Russia 090417 Basic Political Developments

Firms Seek New Bioethanol Sources

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Firms Seek New Bioethanol Sources
17 April 2009 Reuters
Russian companies, frustrated by slow legal reforms, have abandoned costly projects to produce bioethanol from grain and are instead trying to make the environmentally friendly fuel component from other sources.

One Siberian plant has started production, and two projects are under development, a far cry from the dozen projects mooted when oil prices were rising last year, industry officials and lawmakers said.

"We are tired of fighting," Alex Ablayev, president of the Russian Biofuels Association, said on the sidelines of a bioethanol conference Wednesday.

"We have found a compromise, and now we are talking more about producing fuel from timber waste and straw," he said. "But I still believe that until we have created a market for grain-based bioethanol progress will be slow."

Alexei Petrykin, a sector expert with the Federation Council, told the conference that it was difficult to overcome a widespread conviction in Russia that output of bioethanol from grain would lead to a food crisis.

This belief, he argued, is not true. "There is an excess of feed grain in Russia, and stable demand will lead to an increase in grain production."

The current tax system was an obstacle to the development of new projects, Petrykin said. Russia applies an excise tax of 27.7 rubles ($0.83) per kilogram of gasoline containing 1.5 percent of ethanol, which rises to 191 rubles ($5.72) if the ethanol content rises to 10 percent.

This makes production of bioethanol unprofitable. To change this, a group of lawmakers prepared a new law in May 2008, but parliament has yet to start dealing with it, Petrykin said.

Some projects, however, are progressing. The market leader is the Titan group, which launched the Biocomplex project in the Omsk region.

By producing gasoline with a bioethanol-based component, Ethil Tertiary Butyl Ether, and exporting the gasoline itself, the company avoids payment of the excise tax, project founder Mikhail Sutyaginsky said.

Biocomplex, which plans to produce 150,000 tons of bioethanol per year in its first stage, is a replica of a similar project run by the Sutyaginsky family across the border in Kazakhstan.

The Kazakh complex produces bioethanol as a byproduct of other commodities. It makes gluten used to improve the quality of flour, bran and yeast to make animal feed, which in turn is used by poultry and pig-breeding farms in the complex.

Another Russian project envisions production of 250,000 tons a year of bioethanol in Tambov region, said Dmitry Arsenyev, CEO of NPK Ekologia, the engineering firm drafting the project.

"It will use local grain and molasses remaining at local sugar beet refineries as raw materials," Arsenyev said.

NPK Ekologia has also been charged with drafting a project in Nevinnomyssk, a town in the Stavropol region. The plant would be located next to a local utility and would have design capacity of 200,000 tons, Arsenyev said.

Mercury unauthorised dumping sites in Altai settlement threaten Ob river

GORNO-ALTAISK, April 17 (Itar-Tass) -- Residents of the Altai settlement of Aktash requested to the authorities of Russia’s Altai Republic to remove unauthorized dumping sites of 90 tonnes of mercury waste. Some 158 people, who live near the Aktash ore mining plant, signed a letter addressed to Altai First Deputy Prime Minister Sergei Tevonyan. The local residents shoulder responsibility on him for piling up five toxic dumping sites.

The territorial department of the Russian consumer rights watchdog has already confirmed that dangerous dumping sites had piled up in 2003-2005 and now threaten ecological security of the Ob River basin. According to sanitary doctors, the chemical plant should have disposed of this mercury waste at their mercury processing plant, but failed to do it. As a result rains and floods are washing the dumping sites away, so toxic agents are leaking in the river, which is flowing through the whole settlement, where 3,500 people live. Ob’s tributaries – Chuya and Katun are flowing nearby.

Russian Real Estate Sector: Cash Matters

April 16, 2009

Investment Edge - The Russian real estate sector appeared to be highly vulnerable to the global financial turmoil. With access to credits hindered developers found themselves in a rather difficult position with servicing existing debt and funding the ongoing projects. On the other hand, weaker demand has challenged developers' plans to deliver projects. We believe the future is with the companies that have enough financial resources to bring projects to completion.

Office Market - As corporates put on hold expansion plans, demand for office spaces significantly contracted. With vacancy rates surging to 20%, office owners are being prompted to reconsider pricing policy. Lease rates are likely to see a major correction from mid 2008 heights and we believe will not return to a growth path until Russia sees a rebound in economic activity.

Residential Market - Price deflating expectations have finally dominated the real estate market across the country. The outcome is stalling residential property sales, which have further aggravated the financial situation of the residential developers. Our regression analysis suggests that Moscow property prices may fall 40%-60% in US$ terms from current levels.

Picks - The challenging market environment leaves little room for positive news flow for the real estate sector in the foreseeable future. As such, we have lowered our forecasts, ratings and target prices (see table below), in line with the new macro forecasts and new outlook for the Russian real estate market. Still, we think that investors should highlight the stories with sound balance sheets and strong project pipelines as prime rebound candidates. We like AFI Development for its strong liquidity position and focus on key projects. We think OPIN's plans to do another equity placement could further undermine investors' confidence in the stock, while Sistema Hals' high leverage could weigh hard on earnings.

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