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, July 14, 2000

Russian Federation

Politics

UES Falls Victim To Oligarch Campaign

· United Energy Systems of Russia (UES) is the latest victim in the crackdown against oligarchs. The Russian Audit Chamber has launched an investigation into the sell-off of UES stocks to foreigners, claiming that up to 15 percent of the stakes were sold illegally. Foreigners now hold 32 percent of UES, surpassing the maximum under the law of 25 percent. The Audit Chamber will review whether selling UES shares to non-residents was legal and justified given that the state lost its controlling stake in the company. An additional judicial probe will be carried out within a month. Experts will present their summary to the Russian president by late August. Audit Chamber chairman Sergei STEPASHIN said this, "concerns an enormous number of investors. They are hostages to the political situation," which is surrounding UES. He added that at a special Audit Chamber meeting, "a number of serious contradictions have arisen with us, and many questions to the leadership of UES Rossii have emerged," including possible bankruptcy of companies within UES. Some of these violations stem from the period between 1992 and 1998. Anatoly CHUBAIS, UES Chief who was at the time head of the privatization program, denied any wrongdoing. He said, "Those who have started this hysteria...are in essence trying to destroy foundations of Russia's state system. Judging what the accusations they are more than serious, not because they are serious legally, but because they are politically motivated [attack]." CHUBAIS added, "The legal basis is absolutely laughable." Kommersant Daily reported today, "They've come for CHUBAIS," who is a strong symbol of post-Soviet capitalism and respected by Western governments. UES is Russia's most widely traded share, long considered a proxy

for the entire market for those looking to invest in the country.

Sergeyev Threatens To Quit Over Military Row

· Defense Minister Igor SERGEYEV suggested today he would quit, if the military went ahead with a proposal by chief of staff Anatoly KVASHNIN to eliminate Russia's strategic nuclear rocket forces as a separate branch of the military, thereby bringing it under the central command that controls the conventional army, navy and air force by 2003. He described the proposal as a "psychotic attack" which would destroy the force. He also said KVASHNIN's idea was, "a crime against Russia and just plain madness." Strategic Rocket forces commander General Vladimir YAKOVLEV said, "Changing the balance of forces, as implied by reforming the rocket forces, could lead to the disruption of negotiations and transform our country into a second-rate nuclear power." Supporters of the measure say it aims to free up resources for cash-strapped conventional troops. The strategic nuclear rocket forces issue was not resolved during a closed meeting of generals on Wednesday, leaving both sides to lobby President Vladimir PUTIN, has said there will be no immediate shake-up of the military. However, PUTIN publicly dressed down SERGEYEV last week over setbacks in Chechnya, leading some to question the Defense Minister's future.

Economy

Russia To Sign Debt Agreement

· Russian Deputy Finance Minister Sergei

Today's News Highlights

Russia

Russian Forex, Money Supply

AvtoVAZ-LUKoil Probe To End?

Gusinsky Fears For His Life

European Republics

Yermilov New Fuel-Energy Min.

Ukraine Passes CB Amendment

South Caucasus & Central Asia

Georgia Cuts Budget Spending

Aliyev Backs Caspian Meeting

Kazhegeldin Detained In Rome

Politics-Economics-Business

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July 14, 2000

Intercon's Daily

KOLOTUKHIN said Russia is prepared to sign documents for the restructuring of the Soviet-era debt to the London Club of commercial creditors in the form of Eurobonds. He said the delay in sending an official offer to the London Club to re-register was a result of technical issues. KOLOTUKHIN predicted that the documents would be signed by week's-end. Finance ministers of the Group of Seven leading industrial nations want to judge the effect of Russia's proposed economic reforms before agreeing to reschedule $42 billion in debt owed by the country to sovereign creditors.

Russian Foreign Exchange, Reserves

· The Central Bank announced on Thursday that Russian foreign currency and gold reserves rose $800 million to $21.8 billion in the week ending July 7^th. The Bank bought dollars with rubles to prevent the currency from strengthening further. The reserves are at the highest level since 1997. Reserves rose $500 million to $21 billion in the week ending June 30^th. Russia's money supply expanded by 12.2 billion rubles ($438 million) in the week ending July 10^th. The money supply expanded by 3.4 billion rubles ($121.5 million) in the week ending July 3^rd, according to the Central Bank.

Ruble = 27.87/$1.00 (NY rate)

Ruble = 27.85/$1.00 (CB rate)

Ruble = 26.08/1 euro (CB rate)

Oct Nov Dec Jan Feb Mar Apr May Jun Jul

Business

LUKoil, AvtoVAZ Probes Could Be Closed?

· Russia's federal tax police may close its investigations of LUKoil Holding, Russia's top oil producer, and AvtoVAZ, the nation's largest car producer, if the companies pay their tax debts, according to tax police Chief Vyacheslav SOLTAGANOV. The tax police's main task is to uncover tax evasion and ensure the money is paid to the state budget. "The matter is not imprisoning an oligarch or a big businessman," said SOLTAGANOV. Russian authorities have started investigations of some of the nation's biggest companies, including Norilsk Nickel, the world's second-largest palladium producer, Tyumen Oil Co., Russia's fifth oil producer and Media-Most holding, a media group that operates the country's biggest private TV station.

Gusinsky Fears For His Life

· In an interview with Spanish newspaper El Mundo, Vladimir GUSINSKY, head of independent media group Media-Most, said that he feared that his life may be in danger. He noted that his media group has been the target of a series of official investigations on suspicions ranging from breach of privacy to embezzlement. GUSINSKY says the allegations against his empire have been masterminded by Kremlin officials. He believes President Vladimir PUTIN has a personal grievance against him. He said, "In Russia, there used to be a police regime. It disappeared temporarily and now it is being rebuilt. It hasn't been completed yet but it is being restored very quickly." Earlier this week, officials from the prosecutor's office searched Media-Most's offices in a new probe, which the group said was linked to an investigation into its ties with state-controlled natural gas monopoly Gazprom. The gas monopoly guaranteed a multi-million-dollar loan to Media-Most by a foreign bank and recently reimbursed the bank.

Alliance Group To Acquire Sidanco Units

· Alliance Group, a Moscow-based management consultancy, plans to acquire the Khabarovsk Refinery and five retail units in Russia's Far East from the Rosinvestneft group of companies. The subsidiaries earlier belonged to Sidanco, a Russian oil producer that's 10 percent owned by BP Amoco. BP Amoco, along with Yukos Oil Co. and Tyumen

When you need to know it as it happens

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Oil Co., may acquire from Rosinvestneft an 8.5 percent stake in Rusia Petroleum, a Russian exploration company that holds a license to a giant gas field in eastern Siberia. Angarskaya Neftekhimicheskaya Kompaniya, once Sidanco's largest oil refinery, which is now owned by Rosinvestneft, holds the 8.5 percent stake.

would be appointed soon to resolve the country's gas debt problem effectively. Ukraine has already announced plans to seek a long-term $1.4 billion restructuring deal with Russian gas giant Gazprom. Ukraine does not have sufficient energy resources of its own to meet demand. Yulia TYMOSHENKO, deputy prime minister in charge of the energy sector, said earlier this week that Ukraine had managed to resolve its energy crisis by eliminating barter, tackling massive arrears in payment and boosting cash revenues.

Ukraine Adopts Central Bank Amendments

· The Ukrainian parliament on Thursday approved amendments to a controversial Central Bank law aimed at eliminating the danger of political pressure on the bank's activities and its decisions. The amendments were backed by 238 deputies in the 450-seat chamber. A Central Bank law approved in May, 1999, called for the Central Bank to be governed by a 14-member council, which would intervene in Central Bank activities and monitor decisions by the Central Bank's board. Experts and the Central Bank criticized the law, saying it left loopholes for political pressure on the Central Bank, Reuters reported. President Leonid KUCHMA submitted amendments to the law immediately after its adoption. Amendments to the law envisaged the Central Bank board and the council would have equal rights. The Central Bank council will consist of 15 members, with seven members appointed by the President and seven by the parliament from within its ranks, plus the Central Bank chairman. The Central Bank council is elected for seven years. KUCHMA has not yet appointed his seven members to the council.

South Caucasus & Central Asia

Georgia Cuts Budgetary Spending

· The Georgian parliament on Thursday approved the Law on making amendments to the state budget-2000 of Georgia. The law provides for the correction of the main parameters of the state budget-2000. The revenues of the budget are being decreased by 188 million lari and the expenses by 318 million lari. The revised budget, passed by 135 votes to 28, envisages a reduction in spending to 973 million lari (about $496 million) from the initial 1.264 billion-lari target. Revenues are reduced to

European Republics

Belarus Sets Parliamentary Election Date

· Belarus presidential spokesman Nikolai BORISEVICH said President Alexander LUKASHENKO signed a decree on Thursday scheduling the parliamentary election for October 15^th. This is the first vote since a 1996 referendum increased LUKASHENKO's powers, extended his term, and gave him the power to disband the parliament. Western governments expressed concern over these measures, which made the parliament into nothing more than a rubber-stamp committee, human rights abuses, and the sidelining of opposition candidates. The opposition has said it will likely boycott the poll, which it dismisses as a political farce. Activists denounce the authorities' refusal to start political dialogue with all groups. The Organization for Security and Cooperation in Europe has said they will probably not monitor the election. The chamber of representatives, a 110-seat lower house of the parliament, will be elected through single-member constituencies.

Ukraine Appoints New Energy Minister

· Ukrainian President Leonid KUCHMA has appointed Sergei YERMILOV as the new Fuel and Energy Minister. YERMILOV served as first deputy fuel and energy minister from September, 1999 through January, 2000. In March, he became advisor to the prime minister. Ukraine's previous minister for power industry and fuel, Serhiy TULUB, resigned last month over a dispute on how to reform the nation's energy industry. YERMILOV stated that urgent tasks are to stabilize electricity supplies and modernize the ageing and depressed sector. The government plans to reform the ailing sector, boosting cash collection by and attracting strategic foreign investors. Energy reform is a key condition for the resumption of a $2.6 billion International Monetary Fund loan program. YERMILOV said a new head of state oil and gas company Naftohaz Ukrayny

When you need to know it as it happens

Politics-Economics-Business

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679.9 million lari from 874.4 million lari. Finance Minister Zurab NOGAIDELI believes that the revised budget cuts will mostly concern administrative and ministerial expenses and not social programs. The International Monetary Fund (IMF) has said that it will not resume lending, until Georgia cuts budget spending. NOGAIDELI told parliamentarians, "A reduction in budget spending increases Georgia's chances of securing resumed financial support from the IMF and other financial organizations." Vakhtang RCHEULISHVILI of the opposition Rebirth bloc, however, said, "We must put an end to the pernicious practice of taking the easy way out by cutting spending instead of collecting taxes and accumulating revenues for the budget

Baku Backs Need For Caspian Meeting

· In a meeting with Azeri President Geidar ALIYEV, Russia's special envoy to the Caspian, Viktor KALYUZHNY called for a special convocation of the five Caspian nations [Russia, Azerbaijan, Iran, Turkmenistan, and Kazakhstan] to discuss the Sea's status. The bordering nations disagree on how to divide the sea, which is believed to hold a vast reserve of hydrocarbons. Russia has expressed concerns over the environmental implications of drilling for the oil. The meeting would be held in the Russian port city of Astrakhan. KALYUZHNY will also discuss the plans in Turkmenistan on July 18^th to 19^th, followed by a visit to Iran on July 25^th. ALIYEV welcomed the idea for the meeting, stating that he believes all nations can reach an agreement. KALYUZHNY also pitched the idea of forming a united strategic and economic center of Caspian countries. ALIYEV said he would study this issue and holds consultations with specialists. Today, KALYUZHNY is meeting with Foreign Minister Vilayat GULIYEV and president of the Azerbaijan State Oil Company (Socar) Natik ALIYEV.

Kazakhstan Former PM Detained In Rome

· Kazakhstan's former prime minister Akezhan KAZHEGELDIN was detained in Rome late Wednesday, according to senior official of the Ital

ian Foreign Ministry, Mario VIOLA. He said KAZHEGELDIN, wanted on an Interpol warrant, was detained at Rome's Fumicino Airport for extradition to Kazakhstan. Charles BOTH, KAZHEGELDIN's US lawyer, however, said , "He hasn't been arrested, and there is no extradition requested. We understand that the Kazakhs have revived old charges of money laundering in Belgium, tax evasion and abuse of power. These have all been disproved before." Other analysts believe that KAZHEGELDIN's detention is politically motivated and is being used by Kazakh President Nursultan NAZARBAYEV as a way to silence him. KAZHEGELDIN is NAZARBAYEV's main critic and political opponent. He was banned from the January, 1999, presidential elections on a legal technicality, which led NAZARBAYEV to be easily re-elected. The government later opened criminal proceedings against KAZHEGELDIN, saying that it was part of an anti-corruption drive aimed at bringing to justice those who used their official positions to line their own pockets.

KAZHEGELDIN was also the mastermind behind an aggressive policy of market reforms and privatizations as prime minister in 1994 to 1997. His ideas were welcomed by Western investors, but shunned in Kazakhstan. Kazakhstan's KNB intelligence service said it had no details and the Prosecutor-General's office declined comment.

The US Justice Department named KAZHEGELDIN in an investigation of James GIFFEN, an American financial consultant on oil deals in Kazakhstan. It said KAZHEGELDIN's "close family" may have received one of three improper payments possibly funneled through GIFFEN from US oil companies Phillips Petroleum Co., the former Amoco Corp. and the former Mobil Oil Corp. NAZARBAYEV and former Prime Minister Nurlan BALGIMBAYEV were said to have received funds from all three payments. The former hasn't acknowledged the probe, and the latter denies any wrongdoing, The Wall Street Journal reported.

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

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