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 12, 2000


Russian Federation

Politics

Putin Target s Oligarch In Major Crackdown

· Russian Vladimir PUTIN has turned up the heat on several top businessmen or so-called oligarchs. In an interview with Japan's NHK Television on Tuesday, PUTIN said he wanted to build an orderly market economy in which nobody was above the law. These comments appear to refer to an earlier campaign promise to distance him from the oligarchs and trim their influence, particularly on political policy. Former Deputy Prime Minister and leader of the Union of Right Forces in parliament Boris NEMSTOV said, "This is the beginning of a war between business and power."

The President's comment coincided with three separate criminal investigations against major companies. On Tuesday, prosecutors seized financial and personal documents from the Media-Most group of Vladimir GUSINSKY, his NTV Television Station, and Gazprom. Tax police also launched a criminal case, as was predicted by GUSINSKY, against LUKoil head Vagit ALEKPEROV and chief accountant Lyubov KHOBA for alleged non-payment of taxes. The Interros Holding group, of Vladimir POTANIN, was also the target of the crack down. The Prosecutor General's office has demanded that Interros make an additional payment on the 1995 privatization sale of Norilsk Nickel. Russian officials have said they had no intention of reviewing all the privatization cases. These attacks have raised great concerns among foreign investors regarding property ownership rights, the growth of the economy, and the freedom of the independent press. Eric KRAUS, an analysts at Nikoil Investment said, "It is clear that open season has been declared on the oligarchs," the Financial Times reported. Of the so-called oligarchs, it should be

noted that Mikhail FRIEDMAN's Alfa Group and Alexander SMOLENSKY's Kommersant Daily and Novaya Gazeta have so far avoided the scope of PUTIN's crack down.

Russian Tightens Border Checkpoints

· Russian federal forces have tightened security along the border with Chechnya and various checkpoints, after receiving information that rebels were planning more attacks. Russian forces suffered two weeks of suicide attacks killing dozens of officers and civilians. Kremlin spokesman Sergei YASTRZHEMBSKY said, "Militants have switched over to a subversive-partisan war, attacks from behind the back, blasts and a mine war."

In addition, the Russian military on Tuesday appointed Bislan GANTAMIROV, former commander of the Chechen pro- Kremlin militia, as first deputy to Akhmad KADYROV, head of the federal administration in Chechnya. Anatoly KVASHNIN, chief of the Russian General Staff, introduced him as KADYROV's new aide in the temporary Chechen capital of Gudermes. GANTAMIROV will supervise all the republic's armed structures.

Economy

Environmental Groups Calling On WB To Stop Loans

· Russian and international environment organizations in a letter to World Bank President James WOLFENSOHN urged the lending

Today's News Highlights

Russia

Tax Police Investigate AvtoVAZ

Interros Ordered To Pay $140M

Gazprom To Start Artic Drilling

European Republics

IMF Reviews Estonian Economy

Daewoo To Sell Ukrainian Mobile

South Caucasus & Central Asia

Georgia Creates Anti-Corruption

Socar Reports Falling Oil Output

US-Turkmenistan On Pipelines

Politics-Economics-Business

Page


Wednesday

July 12, 2000

Intercon's Daily

institution to stop loans to Russia, until Russian President Vladimir PUTIN re-establishes the State Committee for Environmental Protection and the Federal Forest Service. They also questioned continuing a $60 million bank loan to the forest service that was made five days after the agency was dissolved on May 17th. In an apparent cost-cutting move, environmental protection was placed under the Ministry of Natural Resources, which helps enterprises make the most of Russia's mining, oil and timber resources. The letter was signed by 67 mainly Russian organizations, international groups such as Friends of the Earth and the Sierra Club of San Francisco, as well as Alexei YABLOKOV, an environmental adviser to former President Boris YELTSIN and Alexander NIKITIN, a former Navy officer who was imprisoned and later released after speaking out about the Russian fleet's handling of nuclear waste. Environment problems in Russia include oil spills, contaminated drinking water, over-logging and huge, poorly stashed repositories of nuclear and chemical waste. The Associated Press reported that last week the World Bank's board of directors canceled a $40 million loan to China, in part because of concerns over the effect it would have on the environment.

Ruble = 27.9/$1.00 (NY rate)

Ruble = 27.86/$1.00 (CB rate)

Ruble = 26.24/1 euro (CB rate)

Business

Tax Police Launch Probe Against AvtoVAZ

· The Russian Federal Tax Police Service (FSNP) have filed criminal charges against the executives of AvtoVAZ, Russia's top carmaker and producer of the Lada, for misreporting sales figures and evading taxes. The tax police allege AvtoVAZ didn't declare sales of more than 200,000 cars by giving them the same serial numbers. The vehicles sold illegally through regional sales departments thereby removing them from legal turnover. It is estimated that the damage could be around $600 million. Tax police director Vyacheslav SOLTAGANOV said, "There also large sums of taxes were hidden amounting to several hundreds of millions of dollars." Police raided the offices of AvtoVAZ in late May, seizing documents from the company and AvtoVAZ Bank, partly controlled by LogoVAZ. Businessman and Duma deputy Boris BEREZOVSKY

founded the LogoVAZ dealership and is closely linked with AvtoVAZ. The FSNP conducted a large-scale operation in 30 regions of Russia to check the tax record of subsidiaries of AvtoVAZ. Tax police also seized financial documentation of AvtoVAZ's 42 regional trade outlets.

AvtoVAZ has appealed the decision to start criminal proceedings against it at the Moscow arbitration court. The AvtoVAZ case, however, differs from other campaigns against the so-called oligarchs of Russia. Analysts point out that AvtoVAZ head Vladimir KADANNIKOV supported President Vladimir PUTIN's party of choice in the December parliamentary election and because the government effectively controls the company. The company's press office quickly pointed out that the criminal proceedings should not affect talks with General Motors (GM) to form a joint venture. The AvtoVAZ-General Motors joint venture is aimed at converting Astra-3000 and VAZ-2123 Niva cars. AvtoVAZ shares fell 9.4 percent to $1.63 on July 6th, when they were last traded.

Evidence Obtained Implicating Media Most

· Russia's Prosecutor General Vladimir USTINOV announced today that investigators had obtained evidence implicating Media Most of financial violations. He clearly stated, "there is wrongdoing in the Media-Most case." Agents from the Prosecutor's office and the Federal Security Service (FSB) raided Media Most's offices and the NTV Television Station, seizing financial and personal files. Agents also searched the offices of Media Most's financial partner, gas monopoly Gazprom. Media Most's chairman Vladimir GUSINSKY is accused of defrauding the government of $10 million during a privatization deal for Russkoye Video. GUSINSKY was also ordered to hand over a pistol that the government awarded him in 1994 for "outstanding services to the fatherland." Lawyers for Media Most have stated that investigators have failed to present any evidence to support their charges against GUSINSKY. Many believe that the campaign against GUSINSKY is a political one, because his independent media empire is critical of President Vladimir PUTIN and government's policies. The Kremlin has stressed this is not a political probe, insisting that the prosecutors are acting independent of the government.

When you need to know it as it happens

Politics-Economics-Business

Page


Wednesday

July 12, 2000

Intercon's Daily

Interros Ordered To Pay More For Norilsk Sale

· Russia's Prosecutor General's office has targeted the sale of Norilsk Nickel, one of the largest metals factories in 1995, claiming that Interros Holding company underpaid the state for a 38 percent stake. Deputy Prosecutor General Yuri BIRIUKOV in a letter to Interros Chairman Vladimir POTANIN demanded a "voluntary" payment of $140 million or a criminal case would be launched. Reuters reports that Norilsk was privatized under a so-called shares-for-loans scheme in which banks and other firms gave the state loans in return for the right to manage state-owned shares in privatized companies. The loans were not returned. The stakes were later tendered and subsequently bought by entities close to the lenders.

POTANIN has refused to pay, saying earlier court rulings have found the privatization legal. He replied in an open letter addressed to the Prosecutor General, Vladimir USTINOV, published by Kommersant Daily on Tuesday, demanding an open investigation of the case in strict accordance with the country's civil law [See page 5]. "I am convinced that the history of privatization of Norilsk will one day find its way into text books on economics and law as it focuses like a magnifying glass on several key problems of life in Russia today."

Gazprom To Begin Drilling In The Artic

· Gazprom plans to start drilling at two offshore deposits at the Gulf of Ob in the Russian Arctic on July 14th, according to Kommersant Daily. The Kamennomysskoye and Severokamen-nomysskoye deposits hold 1 trillion cubic meters of gas reserves and are expected to produce 50 billion cubic meters of gas per year by 2008. The company plans to drill three appraisal wells at the fields at a cost of as much as 200 million rubles ($7.2 million) each. Gazprom is investing in new exploration projects following its gas production decline, which will fall for the second year in 2000.

The IMF also said that Estonia needed to prevent a large account deficit. However, the IMF welcomed the reduction in the fiscal deficit in early 2000. The report said fiscal targets for 2000 and 2001 were appropriate but Estonia needed "firm expenditure policies" before it pushed ahead with tax cuts planned for 2001. The fiscal position improved substantially in the first quarter of 2000 as revenues picked up with the economic recovery and expenditures were restrained, the IMF said. The IMF also said the currency board pegging Estonia's kroon currency to the mark should remain a cornerstone of Estonian economy. It stressed the need for "appropriate macroeconomic and structural policies, particularly in the labor markets" to support the currency board and keep the Estonian economy competitive, Reuters reported.

Daewoo To Sell Ukraine Mobile Co.

· Daewoo Corp. is talking with potential buyers to sell its 49 percent stake in Ukrainiski Radiosystemy, a Ukrainian mobile phone company, by the end of the year. The joint venture operates a GSM-900 mobile phone network in Kiev and the surrounding region under the Wellcome brand name. Ukraine's State Property Fund and domestic companies control 51 percent in the venture. Ukraine is currently reorganizing its telecommunications industry, buying back shares in Utel, a long-distance phone service joint venture, from Deutsche Telekom and other shareholders, and considering selling a part of its stake in the country's largest wireless phone company, Ukrainian Mobile Communications.

South Caucasus & Central Asia

Georgia Creates Anti-Corruption Committee

· On Monday, July 11th, Georgian President Eduard SHEVARDNADZE signed an order creating a special anti-corruption committee. "While I could have score some `points' before the election by establishing an anti-corruption task force and getting a few token arrests, I am sure that this would not have defeated corruption," said SHEVARDNADZE. The seven-member committee will develop recommendations by September 20, 2000, concerning the establishment of the National Anti-Corruption program. The chairman of the group is Vladimir CHANTURIA, the chairman of the Georgian Supreme Court. Other members are

European Republics

IMF Urges Estonia To Implement Tax Reforms

· In an International Monetary Fund (IMF) review report of the Estonian economy, the Fund urged Estonia to use its tax policy to create a more favorable environment for investment and growth.

Page

Politics-Economics-Business

When you need to know it as it happens


Wednesday Intercon's Daily July 12, 2000

David USUPASHVILI, a well known Georgian lawyer, Gia NODIA, director of the Caucasus Institute of Peace, Democracy and Development, Nana DEVDARIANI, Public Defender, Giorgi DZNELADZE, Deputy Minister of Finance, Gia MEPARISHVILI, chairman of the Parliamentary Committee for Judiciary Issues, and Sulkhan MOLASHVILI, chairman of Chamber of Control. The first session of the committee will be held today. SHEVARDNADZE stressed, "I declare with all responsibility; nowadays nothing can be a more important issue for Georgia's society and State development, than combating corruption." The group's first goal will be determining the reasons of corruption and the measures for their elimination, Prime News Agency reported. The order to create the committee is opposed by Mikhail SAAKASHVILI, the leader of the Citizens Union fraction of Parliament. In his statement, SAAKASHVILI stressed that the fight against corruption should begin with the reform of police forces, Ministry of Internal Affairs and the Procurators Office. President SHEVARDNADZE touched upon this in his press conference today. He said that the system needs to be reformed, however he did not say anything about starting such reform yet. "Working out the anti-graft program will be the last step on the way of achieving the most important goal of my life¾defeating corruption in Georgia forever," SHEVARDNADZE told Georgian television and radio. Widespread graft is cited by the International Monetary Fund (IMF) as one of the reasons why the fund will not resume lending money to Georgia.

Armenia Closes Massacre Investigation

· The Armenian military prosecutors announced on Tuesday that the preliminary investigation of the terrorist act in the parliament on October 27, 1999, is over. Terrorists killed the then Prime Minister, Parliamentary Speaker, Deputy Speaker, Energy Minister, a senior economic official, and nine others, before taking hostages overnight. The 14 suspects, their defense, 91 victims and successors of the eight murdered statesmen will be given 50 days to study the case, according to chief investigator of the military prosecutors Artak ARUTYUNYAN. A new preliminary investigation will be done for some episodes of the case, concerning illegal storing of firearms, possible

involvement of officials in the crime and criminal negligence, ARUTYUNYAN added.

Socar Reports Fall In Oil Output

· The Azerbaijan State Oil Company (Socar) announced that oil production fell by 1 percent over the first half of the year following depletion of its inland crude deposits. Socar produced 4.46 million tons (32.7 million barrels) of oil from January to June down from 4.5 million tons extracted last year. At the same time the production at offshore projects reached 3.72 million tons of crude. Azerbaijan produced 2.6 billion cubic meters of gas over the reported period down 4.8 percent from the 2.68 billion cubic meters last year. More extensive "exploration [of deposits] is required for further increase and development of their reserves," said Akif NARIMAMOV, chief geologist of Socar's offshore oil and gas production unit. Azerbaijan shipped 334,881 tons of crude through Transneft, Russia's state-owned oil pipelines monopoly, to the Black Sea port of Novorossiisk as of the beginning of the year. The Azeri company is required to ship 2.3 million tons of crude through the Russian territory this year. Russia is demanding that Azerbaijan pay $29 million in compensation for breaking the agreement

Niyazov-Sestanovich Discuss Pipelines

· Turkmen President Saparmurat NIYAZOV met with advisor to the US Secretary of State for the Commonwealth of Independent States Stephen SESTANOVICH on Tuesday to discuss the diversification of pipelines. According to a Turkmen official, NIYAZOV said that Turkmenistan wants US guarantees on the $2 billion trans-Caspian gas pipeline. Turkmenistan has not fully committed itself to the project. NIYAZOV is still reviewing proposals submitted in March by PSG consortium, The pipeline is vital for Turkmenistan if it is to end its reliance on Russian export routes and sell gas to hard currency markets. However, NIYAZOV told SESTANOVICH Turkmenistan was unhappy with the 16 billion cubic meter (bcm) pipeline quota allocated to it instead of the 30 bcm it had wanted, Reuters reported. The country has signed a deal with Turkey to sell it 16 bcm of gas a year with transit rights for another 14 bcm. The trans-Caspian pipeline is one of the pillars of US energy policy in Central Asia and the Caucasus. It sees the route as a way to reduce Russian influence in the region.

Politics-Economics-Business

Page


Wednesday

July 12, 2000

Intercon's Daily

An open letter from Vladimir POTANIN, president of Interros Holding

to Russian Prosecutor General Vladimir USTINOV, as published in Kommersant Daily

Dear Vladimir Vasilyevich!

"I am sure that the story of privatization of the Russian joint stock company Norilsk Nickel will be included in the textbooks of economy and law someday, because it revealed, like a magnifying glass, several key problems of present-day Russia. Now we can say that the Russian society and state have appreciated the results of social and economic reorganization of the company. Every year the president of Russia gives government awards to the company's workers and leaders, and lately the company and its shareholders have gained the real support of the society.

As you know, the claim of the Moscow prosecutor general's office to the Arbitration court, stating that privatization of Norilsk Nickel was unlawful, received a great response all over Russia and abroad. This incident, being merely a case of privatization, attracted such close attention because there have been several court decisions on Norilsk Nickel's privatization since 1996, and recently the Russian Audit Chamber declared the mortgage and subsequent sale of Norilsk Nickel legal, pointing out the high efficiency of Interros management team.

Despite these decisions and visible success of operations of Norilsk Nickel, the office of the Prosecutor General thought - and they continue to think - that the shares of this particular enterprise must be returned to the state. This might have caused them to start a criminal case against A.R. KOKH in 1998. Acting as a witness in this case, I had an opportunity to observe how the investigators persistently ignored the previous court resolutions and decisions of their own colleagues as well as the results of expert analyses. The office of the Prosecutor General found it impossible to send this case to court, and in 1999 the cased was closed due to unrehabilitating circumstances. At the same time, they couldn't bring a lawsuit against me.

Perhaps it was this self-assuredness based on the materials of the above mentioned criminal case that recently made the office of the Prosecutor General apply to the Arbitration Court. It looks like this case also will never reach the court, because that same self-assuredness led the officers to propose a few days ago that I should personally pay $140 million compensation of the damage, which I allegedly had caused to the state.

I highly value the people's persuasions and their readiness to defend their views, but I find it unacceptable when changes of these views destabilize the work of one of the most efficient Russian companies. I believe that the results of Norilsk Nickel privatization unshakeable, but if the office of Prosecutor General has another point of view, I am ready to consider the case at the Arbitration court.

As regards the charges brought against me personally, if the office of the Prosecutor General is going to put pressure on me or resort to overt blackmail, I insist that the case be heard in public court according to the civil code of the Russian Federation."

President of Holding Company Interros V.O. POTANIN


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

available for non-profit institutions.

Daily Report on Russia is for the exclusive use of the subscriber only. Reproduction and/or distribution is not permitted without the expressed written consent of Intercon. Daily Report on Russia Ó copyright 2000, Intercon International, USA.

When you need to know it as it happens

Politics-Economics-Business

Page