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

Wednesday, September 29, 1999


Peter BERLIN whose accounts are under investigation, has filed a suit against her former employer for violating the bank's internal dismissal policies. She was fired for violating bank internal policies, falsification of bank records, and a failure to cooperate with inquiries. Her lawyers claim that the Bank of New York was required to hold an exit interview with EDWARDS prior to her dismissal. Because of the continuing scandal it is believed that the case will be settled outside of London courts with compensation to be estimated between £12,000 to £50,000, the Financial Times reported.

US investigators say that Russia has refused to cooperate with a Justice Department request to turn over bank statements, audiotapes, and documents related to the alleged laundering, according to USA Today. Russia's Federal Security Service (FSB) rejected the request in a meeting with US Embassy officials because they said it was an, "unnecessary intrusion" into their internal affairs. They further claim that during their visit to Washington Russian investigators were not shown evidence supporting the allegations. However, US investigators said they showed the delegation, including representatives from the FSB, the Interior Ministry, the Prosecutor General's Office, and the Federal Tax Police Service, "irrefutable evidence" that billions of dollars had been diverted through US banks. Aside from difficulties with the Russian side providing evidence, it appears the Federal Bureau of Investigation (FBI), led by Louis FREEH and the New York District Attorney

Russian Federation

Politics

Chernomrydin Calls For Better Relations

· Former prime minister, presidential envoy to the Kosovo conflict, and leader of the Our Home is Russia movement Viktor CHERNOMYRDIN is visiting the US this week for high level meeting with the International Monetary Fund (IMF) Managing Director Michel CAMDESSUS and World Bank President James WOLFENSOHN as well as for the dedication of the CHERNOMYRDIN Institute for Russian-American Economic Studies at Bridgeport University. Speaking on Tuesday at a luncheon organized by the Eurasia Group with business and financial leaders, CHERNOMYRDIN called for better bilateral relations. He warned that the attacks on Russian business ethics and practices could endanger close US-Russian ties developed over the past several years. He blamed political intrigues in both the US and Russia for the current wave of anti-Russian coverage in the US media. Intercon sources report CHERNOMYRDIN said that after parliamentary elections he would be prepared to work with former prime minister Yevgeny PRIMAKOV and Moscow Mayor Yuri LUZHKOV in support of their campaign and movement All Russia-Fatherland. CHERNOMYRDIN today is speaking at a National Press Club lunch organized by the Center for Democracy.

BONY Investigation Gets Wrapped In Tangles

· The Russian money laundering scheme which funneled up to $15 billion through a number of accounts at the Bank of New York faces not only a web of thousands of wire transfers from international accounts, but also tangles from former employees, uncooperative investigators and law enforcement officers in Russia and the US. Former Bank of New York employee Lucy EDWARDS, also the wife of

Today's News Highlights

Russia

Duma Rejects 2000 Budget

Banks Owe $242M To Customs

$1B In Capital Flight Per Month

Coca Cola Cuts Moscow Staff

European Republics

NRG Power Plant Bid On Track

South Caucasus & Central Asia

Georgia Defense Aid To Rise

US-Azeri Sign Non-Proliferation

Rus-Kazakh region Sign Agmt

Politics-Economics-Business

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Wednesday

September 29, 1999

Intercon's Daily

Robert MORGENTHAU have been caught in an old rivalry and are not sharing information. The FBI followed a kidnapping trail to the Benex Corporation's money laundering scheme, where as the District Attorney was tipped off that there was an illegal operation moving money through the Bank of New York. Their information was never pooled and each side is blaming the other for dragging their feet and only acting aggressively once the story broke in August. The New York Times reports that Federal investigators have let it be known that bureau officials and Federal attorneys even discussed whether to file Obstruction of Justice charges against counterparts in other agencies, whom they perceived as getting in the way.

In addition, Russia's prosecutor general has launched criminal proceedings against the Flamingo Bank, charged with illegal banking activity and the suspected money laundering in the US. This is the first legal action taken against Russian bankers and businessmen. A spokeswoman for the prosecutor's office said that the case was not directly related to the alleged money laundering at the Bank of New York. However, an investigator close to the case said that action against Flamingo and other related audits are a part of a wide ranging international probe into flows of Russian money tainted with corruption, The Wall Street Journal reported. Other banks under Russian scrutiny include Depozitarno-Kliringovy Bank (DKB) and Sobin Bank, both with close ties to importers.

Economy

Ruble = 25.22/$1.00 (NY rate)

Ruble = 25.08/$1.00 (CB rate)

Ruble = 26.46/1 euro (CB rate)

Duma Rejects 2000 Budget

· In a final vote of 356 to 11 with one abstention, the Russian State Duma overwhelmingly rejected the 2000 draft budget on Tuesday. Instead the Duma referred the budget to a trilateral commission, consisting of representatives of both chambers of parliament and the Cabinet. Duma speaker Gennady SELEZNYOV said discussion of the budget may return only in mid-October. He said that, "the key problem is to decide on the revenues that should replenish the budget, and find out where the billions of untaxed rubles go...we'll seek variants to fill up the federal budget." He believes that there will be difficult

debates over the next few months as regional governors request more funding. The draft called for a revenue of 745.14 billion rubles and an expenditure of 803 billion rubles, with a deficit of 57.87 billion rubles to be covered by international borrowing. It presumed a gross domestic product (GDP) measuring 5.1 billion rubles. The primary surplus would amount to 3.18 percent of GDP, inflation at 18 percent, and an exchange rate averaging 32 rubles to one dollar.

Prime Minister Vladimir PUTIN accepted the Duma's decision by saying that a referral to the trilateral commission is a better scenario than returning the budget to the government. Before the vote, PUTIN pointed out to lawmakers that the draft was the result of efforts by three Russian governments. Yevgeny PRIMAKOV's government began work on the draft, Sergei STEPASHIN's cabinet approved its key parameters while the present government focused on its "philosophy and logic." He noted that "the government was aware of the fact that the [draft budget] was a complex document and that fractions were bound to arise with relation to different questions...But the setting up of a trilateral conference commission will make it possible to remove the problems in the easiest and most convenient way." Russia has promised to adhere to a strict budgetary parameters in 2000. Despite the annual debate and dragging of feet by deputies to pass the budget, SELEZNYOV expressed confidence that the Duma will approve it before the end of the year.

Commercial Banks Owe More Than $242 Million

· Russian commercial banks owe customs authorities $242 million, according to the press service of the State Tax Committee (GTK). Rossiisky Kredit and Most-bank are the largest debtors with 746 million rubles ($30 million) and 650 million rubles ($26 million), respectively. Mosbiznesbank owes 145 million rubles ($5.8 million), Inkombank 40 million rubles ($1.6 million), Promstroibank 13 million rubles ($520,000) and Menatep about 22 million rubles ($880,000). According to treaties between the GTK and banks, the latter are to service the GTK's accounts and transfer customs payments to the revenue part of the budget without delay. The banks that claim these provisions, "are damaging to the federal budget and the state as a whole." The GTK and the tax police are set to take tough measures to force the debtor banks to pay their debts.

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Wednesday

September 29, 1999

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In addition, Russia's Rossiisky Kredit bank has refused to comment on whether it will make a $10.25 million eurobond-coupon payment due today. On March 29th, Rossiisky Kredit failed to pay a previous $10.25-million coupon and since then the bank appears to have been holding talks with foreign creditors on restructuring of all its foreign debt. Rossiisky Kredit issued $200 million of 3-year eurobonds in September, 1997, with a coupon of 10.25 percent, paid semi-annually.

Capital Flight Estimated At $1B Per Month

· Chairman of the Central Bank Viktor GERASHCHENKO admitted that about $1 billion of capital flees Russia illegally every month. He made a clear distinction between capital flight and capital export. "Capital export is permitted for the setting up of mixed or Russian companies abroad. Capital is also needed to open special accounts abroad to pay for foreign trade operations," which he said is legal. Capital flight is harder to track since as GERASHCHENKO said, "We cannot be judges and evaluate each contract for some or other product to establish whether or not the price is right. It is no secret that quite often Russian enterprises conclude fictitious contracts with offshore companies owned by Russian organizations or citizens. The price lower than the real one is stated. Then the offshore company sells the product at the real price. Part of the receipts remains on the offshore companies accounts in foreign banks." He denounced claims that the Bank of New York was involved in alleged Russian money laundering schemes. GERASHCHENKO also dismissed speculation that he will soon step down because of failures and scandals within the Central Bank. He said that he does not intend to work as Central Bank of Russia chairman for the full four-year term, and instead will, "yield way to the young."

Business

Coca Cola Cuts Moscow Staff By 70 Percent

· Atlanta-based soft drink manufacturer Coca Cola is planning to cut its Moscow staff by 70 percent. The company has been forced to downsize due to a slump in sales. The company has 100 employees in its Moscow office and will be left with only 25 to 30 employees. Earlier this month, Coca Cola lowered its earning forecast for the fifth time since last fall, The Moscow Times reported. Importers to Russia

and companies which rely on imported ingredients or parts have been hurt over the past year because of the depreciation of the ruble, giving advantages to local products with more affordable prices. Coca Cola could not be reached immediately for comment.

Lukoil Confident Of Czech Bid

· The Russian oil company LUKoil is actively enacting plans to expand its operations in Europe. It is confident that it will win a tender in Czech for the strategic oil refinery at Parama-Pardubice. "We will offer the best possible terms and conditions," LUKoil president Vagit ALEKPEROV declared at a press conference in the Czech capital on Monday. He added that he met with Czech Prime Minister Milos ZEMAN to discuss prospects for the Russian oil company's activity in the Czech republic, including its participation in the Parama-Pardubice privatization tender and the expansion of its gas stations there. He pointed out that since LUKoil is a major producer of fuel and lubricants, the "acquisition of Parama-Pardubice as a manufacturer of process oils is a logical step in our activity." LUKoil has set aside 1.5 million Czech crowns (some $50 million) to acquire the refinery. LUKoil already operates three gas stations, but has plans for 15 others to be built. At home, LUKoil is planning to increase the output of oil from 64 million tons in 1998 to 73 million this year. Its confirmed oil reserves are the world's biggest at 2 billion tons.

European Republics

NRG Confident In Estonian Power Deal

· US power giant NRG Energy Inc. is confident in its negotiations to acquire a 49 percent stake in two Estonian power plants and through it a piece of an oil shale mining operation. NRG said its plans are on track. NRG's Estonian representative Hillar LAURI said the key issue of price has not been settled yet. He declined to give any financial details of the deal. The government will keep 51 percent of the plants, located in Narva which produce the majority of Estonia's electricity. Talks had been delayed with previous governments and with the addition of the oil shale firm Eesti Polekivi. The deal is further complicated by Estonia's bid to join the European Union (EU). LAURI said, "Yes, costs are going to rise. There are social costs, and new environmental fees are imposed every year—in some cases doubling as

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September 29, 1999

Intercon's Daily

they come into line with EU and international standards." Despite these obstacles the deal is still attractive to NRG Energy Inc.

South Caucasus & Central Asia

Georgian Border Funding To Increase

· Following the visit of Georgian president Eduard SHEVARDNADZE to New York and Washington DC, the White House has suggested that it will increase financial aid for the State Border Guard Department of Georgia from $12.3 million to $20 million. Chairman of parliamentary committee for defense and security Revaz ADAMIA told Prime News Agency that the aid will go to improve Georgian Coast Guard Service. He also stressed that there is another priority on the Chechen-Daghestan portion of the Russian-Georgian state border. He described statements from some Russian politicians and chairman of the Supreme Council of Adjaria Aslan ABASHIDZE on transit of arms and gunmen through Georgia to the North Caucasus as "absurd." ADAMIA added that such statements are attempts to complicate situations in Georgia ahead of parliamentary elections scheduled for October 31st. Related to the Russian air raids on Chechen militant targets Foreign Minister Irakly MENAGARISHVILI believes information that former Chechen field commander and claimed leader of the invasions in Daghestan Shamil BASAYEV plans to spend the winter in Georgia's highland region of Svanetia as "comical." He told Prime News Agency that such information in Russia is a dangerous provocation and may result in an increase of Russia's military presence in Georgia or an organization of a military operation directed at Georgia. According to him, "Russian political forces attempt to lump the blame for destabilization of situation in the North Caucasus on neighboring countries."

US-Azeri Sign Non-Proliferation Agreement

· US First Deputy Defense Secretary John HAMRE and visiting Azeri Foreign Minister Tofik ZULFUGAROV signed an agreement on coopera

tion in the field of non-proliferation of weapons of mass destruction in Washington on Tuesday. Speaking at the Institute for studies of Central Asia and the Caucasus, the Azeri Foreign Minister said that it was the first bilateral agreement in the field of security signed by Azerbaijan and the US. He expressed the need for international cooperation in struggle against terrorism. He flatly rejected statements that arms deliveries to Chechen militant came through Azerbaijan. The Azeri Foreign Minister noted that he took advantage of his visit to the US timed to coincide with the session of the UN General Assembly, in order to hold consultations on settlement of the conflict around Nagorno-Karabakh with his Armenian counterpart Vartan OSKANYAN in New York today. ZULFUGAROV described the meeting as, "an attempt to take the process of settlement out of the crisis." He stressed that Baku believes a settlement of the Nagorno-Karabakh conflict can be reached only in the framework of the Minsk group chaired by Russia, the US and France, while bilateral meetings even held at a top level cannot replace the negotiating process on Nagorno-Karabakh. US Secretary of State Madeleine ALBRIGHT in an open letter to Azeri President Geidar ALIYEV asked him to agree to a declaration of principles as a framework to resolve the Nagorno-Karabakh conflict. Negotiations sponsored by the Organization for Security and Cooperation in Europe (OSCE) will resume on November 18th to 19th in Istanbul. The OSCE has mediated talks between the two sides since 1992. ALBRIGHT also called for the population of Karabakh to be included in negotiations, something that Baku has opposed since the beginning of talks.

Rus-Kazakh Regions Sign Deal

· Moscow Mayor Yuri LUZHKOV and the Kustanai region in northern Kazakhstan Headed by Umirzak SHUKEYEV signed a cooperation agreement on Tuesday in the fields of cultural, trade, and economic relations. Moscow is interested in buying Kazakh grain and meat. SHUKEYEV said Kustanai was interested in medical cooperation as well. LUZHKOV suggested exchanging trade missions.


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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