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Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Friday, May 26, 2000

Russian Federation


US-Russia Summit Headed For Big Let Down

· The US-Russian summit scheduled for June 4th and 5th, which had been surrounded with optimism and hope, is now shrouded with doubt and lower expectations. The CLINTON administration has said that it expects little progress. One State Department official said the summit would not be an "arms-control-only" summit. "In fact, we think it would be quite a mistake to proceed as though everything could be resolved in one fell swoop in the course of several days in early June." Arms control issues traditionally are the focus of US-Russian summits. The US will raise the prospect of an agreement for the destruction of 34 tons of military grade plutonium on each side. "That's enough plutonium literally to make tens of thousands of nuclear weapons," National Security Adviser Sandy BERGER said. He added that a resolution on amending the 1972 Antiballistic Missile Treaty between the US and the Soviet Union and Strategic Arms Reduction Treaties is not likely during this visit. BERGER expects that the two sides will come away from the summit with, "some greater degree of understanding of each other's position." He added that US President Bill CLINTON wants to clarify where Russia will move under Russian President Vladimir PUTIN, how is it going to achieve the goals and whether the strengthening of the role of the state will not infringe on democratic freedoms. Talks are likely to focus on actions in Kosovo, the war in Chechnya, and economic reform plans. BERGER said CLINTON and PUTIN may meet four times this year. Besides the Moscow summit, they are planned to meet at the G-8 summit in Okinawa, at the "millennium summit" in New York and at the APEC meeting in Brunei. CLINTON will be the first US President to address the Russian State Duma.

Last week, a new riff developed between the US and Russia, when the Russian Foreign Ministry summoned a US diplomat, handing his a formal protest on the US decision to grant Chechen foreign minister Ilyas AKHAMADOV a visa. One government official said that Moscow is deeply upset with Washington's decision to continue receiving AKHAMADOV, who was granted a multiple-entry visa to the US. The officials added that Russia feels, "This is an unfriendly move by the United States. It doesn't conform with the US' stated intention to strengthen cooperation with Russia in measures concerning terrorism and extremism."

PUTIN will have a chance to gain summit experience, when he meets with European Union representatives, including EU Foreign and Security policy chief Javier SOLANA, European Commission President Romano PRODI, and Portugal's Prime Minister Antonio GUTERRES and Foreign Minister Jaime GAMA on Monday.

Moscow Deny Reports Of Fighting In Grozny

· Chechen rebels reported on their website that there had been fierce fighting in Chechen capital Grozny and clashes in the mountain village of Zhani-Vedeno. The rebels said they killed up to five soldiers in Grozny, which Moscow said had been taken months ago. Colonel General Valery MANILOV said, "Any statements about the movement into villages in Chechnya, in Grozny, Argun is complete disinformation...lies. Come and see, find what they

Today's News Highlights


VEB Makes $42M Bond

Tax Police Raid Credit Lyonnais

Norslik Buys NLMK Stake

European Republics

WB-Ukraine Discuss New Loan

Crimean Government Sacked

South Caucasus & Central Asia

Azeri Passes MEP Package

Uzbek Seeks Russian Support

Turkey ToBuy Kyrgyz Exchange




May 26, 2000

Intercon's Daily

have taken or are doing there...any statement from so-called field commanders, starting from any kind of platoon commander and ending with [Chechen President Aslan] MASKHADOV have no connection with reality." Of about 3,000 fighters left in Chechnya, MANILOV said the majority were foreign-backed mercenaries. Russia has obtained information that Chechen rebels and the Taleban movement have reached an agreement for the supply of manpower, weapons, and ammunition. Foreign Minister Igor IVANOV and Defense Minister Igor SERGEYEV have repeated threats that Russia will launch air strikes on Taleban camps in Afghanistan. IVANOV said, "Terror acts and other actions which could damage the interest of Russia and its partners in Central Asia are being prepared on the territory of Afghanistan…We shall act according to how the situation develops." MANILOV stressed that this time Russian troops were there to stay. "We will never leave there, never, never…Chechnya is a part of Russian territory and will remain a part of Russian territory." Official Russian losses have reached 2,304 killed and 6,728 wounded since fighting in the North Caucasus region of Russia began in August.

New G-7 Envoy And Caspian Advisor Appointed

· Russian President Vladimir PUTIN appointed his adviser Andrei ILLARIONOV as the new envoy to the Group of Seven most industrialized countries, replacing former envoy Alexander LIVSHITS. ILLARIONOV graduated from St. Petersburg State University and briefly worked as economic adviser to former Russian Prime Minister Viktor CHERNOMYRDIN. Before his nomination as a Kremlin adviser, ILLARIONOV was director of the Moscow Institute for Economic Development having joined the think tank set up by PUTIN during his presidential campaign.

PUTIN has also appointed former Fuel and Energy Minister Viktor KALYUZHNY to serve as Russia's special envoy in the oil-rich Caspian Sea region. Deputy Prime Minister Viktor KHRISTENKO stressed that this region is of great geopolitical importance for Russia.


Russian Foreign Exchange, Gold Reserves

· Russian foreign currency and gold reserves

totaled $18.3 billion on May 19th, the highest since July 1998, as the Central Bank bought dollars. The reserves rose $600 million in the week ending on May 19th, after climbing $100 million in the previous week. The reserves last topped $18 billion in July 1998, before Russia defaulted on $40 billion of Treasury debt and gave up defending the ruble. Russia's money supply expanded by 6.5 billion rubles ($230 million) in the week ending May 22nd, the Central Bank said. The money supply, which includes cash currency in circulation plus required reserves, grew to 362.1 billion rubles from 355.6 billion rubles on May 15th.

VEB Makes $42Million Bond Payment

· Russia's foreign debt agent, Vneshekonombank (VEB) has transferred $46.25 million to pay interest on the government's 2001 Eurobond due on May 27th. Russia's next Eurobond payment, which the government has promised to service in full regardless of any circumstances, falls due on June 10th. The government is to pay $73 million in interest on its 2003 Eurobond.

Ruble = 28.03/$1.00 (NY rate)

Ruble = 28.28/$1.00 (CB rate)

Ruble = 26.35/1 euro (CB rate)

Oct Nov Dec Jan Feb Mar Apr May

Tax Police Raid Credit Lyonnais Rusbank

· Russia's federal tax police raided the Moscow office of Credit Lyonnais Rusbank, an affiliate of

When you need to know it as it happens




May 26, 2000

Intercon's Daily

Credit Lyonnais Paris. The police confiscated documents relating to one of the bank's corporate clients; a large Russian company. Bank officials have declined to name the company. It said, "The bank considers this action to be illegal, because the tax police acted without legal authority…Because it is the policy of the bank to strictly comply with all regulations in Russia, the bank is considering taking appropriate legal action to protect its clients and its own interests." Russian tax police, however, claim that the raid was necessary because Credit Lyonnais Rusbank failed to turnover the information when requested. Russia's tax police have been given much broader powers, including bugging and searching the offices of suspected tax avoiders. Credit Lyonnais was the first Western Bank to operate in Russia, but raids such as these may discourage the Western Investment. Russian tax police have recently carried out several high profile raids on companies. On Tuesday, local news agencies reported raids on the offices of Russia's leading carmaker, AvtoVAZ, in which documents were seized.


Chernogorneft Makes EBRD Loan Payment

· Chernogorneft, a former subsidiary of Russia's Sidanco oil company, paid off a $50 million loan to the European Bank for Reconstruction and Development (EBRD) made in 1997. Part of this loan was overdue. Chernogorneft went into bankruptcy in November 1998, and its assets later were acquired for $176 million by Tyumen Oil Co., much to the objection of Sidanco. In December 1999, Tyumen Oil shareholders agreed to return Chernogorneft to Sidanco in a swap for a 25 percent stake in the parent holding. Of the total EBRD loan, Chernogorneft owed $35 million to the bank when the bankruptcy started. Chernogorneft's external manager also paid $9 million to an escrow account as a part of the EBRD loan return cutting the debt to $26 million mid-last year. Chernogorneft produces roughly 125,000 barrels of oil per day, what accounts about 2 percent of Russia's total crude output.

AvtoVAZ Increases Car Sales In Ukraine

· The AvtoVAZ stock company of Russia is increasing car sales in the Ukrainian market. An

estimated 8,500 AvtoVAZ cars were sold in Ukraine during the first quarter of the current year, the Auto-Consulting information and analytical group reports. In the opinion of experts, VAZ cars may account in the near future for 70 percent of the total amount of new cars sold in Ukraine. Ukrainian Prime Minister Viktor YUSHCHENKO received a delegation of the Volzhsky Automobile Works early in April. They discussed the program of a joint production of cars. It is planned to assemble some 30,000 cars, using Russian parts and units, at the AutoZAZ and Lutsk automobile works. The production of parts and units for Russian cars will be started in Ukraine soon. A working group has been set up to review AvtoVAZ's proposals. Some 330,000 cars are sold in Ukraine every year, and about 80, 000 of them are new ones.

LUKoil Has Friends In High Places

· LUKoil Holding, Russia's top oil producer, has increased its allies in government after the naming of new appointees. Alexander GAVRIN, the former mayor of Kogalym¾where LUKoil's production is based in Siberia ¾was appointed new Energy Minister. Former Fuel and Energy Minister Viktor KALYUZHNY, who has lobbied on behalf of LUKoil in the past, was moved to the post of Russia's special representative in the Caspian region, where the oil company has projects. In addition, Azat SHAMSUAROV, the former director of Urayneftegaz, a LUKoil production unit in western Siberia, on Thursday was elected to a post at the state-owned Onaco oil producer. Last year, Semyon VAINSHTOK, the former general director of LUKoil-Western Siberia, was named president of Transneft, Russia's state-controlled oil transportation monopoly.

Norilsk Buys Nine Percent In NLMK

· Russian metals giant Norilsk Nickel Thursday announced that its subsidiary, Norilsk Mining Company, has bought a nine percent stake in Novolipetsk Metallurgical Combine (NLMK). This is the company's first step in diversifying its output. According to a company statement, "The acquisition of NLMK's shares widens [Norilsk Nickel's] possibilities to influence the ferrous metals market and in this way makes the company more stable, independent from trends just on non-ferrous and precious metals markets." NLMK produces steel for

When you need to know it as it happens



Friday Intercon's Daily May 26, 2000

gas pipes used by Norilsk. Norilsk and NLMK plan to jointly provide car, tractor and combine makers with ferrous and non-ferrous metals and stainless steel.

Severstal To Boost Steel Output

· Severstal, Russia's largest steel maker, plans to boost output of rolled steel by 5 percent this year to benefit from increased demand and rising steel prices worldwide. Severstal aims to produce 8.2 million metric tons of rolled steel in 2000, a rise from 7.8 million tons in 1999. The company's crude steel output will rise from 9 million tons last year to 9.3 million tons. The company's chief financial officer Mikhail NOSKOV said at a conference on investment in Russia, "We hope that demand for steel will last through the year…At the moment, our exports are evenly spread around the world to react quickly to changes of demand." North America accounts for 14 percent of the company's exports, while 22 percent of it goes to Europe, 22 percent to Southeast Asia and 15 percent to Latin America. Severstal was forced to shift its supplies from North America after facing accusations of dumping steel products.

International Monetary Fund (IMF) negotiations, the World Bank and Ukraine will hold loan talks next week on a financial assistance program. The World Bank mission, lead by Ukraine and Belarus director Luca BARBONE, will review Ukraine's economic development from May 29th to June 10th. World Bank Vice President Johannes LINN will join the talks on June 8th. World Bank officials have said the new country assistance strategy, which will replace the current three-year program approved by the bank in 1996, is likely to put a stronger emphasis on social issues. The World Bank is one of the country's major creditors and has already disbursed $2.022 billion of its total $3.060 billion commitments to Ukraine.

Crimean Parliament Sacks Government

· The parliament of Ukraine's autonomic republic of Crimea Wednesday dismiss the Cabinet, after a vote of no confidence with 68 in favor of the no confidence motion and 20 against, with one abstention. The reason for the vote was the republic's poor economic performance. The parliamentary speaker Leonid GRACH, a Communist, and Prime Minister Serhiy KUNITSYN disagreed on the Cabinet's authority. KUNITSYN has tried to push for a pro-reform parliamentary majority. Both GRACH and KUNITSYN have unsuccessfully tried several times to oust the other, forcing Ukrainian President Leonid KUCHMA to step in each time to break up the political scuffling.

KUNITSYN has asked KUCHMA to review the legislature's vote. He believes the body violated voting procedures, and that in trying to remove him deputies were protecting patrons in the energy sector on the peninsula from an anti-corruption drive he had launched. Parliament must now choose a new head of government, who must be approved by KUCHMA. The new head will then submit his choice of new ministers to the legislature to be voted into office. The parliament had made several attempts to dismiss the government in the past year. Ukraine's government said it expects the country's gross domestic product to grow about 2 percent this year from 1999, after the grew 5.5 percent in the first four months from the same period a year ago.

European Republics

Lithuanian FinMin Makes Deal With WB

· Lithuania's Finance Ministry today finalized an agreement with the World Bank over a $100 million structural adjustment loan (SAL) with the first installment of $50 million seen being disbursed in the first half of July. Rima KAZILIUNIENE, spokeswoman for the ministry said, "The first disbursement will be $50 million after the deal is approved by the board meeting of the World Bank in July." She added, "The second tranche would be extended in some six to nine months after the government proves it is proceeding with the reforms enshrined in the agreement." To secure the loan the government has to narrow its budget gap¾which soared to 7.9 percent of gross domestic product (GDP) last year and is seen at 2.8 percent this year¾and bring down the current account deficit, which was 11.2 percent of GDP in 1999.

WB-Ukraine Discuss New Loan

· Following hopeful signals from the Ukraine and




May 26, 2000

Intercon's Daily

participate in hostilities outside Uzbekistan. Russian President Vladimir PUTIN visited Uzbekistan last week and the two leaders discussed beefing up military cooperation in the face of a perceived threat to regional stability posed by religious extremism and terrorism. KARIMOV also expressed his belief that Russia will not carry out its threats of air strikes on Taleban camps in Afghanistan. "Talk of preventive strikes, in my opinion, is a war of words or a test balloon sent up purely from the point of view of information, and basically has no serious basis," he said. KARIMOV also suspects the Taleban of training and harboring radical Moslem rebels operating in Uzbekistan and elsewhere in Central Asia. He blamed such rebels for a series of bomb attacks in the capital Tashkent in February last year which narrowly missed the car in which he was traveling. Uzbekistan joined the GUUAM nations [Georgia, Uzbekistan, Ukraine, Azerbaijan, and Moldova], after it failed to renew its participation in the CIS Collective Security Treaty in April, 1999.

Turkey To Buy Part Of Kyrgyz Bourse

· The Istanbul Stock Exchange is preparing to buy a 27 percent stake in the stock exchange in Kyrgyzstan, Sabah reported, citing ISE Chairman Osman BIRSEN. The Istanbul bourse is also planning similar partnerships in Azerbaijan and Kazakhstan, two other Turkic nations that became independent in the early 1990s after the breakup of the Soviet Union. "We're preparing for a boss role in the region," BIRSEN said. A meeting between Turkey's Capital Markets Board and Nasdaq Stock Market officials is expected to take place July 31st and August 1st in New York to discuss the possible creation of a Nasdaq-type stock market for technology-related companies in Turkey.

South Caucasus & Central Asia

Azerbaijan Approve MEP Legislation

· The Azerbaijan parliament today approved the package of agreements on the Baku-Tbilisi-Ceyhan Main Export Pipeline (MEP). The package of agreements includes the Agreement between Azerbaijan, Georgia and Turkey, the Istanbul Declaration, signed in November 1999 by the presidents of Azerbaijan, Georgia, Turkey, Kazakhstan and the US and the Protocol of amendments to the Agreement Between Azerbaijan, Georgia and Turkey on the Transportation of Crude Oil via the territories of Azerbaijan, Georgia and Turkey, signed on May 9, 2000. The package of agreements will be presented to oil companies May 29th in hopes of finding investors. The invitations to the presentation have been sent to all the companies operating in Azerbaijan, Kazakhstan, Turkmenistan and Georgia. Cost of the project is $2.4 billion.

The Georgian parliamentary committee for foreign relations on Thursday approved the MEP package of agreements. The package of agreements was turned in to the parliamentary committee by the president of Georgian International Oil Corporation Gia CHANTURIA. The full Georgian parliament will debate and vote on the package on May 30th.

Uzbek Turns To Russia For Military Support

· Uzbek President Islam KARIMOV outlined plans on restructuring Uzbekistan's army to the parliament on Thursday. He said that special battalions will be created for each of the five military districts. He also said that only with Russia's support is the nation able to defend itself. A military cooperation between Russia and Uzbekistan will concentrate on air defense and repairs of ageing equipment. The Uzbek President said, "I state openly that we need military assistance, from the point of view of military defense, from the point of air defense." KARIMOV stressed that no Russian troops will be deployed on Uzbek territory, nor will Uzbek troops

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

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