Updated April 16, 2008

   Federal State Statistics Service (Rosstat) data about the industry state in January-March confirms the recovery of industrial production growth in Russia. It totaled 6,2% in annual terms in 1Q of 2008. The Russian industry grows due to the processing sectors, while oil production has been reducing in Russia. Some economists are convinced that stagnation in the oil industry is predetermined by tax and political pressure on oilmen, and the industry should be already supported by tax deductions and stimuli to deposits exploration.

   According to the Rosstat data published in March, 2008, the industry has upped by 6,5% as compared to March, 2007. "The result is very good, more than it has been expected", marks Vladimir Salnikov from the Center for Macroeconomic Analysis and Short-term Forecasting. The growth would have been higher, if it had not been the one working day as March, 2008 was one day shorter than last year. According to 1Q of 2008 results, the industrial production has upped by 6,2%, but it still falls behind the 2007 results (in 1Q of 2007 – 7,2%).

   The main driving factor of the industrial growth is the processing industry. In March, 2008 the processing has upped by 10,4%, by March, 2007 it has increased by 8,7% for 1Q. The economists explain the rapid growth of processing industry as the result of investment policy in 2007. "Investment demand remains at the high level, in processing industries particularly. Capital investments grow significantly. If take into account the lag between investments and the growth, the industrial growth will be high in the nearest prospect", says Sergey Ulatov from the World Bank. The most rapid growth is observed in the food industry, production related to the construction industry, as well as in the engineering. The increase of population earnings has resulted in the production growth of meat – by 19,7%, sausages – by 10%, butter – by 19,2% in 1Q of 2008. Also in 1Q has upped the production of cars – by 14,4%, tower cranes – by 22%, tractors – 2,1 times, brick – by 10,7%, reinforced concrete constructions and products – by 8,4%. We will mark that a noticeable recovery can be also observed in the production of furniture. According to Rosstat data, the production of tables and closets has upped by 28% and 31% respectively.

   However, the indices of the extractive industries continued to slow down due to the reduction of oil production on the background of the rapid processing growth in 1Q of 2008. So, if in 1Q of 2008 the extraction of gas has increased by 1,4%, coal – by 4,8%, iron-ore – by 3,7% as compared to 1Q of 2007, the oil extraction has reduced by 0,2%. "Oil production decline is a very unpleasant point. The industry shows the real stagnation", says Vladimir Salnikov. "Moreover, it happened first within several years in the quarterly terms". However, as Ekaterina Malofeeva from Renaissance Capital marks, the oil extraction decline has been long ago observed by the branch statistics. "The level of the Russian oil extraction has reached its peak and will not go back to the previous levels. The oil extraction growth in Siberia is over", stated Lukoil vice-president Leonid Fedun. According to him, in 2007 the volume of oil extraction has totaled 10 million barrel a day – "the largest indices I have ever seen for all my life".

   Vladimir Salnikov considers that the fundamental factor that affected the oil extraction reduction is "depletion of old fields, and the rates of new deposits development are very slow". Economists mark that the main reason of small industry attraction is high taxes and absence of tax incentives to explore and develop new fields. "The only thing that can help the industry is tax incentives", Ekaterina Malofeeva underlines. However, Mr. Salnikov names one more factor that did not contribute to the investments growth into the oil extraction – "these issues have not been of high priority in terms of ownership move in the industry".

   We will remind that according to the main tax policy directions for 2009-20011 approved by the government at the beginning of April the Mineral Extraction Tax formula at oil extraction has been changed. Now a tax is not deducted from the first $9 of oil barrel cost, the Ministry of Finance suggests increasing the level by $15. By the agency estimations, such adjustment will permit reducing the fiscal loading on companies by more than RUR 100 billion a year. It is not known yet whether this compensation is enough to recover the growth in oil extraction.

Updated April 16, 2008

Previous year the transactions volume of mergers and acquisitions (M&A) in the metallurgy has upped by 67% – to $144,7 billion, though their total amount has upped by 6,7% only. They have moved form the ferrous metallurgy to the non-ferrous one together with transactions consolidation. Industry analysts consider that 2007 was the peak year and according to its results one should not expect the serious growth of M&A volume in the metallurgy. Thus, the core intrigue takes place in Russia, around the possible amalgamation of OJSC MMC Norilsk Nickel with Metalloinvest or United Company Rusal.

PricewaterhouseCoopers (PwC) has published the analysis of M&A transactions in the metallurgy in 2007. Their amount has upped by 6,7% only, to 411. However, despite the financial markets’ crisis, the growth is considerably higher in money terms – by 67%, to $144,7 billion. "Scales for transactions in a world metallurgical sector are enormous, despite the turbulence on capital markets", marks Jim Forbs from PwC. The company experts talk about the M&A activity move – from steel corporations to aluminium ones. In 2007 the latter have concluded 56 transactions to $77,3 billion volume, and it is 19 times more as compared to the analogical index in 2006. As a comparison, from 2003 to 2006 M&A have been concluded for only $21,3 billion in this sector.

Almost the half of the "aluminium" M&A volume in money terms has provided Rio Tinto Group having purchased Alcan Inc. for $38,1 billion. PwC experts name the establishment of United Company Rusal (amalgamation of Rusal, SUAL and some Glencore International assets) the second by significance. PwC estimates this transaction at $30 billion. The single significant transaction in a steel segment became the purchase of English-Dutch Corus by the Indian corporation Tata Steel for $11,3 billion. North America occupies the leading positions among the regions both by the amount and the money volume of transactions. Central and Eastern Europe follow it. Thus, if 115 transactions for $77 billion were concluded in North America, so, for example, in Western Europe almost the same amount of transactions (104) – for only $20 billion (see Table below).

PwC Russian practice supervisor John Campbell marks that "the Russian metallurgical companies continue the vigorous activity at the M&A transactions market". He gives an obvious example of the expected amalgamation on MMC Norilsk Nickel basis (Metalloinvest and Rusal claim for it). Georgy Buzhenitsa from Unicredit Aton marks that the transaction scales will be impressive regardless of its form, as the analyst estimates MMC amalgamation with Metalloinvest at $85-100 billion, with Rusal – at $100-115 billion, the tripartite alliance – at $140 billion.

Mr. Campbell names the American companies among the most attractive assets for the Russian capital, as in the USA the rates of demand growth for steel will outstrip the supply and the dollar’s fall has the enormous value. In Jim Forbs opinion, now "the fragmented steel sector looks rather "ripened" for the further consolidation".

Some experts do not expect the activity decline of metallurgists in M&A area this year. CIG analyst Yevgeny Bulanov relates this to the high metals’ prices that permit companies to direct the increasing earnings to assets purchase. "In 2008 is quite obvious the consolidation of small producers by large players, like purchase of Sparrows Point by Severstal or Evraz Group by Claymont Steel", specifies Georgy Buzhenitsa. However, he considers there can be no growth of volumes and transactions amount, as only unprecedented consolidations, like GNP and RIO Tinto, can provide it. However, Finam Investment Company analyst Denis Gorev names such transaction unlikely, as then appears a monopolist on the range of markets, and that is not favorable for the majority of its participants.

The head of department for industry control of the Federal Antimonopoly Service (FAS) Alexey Ulyanov expects that the Russian companies will be active at the M&A, even not to violate the antimonopoly law. "When we have been approving the Rusal transaction that has, for sure, limited the competition, we have marked the fact of establishment of the number one industry player with great satisfaction", an official explains. Official names the variants of alliances with Norilsk Nickel the 2008 intrigue. "FAS watches the events with great interest and considers the application as established by law after the transaction form will be finally determined", says Mr. Ulyanov. FAS official is skeptic about the M&A with the state participation, about the state holding establishment for special steel production in particular (Rostechnology project). According to his opinion, the metallurgy is not "that kind of industry, where a private capital does not cope with the direct state participation".

Metallurgy M&A structure of the world regions in 2007

   Russia’s industrial production for January-February, 2008 grew by 6% as compared to the analogical last year’s period, as Rosstat reports. In January-February, 2007 industrial production growth rate totaled 7% as compared to the analogical period of 2006. In February, 2008 the Russian Federation industrial production increased by 7,5% as compared to February, 2007 and by 3% – as compared to January, 2008.

   Industrial production substantial growth in February was caused by surge in the processing productions’ area (by 11,2% in February, 2007 after growth by 4% in January), and due to the growth in the engineering.

   Cars’ production in January grew by 22,3%, and trucks’ production grew by 11,5%. Brick output in February increased by 18%, and the output of constructions and reinforced concrete products increased by 14%. Moreover, in February continued the considerable growth of food products’ production (in particular, meat – by 23%, vegetable oil – by 22%, vine – by 28,7%). Recovery in the furniture industry takes place. The production of tables in February increased by 41,5%, wardrobes – by 35,9%.

   Production surge in processing industries in February was observed on the background of already traditional low growth in the mining area (by 2,3% after 0,6% growth in January) and sharp growth deceleration in the electric energy production and distribution, gas and water areas (up to 2% in February from 12,8% in January).

Actuality February 28, 2008

   Russia forces construction of South Stream gas pipeline. The agreement between Russia and Hungary about the cooperation for creation of gas pipeline for transit of natural gas through Hungarian territory was signed in Moscow. The document, foreseeing joining of Hungary to the project of South Stream gas transmission system, was signed by the head of the Ministry of Industry and Energy Viktor Khristenko and the minister for finance of Hungary Janos Verezs in presence of the Russian president Vladimir Putin, head of Hungarian government Ferenc Gyurcsany and first vice-prime minister Dmitry Medvedev.

Budapest preferred to secure Nabucco and followed the example of Sofia and Belgrade that supported the Russian gas project.

   Agreement with Hungary will become the third intergovernmental agreement that Gazprom needs for realization of ambitious project of gas pipeline construction from Russia on the Black Sea bottom and the Balkan countries to the Central Europe. In two other agreements, with Bulgaria and Serbia, already signed in January of this year, were consolidated principles of share of equity capital of companies that will be engaged in project realization on the territories of these countries. Gazprom agreed with Bulgaria about parity participation and management (50/50), in Serbia received a controlling stock interest – 51%.

   For construction of South Stream section on the territory of Hungary the state companies of each country will establish a joint venture. "Here we succeeded to agree that the gas pipeline section will be constructed by the joint venture that would belong Russia and Hungary on the parity basis 50/50", Ferenc Gyurcsany reported after negotiations with the Russian vice-prime minister Dmitry Medvedev. According to the Hungarian prime minister, "Hungary will be presented by the company that is the hundred-per-cent state property", and Medvedev explained that "Russian will be presented by Gazprom". "Registration will be carried out on the basis of the Hungarian right", Gyurcsany added.

   Within the project framework the underground gas storage with the volume about 1 bcm will be constructed in Hungary. Through the Hungarian section of South Stream, into construction of which will be invested no less than $2 bln, is planned to run through no less than 10 bcm of gas a year. According to the estimations of specialists, investments should pay their way within 10-15 years.

   Dmitry Medvedev did not hide the gladness of the attained agreements. After return to Russia he declared journalists that joining to this Hungarian project "makes it not only absolutely viable, but, in fact, it is its good, beautiful start". "We will hope that in the near future starts the active elaboration of technical moments of realization and transition to construction of capacities also", marked the first vice-prime minister and added that created Russian-Hungarian joint venture "signifies entrance of our Hungarian partners to this large program".

   One should mark that the Russian representatives underlined diligently, that South Stream is not the competitor to another gas project – Nabucco that is supported by the USA and European Union. So, answering the question, whether Russia disagrees to participate in development of Nabucco gas system in the future, which Hungary suggested constructing together with Austria, Romania, Bulgaria and Turkey, Dmitry Medvedev said evasively, that Gazprom task is to diversify maximally the supplies and the developed projects – Nord Stream and South Stream – are directed to that. "We constantly work on provision of energy security strengthening in Europe. First it is necessary to provide creation of operating projects and only then think about the future", he said.

   In his turn, the head of Gazprom Alexey Miller marked that he did not yet receive any official suggestions from the company that suggests constructing Nabucco gas pipeline. "If such will follow, the main will be the matter about the gas resources for filling this gas pipeline. These resources are not enough now, but Gazprom did not receive any suggestions yet about joining the project", he marked.

   The Hungarian prime minister tried to assure also that South Stream and Nabucco projects will not render the unfavorable influence on each other. "Hungary is interested that both gas pipelines crossed its territory, South Stream will not render negative influence on Nabucco", Gyurcsany declared. "Hungary needs additional gas supplies, additional sources and additional routes for supplies", he explained and reminded that now only one gas pipeline crosses the territory of Hungary. "Our purpose is that our vulnerable position would become less vulnerable, two things are needed: it is necessary to find new sources and open new routes", the Hungarian prime minister said. According to him, Hungary works in parallel at two programs and interested in both: "Nabucco project that includes five countries, is developed by Hungary and passed to the governments of the concerned states, Hungary is interested in execution of this agreement".

   We will remind that the Hungarian part completed project development of intergovernmental agreement about participation in construction of Nabucco and passed the document to the ambassadors of Austria, Bulgaria, Romania and Turkey, which should cross the planned gas highway. Nabucco, 3300 km long, should link the countries of Near East and Central Asia with European Union through Turkey and South Europe. The cost of Nabucco project is estimated at $5,8 bln. First gas supplies through this gas pipeline that will run from Azerbaijan are expected already in 2012. According to the estimations of experts of consortium for gas pipeline construction, that includes Austria, Bulgaria, Romania, Hungary and Turkey, after 2017 it would be possible to talk about flow of gas through this pipe from Iran and Iraq.

   In its turn, South Stream is considered the main competitor of this project. The projected through capacity of the Russian gas pipeline is 30 bcm of gas a year; the cost is over $10 bln. Gazprom plans to complete marketing researches and development of feasibility study of South Stream project by the end of 2008 and start the first supplies through the gas pipeline in 2013.

   However, unlike South Stream, which realization prospects become more and more real, Nabucco project becomes more and more ephemeral. They perfectly understand this in European Union – the largest European gas company Gaz de France already withdrew from participation. And there is nothing strange that Hungarian authorities did just the same choice and preferred the more reliable, and the main thing – the variant fully provided with raw material.

Actuality February 18, 2008

   State Corporation "Bank for Development and Foreign Economic Affairs (Vnesheconombank)", Russian Union of Lumbermen and Lumber Exporters and German company MAN Ferrostaal AG announced about creation of joint investment engineering company Rusles-Engineering for construction timber industry enterprises on a turn-key basis. The newly made company has already one project in the Komi Republic. According to the experts, the similar structure will be in demand, as logging segment requires radical updating of capacities.

   Company MAN Ferrostaal, which enters MAN Group, includes printing subdivision Intergrafica Print & Pack GmbH (IPP) that in 1991 passed into the ownership of transnational trading chain Ferrostaal. Since 1999 MAN Roland represents the company. It carries out acquisition, financing, transportation, installation and commissioning of printing equipment.

   Having announced in the end of January of the current year about memorandum signing for construction of Udorsky pulp and paper mill in the Komi Republic, State Corporation "Bank for Development and Foreign Economic Affairs (Vnesheconombank)", Russian Union of Lumbermen and Lumber Exporters decided to involve foreign experts for this project realization. At Krasnoyarsk economic forum parties signed the agreement with МАN Ferrostaal AG about creation of joint investment engineering company "Rusles-Engineering" for designing and construction on a turn-key basis of timber complexes in pulp-and-paper and woodworking industries, as it is noted in information of Vnesheconombank.

   As the representative of Russian Union of Lumbermen and Lumber Exporters Andrey Fomin explained, the idea of creation of such company was matured long time ago. Andrey Fomin is sure that future company has quite good prospects as construction of several large pulp and paper mills is now planned. He also added that the company already works over one of the projects. It is construction of Udorsky pulp and paper mill in the Komi Republic. Vnesheconombank withhold comments.

   МАN Ferrostaal has the greatest experience of construction of pulp and paper mill among the future partners. As the Chief Executive officer of Timber industry confederation of the northwest of Russia Denis Sokolov told, not so long ago the company finished construction of large pulp and paper mill in Germany. Meanwhile, construction of pulp and paper mill in Komi is not the first project for МАN Ferrostaal in which they try to involve Germans. In 2006 МАN Ferrostaal studied the possibility of construction of Dobryansky pulp and paper mill in Perm Territory, planning to be the supplier of the equipment and со-investor.

   Estimating the prospects of "Rusles-Engineering", analyst of investment company AntantaPioglobal Anna Krylova notes that the company can offer the equipment by lower than competitors’ price, and that will raise its competitiveness. As she said, such structure is in demand in Russian timber industry as the majority of its enterprises require radical updating of capacities.

Actuality January 16, 2008

   Fast industrial growth in 2007 is caused not only by demand growth, but the competitiveness of enterprises working in Russia has increased.

   For a year industrial production growth, according to Center for Macroeconomic Analysis and Short-term Forecasting (CMASTF), made 6,4 % (according to Goskomstat (Federal State Statistics Service) – 6,3 % for 11 months, 3,9 % for 2006). Manufacturing activities became the motive power because of the improved indicators practically in all branches, the economist of CMASTF Vladimir Salnikov explained at the report presentation in United Nations Information centre.

   27 % of industrial production growth has provided the mechanical engineering, which rates of growth made 23,9 %. The year before the growth was 3,3 % 2006. The next two leaders by the contribution to the general growth of the industry are food industry and production of vehicles (13,3 % and 11,6 % of the general growth of industrial production).

   The growth basis was the fact that Russian enterprises had learnt to compete for the consumer, considers Salnikov. Two years ago in response to the demand increase by 1 % the domestic production increased production output by 0,4 %, the rest part was covered by import. In 2007 it was already 0,8 %. That means that support of demand growth by means of the domestic goods has increased twice to 80 %. Salnikov defines, that it is necessary to understand foreign enterprises under Russian ones working in the territory of Russia.

   The growth of some markets led to the situation that it became more profitable to invest in manufacture in Russia, than to export finished product. The wave of import substitution touched upon agricultural proceeding industry (intermediate production of frozen food), car industry. The raw materials for plastic articles which was completely imported earlier, now is by one third produced in the domestic market, Salnikov gives an example.

   Demand for highly effective products grows, and in order to keep the market, it is necessary to offer new equipment, Anatoly Meshcheryakov from CJSC Transmashholding tells. Output growth for one third demands increasing investments into research and development and modernization by as many, he says.

   The competition in building will become tougher also through the efforts of the state, which improves the legal base, the general director of Krost Alexey Dobashin says, and in 2-3 years the rate of gain of builders will approximate the European one – 12-15 % against 25 % presently.

   According to the poll of businessmen of the Center for Strategic Studies of Goskomstat (more than 3000 respondents in 15 cities), the enterprises optimistically look not only at 2008, but also at perspective in 5-7 years. There are 36 % and 42 % respectively more than pessimists of those who gave positive appraisals.

   However, the fast growth of the markets can lead to decrease in competition and efficiency of enterprises, Salnikov warns, also negative influence on the industry of its old problems, such as lack of capacities and infrastructure, will intensify in 2008. It can cost the industries the loss of rates for 1-1,4 %: the forecast of CMASTF for 2008 is 5-5,4 %.

Civil aviation fully dominated in Parisian sky. The creators of perspective passenger airplanes are not overmodest in names today. RF liner is named “super airplane -100″. Americans named a new air giant “Boeing-787″ the “liner of dream”. Maybe, it is no mere chance, because money beginning to work at the market of civil airplanes differs with supersums, about which it is possible only to dream. The “Erbas Company” declared that for the first three days of work of the show it sold the airplanes for an astronomic sum of $62 billion. Russian airlines also bought the European air-buses.

That participation in exhibitions like Le Burzhe is very important for Russia, because allows to feel the pulse of world aircraft building, watch tendencies, draw certain conclusions. According to the head of Russian industry, during the last ten years domestic aerospace industry made a great forward step. In particular, at last shows we participated disjoined and faded, but now consolidated and very bright.

Consolidation is really attained, and as for brightness it is possible to argue. In days gone by Russia was conspicuous by unique airplanes, by wonderful helicopters and shocked public by advanced aerobatics of the Russian aces. This time only one MIG-29М OVT flie in Le Burzhe. This just shows the perfunctory approach to organization of exhibition activity.

A new innovative policy and concern for the development of high technologies became almost the base of domestic economy. And it is offensive, that many prominent achievements of RF technologists and scientist not having analogues in the world are represented barely visibly at the snow. But exactly the Russian scientists now decide the major technological task – complete calculation of airplane resiliency. Only in CASI (the name of construction department) they were able to rate how with the help nanotechnologies to take resistance of air current for all aircrafts to the absolute minimum. Only in CASI rated and created new types of steering and bearing screws for helicopters, that promotes their reliability in times and multiplies the actual load at the economy of fuel. These indeed revolutionary breakthroughs could cause furor in Le Burzhe, but put up a poor show.

The tendency of more wide integration of the Russian enterprises with foreign companies becomes dominant. In Europe very large interest to the joint projects is shown by the groups of companies. “Boeing” becomes more dynamic having understood, that success at the Russian market can be well-to-do only due to joint production. Italy also searches new ways of integration with RF aircraft building companies.

In quality of air force Russia is at the level of the best world achievements, and in parts surpasses. As for military cargo aviation it hardly but saves some positions. But in the civil sector of aircraft building, it must be admitted that lag is catastrophic. Meantime the fixed assets are today exactly at the market of civil airplanes.