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

Monday, May 22, 2000


Russian Federation

Politics

Putin Sacks Controversial Energy Minister

· Russian President Vladimir PUTIN has revised an announcement on Friday by sacking former Fuel and Energy Minister Viktor KALYUZHNY and appointing Alexander GAVRIN on Saturday as the new Energy Minister. This move is a shift away for the oligarchs, with whom KALYUZHNY is closely tied. KALYUZHNY had been accompanying PUTIN to Uzbekistan and Turkmenistan along with Gazprom chief Rem VIYAKHIREV on May 18th and 19th. Goohoon KWON, senior economist at ABN Amro in London said, "KALYUZHNY was seen as a major obstacle to Russia energy reforms and especially Unified Energy Systems." She added, "Who will become energy minister was a focus of the market. KALYUZHNY was seen as a bottleneck.'' The market fell to the lowest point in 10 weeks on the initial news that KALYUZHNY would remain in office. The Ministry under KALYUZHNY has been criticized for corruption and favoritism. He introduced a plan to set up a cartel of oil, gas, metals, and transport bodies to fix prices of fuel and transport, but abandoned it within weeks. He has argued with Gazprom and tried, but failed to get a seat on its board. He has set complicated export restrictions on oil products and changed them frequently and apparently arbitrarily, and his policies have been generally unpredictable.

Optimism surrounds the new Energy Ministry and its leader. Analysts are hoping that GAVRIN will revive privatization and liberalization, and repair the country's battered image among foreign investors. GAVRIN, a relatively unknown politician, served for seven years as mayor of the town of Kogalym, an administrative center in western Siberia, the production homebase of LUKoil. Gennady

KRASOVSKY, an analyst at NIKoil investment and banking group, which holds a stake of over 10 percent in LUKoil, said he did not expect any special favors for LUKoil. "PUTIN forms the government as an integrated team, so people working in the team can't give any preferences to anybody. If they do, they go," he said. It is believed that GAVRIN may reverse some of his predecessor's policies, including oil export quotas and the creation of a state oil company on the basis of the government's stakes in Rosneft, Slavneft, and Onako. PUTIN must still specify the responsibilities of the new Energy Ministry in a decree. Analysts believe that the Ministry will be less powerful than the former Ministry of Fuel and Energy, with some of its responsibilities being transferred to the Natural Resources Ministry.

Economy

Ruble = 28.31/$1.00 (NY rate)

Ruble = 28.28/$1.00 (CB rate)

Ruble = 25.63/1 euro (CB rate)

Bank Sector To Be "Rebuilt From Scratch"

· Acting president of the European Bank for Reconstruction and Development (EBRD), Charles FRANK on Friday said that Russia's banking system needs to be "rebuilt from scratch." He said the banking sector must be rebuilt from the ground up, with greater openness to foreign investment and more competition in the retail savings sector. One of the main problems is that the condition of the bank's

Today's News Highlights

Russia

Tymen Obtains Tura Assets

KKR Reduces KamAz Stake

European Republics

EBRD On Eastern Europe

Meri Reject CB Candidate

South Caucasus & Central Asia

Rus-Turkmen Disagree on Price

Azeri May Increase Exports

Socar Seeks Pipeline Investors

Kocharyan Approves Cabinet

Politics-Economics-Business

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Monday

May 22, 2000

Intercon's Daily

capital isn't at all clear currently, due to the use of, "archaic accounting rules," FRANK said. He noted that some banks undergoing restructuring, "are a lost cause." He urged Russia to break up the monopoly of state banks, stressing the need to restructure Sberbank. FRANK said, "Sberbank is a sacred cow and clearly has unfair advantage in the market." Sberbank holds nearly 80 percent of Russia's total deposits. Deputy Finance Minister Sergei KOLOTUKHIN disagrees with FRANK, stating, "The transparency of Sberbank should increase, but I don't think it should be broken up. It proved to be the only shelter for depositors during the [1998 financial] crisis." Following the financial crisis of 1998, which crippled Russia's banking system, many Russian banks transferred assets to new entities, leaving the old banks as shells bearing all of the liabilities. The acting president also added that foreign banks should be given access to Russian markets.

Ron FREEMAN, co-chief executive of Schroders Salomon Smith Barney has called on Russia to restructure the banking sector, which he believes will involve making difficult decision. He told Reuters, "The success of banking reforms is driven by the professional quality of the Central Bank and the willingness of the governor to proceed according to the highest standards, and independent of political diktats." He pointed out that the Central Banks of Hungary, Poland and Kazakhstan are good examples of how reform should be undertaken. FREEMAN said, "The question is do [President] Vladimir PUTIN and [Prime Minister] Mikhail KASYANOV support [Central Bank Governor] Viktor GERASHCHENKO acting by the highest standards of bank oversight and control." He believes that if banks are insolvent and continue to make loans or misuse funds, it should be closed down. "Bad banks must not be allowed to do bad things with other people's money." Russian citizens have grown suspicious of banks, after seeing their savings disintegrate following the ruble devaluation in 1998.

Business

Tyumen Obtains Tura Petroleum Assets

· Tyumen Oil, Russia's fifth-largest oil producer, will secure Tura Petroleum oil producing assets, a joint venture between Tyumen Oil subsidiary TNK-Tyumenneftegaz and Cyprus-registered Great

Plains Petroleum Ltd, a subsidiary of Calgary-based Black Sea Energy Ltd. Tura Petroleum assets were offered for sale at an auction Tuesday for a starting price of 256.6 million rubles ($9.1 million) to pay off TNK-Tyumenneftegaz's claims to the joint venture. Because no bids were made, the assets will be transferred to Tyumen Oil subsidiary. Tura Petroleum's production declined to 220,900 tons of crude last year from 499,500 tons in 1998.

KKR Reduces KamAz Stake

· US investment company Kohlberg Kravis Roberts & Co (KKR) has reduced its share in Russian truck maker KamAZ following a debt restructuring by KamAZ. "De facto, our share in KamAZ has been reduced to five percent from 26 percent, which we had before the debt restructuring," KKR Executive Director Dmitry PLATONOV explained. KKR acquired a 26 percent stake in KamAZ through a 1994 co-operation agreement and planned to change management and improve standards at the truck maker. But the plan fell through as heavily indebted KamAZ, which had to shut down its main assembly line for months in 1997 due to lack of cash, started restructuring its $1.1 billion debt. "We did not suffer direct losses, but it is a lost opportunity. The company could have been turned into a world-class one," PLATONOV said. Last December, KamAZ offered creditors convertible bonds worth about $834 million in a debt-for-equity swap. The conversion increased the number of company shares to about 600 million from about 125 million and cut KKR's stake of 30 million shares to five percent, PLATONOV said. Under an April memorandum of understanding, signed by the EBRD and Russia's Finance Ministry, which controls KamAZ, the bank would swap about $70 million of its overdue $141 million loan into equity and restructure the balance with a guarantee from the government.

European Republics

EBRD Makes Forecasts For Eastern Europe

· The European Bank for Reconstruction and Development (EBRD) forecasted that growth in Central and Eastern Europe, the Baltic States and the Confederation of Independent States (CIS) will accelerate to 3.6 percent this year, a rise from a forecast of 3.2 percent growth it made in November 1999 for 2000. Acting Chief Economist Ricardo

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May 22, 2000

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LAGO said in an EBRD report, "The short-term outlook for growth in the region is relatively favorable. Growth for the region as a whole is likely to continue and it is possible that most, if not all, of the [EBRD's] 26 countries of operation will have positive growth." The EBRD warned that the CIS must create institutions to sustain economic recovery. EBRD noted that capital flows to the region had fallen in 1999, as a result of the Russian financial crisis and decline in investment. Capital flows to the relatively advanced economies of Central and Eastern Europe emerged relatively unscathed, rising from $22.7 billion in 1997 to $24 billion in 1998 before dipping to $21 billion in 1999. The EBRD said that risks remain for policy makers, noting that external indebtedness for 19 of its 25 countries of operation had risen, with Georgia, Lithuania, Moldova and Kyrgyzstan, showing rises in excess of 35 percent. The report pointed out that, "Even in the advanced economies of CEE [Central and Eastern Europe], the authorities must carefully balance monetary and fiscal policies in order to manage the substantial capital flows that are occurring and are likely to continue."

Meri Rejects Choice For CB Chairman

· Estonian President Lennart MERI on Friday rejected Mart OPMANN as a candidate for the chairmanship of the Central Bank of Estonia. The President explained that OPMANN's political connection could compromise the Central Bank's independence. OPMANN was Finance Minister from 1995 to 1999, and a member of the opposition Coalition Party. He had said he would cut ties to the party if confirmed as Central Bank chief. MERI's decision means the Central Bank's Council is facing a third search for a new head in two months since their first choice, Vello VENSEL, stepped down just days before he was to assume the post on April 28th. The Council chose OPMANN in a secret vote on Thursday over parliament member Kalev KUKK. MERI today will meet with the Council and consult on another candidate. Deputy-Chairman Peter LOHMUS has been serving in a caretaker capacity for the Central Bank in the interim.

Mazeikiu Nafta- LUKoil Reach Supply Deal

· Lithuania's Mazeikiu Nafta and Russia's largest oil company, LUKoil, on Thursday reached an agreement to supply the refinery with 6 million tons of

crude oil a year. No financial terms were disclosed and no duration for the agreement was given. The agreement due to be announced and signed today ends a long running battle between Russian oil companies for control of the Soviet-era refinery. Mazeikiu Nafta had also been in negotiations for several months with Russia's Yukos. General director of Mazeikiu Nafta Stephen HUNKUS said, "The deal gives us a guaranteed supply of oil at a price based on import parity with North Sea Brent crude plus $.60 a barrel. But it also gives significant advantages to LUKoil, which will supply one-third of the 6 million tons from its own oil fields. It gets a guaranteed supply of high-quality refined products, access to the Butinge export pipeline and downstream access to markets in the Baltic states and Poland, which will some be EU members." The refinery has a capacity of 16 million tons, while Butinge only has half that capacity. Mazeikiu Nafta is one-third owned and operated by US Williams, which is investing $350 million to bring the refinery in line with EU specifications. HUNKUS added, "We are committed to LUKoil's long-term success in the Baltic region and I believe they are equally committed to our success." The Lithuanian concern, including its crude oil terminal and pipeline system, was forced into an almost $40 million loss last year by frequent interruptions to the flow of crude from Russia. It was forced to shut down for 56 days.

South Caucasus & Central Asia

Russian-Turkmen Fail To Agree On Gas Price

· Russian President Vladimir PUTIN met on Friday with Turkmen President Saparmurat NIYAZOV in Ashgabat to discuss regional, bilateral issues, and the status of the Caspian Sea. The two sides declared that there are no insoluble problems between their nations. PUTIN stressed, "My visit to Ashgabat will undoubtedly promote the development of large-scale cooperation between Russia and Turkmenistan, and the whole region of the Commonwealth expects a great benefit from this cooperation." Russia and Turkmenistan signed a joint declaration on cooperation in the fields of culture, science and public education. NIYAZOV said that the visit marked a step forward in their relations. PUTIN and NIYAZOV also discussed security, the threat of terrorism, and religious extremism. The Turkmen President said, "Turkmenistan

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is not threatened by extremism from Afghanistan in any form."

In meetings held with Gazprom chief Rem VYAKHIREV, Turkmenistan and Russia reached a deal gas supplies, falling short of earlier expectations. Russia bought 20 billion cubic meters of gas from Turkmenistan this year, but had been hoping to increase supplies to 50 billion cubic meters for a period of 30 years. Instead the two sides agreed starting in 2001 to increase the gas purchases by 10 billion cubic meters every year, until it reaches 50 to 60 billion cubic meters in the next five years. VYAKHIREV said Gazprom's pipeline network could not handle more than 30 billion cubic meters per year of gas from Turkmenistan, but that did not stop him from saying he would try to accept more. "If he [NIYAZOV] offers me 50 billion cubic meters, I'll take 50. If he says tomorrow, I'll take it tomorrow. If he says today, I'll take it today," he said.

PUTIN and NIYAZOV did not resolve the issue of price. Turkmenistan wants to increase its price from $36 per 1,000 cubic meters of gas to $42, with payments being split 50-50 between goods and cash, the Financial Times reported. The Russian side has proposed between $32 and $33 per 1,000 cubic meters. If the deal goes ahead, it could jeopardize plans to build a pipeline under the Caspian Sea and across Azerbaijan and Georgia to Turkey, because Turkmenistan would not have enough gas transit through the system while also supplying Russia with huge volumes.

Azeri May Increase Oil Exports Via Russia

· The State Oil Company of Azerbaijan (Socar) is considering increasing oil exports through Russia via the Baku-Novorossiisk oil pipeline. Socar president Natik ALIYEV has been participating in an international conference on problems of the Caspian Sea, which is under way in Washington. According to his information, the main commitment of Azerbaijan to Russia, to bring oil exports by the Baku-Novorossiisk oil pipeline to five million tons a

year by 2002, will be fulfilled. By that time the Azerbaijan International Operation Company (AMOK), which produces oil on the Chigar-1 platform, will have additional reserves. Oil output at the Chigar-1 platform is expected to reach 7.5 million tons annually within two years. In addition to that, AMOK plans to begin the development of the Azeri oil field and to produce there 15 million tons a year.

Socar Seeks Pipeline Investors

· The State Oil Company of Azerbaijan (Socar) is beginning to make presentations to oil companies seeking investment for the Main Export Pipeline from Baku to Ceyhan. The company will also hold talks on creating the Main Export Pipeline Company to operate the proposed pipeline. The parliaments of Azerbaijan, Georgia, and Turkey are scheduled to ratify a package of agreements for the project. The US government has backed construction of the 1,994- kilometer pipeline because it wants oil from the Caspian Sea region to move through Turkey¾its only NATO ally in the region¾rather than through Russia or Iran.

Kocharyan Confirms New Cabinet

· Armenian President Robert KOCHARYAN confirmed the new Cabinet of Prime Minister Andranik MARGARYAN on Saturday. Presidential spokesman Vage GABRIELYAN said, "The president of Armenia believes the new Cabinet is capable of constructive and will soon bring positive changes and improve the socio-economic situation in the country." ANDRANIK was appointed prime minister on May 12th after KOCHARYAN sacked Prime Minister Aram SARKISYAN.

SARKISYAN succeeded his brother, the widely popular Vazgen SARKISYAN, who was gunned down in parliament along with five other senior officials last October. The number of ministries has been increased from 17 to 20, and the new Cabinet appears to be more broadly representative of Armenia's various political factions than the previous one.

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


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