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, February 15, 2000

Russian Federation

Politics

BONY Suspects To Plead Guilty

· The New York Times, citing people involved in the Bank of New York Russian money laundering inquiry, said that the two main suspects, senior bank officer Lucy EDWARDS and her husband Peter BERLIN, are expected to arrive in New York from London today and surrender to federal authorities. It is believed that the two will plead guilty to several criminal charges, including conspiracy to commit money laundering, visa fraud, wire fraud and bribery of a bank official. The newspaper also said the couple agreed to forfeit $9 million that had been seized in their personal accounts. BERLIN's business, Benex International, controlled accounts through which several billion dollars are believed to have been laundered. The charges arose from an investigation that began in the fall of 1998 when US and British officials discovered the money laundering operation. The Bank of New York agreed February 9th to step up reporting to Federal Reserve regulators on suspicious transactions as part of an investigation into the flow of as much as $7 billion of possible Russian crime proceeds through the bank.

Putin, Rushailo On Babitsky Exchange

· Russian Acting President Vladimir PUTIN spoke about missing Radio Free Europe/Radio Liberty journalist Andrei BABITSKY today saying that he was not personally involved in the matter. PUTIN said, "The relevant orders have been issued to the law enforcement bodies. Those orders are aimed at ensuring his life, security and doing everything that depends on our security services to save his life, health, freedom." BABITSKY, who works for a US-funded news agency, has not made contact with his family or editors since mid-January. Moscow said it had handed him over to Chechen rebels in a prisoner

exchange on February 3rd, after he was arrested for reporting from Chechnya without permission and proper accreditation papers.

Interior Minister Vladimir RUSHAILO has said that the exchange of BABITSKY for Russian soldiers was a standard procedure and justified. He said BABITSKY was alive in one of the region's areas still controlled by separatist fighters. RUSHAILO said, "The only reason it has taken on such proportions is because he is a journalist. We are obliged to do everything to secure the release of our illegally held servicemen and civilians...The situation was resolved correctly and was justified." The Interior Minister said he believed Chechen rebels would send BABITSKY into a neighboring country, "and then he will turn up himself." A rebel website has said the rebels had been approached at the end of January by Russians proposing to swap BABITSKY. Rebels have previously denied the swap took place.

Russia To Spend 27.3B Rubles On Weapons

· The Moscow Times reported that Russia plans to spend about 27.3 billion rubles ($960 million) of the 62 billion ruble defense procurement budget on buying weapons systems. At least 15.6 billion rubles will be spent on research and development and all the money will be spent on Russia's defense industry. Government officials said more cash will be allocated this year to develop and buy advanced tactical-level radios and advanced infantry battle equipment, which Russian troops fighting in Chechnya lacked.

Today's News Highlights

Russia

Tras-World To Sell Assets

Sibur Gas Stakes For Sale

European Republics

UMC To Make Large Investment

Rus-Estonia Initial Taxation Agmt

South Caucasus & Central Asia

Tengiz Oil On Georgian Rails

Aliyev Meets President Clinton

IMF Forecasts Tajik Growth

US Delivers Humvees To Uzbek

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Economy

Ruble = 28.77/$1.00 (NY rate)

Ruble = 28.72/$1.00 (CB rate)

Ruble = 28.21/1 euro (CB rate)

Palladium Price Per Ounce Soars

· Palladium raced to an all-time high of $655.00 per ounce on today. This is almost twice its value from a year ago. In January 1999, palladium, used in catalytic converters in cars, stood at $320 per ounce. The price of the metal has surged in January because of fears that Russia will further delay exports. Russian authorities are extremely reluctant to comment on the status of negotiations on exports of the metals. Head of the state precious metals reserve Gokhran said that Russia did not expect to issue quotas in the near future. The latest delay is part of a series of glitches that has kept platinum, palladium, rhodium and ruthenium off the market. "Palladium is crazy, and this morning seems to be heading for $700," one London dealer said.

Since the beginning of the month, at least $160 has been added to the price. On Monday, palladium closed at $607 per ounce a rise of $20 from Friday's trading session. Platinum reached as high as $548 last week. Russia is the largest palladium producer, providing over 70 percent of the world's supplies. Political instability and complicated bureaucracy has disrupted shipments. Precious metals refiner Johnson Matthey Plc estimates Russia exported five million ounces of palladium last year, down 800,000 ounces on 1998. Another estimate shows Russia's platinum exports at 800,000 ounces in 1999, while South African producer Implats puts the total at 450,000 ounces. The disparity is typical in a market mired in secrecy, with Russia issuing no production or export data at all.

Vodka Prices Rise By 40 Percent

· Russia's Economics Ministry has ordered a 40 percent hike in the minimum price of vodka. Head of the ministry's price department Igor BODYAGIN on Thursday said the increase was only intended to make sure prices stayed in line with a 40 percent rise in excise tax enacted at the beginning of the year. "We do not regulate the price of vodka. It's a free price. We only set a minimum below which it cannot be sold, to make sure the market is orderly and safe. The excise went up by 40 percent, so we raised the

minimum accordingly," he said. The new price takes effect on February 25th. Vodka in Russia remains inexpensive by world standards. The new minimum retail price will be 62 rubles, or about $2.21, a liter. Reuters reports that lifting prices on the national drink has been politically unpopular in the past. Many Russians still have unkind words for former Soviet leader Mikhail GORBACHEV, who placed restrictions on the sale and consumption of liquor. Russians have already been hoarding vodka ahead of the price hike.

Business

Trans-World Stakes For Sale

· The controversial Trans-World Group is holding talks with a Russian investor group led by Sibneft, Russia's sixth-biggest oil company, to sell some of its aluminum interests in Russia. Sibneft has offered to pay $500 million for Trans-World's assets in Russia. A deal would create a powerful new Russian financial-industrial group embracing both oil and metals assets and fortify the business and political clout of Roman ABRAMOVICH, a senior director of Sibneft and a prominent member of a group of tycoons known as "oligarchs," The Wall Street Journal reported. Another tycoon Boris BEREZOVSKY is also believed to be a major shareholder in Sibneft. A person close to Sibneft said a deal was "near completion" and would give ABRAMOVICH and other Sibneft management shareholders control of Trans-World's aluminum assets in Russia. The new entity would have significant export sales. Trans-World's assets include stakes in Krasnoyarsk and Bratsk aluminum, Russia's two largest. London-based Trans-World began working in Russia in 1992 in a partnership with Russian businessman Lev CHERNOI through a company called Trans-CIS Commodities Ltd. Last Fall, Geneva prosecutors began investigating CHERNOI for alleged money laundering. Since then, Trans-World founders David and Simon RUBEN publicly said they were parting ways with CHERNOI.

Russia To Sell 14.8 Stake In Sibur Gas

· Russia's Federal Property Fund said it will sell a 14.78 percent stake in Sibirsko-Uralskaya Neftegazo-khimicheskaya Kompaniya, Russia's number one gas refiner. Property fund spokesman Oleg SHEVCHENKO said the government will offer the stake, 9.5 million shares, for 150 million rubles ($5.2

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million). Bids will be accepted until March 28th, with the winner announced on March 31st. The state intends to sell its last holding in the refinery, though the sale may not draw much interest because Sibur subsidiaries have large outstanding debts. Vneshekonombank, Russia's state-owned bank, is suing Sibur over its subsidiary Sibneftegaz-pererabotka's 60 million ruble debt. Gazprom's, Russia's natural gas monopoly, affiliated Gazoneftekhimicheskaya Kompaniya holds a 50 percent stake in Sibur. Bonus-Invest Company also owns a 20.22 percent stake in the refining company.

investment plan is "ambitious." The company estimates that about 600,000 people in Ukraine will start to use mobile phones this year, KUPYCH said. To win more clients, the company gradually will lower fees it charges. UMC said it has invested about $260 million since the company was founded in 1992.

Ukraine Opens Aluminum Smelter Tender

· The Ukrainian government opened a tender for a 30 percent stake of Mykolaiv Hlynozemny Zavod, Ukraine's only alumina producer, for a minimum of $20.3 million. Sibirsky Aluminum holding, Russia's number three aluminum producer, has expressed an interest in the sale because the company already holds a 30 percent stake of the alumina plant. Trans-World Group, a London-based metals trading company, is another contender for the stake, and has requested that Ukraine to sell the entire state-owned stake of 55 percent in the company.

Estonia-Russia Initial Double Taxation Treaty

· Estonian and Russian officials have initialed a treaty on double-taxation avoidance in Tallinn. According to local economic experts, the treaty will help boost bilateral trade and economic relations. Despite the fact that no laws regulate Estonian-Russian trade, Moscow occupies a leading place on the list of Tallinn's foreign economic partners. Since no treaties of double-taxation avoidance and investment protection have been signed by the two countries so far, Estonian and Russian businessmen cannot invest in each other's countries. The treaty was initialed by head of the Estonian Finance Ministry tax department Lemmi ORRO and director of the Russian Finance Ministry department for foreign relations Sergei KALININ.

South Caucasus & Central Asia

Tengiz Oil To Be Transported Through Georgia

· The Georgian State Department of Railways said that approximately 4 million tons of oil extracted by Chevron company at Tengiz field of Kazakhstan will be transported by the Georgian railroads to Batumi this year. According to Prime News Agency a contract to this affect was signed with Chevron on Monday. The tariffs for transportation of oil will remain $5 for 1 ton of oil. Deputy chairman of the railway department Tariel GVABERIDZE said in 1999, the Georgian railroads transported 2.6 million

European Republics

EBRD Committed To Assisting Ukraine

· The European Bank for Reconstruction and Development (EBRD) today pledged that it will continue to render financial assistance to Ukraine. EBRD President Horst KELER told Ukrainian Prime Minister Viktor YUSHCHENKO that the bank will primarily promote Ukraine's power sector. However, the EBRD linked new credits to Ukraine improving its investment climate. After a meeting with the Ukrainian prime minister, KELER described as encouraging "YUSHCHENKO's allegiance to the economic reform and to a strict observance of the budget restrictions...EBRD is ready to render major financial assistance to Ukraine on the basis of such clear statements." KELER expressed satisfaction over the ratification by the Ukrainian parliament of the EBRD second credit line for the development of small and medium enterprises. According to KELER, EBRD is going to open an investment bank in Ukraine for that purpose.

Ukraine Mobile Plans Large Investment

· Ukrainian Mobile Communications (UMC), Ukraine's largest wireless-phone service company, said it plans to invest $60 million this year to expand its network and meet increasing demand. UMC, a joint venture between Ukraine's state-owned UkrTelecom and foreign shareholders including Deutsche Telekom of Germany and Royal KPKN NV of the Netherlands, doubled the number of clients in 1999 to 200,000, according to Bohdan KUPYCH, UMC marketing director. UkrTelecom owns 51 percent stake in UMC, while foreign shareholders control 16.33 percent stake each. Martin DIRKS, UMC's general director told reporters that the company's

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tons of Chevron oil, making 25 percent of the total volume of cargo transported by the railway.

BP Amoco To Beat Gas Delivery Deadline

· BP Amoco, the world's third-biggest publicly owned oil company, said it could deliver the first gas from one of its Azeri fields earlier than expected, after the completion of a successful well. The London-based company, which reports fourth-quarter profit later today, said it could deliver to Turkey as early as the winter 2002 to 2003 the first natural gas from its Shah Deniz field located 70 kilometers southeast of Baku. Natural gas production from the field could rise to as much as 16 billion cubic meters a year. The announcement follows the completion of a second well at Shah Deniz. A third well will be drilled later this year, the company said. BP Amoco owns 25.5 percent of Shah Deniz. Partners in the project include Norway's Statoil and Elf Aquitaine.

Aliyev Seeks US Aid And Support

· Azeri President Geidar ALIYEV is meeting today in the White House with US President Bill CLINTON, during his visit to the US which began on Saturday. Speaking at the Paul H. Nitze School of International Studies, ALIYEV said he is hoping for more assistance from the US is proposing settlement solutions to the dispute with Armenia over Nagorno-Karabakh. ALIYEV pledged to continue a dialogue with Armenian President Robert KOCHARYAN, while criticizing Russia for maintaining a military presence in Armenia. He said that Yerevan had first concluded a "military alliance" with Moscow, and now, according to the reports he had received, with Minsk. The President fears that this could lead to the "militarization of the Southern Caucasus." He added, "The conflict needs to be settled peacefully." He said both he and the Armenian leader have indicated a willingness to compromise but have not been able to reach a comprehensive settlement. KOCHARYAN and ALIYEV last met in Davos, Switzerland, in January and have scheduled another round of talks in Vienna under the joint supervision of the United States, Russia and France. He expressed his commitment to

democracy and free markets. The Azeri President also pressed for more support for the Baku-Ceyhan pipeline, which is one of the US' strategic regional concerns. He said construction on the pipeline will start soon. Western nations are worried that any conflict in the region will stall the pipeline, the way the Chechen conflict affected oil flow across Russia.

IMF Forecast Tajik Economic Growth

· The International Monetary Fund (IMF) on Monday forecasted Tajikistan's economic growth to bounce back to 5 percent this year, from 3.7 percent in 1999. It predicted that inflation will drop from 31.3 percent to 13 percent. A statement summarizing the IMF's January 27th review of the Tajik economy praised government efforts to reverse the previous downturn and strengthen economic performance. The Fund said, "Tight fiscal and monetary policies implemented since last September had restored price stability, strengthened the balance of payments and restored confidence in the economy," Reuters reported. It also urged the government to improve the tax and customs administrations and complete reforms to its value added tax sales tax. It said the government had made progress on privatization, but more was still needed, especially in the key cotton sector.

US Delivers Humvees To Uzbekistan

· In the first sale of US military equipment to Uzbekistan, the US on Monday delivered 13 Humvee vehicles to Uzbekistan as part of efforts to boosts bilateral links between the two countries. The Humvee all-terrain vehicles were delivered to Uzbekistan under a $2.65 million US grant signed between the US State Department and Uzbekistan's Defense Ministry. Additional military equipment will be delivered to Uzbekistan in several weeks. Uzbekistan, a member of NATO's Partnership for Peace program, has recently indicated it would like to build stronger ties with the military alliance. The vehicles, capable of traversing difficult terrain with passengers or cargo, would help make Uzbekistan's forces work more easily with those of NATO.

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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