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, March 15, 2000

Russian Federation

Politics

FSB Detains Spy For Britain

· Russia's Federal Security Services' (FSB) counter-intelligence department today detained a Russian citizen on suspicion of spying for Britain with the help of security police from the Baltic state of Estonia. The FSB declined to give details but said an investigation was being conducted into his activities and he was being held in Lefortovo jail in Moscow. FSB spokesman Alexander ZDANOVICH said that a criminal case had been opened against the alleged spy. Spokesmen for Britain's Foreign Office in London and the Estonian government in Tallinn declined to comment. The detention of the Russia citizens comes just a few days after an amicable visit of British Prime Minister Tony BLAIR.

Tit-for-tat spy arrests have continued in the post Cold War-era. Russia last year expelled US diplomat Cherie LEBERKNIGHT for spying and said the FSB had caught her red handed in a Moscow park where she waiting for her contact. LEBERKNIGHT's arrest in November, 1999 came just one day after US naval officer Daniel KING was arrested for passing classified data to Moscow in 1994. KING pleaded guilty to sending the Russian Embassy a computer disk filled with secrets from the National Security Agency, after failing a lie detector test. Russia and Poland recently became embroiled in a spy spat, each expelling nine of the other's diplomats. Norway's Justice Minister Odd Einar EORUM on March 4th said, "There is still a considerable Russian intelligence activity in Norway, and by that I mean all forms of intelligence." He said that Norway and Poland are the only NATO nations bordering Russia, adding that NATO installations, other technology and infrastructures are likely targets for Russian spies. However, this is not the first back-to-back expulsions between Russia

and Britain. Soviet leader Mikhail GORBACHEV and British Prime Minister Margaret THATCHER engaged in a series of expulsions of alleged spies in the late 1980s, each side expelling several dozen people.

US-Russia Discuss Arms Reduction

· The US Vice President's aide for national security affairs, Leon FUERTH, met with Russian Trade Minister Mikhail FRADKOV and Security Council Secretary Sergei IVNAOV on Tuesday. Earlier FUERTH met with Russian Deputy Prime Minister Ilya KLEBANOV to discuss bilateral cooperation in different fields and its prospects. In particular the two focused on the ratification of the START-II arms reduction treaty and the situation around the Anti-Ballistic Missile treaty. Russia stressed the importance of preserving the ABM treaty in the disarmament process. KLEBANOV said if the US withdraws from the ABM treaty to build a defense shield, "We will step up work in those fields which will make this system ineffective." IVANOV told FUERTH, "It is now important to ensure that emerging problems do not affect our general disposition to give a new impulse to the Russian-US relations and dialogue in the interests of national security of our countries and international security on the whole." That same day in a speech at Moscow State University, IVANOV said Russia must protect itself from various perceived dangers originating both inside and outside its borders. He added that the US plan to create a limited national defense system is intended to "harm" Russia. He said, "Of course, this entire complex would be aimed against us. There is no doubt

Today's News Highlights

Russia

Exxon-Mobil Seek Drill Permit

Transneft To Expand To Iran?

European Republics

Ukraine Euobond Swap Passes

IMF Mislead By CB Reserves

South Caucasus & Central Asia

Kuchma Visits Tbilisi

Turkmen Negotiating Gas Price

Uzbek 1999 Deficit Figures

Politics-Economics-Business

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March 15, 2000

Intercon's Daily

about it," RFE\RL Newsline reported. The US and Russian sides also discussed trade relations. The US still has not given Russia most favored nation status on a permanent basis. Russia is still regarded by the US as a country with no market economy status. A meeting scheduled with Foreign Minister Igor IVANOV scheduled for Tuesday evening, was surprisingly canceled, without any specific reason given.

Economy

Ruble = 28.49/$1.00 (NY rate)

Ruble = 28.42/$1.00 (CB rate)

Ruble = 27.54/1 euro (CB rate)

Russian March CPI Predicted At 0.7 Percent

· Head of Russia's State Statistics Committee Vladimir SOKOLIN today predicted that Russia's consumer prices are likely to rise between 0.7 and 0.8 percent in March, after a one percent rise in February. SOKOLIN also confirmed that Russia's industrial production rose 13.7 percent in February compared with the same period last year. Output in the first two months of 2000 was 13.0 percent higher than the same year-ago period, Reuters. The statistics were the latest in a series of positive Russian economic indicators which could help Acting President Vladimir PUTIN and boost investor confidence. Russia's economy has been growing steadily for more than a year, benefiting from high world prices for Russia's main energy and metals exports and the ruble devaluation of 1998 which allowed domestic producers to compete with imports. First Deputy Prime Minister Mikhail KASYANOV has forecast growth in gross domestic product this year of 1.5 to 3.0 percent, compared with a rise of 3.2 percent in 1999.

Business

Exxon-Mobil Seeks Drilling Permit

· Exxon Mobil Corporation is boosting its efforts to gain a permit from Russian authorities to drill for offshore oil near Sakhalin island in Russia's far east. The oil company put on hold last year drilling plans at its Sakhalin-1 project because of the Russian ban on drilling with liquid discharges at the Sea of Okhotsk. Exxon Mobil has already invested $360 million in the project together with its partner Rosneft, Russia's state-owned oil company. Rosneft said it

may sell a 19.6 percent stake in the Sakhalin-1 oil and gas exploration project to Oil and Natural Gas Corp. Ltd., India's biggest oil and gas producer.

Transneft To Expand To Middle East

· Russia's state-owned oil pipeline operator, Transneft, is interested in expanding its network to the Middle East. Transneft President Semyon VAINSHTOK recently led a delegation on energy specialists to Iran. Transneft Vice President Sergei GRIGORYEV told The Moscow Times, "The company considers Iran as a potential client of Transneft's services because the market is relatively free." Transneft also is considering developing contacts to secure access for Russia's Caspian crude to the Persian Gulf via Iran. From there the oil could travel by sea to the world's major oil ports. Transneft will raise prices for exporting oil by an average 2.3 percent starting April 1st.

BP Amoco's Moscow Gas Stations Approved

· BP Amoco's gas station retail business is enjoying huge success in Moscow. While BP Amoco failed to gain protection for Sidanko subsidiaries during the notorious Tyumen Oil Company take-over, the British-American gas company has won the backing of Moscow Mayor Yuri LUZHKOV to further expand its retail business. Yakov RUDERMAN, director of oil information service Kortes points out, "In Russia, it's impossible to do business if you don't have good relations with local authorities." BP Amoco's retail business set up in 1997, now holds 7 percent of the Moscow market, but is looking to expand to 10 percent by year's end, increasing its outlets from 20 to as many as 33 by the end of the year It is the only foreign oil company that has cracked the market. Jeff FRANKS, BP Amoco's Moscow retail venture's general director noted that LUZHKOV has noticed an improvement in the quality of service stations since BP Amoco entered the market. BP Amoco's Russian partner in the retail project, ST Group, has close ties to the city government. While a typical local gas station consists of not much more than a tank and a hose, and supplies fuel whose quality varies by the day, BP's brightly-lit sites house coffee shops, mini-marts and car washes, and are perceived as selling better and more consistent-quality gasoline. The Moscow Fuel Association, an organization that represents local filling station owners and includes the BP venture, last week complained to LUZHKOV,

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saying the city is giving preferential treatment to BP by tentatively allocating it 16 additional sites for new filling stations.

included were also covered by different documentation and jurisdictions. Symon DRAKE-BROCKMAN, managing director for European debt capital markets at ING Barings said, "This agreement was always going to be a cornerstone of the new government's policies and will give them breathing space to rebuild their finances." Ukraine hopes the agreement will jump start an International Monetary Fund (IMF) lending program, which was suspended in September, 1999. Ukrainian officials on Tuesday flew to Washington to hold talks with IMF managers for the renewal of lending. Ukraine has about $1.1 billion of foreign currency reserves and, until today, about $3.2 billion in foreign debt due this year.

IMF Approved Loans Based On Misleading Data

· The International Monetary Fund (IMF) on Tuesday admitted that it had been mislead by data the Ukrainian Central Bank had reported regarding its reserves and granted three loans it would not have done if the true value of the reserves had been known. The Fund said that Central Bank transactions between 1996 and 1998 gave the impression that the country's reserves were larger than their actual value. According to the Fund, "Ukraine received disbursements from the IMF that it would not have done if the true state of Ukraine's reserves had been known at the time." Ukraine says it did not misused any funds, and denies any wrong doing in accusations that it might have stolen the money so far appear unfounded. The IMF said it will await the results of a second audit of the Central Bank conducted by PricewaterhouseCoopers, due at the end of the month. The Central Bank has said that its foreign debt payments, methods of channeling its foreign exchange reserves, and transparent book-keeping proves that it has not misused IMF money.

The US Treasury expressed deep concern over the, "mismanagement and misreporting" of Ukraine's reserves. One Treasury official stressed, "All IMF members are obligated to provide the IMF with comprehensive and accurate information on their finances and economic and financial policies." Both the Ukrainian finance Minister and Central Bank chairman are visiting Washington this week for talks with the IMF focusing on the economy and Ukraine's ability to meet the terms of its loan. The officials hope to discuss the resumption of a stalled $2.5 billion loan program.

European Republics

Mazeikiu Nafta Predicts Small Profit In 2000

· Mazeikiu Nafta, operator of Lithuania's main refinery, oil terminal and pipeline, said it expects to break even or earn a small profit in 2000, after a loss of 130.8 million litas ($32.7 million) last year. The refinery said it expects to process 1.3 million to 1.4 million tons of crude in the first quarter, and about 7 million tons this year. Mazeikiu's Butinge oil terminal, which started operating last year and has a capacity of 8 million tons per year, will export about 6 million tons this year. About 900,000 tons will be shipped in the first quarter. Mazeikiu will invest $180 million in upgrading the refinery this year and about $50 million to pay interest on its debts. The modernization project also will increase capacity to 16 million tons annually. The company will seek bank loans to finance most of the work, according to Vita PETROSIENE, the finance director. He added that Mazeikiu is in talks with the European Bank for Reconstruction and Development and the International Finance Corporation, the private sector investment arm of the World Bank, about debt or equity financing.

PETROSIENE pointed out that the 1999 loss was mostly due to the five times the refinery shut down because it ran out of crude supplies, which were withheld by Russia. Mazeikiu Nafta is 33 percent owned by US-based Williams Company, which also manages the company, after acquiring the stake through long and turbulent negotiations last year.

Eurobond Holders Approve Restructuring

· Ukraine's eurobond holders approved the terms of a $2.6 billion restructuring program, escaping a possible eurobond default. According to ING Barings, the investment bank managing the debt swap, 85 percent of holders approved the exchange of five Ukrainian bonds due to mature in the next two years for new seven-year bonds, just one day before the deadline for the exchange offer expired. Ukraine's deal is unusual in that around half its creditors are highly dispersed retail investors, as opposed to banks. Adding to its complexity, the five bonds

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South Caucasus & Central Asia

Georgia-Ukraine To Strengthen Relations

· Georgian President Eduard SHEVARDNADZE will welcome Ukrainian President Leonid KUCHMA today in Tbilisi for negotiations on deepening trade and economic relations. KUCHMA will focus on further development of transport corridors from Georgia to Ukraine and supplies of the Caspian oil via Georgian ports. Two governmental delegations will hold coinciding meetings and will close with the signing of documents on the development of the bilateral cooperation. On March 11th, a joint intergovernmental Georgian-Ukrainian commission agreed to better enforce previous economic agreement in the economic sphere, for prevention of falsified productions, continuation of work over the perspectives of improvement of customs procedures and lowering of tariffs for freight forwarding. Head of the Ukrainian department for transportation policy Grigory LEGENSKY told Prime News Agency that 324,000 tons of cargoes have already been transported by the Poti-Batumi-Iliychevsk-Odessa ferry route. According to him, cargo turnover between Ukraine and Georgia in 1999 increased by 16 percent, compared to 1998.

On Thursday, KUCHMA will meet with Parliamentary Speaker Zurab ZHVANIA, State Minister Vazha LORDKIPANIDZE, members of the Ukrainian diaspora, students and professors of Tbilisi University. Georgia attaches a large importance to the cooperation with Ukraine in global transport projects and in international and regional organizations.

Turkmen Negotiates Gas Prices

· Turkmenistan is negotiating with Russian gas monopoly Gazprom over the price for the delivery of gas per thousand cubic meters. Turkmenistan has proposed $42 per thousand cubic meters of Turkmen gas down from an earlier demand of $45 per thousand cubic meters at the border with neighboring Uzbekistan. Russia and Turkmenistan last month agreed that Turkmenistan would deliver 50 billion

cubic meters (bcm) a year via Russia for the next 30 years. In December, 1999, Gazprom agreed to buy 20 bcm of Turkmen gas in 2000 at $36 per thousand cubic meters. The sum was to have been paid partly in cash and partly in barter. Turkmen President Saparmurat NIYAZOV said that under the new long-term agreement, prices should not be fixed for the entire 30 years, but could be fixed for the first three years initially. This long-term commitment, however, jeopardizes a US-backed pipeline from Turkmenistan to Turkey as energy experts doubt whether Turkmenistan could fill the 30 bcm capacity pipeline. Turkmenistan ideally wants its own export pipeline bypassing Russia, but delays in the trans-Caspian project has prompted NIYAZOV to return to its dependence on Russian supply routes.

Meanwhile, Iranian Oil Minister Bijan ZANGANE on Tuesday asked Turkmenistan to cut its price for natural gas exports by 33 percent. He made the proposal in a two-hour meeting with NIYAZOV, saying that Iran would increase its purchasing if the price was lowered. Turkmenistan currently sells natural gas to Iran for $40 per 1,000 cubic meters. ZANGANE asked for a reduction to $28 per 1,000 cubic meters. There was no immediate information on when an agreement might be concluded or whether Turkmenistan would agree to lower its price.

Uzbek 1999 Deficit Reaches 1.8 Percent GDP

· Uzbekistan posted a budget deficit in 1999 of 1.8 percent of gross domestic product (GDP), or 36.9 billion Uzbek sums ($255 million), down from a gap of 2.2 percent in 1998. The Macro-economics and Statistics Ministry released a document late Monday showing that 1999 revenues were 621.8 billion sums and spending 658.7 billion. It did not give details of how the deficit was financed. The final budget version adopted last year Uzbekistan said the deficit would not exceed 3.0 percent of GDP. It said 1.5 percent of the shortfall would come from treasury bills, one percent from printing money and the remainder from privatizations.

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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