Rapaport Magazine

Leviev to Build Retail Group

Russia Market Report

By Maria Kolesnikova
RAPAPORT... Leviev Group’s Moscow Jewelry Plant (MJP) has announced plans to build the largest jewelry retail chain in Russia. The project is expected to cost the plant about $20 million in 2007.

Currently, the factory operates 61 stores in 23 Russian regions, but by the end of 2007, MJP plans to expand to 150 stores, according to Denis Adamsky, who took over as the plant’s director this past May. Between December 2005 and December 2006, the plant opened 42 stores throughout Russia and increased production volume by 60 percent year-on-year. Leviev Group has controlled MJP since 1990.

Adamsky said the company is putting more emphasis on the regional presence because of the higher saturation and competition in the Moscow market, where MJP now operates 14 stores.

Almaz-Holding and Adamas each have chains of more than 100 stores, and about a dozen companies operate medium-size chains. Although the market is competitive, the chains have only been expanding in recent years.

Leviev Group also has a joint luxury retail project with H.Stern to open 50 H.Stern boutiques and shop-in-shop sales points in Russia and the Commonwealth of Independent States (CIS) by 2010. “Russia is a very important strategic market for H.Stern,” said Eden Hoffman, the H. Stern Russia and CIS regional manager. “We are certain of its high potential for our company.” The first H.Stern store opened in Moscow’s Crocus City Mall on November 29 and sales results in the first days of operation were very impressive, according to Hoffman. The next H.Stern stores to open will be in St. Petersburg and major cities in the Ukraine.

Yakutia’s Shtyrov Stays

In a surprise announcement, Vyacheslav Shtyrov was reappointed for a second five-year term as president of Yakutia, Russia’s diamond province, on December 7, by a 60 to 3 vote at Il Tumen, Yakutia’s parliament. The vote followed the unexpected endorsement of Shtyrov by Russian President Vladimir Putin on November 28.

Direct elections of regional presidents and governors were abolished by a Putin-sponsored 2004 law. According to the new procedure, Putin nominates one of the two candidates proposed by his envoy in the federal district. The candidate then has to be approved by the regional parliament.

Shtyrov, 43, who was president of ALROSA from 1995 to 2002, was elected president of Yakutia in January 2003. At that time, Putin supported him in the hope that Shtyrov would be more accommodating to the Kremlin than the former president, Mikhail Nikolaev.

In recent months, however, Shtyrov has had bitter spats with ALROSA’s Kremlin-backed management and the federal government, and few expected he would be endorsed for a second term. But when Kamil Iskhakov, Putin’s envoy in the Far East, supported Shtyrov and proposed Sergey Kirillin, a federal inspector who was an obviously nominal candidate, as the second nominee, Putin’s choice became obvious. Some Russian media have suggested that Shtyrov might have secured a second term by promising to cooperate in the prompt federal takeover of ALROSA and to adopt a more obliging attitude to the company’s current management.

In a speech in Il Tumen on December 7, Shtyrov stressed his government’s role in improving Yakutia’s socioeconomic situation. “Over the five years, 160 billion rubles ($6.05 billion) …was invested into the economic and social development of the republic,” Shtyrov said. “Yakutia now ranks fifth in Russia in terms of gross regional product per capita.”

Shtyrov said he sees the priority as developing Yakutia’s core industries — diamond, gold and coal-mining — which would involve attracting investment and increasing mining capacity. The second tier covers expansion in oil and gas, energy production and metal and uranium ore mining. Shtyrov said he expects Yakutia’s gross regional product to soar by 3.5 times over the second term of his presidency.

Yakutalmaz Settlement Reached

The long-awaited settlement of the Yakutalmaz case in Supreme Arbitration Court on December 20 finally cleared the way for the federal takeover of ALROSA. The settlement agreement between the federal property agency Rosimushestvo and Yakutia over the Yakutalmaz production complex has been in the works for more than a year.

The court has now awarded Yakutalmaz to Rosimushestvo and analysts expect the feds to finalize the deal in two to three months. In order to increase its stake in ALROSA to 50 percent plus one share, the federal government plans to contribute Yakutalmaz, with its 12,700 facilities, to ALROSA’s charter capital. On the other hand, Yakutia’s government wanted to secure adequate compensation for the loss of 9 billion rubles ($341 million) in annual rent paid by ALROSA for the Yakutalmaz complex. As part of the settlement, Yakutia will collect 2.6 billion rubles a year ($98.4 million) in diamond taxes, based on the new law that allocates all diamond mining revenues to the regions. Previously, 40 percent of revenues went to the federal budget. Yakutia’s diamond districts will continue to receive 2 percent of ALROSA’s profits. In addition, the federal government agreed to assume some of Yakutia’s other expenses.

The Marketplace

• Yakutia-based diamond company Almazy Anabara mined $80 million worth of rough in 2006, 10 percent over projections. In 2007, the company plans to mine $87.5 million worth of rough and sell a total of $91.1 million.
•119 offers worth $25.5 million sold at the nineteenth ALROSA auction. The next auction will start in February.

Article from the Rapaport Magazine - January 2007. To subscribe click here.

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