Former Oil Executive Moves to Pulp and Paper

ST. PETERSBURG — In October, Mikhail Moshiashvili left a high-powered job in Moscow as head of corporate finance for Yukos Oil Co., Russia's second-largest oil producer, to work for ZAO Ilim Pulp Enterprise, a privately owned St. Petersburg pulp and paper holding company.

Top managers generally prefer the capital, but Moshiashvili, 27, said he sees a chance to shape a growing company's destiny, and one with sales last year of $1 billion. Under his guidance, Ilim Pulp is launching a program to increase the company's value to prepare for an initial public offering and American Depositary Receipt issue in the West in 2003.

Moshiashvili, who was born in Georgia, is part of the company's effort to bring in foreign experts and Russians with Western experience. He previously worked for the World Bank in Washington and ABN Amro Bank in Moscow.

Moshiashvili said his main goals are to streamline and modernize production, recruit foreign managers and adopt international accounting standards. The company also plans to expand output of high-value wood products, which are now a negligible portion of sales.

"Ilim Pulp is a great opportunity because I am responsible for development and increasing corporate value," Moshiashvili said. "Here, I can make a difference in the way the company develops."

Since Russia's 1998 financial crisis and ruble devaluation, exporting processed timber is more profitable, and Ilim Pulp sales have grown about 20 percent annually. Ilim Pulp's plants are in northwest Russia and Siberia, and it ranks in the world's top 20 pulp and paper companies in terms of output.

Despite its large size, up until a year ago the company's name never appeared in the media. It deliberately kept a low profile until it had solidified its position in the market. Now, Ilim Pulp is flexing its muscles, though plotting its course carefully.

"We want to hold off on the IPO and third level ADRs until 2003 because by then our business will be better developed," said Moshiashvili, whose official title is first deputy chief executive officer. "Increasing corporate value is not a PR exercise, but our company's new philosophy at every level."

Ilim Pulp accounts for nearly 35 percent of the country's pulp and board volume, and exports 70 percent of output. Founded in 1992 as a company trading pulp and paper products, in 1996 it began buying its pulp and paper manufacturing suppliers, a process that accelerated after the crisis.

"Suddenly, after the ruble devaluation, these companies became cheap to buy, especially for us because our company was, and is, earning hard currency from exports," said Svyatoslav Bytchkov, Ilim Pulp's director of corporate communications.

In 2000, sales increased 25 percent to nearly $1 billion. In 1999, sales were $800 million while the company had a profit of $100 million. The company has not released profit figures for 2000.

Among Ilim Pulp's leading shareholders are offshore companies, such as Intersetz S.A., Interpulp Ltd. and Alcaria Ltd. These companies are said to be controlled by company directors, but the company declined to provide clarification. Ilim Pulp did say Promstroibank of St. Petersburg, the largest bank by assets in northwest Russia, is also a shareholder, but again declined to comment on the exact stake.

Sputnik Group, the investment company controlled by American financier Boris Jordan, said it has spent $30 million over the past two years to build its National Timber Co. in the Vologda region, about 460 kilometers northeast of Moscow. The company says it will invest at least $50 million in Vologda over the next three to five years.

Given the changes in the Russian economy since the financial crisis in August 1998, analysts are optimistic about opportunities to develop domestic timber production.

"Sputnik and others like it have a good chance of being successful in the timber industry because the ruble is weak, making it advantageous to export finished goods, and because the domestic market is growing" said Lev Savulkin, senior analyst at the Leontief Center for Social and Economic Research in St. Petersburg.

But there are dark clouds on the horizon that might spoil this growth.

"While worldwide there has been an increase in investment and sales in the timber industry, as the world moves toward recession, things could become tougher as demand declines," Savulkin said. "Also, if the ruble strengthens, that will make exports less profitable."

Nearly 83 percent of the timber Ilim Pulp cuts goes toward pulp and paper production, to make items ranging from raw pulp to carton and paper. The remainder is used in products such as furniture and construction materials.

The company's main program for increasing corporate wealth centers on improving sales of wood products, which is a high value product, as opposed to pulp and paper, which are low value products, Moshiashvili said. Of the company's nearly $1 billion in sales, only $40 million was in wood products.

"Right now, the most valuable part of the trees is processed as pulp, which is a low value product," said Moshiashvili. "Every dollar invested in wood products gives two to three more times profit than that in pulp and paper."

He said that after production is restructured in favor of wood products, total sales should reach $1.8 billion in 2004, and nearly $400 million of that should be from wood products, a tenfold increase over current levels.

According to Moshiashvili, the company is now valued at about $700 million or $800 million, and Ilim Pulp will soon choose an international auditing firm to make a more exact appraisal. The company's goal is to boost its value to $1.5 billion in 2003, in time for the IPO.

But like most Russian companies, the company's directors want a strategic foreign investor but do not want to give up control.

"We plan to sell no less than 15 percent and no more than 25 percent of our shares in the IPO," Moshiashvili said.

And so Moshiashvili's most important task will be convincing foreign investors that their investment is safe with Ilim Pulp's directors.