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

Wednesday, July 5, 2000

scheduled to address a joint session of parliament on July 8^th, to deliver his annual state of the nation address.

Chechen Rebels Step Up Suicide Attacks

· At least 33 Russians died in five suicide bomb strikes in rebel Chechnya on July 2^nd. Chelyabinsk suffered the most losses, approximately 22 police officers. An estimated 84 soldiers were wounded in these attacks, which are believed to have been coordinated raids against Russian military bases. Six soldiers are missing and 11 civilians were reported killed in Urus-Martan. Truck bombings continued today in Urus-Martan and Achkhoi-Martan. Rebel sources report that hundreds of Russian troops were killed during the recent suicide attacks. According to a rebel commanders' statement, "We remind the Russian people that the martyrdom operations that are taking place in Chechnya today and that will take place beyond Chechen borders in the future will have been caused by the criminality of PUTIN…He [PUTIN] and his government have burnt, destroyed and murdered." Russian heavy artillery today also bombarded suspected rebel positions in the Itum-Kale region in the southern mountains, and around Shali and Kurchaloi in the southeast near the edge of the mountains. Helicopters attacked rebel hold outs in the Argun Gorge and other mountainous and forest areas. Russian troops have been ordered to shoot on sight at any vehicle violating the overnight curfew. Federal forces have rounded up 58 suspects in connection with a

Russian Federation

Politics

Duma-FC To Compromise On Reform Plans?

· Russia's two chambers of parliament, the State Duma and the Federation Council, are headed on a collision course over controversial legislation, which would shift the way Russia's regions are governed. President Vladimir PUTIN has proposed to replace governors and regional legislative leaders, who comprise the Federation Council, with regionally appointed senators. The Duma overwhelmingly approved the proposal, but it was quickly vetoed by the Federation Council. This time, the Duma is bolstering its support for the bill, nearing the two-thirds majority necessary to override the Federation Council's veto. PUTIN says reining in the regions is necessary to boost the economy and prevent the breakup of the state. On Tuesday, Federation Council leaders agreed to join a commission to find a compromise. The entire body is expected to meet Friday to work out details. PUTIN has stressed that he wants both sides to reach an acceptable compromise. The conciliation committee also is committed to reaching a compromise that the Duma could approve by July 19^th, the last day before its summer recess.

It should be noted that PUTIN has teamed up with the Duma against the Federation Council. His predecessor, Boris YELTSIN, enjoyed the support of the Federation Council governors which blocked legislative efforts by the Duma. YELTSIN used this relationship to counterbalance the Communist-led opposition in the Duma. The December 1999 parliamentary election filled the Duma with deputies loyal to the Kremlin and its budding leader, PUTIN. Moscow Carnegie Center analyst Andrei RYABOV said, "PUTIN is using the anger of the lower house at the upper for his own interests. " PUTIN is

Today's News Highlights

Russia

Mezhkombank Goes Bankrupt

Onako Sale To Open Next Week

European Republics

Belarus Loses Duty Free Status

Japan Gives $22M For Chernobyl

South Caucasus & Central Asia

Anadarko To Gather Data

Azeri Refuses Transneft Fine

Eni To Drill Again In 2001

US Probes Kazakh Bribery

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series of suicide truck-bombings. The troops searched several Chechen towns and cities for suspected rebels Tuesday. Police detained 46 people in the southwestern town of Urus-Martan, the site of one of Sunday's five blasts, and a dozen other rebels were captured elsewhere

Babitsky Charged With False Documents

· Russia's Interior Ministry filed final charges against Radio Liberty reporter Andrei BABITSKY, accusing him of carrying false documents, while dropping initial charges alleging he forged the documents, The Moscow Times reported. BABITSKY may face a fine equal to between $470 and $940, or as much as two months' salary. He could also serve up to two years in a labor camp. The charges will prevent BABITSKY from attending a session of the Organization for Security and Cooperation in Europe's parliamentary assembly in Bucharest, Romania this week. At the session, BABITSKY was to receive the organization's annual Prize for Journalism and Democracy. The daring journalist was detained in January, while traveling in Chechnya without proper accreditation. BABITSKY's critical coverage of the war included reports from the rebel side, angering the Russian military and then acting President Vladimir PUTIN. He was held for two weeks in a detention center in Chechnya, where he said he saw innocent men tortured by Russian police. BABITSKY then disappeared for weeks, causing co-workers to fear the military had killed him. He later resurfaced in Daghestan.

Economy

Ruble = 28.09/$1.00 (NY rate)

Ruble = 28.02/$1.00 (CB rate)

Ruble = 26.72/1 euro (CB rate)

Mezhkombank Declared Bankrupt

· Moscow's Arbitration Court has declared Russia's Mezhkombank bankrupt. The bank failed to successfully negotiate a deal with foreign creditors after it was hit by the 1998 crisis. A year ago the bank appeared to be ready to become a model for a restructuring agreement with foreign creditors. The Central Bank, however, called off negotiations by stripping Mezhkom of its operating license last July. The Tuesday bankruptcy set the stage for its assets to be divided or sold among creditors. According to the bank's bankruptcy manager, Yevgeny

YELISEYEV, Mezhkombank's outstanding debts total 3.776 billion rubles ($135 million), of which 70 percent was owed to foreign creditors. Assets amounted to about 2 billion rubles and Mezhkombank had already received claims worth 2.614 billion rubles.

Business

Property Minister Predicts Oil-Gas Sales

· Russia's Property Ministry today announced that it will begin a sell-off of the oil company Onako next week, but will wait for market conditions to boost offers for a 2.5 percent in gas monopoly Gazprom. Property Minister Farit GAZIZULLIN said the government would wait until an offer of $1 billion to $1.2 billion is presented before it begins privatization of Gazprom. The Gazprom stake is only receiving offers of $500 million to $550 million. GAZIZULLIN said, "We shall not sell Gazprom shares this year, that is for sure. Probably not next year…Gazprom is such a blue chip...Why should we hurry? We are going to think about what to do with Gazprom." The state initially planned to sell the shares last year, but political instability ahead of the presidential election and Russia's shaky economy forced the ministry to delay the sell-off. GAZIZULLIN said he welcomed foreign participation in Russian privatization adding some foreign investors had already shown interest in buying Onako. Competing oil company, Yukos, has expressed interest in the sale. Onako produced 7.95 million tons of oil in 1999. Sale terms include a starting price of $400 million price and 150,000 rubles ($5,360) or $50,000 of investment.

Arthur Anderson To Reform Svyazinvest

· Arthur Andersen LLC, one of the world's top accounting firms, Tuesday presented recommendations for changing the structure of Svyazinvest, a Russian holding company for 86 regional telecommunications companies and Rostelecom, the long distance phone company. Arthur Andersen recommended that Svyazinvest should continue with its current plan of merging regional operators. The so-called Brazilian variant envisages consolidating the telecommunication industry into seven large regional companies. Russian President Vladimir PUTIN has created seven federal districts in Russia in an attempt to centralize power and simplify the structure of government. The

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Svyazinvest plan would align itself with PUTIN's districts.

South Caucasus & Central Asia

Anadarko To Explore Georgia's Black Sea

· US oil company Anadarko announced on June 27^th plans said to gather seismic data, beginning this summer and lasting 18 months, off the Georgian sector of the Black Sea shore in search of oil and gas. An Anardarko spokesman told Reuters the company had reached an agreement with the Georgian authorities that called for Anardarko to gather seismic information in the area at an estimated initial cost of between $1 million to $2 million. A senior Georgian oil official added that Anadarko plans to invest around $1 billion to $2 billion to develop at least 25 offshore oil and gas wells. The agreement provides 8,900 square kilometers of potential oil and gas fields in the Georgian sectors 2A, 2B, and 3 in the Black Sea. The average cost to develop each well is $5 million. Revas TEVSADZE, the head of Georgian national oil company Saknavtobi, said Anadarko had signed a production sharing agreement for a 25-year term. Initially, Anadarko will receive 60 percent of oil generated per well until their investment is recovered. Then Anadarko will receive 45 percent of the oil and Georgia will receive 55 percent of the oil. An Anadarko spokesman said, "It is far too early to make any sort of estimates as to how much the company might ultimately invest in the project." TEVSADZE, however, predicted that the deep-water fields offshore of Batumi and Poti could hold about 200 million tons of crude.

Azerbaijan Refuses To Pay Transneft Fine

· Azeri Prime Minister Artur RASIZADE on Tuesday said Azerbaijan will not pay Transneft a fine for failing to send 2.3 million tons of oil through the pipeline operator's network according to an agreement. He said, "Whether Transneft demands $29 million or any other amount, we are still not going to pay." Last week, Russia's pipeline monopoly demanded Azerbaijan pay $29 million in compensation for breaching a 1996 intergovernmental agreement between the two countries on crude oil transports. Azerbaijan has only sent 300,000 tons this year. Azerbaijan halted all crude exports through Russia on June 21^st so as to retain large volumes to refine into fuel oil and use for electricity generation during the winter, Reuters reported. Azerbaijan had intended to send 360,000 tons north through

European Republics

Belarus Loses US Trade Benefit

· US Trade Representative Charlene BARSHEFSKY released a statement on Monday stating that Belarus is being removed from a list of nearly 140 nations which enjoy the privilege of duty-free access to US markets. She said that the basis for this removal is growing concern over worker rights. BARSHEFSKY said, "One of the fundamental criteria for GSP [Generalized System of Preferences] eligibility is evidence that a country is taking steps to provide internationally recognized worker rights. Unfortunately the government of Belarus continues to suppress trade union rights and harass union leaders. We therefore recommend that Belarus be suspended from the GSP program." Western experts have long been urging Belarus President Alexander LUKASHENKO to introduce free market reforms, but he prefers his own system, which he describes as a socially oriented market economy. Prices and economic policies are tightly controlled by an administration which brooks no opposition. US census bureau figures show that Belarus exports to the US were just over $92 million in 1999, Reuters reported.

Japan Pledges $22M For Chernobyl Cover

· Japan today pledged $22.5 million in additional to prior contributions for the renovation of a concrete reactor cover in the Chernobyl nuclear plant in Ukraine. Japan made the pledge at an ongoing international conference of donors in Berlin for the Chernobyl Shelter Fund, according to a Foreign Ministry statement. The fund was established in 1997 to pay for a $760 million project to restore the aging "concrete tomb" over Chernobyl's No. 4 reactor, which exploded in 1986 in the world's worst nuclear accident. The Japanese contribution is part of more than $300 million expected to be pledged at the Berlin meeting to cover the remaining portion of the project's total cost, as donors had only promised some $390 million at their first meeting in 1997. In 1997, Japan committed $22.5 million as part of $300 million pledged by the Group of Seven major industrialized nations and the European Union.

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the Russian pipeline to Novorossiisk in the third quarter of this year. But officials at Azerbaijan's State Oil Company (Socar), which is the largest exporter through the line, said it would be hard to guarantee that the agreement would be fulfilled.

Eni To Drill Second Well In 2001

· Eni, Europe's fourth-biggest oil company, said it will drill another test well at the Azeri Kyurdashi oil field, where it struck some oil last week, to judge whether the field is big enough to justify a $2 billion development. Eni said it found "oil shows" when it completed drilling the first well off the Caspian shore. Eni declined to estimate the amount of oil. The company said it will drill the second well there in the first quarter of 2001. The company's subsidiary Agip is the operator at Kyurdashi. It owns 25 percent of the field. Azerbaijan's State Oil Company (Socar) has a 50 percent interest in the field, Japan's Mitsui & Co. has 15 percent, while Repsol-YPF SA and Turkey's TPAO own 5 percent each. Socar estimated the reserves at 700 million barrels of oil.

US Probe Investigates Kazakh Oil Deals

· The US Justice Department has launched an investigation as to whether financial consultant James GIFFEN, from Mercator Corporation, bribed Kazakh officials with money belonging to Amoco Kazakhstan Petroleum Co., Amoco Kazakhstan (CPC) Inc., Mobil Oil Corp., and Philips Petroleum Kazakhstan Ltd. Possible violations could include the Foreign Corrupt Practices Act, statutes on Racketeer Influenced and Corrupt Organizations, money laundering, stolen property, and extortion. The Justice Department is also seeking cooperation from Swiss authorities to freeze accounts which may hold some of the money. A letter to Swiss authorities explained that GIFFEN allegedly, used US banks to funnel funds belonging to certain oil companies through Swiss bank accounts and shell companies in Switzerland and the British Virgin Islands for ultimate transfer to present and former high ranking officials of Kazakhstan," The Wall Street Journal reported. It is believed that

GIFFEN transferred as much as $60 million from US bank accounts in the name of international oil companies to numbered accounts and then onto bank accounts controlled by Kazakh President Nursultan NAZARBAYEV, former prime minister Akezhan KAZHEGELDIN, and head of the Kazakh state oil company Nurlan BALGIMBAYEV. The newspaper reports that KAZHEGELDIN received $6 million on July 9, 1997 in his Swiss account, but returned it to the sender, Novelon Trading on July 16^th. Other bribe payments could boost the alleged amount to $115 million. GIFFEN's lawyer, Mark MACDOUGALL said, "When all of the facts associated with this matter are clearly understood, we are confident that Mercator will be shown to have acted lawfully."

The investigation has raised concerned about business practices in the former Soviet republics and its failing efforts to combat graft. Donald BOWSER, program officer for the former Soviet Union at Transparency International, a Berlin-based organization set up to fight corruption in the region questions, "Where is the line between facilitation payments and bribery?" According to a survey by the European Bank for Reconstruction and Development (EBRD) and World Bank, companies in Kazakhstan pay as much as 4.7 percent of annual revenue as so-called bribe taxes and nearly 23.7 percent of firms report frequent bribing. Governments and companies across the regions, "continue to be tied in a web of interactions in which the state provides a wide range of direct and indirect subsidies to firms, while firms provide public officials with some combination of control over company decisions and bribes," the EBRD said earlier this year in a report on its survey. Corruption has been cited as one of the main problems which prevents further investments in the region. The Wall Street Journal noted that, "graft helps entrench over regulation, holds back development, discourages democratization, marginalizes non-oil sectors, and is pushing out Western investment."

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

Daily Report on Russia is published Monday-Friday (excluding holidays), by Intercon International, USA. Subscription price for Washington, D.C. Metro area: $950.00 per year. A discount is

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