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 28, 2000

Russian Federation

Politics

Governors May Get Second Chance

· President Vladimir PUTIN agreed on Thursday to set up a body allowing the country's regional governors to have direct consultations with the Kremlin and the government. The Kremlin said in a statement that PUTIN had agreed with governors' suggestions to set up a special state council for them. The proposal was made after PUTIN's plan to centralize power was approved. In a vote on Wednesday under intense pressure, the governors of the Federation Council approved a bill calling for their removal and granting PUTIN the right to remove them as heads of Russia's regions. The Kremlin statement said the structure and method of forming the council had to be decided by parliament, Reuters reported. Although it is expected that mainly governors will sit on it, it is unclear as yet what powers it will have. It seems likely only to be a consultative body. Russian newspapers have reported that former prime minister Yevgeny PRIMAKOV may be given a role in the new council.

Military Meets In Kremlin To Define Role

· The military dispute, once described as a military coup, between Defense Minister Igor SERGEYEV and Chief of the General Staff Anatoly KVASHNIN appears to be nearing its end, as military leaders presented Russia's advisory Security Council with suggestions for reforming the armed forces. Valery MANILOV said the proposal took into account the geopolitical environment, the state's finances and real threats. The dispute between SERGEYEV and KVASHNIN surfaced earlier this month, when KVASHNIN called for reducing the size of Russia's strategic nuclear rocket forces and ending its status as separate branch of the military. That proposal was seen as an attempt by KVASHNIN to oust

SERGEYEV, a former strategic rocket forces commander and a staunch proponent of maintaining the rocket forces as an independent military arm. SERGEYEV has countered KVASHNIN's idea with a plan to beef up the nuclear deterrent. President Vladimir PUTIN had requested the military officials to draft a joint plan of options for the armed forces and to pass it on to the Security Council, which groups a restricted circle of police, security, military officials and senior politicians.

In a meeting on Tuesday, PUTIN praised his generals saying, "Today, military force is the factor of greatest importance for preservation of Russia's stability and for provision of its peaceful, progressive development." He added that international terrorism must be recognized as a new threat to the country's security. PUTIN also warned, without being more specific, of "attempts to redraw the map of the world." However, the President underlined that the biggest threat to global security would be a potential loss of balance in strategic nuclear arms, referring to the US' intention of creating a national missile defense shield.

Economy

S&P Raises Russia's Debt Ratings

· Standard & Poor's (S&P) upgraded Russia's debt ratings Thursday, citing, "improved international reserve and fiscal positions, and progress in implementing key tax and structural reforms."

Today's News Highlights

Russia

US Ex-Im Harmon Visits Russia

FC Calls For SBS-Agro Probe

Volkov Obtains Swiss Files

European Republics

Rus-Ukraine Cancel Gas Talks

South Caucasus & Central Asia

Trans-Caspian Gas Pipeline

Kars-Tbilisi Rail Lacks Funding

BG Group To Double Investment

Rus-Kyrgyz Sign Agreement

Politics-Economics-Business

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Friday

July 28, 2000

Intercon's Daily

S&P assigned its B-minus long-term senior unsecured rating to Russia's forthcoming Eurobond issues due in 2010 and 2030. The Eurobonds are being offered in exchange for $20.2 billion of restructured principal notes (PRINS), $6.8 billion of restructured interest arrears notes (IANS) and $2.8 billion in past-due interest (PDI) notes presently in default. S&P raised Russia's senior unsecured ratings on outstanding Eurobonds to B-minus from CCC-plus, Reuters reported, citing a press release. S&P also raised Russia's long-term local currency issuer credit rating to B-minus from CCC-plus. Russia's foreign currency issuer credit rating remains at "SD" [selective default], S&P said, pending completion of the London Club debt exchange. "Russia is doing very well right now because of some short-term factors. But there has been very little progress with the structural reforms needed to straighten out the economy in the long term," said Ben SLAY, a Russia analyst with PlanEcon Inc., a Washington-based consulting firm. He added, "The Russian banking system has been comatose since 1998 and virtually nothing has been done about it. And the investment climate, in terms of corporate governance, must be improved."

Moody's Investor Service's Eurobond rating is B3 with a positive outlook. Moody's stated it is looking for signs of improvement in Russia's economy this year will be durable before starting a review for a potential upgrade, the Financial Times reported.

US Ex-Im's Harmon Visits Moscow

· US Export Import Bank head James HARMON arrived in Moscow on Wednesday for a visit that includes talks with Russian Prime Minister Mikhail KASYANOV and is aimed at expanding cooperation with the country. A US Embassy spokesman said on the first day of the three-day visit HARMON had met officials from Vneshekonombank. No details of the talks were immediately available. The spokesman also said HARMON will visit a children's research hospital later, which is using a $31 million loan backed by Export Import Bank to purchase medical equipment and supplies from US companies. Export Import Bank is an independent government institution, which provides loans, loan guarantees and insurance to US companies exporting to emerging markets.

Federation Council Calls For SBS-Agro Probe

· The Federation Council on Wednesday instructed the parliamentary audit chamber to investigate how failed SBS-Agro Bank spent loans it received from the Central Bank in 1998 to stay afloat, Vedomosti daily reported. The 6 billion ruble ($217 million) loan was extended by the Central Bank under guarantees from regional governments as the bank was the main lender to farmers in the regions. The Central Bank could ask governors to repay the loan if they fail to prove mismanagement. Russia decided to force SBS-Agro Bank into bankruptcy, two years after the country's former top private bank ran into trouble, offering to repay 1 percent of most creditor claims, which total about $3 billion.

Ruble = 27.77/$1.00 (NY rate)

Ruble = 27.65/$1.00 (CB rate)

Ruble = 26.031/1 euro (CB rate)

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Business

Volkov Receives 80 Boxes Of Swiss Files

· Swiss police handed over 80 boxes of files relating the investigation of the alleged defrauding of Aeroflot Airline by Forus and Andava to Russian special investigator Nikolai VOLKOV in Berne. The files focus on $715 million of Aeroflot revenues, which were transferred to two companies linked to Russian tycoon Boris BEREZOVSKY in 1996 to 1997. It is suspected that Forus and Andava si

When you need to know it as it happens

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phoned off the hard currencies in a series of complicated transactions. The Financial Times reported that Aeroflot transferred 80 percent of its revenues to Andava. Andava then held on to the hard currency revenues for a period of 180 days before sending it back. Because Aeroflot's funds were being held off shore, the company suffered from cash flow shortages. The airlines was forced to borrow money to pay its bills from Andava, Forus, and United Finance Corporation, all controlled by BEREZOVSKY and his associates. Andava and Forus claim they are innocent, stating that they used the money received to pay Aeroflot's bills. Andava director William FERRERO told Reuters recently that Aeroflot boss Yevgeny SHAPOSHNIKOV had given orders in 1996 to many Aeroflot offices around the world to send 80 percent of their revenues to Andava which would act as a central treasury service for Aeroflot, paying bills and arranging financing. FERRERO said several hundred million dollars had gone through the Andava accounts on behalf of Aeroflot, in strict legality. The files include documents from BEREZOVSKY's bank accounts and the companies' local United Finance Corporation branch. BEREZOVSKY had attempted to block the turn over of documents, but his request was rejected earlier this week.

Ukraine and Russia have been embroiled in a dispute over the gas pipeline and debts Ukraine owes to Russia, both for legal gas supplies and illegally siphoned gas. Ukraine, which consumes about 75 billion cubic meter of gas a year, plans to purchase from Turkmenistan between 20 billion cubic meters of gas to 50 billion cubic meters a year by 2010 as an alternative. Ukraine will pay $42 per 1,000 cubic meters of gas at the border between Turkmenistan and Uzbekistan, This will boost the price to $90 at Ukraine's border due to transportation costs. Turkmenistan has agreed to accept cash and goods for gas supplies. Ukraine still owes Turkmenistan $211 million for supplies in 1993 to 1994. The supplies of Turkmen gas would allow Ukraine to negotiate lower prices on the gas supplies from Russia, said Yulia TIMOSHENKO, Ukraine's deputy prime minister for the power and fuel industries. It could also allow Ukraine to increase what it charges Russia to ship its gas through Ukraine.

South Caucasus & Central Asia

Building Of Trans-Caspian Gas Pipeline

· Georgian International Gas Corporation president Aleksey GOTSIRIDZE said that the building of the new gas pipeline through Georgia is to begin at the end of 2000 to transport Azerbaijan gas from Shakh-Deniz deposits to Turkey and Western gas markets. Length of the pipeline will be 250 kilometer, with building costs estimated at about $500 million to $600 million provided mostly by Shakh-Deniz investor companies. Kazakhstan also plans to export its gas to Turkey and western markets through Georgia, GOTSIRIDZE said. According to him, "negotiations with Kazakhstan will take place in nearby future." He said that Turkmen President Saparmurat NIYAZOV is expected to make a decision on the transit of Turkmen gas. "Turkey hasn't changed its position-Turkmenistan gas will only be delivered through Trans-Caspian pipeline," GOTSIRIDZE stressed.

Turkey Not Able To Fund Kars-Tbilisi Railway

· Turkey Foreign Minister Ismail JEM announced that his country is not yet able to find funds to realize the project of Kars-Tbilisi railway costing $1.2 billion. Turkey considers this project very important since this road connects not only Turkey with Geor

European Republics

Ukraine-Russia Postpone Gas Talks

· Ukraine and Russia postponed talks on Russian gas supplies through Ukraine and the rescheduling of Ukraine' $1.4 billion debt for gas deliveries. Because most of Gazprom's European customers receive their gas via Ukraine, Gazprom can't afford to cut gas supplies to Ukraine even when Ukraine doesn't pay. Ukraine receives about 30 billion cubic meters per year of gas from Gazprom as payment for transit fees, and must purchase another 25 to 30 billion cubic meters to meet domestic demand, The Wall Street Journal reported. Ukrainian government spokeswoman Gelena ANDROPOVA said, "We agreed [with Russia] to postpone the talks for later at the request of Russia." She did hint that a Russian team could arrive in Kiev on Monday to make preparations for formal negotiations at a later date. Talks between Russia and Ukraine failed last week in Moscow to reach an agreeable solution.

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gia, but it connects the whole Caucasus region with Eastern and Western Europe, Anatolian News agency told Prime News Agency. Turkey is not in the condition to build the railroad alone, Ismail JEM said. He stressed that Ankara and Tbilisi joint efforts continue. When the railway is erected, it will attract cargo away from the port of Batumi and stifle money that would have been reaped from custom duties at the Sarpi border guard checkpoint in Adjaria.

BG To Double Investment In Kazakh Field

· BG Group announced today it will more than double its investment to develop a Kazakh oil and gas field to $860 million in the next three years to build more infrastructure. BG has spent $320 million at the Karachaganak field since the project began in 1997 and had planned to spend another $367 million to complete the early stage of its development in the second half of 2003. By spending more money now, the company hopes it will spend less on maintenance drilling after 2003, keeping the project's total cost low, BG said. Frank CHAPMAN, president of BG's exploration unit BG International, said in an interview, "The main reason (for increased spending) was our overestimation of infrastructure available for us in Central Asia…We need to build roads, pipelines and to bring more equipment. But our drilling costs will be lower. It's still a very low-cost project." International companies have accelerated their exploration in the area, after new finds have predicted greater reserves. CHAPMAN pointed out, "In 2003, we'll achieve a production plateau, and one has to continue drilling to maintain output. Costs of this drilling will be reduced, keeping the project's total cost little changed." The Karachaganak field, BG is developing has 2.4 billion barrels of oil and gas condensate as well as 16 trillion cubic feet of gas in reserves. It is yielding 150,000 barrels of oil equivalent a day. BG hopes to double the daily amount within three years, with oil and gas condensate to account for 180,000 barrels a day of it, CHAPMAN said. At that time a Chevron-led group plans to complete an oil

pipeline from Kazakhstan to a Black Sea port, allowing the BG Group to transport its oil to world markets. BG sells its Karachaganak oil for about $12 a barrel, while world prices for Brent crude are about $27.5 a barrel. BG and Eni each own 32.5 percent of the Karachaganak field, while Texaco has 20 percent and Russia's LUKoil Holding 15 percent. CHAPMAN added, "Karachaganak represents a world-class project for BG International, already delivering strong earnings."

Rus-Kyrgyz Sign Friendship Declaration

· Russian President Vladimir PUTIN and Kyrgyz President Askar AKAYEV on Thursday in Moscow signed a declaration on friendship, cooperation and partnership between the two former Soviet republics. They also signed a treaty of economic cooperation for 2000 to 2009. PUTIN emphasized that the Russian administration has a high regard for the level of relations between the two countries and the prospects for their development. He added that the bilateral relations, "have a special nature," because Kyrgyzstan is, "the most active participant in the integration processes in the CIS ( Commonwealth of Independent States)." AKAYEV noted the Kyrgyz's strategic relationship with Russia. He said, "Russia has always been a guarantor of stability in Central Asia and the world," and therefore there is no reason to be concerned over any Russian expansion against the newly independent states. Today, AKAYEV met with Defense Minister Igor SERGEYEV, Federal Security Service (FSB) director Nikolai PATRUSHEV, and head of the CIS military cooperation headquarters Viktor PRUDNIKOV, regarding the potential for supplying Russian defense hardware to Kyrgyzstan. He also met with Prime Minister Mikhail KASYANOV, who said Russia is ready to support Kyrgyzstan's efforts to "stabilize the economic situation in the republic, fight poverty and create conditions for the economic growth." The two nations are expected to sign intergovernmental agreements on the use Russian military ranges and cooperation between the defense and the health care ministries.

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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