DAILY REPORT ON RUSSIA

AND THE FORMER SOVIET REPUBLICS

INTERCON INTERNATIONAL USA, INC., 725 15th STREET, N.W., SUITE 903,

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Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Tuesday, July 18, 2000

the rebels, and GANTAMIROV himself was dismissed from his official post. He was recently reappointed as KADYROV's deputy.

Vying For Putin's Influence

· Financial Times' reporters Arkady OSTROVSKY and Quentin PEEL have outlined three powerful groups, which are vying to influence President Vladimir PUTIN. The first group is the remaining shell of the so-called "family" of insiders from the YELTSIN administration. Members of the family include businessmen Boris BEREZOVSKY and Roman ABRAMOVICH, Tatyana DYACHENKO, and head of the presidential administration Alexander VOLOSHIN. PUTIN is indebted to the family because it helped to raise him to the post of prime minister and then boosted him to be elected president. PUTIN granted former president Boris YELTSIN and his family immunity, re-appointed VOLOSHIN, and allowed BEREZOVSKY and ABRAMOVICH to gain control and consolidate Russia's aluminum industry. PUTIN is also pulling in people from the Chekisty crowd, former members of the Cheka police and the KGB. Prior to being appointed prime minister, PUTIN served as director of the Federal Security Service (FSB), the successor agency of the KGB. The crackdown behavior on the business oligarchs in the last week shows that the police-like forces are gaining influence and power in the Kremlin. As Yevgeny ALBAT, an independent journalist, points out KGB cronies are anxious to catch-up during the PUTIN administration on

Russian Federation

Politics

Pro-Moscow Chechen Admin. Row

· Kremlin spokesman Sergei YASTREZHEMSKY announced that Russian military officials are beginning the second day of negotiations between head of the pro-Moscow Chechen administration Akhmad KADYROV and deputy head of the administration Bislan GANTAMIROV. The two have been in a power struggle for influence in Moscow and Chechnya. GANTAMIROV has said he objected to KADYROV's firing of several local administration and police heads in Chechnya, after they challenged his appointment in June. GANTAMIROV said he would not "surrender" his allies, who he said had helped seize control of Grozny with Russian forces, "to KADYROV and his band." GANTAMIROV has ordered his men to search for rebels in the temporary capital of Gudermes in a "clean out" campaign to include the civilian administration itself. GANTAMIROV's spokesman Andrei RUBANOV said, "the city will be cleared of terrorists, separatists and nationalists." Russian officials fear this type of move could threaten to split the armed forces supporting the administration. Lieutenant General Ivan BABICHEV, the military commandant of Chechnya, said GANTAMIROV's orders were illegal. "If any home guard (militia) not formed in accordance with the law is going to act in Gudermes, it will be regarded as a rebel formation with all the ensuing consequences." GANTAMIROV has a sketchy relationship with the Kremlin. Formerly the mayor of Grozny and a Chechen separatist, he was jailed in Moscow on charges of embezzlement. In the fall of 1999, former president Boris YELTSIN granted him amnesty and ordered him to lead a pro-Russian militia. That group was broken up earlier this year amid accusations that its members had cooperated with

Today's News Highlights

Russia

RUs-Ukraine To Hold Gas Talks

Transneft Raises Oil Export Tariff

Swiss To Hand Over Documents

European Republics

Belarus-Armenian Relations

Coca~Cola Invests $270M

South Caucasus & Central Asia

Ramco To Drill In Georgia

OSCE On Peace Process

Onux Gains Hight Stake In JV

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July 18, 2000

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wealth building opportunities lost during the YELTSIN-era. Finally, the group of liberal economists from St. Petersburg hopes to bend PUTIN's ear with economic programs slanted toward reforms. This group includes economic program drafter German GREF, Finance Minister Alexei KUDRIN, and economic advisor Andrei ILLARIONOV. A stable economy and reform measures are crucial for international loans and attracting investors. Russia needs these reforms to improve not only the standard of living for its citizens, but also its international reputation.

Economy

Ruble = 27.83/$1.00 (NY rate)

Ruble = 27.80/$1.00 (CB rate)

Ruble = 25.79/1 euro (CB rate)

Rus-Ukraine To Hold Gas Talks

· Ukrainian Prime Minister Viktor YUSHCHENKO will meet Russian Prime Minister Mikhail KASYANOV for gas talks in Moscow on Wednesday. The two will discuss the outlook of Russian gas supplies to Ukraine and payments for gas. Ukraine said last week it stopped siphoning off Russian gas from transportation pipelines carrying the gas to Europe through Ukraine's territory, after it took about $700 million in gas this year. Ukraine wants to hire a Western bank to help it reschedule some debts owed to Russia, including about $1.5 billion owed for gas and electricity supplies.

Transneft Raises Oil Transport Charges

· Russia's state-controlled oil transportation monopoly, Transneft, has raised transport charges for exporting oil by an average of 12.2 percent effective on Monday to cover construction projects. The proceeds from the increased charges will be used to defray the cost of building the Chechen bypass pipeline. Transneft aims to raise $25 million towards the pipeline, constructed in April, which costs about $160 million. Deputy head of Transneft Sergei GRIGORYEV said, "We were promised compensation right after finishing the construction of the Chechnya pipeline, but the Federal Energy Commission kept putting off taking the decision, which is against regulations," the Financial Times reported. It had hoped to lift tariffs by 25.8 percent, thereby raising $57 million. However, an increase of nearly half that was approved.

Business

Visa Int'l To Open Office In Moscow

· Visa International Inc., the world's biggest credit card association, plans to open a representative office in Moscow within seven weeks, The Moscow Times reported. Visa's plan for a Moscow office has been stalled since the 1998 Russian financial crisis and a slow recovery in the country's banking system and purchasing power. Visa, whose main local competitor is MasterCard International Inc., has 2 million cardholders and more than 200 issuing banks in Russia, compared with about 70,000 MasterCards in circulation. Russian banking system is still recovering from the government's Treasury debt default and ruble devaluation in 1998.

Gazprom To Invest In Agricultural Holding Co.

· Gazprom, Russia's natural gas producer, said its market subsidiary plans to invest about $30 million through commodity loans in a regional agricultural holding company to recoup money it is owed for gas. Mezhregiongaz, Gazprom's domestic natural gas marketing unit, will provide loans to the holding company in the Krasnodar region, which will be made up of farms and other organizations that owe money for gas. The profits farms make will go on to repay the gas debts. Gazprom said last month it tripled its short-term borrowing to cover operating expenses last year, a move prompted, analysts said, by a shortfall in domestic gas revenue.

Berezovsky Questions Aeroflot Investigation

· Investigators questioned Russian business tycoon Boris BEREZOVSKY for two hours on Friday in connections with a case against Aeroflot. BEREZOVSKY's business empire stretches from media outlets to aluminum to oil. Nikolai VOLKOV, an investigator for the Prosecutor General is expected to fly to Geneva on July 26^th to obtain 200 out of about 600 files relating to the case from the Swiss Federal Prosecutor's Office. Swiss companies Forus and Andava, are suspected to have been used to channel $400 million to $600 million of the Russian national airline's money abroad.

BEREZOVSKY, who was questioned by VOLKOV, was temporarily a suspect in this case, but charges against him were later dropped and he is now a witness in the case. BEREZOVSKY controls only about 2 percent of the airline's shares. Switzerland

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is handing over the documents in line with a ruling by the country's highest court last month, which cleared the way for the government to provide legal assistance to Russia. The Swiss Federal Tribunal rejected appeals from two Swiss-based companies and six unnamed persons against releasing the documents to Moscow. Aeroflot has denied any wrongdoing. The two Lausanne-based companies have also been seeking to overturn a freeze on their bank accounts. Swiss authorities have not said how much money they have frozen in connection with the affair.

What Is Legal And What Is Illegal?

· The head of Russia's second largest oil company, Yukos, Mikhail KHODORKOVSKY has said that complex and contradictory laws have made it difficult for lawyers and businessmen to discern what is legal. He said, "There is now no understandable criteria which would allow our lawyers to say that we are doing this legally an that illegally. The number of mistakes and contradictions in our legislation is enormous. This all leads to the situation that virtually any economic activity in Russia can be taken to violate the law in some way," the Financial Times reported.

The heads of Russia's largest oil, auto and metals companies and the biggest independent media group have been targeted by government tax officials and prosecutors recently in what is seen as a Kremlin crackdown.

KHODORKOVSKY said the main problem for business was that law enforcement agencies no longer played by a set of informal rules for business. KHODORKOVSKY said tax legislation and privatization both were up in the air in the aftermath of the Soviet collapse. "While there was bad legislation and precedential rights, it was possible to get by in some way. Today the law as before is bad, contradictory, inadequate, but in addition the system of precedents has been put in question," he said. "Given that today the president of the country has not taken a decision about political limits, has not set a new system of precedents, and law enforcement agencies have rejected the old system of precedents, without doubt the political risks of doing business in the country have risen."

European Republics

Belarus-Armenian Prime Minister To Meet

· Armenian Prime Minister Andranik MARGARYAN will visit Belarus from July 19^th to 21^st at the invitation of his counterpart Vladimir YERMOSHIN. During the visit, MARGARYAN will discuss bilateral economic cooperation between the two countries. Belarus President Alexander LUKASHENKO will meet with the Armenian Prime Minister. The two sides are expected to sign bilateral documents, concerning trade and economic relations. MARGARYAN will also visit the CIS Executive Secretariat, the Armenian embassy in Belarus, the Belresusry concern, the Belkommunmash production association and the Minsk tractor plant. The Prime Minister is scheduled to meet Belarussian business people and members of the Armenian community in the country.

Coca~Cola's Investment Reaches $270M

· Coca~Cola Ukraine, a subsidiary of Coca~Cola Beverages, said its investments in Ukraine reached $270 million. The unit of the world's largest soft drink company, said it spent $100 million to build its soft drink plant in the Brovarskiy region. The company, which began operating in Ukraine in 1994, said sales and production are unchanged so far this year from last year. Ukraine's industrial production rose 10.8 percent in the first six months from the same period a year ago, while in June alone, the output rose 1.1 percent from May and was up 10.8 percent from June last year, the State Statistics Committee reported.

South Caucasus & Central Asia

Ramco To Drill In Georgia's Kaheti Block X

· Ramco Energy, the British independent energy and oil services company, today announced that it will be drilling its first well on its Kaheti Block X license, onshore Georgia in the fourth quarter of this year. According to a company press release, the exploratory well will be drilled to test a new play concept in the Gambori Range of foothills of the Greater Caucasus Mountains in eastern Georgia. The location, near the village of Ziari, is approximately 70 kilometers east of Tbilisi. The Ziari-1 well is planned to spud in early October and drill to the

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planned total depth of 2,000 meters in about 30 days. If hydrocarbons are discovered, whether of oil and/or gas, they will initially be produced into the existing infrastructure. The integration of modern geo-technical surveys and studies including 200 kilometers of new seismic data, gravity and geological modeling has identified drillable prospects, which have not been previously recognized in the region. A successful well at Ziari would confirm several structures along the trend as viable drilling targets. Ramco manages its investment in Georgia through its local operating company, Kaheti Oil Ltd., which was established under the terms of a Production Sharing Contract (PSC) with the Georgian National Oil Company and the State. The Georgians would welcome discovery of gas as it could assist in the return to previous levels of power generation, which has been seriously disrupted since the early 1990's.

OSCE Head On Nagorno-Karabakh Peace

· Head of the Organization for Security and Cooperation in Europe (OSCE) and Austrian Foreign Minister Benita FERRERO-WALDNER arrived in Armenia on Monday and met with Prime Minister Andranik MARGARYAN. The Prime Minister said that Armenia welcomes Austria's efforts to strengthen the OSCE and enhance its rapid-reaction capability. He stressed that Armenia is seeking to strengthen European security. MARGARYAN also said Armenia is prepared to make compromises, which will be acceptable to the people and authorities of Nagorno-Karabakh and will exclude territorial swaps. He said Armenia is ready to develop regional economic cooperation and help establish a regional security system. This he believes will promote stability and mutual trust. Nagorno-Karabakh leader Arkady GUKASYAN confirmed his interest in settling the conflict by peaceful means, during a telephone conversation with FERRERO-WALDNER. At the OSCE chairman's request, GUKASYAN released six Azeri prisoners. On July 4^th, Azeri President Geidar ALIYEV visited Vienna to meet with FERRERO-WALDNER. ALIYEV dis

cussed the Armenian-Azeri peace process. Nagorno-Karabakh is populated mainly by ethnic Armenians, but formally controlled by Azerbaijan and war broke out when the region tried to break away from Baku's control in 1988 in the final years of Soviet rule. Some 35,000 people were killed until a truce was established in 1994. The presidents of Armenia and Azerbaijan have held several meetings in the past 18 months to find a compromise on the region's future, with the OSCE overseeing talks. FERRERO-WALDNER expressed hope that Armenian President Robert KOCHARYAN and ALIYEV would hold a new round of one-on-one talks soon. She said, "This is a matter for them and only they can resolve this issue. They know the decision they want to reach."

Oxus To Increase Holding In Uzbek Gold JV

· Britain's Oxus Resources Corp. will be allowed to increase its stake in the Amantaytau gold mining venture in Uzbekistan from 43 percent to 50 percent, according to an Uzbek government resolution. The resolution, released on Monday, said the Cabinet had approved the change, which was made after one of the venture's ore sources was transferred to another Uzbek company. The Amantaytau venture, located in the Kyzylkum desert, was set up in 1995 with the participation of another British firm, Lonrho, which pulled out in 1999, citing low world prices for gold. Its place was taken by Oxus. The document said the $175.6 million project would be realized in two stages. The first 16 month-stage envisages the production of 1.9 tons of gold a year using open-pit methods. During the second stage, the venture will produce 5.8 tons of gold a year from deep mines, Reuters reported. Production is to start this year. Gold is one of the main export earners for Uzbekistan. It is estimated to produce about 80 tons annually. Oxus is also negotiating with the Uzbek government to work independently on a non-ferrous metals project, which would involve the construction of a $140 million to $170 million plant to produce copper, lead and zinc concentrates.

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

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