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

Tuesday, March 7, 2000

Russian Federation

Politics

Russia To Change Tactics After Ambush Attack

· Following a series of bloody setbacks in Russia's campaign to wipe out remaining resistance in Chechnya, military commanders said Russian forces will change their fighting tactics. Russian state television broadcast footage of the funeral ceremony for more than 20 elite OMON police officers who were killed in the Grozny ambush. In addition to the special police killed, Russia lost 31 paratroops in battles near mountain villages in the Argun gorge. Yevgeny MIKHAILOV, governor of the Pskov region where the paratroops were based, said as many as 60 to 80 men from a single company were feared dead. Russia has also lost its second general in Chechnya, Marine Commander Alexander OTRAKOVSKY. According to the military, OTRAKOVSKY died of a heart attack on Monday. Chechen rebels, however, said he was killed by a commando team. These reports could not be independently confirmed.

Defense Minister Igor SERGEYEV offered few new details on how it change its strategy. Russian federal troops had been relying on air strikes and artillery bombardment to prevent the rebels breaking out of the southern mountains and spilling onto the lower plains. Kremlin spokesman Sergei YASTRZHEMBSKY said troops would now chop trees and clear forests to deprive guerrillas of hiding places. Chechen rebel spokesman Movladi UDUGOV said the guerrillas were launching lightning partisan attacks, and Russia had not found an effective way to respond to this tactic. "We have been fighting them for 400 years and they are still using the same tactic: concentrating large forces in single places," he said. "Our strategy is now to strike them throughout Chechen territory." UDUGOV said rebels had seized the lowland villages of Samashki and Stary Atagi

overnight, meeting minimal resistance. He added, "They [the Russian troops] are concentrating their forces in the mountains, while we [Chechen rebel fighters] are fanning out...In a few weeks they will find they have to fight for the entire republic all over again."

Economy

Ruble = 28.58/$1.00 (NY rate)

Ruble = 28.55/$1.00 (CB rate)

Ruble = 27.33/1 euro (CB rate)

Gokhran Confirms PGM Export Decree Signed

· The head of Russia's state precious metals and gems reserve, Gokhran, today confirmed that Acting President Vladimir PUTIN had signed a decree allowing platinum group metals (PGM) exports. Valery RUDAKOV in a news conference said, "Yes the decree was signed...some days ago...The decree assigns a quota for palladium exports to Gokhran, and for platinum (and other PGMs) to Gokhran and to Norilsk Nickel." All of Russia's PGMs, except palladium, were blocked last year due to loose wording in a law which was later amended. Of the three holders of palladium stocks, Norilsk Nickel has a 10-year export quota issued last year. Norilsk believed that the Central Bank also had a long term quota. RUDAKOV confirmed that it was not necessary for the Central Bank to have a quota to sell palladium from its vaults. "The Central Bank has other arrangements for exporting palladium," he said

Today's News Highlights

Russia

Slovakia OKs Gas Pipeline

Rus. On-Line Bookstore Sold

European Republics

Ukraine Seeks Smelter Advisor

Estonia's 4Q GDP Figures

South Caucasus & Central Asia

Gas Pipeline Competition

Armenia Passes 2000 Budget

Tengizchevroil Stake For Sale?

Tajik Economics Minister Fired

Politics-Economics-Business

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Tuesday

March 7, 2000

Intercon's Daily

without giving further details. He did not disclose whether the decree granted the Central Bank a quota for other platinum group metals sales.

Business

Kuzbassenergo To Offer Creditors Settlement

· Kuzbassenergo, an electricity distributor in Siberia and subsidiary of Unified Energy Systems of Russia (UES), will offer creditors on March 14th an amicable settlement to restructure its debts over eight years. Debts of the UES subsidiary will be converted to promissory notes upon request by the creditor. Kuzbassenergo claims 1.3 billion rubles ($45.5 million) debts to Azot, a west Siberian metallurgical company, and 1.5 billion rubles debts to Novokuznetsky Alyuminievy Zavod, Russia's fifth-largest aluminum producer. Kuzbassenergo started bankruptcy proceedings against Novokuznetsky Alyuminievy Zavod for overdue payment of electricity services, and the account is also scheduled for review at a creditors meeting on March 10th.

Slovakia Grants Permission For Pipeline

· The Slovak daily Hospodarske Noviny reported that the Slovak government has granted permission for Russia's gas monopoly Gazprom to build a part of its new Yamal-Western Europe pipeline across Slovakia. The pipeline, which would bypass Ukraine, is expected to cross Belarus, Poland and Slovakia and increase Gazprom's capacity to supply gas to Western Europe. An alternative pipeline for Gazprom would cross the Baltic Sea and cost an estimated $3 billion, or about four times the amount needed to build the Yamal pipeline. Gazprom supplies 21 percent of Western Europe's natural gas consumption. The Russian government holds a 40 percent stake in Gazprom and is represented on the company's board of directors.

Western Investors Buy Rus. On-line Bookstore

· Baring Vostok Capital Partners, Moscow brokerage United Financial Group and other private equity investors have purchased 51 percent of Internet retailer Ozon for $1.8 million, in the first e-commerce company sale in Russia. Ozon is Russia's largest on-line book and video seller, which employs 50 people and makes about $70,000 a month, The Wall Street Journal Europe reported. The buyers also promised to invest an additional $1.2 million over the next year. Although Russia lags behind the west in widespread

computer use in the general public, it is gaining ground. Russia is poised to benefit from a boom in Internet use and electronic commerce if authorities grasp the opportunity and remove bureaucratic hurdles, executives from some of the world's biggest computer companies said last week. Other limitations include lack of wealth to spend on technological tools, limited penetration of computers and telephone lines, as well as poor distribution of the system. "The biggest problems for Internet retailers in Russia are payment methods and bootlegging," said Vladislav METNEV, an analyst at Moscow-based Aton brokerage. "Few people have credit cards and even fewer trust credit cards, and black marketed, pirated videos will¾by their nature¾always be cheaper than videos or books sold through the Internet."

Urals Copper Plant Aims To Boost Profits

· Urals Mining and Metallurgy Company's general director Andrei KOZITSYN on Friday said that the copper firm aims to boost profits to become the second-largest copper producer behind Norilsk Nickel. He said, "Norilsk produced over 400,000 tons of copper last year. We are not planning to outrun them in terms of volumes, but we will aim for profits close to theirs." He added, "Our aim is to ensure a stable raw materials base and to produce 300,000 tons per year working at full capacity." The new Urals company currently unites Uralelectromed Refinery, Kirovgrad Copper Smelter, Safyanovskaya Med Copper Ore Plant in Sverdlovsk region, and Gaisky Mining and Ore-enriching Plant in Orenburg region. But KOZITSYN said the holding company would also bring together regional plants encompassing the whole copper cycle from ore output to production of cathode copper and some copper products. He said the group would include Uralelectromed-Vtortsvetmet Scrap Copper Smelter, Svyatogor and Sredneuralsk Copper Smelters, Katur-Invest, a Russian-German joint investment venture, Sibkabel Wire Producer, Kirov Non-Ferrous Metals Processing Plant, and two car spare parts producing plants, Reuters reported.

European Republics

Ukraine Seeks Aluminum Sale Adviser

· The Ukrainian government is seeking an adviser for the planned cash sell-off of a 68.01 percent stake

When you need to know it as it happens

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in the country's only aluminum smelter, Zaporizhsky Alyuminiyevy Kombinat (ZALK), the state privatization agency said. The State Property Fund said in a statement only banks and companies experienced in privatizing metallurgical firms worth less than $30 million might be chosen as advisers to the sell-off. ZALK's sell-off scheduled to take place by the year end. Bids from potential advisers will be accepted until April 21st. The fund gave no further details. The smelter, located in southeastern Ukraine, increased its output of primary aluminum and aluminum alloys from 106,700 tons in 1998 to 112,400 tons last year. Its nominal issued share, or charter capital, is 155,682,280 gryvnias ($28.2 million).

Ventspils Nafta Oil Shipments Increased In Feb.

· Ventspils Nafta in Latvia said total petroleum shipped in February grew by 20 percent from January. The increase was mostly due to the increased volumes from Russian oil producers. The company loaded 1.8 million tons of crude and oil products in February, up from 1.5 million tons the previous month. Total products shipped fell by 7.6 percent to 3.3 million tons in the first two months of this year, from 3.57 million tons of crude and products in the same period in 1999. "The company's activity is negatively impacted by the Russian Railway Ministry's higher transit tariffs though Latvian territory in comparison with charges in Lithuania and Estonia." Ventspils Nafta handles about 13.4 percent of Russian crude exports. The company has loaded 13 million tons of crude and 4.5 million tons of oil products last year down from 20.6 million tons of petroleum in 1998.

Estonia Hansabank To Sell Eurobonds

· Estonia's largest bank, Hansabank, said it plans to sell Eurobonds at the end of March or the beginning of April. Warburg Dillon Read and Swedbank will manage the sale. Hansabank Treasurer Petteri LAPPALAINEN declined to disclose any further details before next week. Hansabank Group according to an audit earned profit of 815 million kroon ($50.08 million), or 10.5 kroon per share, in 1999, compared with a 60.5 million-kroon loss, or 1.3 kroon per share, in 1998. Consolidated asset grew by 23.7 percent over the year to 34.25 billion kroon at the end.

Estonia 4th Quarter GDP Improved Slightly

· Estonia's fourth quarter gross domestic product (GDP) improved slightly, but failed to reach the level

predicted by analysts. GDP rose 1.9 percent, year-on-year, in the last three months of 1999, according the preliminary data released by the Statistics Department on Friday. Prior predictions forecast the fourth quarter rise from 2 percent to 6 percent. The Department said revised data would be released on May 16th, along with an official full-year 1999 GDP figure. Hansabank Markets analyst Maris LAURI said, "It is an unpleasant surprise...Probably it was weakness in domestic demand. It is the only area where I can see there would be poor performance and is not going as well as expected," Reuters reported.

This is the first economic growth posted in Estonia since the contraction caused by the Russian financial crisis in 1998. Moscow's decision to allow the ruble's value to slide in August that year effectively closed a key Estonian export market and leading to a decline in domestic production and demand. Estonian GDP contracted by 0.7 percent in the fourth quarter of 1998, fell 5.6 percent in the first quarter of 1999, shrank 2.3 percent in the second quarter, and was flat in the third quarter. "We see that the situation in the third quarter is continuing and the economy is lacking momentum...There is recovery in the economy, although it is still quite modest," said Suprema analyst Veikko MARIPUU.

South Caucasus & Central Asia

Chkheidze-Totsky Discuss Reinforcements

· Georgian President Eduard SHEVARDNADZE on Monday told the nation that Georgian border chief Lieutenant-General Valery CHKHEIDZE and Russian Federal Border Service Director Colonel-General Konstantin TOTSKY were discussing in Moscow measures to reinforce the protection of the Georgian border with Chechnya. He pointed out that the, "reinforcement of protection of the Chechen stretch of the Georgian Russian border will top the agenda." SHEVARDNADZE noted that the two border chiefs had established "business-like relations," since they resolved many problems together. According to SHEVARDNADZE, the presence of OSCE observers at the Chechen stretch of the border proved to be "useful and effective." He said Georgia was ready to receive journalists from Russia and make arrangements for them to visit the Georgian areas bordering on Chechnya in order to familiarize themselves with the situation on the spot.

When you need to know it as it happens

Politics-Economics-Business

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Tuesday

March 7, 2000

Intercon's Daily

BP Amoco Urges Action On Caspian Pipeline

· A consortium of investors led by BP Amoco has urged Azerbaijan to step-up measures to build the Caspian gas pipeline from Shakh Deniz to Turkey, before a competing pipeline from Turkmenistan is built. The consortium presented Azeri President Geidar ALIYEV with a development and export plan. The BP Amoco $1.3 billion gas pipeline would export gas from the Shakh Deniz field, which has reserves of up to a trillion cubic meters. The competing Turkmenistan pipeline, backed by the US, will cost $2.5 billion. BP Amoco president Andy HOPWOOD said, "The speed at which we can get the first volumes to market is...important and we're absolutely committed to selling this gas in the Turkish market as soon as possible," Reuters reported. In February, the consortium, made up of Statoil, LUKoil, Agip, Elf and Turkish Petroleum as well as BP Amoco, announced plans to deliver its first gas to Turkey in the winter of 2002-2003. The rival Trans-Caspian Gas Pipeline (TCGP) consortium aims to complete a line carrying Turkmen gas under the Caspian to Turkey at the same time. "Whoever builds a pipeline the quickest will win," joked Abid SHARIFOV, Azeri deputy prime minister and head of the president's working group on gas sales and exports. "Our pipeline will be cheaper because the distance is shorter, even if production costs are higher," he said. Industry sources say difficult personal relations between ALIYEV and Turkmen President Saparmurat NIYAZOV, and a lack of incentives for Azerbaijan to participate in TCGP, make competition between the projects more likely than cooperation. ALIYEV has told NIYAZOV Azerbaijan wants access to half of TCGP's 16-30 billion cubic meter capacity for Azeri gas. But NIYAZOV has only offered Azerbaijan 5 billion cubic meters of capacity.

Intercon sources report the real cost of the Azeri gas pipeline to be only $600 million to $800 million, with the pipeline's completion scheduled for December, 2000. For the pipeline to be completed, Azerbaijan needs only to refurbish its own lines and lay new pipe

in Georgia. Turkey said it would handle the construction of the pipeline on its territory. This pipeline has a greater chance of being completed ahead of the Turkmen alternative because Azerbaijan can finance the project itself.

Tengizchevroil Debate Renewed

· Former Kazakh Prime Minister Nurlan BALGHYMBAYEV in an interview with weekly newspaper Karavan that he supports the proposed sale of part of Kazakhstan's 25 percent stake in the Tengizchevroil consortium. BALGHYMBAYEV, who now heads the Kazakh state oil company, argued that the Kazakh leadership will not begin receiving dividends from that stake until 2006 at the earliest. When the debate within the Kazakh leadership over the expediency of that sale began late last summer, BALGHYMBAYEV said that the sale of the Kazakhstan's stake in Tengizchevroil, "is not an urgent matter." Kazakhstan and Chevron failed last fall to agree on conditions for Chevron to purchase part of the Kazakh stake, RFE/RL reported.

Rakhmonov Sacks Economics Minister

· Tajik President Emomali RAKHMONOV on Monday dismissed Economics and Foreign Economic Relations Minister Davlat USMON, who represented the opposition in the Cabinet. USMON was replaced by former prime minister Yakhyo AZIMOV. AZIMOV was prime minister before being replaced by Akil AKILOV after RAKHMONOV's re-election as president in the November ballot. The signed presidential decree indicated that USMON had been transferred to another post, but it did not specify which. USMON was not immediately available for comment on the unexpected move. USMON, a member of the Islamic-led United Tajik Opposition (UTO), was appointed Economics Minister in February, 1999, as part of a power sharing deal between the UTO and RAKHMONOV's government. Under the 1997 peace agreement, 30 percent of government positions should be filled by UTO members. RAKHMONOV also dismissed and named replacements for eight city or district administrators.

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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