DAILY REPORT ON RUSSIA

AND THE FORMER SOVIET REPUBLICS

INTERCON INTERNATIONAL USA, INC., 725 15th STREET, N.W., SUITE 903,

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Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Friday, February 19, 1999


Russian Federation

Politics

Yeltsin Fires Tax Police Chief

· Russian President Boris YELTSIN fired the head of the state tax police General Sergei ALMAZOV on Thursday after numerous complaints in the media that the service was corrupt, incompetent and incapable of clamping down on rampant tax fraud. No replacement was immediately announced. ALMAZOV admitted that the tax police department was plagued with corruption, but YELTSIN's aides refused to give details on the cause of the dismissal of the tax police chief. ALMAZOV had occupied the post of tax police chief for an incredible seven years, surviving numerous ministerial purges and three prime ministers. Low levels of tax collection is the main reason why Russia is behind in paying millions to stake workers and pensioners. Former Prime Minister Yegor GAIDAR, pointing out the harsh reality of Russia's poor tax collection, said, "In 1995, 1996, and 1997, federal government revenues were about $3 billion per month. Now they are around $1 billion." Russia is under intense pressure from the International Monetary Fund and other lending organizations to quickly improve its tax collection system and crack down on crime.

Bulgak Censures Fuel and Energy Ministry

· Russian Deputy Prime Minister Vladimir BULGAK, today addressed the leadership of the Fuel and Energy Ministry and censured its work as well as that of Minister Sergei GENERALOV. BULGAK said that, "if GENERALOV does not want to be a temporary chief, he should establish strict order in the ministry. The Fuel and Energy Ministry is not a branch of the Menatep, LUKoil, Gazprom or the Unified Energy Systems of Russia companies. It is a state body, and this should be the guiding idea in selecting personnel." According to BULGAK, "the ministry lacks, up

to this time, a clear distribution of duties between a dozen of deputy ministers." Efficiency of production remains very low. He noted that the formation of a state-owned oil company is being considered, which could include Rosneft, Slavneft, Onako, East Siberian Oil Co., and possibly Tyumen Oil Co.

Economy

CB Explains Choice Of Fimaco

· In response to a letter from the International Monetary Fund (IMF) demanding explanations regarding Central Bank deposits into the offshore company Fimaco in Jersey, Channel Islands, Central Bank deputy chairman Oleg MOZHAISKOV provided more details on the management of the country's foreign exchange reserves between 1993 and 1997. He said that the controversy, "is unlikely to have a negative effect on Russia's current talks with the International Monetary Fund." He explained that the IMF had been informed in advance that the Bank might place its reserves in an offshore institution, but never specifically knew about Fimaco. The Central Bank has admitted that it used the company to hide reserves, including some IMF money and Finance Ministry securities, from foreign creditors. It has said that Fimaco never held more than $1.4 billion. Andrei MOVCHAN, chairman of Eurobank the Paris-based Central Bank subsidiary which controls Fimaco, said that it received $1.7 million in commissions during the time it managed Central Bank reserves. This is one sixteenth of a percentage point of the yearly av

Today's News Highlights

Russia

Oil, Gas Decline, Coal Increases

Sidanko Votes For Manager

European Republics

Motorola-Omnitel Sign Contract

South Caucasus & Central Asia

Georgia Confiscates $500,000

Aliyev Endorses Trans-Caspian

Non-Blockage Agreement

IFC, EBRD Invests In Oil Project

Politics-Economics-Business

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Friday

February 19, 1999

Intercon's Daily

erage of assets under management. He also noted that all reserves including interest had been returned to Russia. These moneys were linked to the delivery of products to Russia's Far North. There was no elaboration of what exactly that meant. Former Deputy President of the Central Bank Dmitry TULIN, who worked for the Soviet Central Bank since the late 1970s, said it was a normal Soviet practice to hide assets out of fear of political reprisals by the West during the Cold War. He said the funds were strictly accounted for and all deals were confidential. The credit risk did not exceed that of keeping funds in first-grade assets. TULIN explains that the Russian Central Bank chose Fimaco because, "The risk of information leaks was substantially lower than at any other banks." In 1997, the head of the European Commission's anti-fraud unit said that, "lax regulations combined with offshore status" made the Channel Islands, "ideal places for hiding illegal financial operations." And in November, 1998 the London Daily Telegraph wrote that, "Russian gangsters are among the world's criminals who are alleged to have taken advantage of the banks and trusts in the Channel Islands."

Ruble = 22.92/$1.00 (NY rate)

Ruble = 22.84/$1.00 (CB rate)

Ruble = 25.58/1 euro (CB rate)

Sep Oct Nov Dec Jan Feb

Oil, Gas Declines, Coal Exports Increase

· Russian Fuel and Energy Minister Sergei GENERALOV called a 40 percent decrease in the volume of drilling of wells and a decrease in the stock of operating wells as one of the main reasons for a predicted decline in oil production. A decline in oil


production by 3 million to 7 million tons is expected over the next several years. In 1998, it amounted to 303.3 million tons, including gas condensate, a decrease of 0.8 percent than in 1997. First deputy board chairman of gas monopoly Gazprom Valeri REMIZOV noted that a slump in gas production down to 543 billion cubic meters is expected in Russia this year, or nearly 10 billion under the 1998 level. He believes this is due to a continued decline of investments into the industry. If this trend continues over the next several years, REMIZOV said that gas deliveries to domestic markets will decrease, since exports are outlined in contracts.

Russian consumers debt for natural gas surpassed 114 billion rubles, GENERALOV said. The debt grew 44 percent last year. The Minister said the debt of consumers in member-states of the Commonwealth of Independent States (CIS) continues to rise and reached 33 billion rubles. This situation compelled Gazprom gas giant to cut its capital investments by half. He proposed that export duties on fuel oil be dropped as of March 1st. The duties have served their purpose and their further use may do irreparable damage to enterprises of the fuel-and-energy complex, GENERALOV said. Export duties on fuel oil were introduced by the government last autumn to be enforced for six months in order to replenish fuel stocks at power stations for the Winter.

Deputy Prime Minister Vladimir BULGAK believes that Russia should boost its coal exports by 50 percent in 1999. He said a rise in exports would require the construction of new coal terminals at Baltic ports. The government has planned to take several protectionist steps concerning the industry, specifically a financing schedule for the first six months of 1999 twice the size of last year's. Talks have virtually ended regarding the disbursement of a installment of a World Bank coal loan. BULGAK said that two tranches totaling $400 million will be split into six portions to be disbursed this year.

Business

Sakhalin Oil Project Stake For Sale

· Head of Russia's state oil company Rosneft, Sergei BOGDANCHIKOV, said that Russia will accept bids for a 19.6 percent stake in the Sakhalin-1 offshore oil project until March 15th. He said that unnamed foreign companies and Russian oil com

When you need to know it as it happens

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pany LUKoil and gas monopoly Gazprom have expressed interest in the tender. BOGDANCHIKOV said 49 percent of the combined stake of 40 percent held by Rosneft and its Sakhalinmoreneftegaz subsidiary would be tendered, but gave no other details, Reuters reported. Other participants in the Sakhalin-1 are Exxon and Japanese Sakhalin Oil and Gas Development Co (SODECO) consortium with 30 percent each. In September, Rosneft said it planned to sell part of it stake because it could not finance its participation. ABN AMRO investment bank was acting as a financial consultant to the tender.

Sidanko Creditors Vote For External Manager

· A creditors' meeting of Russian oil company Sidanko, which is facing bankruptcy proceedings, today voted to recommend the appointment of an external manager from the Moscow office of Arthur Andersen. A spokesman for BP Amoco, which owns a 10 percent stake in Sidanko, said that the vote had passed by a large majority. The meeting also voted to appoint an 11-member creditors' committee, bringing together representatives from BP Amoco, Russian production company Chernogorneft, and Russian and international banks. The BP Amoco said, "We welcome the support from all the major creditors for the appointment of an external manager. It is an important step forward for Sidanko for the implementation of the insolvency process." Chief executive officer of BP Amoco John BROWNE stressed to Prime Minister Yevgeny PRIMAKOV that future foreign investment in Russia hangs on the insolvency procedure and external management arrangements being seen as transparent and fair. The Federal Bankruptcy service has proposed postponing bankruptcy hearings from March 2nd in order to allow more time for data collection. The creditors' meeting rejected changes to the court schedule.

planned implementation of dual band capacity relief networks in areas of high subscriber density. The Omnitel network was the first commercial GSM system in Lithuania, launched in March 1995. It remains the largest and most successful, with 100 percent subscriber growth over the last 12 months and 98 percent population coverage. Motorola NSS built the original Omnitel network in 1994, and continues to be the sole supplier of GSM network infrastructure. Motorola NSS will supply its market-leading M-Cell(tm) range of GSM network infrastructure, which provides network operators with a full range of Motorola NSS features for GSM network operators. These include dual band for capacity relief, extended range cell for coverage expansion, and synthesizer frequency hopping and enhanced full rate for improved speech quality. Viktor GRUODIS, President of Omnitel, said, "Omnitel's relationship with Motorola has already helped us to become the number one GSM operator in Lithuania. Looking forward to the next five years, we are enhancing this relationship and will retain our leading position by implementing the best technology from our chosen supplier to serve our customers." Norm KOREY, vice president and general manager of Motorola's NSS in Europe, Middle East and Africa said, "Omnitel is one of the most successful companies in Lithuania, and we are proud of the part we have played in this success. This new agreement provides enormous potential for the future, and we will continue to work with Omnitel to develop and deliver leading technology solutions to serve continued growth in the voice and data market."

South Caucasus & Central Asia

Georgia Confiscates Counterfeit Notes

· A senior Georgian Interior Ministry official today announced that Georgian police have arrested six people from whom they confiscated a total of $500,000 in counterfeit notes. He added that the haul is the largest single sum in counterfeit dollars ever found in either the Commonwealth of Independent States (CIS) or Europe. He did not say where the counterfeit notes originated, but Interfax suggested they may have been printed in Urus Martan, the stronghold of opposition to Chechen President Aslan MASKHADOV.

Azeri President Endorses Trans-Caspian Route

· Azeri President Geidar ALIYEV on Wednesday

European Republics

Motorola-Omnitel Sign Contract

· Lithuanian GSM operator UAB Omnitel and Motorola Inc.'s Network Solutions Sector (NSS) signed a five-year contract for the supply of GSM digital cellular infrastructure on Tuesday. The value of the contract was not announced, but includes the supply of Motorola NSS's GSM infrastructure equipment for the expansion of Omnitel's countrywide GSM 900MHz network, and the supply of GSM 1800MHz infrastructure equipment for Omnitel's

When you need to know it as it happens

Politics-Economics-Business

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February 19, 1999

Intercon's Daily

endorsed the $2 billion to $2.5 billion natural gas pipeline from Turkmenistan across the Caspian Sea and Azerbaijan to Turkey. Azerbaijan was the last country to approve the project. Turkmen President Saparmurat NIYAZOV awarded the pipeline construction to a consortium comprising Bechtel and General Electric. ALIYEV met with the Israeli group Merhav, which is acting as an intermediary for these companies. Chairman of Merhav Yossef MAIMAN said that the US Ex-Im Bank will contribute approximately $1 billion toward construction costs. The 2,000 kilometer pipeline, with a capacity of 30 billion cubic meters of gas, is expected to take three years to build. Turkmenistan is capable of producing up to 100 billion cubic meters of gas within two years. Output in 1998 was only 13.3 billion cubic meters. Export of Turkmen gas to the West has been dependent on Russian pipelines. The Trans-Caspian pipeline pleases not only its transit countries, but also the US which has been pushing this route over a project to Turkey through Iran.

Non-Blockage Agreement Initialed

· On Wednesday, 11 Central Asian countries and Romania initialed an agreement brokered by the European Union (EU) designed to ensure the transit of oil and gas through pipelines. The deal commits countries through which planned pipelines pass to respect the same legal framework and not to block sections of the projects running through their territory. Turkey's Ambassador to the EU Mithat BALKAN said that Ankara was studying the accord and said it might be ready to sign it with other states in several months time. Russia's deputy energy minister Elena TELEGUINA, on the other hand, said Moscow was not considering signing the accord in the near future. Senior EU official Gunter BURGHARDT said, " One of the hardest tasks is to secure financing for the oil and gas networks of the future. No one will invest if it is not absolutely clear who is managing [the pipeline]," Reuters reported. The EU, like the US, is eager to see multiple pipeline routes put in place to bring oil and gas to the West and to secure that supply. The EU insists that a pipeline route should

be based on commercial viability and not political reasons. The Azerbaijan International Operating Consortium (AIOC), led by BP Amoco and Statoil, is due to recommend its choice for the route. Three main routes are competing to be the main export pipeline: Baku to Ceyhan; Baku to Supsa, and Baku to Novorossiisk. BURGHARDT said, "Whatever the outcome of the main pipeline, there will be a need for a Black Sea link because our neighbors in Ukraine and the Balkans will be among the largest consumers of energy [in the future]."

IFC, EBRD Invest In Caspian Oil Project

· The International Finance Corporation (IFC) and the European Bank for Reconstruction and Development (EBRD) announced on Wednesday in an IFC press release that they will each invest up to $200 million in the Early Oil Project to develop the offshore Chirag Field in the Caspian Sea. Up to $100 million of the loan will be syndicated. The Early Oil Project, undertaken by affiliates of 11 international oil companies and the State Oil Company of the Azerbaijan Republic (Socar), is the first stage of the development of the Chirag, Azeri and Deepwater Gunashli field complex. It includes the refurbishment of an existing offshore platform, drilling wells and building subsea pipelines as well as installing terminals in Azerbaijan and Georgia, and repairing and completing two oil pipelines, through Azerbaijan to the Russian border and to Supsa, Georgia. Production commenced in November 1997 and is currently over 80,000 barrels of oil per day. The total development cost of the Chirag Field is estimated to amount to $10 billion to $12 billion and the ultimate recovery of crude oil over 4 billion barrels. Production is forecast to reach more than 800,000 barrels per day over the next 10 years. The facility will be provided by way of five separate loans by both the EBRD and IFC to affiliates of BP Amoco plc, Exxon Corporation, LUKoil joint stock company, Turkiye Petrolleri AO, and Union Oil Company of California. Citibank, Dresdner Bank, and Societe Generale acted as co-arrangers and each contributed $25 million to the syndicated loans.


Paul M. Joyal, President, Editor in Chief Clifton F. von Kann, Publisher Jennifer M. Rhodes, Principal Editor

Daily Report on Russia is published Monday-Friday (excluding holidays), by Intercon International, USA. Subscription price for Washington, D.C. Metro area: $950.00 per year. A discount is

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