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Business


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Diamonds Pressure is on to go public with up to 25pc stake in Alrosa in 2011-12


Diamond miner plans IPO as pit and market struggle


Saddled with financial and technical troubles, Russia’s Alrosa diamond monopoly will seek a transformation through partial privatisation.


SVETLANA SOROKINA SPECIAL FOR RUSSIA NOW


Alrosa may be the world’s biggest diamond miner, but production at the Russian company will grind to halt unless it can raise billions of dollars with a partial priva- tisation – slated to happen as early as next year. Ageing Soviet mines, a se- cretive board that picks cli- ents for diamond sales be- hind closed doors, and a massive social welfare pro- gramme have left the com- pany in a financial mess, with debts of $3.7bn (£2.3bn). In October, lawmakers in the Republic of Sakha (Yakutia) in remote eastern Siberia, which owns about 40pc of the diamond monopoly, agreed to allow the compa- ny to become public. To raise funds, Alrosa has already changed its legal status in order to sell between 20-25pc of its shares, possibly in 2011. Globally, diamond miners are struggling to keep pace with growing demand in emerg- ing economies as ageing mines are depleted, but Al- rosa needs investment more than most. As well as clearing its debts, the company needs to finance another $1.8bn in invest-


A control officer at Alrosa’s Moscow facility examines a diamond from the Mir mine outside the Siberian town of Mirny


ments between now and 2012, analysts say. Opening the mine to foreign investors may be politically unpopular in Siberia, but Sergei Goryainov, an analyst at online industry resource Rough&Polished, thinks that Alrosa has no choice. “Its debt burden is already too high, and the company needs more and more loans. For ex- ample, cash is needed for ex- ploring and further develop- ing new diamond deposits. If Alrosa does not find the money, this could impact pro- duction, since the company’s available deposits are close to exhaustion,” he says. And the investment price tag is about to soar further. Al- rosa operates the Mir mine, a huge open-cast pit in the frozen wastes of the Sakha Republic. The pit – which is already more than a mile across – continues to grow deeper, and the sides of the hole will eventually collapse. Given this situation, the min- ing will have to proceed un- derground if the company is to get at the rest of the dia- monds at the bottom of its kimberlite pipe, and that change is expected to send costs through the roof. Alrosa is already weighed down by massive social costs, being responsible for virtu- ally everything in Mirny, the town of 40,000 people that has grown up since mining began in the Fifties. Today, the town sits perched on the lip of the giant pit, where em- ployees work in temperatures that can fall to around -50C in the winter. Production here was cut drastically in 2008 when the financial crisis reached even these remote climes. As the company struggled to support the workforce with- out any layoffs, debts grew over the following 18 months


Manufacturing Canadian car parts company expands further into Russia


Bumper business ahead for new Magna plant


A Canadian auto parts manufacturer expects the Russian automotive market to play a “significant role” in its global growth strategy.


IRINA FILATOVA THE MOSCOW TIMES


Canadian auto parts maker Magna opened a new plant in Kaluga on October 28, which the company said demonstrated its belief in the strong potential of Russia’s car market. The facility will manufacture bumpers and front-end mod- ules and will assemble radi- ator grills and instrument- panel beams. The company said it was against corporate policy to disclose the volume of invest- ment in the project. Kaluga lies 116 miles south- west of Moscow. Although the company already has plants in St Petersburg and Nizhny Novgorod, Magna chose the town for the new factory because its major customers – the world’s big- gest carmakers – are located in the region, according to Hubert Hoedl, Magna’s vice president for corporate mar- keting and business devel- opment in Europe. Among the carmakers that the plant will supply are Volkswagen, Skoda, Renault and Peugeot Citroën. The plant, currently operat- ing at 25pc of capacity, is making bumpers for three car models – Volkswagen’s Polo and Skoda’s Octavia and Fabia. However, the chief ex- ecutive, Georgy Rotov, said they expect to reach full ca- pacity of 150,000 to 170,000 auto component kits per year by 2012.


by $1.5bn, says Alrosa’s pub- lic relations director Andrei Polyakov. In May 2009, the federal gov- ernment came to the rescue, purchasing $1bn of diamonds and adding them to the state currency reserves, but this only brought temporary res- pite. The company may now sell a stake of up to 25pc to raise $1.5bn to $2.3bn, valuing Al- rosa at $7.3bn to $9bn, ac- cording to a report in the Russian business daily Vedo- mosti. The Sakha Republic’s stake in Alrosa will probably re- main above 25pc after a share issue, guaranteeing it a con- tinued blocking vote in the company’s affairs, say ana- lysts. The federal government


As well as clearing its debts, the company needs to finance another $1.8bn in investments


currently holds about 51pc. Alrosa accounts for a quar- ter of world diamond output and forecasts sales of $3.46bn of diamonds this year, com- pared with $2.21bn in 2009. It is also currently working to build a pool of loyal cus- tomers. In spring 2010, Al- rosa signed a three-year agreement with India’s Rosy Blue, Diamond India Lim- ited, and Ratilal Becharlal & Sons to supply rough dia- monds. And it is considering plans to open an India-based office. Meanwhile, the company signed long-term contracts with 15 Belgian companies this summer worth about $500m, and talks are under- way with companies in China, Armenia, Belarus and Israel.


The new Magna facility in Kaluga manufactures bumpers and front-end modules


The plant will also start sup- plying auto parts for the new Volkswagen Tiguan and Re- nault Duster next year, he told reporters, adding that Magna also has orders from Peugeot and Citroën, and is in talks with Mitsubishi. Manfred Eibeck, president of Magna Russia, said at the opening ceremony that the plant was “a clear indication of our belief in the Russian automotive market, and its prospects for future devel- opment and sustainable growth”. Kaluga governor Anatoly Ar- tamonov also participated in the opening ceremony, and said Magna’s presence con- firmed that the region’s eco- nomic policy was right. The Kaluga Region, which


offers tax breaks to investors, has attracted several leading foreign companies. French carmaker Peugeot Citroën and Japan’s Mitsubishi opened a joint enterprise in April, and French cosmetics giant L’Oréal launched its first Russian plant there in September. Mr Artamonov said he hoped that Magna’s enterprise would contribute to “creat- ing a fully fledged automo- tive cluster” in the region. Ending the ceremony, Mr Ar- tamonov and the Magna ex- ecutives signed the first Volkswagen bumper to be produced at the plant – that was later presented to the carmaker. After having a careful look at the bumper, Dietmar


Korzekwa, chief executive of Volkswagen Russia, pro- claimed that its quality was “very good”, and expressed the hope that the components supplied by Magna would be of the same quality in the fu- ture. Magna’s executives said they considered Russia a strate- gic market, which has good potential for growth. “The au- tomotive market in Russia plays a significant role in our overall global growth strat- egy of developing business in key growth markets,” said Erwin Winkler, president of Magna Exteriors and Inte- riors Europe. “As original equipment man- ufacturers focus on global expansion, the expectation is that their global suppliers


are positioned to support them in all regions of the world,” he said in a state- ment. Mr Hoedl said Russia’s au- tomotive market was “catch- ing up very fast”, and the company believed that the trend would continue in the coming years. He also said the number of cars per 1,000 people in Rus- sia currently doesn’t exceed 250 – which is low compared to Europe, where the figure is 500 – “So, there’s some room to grow,” Mr Hoedl told reporters. Magna has already invested up to €250m (£212m) in Russia, “and there is more to come,” he added PricewaterhouseCoopers said that car assembly in Russia would recover to the pre-cri- sis level next year and reach 1.7 million vehicles. Meanwhile, Magna is facing significant structural chang- es, with co-chief executive Siegfried Wolf moving to bil- lionaire Oleg Deripaska’s Basic Element investment company next month. Mr Wolf will be appointed board chairman at Russian Machines – Basic Element’s manufacturing division, and the controlling shareholder in carmaker GAZ Group – where he will be in charge of strategic business devel- opment. Speaking in an interview with the Moscow Times after the opening ceremony, Mr Wolf said: “After 16 years of successful work with Magna, you can believe it was not an easy step for me… It was a great time.” He also said that it was “an ideal time” to move because of Russia’s stable economic growth and “strong political leader- ship”. Mr Wolf said he expects to bring his experience to GAZ, stressing that he hopes to “build up a very competitive company” in co-operation with Mr Deripaska. “That’s what we are work- ing on already,” he added.


Published in Moscow Times Mobile Phones get more manageable


Now, no-frills phones for your grandma


iPhone may be the in-thing, but Russian operators are now courting the elderly with cheap, no-frills, easy-to- operate mobile phones.


NATALYA FEDOTOVA SPECIAL TO RN


While mobile phone users across the globe are rushing out in droves to buy the iPhone, Russian mobile phone com- panies think they can carve a niche in the global mobile market with a phone aimed at people who want to keep things simple. The “babushka” phone is aimed at elderly users who don’t want the latest apps, but rather a set that is easy to use and handle. Babushka means grandma in Russian, and these cheap phones, without any special gadgets or additional func- tions, are just ideal for the eld- erly who find new fancy in- struments befuddling. “Older men and women often find it difficult to get used to mod- ern multifunctional mobile phones with many, in their view, exces- sive func- tions,” s a y s Mikhai l Nikolayev, president of Orbita Tele- com, manufac- turer of the Just5 phone in Russia. “Nor are they happy with the tendency to- wards smaller size as their eyes are not as good as those of younger customers.” Simple to operate, the Just5 phone has big keys, a large screen, a powerful speaker,


sensitive microphone and an emergency key. Retailing for £80-£100, it is not just for pen- sioners, but also for children, the disabled, and emergency services personnel. Clearly, babushka phones and iPhones have different target audiences, says Maksim Nogotkov, president of Svyaznoy Group, one of Rus- sia’s leading mobile phone re- tailers. Those buying iPhones are image-conscious, they want to check their email and go online; those buying cheap phones just want to call and send text messages. While babushka phones cur- rently form just 1pc of the market, according to market research, sales have jumped tenfold over the year. “Since the end of last year, we have sold several dozen thousand such phones – closer to 100,000,” says Mr Nikolayev. MegaFon, one of Russia’s top three mobile operators, in Au- gust launched a phone with large keys. Orbita Telecom sells phones in more than 30 countries in Western Europe, the United States, Can- ada, and almost all of Latin America.


BUSINESS IN BRIEF


Thomas Cook takes the lead in Intourist


FLIRT


European tour operator Thomas Cook will take a 50.1pc stake in Russian travel agency Intourist with a view to boosting access to the fast-growing Russian tourist market. Intourist president Alexan- der Arutyunov said the partnership will improve operations and expand the company’s worldwide pres- ence. “The new joint ven- ture is another step in our strategy to enter the top 10 European tour operators market. Our focus is to use our partner’s experience and technology to strength- en efforts towards increas- ing the volume of tour busi- ness in different segments of the tourist market in Rus- sia and CIS countries.” Thomas Cook CEO Manny Fontenla-Novoa said the deal would enable the com- pany to capitalise on Rus- sian demand for beach hol- idays, particularly in Turkey and Egypt: “Intourist has a natural market share in Russia of about 13-14pc, but in the Russia to Turkey route they have only about 10pc, so our first growth op- portunity is from Russia to Turkey, where we are very strong.”


S7 joins Oneworld alliance


Russia’s second largest air- line by passenger volume, S7 (formerly Siberian Air- lines), joined the Oneworld alliance this month. Its 18-month implementa- tion was sponsored by Brit- ish Airways, reported Avia- tion Week. “Our focus on quality means that we are particularly selective and demanding in the airlines we invite to join us,” BA CEO Willie Walsh said. The move opens up more than 50 destinations with- in the CIS to Oneworld members.


Ex-pat income and tax details revealed


PHOTOXPRESS


The Just5 CP09 phone


The Federal Tax Service has revealed information on the incomes of expats living in Moscow. While the highest salary went to an adminis- trator of the Russia-based Priyatniye Soobscheniye company (6.2m roubles a month – about £125,000), the local president of ELOS, a subsidiary of the Bank of China, was the highest-paid representative of a foreign company in Moscow on 6m roubles per month. Shell boasted 28 of the top 100 positions on the list. Business daily Kommersant said the figures realistical- ly account for only a frac- tion of the total compensa- tion top expat executives receive in Russia. Much more is provided in bonus- es and social packages. Russia has made simplify- ing bureaucratic barriers for high-skilled foreign la- bour a priority.


MFORUM.RU


BEN ARIS (2)


ITAR-TASS


What will Russia's visa policy be during the Sochi Olympics in 2014?


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