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

Monday, June 12, 2000

Russian Federation

Politics

Putin Appoints Temporary Leader Of Chechnya

· Russian President Vladimir PUTIN today appointed Chechnya's chief Moslem cleric Akhmed KADYROV to lead Chechnya's new temporary administration. KADYROV fought against Russia is the 1994 to 1996 war. Last year, he helped negotiate the entry of federal troops into several Chechen towns. PUTIN has rejected calls for peace talks with elected Chechen President Aslan MASKHADOV, branding him a bandit. Other military commanders claim that MASKHADOV does not have control over rebels who follow warlords such as Shamil BASAYEV and KHATTAB. Colonel-General Gennady TROSHEV, commander of Russian forces in the North Caucasus, praised KADYROV as, "the man Chechnya needs at this moment of transition." He added, "We are doing all we can to bring a swift end [to this war] and to destroy the bandits and their leaders." After federal troops have eradicated Chechnya of terrorists, KADYROV will face the challenge of uniting the Chechen people and rebuilding the region's economy.

Suicide Bomber Kills Two In Grozny

· Two Russian OMON policemen were killed and one was wounded Sunday, when a suicide bomber set off an explosive at a roadblock in Grozny, the second since a similar explosion Wednesday in the village of Alkhan-Yurt. According to the military command reports, the car was stopped at a checkpoint, when the driver refused to let police search his car. The driver then used a remote control device to detonate a bomb in the truck. The driver was also killed by the blast. Chechen spokesman Movladi UDUGOV told Reuters by telephone from an undisclosed location

that four Russian servicemen had been killed and up to 10 people injured in the episode. He also said that 27 people died in the Alkhan-Yurt blast. Earlier on Sunday, a demolition team defused an anti-tank mine with a 70-yard wire connected to a remote detonator that was found in a Grozny marketplace. Meanwhile, Russian forces clashed with Chechen rebels attempting to infiltrate the town of Argun. Russian helicopters and reinforcements were sent to help the police in Argun, which lies a short distance to the east of the Chechen capital. The rebels have kept up ambushes and bombings in the northern lowlands that have inflicted a steady stream of losses on Russian forces and damaged troop morale.

In addition, the Russian Interior Ministry today said that French photographer, Brice FLEUTIAUX, kidnapped October 1^st, while covering the war had been freed as a result "of a special police operation." The ministry gave few details but said FLEUTIAUX was flown to Moscow today. The independent photographer's captors had demanded a $1.5 million ransom. In Paris, French Foreign Minister Hubert VEDRINE confirmed FLEUTIAUX's release and Prime Minister Lionel JOSPIN said he was overjoyed at the news. Both thanked the Russians for their help in bringing about FLEUTIAUX's release.

Kvashnin Appointed To Security Council

· Russian President Vladimir PUTIN signed a decree appointing army General Anatoly KVASHNIN to Russia's Secu

Today's News Highlights

Russia

Economic Min. Raided By Police

Blue Stream Project On Time

European Republics

Lith. Telcom IPO Falls Flat

South Caucasus & Central Asia

EBRD Allocates Georgia $50M

Caucasus Four To Meet In June

Azerbaijan Passes CEC Bill

PSG To Withdraw From TCGP?

OEC Summit Opens In Tehran

Politics-Economics-Business

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Monday

June 12, 2000

Intercon's Daily

rity Council. KVASHNIN, who is known for his ultra-conservative and anti-American views, is only the second member from the Defense Ministry to serve on the Council. Defense Minister Igor SERGEYEV, Security Council Secretary Sergei IVANOV, Prime Minister Mikhail KASYANOV, Foreign Minister Igor IVANOV and Federal Security Service (FSB) Director Nikolai PATRUSHEV, have the status of a permanent member. KVASHNIN is the head of the Russian Armed Forces' General Staff and is also the first deputy defense minister. PUTIN has already made his seven regional envoys members of the council. Changes to the Security Council lead many to speculate that PUTIN plans to boost the body's power, both politically and militarily. During former president Boris YELTSIN's tenure, the Security Council played a comparatively symbolic role and had little influence in determining Russia's security policy. United Press International points out that by adding KVASHNIN, PUTIN underlines the importance of to Russia's military campaign in Chechnya.

Economy

Ruble = 28.391/$1.00 (NY rate)

Ruble = 28.36/$1.00 (CB rate)

Ruble = 27.05/1 euro (CB rate)

Police Raid Economics Ministry

· Kommersant Daily reported on Saturday that police raided the offices of the Economics Ministry seizing documents. The raid has been linked to an investigation that the ministry misused foreign credits for agricultural equipment. The evidence obtained allegedly provides proof that ministry officials provided government guarantees for foreign loans to upgrade equipment at cattle and dairy farms, the Associated Press reported. Police speculated that the equipment then was resold and the proceeds were stolen. The disappearance of the equipment was covered up by false documents indicating the equipment was stuck in customs. Police officials declined to reveal which Western companies the loans came from. A former ministry press spokesman said the documents seized cover topics such as the ministry's departments for investment policy, international cooperation, the defense industry, agriculture and relations with international financial and economic institutions. The ministry was merged with the Trade Ministry in last month's government

reshuffle, to become the Economic Development and Trade Ministry.

Business

Wintershall-Gazprom Plan JV

· German oil and gas company Wintershall announced that it plans to create a 50-50 joint venture with Russian gas monopoly Gazprom to explore the Prirazlomnoye offshore oil field in the Russian north. Wintershall is a subsidiary of German petrochemical giant BASF. Wintershall Chairman Herbert DETHARDING said, "We plan to take 50 percent in this joint venture...We are ready to invest with Gazprom over $1 billion in this project by 2003." He added that future of the project depends on the signing of a production sharing agreement (PSA) with the Russian government. If it is signed, the two companies could finalize the text of the PSA in two months' time and then send it to the Russian parliament for ratification.

Blue Stream Project On Schedule

· Russian gas monopoly Gazprom's board member Yuri KOMAROV said that the Blue Stream pipeline is on schedule to be opened in 2001, following the ratification by Turkey's parliament of a series of documents on a special tax regime for the pipeline. Funding of the project was in jeopardy because of delays by the Turkish parliament in ratification. Italian and Japanese banks refused to unblock loans for the pipeline, whose costs are estimated at over $2.5 billion, until the regime was ratified. "This ratification represents a key element and creates the final conditions for financing the pipeline," said KOMAROV. Gazprom and Italian energy company ENI plan to build a gas pipeline with an annual capacity of 16 billion cubic meters of gas (bcm) from the Russian coast on the Black Sea to Ankara in Turkey. Construction on the underwater section of the pipeline will start in October-November 2000. Gazprom and ENI plan to supply over 360 bcm of gas to Turkey from 2001 to 2025.

Aeroflot Seeks New Airport Funding

· Aeroflot, Russia's national airline, is seeking $300 million in investments over the next three years to build a new Moscow air terminal to replace the existing Sheremetyevo-2. Aeroflot foresees the creation of a management company for the new terminal in which it will have a 40 percent share.

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Sheremetyevo, the company that owns and runs the existing airports, will have about 30 percent, with the remainder set aside for potential foreign investors.

Caucasus Four Prepare For Summit

· Russia, Azerbaijan, Armenia, and Georgia are preparing for the Caucasus Four Summit to be held in Moscow later this month, on the sidelines of the Commonwealth of Independent States' Summit. Russian Foreign Minister said that relations with its other Caucasus four members are a priority for Russia. He believes that the summit is a significant venue for key talks on regional problems. At a meeting on June 9^th, the foreign ministries of the South Caucasus countries agreed to organize such summits annually.

Armenian Gov't Pledges To Fight Poverty, Graft

· On Friday, Armenian Prime Minister Andranik MARGARYAN presented his new government's program to parliament. The new program focuses on boosting the nation's economy, thereby improving conditions for those in poverty, as well as fighting graft. MARGARYAN said, "Economic reforms will shift to the real sector and there will be the implementation of short, medium and long-term programs…Also, the improvement of the state management system, including fighting corruption, will be main directions of the new government's activities." MARGARYAN said there is a gap of 45 billion drams (around $83 million) in this year's budget due to tax shortfalls and a lack of foreign loans. However, he said the government guaranteed to double wages and pensions within the next four years. The government would also secure annual export growth of 25 percent, double Gross Domestic Product growth and ensure low inflation, Reuters reported. Armenia's economy grew 3.3 percent in 1999 following growth of 7.2 percent the year before. The Prime Minister also hinted that the government plans to make significant changes to the tax and custom codes. MARGARYAN came to power after President Robert KOCHARYAN sacked his predecessor, who was the brother of the prime minister slain in parliament last October.

Azerbaijan Passes CEC Bill

· The Azeri parliament on Friday passed a bill on the Central Electoral Commission in the third reading. The Commission will have 18 members. One third of them will represent the New Azerbaijan Party that makes up the parliament's majority with 72 mandates. Another one third of the commission members will come from the opposition People's

European Republics

Lithuania's IPO Falls Flat

· Lithuania's widely anticipated sell off of Lietuvos Telekomas ran flat over the weekend, drawing only a fraction of expected interested parties. The initial public offering (IPO) was downsized from a 35 percent stake to a 25 percent stake. The price drooped to 3.15 litas ($0.788) per share, near the low end of the indicative price range. The 25 percent holding had been valued at more than 640 million litas ($160 million). The phone company's shares will trade in Lithuania's capital and in London as global depositary receipts. Economist Margarita STARKEVICIUTE said, "Under the circumstances it would have been reasonable to postpone the issue. To my mind the decision to proceed with the IPO despite the price at a lower end of the price range was purely a political one aimed to show that this government is committed to rapid privatization." Liudvikas GADEIKIS, editor-in-chief of the highly influential news weekly Veidas said, "It is absolutely clear that the sale will not improve their ratings [Andrius KUBILIUS's government] and now we can only hope the government will not be tempted to start spending money for short-term benefits." The sale was viewed as a morale-booster for KUBILIUS' government, ahead of nationwide elections on October 8^th. However, head of the State Property Fund Stasys VAITKEVICIUS states, "The government remains committed to moving its privatization program forward and regards this offer as the beginning of a line of successful offerings in the future."

South Caucasus & Central Asia

EBRD Allocates $50M To Georgia

· The European Bank of Reconstruction and Development (EBRD) has allocated over $50 million for the realization of oil reconnaissance programs in Georgia and extension of oil refining measures. In today's national radio report Georgian President Eduard SHEVARDNADZE explained the given decision by the existence of "big oil" at the territory of Georgia, Prime News Agency reported.

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Front and National Independence that gained more than 8 percent of votes in the parliament election in November, 1995. The bloc of independent parliament deputies will have six representatives in the Commission. The Commission will pass all resolutions by two thirds of votes. The bill has been given a positive assessment by the Organization for Security and Cooperation in Europe (OSCE).

PSG To Withdraw Trans-Caspian Offer?

· PSG's shareholder General Electric Capital on Friday said that it may withdraw its offer to build a gas pipeline from Turkmenistan to Turkey, if it is not approved soon. Ken KOPROWSKI, vice president of communications for General Electric Capital Structured Finance said, "We continue to have an offer outstanding with the Turkmen government. If we don't receive an answer in the near term we may withdraw the offer." He did not reveal how much longer the company would wait for it to be approved or rejected. The offer was initially presented on March 20^th. PSG and oil company Royal/ Dutch Shell each have 50 percent of Trans Caspian Gas Pipeline (TCGP), a consortium set up to build the link. When asked if the company would pull out of TCGP altogether, KOPROWSKI replied, "I'm not aware of any change in the situation with the mandate. As far as I understand it we have an outstanding offer with the Turkmen government." Reuters reports that in May, PSG began to cut staff and spending in response to the slow process in Turkmenistan regarding its proposal. The 2,000-kilometer pipeline is estimated to cost $2 billion. At present Turkmenistan can only export gas to Russia and Iran. The landlocked Central Asian nation has long sought to build a new line to the booming Turkish market. However, in May Turkmen President Saparmurat NIYAZOV said on state television that PSG was demanding unjustifiably high profit margins and added that he wanted the company to meet its contractual obligations. Just shortly after that, NIYAZOV and Russian President Vladimir PUTIN signed an agreement, under which Russia will increase its purchases of Turkmen gas by 10

billion cubic meters of gas every year until it reaches 50 to 60 billion cubic meters. This agreement greatly deflated hopes for the Trans-Caspian pipeline because Turkmen production is not enough to supply such huge volumes to Russia and to send 16 to 30 billion cubic meters through the Turkish route.

OEC Summit Opens In Tehran

· The Iranian President Mohammad KHATAMI addressed the 6^th summit of the Organization of Economic Cooperation (OEC), which opened in Tehran on Saturday. Presidents from Kyrgyzstan, Turkmenistan, Uzbekistan, Tajikistan, Azerbaijan and Afghanistan, as well as the head of Pakistan's executive power, Kazakh prime minister and a Turkish economic adviser were in attendance. The summit focused on the signing of a framework agreement on intensifying transport relations and exchanging energy resources between OEC member-countries. Other topics included the development of regional trade, banking, railway, navigation and the establishment of peace in Afghanistan. Azeri President Geidar ALIYEV called for establishing peace and stability in Central Asia and the Caucasus. He also stressed the need for restoring the Silk Route, which would improve the economic situation in Central Asian countries. The Azeri President expressed hope that Azerbaijan and Armenia can continue to cooperate to and negotiate peace, if the country's territorial integrity is preserved and the refugees return home.

KHATAMI and his Turkmen counterpart Saparmurat NIYAZOV met on the sidelines of the summit of the OEC. NIYAZOV noted that Turkmenistan has "good, neighborly" relations with Iran. He said the gas project pursued in Turkmenistan with participation of the region's countries would held economic cooperation and peace. KHATAMI in turn called for further consolidation of economic contacts within the framework of the Organization for Economic Cooperation. He said a legal status of the Caspian Sea should be established to meet interests of all Caspian states.

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

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