N°80 - July 3 2008 Published every two weeks / International Edition CONTENTS ECONOMY P. 1-3 Politics & Government c Private and public capitalists in search of new ECONOMY c Private and public capitalists rules of the game in search of new rules of On July 1st, a Russian State monopoly ceased to exist. The national electricity company RAO UES, the game scuttled itself as foreseen, after having completed the sale of the most important regional electricity INTERVIEW company, OGK-1, to the sovereign wealth fund Dubai World, associated with the Russian firm Ros- c Thornike Gordadze/Georgia kommunenergo for 5.34 billion dollars (read page 4). Since 2006, RAO UES had privatised some twenty FOCUS regional power generation companies, that is to say the quasi-totality of its assets in , since the c Estonia spoils Dmitry Medvedev’s European debut electricity network and the distribution system were constituted separately and the activities of RAO UES outside Russia are regrouped in Inter RAO. The only thing Anatoly Chubais failed to sell was the P. 4-7 Business & Networks chair in his office which must be sold at auction these days, just like the rest of the furniture and equip- FOCUS ment of the RAO UES headquarters in (itself sold for 175 million dollars last March). In a bit c TNK-BP affair: an embarass- more than two years, the privatisation of the regional electricity companies were worth to the State ment for Dmitry Medvedev the equivalent of 27 billion euros and a majority of these operations were conducted for the benefit of ENERGY Russian capitalists and investors, among which were most of the large industrial mining groups, but c RZhD breaks into the electri- also the railway monopoly RZhD, beside foreign investors such as Germany’s E.ON, Italy’s Enel, Fin- city sector land’s Fortum and Dubai World. Discussions were also conducted with French groups such as EDF, cBTS-2 oil pipeline : Tokarev but they stumbled, apparently, on price considerations. It must be noted also that the sale of OGK-1 leads the dance was achieved at the record price of 516 dollars per kilowatt/installed, which is 25% over market prices. FOCUS c : 50 billion dollars There are several remarkable points in the history of this privatisation. First, it took place in condi- in profits in 2009 ? tions set by Anatoly Chubais, with the agreement of the government, although many interests in Rus- ALERT sia, especially in the regions but also in certain major industrialists, would have preferred a cutting of c lands in Sicily the cake “among friends”. It was rather this latent opposition from many influencial circles which de- DEFENSE layed it by five years since in the initial plans Chubais expected to finish with RAO UES in 2003. This cSergey Pugachev wins his privatisation also proves that the concept of “natural monopoly” is not as sacrosanct as imagined. Cer- bet, UMPO escapes tainly, the state of the Russian power stations requires a massive investment that RAO UES would have Oboronprom struggled to furnish or finance. Nevertheless the privatisation of electricity generation in a country ALERT like Russia is not a completely anodyne political action. Especially since it is accompanied by a deci- c Yuri Kovalchuk eyes MTS? sion to halt all subsidies for sales price by 2011, in the absence of which the new shareholders would have the right to revise their investment plans, which would amount to removing all substance to this reform. P. 8 Regions & CIS ALERTS In addition, the dismantling of RAO UES is valuable as an example for other natural monopolies c Dmitry Medvedev will such as RZhD, Gazprom or even . Vladimir Yakunin, for example, last week made a brief receive Igor Smirnov visit to Paris, where he met a certain number of corporate managers, as well as Russia Intelligence. c Lukashenko attempts an Even if the president of RZhD would not pronounce himself on a precise calendar on restructuring, opening toward the Vatican the enormous investment programmes to modernise and develop RZhD (450 billion dollars by 2030), c Serge Sarkisyan seeks sup- oblige him to integrate Russian or foreign private investors in this development plan and amount to port from Moscow the object of all discussions with Siemens, Bombardier and Alstom. There is a debate today in Rus- sia on the fate of the “State corporations, style Rostekhnologii, , even Gazprom, and on the SUBSCRIPTION Print Edition fact of knowing if Dmitry Medvedev is an ardent defender of this type of “mixed capitalism” brought (23 issues, airmailed overseas) back into fashion by Vladimir Putin. In our view, there is no theoretical debate on the subject inside €770 TTC the Kremlin but a pragmatic approach. In full process of electricity generation privatisation, Yakunin obtained the right to possess his own company, without hiding the fact that this provoked a certain The Web Pack clash with Chubais, who did not see this operation fitting into his logic of privatisation. (Print Edition + PDF + archives acess) € 880 TTC However, if at any cost we must discern a trend in the recent events, it could be said that the pri- vate capitalists seem to be returning in favour or at least, benefit from a large margin of manoeuvre, The Premium even when they are fighting amongst themselves. The duel between Vladimir Potanin and Oleg Deri- Subscription paska for the control of Norilsk shows it. Some of the most powerful men in Russia, such as Potanin, (Print Edition + PDF + access to all the website contents) Deripaska, Prokhorov, Usmanov and today Vekselberg are waging a fierce battle without the State € 1200 TTC intervening clearly in favour of one or the other camp. The same observation for the TNK-BP case www.russia-intelligence.fr RUSSIA INTELLIGENCE Politics & Government

(read page 4). In a first stage, it seems that the boss of BP, Tony the oil markets. Hayward, had tried to set one against the other the Russian shareholders of TNK-BP (Mikhail Fridman, Viktor Vekselberg, Briefly, the time is no longer for war between private oli- Leonid Blavatnik) and the potential public partners such as garchs and the State, as it has been known for a long time. But Gazprom or Rosneft in order that the second take the place of neither is it time for a sort of “holy alliance” between the pri- the first. It seems that for the time being the manoeuvre has vate and public sector in service of a recovered Russian great- failed and that the State is not disposed to set foot in this case, ness. We are in a sort of observation period from which will at least not now. This is testimony to a certain restraint, even emerge, in our view, a spectacular offensive by private and pu- a completely assumed indifference, since the Russian share- blic Russian capital outside of Russia, in the image of what was holders in TNK-BP have spared no legal means to “oust” the done by Suleyman Kerimov, currently arbitrating his Russian current management of the company, too “British” in their eyes assets in Gazprom for example in favour of significant partici- and not sufficiently attached to the defence of the Russian in- pation in major international banks such as Fortis, Deutsche terests in this undertaking whose market value and economic Bank or Morgan Stanley, whose exchange values have been performances are not up to the current trend now reigning on divided in two in one year...d

INTERVIEW c Thornike Gordadze: “ Russia has begun a process to break the ice in the Abkhaz dispute”

The last few weeks have seen an increase in tension ing military engineering troops to restore the rail lines to Rus- around the Abkhaz question. What is your analysis of sia, is planning to upgrade the Soukhoumi airport and has the situation and what can be expected? shot down drones of the Georgian armed forces (the last UN report points the finger directly at Russia in these incidents). Several factors combine to show that the Abkhazia ques- tion has been particularly acute over the last few months, the Can armed conflict be ruled out? most important of which is Georgia’s aspiration to become a member of NATO. For Russia, in the long run this member- On two occasions during the month of May the conflict al- ship would could mean the definitive loss of its influence in most degenerated into open war between Georgia and Rus- the southern Caucasus as Azerbaijan, in spite of its present sia. The danger cannot be cast aside and tensions could rise more conciliatory attitude to the Kremlin will no doubt follow in September/October at the end of the tourist season. If the the example of Georgia. The risk is huge as, even Moscow’s aim of Russian policy is to prevent Georgia’s membership of strategic ally Armenia, seeing all its neighbours joining NATO, NATO at any price, war cannot be ruled out. If, in spite of the could finish by reversing its policy. The Russians say they are conflict with Russia, NATO extends its hand to Georgia Abk- wary that the arrival of NATO on its southern doorstep would hazia would be the “consolation prize”. The symbolic over-in- destabilize the northern Caucasus resulting in a process that vestment of Abkhazia in the media and political speeches is would dismantle Russia. This “highly questionable” argument already preparing the ground for this. serves to “legitimize” the Russian presence in the southern Caucasus. What is Tbilisi’s present position on this matter?

To take up Vladimir Putin’s formula, among other reasons The Georgians have succeeded in convincing the interna- explaining the high tension in Abkhazia we can cite Russia’s tional community that in reality the conflict in Abkhazia was aim to reply by a “solution made at home” with regard to the a dispute between Russia and Georgia and not an inter-eth- independence of Kosovo. In fact, Russia wanted to “settle” the nic war between Abkhazians and Georgians. Even to the most Abkhaz problem in its favor before the Olympic Games in , sceptical observers the Russian peacekeeping forces now ap- earmarked for 2014 – a project particularly close to Vladimir pear as one of the parties in the conflict, The events of the Putin’s heart. last few months also show that the margin of manoeuvre of the Abkhaz secessionists has been considerably reduced. This Can any changes be noted in the Russian approach? will undoubtedly have consequences for Abkhazian society of which a majority supports independence (contrary to the Moscow began a process to “break the ice” in the Abkhaz South Ossetians) and is not happy with what could look like conflict by operating an important change to their traditional a de facto annexation by Russia. If, in 2005, the Abkhazians policy which is to support the status quo, that is, support the drummed up the strength to reject the presidential candidate de facto independence of Abkhazia and thus prevent Tbilisi that was forcefully imposed on them by Russia, three years from re-establishing control over the province. Today, Russia later the increased Russian presence and the catastrophic is abandoning the status quo of the last few years by officially demographic situation will not enable them to react in the raising all the existing barriers in its relations with the seces- same way.d sionist Abkhaz authorities (unofficially these barriers had not been respected for a long time), it is sending new contingents of troops which were not anticipated under the agreements Thornike Gordadze is director of the Observatory of the (parachutists and not ordinary foot soldiers) without having Caucasus at the French Institute of anatolian studies (IFEA, previously discussed the matter with Georgia, it is also send- Istanbul) 2 Russia Intelligence N°80 j July 3 2008 www.russia-intelligence.fr RUSSIA INTELLIGENCE Politics & Government

cc FOCUS ALERTS Estonia spoils Dmitry Medvedev’s European debut 3 Grigory Yavlinsky hands the baton Everything had gotten off to a good start. The atmosphere at the Russia-Eu- After fifteen years at the head of the Demo- ropean Union summit held Friday June 27 in Khanty-Mansiysk, the country’s catic party Yabloko he had founded in “oil capital”, fortunately contrasted with the mood that prevailed at the pre- 1993, Grigory Yavlinsky has decided to vious exercise at Volzhsky Utyos near Samara. It was remembered that at the leave his post. Candidate in the presidential time, the Polish veto on the launching of negotiations on a new partnership elections in 1996 (7.34%) and 2000 (5.8%), agreement had weighed heavily on the meeting. “Today is a good day“ decla- he had been unable to get deputies elected red Javier Solana, who had been absent at the May 2007 summit. Dmitry Med- to the State Duma in the legislative elec- vedev returned the compliment by expressing his delight at this first contact tions of 2003 and 2007. Approached by the with the European leaders. Kremlin this winter, he was increasingly challenged by a more radical membership. Obviously encouraged by the tone of the statements made during the Saint Grigory Yavlinsky is replaced by Sergey Petersburg Economic forum — far removed, it is true, from the widely-noted Mitrokhin, 45, one of his travelling compa- Munich speech by Vladimir Putin, who was in fact absent from Khanty-Man- nions since 1993.d siysk — they did not stop at assaulting the new Russian President with kind- ness. They also apparently took a substantive step in the direction of Moscow. 3 Alexandre Konovalov, a It has been known for several months, that Russia has repeated to its European man on the way up counterparts that it wanted the new partnership and cooperation agreement The only member of the government that should succeed the 1997 text to be fairly short, to which would be annexed who is truly close to Dmitry Medvedev sectorial accords. The Europeans up to then had argued on the other hand for — whose student he was at the a fairly detailed document setting objectives, obligations and the means of co- Leningrad law school — Alexandre operation, particularly in the energy sector. It is too early to draw conclusions, Konovalov, the Justice minister, is rising but it seems that the Russian side scored some points. On the margins of the in rank. After having been named by the summit, Peter Mandelson, the European trade commissioner, declared not President as member of the commission being able to see a difference between the European and Russian approach. The on military and technical cooperation head of the Union delegation in Moscow, Marc Franco, estimated that the dis- (Russia Intelligence n°79 of June 19), he cussions on the additional document could take place in parallel, which gave has just been promoted to the post of weight to the possibility that the Russian position had gained ground. special presidential representative in charge of cooperation with the The largely positive general impression of the Russia-EU summit was never- European Union for liberties, security theless altered the next day by a major diplomatic incident. Addressing the 5th and justice. He will replace in this post, world congress of Finno-Hungarian people, the Estonia President Toomas Hen- Viktor Ivanov, recently named to head drik Ilves made a speech — in English, contrary to his Hungarian and Finnish the Federal anti-narcotics service. colleagues — for the most part ambigious before Dmitry Medvedev. “Liberty Alexandre Konovalov should also play a and democracy were our choice 150 years ago {...} For many Finno-Hunga- major role in the anti-corruption cam- rian peoples, this choice is still to come. Once you have tasted liberty, you will paign plans that Dmitry Medvedev is understand it is a question of survival, that you cannot do without it. The flut- now drafting. Aged 39, Alexandre ter of a butterfly’s wings gives birth to a hurricane. The Finno-Hungarian peo- Konovalov became known for relentle- ples are small butterflies to be protected. And for the international commu- ssly waging the investigation on massive nity, it is very important that these butterflies do not flap their wings at the police violence in Blagoveshchensk in wrong moment and in the wrong place”. This implicit call for self-determina- Bashkortorstan in December 2004. He tion of the Finno-Hungarian peoples of Russia left Dmitry Medvedev stonily si- had later held the post of presidential lent, just after he had a meeting with his Estonia counterpart (about which Ser- high representative in the Volga federal gey Prikhodko, the diplomatic adviser to the Russian President, said he had district.d seen warmer meetings). 3The State will place The President of the Foreign affairs commission of the Duma, Konstantin orders for patriotic films Kosachev, did not display the same reservation. Speaking after Toomas Hen- It represented a widely-noticed entry by drik Ilves, he stated that “Russia, unlike certain new members located on for- the new Culture minister —and former mer territories of our country, has no need to conduct a special policy toward Russian ambassador to Paris — its various ethnic groups. We have no problems of co-habitation or good neigh- Alexandre Avdeev. Speaking on July 2 bourly relations with peoples of different nationalities.” This declaration pro- at the podium of the State Duma, he voked the departure of the Estonian delegation. Toomas Hendrik Ilves judged announced an imminent return to the the statement by Konstantin Kosachev “misplaced”, Sve Mikser — the presi- practice of State orders in the film indus- dent of the Foreign affairs commission of the Estonian parliament — for his try. No details were nevertheless provi- part estimated that the reaction of his compatriots in Khanty-Mansiysk was a ded on the budgets nor the procedures “justified reply to the insulting speech by Kosachev”. The affair of the bronze for contracts. Last year, the government soldier in the spring of 2007 has, it can be seen, left deep scars. The Baltic stu- had financed the film “1612” by dies centre, a think-tank whose creation was announced June 20 by the Insti- Vladimir Khotinenko, on the time of tute for contemporary development (INSOR, whose board is president by Dmi- troubles, a film judged as mediocre by d d try Medvedev ), will evidently have its work cut out for it. the critics. 3 Russia Intelligence N°80 j July 3 2008 www.russia-intelligence.fr RUSSIA INTELLIGENCE Buisness & Networks

ALERTS cc FOCUS 3 German turbines for The TNK-BP affair: an embarassment for Silovye mashiny It was a good deal for Alexey Dmitry Medvedev Mordsahov to bring off. In its edition of November 8, Russia Intelligence indica- The contest between the Russian and British shareholders of TNK-BP, which ted that the new boss of Silovye mas- we have analysed the stakes of in detail in our previous editions, knows no res- hiny was trying to convince his partner pite. Manoeuvres, low-blows and settling of scores in succession instead unfold Siemens (which holds 25% of the capi- with growing intensity, and everything leads to the impression that the situa- tal) to sell him the production license for tion will worsen until the next meeting of the administrative council planned the SGT5-400F turbine, unmatched in for next July 11. Continuation of hostilities at TNK-BP led Dmitry Medvedev Russia. It’s now a done deal. According to to abandon his discretion. In an interview with Reuters news agency June 25, RAO EES Rossii, 34 units of this model the Russian President strongly insisted on the neutrality of the State in this af- should be ordered in the coming five fair. “I can only qualify as illegal the attempts aimed at instrumentalising the years, which would represent a market of State in shareholder conflicts”. According to him, no proposal for the sale to 2 billion dollars.d Gazprom or Rosneft has been made, therefore “There is nothing to discuss”. And he added that “to seek assets belonging to private companies makes no 3 Electricity : Anatoly sense for public groups”. While the messages delivered during the Saint Pe- Chubais sells OGK-1 to tersburg Economic forum aroused a certain interest in Western economic and Dubai World political circles; it was becoming urgent for the head of the Russian State to It was with the feeling of having accom- avoid any unfortunate parallel with the Yukos affair or with the somewhat ca- plished his mission that Anatoly Chubais valier entry by Gazprom into the Sakhalin-II project (Russia Intelligence n°46- lowered the flag of the national electricity 47 of January 19 2007). company RAO UES, disolved June 30 at the conclusion of reform of the electricity Especially since the TNK-BP issue is followed very closely by the Anglo-Saxon sector in Russia. A few hours earlier, he press and rumours about imminent movements on the part of Rosneft and Gaz- had in fact concluding his operation by prom have multiplied in recent days. June 18, sources close to the Moscow stock completing the sale of OGK-1, the main exchange believed that a share exchange was being studied between Rosneft power generation firm of the country. As and BP (it concerned, according to these same sources, the 9.44% of Rosneft we had indicated in our previous edition, that belonged to Yukos and which reverted to the state major at the end of the it was Roskommunenergo, a small firm final auctions for the former group of Mikhail Khodorkovsky last year — Rus- whose head of the administrative council sia Intelligence n°55 of may 16 2007). There is more discretion on the Gazprom is none other than the son of Vladimir side, but it is known that, for example, that its Gazprom neft subsidiary has an Kozhin, the superintendent of the eye on the 50% of Slavneft held by TNK-BP. It is also known that the British sha- Kremlin, that won the bidding for about reholders prefer having Gazprom as a partner rather than Mikhail Fridman, 5.3 billion dollars. The Sovereign wealth Viktor Vekselberg and Leonard Blavatnik. But the latter are not considering fund of the United Arab Emirates should — officially in any case — leaving the joint-venture. In recent days, the conflict finance the operation and take control of between BP and AAR, the consortium that unites the Russian shareholders, mo- OGK-1. Anatoly Chubais for his part ved toward the TNK-BP administrative council. As a reminder, on conclusion could rapidly resume his activities : it is of the 2003 pact, five of nine seats went to the British side. In order to block the whispered that Dmitry Medvedev could administrative council, the Russian side had announced its withdrawal. The sta- assign him the negotiations for a future tutes of TNK-BP nevertheless foresaw a quorum of five members out of nine, so Russia-European Union accord.d that the attempts at obstruction came to nothing. It should also be noted in pas- sing that the hostilities between AAR and BP do not forbid a certain pragma- 3 Burgas-Alexandroupolis tism. The Russian shareholders preferred to attend the general assembly of June oil pipeline : Vinnichenko 26 rather than preventing it, which would have blocked a vote on the distribu- throws in the towel tion of the dividends (2.1 billion dollars, or all the profits realised in the year The boss of Trans Balkan Pipeline BV, 2007). the firm charged with the conception of the oil pipeline between Bulgaria and The next major event in the conflict between AAR and BP comes on July 11, Greece (Russia Intelligence n°52 of the date by which theoretically the administrative council should meet. At least March 30 2007), has just resigned. three scenarios emerge. The British parties could accept to reconsider TNK-BP Officially, Sergey Vinnichenko left his internal governance by more closely associating the Russian shareholders in post for family reasons. In reality, he is the group decision-making. The second is confrontational. The state of mind of leaving because of the uncertainty sur- each side in recent weeks lends it credibility, but it would undoubtedly have ne- rounding the project; The n°2 of gative effects on the group’s activities. What remains are the Gazprom and Ros- Transneft, Mikhail Barkov, nevertheless neft possibilities. Alexey Miller’s group has never hidden its interest in such a assures that the technical and financial scenario, but its short-term priority lies more in completing the acquisition of studies will be closed by the end of the Kovytka, on which a financial agreement may have been reached (1.2 billion year. We also recall that the Burgas- dollars is being spoken of). Rosneft on its side is saddled by its indebtedness Alexandroupolis line, with a capacity of and would be more tempted by drawing closer to Surgutneftegaz, a less politi- 35MT/yr, is supposed to enter into serv- cally risky operation and on which some “little deals between friends” seem d more probable than with BP. d 4 ice in 2011. Russia Intelligence N°80 j July 3 2008 www.russia-intelligence.fr RUSSIA INTELLIGENCE Business & Networks

PRIVATISATION c RZhD breaks into the electricity sector

It was a serene Vladimir Yakunin that Foreign Policy and Eu- could, the time come, feed electricity to the Udokan infra- rasian Intelligence received in Paris on June 27 for a conference structure. We also note that another candidate for the control on the role of Russia in the world. It must be said that despite va- of Udokan, , as of today controls 27.69% of rious mishaps (the crash of a railway freight convoy in the Far TGK-14, but the Anti-monopoly committee (FAS) blocked it east in mid-June, the possibility of a renewed strike by a — mi- from increasing its capital to avoid the risk of a dominant nority — trade union of machinists, the somewhat chaotic start position in Buryatia, where Norilsk Nickel already possesses of the new shuttle between the Paveletsky station and the Shere- a number of power stations (TGK-3). metevo airport), the last few weeks have been relatively glorious for the president of the Russian Railway (RZhD). In the electri- Vladimir Yakunin also registered several successes in the city sector, first of all. In our edition of march 13 2008 we called railway sector. He first of all was reappointed to his posi- attention to the interest of RZhD for the privatisation of TGK-14, tion as president of RZhD by Vladimir Putin for a term of the electricity generating company composed of seven power plants five years. The Prime minister then paid a visit to his old in the Far east (Republic of Buryatia and the Chita region). The friend June 17 at the headquarters of the Railway. The same Russian Railway, associated for the occasion with the ESN group day, he signed the Strategy for development of rail trans- of the trader Maksim Beryozkin, bid successfully in the auction port to 2030. This document, whose main parameters have organised by RAO EES by proposing 78.5 million dollars for the been known since last autumn, foresees gigantic invest- package of 33.6% put up for sale. An increase in the capital of ments — 450 billion dollars (of which some 100 billion would TGK-14 is foreseen in the follow-up, which should permit the RZhD- be public funds, the remainder the responsibility of RZhD ESN team to take over control of the company. and private investors), 22000 km of rail lines to be built, with a priority to high-speed lines. Several dozens of billion At first glance surprising, the entry of RZhD in the electricity dollars would also been allocated to renovation of the rol- sector should be linked to another major industrial project by the ling stock. The lack of haste by Vladimir Yakunin to meet group — Udokan. In our edition of april 24 2008, we indicated Patrick Kron, the CEO of Alstom, during his visit to Paris that Vladimir Yakunin had formed a consortium with his partner seems to confirm that RZhD prefers Canada’s Bombardier Iskander Makhmudov of the mining group UGMK and Vneshe- as an industrial partnership of scale (especially within Trans- konombank in view of the auction for the most important cop- mashholding, the principal supplier of RZhD in rolling stock, per deposit in Russia, which should be held September 17. Seve- 25% of whose capital would be proposed to a foreign strate- ral power stations of TGK-14 are located in the Chita region and gic investor). d

INFRASTRUCTURES c BTS-2 oil pipeline : Tokarev leads the dance The difficulties encountered in the completion of the oil pipeline or not, it is at Ust-Luga that the public firm Zarubezhneft — projects in the Eastern Siberia-Pacific Ocean (VSTO) and Burgas- which Tokarev presided before taking over the leadership of Alexandroupolis (read alert opposite) have not deterred Transneft Transneft last year — is now building a terminal of a capac- from jumping into a major new undertaking. If we can believe the ity of 10MT/yr. The other organisation having an obvious in- boss of the public operator, Nikolay Tokarev, the question of the terest in the BTS-2 is Surgutneftegaz. The private oil com- BTS-2 line has been “resolved.” pany, which is known for its close links to the business circles around Vladimir Putin (notably the trader Gunvor under We recall that the project was initiated following the oil dispute Gennady Timchenko), will receive 12MT/yr through the BTS- between Moscow and Minsk in late 2006-early 2007. In order to be 2, an amount that will be shipped to its Kirisho refinery be- prepared for any new difficulty with Alexandre Lukashenko, fore being exported via Ust-Luga. In the light of these deci- Transneft then took off the shelf an oil pipeline project of 50MT/yr sions, the reasons that led to the eviction of Semyon Vaynshtok linking Unecha, near Bryansk, to the Primorsk terminal near Saint in 2007 can be understood. According to our information, the Petersburg. It had been approved in principle by the former Prime latter in effect controlled — with Viktor Cherkesov, the for- minister Mikhail Fradkov in May 2007. Then last June 18, the En- mer boss of the Federal Anti-narcotics service — one of the ergy minister submitted a governmental ordonnance project for the Primorsk oil terminals and certainly intended, the case aris- launching of construction of the pipeline next September. ing, having the flows from BTS-2 arrive there in the first in- stance. As so often in Russia, the recent adjustments around Nikolay Tokarev also followed-up ideas concerning the financ- this pipeline can be explained at least as much through pri- ing of BTS-2. In view of the debt linked to VSTO, the boss of Transneft vate interests as those of the State. The entry into service of wanted the construction of the future line — estimated at between the BTS-2 should also have important international reper- 4 and 5 billion dollars — to be charged to the Federal budget and cussions. The future line should “divert” at least 50MT/yr from the National prosperity fund. He had sent a letter with such a pro- the northern segment of the Druzhba oil pipeline, which will posal to the Finance minister Alexey Kudrin. Nokolay Tokarev has dry up the refineries in and Poland.d also worked in recent weeks so that the line’s initial path be some- what redrafted. It would be at Ust-Luga, south of Saint Petersburg, and not at Primorsk, that the BTS-2 would end. The considerations The biographical profile of Nikolay Tokarev is avail- leading to this change are not entirely technical. Whether by chance able in RI n°46-47 of January 19 2007 5 Russia Intelligence N°80 j July 3 2008 www.russia-intelligence.fr RUSSIA INTELLIGENCE Business & Networks

ENERGY c Gazprom : 50 billion dollars in profits in 2009 ? That Gazprom is one of the main beneficiaries of the in- Gazprom in north America. But the Russian group is also consi- crease in world prices of crude oil does not represent a surprise, dering with increasing interest the Middle East, Africa and Asia but the figures announced June 18 by Alexandre Medvedev, to limit its own dependence on the European market. Vlada Ru- the n°2 of the group in charge of international affairs, stagger sakova, a member of the Gazprom directorate, considers that the the imagination. The revenues generated by exports should re- exports of the group in Northeast Asia will represent 100 billion present 71.6 billion dollars for the year 2008, compared with m³ in 2020, or half of the flow expected to the European Union. 44.8 billion the previous year. It must be said that, in the mean- time, the average price of gas on the European market passed Elsewhere, the last few days witnessed the reactivation of an from $272/1000m³ to $410/1000m³ (Gazprom had forecast ambitious project on the Western Mediterranean. The Israeli In- 310/1000m³ when drawing up its budget forecasts). The amounts dustry and commerce minister, Binyamin Ben-Eliezer, confirmed also increased: Gazprom should therefore export 213 billion m³ to Alexey Miller June 23 that his country was ready to import Rus- this year (of which close to 165 is destined for the European sian gas. This possibility had already been discussed in 2006, but Union). In the end, the overall turnover for Gazprom for 2008 without concrete follow-up. Rather than building a pipeline of should reach 125 billion dollars, for a net profit of 33 billion dol- doubtful profitability between the coasts of and Israel, swap lars. The forecasts made by the analysts at Unicredit Aton for accords could be concluded. 2009 are even more optimistic. In view of the programmed in- crease of 25% in the gas price on the Russian domestic market, It should finally be noted that Gazprom could currently be in the turnover for Gazprom should surpass 150 billion dollars. discussions with Nigerian authorities to succeed Shell in the Ogo- The net profit is expected to hit 54 billion dollars. niland. It should be recalled that the Anglo-Dutch group abando- ned the fields in this province 15 years ago, after its relations with This windfall will allow Gazprom to invest close to 30 billion the Ogoni people deteriorated to the point of no longer being able dollar a year, notably in exploration/production and the construc- to operate in that region of the Niger Delta. These fields hold pro- tion of new infrastructure. In the course of the coming years, ven reserves of more than 10.000 billion cubic metres of gas.d the priority will go — on national territory — toward the de- velopment of giant deposits on the Yamal peninsula (especially Bovanenkovo and Kharasaveyskoe, which are supposed to pro- ALERT duce about 145 billion m³ together in the 2020 timeframe). Ac- cording to the n°2 in the department of strategic joint-venture 3 Lukoil lands in Sicily development for Gazprom, Sergey Pankratov, the construction The presidents of Lukoil and the Italian group ERG, Vagit Alekperov of a single system of pipelines from the Yamal peninsula will re- and Alessandro Garrone, on June 24 signed an accord for the creation present an investment of 80 to 90 billion dollars. of a joint venture charged with the operation of the ISAB refinery in Di Priolo in Sicily. The Russian partner will spend 1.35 billion euros to Europe : political deadlocks. The flow of “gasodollars” ne- take a 49% stake in the planned mixed company and committed itself vertheless does not allow Gazprom to escape all its problems. to supplying 8.5 million tonnes of crude oil by 2009. The agreement It is especially in Europe, where the Russian group continues also foresees the possibility of a sale of the ERG interests during the to clash against important obstacles, most often political. The coming five years. Nord Stream supervisory board adopted on June 4 the new ca- After having been one of the first major Russian groups to invest lendar of the project that foresees the beginning of the instal- abroad (the purchase of the Burgas and Ploesti refineries in Bulgaria lation of the underwater section of the pipeline in early 2010 (by Italy’s Saipem), but the absence of progress in the Russo- and at the end of the 1990s), Lukoil has recorded an impres- Swedish discussions cast doubt on the ability of the consortium sive series of setbacks in the European union. The refineries in Gdansk, to put the pipeline into service by the 3d trimester of 2011. One Mazeikiu and those of Hellenic Petroleum had eluded its takeover. In of the German partners of Gazprom, Wintershall, confessed re- 2007, Lukoil had informed itself about the refineries of its partner cently to certain difficulties in obtaining authorisation from re- ConocoPhillips in the Czech Republic and Ireland, had indicated its gulatory authorities in Berlin for the operation of the OPAL gas interest for certain assets owned by Shell in France (Russia Intelligence pipeline, which theoretically should collect the gas supplied by n°50 of march 2 2007) and had begun discussions with Kuwait Nord Stream on its arrival on German territory. Gazprom is also Petroleum International with a view toward purchasing a refinery in encountering certain problems in Austria : the local authori- Rotterdam (Russia Intelligence n°46/47 of january 19 2007). None of ties demand that Wingas (of Gazprom and Wintershall) and its these transactions, however, had materialised. RAG partner grant access to third companies to their future The entry into the capital of ISAB should be seen in the context of a stock capacities in Haidach, which led to suspension of the pro- long-term strategy for the development of the activities of Lukoil in sou- ject. A bit more to the south, in Serbia, the announcement of thern Europe and the Balkans. The Russian group should in all logic the establishment of a government around the pro-European continue its purchases of service stations, already quite active, in Slove- party of President Boris Tadic arouses fears in Alexey Miller’s nia, Serbia, Macedonia and Montenegro. forces of a return to the starting gate for the South Stream deal, The Russo-Italian energy axis, historically structured around the alliance and especially, over the privatisation of NIS to the benefit of between Gazprom and ENI, is therefore strengthened by a new Gazprom neft. weighty element with Lukoil. It should also be noted that Saipem at the end of June was selected to establish the underwater section of the Gazprom casts eyes on the south and east. In its pre- planned Nord Stream natural gas pipeline between Vyborg and vious edition, Russia Intelligence announced the ambitions of Greifswald.d 6 Russia Intelligence N°80 j July 3 2008 www.russia-intelligence.fr RUSSIA INTELLIGENCE Business & Networks

cc DEFENCE ALERTS Sergey Pugachev wins his bet, UMPO 3 The Kovalchuk brothers eye MTS? escapes Oboronprom According to information obtained by Russia Intelligence in Moscow, Yuri Ko- There is a lot to reflect on for the numerous Western commenta- valchuk may be looking to “convince” tors in a rush to consider the sector of Russian defence industries the boss of AFK Systema, Vladimir Ev- as “already in the hands” and “locked up” by the State at the end of tushenkov, to sell him his (52.8%) stake two terms by Vladimir Putin. Two issues to which Russia Intelli- in the mobile telephone operator MTS. gence had drawn the attention of its readers — the situation of the Very active recently in the media (Russia Intelligence n°68 of December 20 2007) Severnaya verf naval shipyards of Sergey Pugachev and that of the Sergey and having acquired control of Gaz- engine-maker NPO Saturn — have just experienced major develop- Pugachev prombank (Russia Intelligence n°69 of ments in recent days. In one case as in the other, the private actors January 18 2008), the owner of the Ros- are on the way to achieving their aims against the the will of the government. sia bank has strong ambitions. But it is hard to imagine how Yuri Kovalchuk Naval : OSK will not produce the Russian Navy combat corvettes. As op- could force the hand of Vladimir Evtus- posed to OAK, the consortium of Russian aircraft producers set up in late 2006, henkov. It should be recalled that AFK OSK — which aspires to be its equivalent in the naval sector — has not integra- Systema is listed on the London stock ex- ted in its assets those held by private groups. This is particularly true in the case change.d of Baltiysky zavod and of Severnaya verf, the two big Saint Petersburg shipyards. It should be remembered that in the spring of 2006, the boss of Rosoboronex- port, Sergey Chemezov, wanted to take over control, but Sergey Pugachev held 3 : Viktor Ivanov firm. The tenacity of the Senator from Tuva paid off since it has just been lear- ready for take-off ned that the agency of the Russian Defence ministry in charge of acquisitions has Named at mid-May to head the Federal just awarded Severnaya verf the status of exclusive supplier for the project 20380 Anti-narcotics services replacing Viktor corvettes. It allows Sergey Pugachev’s shipyards from being exempted from the Cherkesov, Viktor Ivanov should soon procedures for calls for tender. It authorises them also to increase the amount of quit his post as president of the supervi- contracts in response to inflation and to apply a margin of 25%. It should be re- sory board of Aeroflot. His successor will called that the Russian combat navy had expressed the wish to order some twenty probably be Mikhail Kopeykin, 54, who vessels of this type, whose unit price is about 200 million euros. At this stage, only since 2004 has held the position of de- one — the “Steregushchyi” — has been delivered, three others are under construc- puty secretary general of the govern- ment. tion at Severnaya verf and in the Far east (ASZ). We recall that during the Saint Petersburg Economic forum, Igor Shuvalov had an- UMPO : NPO Saturn shows its strength. At the beginning of nounced that the members of the admi- the year, we circulated in these columns the ambitions of Yuri Las- nistration had a mission to leave the or- tochkin, the boss of NPO Saturn, and of his contest with Sergey Che- ganisation of publlic groups. But it is too mezov, the boss of Rostekhnologii (Russia Intelligence n°71 of fe- early to say whether the case of Viktor bruary 14 2008). As part of the restructuring of the engine sector, Ivanov is the harbinger of a wider trend. Yuri the State wants in fact to establish several pulic holding companies. At this stage, Vladimir Putin’s former as- Lastochkin One among them will have to belong to Oboronprom, a subsidiary of sistant is still president of the administra- Rosoboronexport (itself entirely part of Rostekhnologii). It was expected that tive board of the main Russian defence Oboronprom take over conrol of the Ufa engine production facility, UMPO, which group, Almaz-Antey.d has notably produced the engines for the fighter planes Su-27/30, Su-25 and for the Ka-27/28 helicopters. But NPO Saturn, which for numerous years conducted 3 very close cooperation with UMPO and which can also count on a quite success- Ingostrakh : Deripaska ful industrial partnership with Snecma on the SaM-146, was also in line. in discussions with Kellner TIn its edition of November 8 2007, Rus- The general trend for a strengthening of the role of the state in aerospace in- sia Intelligence spread the news of the dustries, as well as the connections that Sergey Chemezov has in the Kremlin led shareholder conflict at the insurance to the expectation of a favourable conclusion for Oboronprom. This nevertheless group Ingostrakh between Oleg Deri- did not take into consideration the ability of Yuri Lastochkin. In the past few paska and the Czech group PPF of Peter weeks, he has patiently —and discreetly — accumulated close to 30% of the shares Kellner, who holds 38.5% of the capital. After having tried to dilute the PPF part in UMPO, which can be added to the 19% that NPO Saturn already held. At the through an increase in capital considered same time, Oboronprom succeeded in gathering only 30% of the shares in UMPO. to be illegal by Russian law, Oleg Deri- The matter is not yet completed, but Yuri Lastochkin was able to obtain the elec- paska had finally resolved to buy — for tion of five of his representatives to the administrative council of UMPO and to close to a billion dollars — the share of reach the presidency. In all likelihood, Oboronprom should activate its network his “partners”. Discussions are now un- of contacts within the State apparatus to assure that the Anti-monopoly commit- derway and the decision should be offi- tee forbid NPO from taking over control of UMPO. The legality of the privatisa- cialised during the general assembly of tion of 25% of the enginemaker Ufa by the authorities in Bashkortorstan could shareholders, interrupted June 27 at the also be contested (but this package was purchased by NPO Saturn).d request of Base Element and should now be scheduled for July 23.d 7 Russia Intelligence N°80 j July 3 2008 www.russia-intelligence.fr RUSSIA INTELLIGENCE Regions & CIS ALERTS c Moldova/ : Dmitry Medvedev will receive Igor Smirnov

The warming of relations between Moscow Moldova, to travel to Moscow for discussions NATO in return for its territorial integrity (an and Chisinau, which we have regularly ana- with his counterpart Vladimir Putin. It approach which should, according to the lysed in these columns (Russia Intelligence concerned economics, immigration (close to Kremlin, give ideas to Georgia). In may, a n°70 of january 31 2008), has been confir- 750 000 Moldovans work in Russia today, delegation of the Russian national security med. Less than two weeks after a meeting most of them illegally) but especially about council led by Yuri Zubakov was in Tiraspol between Dmitry Medvedev and Vladimir the frozen conflict in Transnitria. We know to convince the local authorities of the need Voronin during a gathering of heads of CIS Russia has decided to again fully engage in for a compromise, but also to transmit to states in Saint Petersburg, it was the turn of this problem since Moldova let it be known “President” Igor Smirnov an invitation from Zinaida Grechannaya, the Prime minister of that it was ready to abandon membership in Dmitry Medvedev.d

c Alexander Lukashenko attempts an opening toward the Vatican

As early as last autumn, we had drawn the at- be seen the visit to Belarus of Cardinal Ber- a “fifth column” for Warsaw and NATO, the tention of our readers about certain initiatives tone, Secretary general of the Holy See, from representative of the Pope was received very by President Alexander Lukashenko aimed June 18 to 22 at the invitation of the authori- warmly by Alexander Lukashenko. If we can at loosening the Russian pressure and to re- ties in Minsk. While local Catholics, originating believe certain information circulating since new certain contacts — notably economic — for the most part in the Polish minority living the end of May in Minsk, a concordat between with the West (Russia Intelligence n° 63 of oc- in the west of the country, have been regularly Belarus and the Vatican would even be in pre- tober 11 2007). It was in this light that should accused by innuendo in recent years of being paration. d

c Russian arms deliveries to Turkmenistan

Russia is seeking some new arguments to de- menistan from the n°2 of the Russian group Moscow decided to again put on the table a ter Turkmenistan from operating too sudden a in charge of the CIS, Valery Golubev, did not series of military-technical cooperation pro- strategic reorientation. It is well known that for lead to any progress on the hottest topic at the jects. Six batteries of Smerch 90-kilometre several months, Moscow has found it difficult moment, that is the purchase price for Turk- multiple rocket-launchers, will as a result be to advance its energy projects in Ashgabat. men natural gas beginning January 1 2009. delivered to the Turkmen Defence ministry by The entry into force of the agreement of May Ashgabat let it be known that it wanted to the Motovilikhinskie zavody factory by the 12 2007 on the construction of a gas pipeline align its prices on that date with world prices, end of the year. It should be recalled that in around the Caspian is virtually dead. Last June a decision that would create a chain reaction the spring of 2006, Russia had transmitted to 3, President Gurbanguly Berdymukhmam- and have major consequences for Ukraine, the new president a proposal aimed at entirely medov had refused to receive the boss of the main destination for Turkmen gas. In an re-equiping the Turkmen army, practically dis- Gazprom Alexey Miller. Another visit to Turk- attempt to get Turkmenistan to reconsider, mantled by Saparmurat Niazov.d

c Serge Sarkisyan seeks support from Moscow

“We won’t leave each other again” stated Nalbandyan, and Defence, Seyran Oga- precarious nature of the “normalisation” be- Dmitry Medvedev in greeting his Armenian nyan. This intensification of bilateral contacts gun after the repression of March 1, which counterpart June 23 in the Kremlin. It must between Moscow and Yerevan took place in a had claimed 10 dead and 250 wounded (Cen- be said that the two men had already had the largely agitated context. Several thousand de- tral Asia & Caspian Intelligence n°28 of occasion of meeting on the margins of the monstrators gathered June 20 in the centre of march 13 2008). The situation in Georgia, the summit of the CIS heads of state in Saint Pe- the Armenian capital in response to the ap- case of Nagorno-Karabakh and the presiden- tersburg June 6. The visit of Serge Sarkisyan peals of the former president and unsuccess- tial elections in Azerbaijan planned for this to Moscow came only a few days after those ful candidate in the last elections, Levon Ter- autumn were on the Medvedev-Sarkisyan of the ministers of Foreign affairs, Edward Petrossian, illustrate the essentially agenda d

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