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

Friday, April 28, 2000

Russian Federation

Politics

Permanent Russian Force For Chechnya

· After meeting with Defense Minister Igor SERGEYEV, President-elect Vladimir PUTIN has approved a special division of Russian soldiers, who will be stationed in Chechnya permanently. PUTIN said that the formation of the 42^nd division was complete and ready for deployment. The military estimates that 25,000 Russian troops would be stationed permanently. SERGEYEV said stationing the division in Chechnya was the next step in bringing the eight-month military campaign to an end. Russian Interior Ministry troops suffered a second major loss, when a team of forces was ambushed by Chechen rebels. Russia lost 10 soldiers, yet claim to have killed at least 17 rebels. On Thursday, PUTIN reiterated the claim that the rebels were disorganized and losing control. Although the rebels are outnumbered and outgunned, Russia has not been unable to stave off rebel attacks.

The Russian government has decided to allocate 7.5 billion rubles ($264 million) to rebuild the Chechen republic. Approximately 680 million rubles have already been spent on paying out social allowances and pensions. First Deputy Prime Minister and Finance Minister Mikhail KASYANOV said the amount of money available for rebuilding the Chechen economy will be limited. He said, "We are not talking about reviving the economy of Chechnya this year…The Russian government has set itself the goal of restoring living conditions in the republic. The process of regenerating the Chechen economy will only begin in the following stage from 2001 to 2003," the Financial Times reported. He added that a mechanism to prevent the money from being stolen or squandered must be put in place before

any funds are transferred. According to the Finance Ministry, Russia has already spent about 7.5 billion rubles to fight the war in the first three months of this year. The cost of fighting the war is estimated be about 25 billion rubles this year.

Economy

Draft Economic Plan Calls For Major Tax Cut

· A team of economists led by Deputy Minister of State Property German GREF and his Center for Strategic Development this week discussing the draft economic plan in a dacha outside of Moscow with International Monetary Fund (IMF) and World Bank officials. A preliminary version calls for a huge tax cut of 150 billion rubles in 2001. This would mean scrapping a 4 percent tax on business transactions and abolishing the existing income tax code, which ranges between 12 percent to 30 percent. The income tax would be replaced with a 12 percent flat tax for all. Government officials have said the final version of the plan will be unveiled by the end of May. The plan has won tentative approval from Russian State Duma Budget Committee Chairman Alexander ZHUKOV, but still needs the backing of the IMF's head of delegation, Gerard BELANGER. Most of the new economic plan's details have been kept secret, although GREF and others have said it emphasizes greater protection for property and the rights of minority shareholders, a looser regulatory environment, a level playing field for all investors and a simpler tax code.

Today's News Highlights

Russia

Platinum Reaches New High

Killer Escapes On Bicycle

Tabak Opens Office In Moscow

European Republics

Kuchma Submits Amendment

Berzins Forming Cabinet

Parex Receives $23M Loan

South Caucasus & Central Asia

Itera To Resume Gas Supplies

Eurasia Economic Forum Opens

Politics-Economics-Business

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Friday

April 28, 2000

Intercon's Daily

Ruble = 28.46/$1.00 (NY rate)

Ruble = 28.43/$1.00 (CB rate)

Ruble = 25.87/1 euro (CB rate)

Oct Nov Dec Jan Feb Mar Apr

Platinum Hits Two Month High

· Platinum rose more than 5 percent, the biggest gain in more than two months, as jewelers and other users of the metal await a delivery of metal from Russia. Demand pushed the price up to $523/$528, the highest level since $529.00 on February 22^nd. Russian mining company Norilsk Nickel said last week it was resuming exports after a yearlong halt that sent prices to an 11-year high in February. While Norilsk confirmed on April 21st that it resumed shipping platinum, Gokhran, the state precious metals reserve, said it still hadn't begun to ship metal from its inventories. So far, there is no sign of shipments from Russia, the second-largest producer after South Africa. Traders said there were no indications of significant amounts of the long-awaited shipments. "People are just correcting now, getting back to where they should be," said one London-based trader. Russia's state-run export agency Almazyuvelirexport has informed customers in Japan, the world's biggest user of platinum, that deliveries of platinum will resume on May 2^nd. Russian exports were stopped last year because legislation restricting authority over shipments failed to specify what agency was in control. The country sold about 500,000 ounces of platinum in 1999 before exports stopped early in the year, London-based Johnson Matthey Plc said in a November report.

Business

Contract Killer Escapes On Bicycle

· Russian businessman David DVALI died after being shot in the head on the doorstep of his home late Thursday night. DVALI is a joint owner of a computer firm and a medium-sized air cargo company. Local television report that the killer, who shot DVALI at point blank range, escaped from the crime scene on a bicycle. An investigator at the scene of the crime told NTV that the murder bore all the signs of a contract killing. This is the latest in a series of murders of businessmen, including a number of company executives shot dead in St. Petersburg.

Sibneft Sells Station Stake To Tatneft

· Sibneft, Russia's sixth- largest oil producer, sold a 14.68 percent stake in Mosnefteprodukt, a Moscow-based fuel retailer, to Tatneft, Russia's fourth-largest producer. Mosnefteprodukt is a subsidiary of Moscow-administration owned Central Fuel Co. LUKoil, Russia's number one oil producer, holds a 14.9 percent stake in the marketing company, while Cyprus-based Perryman Trading and Investment Ltd. holds 12.57 percent. Moscow retail market generates from $3 billion to $5 billion revenue per year, according to various analysts estimates.

Uralelektromed Cuts Exports

· Uralelektromed, Russia's second-largest copper producer, will more than halve its exports this year due to rising domestic demand and a wish to avoid price volatility on the London Metals Exchange, The Wall Street Journal reported. "More than half of the 300,000 metric tons we plan to produce this year will go to the domestic market." In March, Andrei KOZITSYN, general manager of Urals Mining and Metallurgy Co., which incorporates Uralelektromed, said it planned to produce 280,000 tons of copper this year, of which 70 percent would be exported. Uralelektromed produced about 270,000 tons of copper last year.

Tabak Opens Moscow Office

· Austria Tabak International, a subsidiary of Austria Tabakwerke, Austria's largest maker and retailer of tobacco products, will open an office in Moscow to launch local production of its Memphis brand cigarettes in May. The company said it aims to manufacture 40 million cigarettes a month at a

When you need to know it as it happens

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plant just outside Moscow. "We are enlarging our cigarette operations with local production," said Gunter PANHOFER, managing director of Austria Tabak International. The Vienna-based tobacco producer said sales abroad surged 70 percent in the first quarter of 2000; profit fell 25 percent last year to 106.8 million euros ($98 million) in the absence of one-time gains that raised profit the previous year.

to four percent starting in 2001, ensure GDP growth of five to seven percent per year and cut the current account deficit to five percent of GDP in 2002. The government would also stick to decisions made by the last government regarding the privatizations of Latvian Shipping, Latvenergo and Ventspils Nafta and invite international investment banks to advise on further sell offs.

Latvia's Parex Bank Receives $23M Loan

· Parex Bank, Latvia's largest bank by assets, signed a $23 million syndicated loan agreement with a group of 11 banks from seven countries. Initially, the loan was fixed at $15 million, but later on increased to $23 million because of strong demand. Landesbank Kiel and Hamburgische Landesbank are managing the syndicate, which includes Komercni Banka, Landesbank Sachsen, Baden-Wurttembergische Bank, Bank Handlowy, Banka Nazionale del Lavoro International, Banka Agricola Mantovana and Arab Bank. The Britain's Standard Bank Plc was the arranger, agent and book-runner of the loan, while Raiffeisen Zentralbank Oesterreich acted as co-arranger. The loan has an interest rate 1.25 percent over LIBOR with a grace period of one year and possible extension for another two years. Parex posted a net profit of 4.2 million lats ($7.2 million) in 1999. The bank's domestic market share exceeded 20 percent in all major areas of banking services.

South Caucasus & Central Asia

Itera To Resume Supplies To Georgia

· A Georgian delegation and the management of the group of Itera agreed on resuming gas supplies to Tbilisi during negotiations in Moscow on Thursday. Georgian deputy state minister Vano CHKHARTISHVILI told Prime News Agency a plan-schedule for the restructuring of Georgia's debt to Itera for the supplied natural gas will be worked out soon. According to CHKHARTISHVILI, the negotiations were not easy due to the large debt of $70 million. The Georgian delegation, which included the Fuel and Energy Minister David MIRTSKHULAVA, Deputy State Minister Vano CHKHARTISHVILI, heads of Sakgas and Tbilgas companies, and the premier of Tbilisi municipality Giorgi SHARADZE, arrived in Russian capitol on April 26^th.

European Republics

Kuchma Submits Constitutional Amendment

· Ukraine's President Leonid KUCHMA has submitted to parliament a draft amendment to the Constitution in accordance with the results of a nationwide referendum. Voters on April 16th approved four proposals to reshape the parliament and give the president more power. Each question must still pass the parliament as a Constitutional amendment. Analysts say parliament is unlikely to pass all the amendments, and KUCHMA has indicated he might disband the legislature if it doesn't approve the changes. The proposals called for trimming the 450-seat parliament to a 300-seat assembly with two houses¾one of nationally elected candidates and the other of appointed municipal and regional officials, the Associated Press reported. Voters also approved removing deputies' legal immunity and giving the president the right to disband parliament in certain circumstances.

Berzins Prepares To Form Cabinet

· Latvian prime minister-candidate Andris BERZINS is making preparations to form a Cabinet, while holding meetings with coalition leaders. On Thursday, he said, "I plan that some time on Friday, or the latest on Tuesday, to be able to reveal my model for forming a government." The new government is being formed after Prime Minister Andris SKELE resigned on April 12^th amid a privatization row. BERZINS said his government will enforce the previous administration's tight fiscal policies. However, according to the draft, the cabinet would commit itself to keeping the current government's aim of limiting the fiscal budget deficit to less than two percent of gross domestic product (GDP) this year. It would plan a budget deficit of no more than one percent of GDP in 2001. The draft also says the government would try to limit annual inflation to two

When you need to know it as it happens

Politics-Economics-Business

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Friday

April 28, 2000

Intercon's Daily

US Ex-IM Bank Gives Azeri Airlines $66M Loan

· The US Export-Import Bank has guaranteed a $66 million long-term loan to Azerbaijan to pay for two aircraft built by Boeing Co. Ex-Im Bank Chairman James HARMON said, "This is the kind of transaction Ex-Im Bank should be doing, leading the way in doing well-structured deals in a new emerging market." Azerbaijan Airlines serves Middle East and European cities with a fleet of 39 Soviet-made aircraft and two Boeing jets, but is seeking to modernize its fleet.

Eurasia Economic Summit Opens In Almaty

· Caspian and Central Asian states gathered in Almaty to attend the Eurasia Economic Summit an extension of the World Economic Forum in Davos Switzerland, which opened on Wednesday focusing on regional cooperation and resource opportunities for potential investors. Klaus SCHWAB, head of the Forum said, "Regionalization and globalization go hand in hand...the areas which cooperate are the building blocks of the global economy." Kazakh President Nursultan NAZARBAYEV agreed saying, "We must all go forward together or lag behind separately…There is a need for efficient mechanisms and agreements to boost regional cooperation." Iranian First Vice-President Hasan HABIBI noted that the legal status of the Caspian is still in dispute and called for a solution. Kazakhstan and Russia, have reached bilateral agreements on carving up the waters, an approach HABIBI said Iran did not support. "If...no consensus is reached on its legal status, then the Caspian will become an irritating source of instability, and God forbid, it will jeopardize the security of the region," he said.

Iran has announced that it is entering the pipeline race to transport Kazakh oil to the Gulf. Iran's Deputy Foreign Minister Mohammed Hossein ADELI told the Forum that the Iranian pipeline would build on already existing infrastructure. He said work on the Iranian section of the two-phase project had already started in the form of a 390-km, 800,000 bpd link from the Caspian port of Neka to Tehran.

The second phase involves a 1500-km, one million bpd capacity line from Kazakhstan to Iran via Turkmenistan. ADELI said, "This is the cheapest, shortest most economically viable way to take 1.8 million barrels per day of oil over 1,500 kilometers…Once it gets to the Gulf it may be transported east or west...environmentally too it is the safest option." ADELI estimated the total cost of the project at $1.2 billion, or about half the cost of a competing US-backed link from the Azeri capital Baku to Ceyhan in Turkey. Turkey has stressed the need for multiple suppliers as demands continue to grow. Turkey plans to import gas via new pipelines from Turkmenistan and Russia and oil from Azerbaijan. The US agrees with the need for multiple pipelines, but supports routes that would bypass Iran and Russia.

One week after Russian President-elect Vladimir PUTIN called for Russia companies to take a more active role, Russian representatives at the conference emphasized that Russia intends to re-assert itself in the Caspian region. PUTIN has stressed that the region is important for economic and security reasons. Deputy Prime Minister Viktor KHRISTENKO, while saying that Russia is solely interested in regional stability, said that the Kremlin will push for its rightful role in the regions pipeline projects. He also held talks with Kazakh Prime Minister Kasymzhomart TOKAYEV on the possibility that Gazprom could enter Kazakhstan's local markets. KHRISTENKO said that Russia is also interested in developing rail links and trade route from Asia through Russia to Europe and from Russia to Iran.

Kazakhstan also appears to be on the verge of a major oil find at the Kashagan field, being explored by the international OKIOC consortium. The field could contain as much as four billion tons (nearly thirty billion barrels) as predicted by initial estimates. The Kashagan project could produce eight million barrels per day by 2015. These finds are sure to heat up the pipeline race.

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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