OREANDA-NEWS. May 12, 2010. Transcript of the beginning of the meeting: Vladimir Putin: Mr Konov, how did your company perform last year? How do you see your prospects for 2010?

Dmitry Konov: Our prospects for this year are much better than in 2009. We faced major problems during the first quarter of 2009. Practically the entire industry was in the red. It was not so much prices as production volumes that fell -- by almost 50% in some sectors. The decline was even more pronounced in the second half of the year, and more or less favourable prospects became visible in early 2010.

Vladimir Putin: How many workers do you have?

Dmitry Konov: Over 53,000.

Vladimir Putin: What was the situation with jobs like last year?

Dmitry Konov: We cut 5% of our staff. We mostly laid off retirement-age workers who received generous pensions and severance pay. On the whole, our average wage increased by 12% last year. This was made possible primarily by increasing additional payments and reorganizing our personnel.

Vladimir Putin: So, you increased wages last year?

Dmitry Konov: We increased the average wages.

Vladimir Putin: What's the situation like with your main products, nitrogen fertiliser and tyres?

Dmitry Konov: We operate five separate businesses, including tyres and nitrogen fertiliser, which are independent. There is also the production of synthetic rubber, plastics and gas processing.

Vladimir Putin: Tyres and nitrogen fertiliser?

Dmitry Konov: Tyres and nitrogen fertiliser are separate production entities. Gas processing, rubber and polymer production are another category. Demand for tyres has rebounded. Imported tyres accounted for 50% of total pre-crisis demand in 2008 and were the first to leave the market in 2009. Consequently, the situation was not so bad for Russian producers. Demand is coming back for tyre sets on the primary market and for tyre replacements for motorists on the secondary market. We definitely see prospects for the second half of 2010.

Vladimir Putin: That's a sign that the automotive industry is recovering.

Dmitry Konov: This is also true of consumer demand. However, the situation with nitrogen fertiliser is not so rosy. We hit an all-time high in 2008 when carbamide, the main type of nitrogen fertiliser, cost USD 800 per tonne. In early 2010, it cost USD 280 per tonne, and now it costs even less, USD 240-250. We spend a lot on logistics and shipping to our main markets. Our gas expenses are substantial and growing all the time. Russia consumes 20% of domestically produced nitrogen fertiliser. Logistics and the cost of gas account for 80% of our current price. This is a serious problem. We are losing our position on the fertiliser market.

Our gas processing, on the other hand, is rather successful.

Vladimir Putin: So your fertiliser problems are in foreign markets, because you are becoming less competitive?

Dmitry Konov: Yes, the situation is rapidly deteriorating. It is a very serious problem. New enterprises are opening up in regions where gas expenses are much less than in Russia, primarily in North Africa, the Middle East and part of Latin America. Their gas expenses are completely different. Moreover, they are usually located on the coast. Unfortunately, we cannot do this for a number of reasons. Their cost of delivery to the main markets is considerably lower. Ukraine provides an interesting example. Last year, with the contractual gas price being what it was, production in the Ukrainian fertiliser industry fell by nearly 60%. It had almost ground to a halt.

As for gas processing, we are consistently increasing the volume of associated gas we process. We have gone from 8 billion cubic metres in 2004 to 19 billion in 2008. All our investment projects, which we implemented from 2006 through 2008, have already materialised, and are allowing us to earn more and invest more.

Rubber production fell sharply in 2008 as a result of falling demand in the tyre industry. We are currently witnessing a renaissance, with high prices and very good demand. This sub-sector is now in a very solid position.

The market for polymers is good. Domestic demand is rising. Russia still lags three to four times behind western Europe in terms of per-capita polymer consumption. There is impressive growth potential here.

As far as the economy is concerned, it is adequate, and we are investing actively. As you know, there are plans to start producing polypropylene in Tobolsk. This project is being financed by Vnesheconombank and other investors. We believe it has good prospects, and we continue to make substantial investments there.

Vladimir Putin: So the company managed to stay afloat in 2009 by diversifying broadly in various sectors?

Dmitry Konov: That's right.

Vladimir Putin: There were slumps in some sectors, while others stabilised.

Dmitry Konov: Except for the first two months, the feedstock segment was steady, while the rubber-tyre chain dropped off significantly. The situation with polymers and fertiliser was more or less balanced.

Vladimir Putin: We should see what additional measures can be taken in order to boost the competitiveness of our nitrogen fertiliser on foreign markets.

Dmitry Konov: As I see it, since we can't stop gas prices from rising, the only way to do this is to reach an agreement with Russian Railways regarding port-shipment tariffs.

Vladimir Putin: But Russian Railways will argue that you have a special relationship with the energy giant Gazprom, and that mutually acceptable solutions should be found.

Let's discuss this in greater detail now.