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

Friday, June 2, 2000


Pavel BORODIN, the Kremlin property manager under former president Boris YELTSIN, Andrei SAVCHENKO, BORODIN's deputy, and Oleg SOSKOVETS, a former deputy prime minister. The Swiss investigation has included allegations that YELTSIN and his two daughters were issued credit cards guaranteed by Mabetex. PACOLLI and STOLPOVSKIKH have denied any wrongdoing. The Associated Press reported that STOLPOVSKIKH, a Russian, once worked with PACOLLI and reportedly quit Mabetex in 1995 to move to the second firm, naming Andrei SILETSKI, a son-in-law of BORODIN, as vice president. BORODIN has denied the allegations, and on Wednesday dismissed the latest Swiss move as, "another attempt to make a scandal out of nothing." He also added, "We are periodically getting groundless information about corruption in the Russian governmental structures."

Economy

New System Adopted To Prevent Tax Evasion

· New Tax Minister Gennady BUKAYEV has launched a new tax system, based on his program in the regional republic of Bashkortostan, to boost tax compliance. The new system complies, computerizes, and centralizes information from vehicle and property registration, police department records, marriage offices, notaries' records, and other state agencies and analyzes the information to pinpoint discrepancies between individuals' de

Russian Federation

Politics

Chechen Rebels Attack Grozny Headquarters

· Chechen rebels attacked the Russian military headquarters in Grozny today, firing grenades, which wounded two soldiers. The Interior Ministry said that at least 15 grenades landed around the military commandant's office, which handles administrative business for Russian forces. Rebels also targeted attacks against police headquarters in Urus-Martan and Vedeno regions. These attacks are the latest in a series of hit-and-run-style ambushes, which have killed or wounded scores of Russian soldiers in recent weeks. Rebel fighters have repeatedly attacked Russian positions and vehicles in Grozny itself, even though the Russians took control of the Chechen capital more than four months ago. Russian federal forces kept up their bombardment of rebels in the mountains, launching air strikes against rebel positions in the Argun gorge, the Associated Press reported. Fighter jets flew 14 combat missions on Thursday and helicopters flew 40 missions. Russian troops launched a major operation against bands in the mountains five days ago, and claim to have surrounded several hundred rebels in southern Chechnya.

Two Linked To Kremlin Bribes Charged

· Geneva Judge Daniel DEVAUD has formally charged two Swiss businessmen with money laundering and membership in a criminal organization. Behgjet PACOLLI, head of Mabetex, and Viktor STOLPOVSKIKH, the operator of Merkata Trading, have been accused by Russian authorities of bribing Kremlin officials for prized renovation contracts. DEVAUD claims to have evidence that Mabetex paid $4 million in bribes to Russian officials, while Merkata Trading paid out $60 million in bribes to win contracts. Alleged recipients include

Today's News Highlights

Russia

Sberbank Savings Deposits Rise

Shell-Marathon Swap Assets

European Republics

Lazarenko Indicted In US

Kraft Nominated By Estonian CB

South Caucasus & Central Asia

Four UN Observers Missing

Aliyev-Cem Meet

Sino-Kyrgyz Bilateral Relations

Kazakh Repays IMF Early

Politics-Economics-Business

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Friday

June 2, 2000

Intercon's Daily

clared and real income, the Financial Times reported. The system aims to target the wealthy, which are more prone to declare modest incomes, while buying expensive, cars, clothes, and country homes. Last year, the computer system identified 12,000 people who had failed to reveal a total of 1.6 billion rubles ($56 million) in income between them. This week, the comparison system had picked out prominent tax evades, which included one third of the Russian State Duma's deputies.

Meanwhile, Russia's Tax Ministry has collected an estimated 52 billion rubles ($1.8 billion) in taxes, exceeding its 39.2 billion rubles target for this month. Tax collection in April amounted to 55.1 billion rubles, also over the target, according to Tax Minister Gennady BUKAYEV. May's tax intake amounted to 11.6 percent of gross domestic product (GDP) versus the planned 6.8 percent of GDP. One-third of May taxes were paid by so-called natural monopolies¾Russia's natural gas monopoly Gazprom, national power grid UES, the Railways Ministry¾and by 18 leading oil companies. The ministry has been exceeding its targets in recent months.

Ruble = 28.25 /$1.00 (NY rate)

Ruble = 28.39/$1.00 (CB rate)

Ruble = 26.81/1 euro (CB rate)

Oct Nov Dec Jan Feb Mar Apr May

Savings In Sberbank Grows

· The Russian State Statistics Committee said private savings in Russian banks grew 11.7 per

cent in the first quarter of 2000, to $356.2 billion. Most of deposits, or 73.4 percent, are in the state-owned savings bank Sberbank. Deposits in Sberbank increased 12.2 percent in the first quarter, and made a proportion of 0.4 percentage points in total bank deposits. Private savings in foreign currency accounts of Russians stood at an equivalent of 121.1 billion rubles as of April 1st, including 56.2 billion rubles in Sberbank. Ruble-denominated deposits in all Russian banks grew 11.3 percent in the first quarter, from 211.3 billion rubles to 235.1 billion rubles. Currency-denominated deposits increased 12.5 percent. An increment in ruble deposits in Sberbank made 11.4 percent and in foreign currency deposits 15.4 percent.

Business

Shell-Marathon Swap Assets

· Royal Dutch/Shell Group, the world's second biggest publicly traded oil company, and US Marathon Oil signed a non-binding letter of intent to swap assets in Russia, the UK, and the Gulf of Mexico. Shell will boost its stake in the Sakhalin-2 project off the Sakhalin island in the Russian Far East to 62.5 percent by taking over Marathon's 37.5 percent. Marathon will acquire Shell's 28 percent stake in the Foinaven field west of the Shetland Islands in the UK as well as an interest in the Gulf of Mexico. Marathon will also be reimbursed for funds spent on the Sakhalin project in 2000, estimated to be about $50 million. The Sakhalin-2 fields hold an estimated 1 billion barrels of oil and 408 billion cubic meters of gas. It is considered one of Russia's most important oil and gas centers because of its size and location, which offers easy export access to the US, West Coast, Japan, Korea, and China. Mitsui & Co. Ltd, which holds 25 percent of the project, and Mitsubishi Corp., which owns the rest, support the takeover. JJ TRAYNOR, oil analyst at Deutsche Bank pointed out that. "Shell swapped short-term cash flow for a long-term position."

Russky Alyuminiyum To Take Over BrAZ

· Russky Alyuminiyum, a Russian aluminum company moving to take control of 75 percent of the nation's aluminum producing assets, is expected to take over Bratsky Alyuminievy Zavod (BrAZ), Russia's top aluminum maker, at the smelter's shareholders meeting on June 3rd. BrAZ General

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Director Yuri SHLYAFSHTEIN agreed to sell his 30 percent stake in the company to Russky Alyuminiyum. BrAZ plans to produce 900,000 tons of aluminum in 2000. Sibneft, the nation's sixth oil producer, in May took a majority of board seats at Krasnoyarsky Alyuminievy Zavod, increasing its control over Russia's number two aluminum producer as part of Russky Alyuminiyum.

nated former-governor Vahur KRAFT to again head the bank and guide the Baltic nation toward membership in the European Union. KRAFT is the third choice of the Council. The first two candidates, Vello VENSEL and former finance minister Mart OPMANN stepped down and several other potential candidates withdrew from the nominating process. Council chairman Mart SORG said, "We are sure that, at this time, Vahur KRAFT is the best candidate to continue the governor's duties." KRAFT must still be approved by Estonian President Lennart MERI. KRAFT left the office on April 28th, when he was to be succeeded by VENSEL who stepped down. The council then selected OPMANN, who was rejected by MERI and then bowed out of the race. KRAFT, a former commercial banker, gained the trust of financial markets during his first term. Analysts laud him for helping keep the kroon currency stable through two emerging market crises, including the 1998 Russian crisis, and a devastating equity market crash.

Lith. Approves Eurobond Sale For Gas Utility

· The Lithuanian government approved a plan for Lietuvos Dujos, a state-owned gas utility, to sell as much as 50 million euros ($46.54 million) in three-year Eurobonds. Lietuvos Dujos plans to initially sell 40 million euros, with the rest offered in case it fails to sell short-term bonds or secure a loan from Germany's HypoVereinsbank. The sale will be managed by Credit Suisse First Boston. The utility also plans to sell 50 million litas ($10.25 million) in bonds with maturities of up to one year, and take out a $15 million loan from HypoVereinsbank and other German banks. It will use the proceeds from the short-term bond sale and the loan to repay earlier debts, pay gas suppliers, and boost working capital. The company has to repay 143.8 million litas in debts and another 20.2 million litas in interest by the end of 2000. The company owed gas suppliers 41.1 million litas on April 1st. The Lithuanian government, which currently holds 91.95 percent of Lietuvos Dujos, plans to sell from 41 percent to 58 percent of its shares in the major gas utility.

South Caucasus & Central Asia

Four UN Military Observers Remain Missing

· Four UN military observers and their Abkhazian interpreter, who departed from the Sukhumi office

European Republics

US Indicts Lazarenko On Several Charges

· A US federal grand jury for the Northern District of California, in San Francisco on Thursday indicted former Ukrainian prime minister Pavlo LAZARENKO on seven counts of money laundering, one count of conspiracy to commit money laundering, and 23 counts of transporting stolen property. The indictment, issued May 18th and unsealed on Thursday, alleges that while in office, "LAZARENKO demanded and received payments from individuals and entities as a condition of doing business in Ukraine." The indictment calls for LAZARENKO to forfeit his $6.75 million home in California. It notes that LAZARENKO is accused of transferring $114 million that he embezzled into US bank and brokerage accounts in the US, including Merrill Lynch, Bank of America, Fleet Boston Roberston & Stephens, Commercial Bank of San Francisco, Pacific Bank, Fenner & Smith, and Hambrecht & Quist. Of that amount, prosecutors have discovered that $20 million was laundered through US banks. LAZARENKO is waiting extradition to Switzerland, where he is also facing money laundering charges. Prosecutors from both sides are consulting on the order of proceedings. Jonathan WINER, a former deputy assistant US Secretary of State for international law enforcement said, "This is a very unusual indictment…He used the government as an extortion racket and then engaged in money laundering activities to hide the proceeds." LAZARENKO's lawyer said he would plead not guilty to the charges. If he's found guilty, he could face up to 20 years in a US prison for each of the money laundering counts, plus a $500,000 fine or twice the value of the funds he illegally transferred to the country.

Estonian CB Nominates Third Candidate

· The Estonian Bank Council on Thursday nomi

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of the UN military observers mission at noon Thursday for the Kodori Valley controlled by Georgian authorities, remain missing. Representatives of the UN Office, Russian peacekeeping forces in Georgian-Abkhazian conflict zone and Sukhumi Security Service launched helicopter searches for the missing UN observers in Abkhazian Svaneti and the Kodori Valley. The observers had been conducting a routine patrol trip. According to director of the public relations department of Georgian Defense Ministry Avtandil NAPETVARIDZE, two observers were from Denmark and two represented the British organization Yellow Trust, a British humanitarian mine clearance agency.

Spokesman for the Georgian Foreign Ministry stressed that it is too early to make any allegations on a possible terrorist act. Sukhumi authorities doubt that the UN observers and their interpreter have been taken hostage. However, their car has been found abandoned in the mountainous village of Lata. The Associated Press has reported that the four and their interpreter were taken hostage, although no demands for their release have been received by authorities. If their reports are true, this could be a repeat of a previous kidnapping, in about the same area. UN observers have been targeted previously in Georgia. Five observers, a UN doctor and a translator were seized last October in the Kodori Gorge. All seven were released unharmed after about two days.

Turkey Urges Resolution of Nagorno-Karabakh

· In a meeting on Monday with Turkish Foreign Minister Ismail CEM in Baku, Azeri President Geidar ALIYEV said he is optimistic that Azerbaijan and Armenia will reach a resolution on the Nagorno-Karabakh conflict. He added that the Organization for Security and Cooperation in Europe's Minsk Group is working on a new draft peace plan. ALIYEV noted that he plans to meet his Armenian counterpart, Robert KOCHARYAN on the sidelines of the June Commonwealth of Independent States summit. The Azeri President stressed said Turkey's

assistance is essential in order to resolve the conflict. RFE\RL Newsline reported that CEM pledged Ankara's support in the Nagorno-Karabakh peace process and for Azerbaijan's full membership in the Council of Europe.

Kyrgyz-Chinese Defense Mins. Meet

· Chinese Defense Minister CHI Haotian and Kyrgyz counterpart Esen TOPOYEV met in Beijing on Wednesday to discuss bilateral relations. CHI noted that Sino-Kyrgyzstan relations have deepened and relations between the two armed forces have developed smoothly. He said that China is willing to strengthen cooperation with Kyrgyzstan on cracking down national separatism, religious extremists, and international terrorists. TOPOYEV said that the development of Kyrgyzstan-Chinese neighborly relations conforms to peace and security in the region and the world. Kyrgyzstan would like to promote the cooperation with China in all fields on the basis of friendship and understanding. The two sides signed a memorandum on cooperation between their defense ministries. TOPOYEV will meet with Chinese Vice-President HU Jintao to brief him on the situation in Central Asia.

Kazakhstan Repays IMF Ahead Of Deadline

· Kazakhstan repaid about $385 million to the International Monetary Fund (IMF) four years ahead of schedule to lower financing costs. The IMF provided Kazakhstan with a new credit line in December to assist in balancing the budget and keeping inflation under control. Deputy Finance Minister Anvar SAIDENOV explained that it's cheaper to repay IMF loans now, because the Central Bank can't invest in securities that offer a high enough return to cover the borrowing costs. The country hasn't yet tapped a $453 million loan disbursement the IMF approved in December and is "treating it as precautionary," the Fund said. The IMF praised Kazakhstan for pulling out of a recession sparked by Russia's August 1998 financial crisis. After making this payment, the country's foreign currency reserves are estimated at $1.8 billion.


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

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