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 11, 2000

Russian Federation

Politics

Russia Claims Victory But Fighting Continues

· Russia this week claimed victory in their military offensive against Chechen rebels and hoisted a Russian flag over Grozny. Chechen President Aslan MASKHADOV, however, has said that this is just the beginning of the war. In a video-taped interview recorded on Tuesday from an undisclosed location in Chechnya, MASKHADOV said, "Today we are launching a large-scale guerrilla war in the mountains, the lowlands, in every village, wherever we can." Rebel commanders say they had not planned to offer long-term open resistance to Russia's overwhelming firepower, but always intended to switch to the hit-and-run tactics. The guerrilla-style of rebel attacks helped them win the last war in 1996. Russia is gearing up for what it calls the "final strike." Defense Minister Igor SERGEYEV said on Wednesday that in a couple of days artillery and strike bombers would usher in a concerted attack against mountain strongholds where up to 8,000 rebels are believed to be holding out. The military hopes to destroy the most powerful groups in their onslaught. Interfax news agency said Russian helicopters and planes had flown some 200 sorties on Thursday, more than twice the average. Russia's main spokesman on Chechnya, Sergei YASTRZHEMBSKY, said the army had captured the rebel stronghold of Itum-Kale, near the Georgian border. ORT Television said it had also seized the mountain stronghold of Serzhen-Yurt. Meanwhile, acting President Vladimir PUTIN told a government meeting in Moscow that Russia would spend about $80 million over the next two years to rebuild Chechnya.

Communist Party Outlines Plans For Reforms

· Russian Communist Party leader Gennady ZYUGANOV on Wednesday pledged that if elected

president, he will rewrite the Constitution and denationalize Russia's banks, oil fields and energy utilities. ZYUGANOV called on Russian citizens to either choose leaders associated with former president Boris YELTSIN or get a fresh start with the Communists. He said, "Russia is to choose now with whom it will walk into the 21st century: with YELTSIN's heirs...or will Russia choose those who will once and for all do away with the shameful legacy of Yeltsinism and lead Russia to national revival and greatness?" ZYUGANOV outlined plans to bring back state control over natural resources, the fuel and energy sectors, banks and insurance companies, plus a state monopoly on the sale of alcohol. He also pointed out that property stolen by the oligarchs during the privatization process, which sold state enterprises at prices below market value, must be returned to the state. ZYUGANOV said he would rewrite the Russian Constitution to redistribute power between the legislative and the executive offices, but gave few details.

Economy

Russia Makes Payment To IMF

· Today, Russia paid $124.9 million to the International Monetary Fund (IMF), meeting the payment schedule. The Finance Ministry's spokesman said, "The Finance Ministry has transferred the money. Everything goes according to plan." On Tuesday, Russia paid $200 million to the Fund, and on February 28th it is scheduled to make the month's

Today's News Highlights

Russia

Slavneft Boosts Refining

BPS Financing Plan Approved

European Republics

IMF Expands Banking Probe

Phone Tender Advisor Selected

South Caucasus & Central Asia

WB Approves Georgian Loan

Aliyev To Visit US On Saturday

Newmont Postpones Project

ADB Approves Uzbek Loan

Politics-Economics-Business

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February 11, 2000

Intercon's Daily

final payment to the IMF, $62.45 million. Russia's January payments to the Fund totaled $373 million. Russia repaid $3.61 billion to the Fund in 1999, but remains the IMF's largest single borrower. Russia owed the IMF $15.23 billion on December 31, 1999. The government has pledged to meet obligations on all debts incurred after the collapse of the Soviet Union in 1991, which is mostly IMF loans and Eurobonds, but is seeking to reschedule more than $100 billion of Soviet-era debt. Russia is scheduled to repay $3 billion in foreign debts in the first quarter of 2000.

Ruble = 28.66/$1.00 (NY rate)

Aug Sep Oct Nov Dec Jan Feb

Business

Slavneft To Expand Oil Operations

· Slavneft, an oil producer owned by the Russian and Belarus governments, plans to increase its refining operations in Belarus. Russian daily Kommersant reported that over the next three years the oil company plans to increase its crude deliveries to Mozyr Refinery from 1.9 million tons in 1999 to 3.5 million tons. The company plans to invest $20 million in the refinery modernization. The Russian government has been proposing either to sell 19.68 percent in Slavneft or to merge it with Rosneft and Onaco, Russia's state-owned companies, to create a government-owned oil holding.

Baltic Pipeline Financing Plan Approved

· The Russian government approved a plan on Thursday to raise $130 million to build a Baltic Oil Pipeline System intended to increase crude exports

from Siberia via the Baltic Sea. Acting President Vladimir PUTIN called the pipeline a "strategic" instrument that will insure Russia's energy and transport security. He added that the pipeline is designed to increase Russia's oil export capacity, while lowering transport costs. The estimated $800 million project, under development since 1997, gives Russian oil firms an alternative to the current export routes through the independent Baltic states for cost savings of $3 to $4 per ton. Deputy Oil Minister Vladimir STANEV said, "The government has reviewed and approved a decree to raise funds this year for the construction." He added that , "The Federal Energy Commission will have to calculate the investment tariff now" that Transneft, Russia's oil transportation monopoly, will charge oil exporters to finance the project. The government also approved a $70 million budget for the project for the first six months of this year. BTS, the Transneft-owned Baltic Pipeline project operator, were give permission to start work immediately. It will take 20 to 22 months to complete the project. Transneft will get a stake of 50 percent plus one share in the project by transferring ownership of its oil pipeline between the towns of Yaroslavl and Kirishi to the assets of BTS. A further 15 percent will be sold to outside investors, with no restriction on foreign participation. The balance of the company's shares will be owned by the oil companies, according to their contributions to the project financing. Transneft charged oil companies a $1.43 tariff per ton of exported crude in 1999. The pipeline company has collected $103 million since last May last year. Russian oil companies exported 111.2 million tons of crude last year, according to the Energy Intelligence Group.

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European Republics

IMF Expanding Ukrainian Probe

· The International Monetary Fund (IMF) is expanding its probe into alleged irregularities in Ukraine's Central Bank accounting. The IMF has obtained documents showing that the Central Bank moved at least $600 million in hard currency reserves through Credit Suisse First Boston (CSFB) during 1997 and 1998. This gave the appearance that Ukraine had more reserves on hand, which allowed them to qualify for more IMF credits. Ukraine invested some of its reserves in risky or illiquid investments. Cash was used to buy the Central

Friday

February 11, 2000

Intercon's Daily

Bank's own treasury bills, propping up the domestic market. The Central Bank shuffled $150 million through several accounts to make its reserve seem larger. According to a Fund statement, "The Fund staff intends to examine them [the transactions] with the authorities and will ask that the alleged transactions be included in the special audit [of the Central Bank] that is always underway." CSFB declined to discuss its dealings with the Ukrainian Central Bank. President Leonid KUCHMA has denied any wrong-doing. He has called the allegations, originally raised by former prime minister Pavel LAZARENKO, as "a distortion of the truth." However, in testimony given last May, the Central Bank admitted that it double counted $150 million in order to meet reserve requirements and secure further financing. An IMF mission is set to arrive in Kiev on February 14th.

Ukraine's Gas Debts Rise

· US-based Itera has filed a claim in a Swedish court that Ukraine's Naftogaz Ukrayiny owes it $219 million for gas. The Ukrainian side claims that it reduced its debts to the company to less than $70 million. Itera sells gas to private customers in Ukraine at $40 per 1,000 cubic meters. Gazprom, Russia's natural gas monopoly claims a total $2.8 billion in Ukrainian debts arrears, including $778 million from 1997 through 1999. Ukraine is paying some of its gas debts to Russia with 11 strategic bombers.

EU Supports Reform in Ukraine

· The European Union (EU) on Wednesday pledge that it will support economic and political reform in Ukraine through its strategic partnership accord with Ukraine. An EU summit in Helsinki in December ended with the adoption of a common strategy towards Ukraine that pledged to increase ties. Jaime GAMA, foreign minister of the current EU president said, "Supporting Ukraine is very important. Modernization of its institutions and its economy constitutes a very great priority for the European Union." Ukrainian Foreign Minister Boris TARASYUK indicated to GAMA that EU membership for Ukraine is a long-term objective. The EU has said it wishes to foster economic and political reforms in its near neighbors to avoid alienating them and to maintain stability in central and eastern Europe. Russia, however, has stated that it opposed EU membership for any former Soviet republic. Estonia is already holding EU membership talks, with Latvia and Lithuania ready to begin as well.

Lithuania Selects Phone Tender Adviser

· The Lithuanian Commission in charge of selling the state's telecommunications holdings has chosen Dresdner Kleinwort Benson and CAIB Investment as advisers for the sale of a 35 percent stake in Lietuvos Telekomas. The commission also approved Debevoice & Plimton as legal adviser in the sale, while said Arthur Andersen will carry out a financial audit. Local brokerages VB Vilfima and UAB Suprema will handle the domestic sale of shares, a quarter of which could be sold on the domestic stock market. The advisers won the tender on December 23rd, beating out Deutsche Bank and Nomura International Plc. A final decision has not been made on whether Lietuvos Telekomas shares will be listed on the London stock exchange. The sale, which represents 285,499,892 shares, could be worth between 1.4 billion lita ($349.98 million) and 2 billion lita. Amber Teleholding, a venture of Sweden's Telia AB and Finland's Sonera Oyj, currently owns 60 percent of Lietuvos Telekomas. Another 5 percent was sold to the company's employees last year.

South Caucasus & Central Asia

WB Approves $70M For Georgian Education

· Georgian President Eduard SHEVARDNADZE on Wednesday said that the World Bank has decided to provide about $70 million to support education reform in Georgia. The President stressed the need for the certification of Georgian teachers and for the international support for education reform in the country. He pointed out that the Council of Europe assists his country in its integration in the European educational system. The laws on education and on elementary vocational education passed in Georgia in 1997 and 1998 have created a framework for further progress in this area. SHEVARDNADZE pointed out that some state universities have switched to a two-stage education system and introduced the institutes of bachelor and master in accordance with the new higher education standards. He added, "The leadership of Georgia seeks to develop and support both Georgian and Azerbaijan, Armenian and Russian schools operating in the country."

Aliyev Arrives In The US On Saturday

· Azerbaijan's President Geidar ALIYEV is scheduled to arrive in the US on Saturday for talks with US President Bill CLINTON, other top officials and

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senators. Their talks are expected to focus on Azerbaijan's territorial dispute with neighboring Armenia over Nagorno-Karabakh. Azeri Foreign Minister Vilayat GULIYEV noted that other topics will include security issues and economic cooperation. Western oil companies have signed contracts worth more than $50 billion in potential investments to develop the oil production in Azerbaijan, a Caspian Sea state. Azerbaijan is the starting point for the Baku-Ceyhan oil pipeline and a transit country for the trans-Caspian gas pipeline from Turkmenistan to Turkey. Azerbaijan has demanded that it be allowed to use at least half of the trans-Caspian pipeline for transport of its own gas reserves from the Shah Deniz field. If its demands are not met by Turkmenistan, it could build its own gas pipeline to Turkey. ALIYEV is also expected to confer with members of the US business community.

1999 Kazakh Foreign Investment Totals $1.3B

· In 1999, Kazakhstan attracted up to $1.3 billion in foreign investment, up slightly from 1998 figures, but down from 1997 levels. Kazakh President Nursultan NAZARBAYEV said that capital inflows are a sign that the nation has recovered from the Russian and Asian economic crisis. He said, "These figures demonstrate economic growth and show that the crisis has been overcome," and he added, "The government has been able to wipe out its debts to pensioners and state workers," the Financial Times reported. More than half of the foreign investment comes from the energy sector. Aside from Offshore and onshore reserves of oil and gas, Kazakhstan is also rich in deposits of copper, zinc-lead, chromium, uranium, aluminum, and magnesium. The Kazakh government has pledged to create a more friendly environment for foreign investors. Kazakh Prime Minister Kasymzhomart TOKAYEV said the country's frequent changes in legislation was, "one of the major problems" for foreign investors who risked being, "misinformed and poorly guided." He stressed that the government will re-launch its stalled privatization process, with plans to raise $400 million from the sale of stakes in at least four enterprises.

Newmont Postpones Uzbek Gold Project

· Newmont Mining Corporation has postponed one of its gold projects in Uzbekistan. Company chairman Ronald CAMBRE on Thursday said the postponement was due to the fact that world gold prices are not high enough to justify the project's viability. The price of gold has risen in recent months from lows of about $260 an ounce in mid-1999 and stands currently at about $315. But CAMBRE said even higher prices were needed. CAMBRE said the project would continue once the gold price reached the appropriate level, "But today it is not the kind of project that either the foreign investor or the Uzbek government would wish to put money into." In 1996, US-based Newmont signed a joint venture deal with Uzbekistan and Japan's Mitsui creating the Angren Gold Company to work the Kochbulak and Kyzylmasai fields. Although the joint venture was formed, it has not progressed beyond that point. Newmont and Uzbekistan each hold a 40 percent stake in the $20 million company, with Mitsui owning 20 percent. Angren is only one of several projects in Uzbekistan where production plans have been delayed by investors waiting for higher prices. This is a blow for Uzbekistan, which relies mostly on gold and cotton exports to make ends meet.

ADB Approves $57M Uzbek Loan

· The Asian Development Bank (ADB) on Tuesday approved a $57 million loan to Uzbekistan to assist a senior middle school education project. In a news release, the Manila-based financial body said the project will help develop 45 model schools in Uzbekistan, providing benefit to 55,000 students. The project will also help improve the management skills of school directors, staff and policy makers through international training, in-country training, and policy research activities. The project requires a total cost of $132 million and the remaining $75 million will be provided by Uzbekistan's government. In addition, the ADB will provide a technical assistance grant of $1 million to review the senior middle school education system. The ADB loan has a term of 25 years, including a grace period of 5 years.

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

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