DAILY REPORT ON RUSSIA

AND THE FORMER SOVIET REPUBLICS

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

WASHINGTON, D.C. 20005 -- 202-347-2624 -- FAX 202-347-4631

Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Wednesday, December 22, 1999

Russian Federation

Politics

Putin Meets With Top Party Leaders

· Russian Prime Minister Vladimir PUTIN met on Tuesday with the six top party leaders of the newly-elected Russian State Duma, urging them to support the government's efforts to pursue economic reforms and crush terrorists in the Caucasus. PUTIN told the lawmakers, "The nation is pinning great hopes on the new Duma, the more so since there are many problems to be solved...I hope we will work together the way we worked with the previous Duma." He called for cooperation between the Duma and the government, which has differed and delayed on the passage of necessary reforms legislation. Already, the leaders in the new Duma are bickering over who will control the post of speaker. Communist leader Gennady ZYUGANOV has insisted that the speaker come from his party, since it is still holds the largest number of seats. This appears to be the only way in which the Communist Party can retain some control over the house. Centrists groups made up of four of the six parties, also believe they have a right to propose the speaker. Yabloko leader Grigory YAVLINSKY dismissed the Communists' claim on the speakership. He pointed out that on Tuesday ZYUGANOV laid flowers on Joseph STALIN's grave marking his 120th birthday and praised the leader's role in history. YAVLINSKY said, "Such a party has no right to claim the post of speaker of the Duma nor to the post of first deputy." His faction has proposed former prime minister Sergei STEPASHIN for the speakership. A spokesman for business tycoon and now deputy Boris BEREZOVSKY came out against STEPASHIN saying that he is too weak to lead during this critical time. Duma deputies vote on the candidates for speaker. This battle is likely to continue in the next few weeks before the new parliament holds its first meeting in January. In addition,

the Kremlin and Communists will be courting about 100 independent lawmakers for their loyalties.

Putin-Talbott Arms Control Talks Fail

· Russian Prime Minister Vladimir PUTIN and US Deputy Secretary of State Strobe TALBOTT met on Tuesday in Moscow, but failed to make headway on arms control issues. PUTIN has said that he will press the Russian State Duma to ratify the START-II nuclear arms treaty signed in 1993. START-II calls for the reduction of US and Russian deployed nuclear warheads by up to two thirds to no more than 3,500 each by 2007. The sides failed to come to a closer agreement over the issue of a possible US missile defense shield, which would violate the 1972 Anti-Ballistic Missile pact. Washington has been trying to convince Moscow to amend the treaty, due to the threat of rogue states like Iran and North Korea. The treaty placed strict limits on defense systems designed to shoot down enemy missiles, under the logic that such shields would drive the Soviet Union and the United States to stockpile ever larger arsenals of nuclear warheads. Russia has said it would respond to a US shield by increasing its offensive nuclear capability. Russian Colonel-General Vladimir YAKOVLEV has said that the shield is always weaker than the sword.

A team of Russian missile specialists left for the US on Tuesday to join US experts at a staff center in Colorado which will monitor their countries' nuclear missiles over the New Year holiday in case of any Y2K mishaps.

Today's News Highlights

Russia

Albright Blocks Ex-Im Loan

Fed. Council Approves Budget

TNK-BP Amoco-Sidanko Peace

Yukos Protests Oil Tariff

South Caucasus & Central Asia

Russia Angers Georgia

WB To Grants Highway Loan

WB Grants Loan For Electricity

Kazakh-US Sign Defense Agrmt

Politics-Economics-Business

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Wednesday

December 22, 1999

Intercon's Daily

Economy

Ruble = 26.71/$1.00 (NY rate)

Ruble = 26.75/$1.00 (CB rate)

Ruble = 26.99/1 euro (CB rate)

Albright Blocks Ex-Im Bank Loan To Tyumen

· The US State Department, acting on behalf of the CLINTON Administration, on Tuesday blocked a controversial US Export-Import Bank $500 million loan for Tyumen Oil Company under an obscure legislative amendment. Secretary of State Madeleine ALBRIGHT sent a letter to the bank, "containing a determination that it would be in the national interest and clearly and importantly advance US policy in Russia for Ex-Im Bank not to approve, for the time being, financing for two transactions in Russia. The Ex-Im Bank board of directors acted in accordance with the secretary's determination," according to a Bank statement. Insisting that the decision was not based on Russia's military campaign in Chechnya, US officials claimed that the administration's concerns stem from Russia's weak bankruptcy laws, Tyumen's suspect business practices, and its bitter dispute with BP Amoco. It also said that loans should not be granted because Tyumen is going through privatization and it does not protect or respect shareholder rights. State Department spokesman James FOLEY said, "The raising of our concerns is not a sanction related to Chechnya."

The loan was aimed at purchasing $295 million in oil equipment and services from Halliburton of Texas and $203 million in exports from ABB Lummus Global of New Jersey. Ex-Im Bank chairman James HARMON had hoped the bank would approve the loan based on its commercial merits. The bank statement noted that, "Under its charter, Ex-Im Bank is required to consider all transactions for such commercial reasons as creditworthiness and their positive impact in creating or sustaining US jobs. For all Ex-Im Bank loans or guarantees, all money authorized remains in the United States and is paid directly to US exporters." The blocking of the loan comes just ahead of a World Bank meeting today to discuss future strategy toward Russia.

Federation Council Approves 2000 Budget

· In a vote of 148 to six with no abstentions, the Federation Council today approved the 2000 budget. The budget has already been passed by the

State Duma and must now be signed by President Boris YELTSIN to complete its passage. Finance Minister Mikhail KASYANOV told the Council that the budget remained realistic even after changes by the Duma. "The budget remains achievable. The main principles of the government remain: it is realistic, it stabilizes the situation in the social sphere and the standard of living, it improves tax policies, it keeps the ruble stable, it restores investment activity," he said. "The budget will allow us to launch positive trends in the economy, to strengthen this year's trends and create preconditions for economic growth." The budget targets spending of 855.1 billion rubles ($26.7 billion at a projected average of 32 rubles per dollar rate for 2000) on revenues of 797.2 billion rubles, leaving a deficit of one percent of gross domestic product.

Business

BP Amoco, TNK, Sidanko To Make Peace

· BP Amoco, Tyumen Oil Company (TNK) and Sidanko, Russia's fifth and sixth biggest oil companies respectively, today signed an agreement, ending a bitter corporate dispute. Under the agreement, Tyumen will hand back control of the Siberian oil producer Chernogorneft to Sidanko. In return Tyumen will receive a 25 percent plus one stake in Sidanko and seats on its board. BP Amoco will then increase its voting rights in Sidanko, although its direct equity stake would remain at 10 percent. The two Russian oil firms with BP Amoco's technical assistance will develop the Samotlor oil field. It is believed that BP signed the agreement along with Interros and Kantupan Holdings, all three of which have major stakes in Sidanko, and Tyumen shareholders Alfa Group and Access/Renova Group . One source close to the deal told Reuters that Chernogorneft, Sidanko's major production unit which was sold to Tyumen affiliates in a recent bankruptcy auction harshly criticized by BP and other shareholders, will be returned to Sidanko debt free, ending the bankruptcy. The corporate dispute came to a head in November when Tyumen purchased Chernogorneft in a bankruptcy sale after it earlier acquired 60 percent of Chernogorneft's debt and derailed an amicable settlement proposed by BP Amoco. Sidanko shareholders and creditors, including BP Amoco, the European Bank for Reconstruction and Development, Interros and the Sputnik Group of funds

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challenged the sale. They claim the sale price of $176 million was substantially less than the value of the company. Howard CHASE, director of BP Amoco's external affairs, said, "All of the shareholders, including Access and Renova, agreed that BP Amoco should continue to provide senior management and control of Sidanko and its subsidiaries." BP Amoco's vice President Ralph ALEXANDER said, "This agreement significantly strengthens the Sidanko oil company and fully reverses the adverse consequences of recent bankruptcy proceedings against Chernogorneft."

Yukos Protests Oil Export Duties Increase

· Yukos Oil Company, Russia's second-biggest oil producer, opposes the government's latest increase in oil export duties and warned that the decision will reduce investment in the industry. Russia raised the export duty on crude oil this month to 15 euros ($15.24) per metric ton from 7.5 euros. According to a Yukos press release, "Additional taxes will lead to the reduction of investment projects by oil companies and cause damage to the country's economy." The government has taken advantage of the doubling of world oil prices this year to tax exporters' rising earnings. It first imposed export duties when prices increased from a low in mid-February. Yukos said it produced 40.7 million tons (297.1 million barrels) of oil in the first 11 months, compared with 41 million tons in the same period in 1998. Yuganskneftegaz, one of the company's production subsidiaries, increased extraction by 1.7 percent to 23.9 million tons. Another unit, Tomskneft produced more than 9.1 million tons, while Samaraneftegaz produced 7.1 million tons. Yukos said it exported 15.5 million tons in the period.

The Russian government approved a tax equal to 5 percent of the value of gas exports, though not less than 2.5 euros ($2.54) per metric ton, effective in January. This new gas export duty will cost the gas monopoly Gazprom about $500 million in 2000, according to The Moscow Times. Gazprom Deputy Chief Executive Yuri KOMAROV said the new tax means, "we have had to cut our investment program by two-thirds." The new tax is expected to bring in an estimated 10 billion extra rubles ($376 million) to government coffers next year.

South Caucasus & Central Asia

Russia Accuses Georgia Of Aiding Rebels

· Georgian officials have vehemently reacted to strong accusations issued by Russia on Tuesday that Georgia is taking an anti-Russian stand over Chechnya, supports Chechen terrorists, heals injured rebels in their hospitals, and provides a place for Chechen representatives to meet with their foreign supporters including Osama BEN LADIN. Georgian Foreign Minister Irakly MENAGARISHVILI described Russia's accusations as "slanderous and provocative." A Russian Foreign Ministry statement said, "A loud campaign of attacks on Russia has been unleashed in Georgia," at a time when Moscow is fighting Chechen international terrorists. "The Georgian authorities are presenting a platform for anti-Russian statements by Chechen emissaries," it said. "Tbilisi covers its anti-Russian actions with propagandistic rhetoric, with its many appeals to international organizations, the OSCE and the UN, where it tries to present things as if Georgia has become a victim of a `humanitarian catastrophe' and even `aggression' by Russia." Russia said that Georgia's refusal to allow Russian troops to help it patrol the border with Chechnya has allowed easy access for shipments of supplies and met to cross the border and assist Chechen rebels. This it said has allowed Tbilisi to open, "window through which Chechen gunmen are being supplies with arms, ammunition, finances." Russia has also denied that its warplanes and helicopters have bombed the Georgian village of Shatili.

The Georgian presidential aide for international law Levan ALEXIDZE said, "it is unworthy" for the foreign ministry of such country as Russia, "to make the absurd statements that Georgia has allegedly turned into a supporter of Chechnya, as those statements are based not on the concrete facts, but on newspaper rumors." He added that Russia is issuing these accusations to hide the violations of airspace and bombing of peaceful villages. ALEXIDZE said claims that Tbilisi is a meeting place for BEN LADEN and Chechen terrorists is simply not true. He noted that, "If Russian side has evidences proving such facts, then by the international law it has to officially notify Georgian authorities," Prime News reported. ALEXIDZE stressed that despite that Georgian government will continue building neighborly relations.

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Today, Russia's Foreign Ministry said it was considering trade restrictions on Georgia, a move likely to add to tension between the two countries. Import and transit tariffs could be slapped on goods from Georgia in response to similar measures taken by the Georgian side. The statement said Georgia's Supreme Court had adopted a resolution effectively declaring null and void a 1994 free trade agreement between Russia and Georgia. "Georgia's customs authorities have started levying tariffs on goods imported from Russia," it said. The statement added Russia should have been notified in advance of such a measure which contradicts Georgia's support for the idea of a free trade zone within the Commonwealth of Independent States. "The negative consequences of the above-mentioned decision will above all be felt by the population of Georgia, which is not going through the best of times as it is." Georgia's economy is dependent on trade with Russia. Exports fell sharply last year after Russia's financial crisis. Georgia's main exports are wine, spirits and citrus, along with ferro-alloys and other metallurgical products. It mostly imports natural gas, oil, cars and medicine.

WB To Grant Georgia $43M For Highways

· The World Bank is expected to allocate $43 million for the rehabilitation of Georgia's highways and roads in the Spring of 2000. Preparation of the project Transport-II, providing for rehabilitation of Georgian highways has been completed by the group for the World Bank transport projects realization, by participation of the state department of highways of Georgia. As the head of the group for the World Bank projects realization of Georgian ministry of transport Griogi TSAGARELI told Prime News Agency, the three-year project provides for rehabilitation of some inter-city highways in Georgia and building of two new bridges. According to him, if the World Bank Board of Directors approves the program next February, the credit agreement will be signed in March and the realization of the project will start in May 2000, TAGARELI said.

WB Approves Loan For Kazakh Electricity

· The World Bank on Tuesday approved a $140 million loan to Kazakhstan to improve power supply systems. This project will assist the government and the Kazakhstan Electricity Grid Operating Company (KEGOC) in improving the quality of electricity supply, develop a competitive electricity market, and restructure KEGOC into an efficient grid company. Specifically, it will include refurbishment of substations, upgrading of dispatch control, institutional development, and technical assistance. The total cost of the project is $258.4 million. Other contributors include the European Bank for Reconstruction and Development ($56 million) and KEGOC ($62.4 million). The 20-year loan and carries a five-year grace period. Last week, the International Monetary Fund approved a $450 million stand-by credit to the Central Asian state, clearing the path for loans from other international lenders. Since 1992, Kazakhstan has borrowed $1.66 billion from the World Bank.

Kazakhstan-US Sign Defense Agreement

· Kazakh Defense Minister Sat TOKPAKBAYEV and US Defense Secretary William COHEN on Friday signed an agreement to expand military cooperation and aid to modernize Kazakhstan's military. The US will also support Kazakhstan's peacekeeping battalion, KAZBAT. The military agreement extends the Cooperative Threat Reduction agreement to include all four sectors of Kazakhstan and the Weapons of Mass Destruction Elimination Agreement will include biological weapons as part of threat reduction activities. COHEN and TOKPAKBAYEV also discussed security concerns in Central Asia and the Caucasus. The US will consider Kazakhstan's proposal for assisting the nation's rapid reaction force, which combats potential military insurgents who threaten Central Asia's security balance.

The Daily Report on Russia

and Former Soviet Republics

will not be published from

December 24th to January 3rd

for Intercon's Winter break.

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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Daily Report on Russia is for the exclusive use of the subscriber only. Reproduction and/or distribution is not permitted without the expressed written consent of Intercon. Daily Report on Russia Ó copyright 1999, Intercon International, USA.

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