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

Wednesday, June 7, 2000

ering whether to meet with a Chechen delegation led by Chechen Prime Minister Ilyas AKHMADOV, who is seeking help in drafting a peace proposal in Washington. A spokesman for the Russian embassy in Washington Mikhail SHURGALIM said, "We are rather negative toward any meeting between the US and Ilyas AKHMADOV…We don't think the gentleman in question represents anyone or any Chechens for that matter." The visit by the delegation from Chechnya comes on the heels of US President Bill CLINTON's first trip to Russia since Vladimir PUTIN became president.

Putin's Two Key Bills Face Challenging Votes

· President Vladimir PUTIN has issued two key bills since coming to power: for the re-organization of the tax regime and for the shifting of power from the region to the center. His ability to get both of these bills passed by parliament is coming into doubt. Upon the request of PUTIN, the Russian State Duma has postponed the debate on a unified social tax until Friday. The new tax would unify separate payments to the social insurance fund and the medical insurance fund beginning in 2001. Under a revised government proposal, pension fund contributions would also be merged into the social tax in 2003. Under the initial plan, all tax changes were to be introduced from January 1, 2001. The government, seeking to tighten control over resources, wants the tax service to take responsibility for collection for all three funds. Reuters reported that the pension fund and trade unions fear the

Russian Federation

Politics

Working Towards A Political Solution?

· Russian commander in Chechnya Colonel-General Gennady TROSHEV has called on politicians to seek a solution to end the nine-month military campaign in Chechnya. Although he ruled out having talks with Chechen President Aslan MASKHADOV who is reportedly wounded, TROSHEV said, "The politicians start the war, they should and must end it." He added, "It is high time for the politicians to jump in, they are losing time." TROSHEV has called for a referendum on who should rule the province and suggesting as his own candidate Mufti Akhmad-Khadzhi KADYROV, head of Chechnya's Moslems. Ingush President Ruslan AUSHEV has also called for the beginning of peace talks. He, however, believes that Russia should negotiate with MASKHADOV. He said, "Should MASKHADOV die, an extremist might succeed him, which would be much worse." Kremlin spokesman Sergei YASTRZHEMBSKY said Moscow is still searching for a partner to open negotiations with in the rebel province. The Kremlin believes it should hold talks with those, "who can ably represent a wide number of the Chechen people." MASKHADOV in May noted that about 40,000 civilians and 1,500 Chechen soldiers have been killed in the conflict. In the 1994 to 1996 conflict, about 120,000 civilians and 2,870 fighters were killed. Surprise rebel attacks in Chechnya continue to plague Russian federal troops. Four soldiers were hurt when an armored car ran over a mine in the Nozhai-Yurt region, where fighting has been concentrated for several weeks. The Russian Defense Ministry says more than 2,300 Russian soldiers have died since the beginning of the conflict.

Meanwhile, the CLINTON administration is consid

Today's News Highlights

Russia

Soros Endorses Rus. Economy

Chubais' Position In Jeopardy

European Republics

Ukraine Wins Turkmen Contract

Estonia's Economy Recovers

South Caucasus & Central Asia

Georgia-US Defense Accord

Frontera Wins EBRD Loans

Shell To Pursue Oil-Gas Projects

IMF Reviews Uzbek Economy

Politics-Economics-Business

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Wednesday

June 7, 2000

Intercon's Daily

poor will not get necessary help under the new system. Head of the influential Duma budget committee, Alexander ZHUKOV, believes that the tax proposals would get the necessary backing of 226 votes in the 450-seat house, despite the opposition of the Communist Party and the Agrarian Party. He particularly believes the new 13 percent flat income tax rate will be approved. The tax proposals need to be approved before the Duma breaks up for its summer recess on July 7^th, if they are to become effective by the start of 2001.

The Federation Council held powerful debates on PUTIN's bill to gain the power to sack regional governors and deprive them the right to form the upper chamber of parliament. Vitaly KOTOV, head of the regional assembly of Vladimir region, said, "We should express our total lack of agreement with this law. This is a process of destruction of the state." Alexander RUTSKOI, head of the Kursk region and one of the leaders of the 1993 uprising, said PUTIN's proposals would render regional heads powerless. The governors decided to appeal to PUTIN to get him to withdraw his bill, already passed in a first reading by the Duma.

Economy

Ruble = 28.34/$1.00 (NY rate)

Ruble = 28.29/$1.00 (CB rate)

Ruble = 27.18/1 euro (CB rate)

Russia And New Gov't Wins Soros' Support

· Financier George SOROS has positively endorsed the Russian economic situation and the ability of the new administration to implement necessary reforms. He said in an interview with Echo Moskvy radio station Tuesday, "I think there is a renewed vigor in the economic field…I see the situation very positively. The administration is very serious about passing the right laws and reducing arbitrary interference in business." SOROS is in Russia to meet with political leaders and others. He maintains business and charitable interests in Russia, but had been less enthusiastic about his investing opportunities, particularly telephone holding company Svyazinvest. SOROS lost several hundred million dollars in Russia's 1998 currency devaluation and default on national debt. SOROS cautioned President Vladimir PUTIN against au

thoritarian tendencies. He said, "Instead of dictatorship of law I would like to see rule of law, where there are laws people can actually obey," the Associated Press reported.

Business

Vyakhirev To Remain Gazprom Chief

· Rem VYAKHIREV, chief executive of Russian gas monopoly Gazprom, plans to stay in his post at least until the company's annual shareholders meeting in 2001. Vyakhirev today said, "It's already time for me to start thinking about my pension. But I don't think it will happen this year. It's not a matter for VYAKHIREV¾it's just that the company's not ready for it." He added that he did not see it as a serious possibility that Viktor CHERNOMYRDIN, a former prime minister and chief executive of Gazprom and now the chairman of the Gazprom board would succeed him. This year's shareholders meeting will take place on June 30^th. The rumor of VYAKHIREV's resignation is heard each year ahead of the annual meeting.

Minority Shareholders Challenge Chubais

· Foreign minority investors are seeking support to demand the removal of Anatoly CHUBAIS, the nation's former privatization chief, from the post of Unified Energy Systems' (UES) chairman. At least 10 percent of shareholders are needed to call an emergency general meeting and a vote of no confidence in the chairman, the Financial Times reported. Foreign shareholders are displeased with CHUBAIS' plan to break up UES into hundreds of small companies.

Boris FYODOROV, who represents minority shareholders on the board, said that the lack of consultation on the break plan "outrageous." He said, "No one knows to whom the companies would be sold, using what procedures or at what prices. And you shouldn't sell at such depressed current prices." Others accuse CHUBAIS of trying to "privatize UES all over again." CHUBAIS first announced the plan at a UES board meeting in April, claiming he had the support of the government, which owns 53 percent of the energy utility. The government later expressed reservations on the break-up plan. Since the April meeting, UES' share price has fallen 20 percent.

When you need to know it as it happens

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European Republics

Kuchma Sets Date For Closing Chernobyl

· Ukraine's President Leonid KUCHMA on Tuesday repeated his pledge to shut down the Chernobyl nuclear plant on December 15^th. He added that it would be on the conscience of the West if it failed to give Ukraine financial and political aid in return. Ukraine is dependent on western funds to close Chernobyl, make it safe, re-employ its workers, and complete construction of two replacement reactors. The cost of doing this is estimated to be more than $2 billion. On Monday, visiting US President Bill CLINTON pledged that the US would give Ukraine $78 million in fresh funds to help improve safety. French President Jacques CHIRAC and European Commission President Romano PRODI have also renewed similar pledges. The government is also pushing the international community to help fund completion of two reactors at other plants in Ukraine to replace lost generating capacity. Prime Minister Viktor YUSHCHENKO said on Tuesday the country would need an additional $90 million to $100 million to pay for conventional fuel to generate a year's worth of electricity to replace lost capacity when Chernobyl shuts. The European Union (EU) will provide $1.5 billion in grants and loans aimed at creating facilities that will replace electricity supplies lost by Chernobyl's closure.

Ukrgazstroy To Build Turkmen Pipeline

· Ukraine's Ukrgazstroy said it won a tender to build 50-kilometer gas pipeline for Turkmenistan, Interfax-Ukraine news agency reported, citing Ivan CHILIBI, general director at the company. The pipeline project will cost $10 million and allow Turkmenistan to transport gas via Kazakhstan, bypassing Uzbekistan. Ukrgazstroy also plans to bid for a contract to build another gas pipeline for Turkmenistan later this year. Turkmenistan stopped gas supplies to Ukraine in May last year, after the country paid for only 10 percent of supplies delivered in the first four months of 1999 and accumulated $240 million in unpaid bills.

Estonia's Economy Grows 5.2 Percent

· Estonia's Statistics Office reported Estonia's gross domestic product grew 5.2 percent in the first quarter compared with only 3.3 percent in the same period last year. It only grew 1.9 percent in the fourth

quarter of 1999. Estonia's economy contracted 1.1 percent in 1999. The first quarter's growth rate is lower than the Central Bank forecast. Hansabank Markets analyst Maris LAURI said, "It is a little lower than expected...There was talk of (an) eight to nine percent (rise) and suggestions of ten percent...I think some people might be disappointed…This preliminary estimate is based on monthly statistics so there might be some important information excluded. So I expect at the beginning of August [when revised data comes] it will be a little higher." Analysts had forecast a range of five to eight percent year-on-year growth, while the Central Bank had predicted nine percent. Nevertheless, the growth confirms that Estonia's economy is back on track after the 1999 recession caused by the loss of export markets and Russia's financial collapse in 1998.

South Caucasus & Central Asia

Georgia-US Defense Cooperation

· The Defense Ministries of Georgia and the US are working together to sign a military cooperation accord for 2000 at meeting set for the end of June. US Deputy Secretary of Defense of the Ted WARNER will head the working group of US military experts. Georgian Defense Ministry does not exclude that an agreement for military aspects of environmental protection may also be signed. In 1999, adviser to the US Secretary of Defense Garry WEST said that the US will assist Georgia in securing the nation's radioactive pollution sources.

Anadarco To Invest In Black Sea Shelf Project

· Georgian President Eduard SHEVARDNADZE announced during his Monday national radio address that the US company Anadarco intends to invest billions in the realization of a project over the next four to five years to discover oil in Georgia's Black Sea Shelf. He believes this project will attack as much interest and investment as the Baku-Tbilisi-Ceyhan Main Export Project (MEP). Anadarco plans to extract approximately 200 million tons of oil in the area of Poti, Batumi and Anaklia. SHEVARDNADZE also noted that there are oil layers in the water area of Ochamchire, Sukhumi and Gudauta in Abkhazia. Former prime minister of Georgia Tengiz SIGUA has warned that there could be negative consequences if US companies at

When you need to know it as it happens

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tempt to search for oil on the Black Sea Shelf near Gudauta.

President SHEVARDNADZE also noted that rich oil deposits have been confirmed in Ninotsminda and Ioris Veli fields. At those locations, approximately 1 million tons of oil will be being extracted by 2001, increasing to an annual 3.5 million tons by the year 2004. At the Taribana field in Kakheti region of Georgia, it is estimated that 400,000 tons of oil will be extracted. The President stressed there will be no need for importing gasoline, diesel fuel and mazut.

Frontera Wins EBRD Loans For Caspian

· Houston-based Frontera Resources is set to receive $60 million in loans from the European Bank of Reconstruction and Development (EBRD) to fund the development of onshore oil fields in the Caspian region. Frontera said the agreement represents, "a major milestone," that will allow it to begin full development on the Kursange and Karabagli fields in Azerbaijan and in the Block 12 oil fields in eastern Georgia. The company estimates that it has 1 billion barrels of oil reserves in Georgia and 500,000 barrels in Azerbaijan. The funding will come in two phases: a $10 million convertible loan is available immediately and a $50 million convertible loan will be due this summer. The money will go toward developing the onshore projects, working over old wells and drilling new ones. The company raised $34.8 million last July when it sold 43.5 percent of its stock. Shareholders include Deutsche Bank, Shell Capital, Baker Hughes and Schlumberger. Steve NICANDROS, president and chief executive officer of Frontera, said that by year's end he hopes to double daily production in Azerbaijan from 4,000 barrels a day to 8,000 barrels per day. "We are expecting to see significant increases over our doubling of production over the next two to three years, and this will come primarily through the drilling of new wells and work-overs," he said. According to the Baker Institute's Amy JAFFE, "They can make a good profit, help the Georgian

economy, just by developing the oil in the country and selling it in the region," the Huston Chronicle reported.

Shell To Stay Involved In Russia, Central Asia

· Royal Dutch/Shell on Tuesday said it plans to maintain its projects in Russia, due to the improving economic and political situation, as well as pursue an ambitious gas transportation project in Central Asia. Linda COOK, chief executive of Shell's gas and power unit, told Reuters, "We see lots of positive progress with recent political developments in Russia…Shell has real staying power. We can see through projects in good times and bad." COOK said Shell was "still committed" to a project to build a Trans-Caspian gas pipeline from Turkmenistan to Turkey despite Turkmenistan's political leaders fear of a delay. Shell has a 62 percent stake in the Sakhalin 2 oil production project in Russia's far east, one of the only profitable production sharing agreements in the country, and is close to signing an agreement with Gazprom on an exploration and production joint venture in the Zapolarnoye field in the Arctic Circle.

IMF Reviews Uzbekistan's Economy

· An International Monetary Fund (IMF) team arrived Tuesday in Uzbekistan for a 10-day review of its economy. Uzbek President Islam KARIMOV earlier this year promised to liberalize its economy and remove capital controls. The mission, headed by head of the Second European department of the Fund Leif Hansen, was scheduled to visit Uzbekistan in April, but the visit had to be postponed. The IMF put on hold its $180 million credit program to Uzbekistan in 1996 when the government imposed restrictions on the convertibility of the sum currency. The measure caused investors to flee and led to a black market for the dollar. Uzbekistan last month took the first step towards liberalization when it allowed its official sum/dollar exchange rate to drop to 231 from the previous 110. The country is rich in gold and other minerals and is almost self-sufficient in energy and food.

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

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