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, June 23, 2000

Russian Federation

Politics

Swiss To Charge Five; Hand Over Documents

· Daniel DEVAUD, the Geneva Judge investigating Swiss bribes for lucrative Kremlin construction contracts, plans to charge five people on June 27^th with money laundering offensives. It is believe the five include Beghjet PACOLLI, head of Lugano-based construction firm Mabetex, and Viktor STOLPOVSKY, head of Merkata, another Lugano-based construction company, as well as a Geneva lawyer, and two asset managers. DEVAUD believes that Mabetex paid $4 million in bribes to Russian officials, while Mekata Trading, another Swiss construction firm, paid out $60 million to win contracts. Others linked to the laundering include Pavel BORODIN, the former head of the Kremlin property, BORODIN's deputy Andrei SAVCHENKO, and a former deputy prime minister Oleg SOSKOVETS.

Meanwhile, Switzerland's Supreme Court has rejected appeals from two Swiss companies, which are against handing over documents to Russia concerning the illegal transfer of $600 million from Russian airline Aeroflot. The documents were seized from the companies, Forus Services and Andava, during raids personally directed last July by Switzerland's former attorney general Carla DEL PONTE. Forus Services ad Andava are closely linked to Russian tycoon Boris BEREZOVSKY. The two Lausanne-based companies pleaded that the handing over of document would breach their commercial secrets. They also have been seeking to unfreeze their bank accounts. Swiss authorities have not said how much money they have frozen in connection with the affair.

Putin Plans To Give Major Address On July 3^rd

· Russian State Duma speaker Gennady SELEZNYOV, after meeting with Russian President Vladimir PUTIN on Tuesday, announced that the President is likely to give the state of the nation address on July 3^rd. He said, "This is what we tentatively agreed and how we are going to plan our schedule." Many hope that PUTIN will finally outline his policy plans, particularly those relating to the economy, which remain vague. PUTIN has pushed to enforce his campaign promise of consolidating state rule. He has implemented pieces of legislation to strengthen the state power. His ministers have promised to make public soon a long-term scheme for the economy, based on a document being drawn up by a Moscow think tank.

Russia Missile Fuel Poisons Navy Servicemen

· While unloading a ballistic missile from a warship at a naval base in Russia's Far East, toxic fuel leaked out of a crack in the rocket, poisoning several servicemen on June 16^th. A toxic cloud floated a way from the base, threatening the residents, of a village 150 kilometers northeast of the port city of Vladivostok. A spokesman for the Pacific Fleet said highly poisonous fuel spilt from the rocket's cracked hull, reacting with the air and forming a toxic cloud. Emergencies services urged local residents to shut their windows and stay indoors for about two hours before the cloud dissipated. At least 11 naval servicemen have been taken to the hospital.

Meanwhile, Russian President

Today's News Highlights

Russia

Russia Invests In Nuclear Power

Russian Nasdaq-Iike Index

Rosbank-Uneximabk To Merge

European Republics

Lith. Fixed Exchange Rate?

Ukraine Approves Budget Plan

South Caucasus & Central Asia

US-Georgia Sign Military Agmt.

Kazakh Presidential Powers

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June 23, 2000

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Vladimir PUTIN, while in Berlin, called for Central and Eastern Europe to become a nuclear-free zone. PUTIN said the idea, while unpopular, needed consideration as concerns about the possible use of tactical nuclear weapons were increasing. The President also wants more European countries to join an updated Conventional Forces in Europe Treaty.

Russia To Invest $25B In Nuclear Power

· Russia plans to triple nuclear power-generated electricity by 2030, through an expansion project which would cost about $25 billion. Russia has relied on gas and oil supplies to run its power. But profitable markets are forcing Gazprom to refocus its supplies. Vladimir VINOGRADOV, deputy minister for atomic energy at a press conference earlier this week, "We plan to develop nuclear energy in such a way that it is both good for the country and advantageous for Gazprom. Given the impact of fossil fuels on the climate and environment, we must develop nuclear power." Russia's commitment to build and expand its nuclear power industry comes as other European countries are scaling back. Lithuania is establishing a fund to close down its Soviet-built Ignalina nuclear power plant and Ukraine plans to close the decrepit Chernobyl plant by December 15^th. The percentage of electricity generated in Russia by nuclear power should increase from 15 percent of total production now to 33 percent in 2030. Russian President Vladimir PUTIN said, "The atomic industry sector is one of our strategic interests, and its success will determine our status as a world power."

Economy

Economic 18- Month Reform Program

· The Russian government on June 28^th will consider an 18-month economic reform program. Economic Development and Trade Minister German GREF said, "The heaviest burden of reforms planned by the government falls in the next year and a half." He said Russia had to take advantage of current high international commodity prices to implement the reforms. GREF emphasized that the program contains specific measures to create a normal investment climate in Russia and equal conditions for competition. Vedomosti published what it called the main ideas of the 18-month plan. These include measures to: break up of Gazprom;

stimulate independent electricity producers; enforce non-payment electricity cut offs; increase competition in railways; eliminate the possibility of nationalization and increase stability of property rights; improve bankruptcy procedures; eliminate tax privileges; reduce gradually government interference in business; and introduce international accounting standards.

Ruble = 28.25/$1.00 (NY rate)

Ruble = 28.14/$1.00 (CB rate)

Ruble = 26.35/1 euro (CB rate)

Oct Nov Dec Jan Feb Mar Apr May Jun

Russian To Create Nasdaq-Like Index

· Russian Trading System (RTS), one of Russia's largest stock exchanges, said it would launch an independent trading floor for high-tech companies to give them access to capital to fuel development, a Nasdaq-like high-tech stock index. Russia's business community today warned that such an index could be disastrous, if unless the government seriously addresses issues of corporate governance. Vladimir PREOBRAZHENSKY, deputy head of mobile phone operator Vimpelcom, which is publicly traded in New York, said a lack of concern for shareholders' rights meant most local firms had to mature before being ready for such an index. "Creating such [an index]...is not so much a question of putting together equipment for a system as it is a

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Friday Intercon's Daily June 23, 2000

fundamental change in the regulation of operations and business practices connected with it," he said. Reuters points out that shareholders right have been ignored by Russia's large companies, citing minority shareholders at Unified Energy Systems (UES), who claim a major restructuring disregards their rights as shareholders. PREOBRAZHENSKY said added that, "Danger exists of another pyramid scheme that will scar the heart of Russia's tortured investment community." He warns that such a high-tech index must be set up carefully.

Anatoly KARACHINSKY, CEO of information technology IBS Group said the high-tech sector was the country's best opportunity to attract the foreign capital it needs to get the economy going. However, he also warned, "If we make a mistake with a Russian Nasdaq then we will shut Russia off from that."

Rosbank-Uneximbank To Merge?

· Rosbank and Unexim Bank, hit hard by the Russian financial crisis in 1998, are closer to a merger. Rosbank, set to secure Unexim's assets, has said its shareholders have approved the merger. Rosbank would have to assume more than $1 billion of Unexim's debts. The two banks' shareholders are to vote on a final decision on the merger at a joint meeting. Once Unexim settles its debts and bankruptcy proceedings have stopped, the joint meeting will take place. Most holders of Unexim's Eurobonds and Floating Rate Notes have agreed to restructure the bank's debt. Unexim won creditors' preliminary approval last year to restructure the debts with an upfront cash payment of $105 million and an issue of $130 million in a 12-year Eurobond by Rosbank, Reuters reported.

Business

Rostselmash To Open Branch In Kazakhstan

· Rostselmash, Russia's Rostov-based farm equipment maker, plans to open a production line in Kazakhstan. Kazakhstan agricultural companies require 20,000 new harvesters. Rostselmash plans to produce 2,500 new tractors in Russia this year. Russia's net grain production is expected to total between 69 million tons and 74 million tons

this year, up from 54.7 million tons in 1999.

Campina Opens $50M Yogurt Plant

· Campina Melkunie, a Dutch dairy producer, Thursday opened a $50 million yogurt factory near Moscow, The Moscow Times reported. The factory, located 70 kilometers south of Moscow, is a joint venture of the Dutch company Campina Melkunie and Campina, based in Heilbronn, Germany. The factory, in which Campina branches invested $40 million, employs 85 people and has a capacity to produce 80,000 tons of yogurt a year. International Finance Corp., the private lending arm of the World Bank, agreed last year to lend Campina Melkunie 9.4 million euros ($8.96 million) to equip suppliers in the Moscow region.

European Republics

Ukraine Approves Balanced Budget Plan

· Ukraine's parliament approved a resolution that anticipates a balanced budget for 2001 and improvements in social welfare. According to the resolution, the Cabinet should not provide state guarantees on the loans attracted by companies next year. The government should also initiate a cut in existing tax privileges and make on time all social payments that will be anticipated by the 2001 budget. The current resolution suggests the government should secure funds to service interest on state debt, pay wages to public sector employees on time and make other social payments. Foreign debt should not exceed $12.5 billion next year, the resolution said. The Finance Ministry had said Ukraine's foreign debt totaled $10.9 billion as of May 16, 2000. Finance Minister Igor MITYUKOV said during the debates in parliament earlier this week the 2001 budget would be based on new principles, but gave no further detail, Reuters reported.

In May, the Finance Ministry recommended a balanced budget for 2001, a retreat from earlier calls by President Leonid KUCHMA of a budget surplus. Under the law, the government submits draft budgets to parliament by September 15^th and deputies are to adopt them by the year-end. Next week, parliament plans to start work on a new tax code, proposed by the government earlier this

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month, but it is unclear yet when the document may be adopted.

Lithuania To Abandon Fixed Exchange Rate

· Lithuania approved a plan to abandon a fixed exchange rate policy, which has kept the national currency pegged at 4 litas per dollar since 1994. The currency would be allowed to trade freely beginning in 2002. The proposal meets requirements of the European Central Bank and probably will be adopted by the parliament in the next couple of months, a Lithuanian official said. "At present, the objective of the Central Bank is the stability of the currency while as of the beginning of 2002 the aim will be the stability of prices," said Audrius MISEVICIUS, deputy board of chairman of the Central Bank. Lithuania introduced a currency board, a panel that sets and maintains fixed exchange rates by taking control of monetary policy from a Central Bank, in April 1994. Once the system is changed, the Central Bank will be able to influence interest rates and carry out other monetary policy.

South Caucasus & Central Asia

US-Georgian Defense Ministry To Cooperate

· Georgian Defense Minister David TEVZADZE and US Assistant Secretary of Defense Ted WARNER on Thursday signed an agreement for their respective ministries to during 2000. WARNER pointed out that cooperation with Georgia's military is important for the US. He said that US is prepared to grant military aid to assist Georgia in developing a modern army. The army would aim to be a mobile, well-armed force. The US will also help Georgia build an air defense system, utilize and export military waste. WARNER expressed hope that Georgia's Armed Forces will manage to create an army coinciding with NATO standards in three to five years. WARNER did note that Georgia has already taken the first steps to reaching that goal. Earlier this year, Georgian President Eduard SHEVARDNADZE said after his re-election as head of state that his country will strive for joining the North Atlantic alliance by 2005 when his mandate expires. However, WARNER said the achievement of this objective will to a great extent depend on Georgia's economic possibilities. WARNER also told Georgian officials that the US is ready to render financial assistance to the withdrawal of Russian

military bases from Georgian territory. The US government will discuss this issue in talks both with Georgia and Russia. According to a 1999 agreement between Russia and Georgia, two out the four Russian military bases in Georgia, Vaziani and Gudauta, are to be completely dismantled by July 1, 2001.

Meanwhile, Georgian border guards will receive two helicopters from Ukraine before the end of June, according to chairman of the state border guard department of Georgia Valery CHKHEIDZE. One of the helicopters is being repaired in Ukraine and the Georgian side purchased the second one. Border guards will soon receive a plane from the Kutaisi Aviation Plant, CHKHEIDZE said. Mercury plane will be used for controlling the territorial waters of the Black Sea and the Azerbaijan portion of the state border, Prime News Agency reported.

Rus-Georgia To Hold Base Withdrawal Talks

· A Russian delegation, headed by Deputy Prime Minister Ilya KLEBANOV and including - Head of Staff of the Group of Russian Forces in the Trans-Caucasus Nikolai ZOLOTOV, is to arrive in Tbilisi today for another round of talks on the withdrawal of Russian troops from Vaziani and Guadauta military bases. ZOLOTOV's inclusion in the talks illustrates the importance of this round. According to KLEBANOV, Russia was looking for, "business-like and constructive' talks. One of the main themes of the negotiations will be the withdrawal or utilization of the military technology and ammunition dislocated at the territory of Russian military bases in Georgia. Talks are expected to continue through June 25^th.

Kazakh Presidential Powers Extended

· The lower house of Kazakhstan's parliament on Thursday, in a vote of 57 to three with 10 abstentions and seven not voting, approved in its first reading a bill to extend lifetime powers and privileges to President Nursultan NAZARBAYEV. The 33-seat Senate upper parliamentary chamber voted unanimously to approve the concept. These powers could include the right to address the nation, parliament, government bodies, and officials on key initiatives; to lead the Peoples' Assembly; to be a member of the Kazakh National Security Council; to award an annual prize for peace and progress; to

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make suggestions to future presidents on appointments to and dismissals from official positions; and to advise presidents on declaring a state of war or emergency. The final reading is set for June 27^th, after which the draft must be approved by NAZARBAYEV before becoming law. Rakhmet MUKASHEV, head of the Civilian Party, told parliament before the vote that NAZARBAYEV's leadership had been a key in winning international financial support for Kazakhstan. "The World Bank and International Monetary Fund offer credits to Kazakhstan largely under the guarantee of the first president, confident that he will not turn from the path of reforms and will lead the country out of the economic crisis," MUKASHEV said. The Kazakh President claimed he did not know about the initiative until he read about it in a Russian newspaper, when he was attending the (Commonwealth of Independent States) CIS Summit.

NAZARBAYEV is a former Communist Party boss who has led Kazakhstan since before its independence from Moscow in 1991. He is due to step down in 2006. Reuters reported that he may be clearing the way for a smooth transition of power to a handpicked successor. However, NAZARBAYEV said, "There will be no [chosen] successors. We will live in a civilized state with civilized laws. " However, NAZARBAYEV has already been slammed by the Organization for Security and Cooperation in Europe for banning his main rival Akezhan KAZHEGELDIN from a January 1999 presidential vote. Former Prime Minister KAZHEGELDIN has been threatened with arrest for alleged financial wrongdoing if he returns to his homeland.

Kyrgyz Sets Presidential Election Date

· Kyrgyzstan's Central Election Commission on Thursday has set the presidential election for October 29^th. Bakytbek ABDRAKHMANOV noted that the lower house of parliament would still have to approve the Commission's proposal. Deputies are expected to vote on the decision on June 29^th. The vote will put incumbent leader Askar AKAYEV's

democratic credentials under the international spotlight once again after a parliamentary ballot earlier this year drew widespread criticism from the opposition and the West. October 29^th is the last day the election can be held, since the constitution states that the vote must take place no more than two months before the incumbent president's five-year term ends. AKAYEV's second term ends on December 29^th. A former Communist Party functionary, he was first elected head of independent Kyrgyzstan in 1991.

Jiang Makes Central Asian Tour

· Chinese President JIANG Zemin will pay an official visit to Turkmenistan on July 5^th through 7^th, according to the Foreign Ministry. The visit will address ways to boost oil and gas cooperation because China is one of the most promising markets for Turkmen fuel. Turkmenistan is likely to receive a grant for the implementation of cooperation projects. JIANG will visit Ashgabat after his trip to Dushanbe on July 4^th, as part of the Shanghai Five summit. The Shanghai Five includes China, Kazakhstan, Kyrgyzstan, Russia and Turkmenistan. This will be the first visit to Turkmenistan by a Chinese president since the former Soviet republic gained independence. In April 1994, Chinese Prime Minister LI Peng visited Turkmenistan. Turkmen President Saparmurat NIYAZOV has paid two official visits to China, in 1992 and 1998.

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