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, March 1, 2000

Russian Federation

Politics

Kagalovsky Sues BONY In Russia

· Former Bank of New York executive Natasha KAGALOVSKY has filed a suit against her former employer in a Moscow court. She is seeking $270 million in compensation for damage to her career, after she was suspended in August during a probe of alleged Russian money laundering. KAGALOVSKY claims that she had nothing to do with alleged money laundering and that the suspension damaged her professional and personal reputation. The lawsuit accused the bank executives of defaming KAGALOVSKY by spreading the "deliberate and malicious" lie that she oversaw accounts involved in alleged money laundering, even though they were under the supervision of a different division of the bank. The filing further claims that KAGALOVSKY was singled out to, "artificially draw attention to Russian, or more correctly, anti-Russian issues." She said her managers were, "motivated by anti-Russian beliefs" and suspended her because of her marriage to prominent Russian businessman Konstantin KAGALOVSKY. Natasha KAGALOVSKY resigned from her post in October and has not be accused by authorities of any wrongdoing. By filing the case in Moscow and not New York, where she worked, it appears that she aims to play on the anti-American sentiment growing in Russia. Lawyers warn that the bank's assets in Russia could be frozen due to the action, the Financial Times reported. The Bank of New York on Tuesday said, "This lawsuit is a nuisance and entirely without foundation."

Troops Seize Last Chechen Settlement

· Russian troops on Tuesday seized the last populated settlement in Chechnya, the village of Shatoi. This village is considered as the last important stronghold of the resistance. Commanders be

lieve that this now marks the conclusion of the conflict with Chechen rebels. Russian presidential aide Sergei YASTRZHEMBSKY confirmed that Russian soldiers are in full control of Shatoi, as troops raised the Russian flag over the village. "A group of 200 militants had tried to leave Shatoi. Of these, around 150 were killed," he said. While top commanders have said the war is over, lower level officers still report that fighting is continuing in areas around Argun gorge. The Russian Defense Ministry estimated that 99 percent of Chechen territories had been liberated by federal troops after five months of the Russian anti-terrorist military campaign in the rebellious province.

Economy

PMI Figures Show Industrial Growth

· According to purchasing managers' index (PMI) data released today, Russia's manufacturing growth accelerated in February and exporter orders reached a new record despite a chronic lack of working capital and supplies. London-based Moscow Narodny Bank, which commissioned the index, said PMI in February rose to a seasonally-adjusted 55.2 from 54.6 in January and marked the 14th consecutive month of growth, which was indicated by a reading above 50, Reuters reported. Growth acceleration was slower than most of last year, held back because manufacturers and customers are still winding down stocks purchased ahead of the millennium and manufacturers' chronic shortages of supplies and working capi

Today's News Highlights

Russia

Hilton To Manage Moscow Hotel

Volvo To Build Trucks In Russia

European Republics

Farmers To Receive Assistance

IMF Waits For Audits Results

South Caucasus & Central Asia

Georgia Objects To Disinfo.

Sukhumi Talks Results Vary

Kyrgyz-Canadian JV Figures

Uzbek Cigarette Production Up

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tal. Paul FORREST, Group Economist at Moscow Narodny, which is controlled by Russia's Central Bank, said export orders were the highest in index's 30 months, indicating exports would substantially contribute to gross domestic product growth this year, in contrast to 1999. Prices for inputs paid by manufacturers also rose, continuing a trend recorded since September 1998. Employment among the 300 surveyed manufacturers rose for the twelfth consecutive month.

Ruble = 28.65/$1.00 (NY rate)

Ruble = 28.59/$1.00 (CB rate)

Ruble = 27.88/1 euro (CB rate)

Bankruptcy Proceedings For Tax Evaders

· Deputy Prime Minister Viktor KHRISTENKO today said that the Russian government will implement bankruptcy proceedings against tax debtors who fail to apply to restructure debts by April 1st. In an interview with Vedomosti, KHRISTENKO said, "On the morning of April 1st, after the deadline for taking applications, we will take all tough measures, including ones to set examples, with debtors unwilling to settle with the budget. I am talking about bankruptcy." Russian bankruptcy law reform is high on investors' and international financial organizations' lists of needed measures. This would force loss-making factories to be shut down and transferred to more able hands. KHRISTENKO added there were only 11,500 bankruptcy suits in all of Russia last year, about 5,000 made by tax authorities, although he also said the budget often failed to reap much from bankruptcy.

Tokobank Owes Back Taxes

· Russian Tax Minister Alexander POCHINOK said Tokobank, a bankrupt Russian bank, owes the federal budget 5 billion rubles ($174 million) in taxes. The bank's outside manager said the bankruptcy procedure against the bank was completed in January and that total debt could be about 3 billion rubles. The ministry received only 52 million rubles in the bankruptcy proceedings, out of a total of 2 billion rubles that was left for paying creditors. A Moscow court declared Tokobank bankrupt in December, four months after the Central Bank revoked it license.

Business

Gazprom-BP Amoco Joint Exploration Project

· Russia's gas monopoly Gazprom may join BP

Amoco, the world's third-largest public traded oil company, in exploration projects in East Siberia, according to a letter from Gazprom Chief Executive Rem VYAKHIREV to Fuel and Energy Minister Viktor KALYUZHNY. Rusia Petroleum, an exploration company in which BP Amoco owns a stake, is developing the Kovyktinskoye gas field, which has about 1.5 trillion cubic meters of gas reserves. Gazprom plans to develop exploration blocks with about 600 billion cubic meters of gas reserves bordering Rusia Petroleum's licensed area, the paper said. However, Surgutneftegaz, Russia's third largest oil producer, said it plans to bid for the same additional exploration blocks along with Rusia Petroleum and two small exploration companies, Usinskgeoneft and Aganneftegazgeologiya.

Magnitogorsk To Sell Ruble Bonds

· Russia's second-largest steel producer Magnitogorsk Metallurgichesky Kombinat announced on Tuesday that it will sell 300 million rubles ($10.5 million) of 110-day and 200-day bonds in March. The company will hold two sales: in the first it will offer three sets of 50 million rubles each of 110-day bonds; in the second sale the company will sell three sets of 50 million rubles each of 200-day bonds. The 110-day bonds will pay a coupon of 32 percent, while the 200-day bonds will have a coupon of 35 percent. Last week, Russia raised 3.4 billion rubles ($118 million) in the first sale of Treasury bills since the government's August 1998 Treasury bill default, borrowing at an average yield of 20.1 percent, a fifth the rate of 18 months ago.

Hilton To Manage Business Hotel

· The Hilton International chain plans to manage a five-star hotel in Moscow aimed at business travelers. The hotel, under construction near the Bolshoi Theater with 218 rooms, is scheduled to open in Spring, 2001. The Financial Times reports that the $58 million property will have a business center, conference and banquet rooms, a gym and Turkish baths and pool. The developers will restore the Ararat Restaurant, which formerly occupied the site. The restaurant will specialize in Armenian cuisine.

Volvo Form JV To Produce Trucks In Russia

· Volvo, the world's second-biggest maker of heavy trucks, signed an agreement with Russian industrial-financial group AFK Sistema to set up a joint venture company in Russia to produce Volvo trucks. Sistema

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will contribute production facilities in Zelenograd, a suburb of Moscow, after a refurbishment, and hire staff, while Volvo will draft the plan for the reconstruction, provide equipment and technical assistance. The venture is intended to produce about 300 trucks a year. The first trucks are expected this summer. Volvo sold 450 trucks in Russia in 1998.

the second audit will examine management and other procedures at the bank. The result will be published and will include details from third parties about their transactions with the bank. The IMF halted payments from its $2.6 billion lending program to Ukraine last September because of concern about tax rules, stalled economic reforms and delays in bringing in market prices for key utilities. An IMF team left Kiev earlier this month without making any recommendation about starting lending up again.

Meanwhile, US House of Representative Banking Committee chairman Jim LEACH on Tuesday has called for chairman of Credit Suisse First Boston Rainer GUT to testify before Congressional hearings probing into the monetary misuses allegations. He said, "As you know, recent press accounts contain allegations that IMF disbursements to Ukraine may have been diverted by the Ukrainian Central Bank through Credit Suisse First Boston accounts in Cyprus, perhaps as an attempt to mislead the IMF about the level of its foreign currency reserves," the Financial Times reported.

South Caucasus & Central Asia

Georgia Objects To Disinformation Campaign

· The Georgian Security Ministry has rejected information from the Russian Federal Border Service's North-Caucasian department which claims that the 4,000 to 7,000 Chechens living in the Akhmeti district included rebels disguised as refugees who might try to break into Chechnya to rescue their counterparts. Ministry spokesman Gela SULADZE said, "The Security Ministry of Georgia has no information that groups of Chechen rebels are allegedly staying on territory of the Georgian Akhmeti district under the disguise of refugees from Chechnya." Russian Colonel-General Yevgeny BOLKHOVITIN said his department's claims were based on intelligence information, including from Georgia. SULADZE countered this statement saying, "the Security Ministry of Georgia did not give such information to the Russian side because it did not have such information at all." He noted that Georgian Border Guards thoroughly reviews each Chechen who wants to enter Georgia. SULADZE said, "We have lists of all Chechen rebels wanted by Russia and we are careful to prevent their penetration into Georgia."

European Republics

Ukraine Allocates Funds To Help Farmers

· The Ukrainian government today announced that it has allocated 50 million gryvnias ($9 million) this year to farmers to offset high interest rates charged by commercial banks on loans to buy fuel. The resolution on the compensation was signed by Prime Minister Viktor YUSHCHENKO late on Tuesday and was aimed at eliminating the disparity between moderate inflation and high interests on commercial loans. Officials say the assistance should enable Ukraine's hard-up farmers to buy enough fuel and carry out spring sowing this year. Farmers complain they cannot get credits from commercial banks because of high interest rates, while bankers say most farms are bankrupt and loans are unlikely to be paid off. Official data show that some 85 percent of Ukraine's 12,687 collective farms made losses in 1999. Agricultural officials have estimated farms' needs at over 25 billion gryvnias this year, including seven billion gryvnias for sowing alone. The state can provide only 10 percent of this. Officials have said farms needed 1.2 million tons of diesel for sowing. The country, however, maintains reserves of just 70,000 tons. Official figures show farms have only 35,000 tons of diesel in stock, or 35 percent less than at this time a year ago.

IMF Waits For Audit Before Funding Decision

· The International Monetary Fund (IMF) said on Tuesday it was waiting for the results of initial Ukrainian Central Bank audits before it can finalize a decision to release more funding to Ukraine. IMF media chief Thomas DAWSON pointed out that Ukraine has agreed to have two audits conducted, after charges emerged that Ukraine may have misused IMF money and misled the Fund.

PriceWaterhouseCoopers (PwC) will conduct the two audits: first into the transactions at the Central Bank between July 31, 1997 and January 31, 1998;

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Outcome of Sukhumi Talks Vary

· Chairman of the Georgian parliamentary committee for defense and security Revaz ADAMIA recently traveled to Abkhazia for discussions with separatist leader ARDZIMBA concerning a letter ARDZIMBA had sent to UN Secretary General Kofi ANNAN. In this letter, ARDZIMBA asserted that Abkhazia was an independent country and would not engage in discussions with Georgian authorities concerning its status. In describing discussions in Sukhumi between ADAMIA and ARDZIMBA on February 27th and 28th, personal representative of the Abkhazian leader Anri JERGENIA told Prime News Agency the, "Political status of Abkhazia is not due to discussion, as it has already been determined and Abkhazia has gained a status of an independent country." "According to him the sides only discussed the Peace Treaty and the Protocol for the return of refugees," Prime News Agency reported. In fact Abkhazia has been recognized by no international organizations or independent sovereign state.

Chairman ADAMIA pointed out to ARDZIMBA and his staff that this position was untenable and would force Georgia to take a military approach to re-establish Georgian sovereignty. Clearly, this must have reverberated in the Abkhaz representatives coming on the heals of Russia's actions in Chechnya. "If Sukhumi authorities continues on refusing the discussion of the status of Abkhazia, they will have the Chechen variant of the problem settlement," ADAMIA said. He pointed out that this is not preferred and unless the Abkhaz provided a window for political discussions no other option would exist. This helped the Abkhaz rethink their position and a window was opened for continued political discussion. UN Ambassador Dieter BODEN, who was also present, suggested the possibility of an international conference, possibly in New York that would allow for political discussions to be undertaken. These talks would hopefully prevent any military option from being exercised. President SHEVARDNADZE has consistently maintained that Georgia seeks a peaceful solution to the Abkhaz problem and his position has not changed.

Turkey Urges Georgia To Step Up Pipeline Talks

· Hikmet CETIN, Turkish President Suleyman DEMIREL's advisor and former foreign minister and deputy prime minister, presented a letter from DEMIREL to Georgian President Eduard SHEVARDNADZE. The aim of the letter is to encourage Georgia to accelerate the negotiation process with Azerbaijan on the Baku-Ceyhan pipeline project. Turkey is anxious to implement the oil pipeline project agreement, initialed by the three countries on the sidelines of last November's summit of the Organization for Security and Cooperation in Europe, which was held in Istanbul. Georgia has demanded a higher share of the tariff for the transportation of oil through its territory and insisted that it should not have to assume any responsibility for the security of its pipeline section. Turkey has offered assistance to Georgia in the form of military training, equipment, electronic surveillance systems and ammunition to help maintain security of the pipeline.

Kyrgyz-Canadian JV Production Figures

· Kumtor Operating Company, Kyrgyzstan's mining joint venture with Canada's Cameco Corporation, produced 19 tons of gold in 1999 against 20 tons in 1998, according to spokeswoman Tynara SHAILDAYEVA. She added that gold output this year would be around the same as in 1999. The Kumtor mine, the largest foreign investment project in the Central Asian state, is one-third owned by Cameco, with the rest owned by the Kyrgyz government. The deposit, estimated to contain 514 tons of gold, is Kyrgyzstan's biggest.

Uzbek Cigarette Production To Increase

· An official on the Board of an Uzbek-British joint venture of the British American Tobacco Co. said that about 2,000 million "Made in Uzbekistan" cigarettes are expected to be exported this year. Last year the joint venture exported more than 1,000 million cigarettes worth $5,000 to ten countries. The British company is one of major investors to the Uzbek economy. Its equity share in the joint venture charter capital is 97 percent.

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

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