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, August 20, 1999


Russian Federation

Politics

Bank Of NY Laundered Mob Money

· It is now estimated that as much as $10 billion flowed through the Bank of New York in a money laundering scheme linked to Russian organized crime, in a story first reported by The New York Times on Thursday. Natasha Gurfinkel KAGALOVSKY and Lucy EDWARDS, two senior officers in the Bank of New York's Eastern Europe department and married to Russian businessmen, have been suspended because of their suspected roles in the operation until the investigation is completed. EDWARDS is married to Peter BERLIN, who managed the Benex account which is being investigated. KAGALOVSKY's husband Konstantine was a former executive at Menatep and now is vice chairman of oil company Yukos. The Benex account and others under scrutiny have been linked by investigators to a man who is a major figure in Russia's organized crime, Semyon Yukovich MOGILEVICH. The suspect is involved in a wide range of activities from arms trafficking and extortion to prostitution. "What we have here is the penetration of a major US organization by Russian organized crime," a US government official was quoted as saying. The accounts under investigation allowed Russian institutions, now mostly insolvent, to easily transfer money outside of Russia to the Bank of New York and then on to off-shore accounts. The outflow of money out of Russia accelerated after the collapse of the Russian financial system last year. Bank of New York's customers include Inkombank and Menatep, part of financial industrial empire of Mikhail KHODORKOVSKY. Inkombank funneled more than 250 payments a day through the bank. The New York Times reports that Inkombank switched from the Republic New York Corporation because KAGALOVSKY promised to be less vigilant. She

once wrote in a memo, "Inkombank is our largest generator of fee income and they are now the largest clearing bank in Russia for domestic transaction." Inkombank is now bankrupt. Federal authorities are investigating whether the money was legitimately earned or looted from Russia.

US State Department James RUBIN said the Department will use every possible means in providing assistance to US law enforcement bodies in its investigation into the money laundering scheme through the Bank of New York linked to Russia's organized crime. The US spokesman declared that the fight against money laundering is the task of priority importance for the US government. During an investigation, authorities will look into the possibility of a link between the presumed "money laundering" and financial aid provided to Russia

Berezovsky's Swiss Accounts Frozen

· A spokesman for Switzerland's federal prosecutor's office said that in response to a May 5h request from Russian law enforcement officials, Swiss authorities have frozen bank accounts for certain, suspicious individuals. The spokesman declined to comment on a recent report in the Swiss magazine Facts that accounts worth 100 million Swiss francs ($66 million) belonging to media magnate Boris BEREZOVSKY have been frozen on suspicion of fraud and money-laundering. Novaya Gazeta reported in its most recent issue that companies and structures close to BEREZOVSKY have an indebtedness of nearly

Today's News Highlights

Russia

Tax Collection Doubles In 1999

BMW Assembly Starts In Kalin.

European Republics

Williams-Mazeikiu Close To Deal

Rosvagonmash Buys Riga Share

South Caucasus & Central Asia

Georgia Resumes T-Bill Sales

Azeri-Armenia Meet In Geneva

Kazakh To Sell Tengiz Stake

Uzbek May Admit Bombing Tajik

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$3 billion, RFE\RL Newsline reported. According to the publication, last year's economic crisis hit hardest banks owned by BEREZOVSKY. Preliminary estimates show Avtobank and United Bank lost almost $180 million. Novaya Gazeta, which is reportedly financed by rival Vladimir GUSINSKY Media-Most Group, concluded that, "BEREZOVSKY's whole empire lives on borrowed money," that flows from one structure to another, making new loans and purchases possible.

Cold War Typhoon Submarine To Be Dismantled

· Co-founder of the NUNN-LUGAR Cooperative Threat Reduction, US Senator Richard LUGAR (Rep.,Indiana) will observed the dismantling of the Typhoon missile submarine, when he visits the SevMash submarine base near Severodvinsk, Russia on Saturday. This is the first dismantling of the Typhoon-class ballistic missile submarine. According to a Senate press release, the Typhoon submarines prowled the waters off North America's eastern seaboard during the Cold War. The submarine, the largest in the world, is capable of carrying 20 long-range ballistic missiles with up to 200 nuclear warheads. The NUNN-LUGAR program is scheduled to destroy 25 Delta-class, five Typhoon-class, and one Yankee-class ballistic missile submarines capable of launching over 400 missiles with over 1,700 warheads, by the year 2003. The program has facilitated the destruction of 365 ballistic-missiles, 343 ballistic missile launchers, 49 bombers, 136 submarine missile launchers, and 30 submarine launched ballistic missiles.

Meanwhile, a Russian shipyard officials has said that the US plans to earmark another $15 million to continue the program of scrapping Russia's decommissioned strategic atomic submarines. The Nerpa shipyard in Snexhnogorsk has scrapped three Northern Fleet submarines. Pavel STEBLIN said Russia's Finance Ministry has ratified a protocol for these funds to be earmarked for Nerpa for the dismantling of two more submarines.

Economy

Livshits Makes European Tour

· Alexander LIVSHITS, Minister of the Russian Federation, and chairman of inter-governmental commission for the coordination of action within the framework of the Group of Eight (G-8), outlined

Russia's commitments to reforms and a stable political environment ahead of parliamentary elections in December. He will visit Britain, France, Germany and Belgium and meet with top officials and businessmen in each nation. A comprehensive settlement of the debt of the former USSR will be on the agenda. LIVSHITS said that the world's leading nations must realize that Russia is currently unable to pay interest on the foreign debt by the original schedule in full. In London on Thursday he said, "Russia should balance its economic and political relations with Western partners due to the changes occurred in Russia after the August 1998 crisis." He noted progress in Russia's economic development and its important role in the solution of global military and political crises. He added that the US government will approve the draft resolution on Russia's market economy before October. His statement could not be confirmed. LIVSHITS said this would facilitate Russia's accession to the WTO.

Ruble = 24.62/$1.00 (NY rate)

Ruble = 24.82/$1.00 (CB rate)

Ruble = 26.39/1 euro (CB rate)

Mar Apr May Jun Jul Aug

IMF Mission Arrives In Moscow

· A group of International Monetary Fund (IMF) experts arrived in Moscow on Thursday to studying the parameters of Federal budget performance as well as the distribution of additional budget revenue received in 1999. They will review a number of the taxation initiatives of the Russian government such as the effectiveness of an increase in excise tax on gasoline as well as a cut in the tax on motor road users effective from the year 2000. The IMF team will


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meet with Russia's experts to discuss a number of matters connected with a reform of the income tax scale in 2000. After evaluating these measures, the IMF experts will take a tentative decision on the possibility or impossibility of achieving a primary surplus of the Russian 2000 budget at the level of 3.8 to 4 percent of gross domestic product (GDP). The Russian government has said it could not possibly raise it above 3 percent. Nonetheless, Russia's Chief negotiator with the international financial organizations, Mikhail ZADORNOV predicted a positive outcome to talks between the IMF and the new government. The mission will complete its work in Moscow on September 1st. As early as in mid-September, the IMF may decide to allocate the second credit installment of $630 million to Russia out of $4.5 billion planned to be allocated to Russia in 1999. At the beginning of this month, Russia received the first $630 million out of that amount. These funds were used to make previous payments to the IMF. So far, Russia has honored all payments to the IMF due this year, totaling about $4.5 billion.

Tax Collection Doubles In 1999

· Russia's tax collection has nearly doubled in the first seven months of 1999. According to the Tax Ministry, tax police collected the equivalent of $6.27 billion in cash between January and July, a rise of 96 percent from the same period of 1998. The collections exceeded the government's goal by 11 percent. The revenues collected contributed to the consolidated budget, which includes both federal and regional tax sources. Federal tax collection for the first seven months of the year constituted 7.1 percent of gross domestic product up from 5.8 percent of GDP in the same period in 1998. One economists points out the devaluation of the ruble was partially responsible for the improved tax collection; it stimulated some sectors of the economy by making Russian good more competitive. Tax Minister Alexander POCHINOK expects overall August tax collections to be more than the ministry's target, the equivalent of $1.08 billion.

Business

Ships Seized For Bad Debts Go To Auction

· Police in various ports seized 29 refrigerator ships of the Vostoktransflot stock company, based in the Russian Far Eastern city of Vladivostok, the

company's board of directors said on Thursday. The ships will be auctioned off to repay the company's bad debts. The arbitration court of the Primorye territory has recently started bankruptcy procedures against the company and appointed a temporary manager. A company statement said that the company's existence is at stake. If Vostoktransflot is declared bankrupt, shareholders will suffer considerable losses. However, the priority is to pay off debts and rescue sailors from the seized ships which are suffering from lack of food and water and regional illnesses. One ship, Ussuriyskaya Taiga, arrested in the Nigerian port of Lagos, is affected by malaria, and one crew member is declared missing. The board of directors is ready to provide assistance to the temporary manager in order to solve the sailors' problems and will do its best to restore the company's normal functioning.

BMW Launches Assembly In Kaliningrad

· German luxury carmaker Bavaria Motor Works (BMW) started assembling sedans at a plant in Kaliningrad, the Russian enclave on the Baltic Sea. Company officials at the Avtotor Plant say they plan to have already assembled 24 cars in the first day of operations, and will gradually increase the output. The new BMWs will retail for approximately $40,000 in Russia. The assembly line is using parts made in Europe and imported into Russia, but will eventually shift toward local components and suppliers. Officials say Land Rovers will also be assembled at the plant, located in a special economic zone in western Russia. The carmaker says certain adjustments have been made to the sedans to take account of Russia's appalling roads. BMW will soon be joined by other western car manufacturers in opening assembly plants in Russia as a means to escape high import taxes that have hurt sales. Ford and General Motors' Opel division are gearing up their local operations, and Italy's Fiat also has big plans for the Russian market. France's Renault is already producing limited numbers of its Megane model at a Moscow plant. Volkswagen's Czech-based unit Skoda plans to begin assembly of its popular Felicia model in Russia shortly.

Russia Begins To Build Baltic Pipeline

· Russia has developed plans to build a new oil export pipeline to the Gulf of Finland in October. The pipeline would carry oil from Timan Pechora prov

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ince in Siberia, the Urals, and the Volga regions to a terminal at the port of Primorsk. Russian state-owned oil pipeline monopoly Transneft said the new Baltic Pipeline System would be operational in one and a half to two years. The state would have a state of at least 75 percent in a joint stock group, which will operate the project. The state may distribute some of the shares in the project among oil companies that pay a special tariff of $1.43 per ton of crude oil exports to fund the construction of the pipeline. Transneft expects to raise $200 million from the tariff, which will be used to finance 40 percent of the first stage of the project. Stage one will link the existing Kharyaga-Usinsk-Ukhta-Yaroslavl-Kirishi pipeline to a new pipeline to be built between Kirishi and Primorsk. The second stage the pipeline's capacity will be increased to 600,000 barrels per day from the initial 240,000 barrels per day, when crude oil from Tengiz oilfield in Kazakhstan may start flowing into the system.

Eur-Asian Teleforum Opens In Moscow

· The Eurasian teleforum 1999 opened at the Krasnaya Presnya World Trade Center in Moscow Thursday. A review of competitive productions is to begin on this afternoon and a ceremony to be attended by prominent television people from other countries this evening. This year's program for the meeting has been extended and interest in it has mounted. About 400 works from State-run and private-owned television networks of Russia, Ukraine, Belarus, other Commonwealth of Independent States (CIS), and Estonia have been entered for competition. A market of television products, an exhibition of professional television equipment, a retrospective review of CIS countries' films, master classes, seminars and round-table meetings on topical professional problems will be conducted within the framework of the teleforum. The forum has been organized by the National Association of Television Distributors, the SKIP-Media television network, the Prometheus AST television network, the Mir international television and radio network, with the participation and support of the Presidential administration of Russia, the Ministry for CIS Affairs and many other state agencies, professional and public organizations.

Putin Attends MAK-99 Air Show

· Prime Minister Vladimir PUTIN attended the international MAKS-99 air show outside Moscow

on Tuesday and praised the quality of Russian military equipment. Russian military equipment, "is the best in the world and will remain so for ever," PUTIN said at the opening ceremony in Zhukovsky. Russia attaches great significance to the domestic air-space industry. He added, "We perfectly understand what it means for our country, considering its geography and possibilities. We realize that [our] aviation and space technologies are the most advanced and we are proud of them." He said he backed co-operation between Russian and foreign producers on several projects. PUTIN said the new government will support programs in the field of high-tech technologies which now concentrate in the aerospace industry. The Prime Minister observed demonstration flights of newest domestic civil and military planes, such as Il-96M/T, Tu-334, Su-27 and Su-30MK.

European Republics

Mazeikiu Nafta Sale Almost Complete

· Lithuanian Prime Minister Rolandas PAKSAS said today that negotiations with US-based Williams International over the sale of a significant stake in the Mazeikiu Nafta refinery were progressing. Williams Lithuania's general manager Randy MAJORS said, "We are anticipating the government's initial response by the end of the week. If so it would facilitate concluding the agreements by the end of the month." Over a year and a half, Williams has been in talks over taking an equity stake and optional control of 88.5 percent state-owned Mazheikiu, which includes a pipeline system, newly built crude terminal, and the only refinery in the Baltic States. The new government earlier this week released a list of proposals by the Economics Ministry to which Williams had agreed, including allowing other financial investors into the shareholder structure and reducing government liabilities. This will allow the European Bank for Reconstruction and Development (EBRD) and the International Finance Corporation (IFC) to take small stakes, together seen at about 10 percent. Williams Companies, headquartered in Oklahoma, is an energy and telecommunications company valued at over $21 billion with operations in the United States, South America, and Australia.

Rosvagonmash Buys Riga Energy Plant Shares

· The Russian financial and industrial group

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resumption issue, 28-day discount bills known as GKOs, was 14.76 percent. The ministry issued 500,000 lari ($273,224) of bills to eight banks which bid for 1.125 million lari of paper. Dealers, however, have complained that the yields and volume were both low. The last T-bill was held on September 16, 1998, when 91-day bills yielded 39.13 percent. Reuters quoted Gogi AKHALKATSI, chief dealer at Absolute Bank, one of the nation's largest bank said treasury bills sales were unprofitable for commercial banks despite new rule to make the paper more liquid and attractive. He said, "These measures don't increase our interest in GKOs. And the issue volume—500,000 lari—is very small." Finance Ministry's Domestic Debt Department Head Malkhaz BEBERASHVILI said, "It is not realistic to talk about covering the 1999 state budget deficit of 9.1 million lari now through GKO issues." He noted that the first goal of the resumption of auctions was to restore investor's confidence in the financial instrument, which was tarnished by the effects of the Russian financial crisis. Nino MAKASHVILI, head of the foreign department at United Georgian Bank, said he was optimistic about the market's future in Georgia.

Aliyev-Kocharyan To Meet In Geneva

· Azeri President Geidar ALIYEV and Armenian President Robert KOCHARYAN will meet in Geneva on Saturday to discuss the peaceful settlement of the Nagorno-Karabakh conflict. Nagorno-Karabakh is an Azeri region populated predominantly by ethnic Armenians, which broke away in 1988 and claims full independence. During a six-year war, approximately 35,000 people died and more than a million Azeris were left homeless. Armenia has given political and military support to the separatists. ALIYEV and KOCHARYAN held the first direct talks in Geneva on July 16th, but failed to reach any substantial progress in resolving the dispute. ALIYEV has stressed that it is necessary for both Azerbaijan and Armenia to compromise at negotiations for a peaceful settlement.

Turkmen Receives $150,000 Installment

· The US Trade and Development Agency has provided a third $150,000 installment to Turkmenistan to finance the construction of a trans-Caspian gas pipeline. Turkmen President Saparmurat NIYAZOV and the agency's Director Joseph GRANDMAISON signed a document to this affect

Rosvagonmash has acquired 28 percent of shares of the Riga Electrical Engineering Plant and will buy the controlling stake before the end of 1999. Yevgeny TIKHONOV, head of the administration of the Russian commercial counselor in Riga, pointed out that not a single major Latvian production company has managed to attract Russian capital. The energy plant is the first. The Riga Electrical Engineering Plant holds a monopoly on manufacturing electro-technical equipment for trains. Vladimir ANDRIYAKA, the Rosvagonmash director-general, said the Latvian government welcomed the development of mutually beneficial ties with Russia.

Rus-Ukrainian Premiers Set Meeting Date

· Ukrainian Prime Minister Valery PUSTO-VOITENKO said he will hold a meeting with his Russian counterpart Vladimir PUTIN in Moscow on September 27th to 28th. PUSTOVOITENKO told journalists on Wednesday, "I will go to Moscow with pleasure to take a new step towards the implementation of decisions adopted by the Russian-Ukrainian joint commission on cooperation....We are concerned with both payments for the work done by Ukraine for Russia and Ukraine's debts to Gazprom." PUSTOVOITENKO said the discussion in Moscow will focus on the implementation of the An-70 aircraft joint project, the creation of a consortium at the Lisichansk Oil Refinery between Ukraine, Russia and Kazakhstan and possibly other countries, as well as other aspects of bilateral economic relations. Prior to this visit, PUSTOVOITENKO will meet with top Russian officials in Moscow on August 27th.

Russia To Sell Belarus MiGs

· Russia will sell eight MiG-29UB fighters to Belarus under an agreement signed at the MAKS-99 aircraft show in Moscow on Wednesday. The news was announced to the press by Alexei OGARYOV, general director of Rosvooruzheniye, Russia's state arms trading company. He said the aircraft will be delivered to Belarus by the end of this year. He did not name the sum of the deal.

South Caucasus & Central Asia

Georgia Resumes Treasury Bill Auctions

· The Georgian Finance Ministry resumed treasury bill auctions this week, after almost of year. The annualized average yield on Wednesday's

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on Thursday. An agreement on a $1.495 million grant to build the pipeline was signed in Washington in April during NIYAZOV's first official visit to the US. It was then that Turkmenistan received the first $750,000 tranche to carry out a feasibility study for the trans-Caspian gas pipe. The second $595,000 installment was provided early in 1999. The construction of the trans-Caspian gas pipeline is estimated to cost from $1.7 billion to $2.5 billion.

US Energy Secretary Bill RICHARDSON held talks with NIYAZOV on the resuming construction of a gas pipeline from the Central Asian republic across the Caspian Sea to Azerbaijan. RICHARDSON pressed Turkmenistan to speed up the pipeline project by offering US mediation to resolve remaining difficulties between Ashgabat and the three other participants, Azerbaijan, Georgia and Turkey, primarily the dispute over Caspian oil and gas reserves. He said, "today both countries have realized that this disagreement should not be a barrier to the completion of this project." Turkmenistan is interested on completing the project to escape its dependence on Russian pipelines.

Kazakhstan To Sell Tengizchevroil Stake

· Kazakhstan has issued 20 letters to major petroleum companies and state-owned oil companies to participate in the sale of a 25 percent stake in the Tengizchevroil joint venture. The government has not publicly announced the event. It has organized a London-based, invitation-only action for the country's stake, which the government estimates to be worth between $1.2 billion and $1.6 billion. Rick MCARTHUR of Arthur Andersen, "Taking into account the introduction of the Caspian Pipeline Consortium, the value [of Kazakhstan's stake in Tengizchevroil] could double again at least." Parliamentary speaker Marat OSPAOV said, "This stake is likely to be worth three to four times more after a number of years." The revenue would be more than enough to fill an estimated $560 million budget gap for 1999. The sale is sure to cause a backlash

against the government of Prime Minister Nurlan BALGIMBAYEV which has been forced into the sale, due to mounting budgetary pressures. Chevron Corporation owns the largest share in the field, a 45 percent stake, with Kazakhstan and Mobil Corporation at 25 percent each, and LUKoil and US Arco share the remaining 5 percent.

Uzbek May Admit Bombing Mistake

· Uzbekistan on Tuesday said that it may have bombed a remote area in Tajikistan by mistake when its jet fighters crossed over the Kyrgyz border, during a mission to flush out a group of armed kidnappers on Sunday. Uzbek Foreign Minister Abdulaziz KAMILOV said, "We do not exclude the possibility that the planes could have flown over the territory of Tajikistan, as the terrorists were very close to the border." He confirmed that planes were helping Kyrgyzstan to liquidate a group of 21 armed men who held four Kyrgyz officials hostage for two weeks. He added that some bombs had been dropped accurately on the place where the group was believed to be hiding. There have been no report of casualties. Uzbekistan has long suspected that armed fundamentalist Moslems are hiding and training in Tajikistan and therefore represent a threat to Uzbek security. KAMILOV called on Tajik President Emomali RAKHMONOV to destroy these training camps. Uzbek President Islam KARIMOV also criticized Tajikistan for not control situations in it territory and along the eastern part of its border. He said, specifically, that instead of sending a note to Uzbekistan, Tajikistan should consider how it happened that a bandit formation of 21 men passed without a hitch from its territory to neighboring Kyrgyzstan. "If Tajik leaders are unable to eliminate military camps where these bandits are trained, they should seek international aid."

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