Ruminations on Russia

I have moved.  The unbelievable pain of finishing Gas - Hot and Otherwise means I have given up on Blogger and moved to WordPress.

So much to write about, too much time spent in SVO and the route therefrom to home. SVO is a shithole, so bad that it makes Heathrow Terminal 2 look like a paragon of virtue. Oh and the "otherwise" of hot air is the start of Duma election season, but I guess that deserves its own derision.

The graph below shows the total supply of gas required to meet forecast demand. If you can get over the fact that by 2015 the gap between known GAZP supply and expected GAZP supply is 100bcm p.a. out of a total of 550bcm p.a. and why not, people continued to buy pools of AAA rated worthless mortgages way after they knew that they were worthless. So with that intellectual honesty established; the next concern is whether Central Asian (shitty nomenclature) is actually a. going to produce all the gas forecast (Kazakhstan and Turkmenistan) and b, whether they are going to actually send it via Russia to feed Russia and Europe (once the gas enters the pipeline its fungible whathever fiction RosUkrEnergo maintains.)

China has enacted a new industry policy on natural gas use to address the supply shortage and optimize usage, the nation's planning agency said yesterday. The guideline says residential gas use is a top priority, while usage in petrochemical plants is discouraged, the National Development and Reform Commission said on its Website. The policy, described by the NDRC as of "strategic importance," became effective on Aug. 30 after approval by the State Council. New methanol projects that use gas as a base will be barred. Methanol, which can also be derived from coal or crude oil, is an industrial chemical and a fuel that can be mixed with gasoline and diesel to cut pollution. The use of natural gas in other petrochemical projects and power-generation plants will also be limited or outlawed. For example, gas-fired power plants will be banned in certain coal-rich regions. The guideline said urban residential gas use is the most favored option. "We have to ensure gas will be first used in the residential sector," the planning body said. "We should consider social benefits, environmental benefits and economic benefits" while deciding where the gas resources should be used first. The NDRC said gas use should be well planned for better conservation and higher usage. Existing gas-based petrochemical projects, especially fertilizers, will remain in operation. Those approved and under-construction projects, which have signed long-term gas-purchase contracts, also won't be affected, the NDRC said. China wants cleaner-burning natural gas to account for 5.3 percent of total primary energy consumption by 2010, up from 2.8 percent in 2005. But supply may not catch up with the strong demand, typically in booming coastal regions. Several major gas-transport projects have lately been announced or launched. Sinopec Corp on Friday started building a 1,702-kilometer pipeline to transmit gas from the Puguang field in Sichuan Province to Shanghai. China National Petroleum Corp announced early last week the route for a mega cross-country gas pipeline, at more than 7,000 kilometers long, to transport Turkmenistan gas via far northwestern Xinjiang Uygur Autonomous Region to Shanghai in the east and Guangzhou in the s [From Новости Neftegaz.RU | Policy on natural gas streamlined in China]

I had failed to spot this little tidbit. Any clues in here as to why RenCap are off to Africa?

Mr Misamore and two other Yukos executives, David Godfrey and Daniel Feldman, told the Financial Times that the group of investors behind the Monte Valle bid included a representative of Moscow investment bank Renaissance Capital and another from US hedge fund VR Capital. They claimed that two members of the group, Renaissance Capital vice-president Bob Foresman and VR Capital president Richard Deitz, had called to ask them to unwind the legal attachments protecting the assets from the bankruptcy sale, saying that in return, state-run Rosneft would drop its creditors’ claims on the Dutch holding. Mr Feldman said Mr Foresman had called him two days before the sale, “to know if there was a way to make a deal that would provide them with comfort”. “He called the day before the auction and said you have to understand if we can work out a compromise you can come back and work in Russia.” Mr Feldman left Russia in February, fearing arrest. The claims could not be fully verified: Mr Foresman declined to comment. Mr Deitz said he did not recall all the details of his conversation with Mr Godfrey. Mr Deitz said he had “never in his life” met with Rosneft, while Monte Valle owner Stephen Lynch also said he had no talks with Rosneft or the authorities prior to the sale. The allegations are the latest twist in a bankruptcy process marred from the outset by claims it has been rigged in favour of Rosneft. [From FT.com / Companies / Energy Utilities Mining - Investors made backdoor Yukos approach]

1. Fly via the 3rd World Airport otherwise known as Sheremeytevo and then drive in to the center of Moscow - approx 2 hours 30 minutes*

2. Work in a multi-story building with too few lifts and large numbers of (principally) girls who fill in the gaps between smoking with a bit of work

3. Drive in Moscow between the hours of 00.01 and 23.59

* Timing does not include retrieval of bags or passport control queues. Though passport queues are redundant when carrying a small child - oh what a joy walking to the front of a 40 minute queue with small child. Any suggestions as to where I can acquire a lifelike blow-up baby for queue-jumping much appreciated.

According to the Moscow Times (no link love due to ante-deluvian archiving policy) Oleg "the natural resources beast" Mitvol is off to the US to lecture the likes of Capital International on how to invest in Russian E&P stocks.

Presumably such tips include;

• Open a short position - launch an enquiry



• Close short position, open long position, meet with relevant governor. Admit that you were in the wrong, sell long position.

Brilliant investment advice.

Oleg Mitvol, the environmental regulator who threatened to halt a $20 billion Shell project last year, said Wednesday that he planned to advise U.S. fund managers on how to invest in Russia's natural resources.

Mitvol will hold meetings with investors from Capital Research & Management, American Century Investments, Fidelity Investments, UBS, State Street and Wells Capital Management during a trip to the United States next week, the deputy head of Federal Service for the Inspection of Natural Resources Use said in a statement.

Mitvol said he would travel from Sept. 4 to Sept. 7, on an invitation from the investors. He will be accompanied by Igor Maidanov, director of the Natural Resources Ministry's department for international cooperation.

Mitvol to Go on U.S. Lecture TourLast year, Mitvol led a campaign against Shell's Sakhalin-2 project in the Far East, which did not subside until the foreign-owned development ceded control to state-run Gazprom.

Bloomberg

I have not read Transitions Online, but it gets mentioned reasonably frequently in the english language Russian blogosphere so when this article Europe’s Escape Routes, was linked to via the authoritative The Oil Drum, which found the story on Business Week, it seemed worth a read.

I was close to giving up after reading the first paragraph:

Wary of Moscow's stranglehold on natural gas supplies, the EU hopes several planned pipelines will provide a way out.  Russia's threat in early August to nearly halve the amount of gas it exports to Belarus over unpaid bills must have brought back bad memories for many in Europe.

on the assumption that everyone, bar Edward Lucas, has just about worked out that Russia has to sell its gas to Europe in order to pay for the developments that will allow it to sell its gas to Europe.  But I struggled manfully through to the second paragraph:

Memories, for instance, of earlier this year, when Russia cut off the gas that flowed through its Druzhba pipeline to Belarus in a dispute over price hikes and tariffs. At that time, a wave of disruption surged down the supply chain.

Just imagine the turmoil, if you aren't getting gas through Druzhba then all those cars won't run.  Except that the author was talking about natural gas, not US gas.  No wonder it had knock-on effects in the supply chain.  If you were waiting for gas through the Druzhba pipeline then your supply chain is probably pretty screwed-up.

Within days, the Czech Republic and Slovakia (who rely on Russia for around 65 percent of their natural gas) saw their shipments halved. Poland and Germany began tapping reserves, and other countries looked to increase imports from other suppliers like Norway.

Except that the Druzhba is an oil pipeline as a cursory search would show this as the top hit:

Druzhba pipeline - Wikipedia, the free encyclopedia
The Druzhba pipeline (Russian: нефтепровод «Дружба») is the world's longest oil pipeline, it carries oil some 2500 miles from southeast Russia to points in ...
en.wikipedia.org/wiki/Druzhba_pipeline - 24k - Cached - Similar pages

Technorati Tags: Gas, Russia

After some considerable, but worthwhile wait, Ecto3 has been released; albeit in Alpha version.

Has not crashed my struggling laptop yet.

Writing in today's (01/08/2007) FT Quentin Peel once again manages to put
the western side of the Russian debate, whilst acknowledging Russian
concerns and western policy mistakes and missteps. It is a difficult line
to tread, and in this case done with some nuance.

What confounds many of us who try to convey a balanced view is the utter
cynicism with which the Fifth Directorate Thugs conduct business. a
mirror to the same cynicism displayed in the UK and US without even a
smattering of a critical press to print, and embarrass, just how corrupt
the posturing is.

Reverting to the taxi driver school of foreign reporting, and as a result
of a 2 hour journey to DME in the middle of July: if the vlast had to
experience this, how different it would be. The ability to drive would
help - some 40-50 per cent of licences are bought.

Neil Buckley, the very antithesis of a competent foreign reporter, has over
the last few days reported that we await VVP's glorious return in 4 years
for another 7 years.

God forbid (as if he/it/she had anything to do with it): damn this
certainty, can' t we have some hope that things might get better.

Returning to London to get SWMBO and CC#1 via Domodedovo. Firstly huge
kudos to East Line for DME, it is really a first class airport these days
(well compared to everywhere else), once you have checked in (albeit avoid
Sector B if you can). Time between checking in and having a beer in my
hand must have been at least 7 minutes. Of which, 3 minutes was waiting
for a beer and 2 minutes in passport control. Not sure if the whizzy
security machine is of any use (in my previous incarnation I looked at a
number of these technologies - let's just say there is probably a reason
that they are not used in London or New York).

None of which is pertinent to the subject of this story. The coffee shop
at DME gives an excellent view of the businessmen leaving the BA lounge,
which given the time of year are all British (or American) as the
biznessmen are now safely ensconsed with the tall and beautiful who have
been topping up their tans for a month already.

And what a strange lot we are. Guys, it was 25 degrees in Moscow today - a
worsted wool suit with tie in a shirt whose neck size might have been
appropriate when you were 18. Pasty and with an unhealthy addiction to
crackberries.

They actually made Russian youth look healthy.

It's not often that anyone being quoted in a newspaper adds any value to the reader (as opposed to the journalist).

However, Yury Korgunyuk from the Indem think tank hits more than one nail on the head here, or the same nail multiple times - unimportant really.

The underlying story is that the narod are becoming increasingly restless over corruption.  The corruption that matters to them is the day-to-day stuff; breathing, living and eating (and driving).  Using the bread and circuses approach, Sergei Naryshkin (another maybe for President) has been given the task of addressing corruption (The Kremlin, Russia should get there if the pochta works.)

His not entirely stupid plan is to increase salaries and then fire anyone caught practicing bribery.  Which is where the plan then falls apart as Korgynyuk explains.

Actually the first quotation comes from someone else:

"Yuzhakov, head of the Center for Strategic Development, said the compensation package under the pilot program would be comparable to a "performance-related bonus."

It is unclear whether the compensation package would be comparable to the money bureaucrats can make through unofficial business channels."

"and so are their bosses, which is the real problem, said Yury Korgunyuk, a political analyst at the Indem anti-corruption think tank.

"It's just rubbish," Korgunyuk said. "The corrupt will check up on the corrupt. And anyway, what's the point of such a program when a bribed judge will decide whether the official has been dabbling in corruption?"

Laws currently on the books are sufficient to deal with corruption, but no one adheres to them, Korgunyuk said."

Technorati Tags: Corruption, Russia

The end of an era approacheth?  It looks as though Friedman has been finally convinced to back off.  That's what happens when everything goes silent.

What is not addressed is Bermuda's monetary authority's suit to have IPOC dissolved - not much fun for Usmanov to buy IPOC and then find that they don't own exist.  In short, Alfa got their stock and Reiman lost his reputation.

FT.com / Companies / Telecoms - Russian phone feud peace deal:
Russian phone feud peace deal
By Neil Buckley in Moscow
Published: July 30 2007 03:43 | Last updated: July 30 2007 03:43
One of Russia’s longest-running and most bitter corporate feuds has been settled in what could clear the way for an ownership shake-up in the booming Russian mobile telecoms sector.

The telecoms arm of the Alfa Group conglomerate, controlled by the oligarch Mikhail Fridman, and Ipoc, a Bermuda-based investment fund, have signed a “peace agreement” ending their battle over a 25.1 per cent stake in MegaFon, Russia’s number three mobile telecoms operator.

The groups agreed late last week after several months of talks to end all court actions and renounce legal claims against each other.

Alfa’s telecoms arm, now known as Altimo, bought the MegaFon stake in 2003 from entrepreneur Leonid Rozhetskin.

But Ipoc challenged the deal, saying it had earlier options agreements with Mr Rozhetskin to buy the stake. The conflict generated legal and arbitration proceedings in Switzerland, Bermuda, Russia, Sweden and New York, several of which in the past year had found in Altimo’s favour.

The two companies refused to comment, but people familiar with the negotiations said the peace deal left Altimo in control of the 25.1 per cent MegaFon stake. Ipoc directly and via an intermediary company, Telecominvest, controls another 39.3 per cent of MegaFon.

The deal clears the way for Ipoc to negotiate the possible sale of its MegaFon stake to Alisher Usmanov, another billionaire Russian businessman.

With analysts estimating MegaFon’s market value at about $15bn, 39.3 per cent would be worth about $5.9bn.

People familiar with the situation said Mr Usmanov had contacted Ipoc about a sale but made it a condition that the dispute with Altimo be resolved.

The peace deal could also clear the way for a long-awaited initial public offering of MegaFon.

The Alfa-Ipoc battle generated particular controversy, as Alfa repeatedly alleged in legal action that Leonid Reiman, Russia’s telecommunications minister, was Ipoc’s owner, and not its ostensible owner, Jeffrey Galmond, a Danish lawyer. Mr Reiman and Mr Galmond have denied the claims.

But a Zurich arbitration panel said in May 2006 it believed Ipoc’s beneficial owner was an unnamed individual who “served as a high-ranking officer in the Russian Federation with the function of co-ordination and regulation” of communications in Russia.

Have you any idea how much they cost? A lot in any language.

And I have had two pairs stolen this week from the road outside work.
Random or what? Try driving around Sadovaya Koltso with no wing mirrors -
price ceases to be a factor.

Which took me down the backroads just outside the 3rd ring (of Uranus?) in
to Moscow's netherworld where you can buy wing mirrors (and their motors)
for 60 per cent of the official dealer price (you have to love drivers even
if you wish they weren't yours once you have learnt what Rumsfeld would
have called the unknowable knowns).

Shitty mud and concrete tracks in what in any other 20 million person city
would be high-to-mid-end housing.

Who said you needed to travel to regions to find life - which is where I am
headed as I write this. Sunshine on the Volga for me.

(Sent from my handheld)

"The only thing that saves us from the bureaucracy is inefficiency. An efficient bureaucracy is the greatest threat to liberty."

Eugene McCarthy, Time magazine, Feb. 12, 1979
US politician (1916 - 2005)

On waking on an overcast 25th July your first thought is;

oh well that's the end of summer.

I enjoyed this piece from bne.  The government should do something about corruption however, it is worried that getting rid of corrupt chinovniki would undermine the work of government.

If my personal dealings have anything to do with anything firing the most corrupt chinovniki would have no impact on their ability to do their work as they don't - work that is.  Their job is to return the investment which bought them their post, not to do the job they are officially paid to do.  Added to which the likelihood of them being fired is close to zero as they are, almost without exception, former employees of the three letter power agencies.  They can be spotted a mile off by their complete lack of knowledge of the industry in which they work, $2,000 suits and shoes, well what more can be said.

BUSINESS NEW EUROPE - bne Page:
Poll: Russians want a clamp down on corruption
bne
July 24, 2007

Corruption is top of Russians wish list as the country swings into election cycle, according to a poll released this week.

The Kremlin has already launched a low key anti-corruption drive this year that has seen the arrest of several senior bureaucrats from various ministries.

The Kremlin is trying to strike a delicate balanced between warning apparachiki against putting their hands in the till and starting a pogrom against the universal corruption that would wreck the operation of government.

Forty-five percent of Russian citizens surveyed in July want the government to concentrate on the fight against corruption, compared with 41% in 2006 and 38% in 2005, according to a poll by the Yury Levada Analytical Center.

Corruption is top of citizens' wish list. Those that are most concerned by wages, pensions and benefits for neutralizing inflation has grown by 6% to 39% from 33% a year earlier.

The percentage of citizens who want prices for commodities and services to be lowered has shrunk from 47% to 40% over the past three years, and of those who want prices to remain under state control has remained almost unchanged - 36% and 39%, respectively.

Technorati Tags: Corruption, Russia

I successfully managed not to post a quick response to Kuznetsov's comment on my post where I somewhat sharply described the stuff he writes as crap peddled, or his subsequent post "Why do they hate us?"  This was partially because the Russia Blog would not let me/was having a technical bad hair day for the second day in a row and partially because there is enough unhelpful inflammatory rubbish going on between Russia and the UK as it is.

Silence however, would be a little too much to ask.  I will endeavour to be balanced, as anyone who can determine that I hate Russians from suggesting that he writes crap is clearly a little sensitive.

Criticism is hardly alien to Russian culture; it gets ladled out with big stolovaya spoons at pretty much any opportunity.  The first Volgotanker post-shareholder meeting dinner I attended way-back-when still wins the award for most destructive toasting.  However, in Moscow circles criticism is again a little taboo at the margins.  And criticism does not indicate anything other than a view that things could be done a. better or b. better not done at all. 

Constructive criticism would be more useful than describing a blog as peddled crap; and the response from Kuznetsov that I am a crap writer - whilst closer to the mark than he imagines - is equally useless as piece of criticism.  Suggesting that because I am aware that the garden does not universally smell of roses, and write about it, that I should return to the UK shows a level of sensitivity which is bordering on the paranoid.  I have lived in Russia longer than I have lived anywhere, and am way more qualified to be critical than I am of the UK.  If I hated the place I would not still be here, and I came to do nothing other than participate in the boom, bust and boom again.  I don't need to write that the garden is rosy - I invest in the garden; real money in primary issues which grow young companies. 

Oh and if anyone thinks that I am hiding I would suggest that 30 seconds with google will provide you with my identity.  I am partially anonymous for a very good reason.  This likelihood of this blog impacting my business negatively is a very non-trivial greater than 100%.  I don't use it for publicity - I use it to write what I see, what I think and to work out what I am thinking. 

Russia Blog: Equity Financing in Russia Asks:  Why Do They Hate Us?:
Equity Financing in Russia Asks:
Why Do They Hate Us?
Vladimir Kuznetsov
Director of Equity Financing, FINAM Investment Company, Moscow

Before I get to more serious discussions, a small diversion.  The online magazine, The First Post, has an Aeroflot ad embedded in this article. 

I have used their delightful services quite a lot recently, easier to exceed weight restrictions, and have to say that once on the plane their service is pretty good.  The problem is that for a flight to/from the UK it means passing through Heathrow Terminal 2 - though it would be easier to commit suicide first - and Sheremeytevo, which includes a 1-2 hour inspection of the flourishing retail parks lining the side of Leningradsky Prospect (except at 5.00 a.m. when it takes exactly 22 minutes from the centre).

A very simple hint to the airlines.  Worry less about the onboard experience and a whole bunch more on the getting on to and away from the plane.  For example in Heathrow it now seems to catch the ground handlers by surprise every time an airplane arrives.

Anyway on a price performance basis Aeroflot is blowing BA away - not that either of  them care - the planes are full and they are making money hand over fist.

There was remarkably little about the Litvinenko/Lugovoi affair in the
British press at the weekend (back admiring cc#1's gurgling). Lavrov, as
reported in Monday's FT, set the tone: we expect relations to return to
normal soon. Which I am sure was not the line being peddled in MK and the
Daily Mail/The Sun.

However, in a couple of longer pieces there has been some discussion of how
best to do business in Russia. Inevitably the 'good business partner'
solution is prevalent.

It has been my universal experience that this is an oxymoron. Whilst there
are plenty of not bad JV's, albeit not in my direct experience, when the
going gets tough it's usually because the local partner cannot solve the
problem. At which point it's cheaper toblearn how to bribe yourself rather
than via a consultant. Even if it's harder to find the correct entry under
IAS.

For those who care - a politer version of my own analysis from Ben's bne.  It looks as though I have some of the details of the contract wrong - but then as there really is not one to talk of we are all guessing.

Furthermore, Jonathan Stern of the Oxford Institute of Energy Studies and the writer of "The Future of Russian Gas and Gazprom", one of the most informed commentators on GAZP, and trusted by them, says that Total thinks that it has signed up for is a study based on some principals.  As I wrote earlier, a political not a professional deal. 

The final comment with which I agree entirely is from the author's final paragraph:

"And it could be an expensive model for the Russian company -- and ultimately the state."

BUSINESS NEW EUROPE - bne Page:
Total finds itself in the deep end with Shtokman deal

Derek Brower in London
2007-07-16


Oil major Total signed an agreement with Russian gas monopoly Gazprom on Thursday, July 12 to take a stake in the Shtokman gas field, in the Barents Sea. But the deal, which will should see the French company take 25% of the company that will develop the field, one of the world's largest, leaves many questions unanswered.

According to Gazprom, the two companies will establish a special-purpose company to manage engineering, financing, construction and exploitation of installations at the first phase of Shtokman field development. The company will be the owner of this infrastructure for 25 years, starting from the moment the field comes on stream.



When the first phase of the field's exploitation phase is complete, Total will return the stake in Sevmorneftegaz, the development company, to Gazprom. The Russian company says that in the meantime other firms will be able to take up to 24% of that company, leaving 51% in Gazprom's hands. 100% of the licence, as well as all the rights for marketing of the commodities, will be retained by Gazprom.

The company says the field will produce 23.7bn cubic metres a year (cm/y) of gas, with piped deliveries -- probably to the Nord Stream pipeline that will run under the Baltic Sea from Russia to Germany -- coming on stream in 2013 and liquefied natural gas (LNG) deliveries beginning a year later.

So much for the initial details. The rest remains hazy. The first question is why Total, and not as expected the Norwegian companies Hydro and Statoil (which are in the process of merging), was Gazprom's choice to partner it on Shtokman. Unlike the Norwegian firms, Total has no experience of bringing on stream an LNG project in the harsh Arctic environment. Furthermore, its recent record in Iran, where an LNG plant that Total is developing is running into severe cost overruns, is not good.

Sarkozy suffers Shtokman syndrome?

The likeliest explanation is political. Presidents Nicolas Sarkozy of France and Vladimir Putin of Russia are understood to have agreed the deal by telephone last week. Sarkozy has promised his European partners that he will take a tougher line with Russia than that of his predecessor, Jacques Chirac. The Shtokman deal, suggest analysts, is a pre-emptive strike by the Kremlin to stop that happening. Sarkozy could find his rhetoric on Russia mysteriously softening in the wake of Total's deal.

The next question is what, exactly, Total will get from the deal. The company's chief executive, Christophe de Margerie, told journalists after the signing ceremony that Total would be able to book reserves from the field. But given that the asset will remain entirely in Gazprom's hands, Total's shareholders will wonder about the legality of that. Gazprom's statement clearly states that Total's stake relates to infrastructure, not gas.

More likely is that Total will act as a glorified service contractor, providing capital and investment for a fee. Gazprom has indicated that it considers such a model to be the preferred mode of partnership with Western oil majors. But sources told bne that the French company has resisted such a notion up to now.

Meanwhile, given Total's inexperience in the Arctic, the likeliest contenders for the remaining 24% of Sevmorneftegaz remain the Norwegian firms. They will watch with interest as the details of Total's contract emerge. Jonathan Stern, of Oxford's Institute for Energy Studies, told bne that all Total had signed up for at present was a study into a potential partnership -- a far cry from the deal that much of the media presented last week.

The other question is the destination of Shtokman's gas. Gazprom's decision last year was that the field would not, as planned, be used for LNG, but to fill Nord Stream. That suggested that the company was worried about finding the gas to fill its prized export project to Europe. The re-commitment to LNG fits with the company's eagerness to develop a position in that market, but it still leaves the issue of filling Nord Stream, which has planned total capacity of some 55bn cm/y.

Then there are the questions of cost and timing. Stern suggests the 2013-14 targets will be difficult to meet. And Gazprom's cost estimate of $15bn could be conservative. And who will pay? With a share of the asset, Gazprom's international partners would be expected to cough up their proportion of the investment. Whether they can be expected to do so if they don't own any of the gas is another detail that remains to be revealed.

Gazprom seems to be inching to a new model of partnership with the majors: a form of service contract that nakedly shows the balance of power between Gazprom and the once-mighty oil majors. Shtokman will test the new model's viability. It isn't the kind of arrangement oil majors like. And it could be an expensive model for the Russian company -- and ultimately the state.


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