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

Thursday, June 8, 2000

Russian Federation

Politics

US-Rus Defense Mins. Review Missile Plans

· Russian Defense Minister Igor SERGEYEV will present the Russian plan for a joint NATO-European missile defense to NATO defense chiefs in Brussels this week. US Defense Secretary William COHEN said he will have to assess the Russian plan to determine whether it is constructive or a ploy to divide the US and Europe. COHEN said, "We've got to look at exactly what he [SERGEYEV] has proposed in great detail before even making any realistic assessment of what he has in mind. I think there has been an attempt over the last year to divide the Europeans from NATO." Russian President Vladimir PUTIN proposed the plan, following a summit with US President Bill CLINTON, for a joint missile defense system as an alternative to a unilateral shield sought by the US. The US plan violates the Anti-Ballistic Missile Treaty agreement between the US and then Soviet Union. However, CLINTON and PUTIN agreed at the summit that the Treaty could be amended. Russia also acknowledged that there is an impending threat from rogue states. COHEN pointed out that once you accept that there is a threat the next step is to determine how you will respond to the threat. COHEN and SERGEYEV plan to meet in Brussels on Friday during which they will discuss their respective missile defense plans. They will also meet in Moscow, the last stop of Cohen's trip after he visits Sweden and Lithuania. The US Defense Secretary said it is important to focus on similarities in their thinking, rather than differences in their plans. "These are not necessarily either-or plans, they are plans that could work together, one buttressing the other," he said.

Chechen Tactics Turn To Kamikaze Missions

· Two Russian OMON Interior Ministry policemen were killed and five seriously injured in a suicide bomb attack on Wednesday in the Chechen village of Alkhan-Yurt. Kremlin spokesman Sergei YASTRZHEMBSKY said a truck filled with explosives, driven at high speed by a Chechen man and a woman, smashed into the wall of a building housing the OMON troops, exploding as it collided with the wall. He said, "both kamikaze-terrorists were blown to pieces" by the blast. In addition, Chechen gunmen fired on the policemen running toward the explosion. Fighter jets were summoned to fight against the rebel fire. Russian media reports say rebels initiated 19 attacks on Russian military positions over the past 24 hours, with Interfax news agency reporting that 20 rebels had been killed in overnight clashes. Russian jets and helicopters made more than 40 sorties, bombarding Chechen positions in the mountains. The rebels, although outnumbered and outgunned, have tormented Russian troops with sniping and lightning attacks that sometimes produce casualties. According to Russian First Deputy Chief of Staff General Valery MANILOV, 2,331 Russian soldiers were killed and 6,803 wounded in North Caucasus since August 1999. Russian General Gennady TROSHEV, commander of Russian forces in the area, said Tuesday that, "the army has virtually fulfilled its task" and claimed the Russian operation had left only 1,500 militants able to fight from their refuges in the southern mountains.

Today's News Highlights

Russia

Flat Rate Passes 2nd Reading

CB On Refinancing Rate, Ruble

Mediobanca Gants $1.5B Loan

European Republics

New Charges Against Lazarenko

Meri Approves Kraft For CB Post

South Caucasus & Central Asia

Armenia Increases Spending

Kazakh Sets Up Arms Body

Statoil-Socar To Hold Talks

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Moscow has promised to rebuild Chechnya's devastated economy and reorganize the local administration to make it more efficient. Prime Minister Mikhail KASYANOV said, "Measures to restore vital infrastructure, the health and education systems must take key place." The government has allocated 7.754 billion rubles ($276 million) towards funding priority measures in Chechnya this year. The Kremlin's civilian official Nikolai KOSHMAN complained that his administration had already used up the funding. "I think that for the year 2000 we shall end up spending between 10 billion and 12 billion rubles." President Vladimir PUTIN has sent a new bill to the Russian State Duma to create direct Presidential rule in Chechnya. A Kremlin controlled administration is expected to last for three years.

Flat Taxes Passes Second Reading

· Russian State Duma deputies on Wednesday approved in the second reading the flat income tax of 13 percent, in a vote of 266 to 114. The radical new proposal must pass three readings in the Duma before being sent to the Federation Council. The proposed flat tax, which would replace a progressive tax ranging from 12 percent to 30 percent, is a key part of a tax reform plan introduced last month by President Vladimir PUTIN's Cabinet. Communists and their allies argue that the flat tax would benefit only the rich, but they do not have enough votes in the Duma to block the proposal. The government argues that simplifying the tax system will make taxes easier to collect, encourage investments, and boost the economy, the Associated Press reported. The reform plan also calls for removing a widely criticized tax on business transactions and allows a range of tax deductions for business expenses, such as advertising and property insurance. The plan also calls for abolishing some ineffective taxes, combining others into a single flat charge. The government hopes that the parliament will pass the flat tax before summer recess so that it can become effective in 2001.

Economy

Ruble = 28.3/$1.00 (NY rate)

Ruble = 28.25/$1.00 (CB rate)

Ruble = 27.03/1 euro (CB rate)

CB Strong Ruble, Refinancing Rates Reviewed

· Central Bank Chairman Viktor GERASHECHENKO positively assessed the Russian currency, stating that it should be able to hold its own against the dollar. He noted that the Central Bank has enough reserves to counter any speculative pressure. GERASHCHENKO confirmed that the Central Bank is considering cutting its key refinancing rate soon to keep it in line with inflation. Reuters reported that the ruble has been firming steadily since the start of the year, supported by strong export revenues resulting from high international energy and commodity prices. GERASHCHENKO said export revenues in the near future would not be lower than in April. Prime Minister Mikhail KASYANOV said last month that further strengthening of the ruble was not in the economy's best interests. But GERASHCHENKO reiterated that artificial weakening of the ruble against the dollar would not be good for Russia. "The negative consequences of the national currency's depreciation may be harmful for the social sector, households...and servicing foreign debt," he said.

Cutting the refinancing rate is on the agenda of the next Central Bank board meeting set for June 12^th. The refinancing rate was last cut from 38 percent to 33 percent on March 21^st. GERASHCHENKO said the rate would change gradually in line with inflation, which according to government estimates would be 16 percent this year, down from 36.5 percent in 1999. Some analysts have forecasted a lower inflation rate for 2000 at about 10 percent to 12 percent. Commercial banks seldom borrow from the Central Bank at its refinancing rate, but its movements serve as a guideline for them in setting their lending rates. The refinancing rate is widely regarded as a major signal used by theCentral Bank to indicate its overall monetary stance.

Business

Mediobanca Grants Russia $1.5B Loan

· Mediobanca, Italy's largest investment bank, signed an accord to provide a credit line of $1 billion to $1.5 billion to fund Russian industrial projects via Vnesheconombank, a state-owned Russian bank. Under the terms of a memorandum of understanding, the loans will mainly go to companies jointly set up by Italian and Russian businesses. SACE, Italy's export credit insurer, will insure the individual projects

When you need to know it as it happens

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the banks agree to fund. The Russian economy grew an estimated 7 percent in the first quarter of 2000, and expanded 3.2 percent in 1999. Simest, an Italian government lender set up to promote Italian business interests abroad, also will sign the memorandum. Simest said it is prepared to take equity interests in Italian-Russian joint venture companies and to fund as much as 90 percent of the Italian side's equity investments at below-market rates. The Moscow Times, citing Vladimir DMITRIEV, first deputy chairman of Vnesheconombank, reported in April that among the projects the banks are considering funding are Gazprom's Blue Stream project, which will build a natural gas pipeline to Turkey from Russia and a loan to Gorkovsky Avtomobilny Zavod, Russia's second-biggest car-maker. The accord was signed this week in connection with Russian President Vladimir PUTIN's visit to Rome.

yers say that the accused is prepared to provide documentations of bank accounts and wire transfers proving that a "named senior Ukrainian politician" was among the beneficiaries of his financial operations. LAZARENKO is accused of siphoning off hundreds of millions of dollars from Ukrainian state enterprises in 1996 to 1997. Current Deputy Prime Minister in charge of energy reform Yulia TYMOSHENKO was cited as, "a key figure in [LAZARENKO's] money-laundering conspiracy." TYMOSHENKO reportedly transferred $72 million to LAZARENKO "specifically at a point in time when he was prime minister" through a company she controlled, Somolli Enterprises.

Baltic Radar Center Opens

· The regional air surveillance coordination center of the joint Baltic airspace surveillance system BALTNET was opened in Karmelava, Lithuania, on June 6^th. Defense ministry and military officials from Baltic and other partner countries attended the opening. The BALTNET project was launched to coordinate airspace surveillance over the Baltic countries, and is supported by several NATO member countries, including the US, which has allocated $10.5 million. Estonian Defense Minister Juri LUIK said the establishment of the BALTNET office is a major step for the Baltic countries toward NATO, ELTA reported.

Meri Confirms Kraft As CB Governor

· Estonian President Lennart MERI has confirmed Vahur KRAFT as the country's new Central Bank governor. KRAFT first became governor in 1995, but was not re-elected when his five-year term ended on April 28^th. Instead, the Central Bank council chose little-known academic Vello VENSEL. But VENSEL stepped down just days before taking the job, citing health reasons. The council then selected ex-finance minister Mart OPMANN as Central Bank governor only to see his nomination rejected by MERI, who said his political connections might compromise the Central Bank's independence. The appointment of a new governor has been in doubt for six weeks. KRAFT, a former commercial banker, said he would take the position to restore some credibility, lost during the selection process. He said last week when the council nominated him once against that he remains opposed to Estonia's unilateral adoption of the euro and committed the country's currency board system.

European Republics

Lutskyi Avotmobilnyi Produces Russian Cars

· Lutskyi Avtomobilnyi Zavod, a Ukrainian automaker, began producing Russian AvtoVAZ cars to meet demand in Ukraine's domestic market. The Ukrainian company plans to make between 2,500 to 4,000 cars a year designed by AvtoVAZ and expects to produce 1,100 cars designed by Russia's Ulianovskyi Avtomobilnyi Zavod before the end of this year. Ukrainians purchase about 50,000 AvtoVAZ cars a year and about 5,000 vehicles made by Ulianovskyi Avtomobilnyi Zavod. Earlier this year, Ukraine's government cut tax privileges initially approved for the country's biggest $300 million AvtoZAZ-Daewoo car-making joint venture in order to set a fair competition on the market and boost the production.

New Charge Brought Against Lazarenko

· Ukraine has issued a new charge against former prime minister Pavlo LAZARENKO, who was indicted in the US last week on seven counts of money laundering, one count of conspiracy to commit money laundering, and 23 counts of transporting stolen property. Ukraine's prosecutor general added the charge of murder, accusing him of ordering three assassinations, including well-known businessman Yevhen SCHERBAN in 1996, the Financial Times reported. However, LAZARENKO's law

When you need to know it as it happens

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South Caucasus & Central Asia

Armenian Parliament Increases Spending

· Armenian deputies on Monday voted to increase this year's budget expenditures by 5.5 percent, to $495 million, the RFE/RL Newsline reported. The government will withdraw $26.7 million from a $53 million privatization fund to underwrite the additional expenditures, mostly in the construction sector. Of that sum, $10 million will be earmarked for the northern districts hit by the 1988 earthquake. The additional expenditure, which has also been approved by the Armenian Central Bank, will raise the projected budget deficit to some $120 million.

Kazakh Sets Up Special Arms Controls Body

· In order to boost its international image after two arms scandals in 1999, Kazakhstan has decided to set up a special government body to control the sale of weapons abroad. According to a government statement, "No arms sales will take place without the permission of the special inter-departmental commission." Kazakhstan's arsenal consists of mostly ageing Soviet-era weapons, frequently sold to Third World countries. Defense Minister Sat TOKPAKBAYEV said earlier this week that violations were rife in Kazakh arms sales and that the business should be handed over to the defense ministry. "This will be profitable to the country. An independent commission could set sale prices and control the transactions." Last year, the West criticized Kazakhstan after an undisclosed number of warplanes were sold to Stalinist North Korea. The government denied knowledge of the sale but the scandal embarrassed President Nursultan NAZARBAYEV and threatened relations with the United States and South Korea, both key investors in the oil-rich Central Asian state, Reuters reported.

Statoil-Socar To Hold Talk on Azeri Oil

· Azeri President Geidar ALIYEV on Tuesday instructed senior officials at Azeri State Oil Company (Socar) to move ahead in negotiations with Norway's Statoil. If the talks are successful, Statoil

would receive approval on the operatorship of a new gas field in the Azeri sector of the Caspian Sea. Harold FINNVIK, vice president of Statoil Azerbaijan, said a number of blocks were under consideration, including D-8, D-10 and D-11, which are deep-water areas in the middle of the Azeri sector, neighboring the giant Shakh Deniz gas field. Statoil is already involved in three of Azerbaijan's 17 existing foreign consortia, including the flagship Azerbaijan International Operating Company (AIOC), a group of 11 companies led by BP Amoco. Until the beginning of last year, Statoil was joint operator of two projects, Shakh Deniz and Alov, in a formal alliance with British Petroleum. Reuters reports that once BP and Amoco merged, the alliance with Statoil was dissolved. Statoil Vice President Rolf Magne LARSEN said, "We hope from the experience of Statoil and Socar in negotiating deals here that we could be signing a contract by the end of this year."

Meanwhile, Statoil said a group it leads with BP Amoco will have to pay between $1 billion and $2 billion to bring natural gas from the Caspian Sea to Turkey by 2003. Statoil, which owns 25.5 percent of the Shah-Deniz project to extract gas from under the Caspian, began testing the Azeri stretch of a planned 680-kilometer (422 miles) route to Turkey to assess the costs. The company hopes it can upgrade a stretch through Azerbaijani to Georgia, while it will have to build a another 280-kilometer stretch to complete the pipeline to Turkey. BP Amoco, the world's third-largest public traded oil company, also owns 25.5 percent of the project that also includes France's Total Fina Elf, Socar and LUKoil Holding.

Central Asia Economic Community Meets

· The Prime ministers of the Central Asian Economic Community [Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan] opened a meeting in Astana today to discuss the further economic integration of these countries. A set of joint documents is expected to be signed.

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