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, May 10, 2000

Chechen Officials Seek End To Conflict

· After meeting with former Chechen Interior Minister Kazbek MAKHSHEV in Karabulak, Ingushetia, Russian Duma deputy Pavel KRASHENINNIKOV, who serves as chairman of the commission on criminal investigations and human rights in the North Caucasus region, said that Chechen officials are seeking negotiations to end the conflict with Russia peacefully. MAKHASHEV said, "The Chechen leadership in the person of Aslan MASKHADOV is prepared for a peaceful settlement of the situation." KRASHENINNIKOV said the talks he held with MAKHASHEV, "cannot be called negotiations" on ending the conflict, but added that a political dialogue was possible. Russian presidential aide Sergei YASTRZHEMBSKY earlier today said Moscow has not received any peace proposals from MASKHADOV. The Chechen President in an interview with Radio Liberty said peace plans were sent to Moscow on Monday. General Gennady TROSHEV has urged Chechen rebels to "make use of the amnesty" option, which expires on May 15^th. Russia has offered amnesty to fighters who surrender with their weapons if they are found not to have committed what federal authorities consider series crimes.

No major rebel attacks in Chechnya were reported Tuesday, the 55^th anniversary of the WWII victory over the Nazis, despite Russian fears of a large-scale offensive. Security officials in Daghestan, however, disarmed two bombs Tuesday on the central

Russian Federation

Politics

Putin Submits Kasyanov's Candidacy To Duma

· President Vladimir PUTIN in a letter to the Russian State Duma has proposed Mikhail KASYANOV as his prime minister. He wrote, "I am proposing the candidature of KASYANOV to secure the consent of the State Duma to be appointed as chairman of the government in accordance with article 83 of the constitution of the Russian Federation."

The Duma has a week to consider the nomination and vote on it. The President's candidate needs to win approval from a simple majority of the 450-seat parliament. The President can present KASYANOV three times to the Duma for approval. If the Duma refuses to approve his choice, the President must dissolve the chamber and call a fresh parliamentary election. This is unlikely to happen. Vladimir LUKIN, the Duma's deputy chairman, told RTR State Television that he was confident the Duma would approve of KASYANOV, "Not because of his name or personality, but because he has been proposed by the newly elected president."

KASYANOV has served as PUTIN's First Deputy Prime Minister and Finance Minister. He is a technocrat who rose to prominence from back-room obscurity after building a reputation as a shrewd foreign debt negotiator. He successfully won the write-off of billions in Soviet-era debt and brokered a debt- restructuring plan. KASYANOV has promised to release a new economic policy program by early June. He said the Cabinet will discuss the plan and amend it and then, "the government will be able to call `its own.'" Analysts expect the new government to be broadly supportive of market reforms.

Today's News Highlights

Russia

Gazprom Bids On Iranian Gas

Tatneft Misses Bond Payment

European Republics

Yushchenko Impresses US, WB

IMF Assesses Lithuania

Adamkus To Visit Kazakhstan

South Caucasus & Central Asia

US Senate Foreign Ops Bill

Baku-Ceyhan Legal Work

Nagorno-Karabakh On Agenda

Politics-Economics-Business

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Wednesday

May 10, 2000

Intercon's Daily

square in the capital Makhachkala, an hour before a Victory Day parade. The bombs were found by a sniffer dog near a statue of Soviet founder Vladimir LENIN. Clashes were reported in the Vedeno, Nozhai-Yurt and Shatoi regions. Rebels shot at Russian checkpoints in Grozny's Oktyabrsky district, near Urus-Martan, and in Assinovskaya. A top member of MASKHADOV's government, National Security Service chief Ibragim KHULTYGOV, was detained in southeastern Chechnya, according to Russian officials in Gudermes. KHULTYGOV took over the security service when his predecessor and brother Lecha was killed in 1998.

Russian Chief Of Staff Visits NATO

· The Russian Defense Ministry said that the chief of staff General Anatoly KVASHNIN today left Moscow to visit NATO headquarters in Brussels. This will be KVASHNIN's first talks with NATO since Moscow froze relations over air-strikes on Yugoslavia. He will attend a Russian-NATO council established under a 1997 treaty. The Defense Ministry spokesman said, "Renewal of development of mutual relations with NATO is only possible on the basis of real equality, real joint taking of decisions on the most important problems of European security and joint implementation of them." KVASHNIN will discuss the Balkans and security matters, including a new military doctrine drawn up by Russia. This doctrine, defensive in nature, states that Russia will resort to using nuclear weapons. President Vladimir PUTIN supported KVASHNIN's visit after meeting with NATO Secretary-General George ROBERTSON in Moscow in February.

Economy

Ruble = 28.4/$1.00 (NY rate)

Ruble = 28.3/$1.00 (CB rate)

Ruble = 25.78/1 euro (CB rate)

Fitch Upgrades Banking Ratings

· Fitch IBCA, the international rating agency, has upgraded the Long-and Short-term ratings for Sberbank from CCC to B minus and for Vnesheconombank from C to B. The two banks have been placed on the Rating Alert Positive. The agency does not currently assign an Individual rating to Vnesheconombank. Sberbank's Individual rating remains D/E subject to a full rating review by Fitch IBCA later this year. Sberbank, the largest

Russian bank, which holds 88 percent of the nation's retail deposits, is majority owned by the Central Bank. Vnesheconombank, the principal agent for the Russian government in management of the country's external debt, as well as a major commercial bank, is fully owned by the government. Fitch IBCA continues to regard both banks as a sovereign risk and rates them at the sovereign ceiling. According to a press release, Sberbank and Vnesheconombank each have a support rating of 2T. Fitch has not excluded the possibility of further upgrades for privately-owned Russian banks later this year. Those decisions will be made on a case-by-case basis and will depend on the agency's analysis of the banks' financial standing, changes in their role and position in the Russian banking system and management's strategy and outlook.

Business

Gazprom Competes For Iranian Gas Contract

· Russia's natural gas monopoly Gazprom and France's Total Fina Elf are reported to be the front-running companies in a bid to develop phases four and five of Iran's South Pars gas field. The Financial Times writes that the deal is estimated to be worth $1.5 billion dollars. Royal Dutch/Shell Group, Malaysia's state-controlled Petroliam Nasional Bhd. (Petronas), Britain's BG Group Plc, and Gaz de France have also submitted bids for the contract. Iran is expected to announce the tender results soon. A decision on the tender has been delayed by a power struggle between hardliners and reformist supports of President Mohammad KHATAMI. The National Iranian Oil Company believes that Iran paid Total too much for the development of phase two and three and oppose granting further contract to France. The Middle East Economic Survey reported earlier this month that Iran plans to spend $10 billion upgrading its energy industry over the next five years.

Tatneft Misses Bond Payment

· Russia's Tatneft oil has missed a $13.5 million Eurobond coupon payment, but still has time within a legal grace period. "Tatneft did not pay the coupon on April 29^th, but the company still has a grace period, which is 15 working days," Valery SKIBA of Tatneft public relations agency Solid-Info told Reuters. Tatneft, which accumulated substantial foreign currency debts before the ruble devaluation

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in 1998, missed the due dates on three previous Eurobond payments, but has always paid before its grace period expired. The five-year $300 million bond matures in 2002.

nomic reform] program." He noted, "I was much encouraged by the sense of determination that Mr. YUSHCHENKO conveyed to me."

IMF Mission Assesses Lithuania

· An International Monetary Fund (IMF) mission is expected to arrive in Lithuania today to assess the government's economic progress and discuss funds available. According to an IMF statement, "With the fulfillment of performance criteria for end-March, a further 10.3 million SDR (approximately $13.7 million) would be available to the [central] Bank of Lithuania under the precautionary stand-by arrangement." In early March, the IMF approved a 15-month, 61.8 million SDR precautionary, stand-by arrangement with Lithuania under which the Baltic state agreed to lower its fiscal deficit to 2.8 percent of GDP from 7.9 percent and make structural reforms. "The mission will pay close attention to the budget of the government and of (social security fund) SoDra…The mission will also review monetary and external economic developments and the implementation of various structural reforms agreed under the stand-by arrangement." Deputy Baltic Division Chief Odd Per BREKK will lead the IMF mission.

Adamkus Leaves For Kazakh Visit

· Lithuanian President Valdas ADAMKUS is scheduled to leave today for a three-day official visit to Kazakhstan. The main purpose of his visit is to discuss with Kazakh leaders ways to expand bilateral relations, especially in economy. His schedule includes talks with Kazakh President Nursultan NAZARBAYEV, Prime Minister Kasymzhomart TOKAYEV, and other leaders. The Lithuanian president will be accompanied by a large group of Lithuanian businessmen. A meeting of the intergovernmental commission for economic cooperation will be held in Astana. Lithuania wants more Kazakh goods to be exported to the West via the Klaipeda sea port and to buy Kazakh petroleum.

South Caucasus & Central Asia

Senate Foreign Ops Mark Up 2001 Budget

· Wednesday, the Appropriations Committee of the US Senate conducted its mark-up of the budget for the Foreign Operations Subcommittee. The bill appropriated $775 million for the Freedom Support

European Republics

US-WB Impressed With Ukraine Reforms

· US President Bill CLINTON and World Bank President James WOLFENSOHN both said they were impressed with Ukraine's economic reforms, after meeting separately with visiting Ukrainian Prime Minister Viktor YUSHCHENKO. YUSHCHENKO is in Washington to bolster his nation's image following the release of a damaging audit. The report shows Ukraine misrepresented its foreign reserves to the International Monetary Fund (IMF) by $713 million in 1997. YUSHCHENKO has claimed that the error was due to old Soviet accounting practices, and was not part of a deliberate lie. The IMF lent Ukraine $200 million in loans it wouldn't have otherwise granted, if the accounting information was correct. In the short time that YUSHCHENKO has been Prime Minister, he has pushed important reform measures through the parliament and turned around the nation's economy. Ukraine's economy grew by an annual 5.6 percent in the first quarter of the year, compared to a decline of 0.4 percent for the entire 1999.

CLINTON dropped in on a meeting between YUSHCHENKO and National Security Adviser Samuel BERGER on Tuesday. National Security Council spokesman Mike HAMMER said, "The President praised the Prime Minister for Ukraine's ongoing efforts and progress in economic reform. He encouraged them to continue efforts at trying to become better integrated into Europe." YUSHCHENKO's government is seen in Washington as representing Ukraine's best hope for recovery. The US has made Ukraine one of the four ``emerging democracies'' that are priorities for foreign aid this year.

WOLFENSOHN said, "I expressed a strong desire on our part to assist the government in its efforts to plan and implement its proposed economic and social program, but I also stressed that in determining continued World Bank support, much will depend on tangible results in implementing the [eco

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Act, which authorizes aid to the Former Soviet Union. Ukraine received $175 million with a restrictive disbursement language. Georgia obtained a mark of $94 million in assistance with not less than $25 million committed to the Border Security program. This program has been so successful in Georgia that the State Department is attempting to reproduce it in other countries. An additional $5 million was earmarked for the development of training for municipal officials in water management, transportation and agro-business. Georgia also received an additional $12 million for the Foreign Military Finance Program (FMF). This FMF assistance also contained language providing a $5 million draw down authority for excess military equipment and training programs. Armenia received $89 million and section 907 of the Freedom support act restricting assistance to Azerbaijan was waived for democratic institution building activities. Georgia also received military equipment transfer authority to obtain up to $10 million in US military equipment from Turkey: "The US consents to the transfer by Turkey to Georgia of defenses articles sold by the US to Turkey value not to exceed $10 million in fiscal year 2001." Other details of the bill will be released to the public later today.

Baku-Ceyhan Legal Framework Finalized

· Turkey, Azerbaijan, and Georgia signed the Azerbaijan host government agreement on Tuesday in Istanbul, the final phase of creating a legal framework for the Baku-Tbilisi-Ceyhan pipeline project. The agreement promises to open a new era for energy development in the Caspian region. The signing took place at the third annual "Tale of Three Seas" energy conference which focuses on energy investment in the Caspian Sea, Black Sea, and eastern Mediterranean regions¾sponsored by Cambridge Energy Research Associates (CERA), the Black Sea Economic Cooperation Business Council (BSEC BC), and Turkey's Foreign Economic Relations Board (DEIK). The legal framework was first initialed in Washington in April by the three governments' representatives. Turkish

President Suleyman DEMIREL said, "In the legal area, our work is now completed. But our work is not over. Now, we have to construct the pipeline." The 1,080-mile, pipeline, expected to be completed in 2004 to 2005 will carry oil from Azerbaijan into Georgia and then to the Turkish Mediterranean port of Ceyhan. "This pipeline will connect Caspian oil resources to the global market, delivering a major new resource for consumers around the world," said Laurent RUSECKAS, CERA Associate Director for Caspian Research. The three countries now need to seek approval from their parliaments and to look for resources to finance the estimated $2.4 billion pipeline. The US is strongly backing the project, drawing the Caspian region closer to the West and lessening Russia's influence over the Central Asian states. It also helps protect energy supplies, by giving oil transporters multiple routes to chose from.

Nagorno-Karabakh On Summit Agenda

· American Co-Chairman of the OSCE Minsk Group for Nagorno-Karabakh Carey CAVANAUGH told Azerbaijani President Geidar ALIYEV on Tuesday that the Nagorno-Karabakh settlement would be discussed at the US-Russia summit between Presidents Bill CLINTON and Vladimir PUTIN in June. He said that CLINTON plans to use the visit to achieve progress in the settlement. The Russian, American and French Co-Chairmen of the OSCE Minsk Group will have a meeting in Geneva next week to discuss new settlement proposals. After that representatives of 12 international organizations will meet to discuss the financing of restorations. CAVANAUGH stressed that although peace has not been achieved, it is time to think about normalizing life for the people of Azerbaijan and Armenia. Azeri President Geidar ALIYEV has said that a peace between Armenia and Azerbaijan, "is important for the entire southern Caucasus." He also expressed concern surrounding the deployment of Russian armed forces and a military base in Armenia.

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

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