The Business Book of Records
Vlast is publishing the next installment of the Business Book of Records. In this issue, we review the fourth quarter of 2004. In the new chapters of the book you will find out who followed the letter of the law more diligently than anyone else, who was fired with the greatest scandal, which event was the most devastating for insurance companies, whose bankruptcy was the most publicized, and how much a tarnished business reputation costs.
Largest Insurance Payment
Larry Silverstein, the builder of the World Trade Center in New York, obtained a court ruling that the destruction of the twin towers by terrorists on September 11, 2001, was two separate terrorist acts rather than one act. This was Silverstein's first victory over insurance companies. Up to then, the insurers regarded the destruction of the twin towers as part of a single long-planned terrorist act and were willing to pay the $3.5 billion in insurance owing to Silverstein. Silverstein, however, considered the destruction of two different buildings by two different airplanes at two different times to be two different insured events, which allowed him to demand a payment of $7 billion. Nine insurance companies named as the defendants in Silverstein's suit are planning to appeal the judge's decision.
Most Diligent Adherence to the Letter of the Law
Japan Tobacco (JT), one of the world's largest tobacco companies, displayed singular adherence to the letter of the law in its homeland. New rules for marking cigarettes in Japan approved by the country's health ministry will not enter into force until June 2005. However, the new marking had appeared on many packs of cigarettes manufactured by JT by the end of November. Thirty percent of the cigarette package is taken up by new captions. One advises that “smoking is one of the causes of lung cancer”. The second says that “nicotine causes dependency on tobacco smoking, although it appears in different forms in different people”. For a country in which the ministry of health previously never warned but only advised people” not to smoke so much, since this may be harmful to your health”, this is an unquestionable intensification of the pressure on smokers.
Highest Starting Price
The starting price of $8.65 billion for the shares of AO Yuganskneftegaz, YUKOS's main production unit, sold at auction on December 19. The quoted deposit price for participation in the auction – $1.74 billion – was also a record.
Largest Reorganization
AOL, the world's largest Internet service provider, announced its reorganization at the beginning of November. The company plans to split into four units – Access, Audience, Digital Services, and AOL Europe. The units will be independent in making financial and operational decisions. The reorganization is part of a large-scale campaign to stabilize the company's position; in 2003 alone, it lost 2.2 million customers, who felt that the services AOL provided were not worth the cost of these services.
Greatest Reputational Damage
In the opinion of the Moscow Arbitration Court, Kommersant Publishing House caused Alfa Bank a record 300 million rubles (about $11 million) in reputational damage with its article The Bank Crisis Comes Out into the Street of July 8. The judge's decision was handed down on October 20. This is the largest reputational lawsuit satisfied in a court of first instance in the history of Russian legal proceedings. In addition, the court also ordered the recovery of 20.5 million rubles from the newspaper for direct damages allegedly sustained by the bank from the publication of this article. The main point of the bank's claims against the publishing house is that Kommersant published information on the presence of problems at Alfa Bank during the bank crisis last July. In particular, the article spoke of lineups in the Moscow branches of this bank and a number of other structures, including Guta Bank, which was later resold. Alfa Bank launched a record suit, claiming that the newspaper, which it considered the most influential business publication in Russia, had published questionable information and this would have to be paid for at the highest possible rate. The question of whether Kommersant destroyed the reputation of a pillar of the banking establishment with a stroke of the pen has not been conclusively settled. A court of appeal may adjust Alfa Bank's record. The appeal will be considered on December 24. [Note: On December 27, Arbitration Appeals Court #9 partially satisfied Kommersant's appeal and reduced the recovery for direct damages from 20.5 million rubles to 10.8 million rubles – see Kommersant of December 28, 2004.]
Largest Downsizing
The American company Delphi Corp, one of the largest suppliers of automotive parts in the US, slashed 8500 jobs. This is about 5% of the company's entire workforce. The reasons given for the downsizing were a drop in car production in North America and an increase in prices for materials.
Most Unhurried Privatization
Russia's metallurgical industry had been waiting since 2001 for an auction for the sale of 17.84% of shares in the Magnitogorsk Iron and Steel Works (MMK), which presently belongs to the Russian Ministry of State Property. At that time, the government came up with the first plans to sell the last large chunk of state property in metallurgy. The suspense ended in November 2004, when the Russian Federal Property Fund (RFFI) set an auction for the package of MMK shares for December 20. The starting price of the package was $790.15 million, which in itself was a record for publicly sold securities of Russian metallurgical companies.
Most Scandalous Dismissal
At the beginning of November, Graham Avison, a 27-year-old engineer at Britain's Sellafield Nuclear Power Plant belonging to British Nuclear Fuels (BNF), was fired. The reason for his dismissal was his weight – nearly 190 kg. Company officials reported that the decision to fire Avison was made after he was unable to squeeze through a turnstile on arriving at work one day. In addition, he could no longer fit into the protective suit he was required to wear for safety reasons. “He was simply too fat to carry out the duties essential for his job,” a BNF spokesman said. All British newspapers and the world's leading news agencies reported on Avison's sad fate. The engineer is now planning to go to court not only to get his job back, but also for compensation for moral damage.
Most Loyalty to Authority
Viacom Inc. a media corporation that owns the Infinity radio network, will pay $3.5 million to US federal authorities as compensation for obscene jokes on the air. The corporation agreed with all the complaints of the Federal Communications Commission and did not contest them in court. In exchange for this display of loyalty, the commission will not take past claims into consideration when examining an application for an extension of Infinity's license.
Most Prolonged Conflict
The last quarter of 2004 saw a settlement of the conflict between the St. Petersburg forest industry corporation Ilim Pulp, Oleg Deripaska, the head of Base Element, and Vladimir Kogan, the co-owner of Promstroibank of St. Petersburg (PSB). The conflict, which made Russia's forest industry virtually uninteresting to investors because of heightened risks, began in the fall of 2001 and lasted more than three years. During this time, opponents of Ilim Pulp tried unsuccessfully by various means to seize control of its key timber processing facilities. As a result, in October 2004, the parties signed an agreement under which structures belonging to Vladimir Kogan will once again become shareholders in Ilim Pulp with a 25% holding (Kogan left the company in 2000) and will have the opportunity to increase its shareholding to 50%. Oleg Deripaska will have at his disposal Continental Management, a company set up jointly with Kogan, and everything that this company has been able to amass in the forest industry in the period of its existence.
Biggest Soap Bubble
Authorities in the Chinese city of Guangzhou set a record in the quarter for short-lived megaprojects. On November 15, the authorities in the southern Chinese city of Guangzhou announced plans to construct the world's tallest building. The tower was supposed to be 600 m high, surpassing the CN Tower in Toronto (553 m), which is currently the world's tallest building. However, by November 21, a city government spokesman reported that changes had been made to the construction project. The tower would be only 400 m high, which would not make the building a record-holder even on Chinese scales (the already-completed Jinmao tower in Shanghai is 20 m higher than the Guangzhou project). To all appearances, the city authorities had to consider the opinion of experts, who thought that a 600-m tower was too expensive for the city, that it might not be able to withstand typhoons, and finally, that it was just too ugly to build.
Most Unexpected Tax Claim
At the beginning of December, two Russian cellular operators – AO Vimpelcom and Northwest GSM, the St. Petersburg operator of the Megafon network – received tax payment claims for 2001 from the Ministry of Taxation (MNS). According to MNS calculations, Vimplecom owed 4.4 billion rubles in unpaid taxes, fines, and penalties, while Megafon's owners owed 110 million rubles. The forty-four-fold difference is apparently a record for a graphic demonstration of the authorities' differing approach to two players on the same market. As shown in practice, the company that has the means to avoid paying so much tax deprives its competitors of the ability to compete with it. Since this did not happen, we must assume that either MNS treated Vimpelcom too harshly or was not critical enough of Megafon. Critics maintain that the claims against Megafon were only a cheap attempt to show that the claims against Vimpelcom were not politically motivated.
Most Publicized Bankruptcy
Trump Atlantic City Associates, a division of billionaire Donald Trump's business empire that owns several casinos in Atlantic City, New Jersey, has declared bankruptcy. The company estimated its debts at $1.3 billion and its property and revenues at $1.5 million. This is already the second bankruptcy of Trump's gambling business. His Atlantic City casinos declared bankruptcy back in 1992, but the billionaire managed to regain control over them. Experts speculate that the voluntary bankruptcy of Trump Atlantic City Associates will allow Donald Trump to restructure its debts and renovate the aging casinos in Atlantic City. Under an agreement with creditors, Trump will remain the company's president and CEO, although his shareholding will be cut from 56 to 27 percent.
Largest Merger
Mittal Steel, a company formed by the merger of three steelmakers – the Dutch companies Ispat and LNM and the American International Steel – will produce 57 million tons of steel per year. Merger plans were announced at the end of October. The deal is worth an estimated $17.8 billion. Mittal Steel will become the world's largest company by production volume.
Most Incomprehensible law
According to information of TNS Gallup Media, the volume of beer ads on national television decreased 20-30 percent in the last quarter. Based on experts' estimates that breweries spent $150 million on advertising last year, television channels lost at least $30 million from the ban. The main reason for the decrease was amendments to the law “On Advertising” restricting beer advertising that have come into effect. In addition to a ban on advertising beer on television between 7.00 and 22.00, the amendments imposed a number of restrictions on advertising itself. In particular, it is prohibited to use images of people and animals (including animated images), to portray beer as a thirst-quencher, or to create the impression that consuming beer contributes to the achievement of social, athletic, or personal success. Because there are no precise definitions of what constitutes a portrayal of thirst-quenching or social success in the Russian legislation, officials of the Federal Antimonopoly Service (FAS) had to give brewers a clarification. However, all clarifications ultimately boiled down to the fact that the new provisions of the law will be applied only to each specific television clip or printed module. At the same time, the FAS refused to give any preliminary expert evaluations at the development stage of advertising, alleging that this would be censorship, which is prohibited in Russia. As a result, only after an expensive advertising clip is created will it be possible to determine whether or not it complies with the updated legislation.
&Most Mentioned Russian Companies
Vlast is continuing the publication of its quarterly rating of the international popularity of Russian companies. Here we offer the rating for the fourth quarter of 2004.
The YUKOS affair and the auction for the sale of its main production unit, Yuganskneftegaz, were the main business news from Russia in recent times. With only a few exceptions, this determined the top ten participants in the rating for the fourth quarter. Journalists followed the development of events closely, noting the possible participation (or non-participation) Russia's leading oil companies ( Surgutneftegaz, LUKOIL, and Rosneft) and OAO Gazprom in the auction. The media also did not ignore the departure of most of YUKOS's senior managers for London. In their commentaries, the journalists turned most frequently to experts and analysts from the company Renaissance Capital, and as a result its name was mentioned almost as often as the names of the main players. Foreign journalists were less interested in relations between the tax authorities and other companies; nevertheless, they still wrote about them. For example, the incident with Vimpelcom in mid-December, which also came under increased scrutiny of the tax authorities, put the company back on the list. American newspapers and magazines and the press in Northern European countries showed the greatest interest in the events around Vimpelcom.
1 (1) YUKOS 1567*
2 (2) OAO Gazprom 1242
3 (12) Surgutneftegaz 1234
4 (5) AO Yuganskneftegaz 979
5 (19) Renaissance Capital 862
6 (4) LUKOIL 608
7 (9) RAO UES of Russia 503
8 (7) Rosneft 482
9 (17) RAO Norilsk Nickel 385
10 (6) Sibneft 333
11 (23) Alfa Bank 328
12 (13) Sukhoi Aviation Military Industrial Complex 300
13 (8) Tyumen Oil Company 257
14 (3) MiG Russian Aircraft Manufacturing Corporation 248
15 (14) OOO Base Element Company 167
16 (10) OAO Aeroflot 152
17 (25) OAO Vimpelcom 144
18 (16) Tatneft 129
19 (18) AO Russian Aluminum 128
20 (15) Sberbank of Russia 124
*Number of publications in which the company's name appeared.
The rating was based on materials from 100 leading newspapers and magazines from Australia, Great Britain, Germany, India, Spain, Italy, Canada, Malaysia, New Zealand, Pakistan, Singapore, the United States, France, and Japan. In the US, the largest national newspapers and leading newspapers in the states were chosen. Other countries were represented by newspapers and magazines with a circulation of at least 5% of the given country's total newspaper and magazine circulation. Only articles in which a company's name was mentioned along with the words “Russia” or “Russian” were considered. The place in the previous rating is shown in brackets.
Most-Advertised Brands
After the amendments to the law “On Advertising” strictly limiting television beer ads came into effect in September, Russian breweries instantly lost their positions in the top ten of the most- advertised brands. In their place are cellphone operators, which had already been among the largest advertisers for a long time. For example, Mobile TeleSystems (MTS) spent $84 million on advertising and marketing last year. This figure is expected to reach $100 million this year (2004) – in the first half of 2004, the company had already spent $48 million on advertising and marketing. Although Vimpelcom does not disclose its advertising budgets, it is clear to market experts that their advertising and marketing expenditures are comparable to the figures for MTS: $70-75 million per year. Megafon spends considerably less on advertising and marketing – about $60 million in the experts' opinion.
Specialists believe that in the near future the range of advertisers in the “cellular communications” category will increase dramatically. Along with the already-customary advertising of operators, telephone manufacturers, and cellular retailers, Russians will soon be assailed by a storm of advertising from content providers – producers of games for cellphones and sellers of ring tunes and mobile matchmaking and acquaintance services.
Finally, few doubt that the volume of traditional cellular advertising will also increase. The fact is that cellular communications are being rapidly transformed from a predominantly voice service into a multimedia service: operators are starting to make money not only on ordinary calls, but on the transmission of multimedia content, from photographs to TV broadcasts. In order to tell subscribers about all these innovations and explain how to use them, operators will have to increase their advertising budgets significantly.
Khakim Ibragimov; Timur Bordyug
All the Article in Russian as of Dec. 20, 2004
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Photo: Alexey Kudenko
