What the Russian papers say

MOSCOW, October 27 (RIA Novosti)

Russia expects more countries to recognize Abkhazia and South Ossetia / Russia risks losing all its timber exports - analysts / Gazprom increases stake in Europol Gaz, will pay more for gas transit / Western consumers want Gazprom to revise pricing policy

Vedomosti

Russia expects more countries to recognize Abkhazia and South Ossetia

Ecuadorian President Rafael Correa will come to Moscow to discuss weapons supplies, but the Kremlin also expects him to speak about the recognition of Abkhazia and South Ossetia.

"We need to restore the might of our army," Correa said about the goal of his visit to Moscow, which he will make together with Defense Minister Javier Ponce.

Ecuador has been alarmed by the decision of Colombia, with which it severed diplomatic relations in March 2008, to allow U.S. troops to use its bases.

The Ecuadorian officials plan to sign the contract, which was initialed last week, for the delivery of two Mi-17 Hip multirole helicopters for its Defense Ministry's civilian purposes, said a representative of the Russian state arms exporter, Rosoboronexport.

However, Moscow also expects Ecuador to sign other contracts. A source at Russian Technology said Russia could supply six Su-30MK2 Flanker multirole fighters, several helicopters, and air defense systems to Ecuador, which would increase the value of their military cooperation to over $200 million.

In response, Russia expects Ecuador to recognize the independence of Abkhazia and South Ossetia. A source at the Russian Foreign Ministry said Ecuador had unofficially promised to announce its intention during the president's visit.

There are no indications that the decision has been taken, but we have strong hopes for recognition by Ecuador and Bolivia, said South Ossetian Foreign Minister Murat Dzhioyev.

Positive signals are coming from all Latin American countries, said Maxim Gvindzhia, deputy foreign minister of Abkhazia. "Following recognition by Nicaragua and Venezuela, the other ALBA countries will eventually recognize us too," he said.

The Bolivarian Alliance for the Peoples of Our America (ALBA) is an international cooperation organization comprising Venezuela, Cuba, Bolivia, Nicaragua, Ecuador, the Dominican Republic, Honduras, Saint Vincent and the Grenadines, and Antigua and Barbuda.

Nicaraguan President Daniel Ortega announced the recognition of the two breakaway Georgian republics in September 2008, and in December Russia granted Nicaragua a $1 billion loan.

Venezuela was issued a $2.2 billion loan for the purchase of Russian weapons during the visit by President Hugo Chavez in September this year, when he announced the recognition of Abkhazia and South Ossetia.

However, Gvindzhia recalled that a $1 billion loan had been granted to Venezuela in September 2008, when Chavez was in Moscow, but Venezuela did not recognize the two republics then.

Gazeta.ru

Russia risks losing all its timber exports - analysts

Russia's decision not to raise timber export duties throughout 2010 is not just a political concession to Finland for its consent to support the Nord Stream project, a planned natural gas pipeline from Russia to Germany by the company Nord Stream AG.

The decision has far more economic, than political, implications, economists say.

Instead of processing timber at home, Russian companies exported too much feedstock elsewhere, the government believes. Finland used buy Russian timber, processing it at local enterprises and selling ready-made products to Russia.

Consequently, it was decided to introduce cut-off export duties, which would make round timber exports unprofitable.

Since early July 2007, export duties have been raised from four to ten euros per cubic meter, reaching 15 euros in April 2008. Starting from January 1, 2009, one cubic meter of round timber should have cost 50 euros.

"This accounts for 75-80% of its customs value. Such duties make exports pointless," said Lesprom Industry Consulting analyst Lilia Atamanyuk.

Moscow's decision not to raise timber export duties does not merely aim to please Helsinki.

"The Russian government believed that skyrocketing export duties would channel additional investment in the timber industry, and that the national wood-working sector would develop more actively. However, it is very hard to finance the construction of new pulp-and-paper mills during the crisis," Atamanyuk said.

It would make sense to raise export duties when the Russian timber industry is ready to build its own production facilities, analysts say. Otherwise foreign customers will squeeze out maximum profits from their contracts with Russian companies over a 12-month period and will start looking for new suppliers in anticipation of higher duties.

Analysts say Russia will not be able to commission any new production facilities throughout 2010 for the lack of time and funding.

Russia could also lose its timber exports in late 2010 if it hurries to raise export duties. Timber exports have already started to plunge, falling by 47.6% in January-June 2009 on the same period of 2008.

Kommersant, Vedomosti, RBC Daily

Gazprom increases stake in Europol Gaz, will pay more for gas transit

Russia and Poland have removed the main obstacles that hindered the signing of a new gas contract. Poland has agreed to increase Gazprom's stake in Europol Gaz, the Russo-Polish operator of the Yamal-Europe gas pipeline, after a decade of talks and fearing that it may be short of gas this winter.

In response, Russia will pay more for gas transit, making Europol Gaz profitable for the first time since its establishment in 1993.

As soon as the sides agree on a new transit fee, the Russian energy giant will increase annual gas supplies to Poland from 8 billion to 11 billion cubic meters.

Russia and Poland have decided that Gazprom and Polish oil and gas company PGNiG should hold equal stakes (50%) in Europol Gaz, as stipulated in the intergovernmental agreement signed in 1993.

Currently, they each own 48% in the pipeline operator, while the remaining 4% belongs to Gas Trading, in which PGNiG holds 43.41%. This means that PGNiG indirectly owns another 1.74% stake in Europol Gaz. However, Gazprom also owns a stake (16%) in Gas Trading, while Polish gas importer Bartimpex of businessman Aleksander Gudzowaty controls 35% in the gas trader and can therefore influence key decisions in conflict situations.

Mikhail Korchemkin, head of the East European Gas Analysis consultancy, described the agreement as a victory of Gazprom, "which has sold gas in an oversaturated market."

However, Russia had to make a major concession on the transit fee, which has not been coordinated since 2006. According to Valery Nesterov from Troika Dialog, Poland demanded $2.60 per 1,000 cu m of gas per 100 kilometers, but Gazprom refused to pay more than $2.00.

Russian Energy Minister Sergei Shmatko said the sides decided on Monday that the joint venture will get a transit fee ensuring it sufficient financial stability and a small but guaranteed profit. He said the size of the fee was to be coordinated by Wednesday.

As of March 31, 2009, Gazprom assessed its investment in Europol Gaz at $550 million, the joint venture's assets were estimated at $1.9 billion and its debts at some $740 million. This means that Gazprom will have to pay about $23 million for an additional 2% in the joint venture.

Dmitry Lyutyagin, an analyst at Veles Capital, said 2% in Europol Gaz could cost as much as $50 million, and Gazprom might pay a monetary consideration for the stake.

However, Sergei Yurov, an analyst at the Barrel investment company, said Gazprom should pay for the stake with gas, because it is currently short of free funds.

Nezavisimaya Gazeta

Western consumers want Gazprom to revise pricing policy

The Russian natural gas monopoly's strategic plans, based on expectations of growth in gas prices and European gas consumption, are in jeopardy. Spot (short-term) market prices are plummeting, while most European consumers are refusing to buy Gazprom's expensive commodity on a long-term contract.

After cutting their acquisitions of Russian gas, Western energy companies have found themselves in debt to Gazprom. European customers owe Gazprom $2.5 billion under take-or-pay provisions, which fix a minimum amount of gas they must buy annually.

Analysts believe the Russian monopoly will either have to write off the debt or rewrite their contracts removing the link between oil and gas prices.

The financial meltdown and recession have led to a drop in demand, while supply increased due to new shale gas projects in North America as well as new LNG projects.

Valery Nesterov from Troika Dialog explains that shale is one of the non-conventional sources of natural gas. "It is difficult to extract, and shale production requires hydrofracturing in the first place. This method is energy-consuming, but still profitable if the oil price is above $80 per barrel. The United States has had some success lately in shale gas development, due to shrinking conventional resources," the analyst added.

In 2000, shale gas output in the United States was 136 billion cubic meters, or a quarter of total natural gas production (543 billion cu m); in 2008, its level grew to 264 billion, or around 45% of the total (582 billion cu m).

According to Nesterov, Gazprom earlier relied on excessively optimistic gas price forecasts, but has become more objective since.

"The problem may also be solved through setting up the gas OPEC, if some sort of coordination is achieved between gas exporters. It is high time they begin to regulate prices, which can plunge if left alone, with drastic repercussions for the whole sector," the analyst said.

"It would be unwise to hope to collect the fines for low gas consumption," said Dmitry Aleksandrov, investment analysis chief at UNIVER Investment Group. "There are two ways now - either Gazprom agrees to change the pricing policy, or write off the fines," he added.

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