DAILY REPORT ON RUSSIA

AND THE FORMER SOVIET REPUBLICS

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Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Thursday, July 13, 2000

Russian Federation

Politics

Military Coup Against Sergeyev Erupts

· At a closed meeting on Wednesday, Chief of Staff Anatoly KVASHNIN directly challenged the authority of Defense Minister Igor SERGEYEV, setting up a show down between conventional forces and rocket forces. KVASHNIN had called for the missile service, now a separate branch of the military, to be brought under the central command that controls the conventional army, navy and air force by 2003. He also called for rocket forces units to be eliminated as their missiles become obsolete due to age or are dismantled under arms control treaties. SERGEYEV, who once served as commander of the rocket forces, backs their continued independence. Rumors of a dispute in the military finally surfaced today in Kommersant Daily. The newspaper claims that KVASHNIN's strong recommendations "can only be described as an attempted coup in Russia's military." The strategic nuclear rocket forces issue was not resolved during the meeting, leaving both sides to lobby President Vladimir PUTIN, who has not commented on the row. Alexander GOLTS, defense analyst for Itogi weekly magazine, told Reuters, "Eventually, one of the two [SERGEYEV or KVASHNIN] will have to go. The row has already reached the point where it clearly harms the functioning of the Defense Ministry's leadership." Rocket forces' commanders sent a letter to KVASHNIN stating, "A sharp cut in the strike formations of the rocket forces can have negative political, military-technical and socio-economic consequences for Russia and its international authority." Conventional forces, however, have complained that Russia's deteriorating Cold War arsenal diverts resources away from basic needs.

Doubts Surrounds Big Business Campaign

· While President Vladimir PUTIN's aim to combat corruption by toppling the nation's oligarchs appears to be working, after assaults on Media Mosts' NTV Television and Gazprom, LUKoil, Interros, and AvtoVAZ, there is skepticism among the ranks as to what the results will be. PUTIN's deputy chief of staff, Vladislav SURKOV, in an interview with Kommersant Daily called the criminal probes, launched against the oligarchs in search of financial violations, pointless and counterproductive. He said, "I believe that the sort of period we are now living through should sound something like this: We should forget what happened before. Or perhaps not so much forget as not to settle accounts. People are tired of hatred for one another and recalling matters of evil. This applies to the economic sphere." Yevgeny VOLK of the Heritage Foundation pointed out that the attacks on big business appears to be simply a symbolic move to show who is in charge and that "no one is above the law." He said, "PUTIN needs to show positive results of his rule, to show that he is in charge...These moves are more political than criminal." VOLK added that oligarchs, who do not have close ties to the Kremlin, have been targeted first. Other analysts note that the assault on oligarchs could backfire and show weaknesses in PUTIN's government. In fact, PUTIN has opened his government up to a two front war, one against oligarchs and another against Chechen rebels. Both could be long, costly, disrupt the nation's economic

Today's News Highlights

Russia

Police Confiscation Illegal

St. Pete Telecom Merger

European Republics

Latvian GDP Growth Predicted

Ukrainian Audit Report

Sun Brew To Invest $20 Million

South Caucasus & Central Asia

Georgia Commits To Pipelines

Kalyuzhny On Caspian Sea

Uzbekistan's Economic Reforms

Politics-Economics-Business

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Thursday

July 13, 2000

Intercon's Daily

growth, and disillusion the citizens, who have longed for freedom and real democratic reforms.

Economy

Ruble = 27.9/$1.00 (NY rate)

Ruble = 27.84/$1.00 (CB rate)

Ruble = 26.07/1 euro (CB rate)

Russia Calls For Equality From G-7

· Russian President Vladimir PUTIN said that Russia must be considered an equal partner with the world's seven wealthiest industrial nations, but adds that Russia is not seeking funding from the organization. The assertion reflects PUTIN's push to portray Russia as a major power, even as the Kremlin says it will trim commitments abroad to conserve scarce resources, place more emphasis on assisting the country's economic recovery and build a stronger state. Foreign Minister Igor IVANOV on Monday remarked that, "Russia was, is, and will always be a superpower." While Russia has tended to talk like a superpower, attempting to wield its influence, in reality Russia lacks the qualities of a superpower. This can be seen in its faltering economy, high debts to international lending institutions, and its deteriorating nuclear force. PUTIN's statement also reflects the in the new foreign policy released this week, which calls for concentrating resources to rebuild its economy. PUTIN said in a lengthy interview with Reuters, Russia's ORT Television, and Japan's NHK, "We are not counting on or striving to receive any concrete privileges or benefits." He explained that under former president Boris YELTSIN, Russia developed a relationship, forming the "Group of Eight. PUTIN said, "Back then, the talk was mostly about reviving and improving Russia's relations with leading financial international organizations, about credits for the Russian economy and so on. Today, we do not subscribe to that format of relations with the leaders of the world's main industrial countries."

Business

AvtoVAZ-GM "Business As Usual"

· US General Motors (GM) today said that the negotiations for a planned joint venture with Russia's largest car manufacturer AvtoVAZ are continuing as usual, despite the opening of a criminal tax evasion case against AvtoVAZ. Tax Police chief

Vyacheslav SOLTAGANOV said the company dodged "hundreds of millions of dollars in taxes," by producing cars with identical identification numbers. AvtoVAZ spokesman Vladimir ARTSYKOV denied any wrongdoing. GM''s public affairs manager in Moscow, Dmitry CHOULGA, noted that the accusations have been leveled at unidentified senior management at AvtoVAZ rather than the company itself. "General Motors is going ahead with negotiations with AvtoVAZ regarding a joint venture manufacturing project. And of course we're not dealing with individuals employed by AvtoVAZ, we're dealing with a large Russian plant which we consider our primary partner." He added, "We are aware of risks, specific and possible risks, that can arise in Russia, but we're doing business as usual."

Police Confiscation Declared Illegal

· A Siberian court on Monday ruled that the confiscation of documents on June 27^th from subsidiaries of Tyumen Oil Company (TNK) by special police was illegal. The court demanded that the authorities return the documents to TNK's subsidiaries, according to a press release. The Prosecutor's Offices in Moscow and Nizhnevartovsk had earlier confirmed to TNK that they did not authorize the seizure. German KHAN, chief operating officer of Tyumen Oil said, "Today's court decision essentially confirms our company's position from the very start that what happened in Nizhnevartovsk was not a seizure but a search, which requires the approval of a prosecutor…The special forces' actions had no foundation in the law. While we are prepared to cooperate with investigators, we categorically reject the use of law enforcement bodies as a tool in a competitive dispute." The special police claimed they were acting as part of an investigation of alleged financial fraud by the former management of the companies. However, later police statements claim that the search was conducted due to concerns surrounding the company's privatization in 1997. The documents taken from TNK included information from 1998 through 2000 and appear to have no relevance either to the fraud claims or to the privatization carried out in 1997.

St. Petersburg Phone Merger At Risk

· The merger of three St. Petersburg telecommunications companies, St. Petersburg Telephone, St.

When you need to know it as it happens

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Petersburg Telegraph, and St. Petersburg MMT, is in danger of failing, after a court halted the sale, the Vedomosti reported. The decision came following a lawsuit brought by Sergei MOICEEV, a shareholder of St. Petersburg MMT, who is attempting to appeal the valuation of the company and the co-efficient for the proposed share swap. Valeri YASHIN, general director of Svyazinvest, the holding company for Russia's telephone companies, appealed the court's decision. YASHIN has previously said the consolidation of the St. Petersburg telecommunications companies into a regional operator is a test case for a plan to restructure all of Russia's regional telephone companies into seven operators.

million. The government will retain 50 percent plus one share, while employees will be able to buy between 7 percent and 12 percent at half-price. Chief consultant to the parliamentary committee on transportation and communications Volodymyr ARTEMYEV said, "The law sets out clear rules for UkrTelecom's privatization and makes Ukraine's phone industry significantly more attractive to foreign investors." According to Ivan KOMPAN, head of Wood & Co. brokerage in Kiev, Deutsche Telekom, AT&T Corp. and KPN, "may be interested in buying UkrTelecom." The International Finance Corp., the World Bank's private lending arm, has also expressed an interest in the Ukrainian telecommunications sector. Ukraine will spend 30 percent of the proceeds to develop UkrTelecom's phone networks, 10 percent will go to develop the Defense Ministry's digital phone network and 60 percent will go to the budget, ARTEMYEV said.

Audit Finds Ukraine Did Not Misuse Funds

· A second audit conducted by PricewaterhouseCoopers of Ukraine's Central Bank's financial activities shows no misuse of International Monetary Fund (IMF) loans, the bank's chairman said. In earlier findings reviewing Central Bank transactions in 1997-98, the auditors said Ukraine had overstated its reserves by up to $713 million, enabling it to win loans of $200 million, which the IMF might otherwise have withheld. Ukrainian officials, however, have denied all wrongdoings and say different accounting systems were to blame. In Washington, IMF spokeswoman Kathleen WHITE confirmed the IMF had received the second audit, but she declined to comment on the Ukrainian statements that the report showed no evidence of misuse of funds, Reuters reported. "We have received the second report and are studying it," WHITE said. Ukraine is hoping the IMF will restart a $2.6 billion program, which was suspended in September, 1999. IMF financing would allow Ukraine to approach the Paris Club of country creditors to seek restructuring of $500 million in debt due this year, Reuters reported.

Sun Brew To Invest In Ukraine, Russia

· SUN Interbrew Ltd., which owns controlling stakes in 11 breweries in Ukraine and Russia, said it plans to invest $20 million in Ukraine and $100 million in Russia this year. In 1999, the company

European Republics

Latvian Economic GDP Predicted At 5 Percent

· The Latvian Economics Ministry today predicted a positive growth for the nation's gross domestic product (GDP) at 4 percent to 5 percent. This would be a great jump from last year's 0.1 percent GDP. The ministry said, "A faster recovery in Russia would allow an increase in Latvia's transit service volumes...and would leave a favorable effect on industry volume growth in the near future." Latvia's trade with Russia fell 40 percent in 1999, which forces Latvia to seek western markets, particularly forming new links with the European Union (EU). These new markets, however, did not make up for the drop in trade due to the financial crisis and ruble devaluation in Russia. According to the ministry's statement, "To compensate for lost markets in the east by reorienting towards other directions, mostly the EU, takes investment and time, preventing industrial output from growing fast." It also said that the economic impact of a relatively high current account deficit ¾above 10 percent of GDP in last two years ¾remained one of the key economic problems and had to be considered when forecasting economic growth, Reuters reported. Latvia's year-on-year CPI rate in June stood at 2.4 percent.

Ukraine Approves Telecom Sale

· Ukraine's parliament today approved the sale of a minority stake in UkrTelecom, ending a three-year standoff between the parliament and government. The government did not say how much of the phone company it will seek to sell, though it will offer at least 25 percent plus one share, valued at $548

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invested $50 million in Ukraine and Russia, according to SUN Chief Executive Michel NAQUET-RADIGUET. SUN Interbrew controls a 17 percent share of Russia's beer market and 20 percent of Ukraine's beer market and plans to invest about $350 million in beer production in the two countries. The company said its first-quarter loss widened on expanded distribution and marketing efforts and higher administrative costs following brewery acquisitions.

South Caucasus & Central Asia

Georgia Commits To Energy Projects

· Georgian President Eduard SHEVARDNADZE on Wednesday reiterated to US special envoy for the Caspian Sea John WOLF that Georgia is committed to comply with all of its obligations under the Baku-Tbilisi-Ceyhan oil project. The 850-mile pipeline would cost some $2.4 billion and is planned to be in operation by the end of 2004. WOLF welcomed the creation of a group of non-governmental organizations under the Georgian International Oil Corporation (GIOC) to consult the Georgian government on the oil project. WOLF said the US is prepared to cooperate with Georgia for the security of the oil pipeline. SHEVARDNADZE noted the importance of the pipeline in bringing new possibilities to regional development and cooperation. WOLF also pointed out that earlier this week Turkey's President Ahmet SEZER an Azeri's Geidar ALIYEV held negotiations on the transportation of Azerbaijan Shah-Deniz gas to Turkey. He said that this project will not replace the need for the Trans-Caspian gas-pipeline, which will cross the territory of Turkmenistan, Azerbaijan, Georgia and Turkey. WOLF also held talks with Georgian government officials and top executives from Georgian energy companies.

Kalyuzhny Discusses The Caspian Sea

· Russian's presidential representative for the Caspian region and Deputy Foreign Minister Viktor KALYUZHNY is expected to arrive in Azerbaijan to

discuss the status of Caspian pipelines. Russia, Azerbaijan, Kazakhstan, Turkmenistan and Iran all stake a claim on the resources in the Caspian Sea. Iran believes all Caspian wealth should be for common use, while Azerbaijan offers to divide the Caspian into national sectors. Russia proposes that the Caspian be left in common use, as it would facilitate solutions to problems related to the Caspian ecology and biological resources.

Russia will also express concern that a US backed plan to run pipelines from Turkmenistan and Kazakhstan to Baku would disrupt the fragile ecology of the Caspian Sea. These pipelines are crucial to the viability of the Baku-Ceyhan pipeline project, which would break Russia's dominance on oil export routes. The US has support a policy of multiple oil and gas pipelines from the Caspian that would avoid Russia and Iran. Head of the Caspian Sea working group in the Russian Foreign Ministry Andrei URNOV said that seismic activity in the Caspian puts planned pipelines at risk. It should be noted that Russian President Vladimir PUTIN has abolished the Russian Environmental Protection Ministry. The Russian Committee on Fishing Industry has published a report showing a sharp decline in the Caspian's sturgeon population, the Financial Times reported. Last week, KALYUZHNY lobbied the environmental cause in Kazakhstan, where dozens of dead seals have washed ashore.

Uzbekistan To Continue Economic Reforms

· Uzbekistan's Finance Ministry and Central Bank in a joint statement said Uzbekistan would continue with economic reforms, including one that would, "unify exchange rates and achieve convertibility of the balance of payments accounts." The IMF has said international lenders could put together a package of up to $700 million to cushion the effects of the changes. Uzbekistan defended its protectionist economic policies, stating that its currency policy was prudent and had insulated it from the crisis, which consumed neighboring states. President Islam KARIMOV has promised key reforms this year.

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

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