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

Monday, July 31, 2000

Russian Federation

Politics

Peace Negotiations? Fighting Continues

· Russian President Vladimir PUTIN's regional envoy Viktor KAZANTSEV and Kremlin spokesman Sergei YASTRZHEMBSKY confirmed rumors of talks with Chechen President Aslan MASKHADOV and a top rebel commander Khamzat GILAYEV. Russia still stressed that surrender is the rebels' only way out. Konstantin MAKEYEV, a deputy to YASTRZHEMBSKY, said that the pro-Russian administrator of Chechnya, Mufti Akhmad KADYROV, was trying to persuade MASKHADOV to lay down arms. KAZANTSEV refused to say precisely who was conducting the talks, where they were taking place, or whether any progress had been achieved. He simply added, "Our only aim is to stop the fighting." GILAYEV warned, just a day earlier, that fighters were preparing a new large offensive.

Chechen rebels staged hit-and-run attacks on 11 Russian positions on Saturday night, including six attacks on federal facilities in the capital Grozny. No casualties were reported, and a spokesman for the North Caucasus Interior Ministry said the operational situation in the city was unchanged as a result of the attacks and there was no need to tighten security. Rebels also ambushed a column of Russian vehicles heading from Grozny. Witnesses at the scene of the fighting said several people were killed in a subsequent 40-minute shootout, which left a truck destroyed. NTV commercial television reported that the column was escorted by fighter helicopter, but that the helicopters had turned back to base before the attack occurred. Federal troops and border guards on Sunday carried out a search and destroy mission in the mountains near the southern border with Georgia. The operation was being carried out with massive artillery and air

support, with warplanes delivering strikes on suspected rebel concentrations in the mountain passes, the Associate Press reported. Combat jets bombarded suspected rebel positions in mountain passes during the operation and mines were placed on trails. Russia accuses Georgia, the only foreign country bordering Chechnya, of letting fighters bring men and supplies across the border; something Georgia firmly denies.

Meanwhile, in Ingushetia, there was an attempt on the life of Chechen warlord Arbi BARAYEV, the military's press center said. It said a bomb exploded near BARAYEV, but he escaped uninjured. There were no further details.

Economy

Harmon Meets With Kasyanov

· US Export Import Bank head James HARMON met Russian Prime Minister Mikhail KASYANOV on Friday for talks aimed at expanding the bank's activities in the country. The US embassy gave no details, but local news agencies said the talks touched on a possible $400 million loan for agricultural machinery from John Deere and CNH Global, formed from the consolidation of Case Corp and New Holland last year. It is also believed that HARMON and KASYANOV discussed a $120 million loan to be used to buy engines for three Russian Ilyushin Il-96MT aircraft, which are part of a planned deal with national Aeroflot for the purchase of 20 of

Today's News Highlights

Russia

Putin Meets Russia's Oligarchs

Alfa Bank Repays Eurobonds

European Republics

Lith. Shuts Down Reactor

Ukraine To Privatize Alumina

South Caucasus & Central Asia

Rus-Georgia Agree On Bases

UNOMIG Mission Extended

Niyazov Fires Foreign Minister

Nuclear Test Complex Destroyed

Politics-Economics-Business

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Monday

July 31, 2000

Intercon's Daily

the new planes. Both projects have been stalled since Russia's 1998 financial collapse. HARMON also met with Moscow Mayor Yuri LUZHKOV, who said they had discussed a possible project to build a children's hospital. In the past Export-Import Bank participated in deals with Russian firms including gas giant Gazprom and Aeroflot. In April, the bank approved $500 million in credits to the Tyumen Oil Company. The bank is an independent federal government institution, which provides loans, loan guarantees and insurance to US companies exporting to emerging markets.

Ruble = 27.77/$1.00 (NY rate)

Ruble =27.85/$1.00 (CB rate)

Ruble = 25.8/1 euro (CB rate)

Business

Putin Meets With Russia's Oligarchs

· In a meeting proposed by liberal politician Boris NEMSTOV, some 21 Russian businessmen met with Russian President Vladimir PUTIN in the Kremlin on Friday. Their talks were aimed at claiming tensions built up between the government and businesses due to legal investigations launched against major businesses. The pressure has come in the form of tax cases opened against leading oil company LUKoil Holding and carmaker AvtoVAZ, producer of the Lada vehicles. Media Most head Vladimir GUSINSKY was also arrested in June on embezzlement charges although these have now been dropped. However GUSINSKY, along with other well-known businessman Boris BEREZOVSKY, was not invited to the meeting. Also absent was oil and metals magnate Roman ABRAMOVICH, who has been spared from legal attacks. The Russian President opened the meeting telling the oligarchs, "you built this state yourself, to a great decree through the political or semi political structures under your control. So there is no point in blaming the reflection in the mirror. Let us get down to the point and be open about what is necessary to do to make our relationship in this field civilized and transparent." While, PUTIN made no promise to curb police actions against large businesses, he promised there would be no reviews of post-Soviet privatizations and no redistribution of assets. PUTIN did stop short of promising amnesty for violations of the law. Businessmen had feared that the privatization sales of the 1990s would be

investigated. Russia's Prosecutor General authorities approached head of Interros Holding Company Vladimir POTANIN demanding a payment $140 million for compensations owed to the state for the 1995 sale of Norilsk Nickel. NEMSTOV noted, "The oligarchs are fed up with being oligarchs. They just want to be businessmen and pay their taxes." He added that, "the era of the oligarchs is over." The President and oligarchs agreed that all businessmen should be equally distanced from the Kremlin, the Financial Times reported. The two sides also agreed to host regular meetings in the future. POTANIN noted, "I got the impression from the meeting that Russia's powers-that-be, as represented by the President, regard business leaders more as allies in implementing economic programs, rather than in some other capacity."

Despite the Kremlin talks, others remained skeptical of the newly defined relationship between the government and business. Head of lobby group the Russian Union of Industrialists and Businessmen Arkady VOLSKY criticized the talks at the Kremlin stating that it had boosted the president's authority. Vremya newspaper said the meeting had shown PUTIN as an authoritative leader who had been able to dictate terms to the businessmen rather than the other way around.

Alfa Bank Repays Eurobond

· Russia's Alfa-Bank today said it had repaid in full and on time a three-year $175 million Eurobond maturing on July 28, 2000. According to a press release, Alfa-Bank planned to borrow again on Western capital markets in the near future, with a syndicated loan later this year and a Eurobond issue in the first half of 2001. Many Russian banks had trouble meeting foreign debt obligations after the 1998 financial crisis, which led to a devaluation of the ruble and a default on state domestic debt. "We are pleased to be the first Russian corporate issuer to fully honor its obligations to Eurobond holders," Alfa-Bank CEO Alex KNASTER said. "Our decision to raise new capital in international markets will depend primarily on the cost of capital. The bank will enter the markets if the funding costs are in the range of 10-11 percent," he said. Fitch, the international rating agency, upgraded Alfa-Bank's long-term rating to CCC+ from CCC- earlier this month and placed the bank's individual rating of D/

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E on Rating Watch Positive. Alfa-Bank finished 1999 with assets of $1.35 billion and equity capital of $233 million based on an audit to international accounting standards carried out by PriceWaterhouseCoopers. The bank said net income in 1999 was $50 million, but it gave no comparisons.

for more loans from the International Monetary Fund, which wants the country to speed up its state asset-sale program. The EBRD and Pechiney are also involved already with the alumina company: Pechiney constructed the plant for the Soviet Union 20 years ago, while the EBRD may release an undisclosed loan for its upgrade. The renovation will help increase production and improve quality, said Ukrainskiy Aliuminiy spokesman Oleg PANIUTA. The plant will also begin refining some of the waste from alumina production to make raw materials needed to make ferrous metals and fertilizers, PANIUTA said. The plant produced 458,000 tons of alumina, a key raw material for making aluminum, in the first five months of the year, up 28 percent from the same period a year ago. It is targeting an output of 1.1 million tons of alumina this year, up 11 percent from 1999, PANIUTA said.

South Caucasus & Central Asia

Rus- Georgia Agree On Base Withdrawal

· Georgian Defense Minister David TEVZADZE and Foreign Minister Irakly MENAGARISHVILI represented Georgia over the weekend for the third round of talks on the withdrawal of Russian military technology from Georgian territory. Negotiations stem from the Organization for Security and Cooperation in Europe's (OSCE) summit agreement on November 17, 1999. This called for the reduction of Russian military presence in Georgia, including arms and military hardware, which fall under restriction in accordance with the Conventional Forces in Europe (CFE) treaty. Withdrawal of Russian military technology, exceeding the quotas set by the Agreement on Conventional Armed Forces in Europe, is to start on August 1^st. Russian Deputy Prime Minister Ilya KLEBANOV said by the end of this year there will be no more than 153 tanks, 241 armored vehicles and 140 artillery systems left in Russian bases. He added, "I'm sure the Georgian side will provide the conditions for a secure withdrawal of our equipment." According to the OSCE agreement, the Vaziani base is to be eliminated by July 1, 2001. The London-based International Institute for Strategic Studies estimates Russia has 5,000 troops stationed in three bases in Georgia, legacies of the Soviet era. It says they are equipped with some 500 armored vehicles. KLEBANOV said a further round of talks would follow in September or

European Republics

Lithuania Shuts Down Nuclear Plant

· Lithuania's Soviet-built Ignalina Nuclear Power Plant's second reactor was shut down on Friday due to a malfunction in the turbo generator. The plant did not leak any radioactive material. It is unclear at this time when the reactor will be put back into operation. In a news statement the plant said, "The turbo generator stopped operation due to a malfunction at a 330 kilovolt voltage distribution lines unit. Radiation background in the territory of the plan and outside of it has not changed." The first reactor of the plant has been shut since May for regular maintenance work. The two reactors have a capacity of 1,300 megawatts (MW) each. Ignalina was built to the same design as Ukraine's Chernobyl power plant, which exploded in 1986 and spewed a cloud of radioactive dust across Europe. Lithuania has decided to close the first reactor by 2005 and will decide the fate of the second one in 2004.

Ukraine To Sell Alumina Producer Stake

· The Ukrainian government said foreign investors are urging it to sell its remaining 25 percent of Europe's largest alumina producer, Mykolayivskiy Hlynozemniy Zavod, after it sold a 30 percent stake earlier this year. Pechiney, the world's fourth-largest aluminum producer, the European Bank for Reconstruction and Development (EBRD) and Ukrainskiy Aliuminiy, a partner of Russia's Sibirsky Alyuminiyum and the buyer of the 30 percent stake in the alumina maker, are interested in another sale, Bloomberg News reported. The government has said it may offer the stake early next year. "It's likely that Ukrainskiy Aliuminiy and Pechiney may jointly buy the stake," government spokesman Gennady HARMASH said. The investors, "are considering a technical reconstruction of the plant, which would be done by Pechiney." Ukraine needs to go ahead with the sale to help stabilize its finances and qualify

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October in Tbilisi to discuss a timetable for withdrawing troops and equipment from the remaining two bases.

UNOMIG Extends Observer Mission

· The UN Security Council unanimously approved on Friday a six-month renewal of the 102-member UN Observer Mission in Georgia (UNOMIG) lasting until January 31, 2001. The mission, established in 1993, works with a much larger Russian-led force fielded by the Commonwealth of Independent States (CIS) to try to keep peace between the Georgian government and Abkhazian separatists. Some 250,000 Georgians fled the breakaway region of Abkhazia in 1993 when the separatists, backed by mercenaries and arms from Russia's northern Caucasus region, drove out Georgian government troops in a lightning campaign, Reuters reported. About 10,000 people were killed in the civil war that followed. There has been little progress in deciding Abkhazia's future political status. The resolution renewing UNOMIG demanded that both sides strictly observe a 1994 Moscow agreement for a ceasefire and separation of forces. The resolution also reaffirmed the unacceptability of the demographic changes due to the conflict and the right of all refugees to return to their homes.

Armenia To Privatize Electricity Producers

· The Armenian parliament on Friday, in a vote of 63 to 36, approved a plan to privatize the country's electricity grid. The plan calls for the privatization of four state electricity producers, with 51 percent of the shares going to strategic investors, 20 percent to the European Bank for Reconstruction and Development (EBRD), 20 percent remaining in the hands of the state, 5 percent to other investors and 4 percent to employees of the companies. Four companies have made tenders: AES Corp., the Swiss-Swedish ABB Ltd., Electricite de France, and Spain's Union Electrica Fenosa.

Niyazov Sacks Pro-Western Foreign Minister

· Turkmen President Saparmurat NIYAZOV

sacked his longest serving Cabinet member, Foreign Minister Boris SHIKHMURADOV, signally a shift in the nation's regional policies. SHIKHMURADOV, well liked in the West with ties to Europe and the US, had been a supporter of the Trans-Caspian pipeline plans to export Turkmen gas. SHIKHMURADOV was replaced by his first deputy Batyr BERDYEV, who has played only a marginal role in pipeline talks. This gives NIYAZOV the opportunity to shift Turkmen's pipeline policy away from SHIKHURADOV's efforts and toward alternative options in Moscow, Tehran and Beijing. Paul GOBLE of RFE/RL Newsline points out that the US and Europe have been critical of NIYAZOV's governing practices and human rights abuses. NIYAZOV had hoped that Western government would give him greater "understanding" for his approaches of dealing with the Islamic threats and because of his country's enormous gas reserves. But Moscow, Tehran, and Beijing have been more sympathetic to NIYAZOV's whims. In recent months, Ashgabat has stepped up its diplomatic and economic contacts with Russia, Iran, and China.

Kazakh Nuclear Testing Site Destroyed

· The last nuclear testing site in Kazakhstan was destroyed with a controlled explosion Saturday morning, removing the former Soviet republic from the list of nations capable of testing and launching nuclear weapons, the BBC reported. An international team of scientists used 100 tons of dynamite to blow up the site. The northern Kazakhstani site covered 85,000 square kilometers. US Senator Dick LUGAR (Rep.-IN), the co-founder of the NUNN-LUGAR program said, "This was the world's largest nuclear test tunnel complex and the most important test range of the former Soviet Union. This nuclear testing range is now eliminate and will never again be used of nuclear weapons testing or contribute to the proliferation of nuclear terror." The project involved the closing and sealing 180 tunnels and 13 vertical boreholes used for nuclear testing. It was used for 470 nuclear explosions while part of the former Soviet Union between 1949 and 1989.

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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