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, May 5, 2000

Russian Federation

Politics

Putin's Inauguration To Be Low-Key

· Vladimir PUTIN, who has been acting President since December 31, 1999 and President-elect since March 26^th, will take the last step to becoming the official president of Russia on Sunday, when he takes the presidential oath in St. George's Hall of the Kremlin. PUTIN's inauguration, as the second Russian President, will have less pomp and ceremony than his predecessor Boris YELTSIN's inauguration, consisting merely of a ceremony, parade, and review of Kremlin guards. The reason for the low-key event is to make sure that the inauguration does not overshadow the 55^th anniversary of the end of World War II. Those attending the ceremony will be limited to only those necessary. This includes the Russian State Duma and Federation Council deputies, Constitutional Court judges, government officials, presidential administration staff, and some selected guests. Diplomats, ambassadors and international heads of states have not received invitations to attend the ceremony. Four years ago 5,000 dignitaries watched YELTSIN get sworn in for a second term. The centerpiece of the inauguration, due to be broadcast live, will be a 26-word presidential oath which PUTIN will read with his hand on a copy of the constitution. Orthodox Church leader, Patriarch Alexiy II, will bless the new president, to foster ties between church and state in modern Russia. YELTSIN will hand over to PUTIN a special presidential medal in a transfer meant to symbolize political continuity.

Details Of the Leaked Kremlin Documents

· Kommersant Daily has released more information on the leaked Kremlin documents, which call for stronger presidential control and using the Federal Security Service (FSB) and other security

services as a Kremlin administration weapon against political opponents, journalists and other activists. The newspaper, owned by business tycoon Boris BEREZOVSKY, has published two of three articles detailing the contents of the documents titled "Structure of the Administration of the President of the Russian Federation." It was marked "Revision Number 6" and "Only for reading/Not to be copied." There is no indication that the documents are not genuine. The leaked document "defines as a strategic necessity the inclusion of the FSB and other intelligence agencies in the activity of the political directorate of the president." In other words, whereas in the past the KGB served as the sword and shield of the Communist Party, now the FSB will become the sword and shield of presidential administration. The document stated that expanding the presidential authority over the central government and regions is "a strategic necessity." The documents calls for creating a political directorate charged with gaining, "real control over political processes in Russia," The New York Times reported. The document envisions the political directorate controlling political parties and candidates, gathering compromising information on opponents, and manipulating the press. Kommersant Daily describes three examples of this. The first explains a pre-emptive strike the Kremlin would take, if it learned that a political opponent was about to reveal damaging information on Kremlin officials. "The directorate holds an analogous press conference a day or a few hours earlier disclosing materials on the

Today's News Highlights

Russia

Customs Exceeds Target

Blue Stream Building Begins

European Republics

Ukraine Misled IMF On Reserves

Lith. GDP Predicted -2 Percent

Latvia Hold Confidence Vote

South Caucasus & Central Asia

Georgia Appoints State Minister

Armenia Boosts Relations

Kazakh Gets Positive Rating

Politics-Economics-Business

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Friday

May 5, 2000

Intercon's Daily

property of the opposition leader in a negative light." Secondly, the Kremlin administration would aim to neutralize an impending critical newspaper article by issuing its own statement to cloud the first. This is aimed at confusing the reader and making the oppositions article irrelevant. The third example suggests that the FSB as part of this political directorate would collect special information on, "potential candidates for president, now and in the future." The Presidential press service has refused to comment on the newspaper's reports. Comment: This is the kind of document that critical analysts expect from the people working for PUTIN, mostly FSB colleagues. It should not come as a surprise that the authors of this document do not support democratic reforms or the process of governing, instead control, manipulation of events, and intimidation of opponents. It should be noted that this is the type of plan that PUTIN would be open to.

Economy

Ruble = 28.36/$1.00 (NY rate)

Ruble = 28.38/$1.00 (CB rate)

Ruble = 25.47/1 euro (CB rate)

Oct Nov Dec Jan Feb Mar Apr May

Custom Collections Exceed Target

· Russia's Customs Committee on Thursday said reported that it had collected 29.39 billion rubles ($1 billion) in federal budget revenue in April, exceeding its target of 26.15 billion rubles. The Committee had surpassed its first quarter plan by 11 percent, having collected 74.15 billion rubles.

Russia's Tax Minister Alexander POCHINOK on Wednesday said his ministry had collected more than 50 billion rubles in April, surpassing its target of 42 billion rubles. Customs Committee and Tax Ministry are the main contributors to the budget.

In addition, the Central Bank said Russia's money supply expanded by 2.2 billion rubles ($77.6 million) in the week ending May 3^rd. The money supply, which includes cash currency in circulation plus required reserves, rose to 341.7 billion rubles from 339.5 billion rubles on April 24^th. Russian foreign currency and gold reserves rose $100 million to $17.1 billion in the week to April 28^th, the highest level since the government's Treasury debt default in August 1998.

Business

Blue Stream Construction Begins In Turkey

· Construction on the Turkish section of the Blue Stream pipeline, to carry Russian gas under the Black Sea to Turkey, began on Thursday. Turkey is scheduled to receive natural gas through the 1,200 kilometer Blue Stream pipeline, built by Italy's oil and gas company Eni and Russia's Gazprom by mid-2001. Turkish authorities launched the construction of the first 200-kilometer leg of the pipeline between the Black Sea port city of Samsun and the central city of Corum. Gazprom is already building the above ground section of the pipeline in Russia. The pipeline is expected to transport 16 billion cubic meters of natural gas annually.

Gazprom To Secure Lenenergo Board Seat

· Russia's natural gas monopoly, Gazprom, plans to secure one of the 10 board seats at Lenenergo, a power utility and part of Unified Energy System (UES). Valentin KAZACHENKO, general director of Peterburgregiongaz, Gazprom's gas retail subsidiary, has been nominated as a candidate to the board by St. Petersburg-based S-P Securities, which holds 10 percent of Lenenergo. The utility shareholders will elect a new board at their shareholders meeting on May 25^th.

Unexim Bank Bondholders Approve Plan

· A majority of Unexim Bank bondholders approved a restructuring plan on Thursday, with 89.4 percent of FRN (Floating Rate Notes) holders and 85.95 percent of Eurobond holders voting for the pro

When you need to know it as it happens

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gram. Advisor to the proposal Felming UCB said in a statement, "The resolutions adopted today have legally binding force and, as regards the category of claims represented by the FRNs and Eurobonds, will allow restructuring of Unexim to proceed to closing by the target date of June 30, 2000." The next step will be approval of the plan by all other Unexim's creditors, to be given by May 15^th. Under the restructuring plan, creditors will get an up-front cash payment of $105 million and $130 million worth of 12-year Eurobonds guaranteed by Rosbank, which was set up by Unexim shortly after its problems started to secure its assets. The remaining debt payments will be made with expected revenue from a so-called special purpose vehicle¾ a trust to be set up to manage Unexim's assets. The trust would issue about $1.15 billion in "link notes," Reuters reported.

FISCHER added that it will be difficult to resume the $2.23 billion loan program with the Fund, which was suspended in September, 1999. Ukraine, with reserves totaling just $993 million in late April, desperately needs new IMF support to repay $900 million in previous credits due this year. YUSHCHENKO wants $800 million from the IMF and $400 million from the World Bank this year and said he would also seek guarantees of continued Western support for the closure of Ukraine's troubled Chernobyl nuclear plant in 2000.

Lithuania Predicts 2 Percent GDP

· Lithuanian Prime Minister Andrius KUBILIUS on Thursday said the nation's economy should grow by at least 2.0 percent this year and by 3.5 percent next year, after estimated first quarter growth proved quite strong. "This year, we can see clear growth tendencies. In the first few months, we have seen a one-third increase in exports and a one-fifth rise in output," KUBILIUS said in a speech to a German trade group in Berlin. Preliminary data shows that first quarter gross domestic product (GDP) rose 4.2 percent. KUBILIUS also called on German investors to be more active in business in Lithuania, particularly in the upcoming privatization of several large infrastructure companies, including the power and gas utilities as well as the sale of the county's second and third largest banks.

Latvia To Hold Confidence Vote

· Latvia's parliament is to hold a confidence vote on the newly formed government of Prime Minister-designate Andris BERZINS today. On Thursday, BERZINS' Latvia's Way Party, the nationalist Fatherland and Freedom Party, the Peoples' Party and the New Party signed an agreement to form a majority centrist administration. The four-party coalition holds 69 of the 100 seats in parliament and is expected to win the vote easily. The parliament's approval will establish the Baltic state's ninth government in less than 10 years.

South Caucasus & Central Asia

Shevardnadze Appoints New State Minister

· Georgian President Eduard SHEVARDNADZE today announced that he will present Giorgi ARSENISHVILI to the parliament as his candidate for the post of State Minister to replace out-going

European Republics

Ukraine Overstated Reserves To IMF

· An audit of the Ukrainian Central Bank, conducted by PriceWaterhouseCoopers on behalf of the International Monetary Fund (IMF), revealed that a series of risk transaction led the bank to overstate its foreign exchange reserves by more than $700 million at the end of 1997. The IMF lent Ukraine $200 million in three loan installments that it otherwise wouldn't have, if it had known the true extent of Ukraine's reserves. The IMF has already set a precedent for punishing misleading the IMF. The Fund has required Pakistan to repay $55 million to the IMF that was lent on the basis of deliberately understated figures. Ukraine will almost certainly meet a similar fate of paying back all or some of the money it borrowed from the Fund during period when these transactions were outstanding.

IMF Deputy managing director Stanley FISCHER on Thursday said he would "make it absolutely clear how unacceptable this is," to visiting Ukrainian Prime Minister Viktor YUSHCHENKO. The Premier, who served as Central Bank chairman from 1993 to 1999, during the controversial transactions and reporting, will visit Washington next week to confer with the IMF and World Bank. YUSHCHENKO said before the report was released that any negative findings might be due to "faulty statistical methods" used by the Central Bank in recent years.

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Vazha LORDKIPANIDZE. SHEVARDNADZE rejected two candidatures _ businessmen Levan GACHECHILADZE and David GAMKRELIDZE, proposed by Niko LEKIVASHILI, one of the leaders of Citizens Union Party and former State Minister. ARSENISHVILI, who serves as the governor of Kakhetia, has been at that post for only one year. Prior to being governor he was a lecturer at a university in mathematics. He is known to be intelligent, a pacifist, one who seeks political consensus and compromise, not connected to business interests, and uncorrupt. Some political analysts predict that ARSENISHVILI will serve as an interim State Minister until a constitutional change occurs to create a Council of Ministers with the new position of prime minister. Others indicate that if he is successful in this period that the opportunity for him to remain in the government remains strong. He is a man who does not have higher ambitions to become president. He is viewed as an effective governor who can bring the needed changes to the present governmental structures. ARSENISHVILI speaks English and some German. He has recently established relations between Kakhetia and a corresponding region in Austria. Others point out that while he is a scientist by training, his knowledge of economic and management of large organizations is particularly thin. The bottom line is that ARSENISHVILI is a trust worthy and honest man _ a good start for the Cabinet formation. The question remains can he manage the tough decisions that will be required to improve revenue and collection and tackle the systemic problem of corruption.

Armenia Boosts Relations With Russia, Iraq

· Armenian Foreign Minister Vartan OSKANYAN said that Armenia and Russia are focused on developing a strategic partnership. He said, "Armenia is interested in the involvement of democratic Russia, which will gave a positive impetus on the world and regional policy." The Foreign Minister noted that Armenia is building with the world, trying to harmonize different interests in the South Caucasus, and avoiding the polarization of the

region. Armenia put forth an initiative to create a stability pact in the region, OSKANYAN said.

The Foreign Minister also said that the nation is focusing on the economic potential, particularly in the energy sector, of relations with Iraq. OSKANYAN and Iraqi First Deputy Foreign Minister Nuri ISMAIL in Yerevan on Thursday held talks regarding their bilateral relations and possible joint projects. During the talks, the Iraqi diplomat invited Armenia to participate in an economic exhibition. OSKANYAN and ISMAIL agreed to establish diplomatic relations between the two countries in February. The two men considered a possibility of opening the Armenian embassy in Baghdad and the Iraqi embassy in Yerevan. ISMAIL also met with parliament speaker Armen KHACHATRYAN, Industry and Trade Minister Karen CHSHMARITYAN and Energy Minister David ZADOYAN.

Moody's Gives Kazakhstan Positive Rating

· Moody's Investors Service announced that it has changed the outlook for Kazakhstan's B1 foreign-currency ceiling for bonds and B2 ceiling for bank deposits from stable to positive. According to a press statement, the decision for the rating increase came in part from an improvement in Kazakhstan's external liquidity during 1999 and the expectation that the balance of payments would continue to strengthen in 2000 and 2001. The rating agency noted that the authorities achieved this turnaround through appropriate policy measures taken in 1999, although a recovery in commodity prices also boosted the external accounts. The recovery in exports and dampening of imports following a large devaluation was instrumental in the improvement of the economic situation. Higher oil production and exports in the next several years combined with lower debt repayments and continued access to private capital markets will also enhance medium term liquidity. Further privatization combined with more foreign investment are expected to contribute to the improving balance of payments situation, Moody's added.

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

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