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Moscow Times
March 30, 2005
Putin Aide Defiant Over Yukos
By Alex Fak
Staff Writer

Negative fallout from the Yukos affair will not deter the government from pressing future tax cases or stop the consolidation of state assets such as Gazprom and Rosneft, Igor Shuvalov, a senior presidential aide, said Tuesday.

"No one wants to repeat the Yukos thing again, but even if it negatively affects the country's image, such measures will continue to be used when it comes to taxes," Shuvalov told a conference sponsored by the American Chamber of Commerce in Russia.

Shuvalov's unapologetic remarks came only days after President Vladimir Putin sounded a conciliatory note by telling businessmen the Kremlin was ready to clean up a tax regime that led to the smashing of Russia's biggest oil company, Yukos.

Even as Shuvalov defended the tax authorities, other ministers gathered across town in the Economic Development and Trade Ministry to discuss ways of putting the economy back on track in the aftermath of Yukos' downfall.

"Our forecasts show that growth will slow over the next few years and the first two months of the year confirm that," Finance Minister Alexei Kudrin said, Reuters reported.

"Demand is growing fairly fast while output is not reacting sufficiently."

The economy expanded by an annual rate of 4.4 percent in the first two months of the year, a significant slowdown from the overall 7.1 percent growth rate in 2004.

Economists expect the economy to grow less than 6 percent in 2005, well under the 7.4 percent growth rate needed to meet Putin's goal of doubling the economy within a decade.

Capital investment rose by just 7.8 percent year-on-year in February, down from a double-digit rate in the same month in 2004.

Capital flight has also picked up as businesses were spooked by the destruction of Yukos and the incorporation of its main production unit into state-owned oil company Rosneft.

Speaking before Shuvalov, U.S. Ambassador Alexander Vershbow told the conference that "the transfer of once- private assets to government hands" is undermining energy deals with foreigners.

The dismantling of Yukos, Gazprom's upcoming merger with Rosneft and the presence of senior government officials as board chairmen of state companies all suggest that the Kremlin is strengthening control over the oil and gas industry, Vershbow said.

He cited the sharp decline in domestic investment in extraction last year as an indicator that businessmen are wary of state encroachment.

Shuvalov, however, defended the long-delayed Gazprom-Rosneft merger.

"It's a good step and has nothing to do with strengthening the role of the government in the economy," he said.

"I have a boss, the president ... and there is an order that the deal must be completed within a certain time frame," Shuvalov said.

"So it makes no difference to me that someone below is commenting in some way. The deal will be completed, and the state will obtain a controlling stake in Gazprom, and Rosneft will be added in some way or another."

Shuvalov's comments indicated the presidential administration's determination to stamp out infighting over Rosneft's assets. Vicious squabbling over the merger broke out into the open earlier this month, threatening to derail the deal.

Despite Shuvalov's certainty the merger would happen "soon," he said foreign investors would have to wait until next year before limits on trading in Gazprom shares are fully lifted. Under the so-called "ring fence," foreign ownership of Gazprom is limited to 20 percent.

"I don't think it is likely that this 20 percent quota will be lifted by year-end," Shuvalov said, Dow Jones reported.

Analysts downplayed Shuvalov's comments on tax persecutions.

"Mr. Shuvalov's words were taken out of context [by news agencies] -- his main message was that companies need to pay taxes," said Yaroslav Lissovolik, senior economist at UFG.

"It is pretty clear that there will not be another Yukos-style event," said Chris Weafer, chief strategist at Alfa Bank. "Part of this government's modus operandi is to have just one public hanging."

Staff Writer Catherine Belton contributed to this report.