ for 2009-2011 implying export of nearly 6000 names of products to the EU on zero or reduced customs fees.

The National Statistical Service of Armenia reported $572 million commodity turnover between Armenia and the EU for Jan-May 2010 (up 42.1% versus Jan-May 2009). Unfavorable balance with the EU countries fell 13% to $176.1 million. Export to the EU totaled $200 million and import $374 million.

169. Armenia: Government of Armenia allocates 3.5 billion drams for restoration of roads Arminfo July 5, 2010

Government of Armenia adopted a decision on Thursday to allocate 3.5 billion drams from the reserve funds ($9.5 million) for restoration of roads damaged by heavy showers. Prime Minister Tigran Sargsyan said heavy sediments have damaged roads and the situation is unprecedented. The roads need immediate and high quality restoration, he said.

170. Armenia: In 2001-2009 ArmRosgazprom invested over $700mln in Armenia's gas sector Arminfo July 5, 2010

In 2001-2009 ArmRosgazprom CJSC invested $719mln in Armenia's gas sector, the chief financial management specialist of ArmRosgazprom Spartak Arzumanyan said during the 7th Bond Congress of the CIS and Baltic states, held in Yerevan, today.

The key projects of the company are the construction of the 5th unit of Hrazdan Thermal Power Plant and the Iran-Armenia gas pipeline. The $460mln project to build and modernize the 5th unit of Hrazdan TPP is to be completed by the end of this year. The Armenia-Iran gas pipeline project was finished in 2009 with $165mln invested in it.

In 2006-2009 ArmRosgazprom implemented big projects to improve the gas supply system of Armenia.

At present, he said, the company is implementing a project on installation of security alarm devices at houses. The given project is fully funded by loans in the amount of 65 million dollars. Investment projects of the company have increased the energy security level of the country and the competitive ability of the energy system in the region," Arzumanyan said.

Gazprom holds 80pct stake in the company and the Government of Armenia holds the remaining 20pct. In 2007 the company entered the corporate debt market with an issue of 1 billion drams bonds. The second issue of corporate bonds was in 2008 in the same amount. ArmRusgasprom CJSC is the only company whose bonds are listed in Abond category.

171. Armenia: In Jan-May 2010 fish production in Armenia grew by 2.4% Arminfo July 5, 2010

In Jan-May 2010, as compared with Jan-May 2009, fish production in Armenia grew by 2.4% to 2,812 tons.

The National Statistical Service of Armenia reports that in May 2010, as compared with Apr 2010, this index dropped by 28.2%.

172. Armenia: Over 1.1bln RUR invested in the development of the South Caucasus Railway in 2009 Arminfo July 5, 2010

Over 1.1bln RUR was invested in the development of the South Caucasus Railway CJSC (subsidiary of the Russian Railways) in 2009, President of the Russian Railways Vladimir Yakunin said during a meeting of the South Caucasus Railway's shareholders, today.

"In 2009 railway cargo operations grew by 7%, cargo turnover - by 2%, passenger operations - by 11%. The wages of railroaders were also increased," Yakunin said.

He said that in 2009 the Russian Railways fulfilled all of its investment obligations. The equipment and infrastructure were overhauled, 10 locomotives were bought, 20 km of railroads and a number of facilities were repaired.

The South Caucasus Railway CJSC is 100% subsidiary of the Russian Railways OJSC. Feb 13 2008 it was granted 30-year concession over the Armenian railways.

173. Armenia: Wine production in Armenia up 30,8%, brandy - 45,9%, and beer - 50% in Jan-May 2010 Arminfo July 8, 2010

Wine production in Armenia up 30,8% - up to 1678.1 thsd liters, brandy - by 45,9% - up to 4611.2 thsd liters, beer - 50% - up to 4704.8 thsd liters and champaign - 35% - up to 86.8 thsd liters in Jan-May 2010.

As Armenian National Statistics Service reported, 13314.4 thsd liters of non-alcohol drinks were produced in Armenia Jan-May 2010. The volume of the produced natural juices in Jan-May 2010 grew by 64,7% - up to 3909 thsd liters as against the same period of 2009, and mineral water - by 28,4% - up to 11156.4 thsd liters.

As chairman of Armenian wine makers union Avag Harutyunyan told Arminfo, growing of wine production volumes in Armenia is continuation of the last year tendency connected chiefly with growing of wine drinking within the country. Growing of the brandy production is also connected with the last year crisis and with the fact that medium-sized companies produced not so much expensive brandy. Beer production growth is also connected with a tendency of overcoming the crisis and with the growth of its drinking.

174. Armenia: Yerevan Brandy Company intends to strengthen ARARAT brand Arminfo July 8, 2010

In the coming autumn the whole range of ARARAT brand will be represented in new bottles with new labels and new packages, Executive Director of the Yerevan Brandy Company (YBC) Ara Grigoryan told ArmInfo correspondent.

According to him, the company started the elaboration of this project two years ago. "The launch of the new package has coincided with the negative aftermath of the global crisis in the market, and this coincidence will eventually have a positive effect on the sales in the current conditions",- said the director. In 2008, when YBC launched the project, the leadership of the company faced several tasks, among them – to consolidate the positions of ARARAT as the leader among Armenian brandies, as well as to strengthen the image of ARARAT as a true modern premium brand. Over the past two years the international team thoroughly worked at the design of the new package. It should be noted here that it is very important for the company to avoid a contrast with the current package. "The current changes can be called progressively evolutional, that is to say one should expect no revolutionary reforms. Therefore, it is probably wrong to speak of re-branding",- he said.

Grigoryan said that ARARAT is a powerful historical component, which should by all means accompany the brand, however, this historicism should not be an obstacle for innovations. In other words, the company is trying to balance between these two factors, which are harmoniously combined in the new package. "I think the new package is the modernity of our legendary brand, I suppose that leading positions in certain field is impossible without industrial, technical or marketing innovations. In the modern alcohol market the image characteristics of the products play one of the key roles in the fight for consumers",- said the director.

To note, the Yerevan Brandy Company was privatized in May 1998 by the French group Pernod Ricard for $30 mln.

175. Azerbaijan intends to conduct geological exploration works in Mediterranean and Red Seas APA-Economics July 8, 2010

Azerbaijan may carry out geological exploration works in Mediterranean and Red Seas, Azerbaijani Energy Minister Natig Aliyev told APA.

According to him Azerbaijan and Egypt can work together in Iraq, Libya and African Countries: “Azerbaijan has not a problem in conduction of exploration works in Mediterranean and Red Seas. If Egyptian government announces tender, Azerbaijan is ready to take part in this tender.”

176. Azerbaijan to produce 52 mln tonnes oil this year APA-Economics July 8, 2010

Azerbaijan is forecasted to produce 52 mln tonnes oil this year, Azerbaijani Energy Minister Natig Aliyev told APA.

According to him Azerbaijan produces more 1 mln barrel per day. “Azerbaijan is expected to produce more 52 mln tonnes oil during the current year.”

He also noted that, Azerbaijan’s blue gas reserves are more 2 trillion cubic meters. “We produced 23.6 bln cubic meters gas last year. Presently, Azerbaijan conducts works in several prospective structures.”

177. Azerbaijan: Compliance schedule of motor vehicles’ release date to Euro-2 standards explained APA-Economics July 9, 2010

The State Committee on Standardization, Metrology and Patents of the Republic of Azerbaijan issued several orders about the apply of AZS 447-2010 (EURO-2 demands) State Standard.

SCSMP says the compliance of imported motor vehicles till September 1, to the AZS 447-2010 State Standards is determined in accordance of 2nd addition depending of release date.

178. Azerbaijan: SOCAR and BP-Azerbaijan to sign contract about exploration of prospective structures in autumn APA-Economics July 7, 2010

SOCAR (State Oil Company of Azerbaijan) and BP-Azerbaijan will sign a contract about the joint exploration in Shafag and Asiman prospective structures in autumn, head of the SOCARs Investment Management Department Vagif Aliyev informed.

The main principles of the contract are almost drafted and the contract is expected to be signed in autumn, he said.

He also emphasized that the Main Principles Contract about the drafting of the contract for joint exploration in Shafag and Asiman prospective structures was signed for 30 years. The exploration term in prospective structures was determined for 4 years. During this period, BP-Azerbaijan will drill a exploratory well. According tom consultations to be held between the sides, more 2 exploratory wells can be drilled during three years.

179. Azerbaijan: Ultra company intends to put up its productions in European market APA-Economics July 9, 2010

Azerbaijan-based Ultra IT Company intends to register in innovation zone for export of its productions, till the end of the year, general director of the company Tahir Mirkishili told APA.

According to him the company will be the first which registered in innovation zone.

He also noted that, the company received a letter about the successfully testing of its productions which it presented to European Commission in November, 2009 and the company will sign a protocol of intention with the companies of Belgium and Germany about the export of the production to abroad.

180. Georgia in Investing Across Borders 2010 – World Bank’s Report GBC July 9, 2010

The World Bank (WB) has developed Investing Across Borders 2010, a report on investment environments in 87 countries.

Georgia is one of the most open countries to foreign equity ownership as measured by the Investing Across Sectors indicators. All of the 33 sectors covered by the indicators are fully open to foreign investment. There are neither sectors with monopolistic or oligopolistic market structures nor any perceived difficulties in obtaining any required operating licenses.

With only 4 procedures and 4 days, Georgia (Tbilisi) is among the fastest countries in the world in terms of establishing a foreign-owned limited liability company (LLC). A foreign company requires no additional procedure other than the authentication of the parent company’s documents abroad. According to the new order on the Approval of Instruction on State and/or Tax Registration Procedure of Taxpayers and Branches, a company must be registered on the same day of filing or the following day. The application is available online. Registering with the Entrepreneurial Register and obtaining an identification number and a certificate of state and tax registration are required in order to commence the company’s activities. Companies in Georgia are free to open and maintain bank accounts in foreign currency. There is no minimum capital requirement for foreign or domestic companies. Since 2008, evidence of contribution to the company’s capital is no longer required.

In Tbilisi, Georgia’s capital, registration of land-related rights has become a simpler and quicker process due to a law that was adopted in 2008. Both privately and publicly held land may be leased or bought. Publicly held land may be leased through direct negotiations with the public authority that owns the land. If there are several persons or companies seeking to lease the land, then the relevant public body is obliged to hold a competitive bidding process. Different approvals may be required from different state agencies depending on where the land is located. For example, more approvals may be required to lease land located near cultural monuments.

Fast-track registration of land is available in Tbilisi, for a higher fee. Lease contracts can be of unlimited duration and can offer the lessee the right to subdivide, sublease, or mortgage the leased land, subject to the terms of the lease contract. There are no restrictions on the amount of land that may be leased. Tbilisi has both a land registry and a cadastre, which are linked and coordinated to share data.

When Investing Across Borders (IAB) data was collected in 2009, arbitration in Georgia was governed by the Law on Private Arbitration of 1997. The law requires the existence of a prior written agreement between the parties to an arbitration. It does not specify, however, whether exchange of documents via email or fax could constitute such written agreement. Parties can demand replacement of an arbitrator in case of reasonable doubts about the arbitrator’s impartiality or independence, or if the arbitrator does not know the language of the proceedings. Parties are free to appoint arbitrators of any nationality or professional qualifications. Parties can choose foreign counsel to represent them in arbitration proceedings. Georgian Civil Procedural Code contains a chapter on the participation of courts in arbitration proceedings and on the execution of arbitration awards. The Code grants the courts of Georgia the right to deem an arbitration invalid if a criminal case arises in connection with the dispute being considered and if the court deems that resolution of the case by an arbitral tribunal may have adverse consequences. The National Enforcement Bureau, a public entity under the Ministry of Justice, enforces domestic arbitration awards, which takes around 13 weeks. The Supreme Court of Georgia has jurisdiction to enforce foreign arbitration awards, which takes around 37 weeks. A new arbitration law should have been passed in early 2010. Its content will be reflected in the next IAB report.

181. Georgia: 2010 First Quarter Recorded Rise in Milk Production and Drop in Egg and Meat Production GBC July 5, 2010

The first quarter of 2010 marked a 14 percent rise in milk production compared to the first quarter of 2009.

Namely, the country produced 98.9 thousand tons of milk, while the figure made up 86.6 thousand tons in the first quarter of 2009, says GeoStat, the National Statistics Office of Georgia.

The reporting period registered a 5.2 percent contraction in egg production. The country produced 105.6 million eggs in the 2010 first quarter.

The reporting period also registered slump in meat production. Namely, the country produced 10.8 thousand tons of meat in the first quarter of 2009, while the figure marked 10.4 thousand tons in the same period of 2010.

182. Georgia: Ardi Group Insurance Company to Intensify Business Activity starting September GBC July 9, 2010

Ardi Group insurance company plans to intensify business activities in September 2010.

Ardi group founder Armaz Tavadze says currently the company is completing the staff selection and insurance product development.

“The Georgian insurance market is saturated with standard and adapted insurance products, while Ardi Group plans to offer new innovative insurance products”, Tavadze noted, but abstained from unveiling further details on the innovative products.

The National Bank of Georgia (NBG) granted an operating license to Ardi Group on April 15, 2010. The company owns a nonlife insurance license. The license due makes sup 500 GEL and the licensee minimum capital must be 1 million GEL.

Aversi Pharma is a cofounder and owner of an 80 percent stake in Ardi Group. Aversi Pharma also owns another insurance company of Alpha.

Currently, the Georgian insurance market registers sixteen insurance companies.

183. Georgia: Authorities to Ease Legislation to Promote High-Quality Cement Production for Hydro-Engineering Construction GBC July 8, 2010

The Georgian Authorities plan to mitigate the legislative basis to support the high- quality cement production for hydro-engineering construction.

Namely, amendments will be made to the law on transition and imports of wastes on Georgian territory. The bill says this category of wastes do not fit the A subentry of first clause of the Basel Convention.

Consequently, the imports and transit of this category of wastes is legal and comprises no significant ecological risks.

The bill determines the list of wastes, which is legal for transit and imports. The bill calls for including a category of GC into the list, that is a granulated slag in steal- melting plant.

The bill has been developed by the Ministry of Environment Protection and Natural Resources. The parliament is expected to discuss the bill in autumn.

184. Georgia: Chamber of Commerce and Industry Resumes Issuing Certificates for Indication of Origin GBC July 5, 2010

The chamber of commerce and industry has resumed issuing certificates of indication of origin in June 2010 following a two-year break.

Under the government decision, the chamber of commerce and industry was deprived of the right for issuing the certificate in 2008. The right was transmitted to the Georgian Finance Ministry Revenue Office and the Ministry of Economy and Steady Development.

Besides CT-1, which is a certificate of indication of origin, the chamber also issues non-preferential and preferential certificates of EUR 1.

The certificate is issued free of charge for three workdays, the service price makes up 20 GEL if the certificate is issued for two days, 50 GEL – for four to eight hours and 75 GEL for one to three hours.

The revenue office charges no fee for issuing the certificate for three days, while the service fee makes up 70 GEL for issuing the certificate for two days, 100 GEL - for four to eight hours and 150 GEL - for one to three hours.

As to the Ministry of Economy and Steady Development, the body issues all kind of certificates free of charge for three days. The body does not discuss any application for issuing the certificate in shorter period.

The CT-1 certificate is issued in line with the November 30, 2000, resolution of the Council of the CIS Presidents, while the EUR 1 certificate is issued as part of the November 21, 2007, agreement between Georgia and Turkey on free trade relations.

185. Georgia: First Half of 2010 Recorded 20.4 percent Rise in Investments in Achara compared to First Half of 2009 GBC July 7, 2010

The first half of 2010 recorded investments inflow of 61.3 million USD to the Autonomous Republic of Achara, up 20.4 percent compared to the same period of 2009.

The ratio of domestic investments in total investments makes up 18.5 million USD, while the figure marked 15.4 million USD in the first half of 2009 and foreign investment inflows registered 35.5 million USD, says the Ministry of Finances and Economy of Achara.

Major investments of 29.8 million USD has gone to the tourism sector (24.7 million USD in the first half of 2009). The housing sector is second with 24.3 million USD (20.2 million USD year on year). The Industry sector ranks third with 4.6 million USD (3.8 million USD year on year). The transportation and communications sector ranks fourth with 0.7 million USD (0.5 million USD in the first half of 2009), while 2 million USD was invested in all other sectors (1.6 million USD in the same period of 2009).

The ratio of privatized assets in total investment inflows makes up 41.1 million USD.

A total of 242 million USD was invested in Achara in 2009, including 140 million USD in the private sector.

A total of 75.7 million USD was invested in Georgia in the first quarter of 2010, down 41 percent year on year.

186. Georgia: Fly Dubai Airline to Launch Operation in Georgia GBC July 5, 2010

Fly Dubai airline plans to launch operation on the air transportation market of Georgia.

The united transport administration of Georgia says the Dubai aviation service has already forwarded a notification on flight appointment. However, the airline has not submitted the flight schedule yet.

Qatari Airways and RAK Airways are also interested in the Georgian market, the united transport administration of Georgia said.

At this stage, LOT Polish Airlines have already drawn up the flight timetable.

At this stage, two Georgian and fifteen foreign airlines operate on the Georgian market, including Turkish Airlines, Lufthansa and Air Baltica own14 frequencies and Aerosvit and Ukrainian Airlines have seven frequencies each.

187. Georgia: Government Develops Bill on Information-Technology Zones GBC July 7, 2010

Under the new bill, the Government is authorized to issue operating licenses for IT zones in one day.

A bill on information technology zones will regulate the creation of virtual zones. The bill has been already submitted to the parliament.

Under the bill, the virtual zone is exempted from all state taxes, namely, profit, income, value added, excise and customs taxes.

The zone is free of any special regulations and the operating permit is issued in the form of an electronic certificate.

At the same time, under the new law the Government is obliged to develop amendments to the tax code and standard acts.

188. Georgia: Registration of Foreign Company Subsidiaries in Georgia Takes less than One Week vs. Six Months of Angola, says World Bank Report GBC July 9, 2010

Excess barriers and outdated legislations make barriers to drawing foreign direct investments (FDI), while bad enforcement increases the investing costs, a World Bank report called as Investing Across Borders 2010 reads.

The report is based on comparison of legislations and standard acts of 87 countries.

“FDI is of crucial importance for the country development, especially during the economic crisis. FDI brings stable capital, new technologies and management style to create new job places, stimulate competition and this increases the public accessibility to goods and services”, a WB vice president noted.

“It takes over six months to register a foreign company subsidiary in Angola and Haiti, while less than one week is required to do the same in Canada, Georgia and Ruanda. Registration of a leasing agreement on land plots takes six months in Nicaragua and Sierra Leone and less than two weeks is required in Armenia, Korea and Sudan. Enforcement of an arbitration award takes two years in Pakistan and Sri Lanka”, the report reads.

189. Georgian Government Plans to Hand over Management of State-owned Hospitals to International Companies GBC July 5, 2010

International companies are expected to assume the management of state-owned medical assets, Georgian Health Minister Aleksandre Kvitashvili said at the parliament’s health committee on July 2.

The accent will be made on the hospital sector, which will be developed by the tender-winner insurance companies.

“According to one of the considerations, state-owned medical assets may be handed over to international companies in management. Negotiations are underway with several international companies”, Kvitashvili noted.

A pilot program will be implemented in Ghudushauri national medical center, he added.

The Georgian government have been conducting negotiations on handing over the management of Ghudushauri national medical center to one of the British investment groups for several months, the Health Minister noted.

Ghudushauri center director Zaza Sinauridze told GBC the potential investor has completed the clinic audit.

The government owns a 100 percent stake of Ghudushauri national medical center.

190. Georgian Railway: Caspian oil on the move Renaissance Capital, Russia Thursday, July 8, 2010

Georgian Railway (GR), the 100% state-owned national rail company of Georgia, is marketing its debut seven-year $250mn bond issue. The bond documentation contains typical quasi-sovereign language; there is no single financial covenant in the indenture, but there is, customarily, a change-of-control put in case the government ceases to own more than 50% of GR's shares. GR is rated B+/Stable by both Standard & Poor's (S&P) and Fitch, in line with the sovereign; S&P's rating does not incorporate any state-related uplift to GR's standalone credit quality (which it also sees at B+). Although the issue does not qualify for inclusion in quasi-sovereign indices (at least JP Morgan's, because of its small size), the scarcity of Georgian risk on the market makes it likely that the placement has a good chance of being overpriced. For us, the issue would be attractive in the area of 8.5%. We note the following:

GR owns and operates rail infrastructure and rolling stock in both the freight (91% of revenues as of FY09) and passenger segments (5% of revenues). Unlike in most other cases in the region, GR's tariffs are not explicitly regulated by the government, although passenger-segment tariffs are kept well below cost (and these have been relatively stable over the past five years) to keep rail transportation accessible to the population; there are no offsetting government subsidies. GR's freight traffic is dominated by transit flows (67% of total volume and 74% of freight revenue in 2009). It is a convention among FSU rail networks to quote international transit tariffs in Swiss francs: GR's economics on the revenue side are therefore significantly tied to this currency. All customers are required to fully prepay before transportation services are provided, except where rail networks in neighbouring countries are involved.

Crude oil and oil products accounted for 48% of the freight transportation revenue GR collected in 2009, of which, in turn, 88% were transit flows. Transit also dominates dry cargo (60% of total dry cargo revenues). Dry cargo is very evenly split, making this segment less volatile (grains, cement, metals, ores, sugar all contribute between 0.5-1.1mn tpa each). GR is therefore most exposed to volumes of transit of oil and products. We think, however, that despite some year-to-year volatility in volumes - as seen in 2008, when rail volumes dropped on larger shipments through alternative routes (see table below) - the threat of permanently losing significant volumes is remote. KMG and SOCAR, two key upstream players in the region, have invested in port assets in Georgia (Batumi and Kulevi) where delivery is only possible by rail.

Since Feb 2008, KMG (Kazakhstan's state oil conglomerate) has owned and operated the port of Batumi, covering crude/products terminal facilities capable of handling Panamax tankers at piers and full-sized Aframax vessels at offshore single-point buoy moorings, with a combined throughput capacity of 15mn tpa. Except for Kazakh-originated crude, small cargoes of Turkmen and Azeri Light crude also occasionally flow through Batumi. In 2009, Batumi's throughput was 6.4mnt. Inaugurated by SOCAR (Azerbaijan's state oil company) in 2008, Kulevi has a capacity of 10mn tpa (combined for all liquids) and is now the fastest-growing liquids terminal on the Georgian coast. SOCAR intends to invest in expanding the link between the port and the main railway line. In 2009, Kulevi transshipped 2.1mnt of crude and products.

In early 2010, TengizChevrOil (TCO), Kazakhstan's biggest oil producer, halted transit through the Baku-Tbilisi-Ceyhan (BTC) pipeline on a disagreement about commercial terms (most likely associated with continuing output growth at the Azeri ACG offshore project), and diverted respective flows, by rail, to both Batumi and Kulevi. We understand the resumption of the BTC route for TCO is unlikely this year. Due to additional TCO volumes, total loadings at Georgian ports (Batumi, Kulevi, Poti) are now between 850k tpm-1mn tpm, based on April and May data. Accordingly, when GR reports FY10 data, we expect it to post a notable increase over 2009.

More importantly, Kazakhstan's search for evacuation routes for its oil remains a moving target, and it remains uncertain how additional output will be transported in future. When the Caspian Pipeline Consortium expansion is completed, in 2013- 2014, all new capacity (bringing total Kazakh allocation to 52mnt) is likely to go to TCO only. With regard to Kashagan, there is still little clarity. Kazakhstan seems resolved to accelerate the Iskene-Kuryk project, meaning that in one way or another, this crude will end up offloaded in Azerbaijan, from where Georgian ports, through GR, remain the only alternative with significant spare capacity at the moment. We expect no serious competition for oil cargoes from a new Tbilisi-Kars link that is supposed to connect the Georgian and Turkish railway systems in 2012 (from the Georgian side, Tbilisi-Kars is being built by a state-owned company other than GR). The last leg of the route (from the Georgian border to any Mediterranean port ) is likely to be more than 1,000 km in length, which we think will render it uncompetitive.

Overall, we see relatively little risk in GR's operations, or its ability to generate operating cash flow. EBITDA margins have been running in the high 30s-low 40s - much higher than usual in the region. Because of this superior profitability, GR has been FCF-positive and has been paying dividends, in contrast with operators in the rest of the region. It is clearly impossible for us to know how much capex was deferred, but as a very rough benchmark, GR's capex as a share of revenues was higher than for a national rail company in Ukraine, in line with that of Kazakhstan, and a touch lower than in Russia. We are reasonably confident that GR undertakes rolling-stock repairs on time, since Georgia shares the same Soviet technical regulations in this regard with the rest of the FSU countries; however with infrastructure capex, there is much less clarity. The Georgian landscape necessitates a very high concentration of complex engineering challenges, such as tunnels and bridges . We suspect a fair amount of underinvestment in the country's ageing rail infrastructure.

With regard to capex going forward, we note the following key initiatives: 1) the Bypass Project, with a budget of $270mn, to relocate certain tracks and a station from downtown Tbilisi to the north of the city, with completion estimated by YE13; and 2) the Modernisation Project, a wider upgrade and renovation programme intended to revamp the main line from Tbilisi to the Black Sea coast (Batumi and Poti ports included). This is valued at $340mn and is expected to be completed, we understand, by late 2014 (if a final feasibility study is done by YE10) - with the ambitious task of reducing operating costs by about 40% through higher efficiency.

In terms of funding, GR recently signed a CHF146mn loan with the European Bank for Reconstruction and Development for the Bypass Project, which is undrawn, but finally matures (we understand, based on a Fitch report) in 2022. The facility prohibits the company from paying dividends until the project is completed. Funding sources for the Modernisation Project have yet to be determined. Following GR's proposed $250mn bond issue, we very roughly estimate the company's total debt/EDITDA will jump to 3-3.5x; therefore our estimate is closer to Fitch's than to S&P's (the latter sees adjusted debt to funds from operations close to 5x over 2011- 2013). In this sense, the forthcoming eurobond is set to create a very large bullet liability for GR. That said, we think the market will be ready to accept such a structure, given the quasi-sovereign status of the issuer which must, under normal conditions, assist in refinancing the debt - setting aside a possible new equity injection via an IPO.

Petr Grishin

191. Georgian Railway and EBRD Announces Tender for Drawing up Tbilisi Center Development General Plan GBC July 7, 2010

Georgian Railway and the European Bank for Reconstruction and Development (EBRD) have announced tender on drawing up a general plan for developing the Tbilisi center after the Tbilisi central railway station will move to the Tbilisi Sea areas and the detour railway project will be implemented.

Under the plan, the detour railway construction works will start in summer 2010.

The freed territory comprises about 73 hectares and is considered to be a core of the new district of Tbilisi.

Georgian Railway says invitations have been forwarded to leading developers and urban companies to take part in the project.

Interested companies should submit the land plot development plan on the ground of the Georgian market research.

Interest expressions should be submitted until July 26, after which qualified applicants will be notified to make proposals within 45 days.

The project is an estimated 170 million EUR, of which 100 million GEL will be disbursed by EBRD and 70 million EUR- by Georgian Railway.

192. Moldova to pay $265 per 1,000 cubic meters of Russian gas in 3rd quarter bne July 08, 2010

Victor Parlicov, the general director of the National Agency for Energy Regulation (ANRE), says that the price of Russian natural gas for Moldova will grow to $265 per 1,000 cubic meters in the third quarter of this year, having risen by $13, reports Interfax.

The news agency says that envisaged increases in purchase prices were taken into account in calculating prices for ultimate consumers and so those are not to rise in the third quarter.

193. Moldovan wine should be used to paint fences - Russia's chief sanitary official Ria Novosti July 7, 2010

Russia's chief sanitary official said in a live radio interview with Ekho Moskvy on Tuesday that Moldovan wine should not be consumed and should be used to paint fences.

"Moldovan wine should be used to paint fences," Gennady Onishchenko said.

"It should not be consumed just in Russia but also nowhere else as the product is not interesting," he continued.

Onishchenko said dangerous ingredients were found in 18 batches of Moldovan wine on June 30-July 2, 2010.

"The situation is that between June 30 and July 2, in 18 batches [of wine] or in 102,000 bottles of three companies we found dangerous ingredients such as dibutyl phthalate, which should not be in wine at all," Onishchenko said. "This indicates that during fermentation... the wine was kept in plastic containers," he continued. "And the second was the fungicide metalaxyl, which exceeded the limits."

Dibutyl phthalate is used as a plasticizer and is added to adhesives and printing inks. Metalaxyl is a fungicide used against root rot.

Russia, which previously imported 80% of all wine produced in Moldova, imposed an embargo on Moldovan imports in March 2006. The ban dealt a severe blow to the small, impoverished ex-Soviet nation's economy, bringing many winemaking enterprises close to bankruptcy.

The ban was introduced after tests revealed the presence of pesticides and heavy metals in Moldovan wine.

Russia resumed imports in 2007 of Moldovan wine, meat, as well as apples, grapes, tobacco, and sunflower seeds, following a resolution to some of the "quality issues," but imposed strict standards on imports.

In July 2009, Russia lifted all restrictions on the import of Moldovan wine and was even prepared to open extra custom points.

MOSCOW, July 6 (RIA Novosti)

SOUTHEAST INVESTMENT 194. Banca Transilvania co-financed EUR150m projects eligible for European funds in H1 RZB July 8, 2010

According to a media release, Banca Transilvania (TLV) co-financed projects eligible for European funds worth EUR 150 mn in the first six months of the year, the total volume of this type of credits reaching EUR 300 mn. According to the CEO of the bank, the amounts exceeded their expectations. We do not believe that the amounts financed by the bank are significant considering their total portfolio, thus we view the news as neutral.

195. Bosnia FDI shrinks by 45.5% y/y in Q1 bne July 5, 2010

FDI attracted by Bosnia-Herzegovina shrank by 45.5% y/y to KM 33mn (EUR 16.9mn) in Jan-Mar, central bank data revealed, IntelliNews reported. We consider that this was mainly a result of the global economic crisis and the worsened investors' sentiments. The unstable political environment and the rise in nationalistic rhetorics could also have been among the detaining factors. Meanwhile, the country registered an outflow of KM 38.2mn in portfolio and other investments, as compared to the KM 43.2mn inflow a year earlier. The net capital entering the economy totaled KM 133.1mn in Q1, down by 61.4% in y/y comparison.

196. Bulgaria agrees to hhost Russia's South Stream gas pipeline bne July 8, 2010

Bulgaria ended a year-long timeout Tuesday and agreed to move forward on hosting a stretch of the Gazprom-backed South Stream pipeline, a deal Prime Minister Boiko Borisov said would be two or three times more profitable for his country than first estimated, Standart daily reported. Borisov may have exaggerated the potential benefits to glean political support for the project's smooth development, an analyst said, but Russia most likely did offer additional rewards to gain the government's support. The announcement came days after Prime Minister Vladimir Putin and Borisov spoke by telephone, and weeks after Gazprom said June 16 that it was looking at another Black Sea country, Romania, as an alternative partner for the undersea pipeline. ,,Having come to terms on the outstanding issues, we are increasing the profitability of the South Stream project for Bulgaria twofold or threefold," Borisov said, Interfax reported. Moscow and Sofia will finish drawing a ,,road map" on Thursday to move toward setting up a joint company that would conduct a feasibility study, he said. Borisov made the statements after talks with Russia's First Deputy Prime Minister Viktor Zubkov, who is chairman of state-controlled Gazprom, and Gazprom's deputy chief Alexander Medvedev. ,,We will make this project beneficial both for Bulgaria and Russia," Zubkov said. South Stream, a joint venture between Gazprom and Italy's Eni, is designed to snap Russia's dependence on Ukraine as the principal route for its gas exports to the European Union. The pipeline will have the capacity to carry 63 billion cubic meters of gas across the Black Sea, surfacing in Bulgaria and bifurcating to snake on overland to Italy and Austria. Talk of soaring benefits for Bulgaria is cover for Borisov to shepherd the project through his coalition Cabinet, where other members may still be doubtful of the plan, said Dmitry Abzalov, an energy expert at the Center for Political Studies, a think tank. Gazprom probably did sweeten the deal by agreeing to buy more pipeline work from local contractors and ceding to Bulgaria a greater portion of potential receipts from the local sales of the gas that will travel in the pipeline, he said. ,,Gazprom traditionally insists that it get most of the revenue," Abzalov said. It most likely offered Bulgaria special terms. All in all, the rewards would bump up Bulgaria's revenues by 30 percent to 40 percent, he said. Gazprom declined comment Tuesday afternoon. A spokeswoman for the Bulgarian government requested that questions be sent by e-mail, but the message went unanswered Tuesday. Gazprom combined the carrot for Bulgaria with a stick, which was its threat to lay the pipeline through Romania instead, Abzalov said. Borisov also said Bulgaria would wait until September to decide on the planned 4 billion euro ($5 billion) Belene nuclear plant. Russia's state-run Atomstroiexport had begun building the facility before Sofia suspended the deal for more considerations.

197. Bulgaria still pays for Belene NPP without strategic investor bne July 7, 2010

While it is still struggling to bring a strategic investor onboard, Bulgaria will continue to make payments to Russian contractor AtomStroyExport for the construction of the first reactor of the future Belene nuclear power plant project, it emerged at a July 6 2010 meeting between Bulgarian Prime Minister Boiko Borissov and Russia's first deputy prime minister Viktor Zubkov, Sofia Echo reported.

"By mid-September, Finance Minister [Simeon] Dyankov will have to shell out a further 280 million euro for the project's first reactor, which is expected to be completed by that time," Borissov said, adding that Bulgaria had already paid 300 million euro for this reactor.

In autumn 2009, Germany's RWE withdrew as strategic investor in the Belene project, which is designed to offset the loss in generating capacity at Bulgaria's Kozloduy nuclear power facility following the premature closure of two pairs of 440 MW reactors.

A Finance Ministry source told Dnevnik that the 280 million euro payment could be made if Bulgaria's Cabinet has made such a decision, but did not specify where the money will come from.

This statement contradicted one by Dyankov, who at the end of February 2010 was adamant that he would not give "a penny of the state budget for this year, next year or the year after" for Belene's construction. At the time, he said that a clear financial model should be worked out so that the nuclear power station project could be implemented.

Borissov said on July 6: "Russia is familiar with how far the project has progressed and knows that there is a puddle of water at the site at the moment".

A project roadmap has already been drawn up but there are a couple of key issues about the project that need to be tackled by the end of September, Borissov said.

198. Bulgarian PM to discuss energy projects with Russian Deputy PM bne July 6, 2010

Russian Deputy Prime Minister Viktor Zubkov will visit Bulgaria on Tuesday to discuss on energy projects realization, Focus News reported. The arrangement for the visit of Zubkov has been made by the phone in a conversation between Bulgarian PM Boyko Borisov and his Russian counterpart Vladimir Putin. It is expected the topic of the discussion to be South Stream energy project as well as the project for Belene NPP equipment. By the last week end PM Borisov said he and his Russian counterpart Vladimir Putin have good dialog regarding the energy projects.

199. CEZ to decide on new power plants in Romania Wood July 6, 2010

The Romanian government is pushing CEZ to get a final answer as to whether the company is willing to become its partner for the construction of new gas-fired power plants. A letter of intention was signed two years ago but the projects were put on hold because of the lack of funding during the crisis. The original plan includes the construction of new power plants at several sites.

Apart from CEZ, the government intends cooperating with Enel and E.ON, which both participated in the privatisation of local incumbent power distribution companies, like CEZ. The Minister of the Economy mentioned that should CEZ want to back off, it can easily replace it with the local branch of Arcellor Mital, which is interested.

CEZ (owning 9.15%) is already one of the partners of the state-owned Nuclearelectrika for the construction of two new 700-720-MW blocks in the Cerna Vodanuclear power plant. The state is considering lowering Nuclearelektrika's stake in the project below the current 51%. According to the Minister of the Economy, the final decision should be taken by August.

NEUTRAL

We learnt from the head of the International Division of CEZ at a recent press conference that the Romanian market is their favourite one to expand into. CEZ appreciates the stable regulatory environment in Romania, which has developed similarly to the one on CEZ's domestic market in the Czech Republic, and the high demand growth potential. The average electricity consumption of households and services equals 0.77 MWh, far below the CEE and EU averages of 2.29 and 3.27.

Romania is a net electricity exporter. Its exporting capacity increased around ten years ago, when the first block of the Cerna Voda power plant was commissioned and increased further when the second block was plugged into the network in 2006- 07.

CEZ also confirmed that if there is any privatisation opportunity in Romania, it will definitely look at it carefully. Currently, CEZ's sole power generation project in Romania is the huge 240 turbines at the 600-MW Fontanele and Cogealac wind farms. Phase One, comprising 139 turbines, will be accomplished soon and the first windmills are already generating electricity. The remaining 101 turbines will be erected in 2011. The project economics are boosted by two green credits @ EUR 55 granted for each MWh of electricity generated.

We can't make any assessment of whether CEZ will participate in the project until more details are disclosed. A crucial factor for the economics of the gas-fired power plant will be the cost of gas that the power plant would be burning, i.e. whether it's expensive Russian gas, the price of which is linked to crude oil, or cheaper domestically produced gas.

200. E.ON Ruhrgas becomes new partner in Trans Adriatic Pipeline project bne July 8, 2010

Press release:

Statoil and EGL today announced the successful financial close of E.ON Ruhrgas's 15% shareholding in the Trans Adriatic Pipeline (TAP) project.

Baar, Switzerland. E.ON's participation, announced in May, is a significant step in the realization of the TAP project which plans to build a 520-km pipeline with a capacity of between 10 and 20 bcm per year from Greece, through Albania and the Adriatic Sea, to Italy. Statoil and EGL now each hold a 42.5% shareholding in the project company.

Making the announcement, TAP Managing Director Kjetil Tungland commented: "E.ON Ruhrgas has a strong track record in the successful development of gas projects in both the upstream and downstream sectors. Their additional knowledge and expertise will further strengthen our project as we continue to make steady progress."

TAP will open the Southern Gas Corridor by offering the shortest route to market for natural gas from the Caspian and Middle East. The project, which will enhance both security and diversity of gas supply to Europe still remains open for additional partners, said Mr. Tungland.

About TAP The 520km long pipeline will transport gas via Greece and Albania and across the Adriatic Sea to Italy's southern Puglia region and further to Western Europe. The project is aimed at enhancing security of supply as well as diversification of gas supplies for the European markets. TAP will open a new so-called Southern Gas Corridor to Europe and market outlet for natural gas from the Caspian Sea and Middle East regions. The project is designed to expand transportation capacity from 10 to 20 bcm per year depending on throughput. The TAP project also envisages the development of natural gas storage facilities in Albania to further ensure security of supply during operational interruptions of gas deliveries. www.trans-adriatic- pipeline.com

201. East Gate Export UniCredit July 6, 2010

East Gate Export, the initiative promoted by UniCredit for businesses interested in starting or expanding export activities towards Russia, Turkey and Poland, was held in Piacenza (June 23, Collegio Alberoni).

The event (25 dedicated workshops and over 600 customised meetings) drew over 200 businesses from the provinces of Piacenza, Parma, Modena and Reggio, which had the opportunity to take part in meetings with independent legal, corporate and fiscal consultants and with UniCredit experts ready to offer tangible information about the economic, fiscal and legal frameworks of Russia, Turkey and Poland.

Why exactly these three countries? The data speak clearly. Russia is the largest emerging economy after China, and the eighth world economy. It is considered a leading market and shows a potential that finds no equal in other countries. Russia has a population of more than 140 million people and recorded an 885 billion euro GDP in 2009, destined to reach 1,269 billion in 2011. With over 70 million people, Turkey is an interesting market and is the largest emerging economy after the so-called BRIC countries. A further element of interest is the EU convergence process - Turkey, together with Croatia, is a candidate country - which, although not likely to be concluded in the short term has led to many reforms and opening towards foreign investors over the past few years. The Polish market also offers interesting growth perspectives: with its 14 million households and 40 million people, Poland is developing rapidly; the middle classes are growing alongside the possession of consumer goods, already well above other Countries.

After the events in Udine (14 May 2010) and Padua (25 May 2010), where 270 and 224 meetings were held respectively, Piacenza was the third appointment of East Gate Export. The initiative stems from the experience of East Gate on tour which involved, throughout the three editions held between 2008 and 2009 in Brescia, Treviso and Reggio Emilia, over 1200 entrepreneurs interested in internationalisation towards Central Eastern European markets.

The event in Piacenza confirmed UniCredit's appropriate attention to Emilia Romagna and its businesses. After the drop in 2009, especially in the machinery (-9.5%), metal products (-6.3%) and means of transport (-13.6%) production sectors, export in Emilia Romagna is slowly recovering. Although at a slower rate compared to the North East and to the "Italy system", in the first quarter of 2010, the rate of change of export in Emilia Romagna grew by 4.6% compared to 2009. The main markets are EU Countries, United States and Switzerland, followed by Russia. In 2009, 3.2% of exports were destined to Russia, 2.4% to Poland and 1.5% to Turkey.

"Export revival is crucial for the recovery of our economy. Our aim with East Gate Export was to design a specific event meeting the real needs of entrepreneurs from Piacenza - stated Rodolfo Ortolani, general manager of UniCredit Banca - "Our SMEs have ability and potential which must focus on and invest in tangible opportunities also abroad. Within this framework, a bank such as ours - which is an international bank but at the same time is responsive to territorial needs - helps provide the instruments needed for the development of Italian businesses in Europe".

UniCredit provides its support through a network made of 123 branches in Russia (third largest private bank in the country), 1,030 branches in Poland (second largest bank in the country) and 901 branches in Turkey (fourth largest private bank in the country). It also provides the necessary information to evaluate the opportunities that these markets offer and identifies the operating approach to seize them.

202. EPS, Seci Enegia sign JV contract for building ten hydro-power plants bne July 6, 2010

Power monopoly EPS and Italian Seci Energia S.p.A, part of Italy's Gruppo Industriale Maccaferri inked the agreement for setting up a joint venture that will be in charge of building ten hydro-electric power plants along the Ibar River, in central Serbia, IntelliNews reported. The investment worth a total of EUR 285mn will be financed by Seci Energia, which will hold 51% stake in the JV, while the remainder will be controlled by EPS. The power plants will have a combined capacity of 103MW and will produce 420mn KWh per year. The generated power will be exported to Italy until the JV posts return on investment. The agreement is part of a wider energy deal between Serbia and Italy from 2008, which envisages EUR 1.5bn investment in the Serbian energy sector. The construction of the plant is expected in 2011.

203. Islamic Development Bank express interest in boosting presence in Albania bne July 5, 2010

Islamic Development Bank (IDB) officials, at a meeting with Prime Minister Sali Berisha on Saturday, have expressed interest to boost the bank's presence in Albania through funding important development projects, ATA News reported.

The Premier's press office said that during a meeting with the IDB delegation, headed by IDB Vice President for Operations, Mr. Birama Boubacar Sidibe, Prime Minister Berisha, after presenting some of the national priorities with interest for investments by the Islamic Development Bank, invited IDB officials to increase bank's presence through funding Tirana-Elbasan and Berat- Tepelene highways, projects in energy, agriculture and health system projects.

IDB Vice President Birama Boubacar Sidibe expressed readiness and commitment to strengthen partnership with Albania and offer financial assistance to these important projects.

204. Kraft Foods to sell Cadbury Romania, Poland units bne July 9, 2010

Kraft Foods said it's going to sell the Romanian unit it acquired through its acquisition of Cadury. It's selling the unit to Oryxa Capital for an undisclosed sum. The sale was required by the European Commission as a condition for approving the Cadbury deal.

In late June, Northfield, Illinois-based Kraft agreed to sell Cadbury's E Wedel- branded chocolate and sugar confectionery operations in Poland to Lotte Group.

The sale, which is subject to customary regulatory approvals, includes the E Wedel business, its related brands and a manufacturing facility in Warsaw.

Cadbury Wedel employs approximately 1,000 people, who will be transferred to the Lotte Group.

Kraft will keep the remaining Cadbury business in Poland, including the Halls brand and other non-E Wedel-branded chocolate and sugar confectionery products sold in Poland and two manufacturing plants in Skarbimierz.

205. MOL was granted exploration permits in three blocks in Romania Equilor July 7, 2010

MOL, the largest Hungarian energy group and its Romanian strategic partner, Expert Petroleum received exploration permits on Monday by Romania's National Agency for Mineral Resources in 3 different research blocks. Based on an evaluation process, MOL and Expert Petroleum bid on and received permits for the three most promising blocks in Transylvania, close to the Hungarian border. Phase 1 of the exploration project is set to commence in 2011 and based on previous assumptions, the blocks in question carry a major potential in terms of oil and natural gas holdings. More importantly, some of these blocks actually carry unconventional oil resource potential as well.

206. No new concession contracts awarded to Petrom RZB July 6, 2010

Romania's mineral resources agency ANRM recently declared the winners in the auction for the concession contracts regarding 22 oil blocks, 5 of them off-shore and the rest on-shore, while the contracts have to be negotiated and passed by the lawmakers. Notably, neither the local bidders (Petrom, Rompetrol, Romgaz) nor large bidders like Exxon-Mobil or Repsol gained any contract. Out of the five blocks gained upon the case in The Hague against Ukraine, four of them were awarded to Lukoil Overseas. Among the on-shore blocks auctioned, three were awarded to MOL in the west of the country. We were expecting some license awards for Petrom from this round, especially for the offshore blocks in cooperation with Exxon. The fact that Petrom did not gain any additional blocks cancels further upside and supports our current ?hold? recommendation for the stock. A short-term negative market reaction is possible.

207. Raiffeisen International's Annual General Meeting Approves Merger bne July 9, 2010

After Wednesday's approval by RZB shareholders, on Thursday shareholders of Raiffeisen International voted to approve a merger with the banking part of its unlisted Austrian parent, which will unite Raiffeisen International's emerging Europe network with RZB's Austrian and international commercial banking operations, creating a universal banking group active in 18 countries.

With a majority of 75% required at Thursday's annual general meeting, approval of the tie-up was never in much doubt as RZB already controls 72.8% of Raiffeisen International's share capital. However, it did provide an opportunity for some shareholders to express disappointment about the terms of the deal, under which the free-float in the new bank will decline from 27.2% to 21.5%.

Herbert Stepic, Raiffeisen International's chief executive and future head of the merged company, reiterated that the primary motivation for the deal was to improve better access to capital markets. However, some Raiffeisen International shareholders question the strategy of diluting exposure to fast-growing CEE markets with more exposure to the saturated Austrian market.

COMMENT: Now the merger has won the approval of both sets of shareholders, the merged bank can begin to unlock "enormous synergies," according to Patrick Butler, RZB's board member for financial institutions and investment banking.

That optimism hasn't been universally shared; when the announcement of the merger of the unlisted Austrian savings bank with its international arm was announced in March, it pushed Raiffeisen International's share price down 17% in a week. Raiffeisen shareholders feared that the merger with its parent - which currently holds 70% - would condemn the bank to the lower growth of the Austrian banking market, rather than the much higher rates forecast in the 17 countries of Central and Eastern Europe where Raiffeisen has operations.

The timing of the announcement, amid continuing worries about the health of emerging Europe and the overall banking market, also sparked speculation that RZB needed to raise equity, which would dilute existing shareholders.

RZB believes shareholders are beginning to understand the potential benefits of combining two banks with "different processes, cultures and products." Once the merger takes effect this autumn, the bank's ability to draw funding will improve and operations can be standardised or centralised where it is most efficient. "A lot of these are unnecessary differences," says Butler, a British banker who has been working for Austrian banks on and off for 20 years. "There are enormous synergies if we make the processes more uniform. Why should we have 15 banks trading in the dollar/euro?"

Better days

RZB has also played down the urgency of its capital raising, which will be required both to repay €1.75bn lent by the Austrian government during the financial crisis, and to meet the new tighter capital rules imposed under the Basel III international banking guidelines. Nevertheless, RZB's Tier I capital adequacy ratio will only be 9.3% after the merger, which doesn't give it much room for manoeuvre. "In years to come we will raise capital from equity markets," says Mr Butler.

The bank believes that won't be a problem, as investors are once again focusing on the faster long-term growth possibilities in CEE, with Raiffeisen International's share price already back at its 2005 flotation level. Worries over the health of the region's banking sector have been shown to be overdone - because banks there were well capitalised and did traditional banking business - and even the crisis in the Eurozone sparked by Greece's debt problems has so far had little impact. "The Greek crisis demonstrated how positive the numbers are in Eastern Europe," Butler points out.

The growth of banks' non-performing loans is "clearly slowing down" - Raiffeisen International's on a pro forma basis were 7.7% of all loans at the end of March - and will probably hit their peak towards the end of this year, he adds. At the same time, provisioning for problem loans will be much lower this year than last, and next year some will start to be written back, boosting banks' profits.

He remains concerned, however, about two of Raiffeisen's eastern operations. "Our big worries are Hungary and Ukraine, particularly Ukraine," he says, though he adds that President Viktor Yanukovych has brought greater political stability and with it faster economic recovery. Hungary remains a problem because of the proportion of lending in foreign currencies and the "jury is still out" on the new government there.

Looking longer term, the outlook for the region is improving, according to analysts, though banks have yet to see it reflected in loan demand. "We are seeing recovery without consumption and only limited corporate investment," says Debora Revoltella, head of CEE strategic analysis at UniCredit. "For banks this is not ideal, because there is no demand for lending."

Butler admits to some frustration. "Demand is slower than we anticipated," he says, pointing out that the bank is still doing a lot of repo business and short-term lending to other financial institutions when it would like to expand corporate and retail lending.

But he insists that the region still holds a lot of promise. "Growth will not be as high as the past, but it will still be significantly higher than the Eurozone."

Mergers and acquisition in the banking sector could also start to pick up as the global economic crisis eases, according to Revoltella, as weakened local banks or foreign banks with domestic problems decide to sell up when valuation multiples recover. Parex Banka, which was taken over by the Latvia government, and BZ WBK in Poland, owned by Ireland's AIB, are already up for sale.

RZB, though, is unlikely to take part in any M&A, but will focus on making its internal merger work. "Now is the time to build on what we have," says Butler. "Major acquisitions are not on the menu."

The full press release follows:

* Shareholders approve the merger of Raiffeisen International and RZB's principal business areas * Dividend of € 0.20 per share, maximum dividend payout of € 30.9 million authorised * Seven new members elected to the Supervisory Board, whose total number of shareholder representatives increases to ten

The shareholders at the annual general meeting of Raiffeisen International Bank- Holding AG, which took place today in Vienna, approved the merger of Raiffeisen International and Cembra Beteiligungs AG with a clear majority. The transferring company Cembra consists essentially of the corporate customer business, together with the associated shareholdings, spun off from Raiffeisen Zentralbank Österreich AG (RZB). The merged company will operate as Raiffeisen Bank International AG as of the merger's entry in the commercial register, which is expected to take place in the fourth quarter of 2010.

"By granting their approval, our shareholders have clearly voiced their belief that this merger provides the best means of maintaining and even further expanding Raiffeisen's strong positioning in CEE and in the Austrian corporate customer segment," said Herbert Stepic, CEO of Raiffeisen International and future CEO of Raiffeisen Bank International.

At their respective general meetings on 7 July, the shareholders of RZB and Cembra approved the spin-off of RZB's corporate customer business and the associated shareholdings, and their transfer to and absorption by Cembra. Those business segments and shareholdings associated with RZB's role as the central institution of the Austrian Raiffeisen Banking Group are not impacted by these steps and will remain in their entirety in RZB.

The shareholders at Raiffeisen International's general meeting today provided their approval for the merger of Cembra and Raiffeisen International by way of universal succession as at the record date of 31 December 2009. The shareholders also approved the associated share capital increase and the merger agreement. With 40.8 million new bearer shares being issued in order to perform the merger with Cembra, Raiffeisen International's share capital will be increased from € 471.7 million by € 124.6 million to € 596.3 million. In addition to the shares that Cembra has held in Raiffeisen International to date, these newly-issued shares will be granted to Cembra's sole shareholder, Raiffeisen International Beteiligungs GmbH, as settlement for the corporate assets of Cembra transferred to Raiffeisen International as part of the merger.

Once these transactions are completed, the free float of Raiffeisen Bank International, which will continue to be listed on the Vienna Stock Exchange, will be around 21.5 per cent; Raiffeisen International's free float had stood at around 27.2 per cent. RZB's indirect shareholding in Raiffeisen Bank International will amount to around 78.5 per cent. Previously, RZB's indirect shareholding in Raiffeisen International had stood at around 72.8 per cent.

General meeting approves dividend of € 0.20 per share

Raiffeisen International's annual general meeting approved a dividend of € 0.20 per share for the business year 2009; this corresponds to a maximum dividend payout of € 30.9 million. Dividends will be paid out to shareholders with dividend rights on 16 July 2010.

Enlargement of Raiffeisen Bank International's Supervisory Board

Raiffeisen International's annual general meeting also passed a resolution increasing the total number of shareholder representatives on the Supervisory Board from seven to ten. This measure will take effect from the time the merger of Raiffeisen International and Cembra is entered in the commercial register.

As of that point in time, Erwin Hameseder (Chairman of Regional Raiffeisen Bank Lower Austria and Vienna), Markus Mair (Chairman of Regional Raiffeisen Bank Styria), Ludwig Scharinger (Chairman of Regional Raiffeisen Bank Upper Austria), Hannes Schmid (Chairman of the board of Regional Raiffeisen Bank Tyrol), Johannes Schuster (currently a division head in RZB and designated Managing Board member of RZB), Friedrich Sommer (currently a division head in RZB) and Christian Teufl (currently a division head in RZB) will be members of the Supervisory Board until the end of the general meeting which resolves on releasing the Supervisory Board from liability for the 2014 financial year. Also as of the merger's entry in the commercial register, Patrick Butler, Karl Sevelda, Johann Strobl and Manfred Url will step down from their positions on the Supervisory Board. The Raiffeisen International Supervisory Board members Stewart Gager, Kurt Geiger and RZB CEO Walter Rothensteiner will continue to exercise their mandates. Raiffeisen Bank International's managing board will consist of Herbert Stepic, Karl Sevelda, Aris Bogdaneris, Patrick Butler, Martin Grüll, Peter Lennkh, Johann Strobl and Heinz Wiedner.

With more than 700 participants this year, Raiffeisen International's annual general meeting was once again one of the best-attended in Austria's recent capital market history.

208. Tender for new block at Bosnia's Tuzla power plant attracts only Swiss Alpiq bne July 7, 2010

The tender for the construction of the 7th block of thermoelectric power plant Tuzla in Bosnia-Herzegovina has attracted only one investor - Alpiq - a Swiss-based service provider in the field of power engineering, energy generation, trading and sales, IntelliNews reported. The deadline for submitting bids expired on June 18, after power utility Elektroprivreda BiH, at the request of the Bonsian Federation government, extended the deadline by 45 days. Elektroprivreda BiH director Amer Jerlagic said that despite the disappointingly low interest in the tender, the procedure for selecting a strategic partner would not be stopped and a deadline for submission of financial offers will be announced. Alpiq meets all the set prequalification criteria of the tender, including an annual revenue of EUR 5bn and a profit of at least EUR 400mn for the last three years. Authorities also require bidding companies to have available KM 500mn for investing in the project or to be able to receive a loan in that amount, to have the ability to finance the construction of the new block through a contract for a long-term takeover or a loan and without forming joint companies as well as to have energy facilities with an installed power of 400MW. The project is worth EUR 840mn (KM 1.6bn). The construction works are planned to be launched in 2012, while the plant should be operational by 2017. The new block will have a capacity of 450MW and will replace blocks 3 and 4 of the power plant. Jerlagic earlier said that several European, US and Chinese companies had already purchased tender documentation under the initial call. Jerlagic now explained the low interest in the tender with foreign partners waiting for the abolition of the ban on construction of nuclear power plants, which would create opportunities for large investments.

209. Turkey aviation market takes off in first 6 months bne July 7, 2010

The number of airline passengers in Turkey reached 44.6 million in the first six months of 2010, representing an increase of 24 percent over the same period last year, Today's Zaman reported.

According to a report released by the State Airports Management General Directorate (DHM_) on Tuesday, nearly 10.3 million people traveled by air in June, a 19.5 percent increase over the same month of 2009. The total number of flights between January and June increased by 16 percent over the same period a year before. _stanbul International Atatürk Airport alone had 33 percent of Turkey's air and passenger traffic in the first six months of 2010. In June, 4.4 million passengers traveled on domestic routes, while 5.9 million flew internationally. Meanwhile, the number of planes that used Turkish airspace increased by 7.3 percent to 24,737 in June 2010, when compared to June 2009.

Turkey's aviation industry has enjoyed steady growth within the last few years, driven by an increasing demand for domestic and international flights, while the condition of Turkey's airlines and airports have improved significantly, a major factor leading more people to prefer air travel than in the past.

Meanwhile, Culture and Tourism Minister Ertu_rul Günay said a reduction in the number of tourists from Israel visiting Turkey following tension between the two countries will not affect the country's tourism revenue,

Speaking to the press during a visit to Kırıkkale on Tuesday, he said the recent decrease in tourist numbers from Israel had not had a major effect on Turkey. "Turkey expresses itself in millions and Israel in thousands or tens of thousands. These are not figures large enough to finish off or undermine tourism in Turkey."

Günay said tourism in Turkey always remained on a stable axis. He said the current administration in Israel was as big a problem for Israel's own people as it is for the people of the Middle East. "We have no problems with the people of Israel. We host hundreds of thousands of people from Israel, and they have great holidays here. We are always ready to have them as our guests. But the administration has this tense attitude. I truly hope the Israeli people gets rid of them."

He said the government's priority was to ensure that more cultured and wealthier tourists come to Turkey. "We are not there yet. Those who want cheap holidays come here. All guests from all countries and budgets are very valuable. But we need a higher income from tourism in Turkey to restore our historic assets. This is why we are making an effort to attract people from a higher educational background and a higher income group."

210. Turkey eyes share in Iraqi construction pie bne July 6, 2010

Turkish construction companies have set their sights on receiving a favorable share of the market in planned construction projects anticipated to reach $100 billion in war-torn Iraq, Today's Zaman reported.

Observers argue that the current potential in the Iraqi market will serve as a prominent anchor to help keep the Turkish construction sector on its own two feet during the next few years. A recent report released by the Foreign Trade Undersecretariat has shown that the Iraqi construction market has maintained a fast growth trend thanks to recently announced infrastructure and mass housing projects.

The undersecretariat predicts that the demand for construction equipment and raw materials in the Iraqi market will increase sharply in the following months and that Turkish providers should seize the opportunity to take a share of the upcoming projects. The Iraqi government gives priority to experienced foreign companies and encourages them to undertake new construction projects. The report stated that some 44,700 new residences are expected to be built in the city of Basra alone.

The report said Turkish construction firms completed more than 450 construction projects amounting to $4.8 billion between 2003 and 2008, valuable experience for Turkish companies in the Iraqi construction market. Also underlining the advantage of geographical proximity for Turkish companies, the report said there are 300 Turkish-owned businesses, most of them contractors, in northern Iraq, a fast developing, promising market.

211. Turkish investors complain about stifling red tape in Bosnia bne July 8, 2010

Ahmet Kemal Baysak is BH's honorary consul in Izmir and the Chairman of Terbay who recently spoke about business relations between BH and Turkey, and criticized Bosnia-Herzegovina's red tape, Presscut reported

He singled out power generation, road construction and tourism as the main areas of interest for potential Turkish investors. He believes BH has a lot of potential in tourism and that investment climate should be improved in the country overall.

Baysak participated in last week's international conference in Sarajevo on regional business collaboration and development, organized by the BH, SEE Top Manager Selection Agency. Representatives of Turkish Gintas were also there, and Baysak announced they plan to build a big shopping centre in BH, like the one they put up in Montenegro.

CENTRAL EUROPE INVESTMENT 212. Czech MinFin excludes PPF consortium from environment clean-up tender bne July 7, 2010

The Czech finance ministry has excluded the consortium of PPF Advisory, AVE, Dekonta and Ecosoil Sud from the CZK 115bn (EUR 4.3bn) tender for the cleaning up of past environmental damage at over 300 locations across the country, outgoing finance minister Eduard Janota announced, IntelliNews reported.

According to the recommendation on part of the tender committee, the consortium did not qualify for the job. The consortium has already been once excluded from the tender, but the antitrust office UOHS then ruled out against the then decision of the finance ministry. Now the consortium has 15 days to complain. Geosan Group, Marius Pedersen Engineering and Environmental Services have advanced to the second round of the tender. UOHS has not yet taken a stance on the complaints of the other two disqualified bidders: the consortium between Deme Environmental Contractors and Dredging International and the consortium between P-D Industriegesellschaft and Stavoprogres Brno). The leaders of the centre-right parties, which are expected to form the country's ruling coalition, have called upon the finance ministry to guarantee that the country will not face arbitrations if no winner is selected in the tender.

While the conservative TOP 09 wants the tender to be completed, ODS and centrist VV (Public Affairs) prefer it to be split in several smaller public procurement tenders. According to a preliminary agreement, the tender will be continued, but if doubts about its transparency and profitability appear, no winner will be selected. PM- designate Petr Necas expressed annoyment as he and other coalition partners have continuously called on the outgoing government of PM Jan Fischer not to take any strategic decisions.

213. FAW enters Turkey's auto market bne July 9, 2010

China's motor vehicle manufacturer FAW introduced four of their light commercial vehicle models to Turkish customers in _stanbul on Thursday, marking their entry into the country's automotive market, Today's Zaman reported. FAW is entering the Turkish market in cooperation with Turkish auto distributor Komsan Otomotiv.

Speaking to reporters in _stanbul, Komsan CEO Süheyl Baybalı said they expected to reach a 50 percent share in the Turkish light commercial vehicle market. FAW International Sales and Marketing Manager Qingxi Zhao said the company expected to branch out into the European market via Turkey. "We have faith that our success in the Turkish market will pave the way for new investments in the EU."

214. Latvia expects to agree on lower price for Russian gas by 2011 bne July 08, 2010

Latvia's Economy Minister Artis Kampars has said that Latvia expects to agree with Russian natural gas supplier Gazprom before the end of 2010 on a lower price of gas supplies to Latvia starting January 1, 2011, reports Prime-Tass.

The news agency quoted Kampars as saying that the talks on cutting the gas price could be concluded by the end of 2010 according to Gazprom's estimation.

215. Polish gas firm PGNiG to launch project to guage unconventional gas deposits bne July 7, 2010

PGNiG (PGN PW) is launching a project aimed at documenting unconventional gas deposits on 9 July. If the operation succeeds extraction may follow in 3-4 years. The operation will be conducted at the Markowola-1 borehole. PGNiG holds around 13% of concessions in areas where, according to experts, unconventional gas can be found.

216. Unconventional hopes in Poland bne July 5, 2010

Poland has not been endowed with enormous amounts of natural resources - except for coal - but now the prospect that the country could be sitting on huge deposits of unconventional gas is causing dreams of wealth.

The winner of the Polish presidential election on July 4, the ruling party candidate Bronislaw Komorowski, said before the election that Poland would not sign the long- awaited gas deal with Russia if it finds enough shale gas in its territory. "If we find out that we have enough of shale gas, we want to have the right to renegotiate the deal with Russia or maybe we will step aside from it," Komorowski said in a TV debate with his challenger Jaroslaw Kaczynski, the twin brother of the late president who died in a plane crash.

With 95% of votes counted, Komorowski had 52.6% of the vote compared with Kaczynski's 47.4%.

Kaczynski has criticised the gas deal that the ruling Civic Platform government negotiated, which calls for Russia to supply 10bn cubic metres (cm) of gas a year until 2037. The deal is supposed to fill an annual shortfall of some 2.5bn cm of gas, which now Kaczynski and others say could be done with shale gas.

Radoslaw Sikorski, the country's foreign minister, has said that Poland could be very rich. "There is a chance - and I don't want to exaggerate here - but in 10 to 15 years we could become another Norway," he said in a television interview last month.

More will be known about the scale of Poland's unconventional gas reserves - hard- to-get-at deposits of tight and shale gas, as well as coal-bed methane - when Canada's Lane Energy begins drilling a test well in northern Poland in June. The testing could last as long as four years, but the potential rewards are enormous. US consultancies estimate that there could be anywhere from 1.5 trillion to 3 trillion cubic metres (cm) of gas buried in Poland's shale formations.

Henryk Jezierski, Poland's deputy environment minister and chief geologist, cautions that the true amount of gas in Poland is still impossible to verify. US estimates come from comparing Poland's geology to that of parts of the US where shale gas deposits have been found. "The gas is probably there, but to say it with certainty I require documentation," he tells bne, adding that about 12% of Poland has structures that could be favourable for shale gas.

Europe could have as much as 14 trillion cm, of which almost a third could be in Poland. "Poland has the best prospects in Europe," he says.

Poland has already issued 58 concessions to explore for shale gas, and the companies in the hunt include some of the biggest players in the US, like ConocoPhillips, Exxon Mobil, Chevron, and Marathon Oil, as well as Poland's PGNiG, the gas monopoly.

Hard economics

In the US, shale gas has changed the economics of the gas business. Although shale gas - small quantities of gas trapped two to three kilometres underground in ancient shale formations - has been known for decades, it is only in recent years that US companies have discovered the technology of fracturing the shale with high pressure water to allow them to extract large quantities of gas at reasonable prices. In the last four years, shale gas production has tripled, and the US is now becoming a gas exporter. Liquified natural gas (LNG) terminals built just a few years ago to allow for the importation of vast quantities of gas are now either standing idle or being converted for use in exporting gas.

While the possibility of becoming a gas giant is turning the heads of some Polish politicians, the economics are quite complicated. Poland currently pays about $340 per 1,000 cm for gas from Russia, but that price may fall if US production continues to grow, making it difficult to calculate the business sense of going forward with drilling in Poland - which will only happen in a decade or more.

The European regulatory environment also may make it more difficult to exploit shale gas. EU environmental rules are much stricter than in the US, where some states are already expressing concern about the potential impact of shale gas extraction on water quality. There are also worries about the release of methane, a greenhouse gas, during mining operations.

There are also legal differences between the US and Europe. In the US, surface landowners normally own the mineral rights below their property, while in Europe mineral rights usually belong to the government. That may make it politically more difficult to allow for large-scale gas extraction in Poland, because the benefits will tend to accrue to large foreign companies.

Komorowski has expressed misgivings about shale gas, though, worrying about the "devastation of picturesque areas of Poland" with techniques he compared to open pit coal mining.

Although Komorowski's geological knowledge may have proven a little wanting - shale gas is not extracted in the same way as coal - others share his concerns. Waldemar Pawlak, deputy prime minister and head of the Polish People's Party, a junior member of the ruling coalition, fretted about the cost of extracting the gas. "Shale gas may be interesting, but its costs and the size of deposits first have to be assessed," he said.

Jezierski is also keen to first get some hard data in his hands before making predictions of Poland becoming a gas superpower. "Everyone wants to hear that Poland could become a second Texas," he said. "We may be or we may not be."

OTHER COUNTRIES 217. Mongolia and China to cooperate on fighting corruption bne July 6, 2010

Mongolia’s Anti-Corruption Agency has agreed to increase cooperation with its Chinese counterpart on combating corruption, Xinhua reports. Joint efforts will include exchanging information and providing technical assistance. An agreement between the two countries is expected to be signed later this week, when a Chinese delegation is due to visit Ulan Bataar.

218. Mongolia: EBRD invests in coal washing plant bne July 7, 2010

The European Bank for Reconstruction and Development has provided a $180m loan to Energy Resources for the construction of Mongolias first coal washing plant.

The EBRD already holds a minority stake in Energy Resources, which owns the Ukhaa Khudag coal mine in the South Gobi region.

A coal handling and preparation plant (CHPP) is due to be built at the mine, in line with latest international best practices.

This will allow Energy Resources to increase exports, raise its competitiveness and help it to establish its brand name for Mongolian coking coal in China and South East Asia.

This project will embed the highest international standards in the mining industry in Mongolia, serving as a great example to follow by other players in the sector, said Riccardo Puliti, EBRD managing director for the energy business group, in a statement.

The EBRDs investment will have wider positive implications in Mongolia by creating new business opportunities for local companies servicing the mining industry.

219. Mongolia: Hindustan Copper interested in Mongolian mines bne July 5, 2010

India’s Hindustan Copper is interested in acquiring mines in Chile, Mongolia, Namibia and Peru, according to reports in the Indian press. The state owned company plans to triple its annual production capacity from the current 3.2 million tonnes. Copper consumption is growing by 7-8% a year in India. Earlier, Hindustan said it was considering acquisitions in Afghanistan.

220. Mongolia: Parliament approves TT resolution Frontier Securities July 9, 2010

Authorising GOM to start competitive selection of TT consortium of foreign and domestic companies to mine up to 40 m tons of coal per year and to introduce draft IA by fall session

According to Parliament Media Office (http://www.open-parliament.mn) press release of July 7,2010, “ United session of Parliament started on Wednesday with quorum of 61 per cent. First item on the agenda was a final reading of bill(draft resolution) on some issues on mining Tavan tolgoi coal deposit.

MP D.Damba-Ochir (Orkhon province,MPRP, Director-General of “Ochir Tuv” LLC, Head of Mongolian-Chilean parliamentary group) introduced the bill prepared by Economic Standing Committee for final reading.

Tavan tolgoi coal deposit covers in total 80 thousand hectares and there are seven mining licenses on the deposit. Deposit reserves are 6,4 billion tons, 1.495 million tons of those are coking coal and the deposit is among top 10 in the world. However, the remaining 4.6 million tonsa are thermal coal. It is being estimated in preliminary manner that 20-40 million tons of coal will be mined annually and it can be concluded that deposit has reserves that can accommodate over 100 years of mining.

During discussion of the bill, Chairman of Economic Standing Committee Ts.Bayarsaikhan ( Umnugobi province, DP) has said that he views that Parliament will work ensuring specific supervision of the Investment Agreement. Opinion and proposals of the MPs during the united session and standing committee meetings will be delivered to the Government. He also informed that a duty and task has been assigned to the Government to make research, estimates and calculations, and introduce it to the Parliament.

Majority of MPs have supported proposals of the Economic Standing Committee to research issue of restructuring “Erdenes MGL” company, head company of “Erdenes- Tavan tolgoi” in compliance with Constitution of Mongolia, Law on Human Development Fund and other related law and regulations, introduce results to the Parliament, make negotiations regarding transit transportation, counter conditions, prepayment, use of ports, investment and sales conditions, competitively select in open manner united company/consortium/ with participation of foreign and domestic companies and have draft Investment Agreement discussed by 2010 Fall Session of the Parliament and introduce other draft documents.

By vote of 88.7 per cent MPs have approved Parliament resolution on some issues in mining Tavan tolgoi coal deposit.”