Terra Energy & Resource Technologies Inc. (TEGR)

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fyi: Kremlin aims to control Alrosa 8/30/06

http://www.finmarket.ru/z/anl/anlpgv.asp?id=520811&lr=0

Alrosa The federal government is seriously aiming to take a diamond monopoly under its control.

The federal government intensified its efforts to take Alrosa, the second-biggest diamond company in the world, under its control. At the beginning of the year, the company was not public with 37% of its shares in federal government property, 32% belonging to regional authorities and 8% to municipal authorities. The other 23% is dispersed among minor shareholders.

The idea to increase the federal share in the company to a controlling stake is not new - the issue has been discussed since the mid-1990. In 2001, President Putin targeted returning the monopoly to federal control while regional Yakut authorities have successfully used all opportunities to protect their 40% stake. However, the federal government had already managed to increase its share to 47% by 2H06 and is now aiming to expand it to 50% + 1 share. The federal government is looking to be very serious.

Yesterday, it submitted the amendments to the budget code to the Duma, which will be approved in September-October 2006. The proposed amendments are re-distributing Mineral Resource Tax on diamonds from federal to regional budget.

As a result, the regional Yakut budget will get an additional RBL2.6bn. The federal and regional sides have also agreed on a further compensation package as the Yakut budget may lose some more RBL9-11bn. This makes the project to take the company under federal control already in 2006 realistic. The deal itself could be positive for Russia in general:

* It is unlikely result in a further increase of government control over economic activity as in this case we should see asset redistribution from regional to federal government. This is not bad for transparency of the monopoly and thus for management efficiency.

* It should accelerate the IPO process.

* If/when the company becomes public, it should be positive for the market, and federal government investments.

* Previously, President Putin has discounted reports of a potential deal between Norilsk Nickel and Alrosa. However, we cannot rule out that the issue will be raised later, in our view. Investment implications: We believe the federal government may complete the deal on Alrosa in 2006.

As has been expected, the deal represents a compromise between regional and federal authorities. The deal should be positive for the market (it would bring a new stock there) and for Russia in general. The event should help to further curb the political power of regional authorities. Julia Tsepliaeva, Moscow (7 495) 755 5489 <<06.08.30.pdf>>