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

Tuesday, July 25, 2000

Russian Federation

Politics

Swiss Investigators Continue IMF Probe

· Geneva magistrate Laurent KASPER-ANSERMET has ordered Swiss investigators to probe several banks to determine whether a $4.8 billion International Monetary Fund (IMF) credit to Russia was diverted via secret Swiss accounts. KASPER-ANSERMET heads an investigation into possible Swiss links to a Russian money laundering case involving the Bank of New York under which he has already frozen 30 million Swiss francs ($18 million) at a dozen Swiss banks. He said he had "some information on possible Swiss links to the Bank of New York affair" but declined to elaborate. In early 1999, the IMF hired Price-waterhouseCoopers to conduct a similar audit of the Central Bank, based on charges that IMF Funds were misspent. This audit concluded the Funds had been spent defending the ruble. Viktor ILYUKHIN, who first accused the Central Bank of misappropriation in 1999, on Monday, claimed his charges were not properly investigated. His evidence was handed over to then prosecutor general Yuri SKURATOV. ILYUKHIN said that after he turned over the documents, "the process was just put on hold." Sources close to the IMF, note that ILYUKHIN's evidence was carefully scrutinized, the Financial Times reported. This time, however, the IMF has said it is not familiar with the details of the Swiss investigation. KASPER-ANSERMET is seeking more evidence, which has not been forthcoming from the US. He has complained that US investigators had still not handed over documents he had formally requested on January 28^th as part of Switzerland's own investigation into the Bank of New York Russian money laundering affair. "We haven't heard anything from the American investigators so far. Without US cooperation, it would be

very difficult to advance our own investigation," KASPER-ANSERMET told Reuters.

G-7 To Assist In Plutonium Conversion

· The Group of Seven industrialized nations agreed on Friday to financially assist Russia in an agreement with the US costing nearly $2 billion over 20 years to destroy 68 tons of plutonium that could otherwise be used for nuclear weapons. US President Bill CLINTON and Russian President Vladimir PUTIN signed an agreement in June for the destruction of 34 metric tons of weapons-grade plutonium. Under the deal, the plutonium is to be burned as fuel in reactors or immobilized with radioactive waste. It cannot be exported to third countries, including for reprocessing, except by written agreements and if the terms of international guarantees are fulfilled. France, Italy, Canada, Britain, Germany and Japan agreed at their summit in Okinawa to develop by next year "an international financing plan" to help defray the cost of the deal. The agreement also includes a commitment to provide "multilateral cooperation arrangements for Russia's disposition program," presumably in-kind assistance other than cash. United Press International reports that the US Congress has already approved more than $200 million in aid to the Russian plutonium destruction project, and CLINTON has requested another $200 million for next year, according to the White House. US experts point out that the amount of plutonium involved represents thousands of potential nuclear warheads that will now not be built.

Today's News Highlights

Russia

Gov't To Repay Central Bank

Kudrin Predicts Stable Ruble

Swiss Reject Tycoon's Request

European Republics

Est. Parliament Quorum Fails

Ukraine-EBRD Holding Talks

South Caucasus & Central Asia

BP Amoco To Start Pipeline Fall

Ukraine-Turkmen Gas Talks

Akayev To Visit Russia

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Intercon's Daily

Economy

Ruble = 27.64/$1.00 (NY rate)

Ruble = 27.68/$1.00 (CB rate)

Ruble = 25.99/1 euro (CB rate)

Government To Repay Central Bank

· The Russian government plans to spend some of its expected 200 billion rubles ($7.2 billion) of additional budget revenue this year to repay the Finance Ministry's debt to the Central Bank. The government, which owes about 430 billion rubles to the Central Bank, didn't specify the amount it would repay. The funds would help the Central Bank in its effort to keep inflation under control, allowing it to print fewer rubles. Since 1998, when the government defaulted on most of its Treasury bonds, the Finance Ministry has borrowed from the Central Bank to make foreign debt payments.

Kudrin Predicts Ruble Stability

· Russian Deputy Prime Minister Alexei KUDRIN on Monday said the ruble's exchange rate against the dollar should hold steady. He claims that authorities are doing enough to keep inflation in check. He added that the government and Central Bank, which in recent weeks have appeared at odds over exchange rate policy, had the situation under control. "The main trends are being maintained and exchange rate stability will be maintained." The ruble edged down slightly on Monday to 27.6442 per dollar from 27.6350 on Friday, but the currency has been firming steadily for weeks due to strong export revenues, with gains tempered only by Central Bank dollar-buying. However, increases in money supply have sparked fears of inflation in the absence of adequate financial instruments or investment opportunities to soak up the excess rubles. "The nominal rate of the ruble has been strengthening insignificantly recently as the Central Bank, aiming to keep inflation under control, has been buying less hard currency," KUDRIN said. Consumer price inflation in July is officially forecast at 2.1 percent to 2.3 percent, down from 2.6 percent in June.

Inkombank Creditors Demand Transfer

· Creditors of Russia's failed Inkombank are demanding a transfer of $43 million of Inkombank's funds from another Russian bank to state-controlled savings bank Sberbank. Guta Bank was

asked by Inkombank's external managers to transfer the money three weeks ago, but it still hasn't carried out the transaction. Foreign creditors initiated the transfer to Sberbank. Inkombank was Russia's second-biggest commercial bank before it collapsed in 1998.

Business

Russia Begins to Build Toll-Roads

· The Swiss High Court on Monday rejected a request by Russian business tycoon Boris BEREZOVSKY to unfreeze accounts in Switzerland blocked as part of a fraud investigation. The investigation accuses two Swiss firms connected to BEREZOVSKY, Forus Services and Andava, of defrauding Aeroflot Airlines out of $600 million. BEREZOVSKY is one of the founders of Forus and was on Andava's board. Russian special investigator Nikolai VOLKOV is due in Switzerland Wednesday and will be able to peruse some 800 Swiss legal files connected with the case. He can take some 200 of them back to Moscow immediately. The offices of Forus and Andava were raided in July last year under the personal supervision of then Swiss attorney general Carla DEL PONTE, and many documents were seized, Reuters reported. Forus says it has been involved in financing operations for Aeroflot, but claims that allegations by VOLKOV of defrauding the airline are "false and unjustified." Andava director William FERRERO told Reuters that the firm had run accounts to handle most of Aeroflot's hard currency revenues amounting to "several hundreds of millions of dollars" on the orders of Aeroflot's then boss, Yevgeny SHAPOSHNIKOV. FERRERO insisted that all transactions were fully documented and had been verified by accountants and Russian control bodies. He said the fraud allegations were "nonsense" because Aeroflot would have gone bankrupt if it had lost such a flow of funds.

Swiss Court Compensates Rus. Businessman

· The Swiss Canton of Geneva has been ordered to pay 800,000 Swiss francs ($485,000) in compensation to a Russian businessman wrongly accused of belonging to a Moscow-based criminal organization, Le Temps reported. Sergei MIKHAILOV sued the Canton after a jury acquitted him in December, 1998, of charges of forging documents and belonging to the criminal organiza

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tion known as Solntsevskaya. MIKHAILOV spent a total of 778 days in prison, the Swiss newspaper said. The Geneva court granted MIKHAILOV the full amount he had claimed, accepting that he had lost several hundred thousand francs in income during his time in prison.

Gov't To Sell Svyazinvest Stake

· Russian State Property Minister Farit GAZIZULLIN said the government may sell a 25 percent minus-two-shares stake in Svyazinvest, the holding company for 86 regional telecommunications companies. The government had said the stake would be sold this year, though an Arthur Andersen LLC proposal, commissioned by the government, called for consolidating operators into seven regional companies and delaying the sale. The accounting firm had also suggested that Rostelecom, Russia's long-distance phone company, be spun off from Svyazinvest. Investors said the Arthur Andersen plan was attractive because it limited the role of the government in the telecommunications industry and increased the prospect for competition. "The more the state tries to keep the present structure the less value the company will have," said Iouli MATEVOSSOV, an analyst at Deutsche Bank. "If the local operators are made into supra-regional operators it will mean companies that are much more attractive for investors, " Bloomberg Newsline reported. GAZIZULLIN has called on Arthur Andersen to revamp the proposed plan. "Now is not the most favorable time for the sale," GAZIZULLIN said. Svyazinvest, which owns 51 percent of Rostelecom, was created in 1995 as a holding company to run the regional operators. The Russian government owns 75 percent minus one share in the company. Mustcom Ltd., a Cyprus-based company that financier George SOROS helped form, bought 25 percent plus one share of Svyazinvest in 1997 for $1.875 billion. SOROS later called it one of the worst investments of his career.

was not reached. Speaker Toomas SAVI said, "Forty-seven members are attending the session and 54 are missing. The parliament is able to pass resolutions only if at least 51 members attend the extraordinary session, which is why we can't open the session." Estonia's ruling three-party coalition on Monday stated that they would not attend the extraordinary session. Coalition council leader Andres TARAND told a news conference that the session, set for Tuesday, was unnecessary since the final contract of a deal to sell NRG a 49 percent stake in two power plants is not yet ready. He said, "The opposition is demanding a halt in the privatization. (But) it's not a privatization, it's the sale of 49 percent of the shares." The Estonian government last month announced it had reached a deal to sell 49 percent of the two Narva stations, supplying most of the country's power, to NRG for at least $54.5 million. The deal will see NRG make six billion kroons ($360 million) in investments over 15 years and make state oil shale firm Eesti Polevkivi a 51 percent owned subsidiary of the plants. Opposition parties have said the price for the power plants is too low and the deal will mean electricity price hikes. Business groups, President Lennart MERI and top management at state energy firm Eesti Energia are also against the deal, claiming that it contradicts European law on competition and opening a country's power market.

Ukraine-EBRD Discuss Lending For Reactors

· Ukraine and the European Bank for Reconstruction and Development (EBRD) today in London are holding another round of talks over a loan to construct two nuclear reactors. The bank said earlier this year it was considering a $180 million loan to complete construction of reactors at nuclear plants in Rivne and Khmelnytskyi that should replace output of the Chernobyl nuclear plant once it is closed, in mid-December. The loan is expected be part of $1.4 billion in international financing for the construction of the reactors.

South Caucasus & Central Asia

BP Amoco To Start Gas Pipeline In Fall

· BP Amoco may begin preparations this autumn to build a $1.5 billion natural gas pipeline from Azerbaijan to Turkey through Georgia. President of the Georgian International Oil Corporation Alexei

European Republics

Estonian Parliament Cancels NRG Session

· Estonia's parliament today canceled a special session to discuss the 49 percent stake sale in two power plants to US-based NRG Energy. The session had to be called off because an official quorum

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GOTSIRIDZE made this announcement after talks with BP Amoco. BP Amoco indicated they believe implementation of the project could begin in the near future. The pipeline will first transport 5 billion cubic meters of gas a year and then may be expanded to haul as much as 24 billion cubic meters annually, said GOTSIRIDZE. BP Amoco plans to export to Turkey gas it discovered in the Caspian Sea near Azerbaijan, a project competing with a venture of Russia's Gazprom and Italy's Eni SpA to bring Russian gas to Turkey across the Black Sea via a pipeline, called the Blue Stream.

Armenia Firms-Up Relations With Iraq

· Armenian Councilor Yori Baba KANIAN and Charge D'Affairs Murad MUKTYARIAN arrived in Baghdad on Thursday to establish the Armenian embassy there. The move is aimed to boost Armenia's efforts to strengthen political and economic relations with Iraq. The Armenian delegation said it will "do its best" to call on the UN to lift the sanctions imposed on Iraq since its 1990 invasion of Kuwait, MUKTYARIAN said. Iraq's reconstruction, a market of over $200 billion, has been attracting officials and business delegations from countries worldwide to make business deals within the framework of the UN oil-for-food program. The program, began in November 1996, allows Iraq to export limited amount of oil every six months to finance imports of food, medicine and other humanitarian goods to offset the crippling impact of the decade-old sanctions.

It should be noted that Armenia's Defense Minister Sergei SARKISYAN is holding talks in Washington with top officials, including US Defense Secretary William COHEN. Armenia is hoping to reach a cooperation deal with the US on defense and military technology. Clearly, Armenia's relations with Iraq will be touched on, during these negotiations.

Turkmenistan Resumes Gas Talks With Ukraine

· Yulia TIMOSHENKO, Ukraine's deputy prime minister for the power and fuel industries, is ex

pected to leave for Turkmenistan on Wednesday to resume talks over natural gas supplies to Ukraine. Ukraine also wants to get more construction orders from Turkmenistan's oil and gas industry, according to TIMOSHENKO. In the past, Ukraine was implementing "uninformed policy" in its relations with Turkmenistan, TIMOSHENKO said. Turkmenistan stopped gas supplies to Ukraine in May last year, after the country paid for only 10 percent of supplies made in the first four months of 1999 and accumulated $280 million in unpaid bills.

Krygyz President To Visit Russia

· Kyrgyzstan President Askar AKAYEV is scheduled on Wednesday to arrive in Moscow on a three-day official visit. AKAYEV will hold talks with Russian President Vladimir PUTIN, Russian Prime Minister Mikhail KASYANOV, Nuclear Energy Minister Yevgeny ADAMOV and, tentatively, with Defense Minister Igor SERGEYEV. Kyrgyzstan and Russia are expected to sign a number of important documents, including a Declaration on friendship, cooperation and partnership. The Declaration is expected to state the two countries' continual friendship and adherence to their strategic partnership, which on the threshold of the 21 century defines their relationship both in bilateral format and on the international scene.

AKAYEV is also expected to sign a 10-year economic cooperation agreement with Russia. Although in terms of foreign trade volumes Russia currently tops the list of Kyrgyzstan's partners, the two countries are not satisfied with the present state of their trade turnover and want to increase its volume. Kyrgyzstan has a number of uncompleted hydro-power stations as well as some shelved projects. It hopes to attract Russian financing in these operations, which would produced shared profits. One Kyrgyz diplomat noted, "Our countries have stable friendly relations. Kyrgyzstan is practically the only CIS country that does not have any disputes with Russia…We face the same problems - spread of drugs, arms, illegal migration."

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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