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Amazon Is Finally Setting Up Shop In Russia, Says Report, Expanding Its International Footprint Again

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E-commerce giant Amazon looks like it is gearing up for the latest chapter in its international expansion: an operation in Russia. According to this article in Forbes (in Russian) the company has opened its first office in the country, headed by Arkady Vitrouk. Vitrouk is the former general director of ABC-Atticus, a publishing group owned by media baron Alexander Mamut.

Forbes cites unnamed sources but notes that the appointment, and the office opening, have not been confirmed by Amazon itself. However, we’ve discovered that Vitrouk’s LinkedIn profile does confirm him as director of Kindle Content for Amazon in Russia.

Looking a little closer, Amazon is hiring for at least three other positions for Russia specifically for its Kindle business and the sourcing of local content: a senior product manager for Kindle content pricing, and a principal for content acquisition for Kindle Russia, and another content acquisition manager.

A visit to amazon.ru currently redirects to the company’s main page for Europe, with links to other countries’ local sites, including the UK, France, Spain, German and Italy. We have contacted Amazon and Vitrouk himself for more detail and will update this story as we learn more.

The news comes in the same week that Amazon announced that it would take its Appstore business international — extending it to nearly 200 countries, another sign of how the company is gearing up for more scale. It also follows reports (again unconfirmed) that Barnes & Noble is also preparing for more Nook activity in Russia.

Russia is currently Europe’s largest internet market, according to a recent study from comScore, with an online audience of 61.3 million users.

That, combined with Russia’s rapidly rising middle class, has led to a boom in e-commerce. Morgan Stanley believes the Russian e-commerce market will be worth $36 billion by 2015, up from $12 billion in 2012.

Russia has been a noticeable hole in Amazon’s footprint, but that has spelled opportunity for local players, too.

Ozon — commonly called the “Amazon of Russia” — has raised $121 million in funding and has been building up a very Amazon-like business, complete with a logistics network.

As we’ve pointed out before, this is especially important in a country like Russia, which doesn’t have a solid, extenstive pre-existing delivery infrastructure that spans across the whole of the huge country.

That, and the lack of credit card penetration, has meant that companies like Ozon and fashion/home goods site KupiVIP (itself flush with $120 million of funding) have built out fleets of their own delivery trucks, with drivers who take cash on delivery for goods (KupiVIP, focusing on clothes, will even wait until the recipient tries something on, so that the item can also get returned on the spot if it’s unsuitable).

Ozon’s business has been built on its extensive logistics network to deliver a soup-to-nuts range of goods, but it has not ruled out doing more in cloud services. However it seems less interested in Kindle-style products like tablets, e-readers and digital content.

This is where Amazon could come in. In another BRIC market, Brazil, Amazon has been building out a business based on its non-physical goods — Kindle books and Kindle devices.

This could be one route to how Amazon decides to tackle Russia, at least in part. In that sense, it’s interesting that the Forbes report specifically names as the head of Amazon in Russia someone whose immediate experience lies precisely in publishing, rather than e-commerce or retail, and that he’s already heading up business for the company there in that vein.

P.S. I write “at least in part,” because it turns out that Amazon is also hiring for other Russia-related expansion plans. Fashion e-commerce site Shopbop, owned by Amazon, is seeking a marketing manager for a new rollout in Russia. Amazon has also been headhunting in Moscow for software engineers — although these would be for relocation to Seattle.

Cyprus Rescue: The Destruction of a Tax Haven

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Cyprus is paying a high price for the $13 billion financial rescue it finally obtained from the E.U. early Monday after a week of high drama: the destruction of a key pillar of its economy, its status as the offshore tax haven of choice for wealthy Russians. Under the terms of the deal, Cyprus will proceed with a massive cutback of its major banks. The biggest losers will be bondholders and depositors who have more than $130,000 in their accounts; the exact size of their losses still has to be calculated, but it could easily be above 20% and perhaps much higher in some cases. However, smaller depositors with less than $130,000 will be spared, a significant change from the initial rescue deal agreed upon a week ago that was rejected by the Cyprus parliament. Under that arrangement, all bank-account holders would have been taxed, regardless of the size of their deposits, to enable the island to come up with its own $7.5 billion contribution toward the bailout. (MORE: Cyprus Banking Crisis: The Endgame Begins) The deal still needs to be formally ratified by parliaments in E.U. countries, but — crucially — it has already jumped the biggest hurdle, that of approval in Cyprus itself. On Friday, the island’s parliament approved a range of legislation, including one to restructure the banking sector, which enabled the deal to be sealed. The overall impact will be a dramatic change for Cyprus’ economy. Over the past 30 years, since the fall of the Berlin Wall, the island has banked on its ability to attract money from Russia and elsewhere as an offshore center. Oversight has been tightened up since Cyprus joined the E.U. in 2004, but it remains relatively lax by international standards, and foreign companies pay a flat tax rate of just 10%. For a while the strategy seemed to work well; Cyprus built up a gargantuan banking industry, which is currently about five times the size of its total economy, according to Standard & Poor’s. About one-third of the $88 billion in deposits in

Rosneft tops Exxon with 5% of world oil

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With TNK-BP, Rosneft overtakes Exxon and PetroChina Co. in output. It will pump about 4.1 million barrels a day this year

OAO Rosneft’s US$55-billion takeover of TNK-BP creates an empire stretching from Russia’s Far East to Venezuela that pumps almost 5% of the world’s crude.

As Chief Executive Officer Igor Sechin integrates Russia’s largest and No. 3 oil companies, he will steer an upgrade of Soviet-era refineries, a drilling program in uncharted Arctic waters, the creation of a natural gas business and a global alliance with Exxon Mobil Corp.

The new company, created Thursday, will be about 70%-owned by the Russian state and will employ 218,000 people, more than Exxon and Royal Dutch Shell Plc combined. Rosneft sales per employee will be $729,000 this year, compared with more than US$5-million at Shell, representing the scale of potential cost savings. Sechin plans to find US$10-billion of efficiencies through the TNK-BP deal.

“This is the biggest acquisition in history in terms of production and reserves,” said Daniel Yergin, author of The Prize, a history of the oil industry, who will sit on an integration committee overseeing the takeover. The companies “recognize the scale and complexity, but they also see the scale of opportunity.”

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Ambitious Plans

Buying TNK-BP stretched Rosneft’s finances, racking up US$31-billion in loans, and the company is funding part of the deal by selling oil in advance for as much as US$10-billion to Glencore International Plc and Vitol SA, the world’s two biggest independent oil traders. Moody’s Investors Service and Fitch Rating Ltd. both put a negative watch on Rosneft’s credit after they announced the deal.

“The plans are ambitious and capital-intensive,” said Valery Nesterov, an oil and gas analyst at Sberbank Investment Research in Moscow. “It will need to create a modern, advanced company and not a traditional one that it is now.”

The spending includes investments in the upgrade of refineries, estimated at US$25-billion for Rosneft’s own plants, as well as US$2.5-billion for TNK-BP’s projects.

Sechin will also seek to accommodate the interests of BP Plc, the U.K.’s second-largest oil company, which became Rosneft’s second-biggest shareholder through the deal to sell its half of TNK. BP will have a 19.8 percent holding in Rosneft and CEO Bob Dudley will sit on the board.

‘Long-Term Relationship’

“The Russian oil industry has tremendous potential both onshore and offshore,” Dudley said at a press conference in London yesterday. “This is the beginning of a very long-term relationship.”

BP will buy back US$8-billion of shares from investors after the deal, returning to its shareholders an amount equivalent to the value of the original investment in TNK-BP in 2003, the London-based producer said Thursday.

YANA LAPIKOVAYANA LAPIKOVA/AFP/GettyImages
YANA LAPIKOVAYANA LAPIKOVA/AFP/GettyImagesIgor Sechin

As part of the deal, BP bought a further 5.7% stake in Rosneft from state holding Rosneftegaz, which owned 75.16% of the Russian oil producer. The state’s stake in Rosneft is now 69.5%.

Rosneft’s ambition isn’t limited to Russia, where billions of barrels of crude remain untapped in Siberia’s Vankor field, on the island of Sakhalin in the east and in Siberia’s Bazhenov shale formation. Sechin has partnerships with Norway’s Statoil SA and Italy’s Eni SpA to explore offshore areas and so-called tight oil fields.

Rosneft is also working with Exxon in the Gulf of Mexico, Alaska and Canada. The company has operations in Kazakhstan, Venezuela and the United Arab Emirates.

Soviet Spy
Sechin, a former Soviet spy and longtime Putin ally, said March 6 that the TNK merger will create at least US$10-billion in cost savings, as well as giving Rosneft an additional US$5-billion in cash from TNK’s balance sheet. Many of TNK’s fields lay close to Rosneft’s, creating economies of scale, he said.

Sechin has a track record of combining assets from other companies. As a deputy prime minister in Putin’s government responsible for energy policy, he built Russia’s largest oil producer in part with the assets of bankrupt Yukos Oil Co., whose former chief executive Mikhail Khodorkovsky remains in prison on tax charges.

“It’s a real challenge for Rosneft, primarily a management one,” said Cliff Kupchan, a senior analyst at Eurasia Group in New York. “Sechin will first have to focus on digesting TNK-BP assets. Next, the key will be to prioritize effectively. Tight oil and international partnerships offer relatively big and near-term payoffs.”

With TNK-BP, Rosneft overtakes Exxon and PetroChina Co. in output. It will pump about 4.1 million barrels a day this year, the company said. While it has replaced more reserves than it’s produced every year since 2009, its market capitalization remains a quarter of Exxon’s.

“The list of company issues will expand because there is a simultaneous increase in the number of strategic goals and ambitions happening along with the company enlargement,” said Sberbank’s Nesterov.

Bloomberg News

Cyprus Banking Crisis: The Endgame Begins

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The ultimatum has been issued: The European Union is pressuring Cyprus to end its standoff over a proposed financial rescue package and agree to new terms very rapidly – or face bankruptcy. Cyprus is scrambling to respond with a revised plan that would shield small depositors, but it still needs to finalize details, and then win approval from the E.U. Two days after the Cyprus parliament overwhelmingly rejected the bailout, which would have taxed the deposits of all bank account holders, the E.U. hit the island with a one-two punch. The first blow was a brief, two-line announcement from the European Central Bank (ECB) that it would stop providing emergency liquidity assistance to Cypriot banks on Monday, March 25, unless the island nation agrees to a bailout deal with the E.U. and the International Monetary Fund before then. The announcement was a blunt attempt to force Cyprus’ hand, mainly because the tiny nation’s biggest banks have racked up heavy losses from soured loans to Greece and are dependent on liquidity from the ECB. Cutting off that financial lifeline would push them into bankruptcy, perhaps even taking the government with it, because the banks’ assets are estimated by Standard and Poor’s to be five times the size of Cyprus’s economy. “Neither the bank shareholders nor Cyprus’ government appear able on their own to meet the banks’ pressing capital needs,” S&P said in a statement announcing that it was lowering the island’s long-term credit rating to CCC from CCC+, judging the financial outlook to be “negative.” (VIDEO: Could Cyprus Bring Down the European Economy? TIME Explains) The second blow was a conference call by the so-called Eurogroup, comprised of finance officials from the 17 nations that have the euro as their currency. A statement after the call made it clear that the E.U. would not back down on its key condition for a $13 billion rescue, namely that Cyprus itself put up $7.5 billion. The Eurogroup called on the Cyprus government to put forward a new proposal “as rapidly as possible.” However,

Russia, Saudi Arabia hope to emulate U.S. shale boom

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Fracking isn’t just for shale. In Russia, producers are importing techniques from the U.S. to squeeze billions of dollars of extra oil from Soviet-era fields.

TNK-BP, Russia’s third-largest producer, will use hydraulic fracturing combined with horizontal drilling in almost half the wells it sinks this year, a sixfold increase in just two years, the company said. OAO Rosneft, OAO Lukoil and OAO Gazprom Neft have similar plans.

Meanwhile, Saudi Arabia, the world’s biggest oil exporter, will drill about seven test wells for shale gas this year, according to Oil Minister Ali Al-Naimi.

“We know where the areas are,” Al-Naimi said at a conference in Hong Kong Monday, referring to the country’s shale gas deposits. “We have rough estimates of over 600 trillion cubic feet of unconventional and shale gas so the potential is very huge and we plan to exploit it.”

Saudi Arabia is seeking to develop its natural gas resources to meet rising domestic energy demand. Saudi Arabian Oil Co., or Saudi Aramco, is searching for shale gas in the northwest of the country as it explores for unconventional resources such as sour gas in the oil-rich eastern region and in the Empty Quarter deserts, Senior Vice President of Upstream Amin Nasser told a conference March 10 in Manama.

The nation may hold as much as 645 trillion cubic feet of technically recoverable shale gas, the world’s fifth-largest deposits, behind China, the U.S., Argentina and Mexico, according to estimates by Baker Hughes Inc. The kingdom also has about 282.6 trillion cubic feet of proven conventional gas reserves, according to Aramco’s 2011 annual report.

Russian Winter

So-called fracking, the process of blasting oil from rock by injecting a mixture of water, sand and chemicals into wells, has been used for years in Russia’s Siberian oil heartland to stimulate production. What’s new is allying it with horizontal drilling, turning the drill-bit 90 degrees to bore horizontally to reach more oil-bearing rock. The pairing was perfected in the U.S. to get economically viable flows out of shale deposits. Used in Russia, producers are recovering 15 percent more crude from aging deposits.

“This is a very big change in the way the company approaches production that has literally happened in the last year and a half,” said Gazprom Neft’s deputy chief executive officer. “We have made breakthroughs.”

Enhancing production from decades-old fields is needed to maintain Russia’s crude production above 10 million barrels a day for a fourth year, a figure that surpasses Saudi Arabia and the U.S., said Cliff Kupchan, an analyst at Eurasia Group. Apart from the Russian state, which gets half its revenue from oil and gas, the other winners are suppliers of people and equipment to frack wells including Schlumberger Ltd., Weatherford International Ltd. and C.A.T. Oil AG.

Enhanced Production

“Rosneft is becoming a more technologically advanced company,” Igor Sechin, chief executive officer of Russia’s largest producer, said in a speech in Houston this month.

State-controlled Rosneft will employ the technique at 50 wells this year at its largest production unit, up from just three in 2012, according to a company presentation. Gazprom Neft, the oil unit of Russia’s natural gas monopoly, will double the number of wells where fracks are used this year.

Lukoil, Russia’s second-largest producer, plans to use fracking in 55 horizontal wells over nine years to raise projected production 15 percent at Urevskoye, a 60,000 barrel-a day Siberian field that first started pumping in the 1970s, a company presentation showed. The company expects to get an extra 35 million barrels from the field, valued at about $3.7 billion based on today’s price for Russia’s benchmark grade.

‘Big Change’

“Everyone is now using horizontal wells and the technologies paired with it like fracturing because that’s the most straightforward way to maximize returns,” said Lev Snykov, a partner at Greenwich Capital in Moscow.

Fracking allowed the exploitation of U.S. natural-gas reserves the industry previously considered useless, elevating America above Russia as the world’s largest producer of the commodity. Horizontal drilling increases fracking’s effectiveness by exposing more oil- and gas-bearing rock.

The process is now boosting U.S. oil production from so- called tight reservoirs in North Dakota and Texas. U.S. crude oil production reached 7 million barrels a day in December, the highest in 20 years, cutting the need for imports, according to the U.S. Energy Information Administration.

President Putin

As American production gains, Russian President Vladimir Putin has set a goal of maintaining production at more than 10 million barrels a day. Output, which reached a post-Soviet record of 10.4 million barrels a day in September, will be little changed this year or rise slightly, Deputy Prime Minister for Energy Arkady Dvorkovich said in February.

To help postpone production declines at existing fields, oil services companies are exporting expertise to Russia. Houston-based Schlumberger, the world’s largest oilfield- services provider, is vying with U.S. rivals such as Weatherford and Russian operators led by C.A.T. Oil.

Schlumberger has 12 separate fracturing fleets — the combination of machines and people needed for fracking –working in Russia, a company executive said. C.A.T., which says it has a market-leading share of 31 percent, has 15.

The boom in horizontal wells will cause the number of meters drilled every year to increase at least 40 percent by the end of the decade, according to research from Renaissance Capital.

“Russia under Putin is committed to maintaining production levels,” Eurasia’s Kupchan said by e-mail from New York. Companies like “Rosneft will be drilling and subcontracting unless the oil price really bottoms out.”

Growing Fast

The market is growing fast. Lukoil didn’t use fracking in a horizontal well in Siberia until 2011, a company official said. Since then it’s undertaken 215 such wells, adding about 19 million barrels of production. Lukoil plans fracking in 450 horizontal wells over the next three years.

TNK-BP, which is being acquired by Rosneft, plans 102 horizontal wells with fracking this year, double last year’s number and almost half of all the wells it’s drilling, the company’s press service said.

In time, fracking and horizontal drilling in Russia will spread from rejuvenating older fields to developing unconventional reserves.

The Bazhenov shale, a layer of rock the size of France that lies underneath Siberia’s producing fields, may hold more oil than Saudi Arabia, according to Russia’s subsoil agency. The geology is similar to North Dakota’s Bakken shale, where production has more than doubled in two years to 700,000 barrels a day, data compiled by Bloomberg show.

Gazprom Neft and partner Royal Dutch Shell Plc will spend $200 million over the next three years in the Salym area of the Bazhenov, according to the Russian company. Exxon Mobil Corp. and Rosneft also plan to explore the area.

Bloomberg News

Cyprus: The E.U. ‘Rescue’ That Risks Backfiring

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With its $13 billion agreement to bail out Cyprus, the E.U. this weekend thought that it had successfully doused the latest threat to its single currency, the euro. Cyprus has run into trouble because its banks are heavily exposed to Greek debt. Instead, the nature of the bailout – which features a levy on the bank deposits of ordinary Cypriots — has sparked a bank run on the island that threatens to spill over to other European countries. The sudden eruption of panic could still be contained; European officials on Sunday night were looking to revise the terms of the agreement ahead of a vote on the rescue package in the Cypriot parliament, in order to shield smaller depositors. E.U. officials insist that Cyprus was always a special case. But by forcing ordinary citizens to fund the bank rescues up front, through a tax on deposits, the E.U. is setting a precedent that is chilling to people in other countries, like Spain, which has looked at a bailout for its own beleaguered banking system. (MORE: Saving the Euro Zone, One Bank at a Time) In an impassioned address on Cyprus TV on Sunday night, President Nicos Anastasiades said, “Cyprus is in a tragic situation,” but he argued that this rescue package was the best one for the island nation. “I chose the least painful option, and I bear the political cost for this, in order to limit as much as possible the consequences for the economy and for our fellow Cypriots,” he said. The $13 billion bailout package may seem like chump change, but in fact it represents about 50% of Cyprus’ total economy. The Cypriot central-bank governor, Panicos Demetriades, has pointed out that, as a proportion of GDP, it is one of the largest bank bailouts ever, second only to the 1997 bank bailout in Indonesia. The government first requested a bailout in June 2012 after the two biggest banks, Laiki Bank and Bank of Cyprus, racked up huge losses on their exposure to Greek debt and themselves needed to

Seismic firm upbeat on eastern Russia oil potential

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New exploration of the Russian oil province which supplies China and other growing Asian consumers will yield oil finds that allay disappointment over meager gains in output, the head of a seismic firm said in an interview.

Russia, the world’s top oil producer, pumped 10.4 million barrels per day last year. Most comes from the Soviet-era oil heartland of western Siberia, while output at new export projects further east is rising from a low base.

The government forecasts output will stagnate or rise slightly this year. Oil firms Rosneft, TNK-BP and Surgut, are working to meet demand in the growing Asia-Pacific market as European demand lags.

To find new reserves, Russian companies are moving away from heavy reliance on exploratory drilling toward greater use of seismic, which allows geologists to construct models of underground reservoirs by sending shock waves through the earth.

“I strongly disagree that eastern Siberia is a disappointment. The methods that were used 20-30 years ago simply do not work. Yes, it has resources which are more difficult to discover and to extract,” Geotech CEO Nikolai Levitksy told Reuters in an interview.

“It doesn’t mean they are not there and it doesn’t mean they will not be produced,” he added. “I have always been and remain certain that the Eastern Siberia is Russia’s key region from the standpoint of increasing oil production.”

Geotech is part of IGSS, which recently obtained a technical listing in London. IGSS, which is 13 percent owned by Gunvor trade house founder Gennady Timchenko’s investment vehicle, manages the legacy assets of Soviet oil exploration companies.

EASTERN VECTOR

Russia’s oil industry, led by state-controlled Rosneft, would like to boost Asian exports but needs a sustained increase in eastern output to do so without robbing Europe of oil flows.

The launches of Rosneft’s Vankor, TNK-BP’s Verkhnechonsk and Surgutneftegaz’s Talakan fields in recent years has allowed Russia to export 600,000 barrels per day of oil eastwards and launch a new Pacific grade of crude.

Declines in Russia’s core conventional fields of Western Siberia have so far been offset by rising output at these fields, but ramp-up at two of them, Vankor and Verkhnechnosk, has been scaled back to stretch out peak production over time.

Meanwhile, oil companies have put greater emphasis on stemming declines at older fields by delving into low-permeability, or “tight”, oil reserves in Western Siberia, often using technologies that helped drive the U.S. shale revolution.

“You have to do both and there is a huge frontier of operations in the brownfields,” Levitsky said.

“Of course we have a huge number of fields with falling output, and exploration of those fields should yield a serious increase in reserves through the use of current technologies – first and foremost seismic technologies.”

SOVIET LEGACY

By its own reckoning, Geotech is the world’s second-largest land seismic company. Some of its subsidiaries were founded in the 1940s as Soviet geological expeditions which ultimately discovered the Soviet Union’s supergiant fields.

The last of those major discoveries – Imilor, Shpilman, and Lodochnoye fields – were allocated by the government last year, and Levitsky said producers needed government incentives to explore for the subsequent generation of fields.

“You can’t live your whole life on the exploration legacy of the Soviet Union,” Levitsky said.

“There are no new Samotlors,” he added, referring to a declining Soviet supergiant field operated by TNK-BP.

“It is clear that reserves are more difficult to extract than before, the fields are more complex and new technology is needed to find and produce oil. Now the technology is moving ahead and specialists are maturing.”

For now, Russia’s oil companies are boosting reserves at a pace matched only by countries such as Norway where oil companies pursue intensive exploration programmes.

Levitsky pointed to incentives offered by rival producers such as Kazakhstan and Norway and said Russia should follow suit to help guard against exploration cuts if oil prices fall.

“There are no direct state incentives for geologic exploration. There are only indirect ones, like tax breaks for Eastern Siberia, but they do not incentivise the first stage of exploration,” Levitsky said.

“If in Norway up to 78 percent of exploration costs are compensated by the state, there is nothing in Russia even though it has the biggest territory and the most poorly studied reserves.”

© Thomson Reuters 2013

Meteor explodes over Russia, injuring hundreds

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As everyone was watching a large body called 2012 DA14, which is heading for a close approach to Earth today, a far smaller body exploded in a spectacular fireball over Russia’s Ural region. Although it’s not yet clear whether any pieces of the meteor survived to land on Earth, the large booms caused by its disintegration shattered glass, resulting in hundreds of injuries, though no reported deaths.

According to the BBC, both the Royal Astronomical Society and the European Space Agency have stated that the explosion and the meteor expected to pass within 18,000km of Earth on Friday are unrelated. The the Russian Academy of Sciences said the rock was about 10 tonnes and entered the atmosphere at about 54,000km/h (about 33,500mph) before breaking up in a spectacular explosion 30km above the Earth’s surface. The New York Times reports that a local Russian official is claiming that an impact crater has been identified, which would indicate that a significant piece of the rock remained intact to reach the surface.

Russia Today has collected a series of videos taken in the vicinity of the explosion. Two appear to show the explosion itself, and the remainder of the clips provide a sense of just how significant the explosion was for those on the ground.

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