Italy prosecutors pursue Nomura assets in Europe

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  Copyright Reuters 2013

SIENA/MILAN –  Italian prosecutors took steps in Germany and Britain on Wednesday to carry out the seizure of up to 1.95 billion euros ($2.6 billion) of assets from Japan's Nomura <8604.T>, which they say is needed to halt further losses from Italy's Monte dei Paschi bank.

Prosecutors in Italy accuse Japan's largest broker of colluding with former managers of Monte dei Paschi, the world's oldest bank, to set up huge hidden bets on Italian government bonds that helped drive the Italian bank close to collapse.

Nomura says it has done nothing wrong. It said on Tuesday none of its assets had been seized in connection with the Monte dei Paschi probe and it would take all appropriate measures to protect its position.

Shares in Nomura, Japan's biggest brokerage, closed down 2.33 percent on Wednesday amid uncertainty over the impact of the Monte dei Paschi scandal. The Italian bank, which has shed nearly a third of its value in the past 12 months, was trading 0.41 percent higher.

The seizure order was aimed at preventing Monte dei Paschi from sending more cash to Nomura as collateral for the "Alexandria" trade, a huge bet on Italian government debt made more costly by an interest rate swap that forces the Italian bank to take losses when rates are lower than expected.

The funds are held in accounts outside Italy, which means the Siena-based prosecutors are trying to seize the money through "Target 2", the interbank payment system that links European banks through the central banks of individual countries that use the euro, a judicial source told Reuters on Wednesday.

The source said the Bank of Italy had contacted the Bundesbank to block a Nomura account held with Citigroup in Frankfurt, but had not yet heard back from the German central bank.

Prosecutors are also seeking to seize funds held on behalf of Nomura in London accounts with Citigroup and Bank of America . Neither Citigroup nor Bank of America are part of the investigation. Citigroup declined to comment. Bank of America did not return a call seeking comment.

The prosecutors' seizure warrant, seen by Reuters, says that between Feb 19 and April 5, Monte dei Paschi deposited more than 370 million euros with Nomura as collateral to help cover mounting losses. In total, it had 1.87 billion euros on deposit.

"This requires urgently stemming this landslide of money towards Nomura that is increasing by the day," the prosecutors said in the document, explaining why they did not wait for a judge to authorize the seizure, made public on Tuesday.

The prosecutors' warrant says that by freezing the derivative contract, they will be able to block all related payments.

Part of the 1.95 billion euros figure is some 88 million in "hidden" fees the prosecutors and Monte dei Paschi say Nomura received from the deal.

PARTIAL NATIONALISATION

Monte dei Paschi, Italy's third-largest bank, received a state bailout of 4 billion euros in February to plug a capital shortfall exacerbated by derivative deals. It faces the prospect of partial nationalization from next year.

Italian prosecutors are investigating Nomura's former top executive in Europe, Sadeq Sayeed, and its managing director in fixed income sales for the Europe, Middle East and Africa region, Raffaele Ricci, over allegations of aggravated fraud and usury.

Sayeed, who left Nomura in March 2010, denied the allegations. Ricci did not return calls for comment.

The seizure warrant said Nomura "took advantage of Monte dei Paschi's economic and financial difficulties" when it negotiated a restructuring of the Alexandria deal in 2009.

The prosecutors allege that the Japanese bank colluded with former managers at the Italian bank to conceal losses and engineered "disproportionate and abnormal" contract clauses at the expense of the Tuscan lender.

"All this determined, is determining now and will continue to determine in the future...huge negative consequences for the liquidity and operative functioning of Monte dei Paschi," the document said.

SWELLING LOSS

The Alexandria trade involved the purchase by Monte dei Paschi of Italian government bonds for 3 billion euros financed through a long-term repurchase agreement with Nomura.

The trade also involved an interest rate swap that according to the prosecutors ensured Nomura effectively received a 5 percent coupon on the government bonds, while the interest rate received by Monte dei Paschi was 0.34 percent.

The transaction had an initial negative fair value of 308 million euros for Monte dei Paschi that was not revealed in the bank's financial accounts, including "hidden" fees for Nomura, the prosecutors said.

As the decline in the bonds' value during the euro zone debt crisis swelled Monte dei Paschi's losses on the trade, the Tuscan lender was forced to deposit as much as 2.45 billion euros as collateral in mid-May 2012, they said.

A judicial source told Reuters the prosecutors' seizure order had effectively frozen the Alexandria transaction and all related payments had been suspended. A judge now has around 10 days to decide whether to ratify the prosecutors' move.

Monte dei Paschi booked a pretax loss of 730 million euros in 2012 linked to the Alexandria trade and a similar deal with Deutsche Bank known as Santorini.

When asked whether the prosecutors could also take steps against Deutsche Bank, the judicial source said their examination of the Alexandria trade was at a more advanced stage than that of Santorini but that they could consider such a move. ($1 = 0.7616 euros)

European Q1 car registrations down 10 percent as unemployment and gas prices remain high

MILAN –  Europe's automakers' association says new car registrations slid 10 percent in the first quarter of 2013, with all but three European Union countries posting declines.

ACEA on Wednesday said new car registrations for the first three months of 2013 totaled 2.9 million, down from 3.3 million in 2012.

The European debt crisis has sapped consumer spending and March marked the 18th straight month of declining auto sales as unemployment and gas prices remain high.

Among Europe's major markets, only the U.K. posted growth in the quarter, up 7.4 percent to 605,000 vehicles. Otherwise, all major markets saw double-digit contractions: down 11.5 percent in Spain, 13 percent in Italy, 14.6 percent in France and 13 percent in Europe's strongest economy, Germany.

The smaller car markets of Estonia and Portugal also grew.

US Treasury Secretary Lew calls on Europe to pursue more growth-friendly economic policies

WASHINGTON –  Treasury Secretary Jacob Lew called on Europe's leaders to pursue pro-growth policies in the short term rather than trim their budget deficits, noting that the U.S. economy is "inextricably tied" to the health of its global partners.

Lew's comments were delivered in a speech at Johns Hopkins University School of Advanced International Studies previewing this week's global finance meetings in Washington.

Earlier this week, the International Monetary Fund lowered its outlook for the world economy this year, predicting that government spending cuts will slow U.S. growth and keep the euro currency alliance in recession.

Lew also said he would keep pressing other countries to avoid pursuing policies aimed at gaining trade advantages. The comments underscored U.S. concerns about China and Japan devaluing their currency to make their products cheaper overseas.

Council of Europe: Greece could ban extreme right group Golden Dawn

ATHENS, Greece –  The Council of Europe's commissioner for human rights says Greece should consider banning the extreme right-wing group Golden Dawn which has 18 seats in the country's 300-member parliament, and urged authorities to take tougher measures to combat a surge in racist violence.

Nils Muiznieks told the AP in an interview Tuesday that Greece would be "fully within its rights" to ban the party from public office. The commissioner, who visited Greece from Jan. 28 to Feb. 1, said in a 32-page report published by the Strasbourg, France-based organization Tuesday that he was "seriously concerned" by the increase in hate crimes targeting immigrants in Greece.

The report describes Golden Dawn as a "neo-Nazi and violent political party" that should be isolated under legally binding international human rights conventions signed by Greece.

Countries Buying the World’s Gold

Gold prices collapsed earlier this week one of the biggest selloffs on record  — but some of the world’s central banks are still buying up large amounts of the precious metal. Specifically, the central banks of six countries are adding gold to their official foreign reserves, according to The World Gold Council’s most recent report on global central bank holdings. These six nations have purchased large amounts of gold so far in 2013 or throughout 2012. And if their buying continues, their gold demand could offset some of selling pressure (which has driven gold price to below $1,400) in the future. Some nations may indeed continue buying because of central bank or currency issues.

This content was originally published on 24/7 Wall St.

Of course, a major market concern is that Cyprus is now likely a gold reserve seller. The World Gold Council shows that Cyprus’s 2013 gold reserve is only 13.9 tonnes, which is 61.9% of the small nation’s total foreign reserves. Concerns about selling from Cyprus are compounded by worries that larger troubled nations, including Italy, Portugal and Spain, may start selling gold to either raise capital or because of the existing Central Bank Gold Agreement sale programs. However, it does not appear that there is panic selling among most of these nations, so that effect can be discounted for the time being.

The six nations that could offset or at least mitigate gold sales by other central banks, institutions and individuals are Russia, Turkey, South Korea, Brazil, Kazakhstan and Iraq. In its analysis, 24/7 Wall St. has avoided specific speculation on why these nations may be acquiring gold because the reasons may differ from country to country.

It is worth noting is that the World Gold Council report evaluates central bank holdings and does not include investor and industrial demand in any of the countries. As recently as February, the World Gold Council showed that global central banks had bought the most gold since 1964. But India and China were no longer the demand mechanisms they had been in the past.

Read: Cities Where Unemployment Has Fallen The Most

Many of the official central banks’ gold holdings of large nations, based on gross domestic product (GDP), are nearly the same as they were in 24/7 Wall St.’s last report: The 13 Countries That Own the World’s Gold. But if that changes and some of the troubled nations actually sell gold as a source of funds, then it be beyond the scope of retail investors and speculators to help keep gold price at even the current depressed levels.

Here are nations with largest gold reserves as measured by tonnes. This list includes the International Monetary Fund and the European Central Bank.

• The United States (#1) was static at 8,133.5 tonnes
• Germany (#2) was down slightly at 3,391.3 tonnes (April 2013), versus 3,401.8 tonnes in late 2011
• The International Monetary Fund (#3) was static at 2,814 tonnes
• Italy (#4) was static at 2,451.8 tonnes
• France (#5) was static at 2,435.4 tonnes
• China (#6) was static at 1,054.1 tonnes
• Switzerland (#7) was static at 1,040.1 tonnes
• Russia (#8) increased reserves from 851.5 tonnes in late 2011 to 976.9 tonnes (April 2013)
• Japan (#9) was static at 765.2 tonnes
• The Netherlands (#10) was static at 612.5 tonnes
• India (#11) was static at 557.7 tonnes
• The European Central Bank (#12) was static at 502.1 tonnes
• Taiwan (#13) was static at 423.6 tonnes
• Portugal (#14) was static at 382.5 tonnes

24/7 Wall St. has analyzed the World Gold Council data and added comments on how and why the central banks of Russia, Turkey, South Korea, Brazil, Kazakhstan and Iraq could act as the stabilizing mechanisms for gold if selling pressure continues. If history is a measure, it seems highly unlikely that retail buyers and speculators will start another wave of gold purchases. Central banks buy gold in support of their currencies, and the recent massive drop may give the central banks that can a chance to increase their gold holdings.

GDP and population estimates were both taken from the CIA World Factbook.

Russia
> GDP: $2.5 trillion
> Population: 142.5 million

Russia now ranks as number eight among the nations with central bank gold ownership, up at 976.9 tonnes at the April 2013 report, versus 851.5 tonnes in late 2011. It kept increasing reserves through 2012, predominantly through purchases of gold in the domestic market. In the first two months of 2013, it bought another 19.2 tonnes, which means that if the pace of buying remains the same, Russia will cross the 1,000 tonnes mark by May. With gold production of its own, and the desire of Russia to continue adding to its influence and power as a financial center, it should be expected that central bank buying will continue regardless of the price swings in gold.

Read: America’s Fattest Cities

Turkey
> GDP: $1.125 trillion
> Population: 80.69 million

Turkey is fairly new to the list of the top nations holding gold. However, its serious accumulation of gold has accelerated because of banking regulation changes. It is now ranked 15 on the list of nations and governmental agencies owning gold. Stockpiles are being added to Turkey’s balance sheet as a result of a new policy accepting gold in its reserve requirements from commercial banks. Turkey’s gold now accounts for 15.6% of its total foreign reserves. The gold buying may continue ahead, although the price drop might cause banks to take a reserve loss. Turkey makes banks count the attrition because gold has been mandated. Turkey now holds of 375.7 tonnes, after adding 16 tonnes so far in the first two months of 2013, and that is after adding a net 164.5 tonnes or so in 2012.

South Korea
> GDP: $1.61 trillion
> Population: 48.95 million

South Korea, which ranks at number 34 today on the list of nations with central bank gold holdings, has 104.4 tonnes of gold. However, its central bank holdings have increased gold reserves by 20 tonnes. The country made two large purchases in 2012, one of 14 tonnes and one of 16 tonnes. This is still only 1.6% of the central bank’s reserves. It is possible the escalation of North Korean rhetoric might have something to do with South Korea adding gold, now and in the future.

Read: The Most Generous Countries in the World

Brazil
> GDP: $2.36 trillion
> Population: 201 million

Brazil also moved up the World Gold Council list to number 41, with 67.2 tonnes. However, this is only 0.9% of all reserves in its central bank. There were no real changes so far in 2013 in Brazil’s central bank gold holdings. The large additions were made in late 2012, when the central bank added some 33.6 tonnes to its holdings. For some time, Brazil has needed to back its currency with more gold. The country has one of the great promising economies of in term of future expansion, yet the Brazilian real is backed by a relatively small amount of gold.

Kazakhstan
> GDP: $231.3 billion
> Population: 17.73 million

Kazakhstan may be a major economy, yet the World Gold Council continues to show that the nation is adding gold reserves to the central bank. It now ranks number 30 among central banks that own gold, with 121.7 tonnes. This is also listed as 23.3% of its total reserves. Through purchases and swaps, it has added 6.4 tonnes in the first two months of 2013. The total added for all of 2012 tallied to 33.1 tonnes.

Read: America’s Nine Most Damaged Brands

Iraq
> GDP: $155.4 billion
> Population: 31.8 million

Iraq is very unlikely to put in a floor under international gold selling, but the World Gold Council showed that the nation ranked as number 54, with 29.8 tonnes. This is only 2.4% of its total foreign reserves, but one fact stood out in 2012 — it added 23.9 tonnes in August. As Iraq continues to get on with its recovery, more hard assets like gold may need to be purchased by its central bank to show additional stability for the reemerging nation.

Europe Privacy Regulators Probe Google: Reports

FRANKFURT –  Six European privacy regulators launched investigations Tuesday into Google Inc.'s handling of personal data, news reports said late Tuesday. The joint probe by regulators in France, Britain, the Netherlands, Germany, Spain and Italy follows Google's decision in 2012 to change its privacy policy for its services, such as Gmail and YouTube, to allow them to share data, The Wall Street Journal said. A Google spokeswoman told the newspaper that the company's privacy policy "respects European law" and that Google has "engaged fully" with the data-protection agencies over the course of a year-long investigation and will continue to do so. In France, such investigations can lead to fines of as much as 300,000 euros ($385,000) for repeat offenders. In the U.K., fines are capped at 500,000 pounds ($758,000), while the maximum fine in Italy is 1.2 million euros, the Journal said
.

Volkswagen to Increase Workforce with Focus Outside Europe

Volkswagen AG (VOW.XE) will increase its workforce to about 600,000 by 2018 from 550,000 now, with most new jobs outside Europe, the head of the car maker's employee works council told German daily Handelsblatt.

"In light of the crisis in European sales, we must consider carefully where to strengthen the workforce," Bernd Osterloh told the paper.

"Volkswagen is growing and thus we continue to hire in production, but less in Europe, more in China," he said.

As of the end of 2012, about 410,000 of VW's employees worked in Europe, and nearly 69,000 in Asia, according to the company's website.

The car maker, Europe's largest by sales, has said it plans to boost production significantly in China and will develop a budget car specifically for that market as it seeks offset the effect of a weak European market. In 2012, VW generated about 30% its global sales in China.

Russia Won't Help Out Cyprus Depositors

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  REUTERS

The Russian government will not aid businesses that have lost money in Cyprus, First Deputy Prime Minister Igor Shuvalov said, underscoring Moscow's resolve to clamp down on the flight of capital to offshore financial centers.

Major account holders, many of them Russian, will lose up to 60 percent of their deposits over 100,000 euros ($128,400) at Cyprus's largest bank under a European Union bailout to save the Mediterranean island from bankruptcy.

 

If Russians lose money "it's a terrible shame, but the Russian government will not take any action in such a situation," Shuvalov was quoted by the Interfax news agency as saying in a television interview on Sunday night.

But if a large company, in which the Russian state was a shareholder, sustained serious losses then this could be reviewed on a case-by-case basis, Shuvalov added.

"If there is some kind of concrete situation, we would be willing to examine it - publicly, transparently, here in Russia, but for this it would not be necessary to assist Cyprus," he said.

Cyprus is a staging post for large-scale capital flows in and out of Russia - including around a quarter of foreign direct investment flows and foreign lending, according to investment bank Morgan Stanley.

Much of that money is taking advantage of favorable tax treatment, but some is seeking to evade the Russian tax authorities, Shuvalov said.

Russians were believed to account for most of the 19 billion euros of non-EU, non-bank money held in Cypriot banks in January, according to the island's central bank. Of 38 billion euros in deposits from banks, 13 billion euros came from outside the EU.

Destination Moon: Russia to launch lunar robots

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  The Luna Glob orbiter and lander are on Russia's flight schedule for moon exploration between 2015 and 2020. (IKI)
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  Russia’s new moon exploration agenda involves orbiters, landers, rovers, and return sample spacecraft. (Leonard David/IKI)

Next Slide Previous Slide

Russia is developing a renewed robotic moon exploration program, building upon the history-making legacy of orbiters, landers, rovers and sample-return missions the country launched decades ago.

Russia's rekindling of an aggressive moon exploration plan was unveiled by Igor Mitrofanov of the Institute for Space Research (IKI) in Moscow during Microsymposium 54 on "Lunar Farside and Poles — New Destinations for Exploration," held in The Woodlands, Texas, on March 16 and 17.

The microsymposium was co-sponsored by Brown University, Russia's Vernadsky Institute, the Massachusetts Institute of Technology and the NASA Lunar Science Institute.

Notable lunar firsts

Russia is a spacefaring country not only with the robotic but also manned flight.'

- Igor Mitrofanov of the Institute for Space Research

Russia launched its last moon mission in August 1976, when it was still the Soviet Union. That mission, called Luna 24, was the last in the Luna series and featured a spacecraft that landed on the moon and returned samples of the Mare Crisium (Sea of Crisis) region. [10 Surprising Moon Facts]

The former Soviet Union's robotic lunar program achieved a number of notable "firsts" on Earth's satellite, including the first spacecraft to impact the moon; first flyby and photograph of the lunar farside; first soft landing on the lunar surface; first lunar orbiter; first circumlunar probe to return to Earth; first automatic return of lunar samples; and, of course, the first moon rover Lunokhod.

Today, Russian space scientists are scripting a new plan to reconnect with the moon.

"Exploration of the moon is an important part of the program," Mitrofanov said. 'I just want to emphasize that Russia is a spacefaring country not only with the robotic but also manned flight."

Mitrofanov said that the lunar pole is a most favorable place for future outposts for humans in deep space and emphasized that moon exploration was a step toward future Mars journeys.

Moon timetableAt the microsymposium, Mitrofanov discussed Russia's moon mission schedule over the next several years. "Depending on the success of these [first] three missions, another two will be implemented," he said.

Those five potential moon missions would launch in the following order:

2015 — Luna 25 (Luna Glob Lander): A small lander on the moon's south pole that would analyze lunar regolith and local exosphere and test volatiles from less than 2 feet (50 centimeters) subsurface. This spacecraft would showcase lunar landing system technology, communication systems and longtime operations.

2016 — Luna 26 (Luna Glob Orbiter): An orbiter for the moon in a 60-mile-high (100 kilometers) polar circular orbit. It would globally map the lunar surface, measure the exosphere and plasma around the moon and carry out reconnaissance of landing sites for lunar exploration, exhibiting longtime orbital operations and global mapping.

2017 — Luna 27 (Luna Resource-1): A large lander sent to the moon's south pole to study lunar regolith and local exosphere; it would also test for volatiles in the lunar subsurface. This lander would also test a drilling system for cryogenic sampling of the moon.

2019 — Luna 28 (Luna-Resource-2): A "to be determined (TBD)" mission f that is a polar moon sample return involving cryogenic delivery of lunar samples back to Earth. This mission would help develop return flight system technology for transiting between the moon and Earth.

2020 — Luna 29 (Luna-Resource-3): Another TBD mission. This spacecraft would carry a Lunokhod — a large, long-distance moon rover. Once on the prowl, the wheeled device would study the lunar surface at a distance of about 20 miles (30 km) and conduct cryogenic cashing of the lunar subsurface.

Astronomical windowMitrofanov said that Russia's robotic moon planners "have taken into account" the disaster with its Phobos-Grunt Mars mission in 2011-2012 — a failure due to reported poor management, technical glitches and a hurry to launch schedule.

But the moon is much closer to the Earth than Mars, offering more flexibility in launching lunar probes.

"In this case, we have no astronomical window for the moon," Mitrofanov said.

U.S. scientists said that it is important to keep in mind that Russia is no newcomer to moon exploration. The former Soviet Union, of course, was the chief competitor to the U.S. and NASA during the Space Race to put human explorers on the moon in the 1960s and 1970s. During that time, Soviet scientists were prolific developing moon-bound robotic probes. [Vintage Spacecraft Still on the Moon (Infographic)]

James Head of the Department of Geological Sciences at Brown University in Providence, R.I. and symposium organizer, said, "keep in mind that this is Luna 25, 26, and 27 … and these aren't numbers taken out of the sky."

These are numbers that continue the sequences of missions that the former Soviet Union has already flown, Head said, most of them very successfully.

"Putting rovers on the moon, about doing automated sample returns from various places … accomplished by the Soviet Union over 40 years ago, multiple times. There is great technology there … there is the ability to do this," Head said.

nsight: Russia's Bazhenov - a long, slow shale oil revolution

TYUMEN –  Forty-five years after its accidental discovery deep under the swamps of West Siberia, the race is now on to develop the world's largest shale oil resource, Russia's Bazhenov.

A drilling push begins in earnest this spring, spurred by President Vladimir Putin's promise to loosen the Kremlin's grip on proceeds from its natural resources in hopes of sparking a shale revolution aimed as much at remaking Russia's oil industry as at raising output.

ExxonMobil and Russian state oil company Rosneft are headlining the new phase of exploration to see whether Bazhenov lives up to its billing.

Russian producers have already reported 500 million metric tons (551.16 million tons), or 3.5 billion barrels, of recoverable crude oil reserves in Bazhenov to the Russian government.

Much studied but largely untapped, it lies in impenetrable black clay beneath existing oilfields covering most of West Siberia, whose westernmost hub is the oil town of Tyumen, 1,700 kilometers (1,060 miles) northeast of Moscow.

"Back when I worked in exploration, one of our geologists called it the wild black stone," said Tatyana Smagina, head of reserves management at the Tyumen Oil Research Centre, part of Rosneft.

The centre holds core samples from 30 years of drilling in West Siberia that are studied to help determine where Russia's new oil will come from.

The government now estimates that the wild black stone could yield 1-2 million barrels per day by the end of the decade.

Yet the full scale of its riches remains a mystery. Estimates range from a conservative three billion metric tons, or over 20 billion barrels, to as much as 143 billion metric tons, according to a survey of Russian research by oil consultants IHS Cera.

The upper estimate would mean an extraordinary one trillion barrels, nearly four times the size of Saudi Arabia's oil reserves or 30 years of world supply at current rates of consumption.

The International Energy Agency describes Bazhenov as the world's largest source rock, a bed of ancient organic matter dating back to the Jurassic period which has given rise to most of the crude oil pumped from the fields of West Siberia.

NO BAKKEN SURGE, YET

Those vast reserves do not necessarily add up to a U.S.-style production surge in the making.

The U.S. state of North Dakota has estimated oil production from its Bakken and other formations could reach 1.2 million barrels per day by 2015.

Yet Russia already pumps more conventional oil supply than Saudi Arabia at around 10.3 million barrels per day and may look to shale to maintain rather than revolutionize production.

Its oil-dependent leaders, rather than fearing the surge in U.S. output from shale, have looked on with curiosity and some envy.

For them, Russia's rediscovery of its shale resources is aimed more at offsetting declines in the fields that produce most of Russia's crude - the Soviet giants of West Siberia, like the Salym group fields where Bazhenov was discovered in 1968.

Output there is now declining at an average of about 2 percent a year.

The U.S. experience has produced a new generation of high-tech, low-cost drillers and producers with advances in technology, including horizontal drilling to tap reservoirs more efficiently, and hydraulic fracturing to release hydrocarbons from non-porous "tight" rock.

In contrast to the entrepreneurs who predominate there, Russia's oil industry has been concentrated in the hands of a few powerful players over the last decade, mostly controlled by the state, raising questions about its efficiency.

It faces the task of moving away from standardized bulk drilling and top-down design decisions toward shale and other new deposits where new technology must be developed and honed along the way.

The challenge for the crude oil market posed by the U.S. shale surge "would not hurt us so much if we were more competitive," said Tatiana Mitrova, head of the oil and gas department at the Russian Academy of Sciences Energy Research Institute.

The drilling now under way should determine whether Russia can frack its way to a more modern, competitive oil industry with all the technological savvy of the upstarts in North Dakota, and whether Bazhenov is the key.

"Bazhenov is a huge formation. It covers half of western Siberia. I have seen maps that claim it is 22 times the size of the Bakken in North Dakota," said Richard Andersen, chief financial officer of Eurasia Drilling, Russia's biggest driller.

But Andersen said it was "not homogenous" across western Siberia. "It may work very well in some areas and not in others. I would not say it will be condemned or proven in the next year. But we should get a view as to whether it will work well or not."

Recent drilling by producers such as Salym Petroleum, a joint venture between Shell and Gazprom Neft, which operates in the group of fields where the Bazhenov was discovered, have yielded healthy flows of light, low-sulphur crude. It has also indicated the presence of microfractures in some areas which could help the oil flow out of the tight rock.

TAX KEY

The challenges to Russia's tight-oil revolution so far, however, have had little to do with geology.

Efforts to establish joint drilling ventures have run up against post-Soviet legislation which does not recognize project operators, while cumbersome planning requirements have forced some producers to scale back their plans for this year.

The biggest question of all is posed by the tax system. With lifting costs for a barrel of Bazhenov crude estimated at up to $40, the tax regime has been the main obstacle to its development as producers worked their way through cheaper conventional reserves.

The Kremlin's willingness to loosen the state's grip on oil taxes - which skim 90 percent of the revenue from each barrel of export crude - underscore its interest in exploiting shale.

But even with the prospect of a boost to the oil revenues that amount to 40 percent of the Russian budget, that willingness only goes so far.

The government has offered a package of tax breaks which includes a sliding scale of breaks on Russia's revenue-based mineral extraction tax and targeted breaks on the development of Bazhenov and other shale deposits which are part of Rosneft's drilling ventures with ExxonMobil and Statoil.

But the package - which was due to be approved on October 1 - has yet to reach parliament. Finance Ministry officials have assured investors that it will pass in time to come into effect next year after undergoing tweaks.

Producers also face the expensive prospect of re-drilling their West Siberian fields to access the Bazhenov below, even though it could be tapped through existing wells.

A boon to drillers such as Eurasia and Schlumberger but a drag on the economics of developing Russian shale, this is essentially an accounting measure to prevent fraudulent reporting of conventionally produced oil as new oil to claim tax breaks.

"They are worried that suddenly 70 or 80 percent of Russia's oil is going to be tight oil," a source close to one of the exploration projects said.

The proferred tax breaks may be enough to accelerate exploration of Bazhenov and other tight formations and allow Rosneft's drilling partnerships to proceed, but commercial production will probably require another round of tax reforms, the source added.

The very low levels of rock permeability required to qualify for tax breaks also may rule out profitable development of some tight sandstone deposits on the edges of what the Energy Ministry has called the "grey area" between true shale and West Siberia's current, conventional plays.

Of Russia's 26 billion metric tons of recoverable reserves, two-thirds or more are thought to be "tight", a share that is rising as Russia's easily tapped conventional reserves are depleted.

"That is semantics," said Oleg Mikhailov, who once ran pilot projects in tight oil at TNK-BP and now works at mid-sized producer Bashneft.

"What is easy today was tight yesterday. What is tight today with technology and a good tax regime will be easy tomorrow."