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

Tuesday, July 20, 1999

Russian Federation

Politics

Chernomyrdin Makes Anti-Semitic Statement

· Former Russian prime minister and presidential envoy to Kosovo Viktor CHERNOMYRDIN surprised many when he used anti-Semitic statements to describe the renewed media battle ahead of elections. He criticized the publishing and broadcast of compromising materials on potential political candidates. He blamed the recent mudslinging campaign in the media on a feud between "two Jews," referring to the media oligarchs Boris BEREZOVSKY of ORT Television and Vladimir GUSINSKY of NTV. CHERNOMYRDIN said, "On the eve of a major event for the state, a parliamentary election, when all reasonable forces should unite their efforts, we get dirt. It happens that two Jews are squabbling and the whole country has to watch this circus." While Russian Communists are usually linked to making anti-Semitic comments, CHERNOMYRDIN, the leader of Our Home Is Russia, did not previously have a history of such biases.

Military Reporter Pasko Walks Free

· Russian military reporter Grigory PASKO accused of treason, espionage, and abuse of office in a case involving the turning over of environmental information to a Japanese television network NHK today was convicted for three years for improper military conduct. The court ruled that the other charges were unfounded. It also ruled that the 10 documents and information divulged about the combat readiness of Russia's Pacific Fleet to NHK contained no state secrets. PASKO was released today under an amnesty approved by Russian President Boris YELTSIN because he had already served more than a third of his sentence and was a first time offender. Russia's Federal Security Service (FSB) brought the case against PASKO to punish him for

reports filed to the Network on the fleet's nuclear-waste dumping practices. Some of the footage allegedly showed Russian sailors tossing radioactive waste into the Sea of Japan. PASKO claimed that his investigative reporting documented environmental hazards, but did not involve classified information. The court found PASKO guilty of abuse of service used for personal gains and violating the interests of society and the state. He said, "here in Russia, if the KGB takes up a case there is never an acquittal. I came out today, but tomorrow someone else will go to jail. First of all we need a precedent of an acquittal."

Economy

Ruble = 24.3/$1.00 (NY rate)

Ruble = 24.28/$1.00 (CB rate)

Ruble = 24.98/1 euro (CB rate)

Russia To Receive Billions In Loans

· Russian envoy to international financial institutions Mikhail ZADORNOV said that Russia could receive as much as $3.8 billion in foreign loans this year. He explains that this would allow the government to stop borrowing from the Central Bank to meet foreign debt payments. The International Monetary Fund (IMF) is planning to decide July 28th on the release of the first installment for an 18-month, $4.45 billion loan program to Russia. If approved, Russia could receive $1.9 billion from the IMF this year. An IMF approval could further trigger more lending, specifically $1.85 billion from the World Bank and Japan. It would

Today's News Highlights

Russia

Sidanko Alliance In Doubt

BP Amoco Boosts Holdings

European Republics

Belarus Denies Banking Crisis

Ukraine-US Begin Exercises

South Caucasus & Central Asia

Court Seizes ArmTel Shares

Shevardnadze To Run Again

Parliament Increases Threshold

Uzbek To Receive $10 Million

Politics-Economics-Business

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also be a renewed impetus for restructuring debt talks with London and Paris Clubs of commercial creditors. ZADORNOV stated, "We will cease using Central Bank reserves to finance our external debt [repayments]." New loans from the IMF are contingent on Russian parliamentary approval of a package of laws intended to increase government revenue, combat corruption, and restructure the commercial banking system. ZADORNOV said that Russia will pay $4.2 billion it owes the IMF.

Wolfensohn Praises Economic Reforms

· World Bank President James WOLFENSOHN today hailed the agreement with Russia concerning the terms of the third economic restructuring loan. World Bank top officials were impressed by decisive measures the Russian government has been taking in the past weeks to restore the pace of economic reforms, WOLFENSOHN said in a statement. The STEPASHIN government deserves active support, he said. Its plans now embrace all key spheres of the economic reform, including the growth of vital capacity of the private sector and the solution of fundamental social problems, according to the World Bank. The World Bank Board of Directors is expected to consider the SAL-3 project on July 29th, following Russian Prime Minister Sergei STEPASHIN's visit to the US. Under the terms of the agreement, Moscow will get $1.2 billion in four unequal installments, $650 million will be provided this year. The board of directors will also consider other credits which the World Bank is planning to grant in the next year and a half. Their sum totals $1.85 billion. Russia will also receive a $1.15 billion loan from the Japanese government as part of the World Bank program.

Business

Sidanko Creditor Alliance In Doubt

· The prospect of a financial injections to keep Russian oil company Sidanko intact and halt bankruptcy procedures was thrown into doubt on Monday after Tyumen Oil Company said it had bought a portion of the $154 million in outstanding debt owed to creditor banks. Western creditor banks are led by Dresdner Bank. WestLB has broken ranks with the creditor banks and accepted Tyumen's offer to repay creditors at par value. Legal uncertainty surrounds WestLB's decision, which threatens the consensus between Sidanko's creditors and shareholders. BP Amoco, which has a 10 percent stake in Sidanko,

believes WestLB's action was intended to disrupt the procedure. BP Amoco's Howard CHASE said, "Our interest is to see a successful restructuring, and this seems to act against that." Tyumen's chief financial operator Joseph BAKALEINIK said, "Our objective is to acquire a number of assets, especially Chernogorneft. We are buying a seat at the negotiating table. We are very interested in working with BP, but they have not wanted to talk to us." The Financial Times reports that WestLB has a close relationship with Tyumen and has lent the company over $100 million, compared with $15 million lent to Sidanko.

BP Amoco Boosts Rusiya Petroleum Holdings

· According to deputy head of the Russian State Duma's Industrial Committee Yuri TAN, the Russian government has allowed BP Amoco to boost its stake to 40 percent in a Rusiya Petroleum joint venture, which operates East Siberian giant Kovykta gas field. BP Amoco through its Burovik firm holds 22.3 percent in Rusiya Petroleum. BP Amoco has been constantly increasing its stake in Rusiya Petroleum by purchasing new shares during the previous five share issues. Last month, shareholders of Rusiya Petroleum company agreed again to issue 8.8 million new shares to raise capital for project implementation. During the last share float only three shareholders of Rusiya Petroleum, Burovik, Korea's East Asia Gas Co. and local power generator Irkutsenergo, bought additional shares. Shareholders in Rusiya Petroleum are as follows: Burovik (22.3 percent), Irkutsk regional administration (16.46 percent), Irkutskenergo (12.79 percent), Angarsk Refinery (9.97 percent), East Asia Gas Co. (8.37 percent), Sidanko (6.62 percent), KM Technologies (6.45 percent), Ferasco Holdings (3.83 percent), Tuganis Holdings (3.83 percent), Rakis Holdings (3.83 percent), Lalakis Holdings (3.83 percent), and small investors (1.7 percent).

Tyumen To Issue Ruble Bonds

· Russia's Tyumen Oil Company announced plans to issue the first installment of its 2.5 billion ruble bond offering at a July 27th auction. The price of the issue will be fixed at the auction on the same day. The sale of bonds will continue until August 9th. A Tyumen spokeswoman could not comment on how large the first tranche will be. The auction and subsequent trading of the bonds will take place on the Moscow Interbank Currency Exchange (MICEX).

When you need to know it as it happens

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Foreign investors holding defaulted government treasury debt will be eligible to buy the bonds. The five-year bonds carry a 7 percent coupon paid twice a year. They also have put option that can be exercised in the second, third, and fourth years.

Gazprom Plans For Extra Shareholders Meeting

· The board of directors of Russia's gas monopoly Gazprom has scheduled an extraordinary shareholders meeting for August 26th. The government ordered Gazprom to hold the meeting to elect a new board which would increase the government's representation on the Gazprom board from 4 people to 5. The Fuel and Energy Ministry has been insisting it needs to be represented on the board. This would reduce the influence of Gazprom's chief executive officer Rem VYAKHIREV. A Gazprom spokesman said all candidacies for the board should be submitted to the board no later than July 26th. The government currently holds more than 38 percent of Gazprom stakes.

program. The naval games, which are part of the annual Sea Breeze exercises, will last until July 24th. They will include tactical maneuvering, liaison training, and anti-aircraft and anti-submarine defense. Ukraine is expected to take part in 200 Partnership for Peace events including 12 military exercises in 1999. Last year, Ukraine took part in 200 similar events which included 13 war games.

Ukraine's Parliament Turns Down EBRD Credit

· Ukraine's parliament on Monday turned down for a third time the guarantee agreement between the Central Bank of Ukraine and the European Bank for Reconstruction and Development (EBRD) of opening a second 80 million euro credit line for the development of small and medium businesses in Ukraine. The guarantee agreement was signed on May 8 1998. Ukraine's banks had successfully used the first credit line of 100 million euro, which was opened by the EBRD in 1994. The parliament rejected the new agreement twice, on May 18th and June 30th. Under the previous agreement, Ukraine's small and medium enterprises receive five-year credits from Ukraine's authorized commercial banks at annualized 13 percent to 15 percent, depending on the value of the loan. The grace period is two years. All funds from the first EBRD credit line have been used already and credits are financed with earlier loans repaid by the borrowers.

South Caucasus & Central Asia

Court Seizes ArmenTel Shares

· The Armenian government announced last Wednesday that it obtained a court order against Hellenic Telecommunications Organization (OTE), the Greek telephone company, seizing the shares held by OTE in ArmenTel, the Armenian telephone company. The court order results from a lawsuit filed in Yerevan by the government's Ministry of State Revenues, to collect back profit taxes (capital gains taxes) owed as a result of the sale in March 1998, of the majority interest in ArmenTel to OTE by the government and Trans-World Telecom, Ltd. OTE has asked for an extension of time to respond to the government's claims. The court granted an extension until July 26th. The other defendants, Trans-World Telecom and its sister company Trans-World Telecom Holdings Ltd., offered written evidence in defense but this evidence was rejected by the Court

European Republics

Belarus Banker Denies Crisis

· Belarus Central Bank chairman Pyotr PROKOPOVICH on Friday said, "there is no and cannot be any crisis in the Belarus banking system." He said the government's tough credit and monetary policy kept money supply at 80 percent and devaluation at 32.2 percent of inflation in the first half of the year. The agro-industrial complex received more than 18 trillion Belarus rubles in loans (about $70 million). All loans were provided by commercial banks without the participation of the Central Bank. PROKOPOVICH noted that investments account for about 53 percent of all loans extended in the first half of the year, which means that the country's banking system is beginning to work for the real sector of the economy. He pointed out the fact that, "the absolute majority of payments are processed within 24 hours" is a serious achievement. PROKOPOVICH said his bank has worked out a concept of credit and monetary policy for 1999 to 2000 which calls for, "solving the question of convertibility of the Belarus ruble within 1.5 to 2 years."

Ukraine-US Start Joint Naval Exercises

· Ukrainian-US joint naval exercises will begin in the eastern Mediterranean on Wednesday within the framework of the NATO-led Partnership for Peace

When you need to know it as it happens

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at this time because the material was in English and not in Armenian. Jay MULKEEN, a litigation partner in the law firm of Manatt, Phelps & Phillips which represents the Armenian government said, "It would have been a mistake for the defendants to ignore this matter because the Government will pursue collection of these taxes vigorously with all legitimate means at its disposal, including a sale of the shares that were seized today by order of the Court." The government expects that on July 26, 1999, when the court convenes again to hear the matter, the decision will be to uphold the merits of the tax claim.

Shevardnadze To Run For Second Term

· Georgian President Eduard SHEVARDNADZE during his regular national radio address announced that he will run for a second term as president in the upcoming elections in 2000. He also expressed his belief that the, "president can head a political party," suggesting that he will seek to run as the leader of a party. He said, "eighty years of age is my approximate limit. To be serious, I haven't yet decided, but sometimes I say that I will probably run for a second term." Speculation has surrounded SHEVARDNADZE's decision with most in the Caucasus region expecting him to seek another term. One diplomat in Tbilisi said, "He is a political animal. He has ruled Georgia for most of the past three decades and I can't imagine him not running again."

Georgia Holds Extra Parliamentary Session

· The Georgian parliament is holding an extra session on Constitutional amendments. In a vote of 163 to 72, the parliament raised the minimum percentage political parties need to receive in an election in order to earn seats in parliament. Only 156 votes were required for it to pass. The percentage was increased from 5 percent to 7 percent. The new amendment will make it more difficult for smaller parties to gain representation in the parliament

KazMinCo Announces Agreement With Petrom

· KazMinCo is pleased to announce its 51 percent owned subsidiary Lisburne Holdings Ltd. has en

tered into a Sale and Purchase Agreement with Petrom S.A. (Romanian National Oil Company) for the sale of Tasbsbulat, the owner of the Tasbulat, Aktas and Turkmenoy oilfield licenses in the Mangystau region of western Kazakhstan. The transaction, which is scheduled to close on August 16th, 1999, is subject to a number of conditions in favor of the purchaser including completion of due diligence by the purchaser. In certain circumstances, closing may be postponed to allow these conditions to be satisfied. KazMinCo will issue further information on closing. KazMinCo is listed on the Toronto Stock Exchange and its shares, quoted in US Dollars, trade under the symbol KMC.

South Korea To Provide Uzbekistan With $10M

· South Korea has agreed to provide $10 million to modernize and develop Uzbekistan's telecommunications. The long-term loan has been provided by Korea's cooperation fund for economic development at a low interest rate under an agreement signed by the governments of the two countries in Tashkent, the Finance Ministry said. The loan has been provided for a period of 20 years at a 3 percent interest rate with a five-year grace period. The money will be used to build new telephone exchange stations for about 100,000 lines and more than 300 kilometers of fiber-optic communications lines by the year 2001.

Tajik Currency Loses Value

· Tajikistan's National Bank last week succeeded in stabilizing the exchange rate for the Tajik ruble against the US dollar, setting an official rate of 1,400 Tajik rubles to the dollar, Izvestiya reported. The Tajik ruble had traded at 1,400 to the dollar at the beginning of the previous week before falling to 1,800 to 2,000. The fall in the value of the national currency led to steep price rises. National Bank chairman Murodali ALIMARDONOV and Finance Minister Anvarsho MUZAFFAROV both denied rumors that the Tajik government intends to introduce a new national currency—the somon—in September to mark the 1,100th anniversary of the Samanid dynasty, RFE\RL Newsline reported.

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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