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On 15 December, 2002, December futures contracts totalling RUR 209 million were executed. The greatest amount of contracts presented for execution, 20,896 contracts totalling RUR 88 million, fell on the futures contract on the price of shares RAO UES of Russia (EESI: 12.02).

Corporate News In 2002 the largest international rating agencies assigned new ratings and upgraded old ratings of Russian companies, thus noting positive changes in their performance. E.g., S&P's upgraded the corporate governance rating of the telecommunications operator OAO Northwest Telecom from 5.0 to 5.6. However, the practice of corporate governance is characterised INSTITUTE FOR THE ECONOMY IN TRNSITION http://www.iet.ru by negative features related to the increased influence exerted by a single majority shareholder and its dominating role in the decision-making process, and also due to underdeveloped independent control mechanisms.

S&P's also assigned a corporate governance rating of 6.0 to another telecom operator, OAO Uralsviazinform.

OAO Mobile Telesystems has the highest rating among Russian companies: 7.4. In its reports the rating agency notes that, compared to the majority of Russian companies, MTS has high corporate governance standards that conforms with the practice accepted in the leading international companies. Such corporate governance policy is a result of observation of the requirements posed by SEC to the companies whose shares are listed at NYSE.

Standard & Poor's upgraded Tatneft's rating from stable to positive and confirmed the company's long-term rating at the B- level. The company's rating reflects its considerable exports, reasonable financial policy, significant assets and the insufficient diversification of operations, shortage of processing facilities, delays in the development of the main fields, high levels of short-term debts and influence of the Tartar Republic's government. S&P's has also noted the success of Russia's sixth largest oil company OAO Sibneft, assigning it a B+ longterm credit rating, forecast: developing. Standard & Poor's also assigned Sibneft a credit rating on the national scale at the level of ruAA.

Standard & Poor's has also upgraded Lukoil's long-term credit rating s from BB- to B+.

The upgrading is explained by the company's leadership in the amounts of reserves, production and exports in Russia. The limiting factors include a high level of mid-stream costs and a considerable debt.

S & P's have upgraded the ratings for six Russian banks, which reflects the improving economic situation in Russia.

In November RAO UES published its financial results for the current year. According to the Russian accounting standards, the energy holding net income for 9 months grew to RUR 39.98 billion, and the IAS net income grew to RUR 17.8 billion. According to the statement by V. Sinyugin, Chairman of the Board of Directors, made during his meeting with investors in Boston, the corporation also intended to increase dividend payments approximately two times.

During eight months of 2002 Surgutneftegas produced 32.15 million tons of oil, which is 11.7 percent over last year's level. Gas production reached 8.7 billion cubic meters. The drill meterage grew to almost two million meters, or 13 percent more than in the corresponding period of 2001 (including the growth in exploration drilling by 9 percent, or 191 thousand meters). 613 new wells were commissioned. OAO Surgutneftegas was licensed to explore and develop the Severo-Labatyugansk area. According to the current legislation, the company received the license upon exploration work on risk conditions, without any bidding.

Sberbank presented its RAS financial report for Quarter 3 of 2002. The net income grew 95 percent up to RUR 28.7 billion compared to last year. Besides, according to the bank's officials, the income for 2002 can reach RUR 30 billion, which exceeds the previous forecast of RUR 27.2 billion, and the dividends can double.

US GAAP earnings of Sibneft from January till June 2002 grew 19 percent, reaching US$ 1.984 billion (US$ 1.663 billion in the corresponding period of 2001). The EBITDA were US$ 786.1 million (US$ 870.5 million in the corresponding period of 2001). Net income fell from US$ 615.8 million in the first six months of 2001 to US$ 457.5 million.

RUSSIAN ECONOMY in trends and outlooks In 2002 Russian companies pursued the policy aimed at acquisition of new assets, including foreign assets, and establishing long-term partnership relations.

MMC Norilsk Nickel acquired 100 percent of the largest Russian gold producing company Polyus. In 2002 the company plans to produce 25 tons of gold, which will bring it earnings of cca. US$ 250 million and a profit of cca. US$ 75 million. The MMC paid US$ million in cash for 100 percent of Polyus's shares. In addition to purchasing domestic assets, Norilsk Nickel is actively operating abroad: MMC is buying a controlling block of Stillwater Mining Company, the only US producer of platinum group metals, for US$ 341 million; US$ 100 million will be paid in cash and the remaining US$ 241 million in 876,000 ounces of palladium.

The trading company Norimet, Ltd., a full subsidiary of the MMC, has entered into a long-term contract with General Motors on delivering platinum group metals. Since the beginning of 2002 Norilsk Nickel has not been delivering platinoids to the international market, and the conclusion of a contracts with a leading US company gives hope for the improvement of the metal holding's overall performance.

Russian companies continue to enter international markets and take active measures aimed at improving their image with foreign investors.

After the Securities and Exchange Commission toughened its requirements to financial reports of the companies whose shares are traded in the USA, on 4 September Rostelekom announced it would revise its financial accounts for 2001 due to the situation with its former auditor Arthur Andersen. As a result of a second audit carried out by Ernst & Young a number of financial performance indicators were reduced. However, the company must have only gained from this action since it has demonstrated the business community a responsible approach to the issuer's financial information.

The UK Listing Authority included the company's securities in the official list; thus Lukoil obtained a full secondary listing at the London Stock Exchange. All ordinary shares and Level 1 ADRs of the company have been listed. The shares will trade in the form of ADRs.

On 6 August the ADRs started to trade at US$ 55 per ADR. As the first Russian company to receive a full secondary listing, Lukoil will be subject to more onerous requirements than those, which currently apply to it as an issuer of securities. The new requirements imply more detailed disclosure of information on the operations of the Lukoil group and regular reporting to the holders of its securities.

In early February Wimm-Bill-Dann Foods OJSC, Russia's leading producer of dairy and juices, completed an IPO of American Depository Shares. The company floated 10,62 million ADSs at a price of US$ 19.50 per share totalling US$ 207.1 million. The demand exceeded the offer five times. Thus, US investors valued the company's market capitalisation at US$ 828.4 million. This is the first large listing by a Russian company operating in the market of the basic consumer products. ADSs of only four Russian companies traded at NYSE until recently, three of them in the telecom sector Vimpelcom, Rostelekom and MTS and Tatneft.

Undoubtedly, the successful placement of WBD's American Depository Shares has positively influenced the dynamics of the Russian market and allows to hope for inflow of investments into other national issuers' shares.

Lukoil's President Vagit Alekperov, President of OAO Sibneft Yevgeni Shvidler, Executive Director of OAO TNK German Khan and Chairman of the Board of Directors Mikhail Khodorkhovski have signed a "Memorandum on Mutual Understanding on the Issue of Constructing an Oil Pipe-line System for the Transportation of Oil through an Offshore Oil INSTITUTE FOR THE ECONOMY IN TRNSITION http://www.iet.ru Loading Terminal in the Murmansk Area". The construction of the Murmansk oil pipeline is the first Russian joint project in the field of hydrocarbon raw material transportation carried out by the largest national oil companies. The parties have agreed to develop a co-ordinated version of a Declaration of Intent on the Project as soon as possible. After that they will decide on further projections, select the best route for the pipeline, co-ordinate the main requirements to pipeline facilities and prepare a detailed schedule of project realisation.

In December one of the key events was the auction, in which the RF Government sold its block of shares of the Oil and Gas Company Slavneft. Before the beginning of the auction representatives of the RF Accounting Chamber estimated the selling price of the 74.95 percent block of Slavneft shares at US$ 3 to 3.2 billion. However, on 18 December, in the course of the auction the oil company was sold to TNK and Sibneft for a far smaller amount of US$ 1.86 billion. According to A. Kudrin, Minister of Finance of the RF, privatisation of the Government's block of Lukoil and Slavneft shares allowed to create a necessary financial reserve.

However, this acquisition worsened the financial state of both companies, resulting in downgrading of their ratings by the largest agencies. E.g., Standard & Poor's revised Sibneft's rating from developing to negative and excluded TNK from the CreditWatch list where it had been put in December 2002 with positive forecast. Sibneft's rating on the national scale was downgraded from ruAA to ruA+.

Appendix 2. A Review of Changes in the Legislation Regulating Taxation Issues in the Russian Federation Changes in the Legislation Approved in the End of 2001 and Enacted in Federal Laws Federal law No. 179-FZ of December 28, 2001, amended Articles 149 and 164 of the RF Tax Code concerning the introduction of VAT at the rate of 10 per cent in relation to medicines (including medicinal substances, among them those produced in pharmacies), products intended for medicinal purposes, as well as periodicals (except periodicals of advertising or erotic nature).

Federal law No. 187-FZ of December 29, 2001, amended Section 2 of the RF Tax Code and other legislative acts concerning taxes and charges. The RF Tax Code was supplemented with subsection VII.1 Special tax regimes. The system of taxation of agricultural producers (the single agricultural tax). The single agricultural tax (SAT) shall be enacted by a law of a subject of the Russian Federation introducing this tax. Organizations, farms, and individual entrepreneurs shall become subjects of SAT not depending on the number of employed.

The object of taxation shall be the area of agricultural lands owned, tenured, and (or) used. The SAT tax base shall be the area of agricultural lands comparable in terms of the cadaster value defined in accordance with the methods set forth and approved by the Government of the Russian Federation.

Transition to SAT shall be carried out on condition that a share of proceeds from sales of agricultural produce from the farm lands made not less than 70 % of the total proceeds in the preceding calendar year and shall mean that this tax replaces all taxes and charges payable RUSSIAN ECONOMY in trends and outlooks in accordance with Articles 13, 14, and 15 of the Code, with the exception of the following taxes and charges:

1) value added tax;

2) excises;

3) charges for abuse of the environment;

4) tax on purchase of foreign currency and payment documents denominated in foreign currency;

5) state duty;

6) custom duty;

7) tax on property owned by individuals (as concerns residential buildings, facilities, and structures owned by individual entrepreneurs);

8) tax on property transferred as succession or gift;

9) license charges;

10) insurance fees related to mandatory pension insurance (shall be paid in accordance with the legislation of the Russian Federation on pension security).

The definition of agricultural producers shall exclude agricultural organizations of industrial type (poultry plants, greenhouse integrated works, state fur farms, animal industry agri-businesses, etc.), as determined in accordance with the list approved by the legislative (representative) authorities of RF subjects in order prescribed by the Government of the Russian Federation.

The tax period of this tax shall be one quarter. The tax rate shall be determined in Rubles and kopecks in relation to one hectare of farm lands. It is also stipulated that the substitution of several taxes with one is not the introduction of a new tax, but a special regime.

Federal law No. 190 FZ of December 29, 2001, amended the RF law On Customs Tariff and the second section of the RF Tax Code.

The law stipulates the procedures governing the determination of export duties on crude oil. For instance, according to the law, the Government of the Russian Federation shall monitor the prices of Urals crude oil on world markets of oil raw materials (Mediterranean and Rotterdam) aiming at the determination of the average price over the period of monitoring (months).

The rates of the export duties shall be introduced by the RF Government for 2 calendar months and shall be below the amount of the maximal duty rate calculated as follows:

In the case the average price of Urals crude oil was below US $ 109.5 per metric ton (inclusive) over the period of the monitoring the rate shall be 0 per cent;

In the case the price was US $ 109.5 to 182.5 per metric ton 35 % of the difference;

In the case the price was above US $ 182.5 per metric ton the duty shall be below US 25.53 and 40 % of the excess over US $ 182.5.

Federal law No. 195 FZ of December 30, 2001, enacted the RF Code of Administrative Offences (CAO RF).

The Code regulates issues relating to administrative fines imposed for defaults on taxes (charges). According to Article 3, an administrative fine is a pecuniary penalty and its amount may be set forth in multiples of unpaid taxes and charges. The amount of an administrative fine calculated proceeding from the amount of unpaid taxes and charges shall not exceed the triple value of the respective object, or the amount of unpaid taxes and charges.

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