Russia 100715 Basic Political Developments

Reuters: Russia rail sale to shrink coal margins-exporters

http://in.reuters.com/article/idINLDE66C0W720100714
Wed, Jul 14 2010

* Private owners seen hiking tariffs

* Even greater coal wagon shortage expected

* Traders, others look at taking coal freight stakes

By Jackie Cowhig

LONDON, July 14 (Reuters) - The privatisation of Russian

rail coal wagons may push operators to hike tariffs as subsidies

are removed, threatening to squeeze rail user margins and even

undermine coal exports, exporters said on Wednesday.

Rising Russian coal rail tariffs have implications far

beyond Russia. Since 2004, whenever global prices have fallen

below Russian costs, exporters have halted fresh sales.

The current fine global coal supply and demand balance means

any threat to supply is significant.

Russian railways (RzHD), the state monopoly, plans to hand

over control of its coal wagons to its subsidiary companies

First Freight Co and Second Freight Co.

"Today the tariffs on coal shipments are regulated by the

state because these are socially significant cargoes," said

RZhD's spokesman Dmitry Pertsev.

He declined to say how tariffs might change when the First

and Second Freight Co are spun off from the rail monopoly.

The First and Second Freight Co will end up with most of

Russia's rail cars for coal shipments. The government has said

it will keep a controlling stake in one of the two firms.

"The rail costs for coal were going to rise in January

anyway but they will go up even more due to privatisation," a

source at one of Russia's largest coal exporters said.

Russian rail tariffs currently average $45 a tonne,

inflating cash costs to $75.00-$80.00 and leaving a profit

margin of around $10.00 a tonne, exporters said.

"Despite explaining for years that raising the tariffs hurts

the coal industry, every year the tariffs go up," the source

said. [ID:nLDE60E1LN].

Russia is one of the top five coal exporters globally,

shipping around 67 million tonnes a year of thermal coal to the

Atlantic and Pacific markets and is a key supplier to China,

Japan, Britain, Germany and Scandinavia.

The bigger Russian coal exporters have bought or rented

private rail wagons but they rely on RzHD for the majority.

RzHD said in May that it was considering whether to sell 50

percent of First Freight Co in an initial public offering or to

sell 25 percent via IPO and 25 percent to strategic investors

[ID:nLDE64U02N].

EVEN LESS WAGONS

"Whether they fully privatise or not, First and Second

Freight will be in effect owned by individuals who will control

all the rail cars and they can set the tariffs without having to

justify them in public as RzHD has to do," a coal executive

said.

"The tariffs are going to go up considerably, it will happen

and it's a serious problem. By the end of the year there will be

no coal wagons in the hands of RzHD," another senior coal

executive said.

"There will be even less availability of wagons and more

delays and problems with exports," another source at one of

Russia's largest coal exporters said.

Even when their profit margins are healthy, exporters have

to devote considerable effort to solving the logistical

difficulties of moving coal on time to ports.

But potential investors outside the coal industry see

opportunities rather than problems.

Rail freight is a massive business inside Russia -- RzHD

moves 1.1 billion tonnes a year of total freight. First Freight

Co has been valued at $5 billion [ID:nLDE64U02N].

Vladimir Lisin, owner and chairman of Novolipetsk Steel

(NLMK.MM: Quote, Profile, Research) wants a stake in First Freight [ID:nLDE64U02N].

International and Russian energy traders are also looking at

strategic rail stakes to give them greater access to the Pacific

market for coal, sources in companies involved said.

"We're looking at rail privatisations and other logistical

opportunities in Russia," one potential investor said.

FACTBOXES

Russia's coal restrictions by rail and port [ID:nLDE61L1S0]

Russian companies line up IPOs in 2010 [ID:nRUIPOS]

Key political risks in Russia [ID:nLDE65T2AK]

(Additional reporting by Dmitry Zhdannikov in Moscow,

editing by William Hardy)

Businesswire: SISTEMA ACQUIRES 51% STAKE IN M2M TELEMATICS

http://www.businesswire.com/portal/site/home/permalink/?ndmViewId=news_view&newsId=20100714006336&newsLang=en

Moscow, Russia – July 15, 2010 – Sistema (the “Group”) (LSE: SSA), the largest diversified public financial corporation in Russia and the CIS, which invests in and is a major shareholder of companies operating in different industries, today announced that it has acquired a 51% stake in OJSC M2M Telematics (“M2M Telematics”). Sistema plans to acquire a remaining 49% stake in the next two to five years in accordance with the agreement between the companies.

Founded in 2005, M2M Telematics is the leader in the Russian market of transport monitoring, navigation and telematics based on GLONASS/GPS technologies. The company has a broad portfolio of products for multiple market segments which it sells through an extensive distribution network comprising 56 regional partners, to a large customer base.

Sergey Boev, Vice President and Head of the 'High Technologies and Industry' Business unit at Sistema, commented: “This acquisition will provide Sistema with additional expertise and know-how to assist the federal network operator OJSC Navigation Information Systems (NIS) in implementing a public-private partnership project to create a national traffic accidents emergency response system under the ERA GLONASS brand.”

Notes to editor:

OJSC NIS is owned by RTI Systems (25.5%), SITRONICS (25.5%) and Federal State Unitary Enterprise “Russian Institute of Space Device Engineering” (49%).