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 7, 2000

Russian Federation

Politics

Russia Endanger Of Losing MFN With US?

· The CLINTON Administration has waived the deadline for a fourth and final payment on Lend-Lease loans to Russia from World War II. The final payment, due on July 1^st of this year, totaled $155 million. The total Russian debt to be rescheduled is $485 million. According to the aging loan agreement, a catch was attached to the final payment. It appears that if Russia failed to make the final payment, it could possibly lose its status of Most Favored Nation (MFN). This would have serious repercussions for US-Russia business relations.

Senator Jesse HELMS (NC-Rep.) has strongly denounced the decision by the CLINTON Administration, threatening to further impede foreign legislation, particularly delaying indefinitely foreign appropriation agreements. He claims that the rescheduling of Russia's debt contradicts key US foreign policy objectives. In a June 14^th letter to Secretary of State Madeleine ALBRIGHT, HELMS writes, "It is ironic that Russia's loan to the [Slobodan] MILOSEVIC regime and the estimated monthly cost of its war against Chechnya each falls just shy of the $155 million Russia is currently scheduled to pay on Lend-Lease debt next month. If the Government of Russia has the financial capacity to conduct its brutal assault of Chechnya and to finance the MILOSEVIC regime, it certainly has the financial capacity to meet its existing debt obligations. Rescheduling Russia's international debt will only reduce the political and economic pressure that should be directed against the Kremlin." He states that he will not agree to a debt rescheduling until, "Russia terminates its assistance to the MILOSEVIC regime in Serbia and has initiated a dull cease-fire in Chechnya and peace-negotiations with the demo

cratically elected government led by President Aslan MASKHADOV."

Putin Prepares State Of The Nation Address

· Russian President Vladimir PUTIN is preparing to make his first state of the nation address to a joint session of the Russian State Duma and Federation Council on Saturday. In an advance draft of the address received by Reuters, PUTIN said he foresaw a Russia, "where its citizens live well and the state is able not only to defend itself, but to inspire respect due to its well-being and sufficiency." PUTIN will also call for restrictions on investment to be reviewed and especially for the ruble to be made convertible for a broader range of trade and investment operations. He said a priority should be economic freedom and the defense of property rights. "For an effective state, there can be no difference between the rights and obligations of oligarchs and small entrepreneurs." PUTIN will also denounce separatism, renewing his commitment to Moscow's military campaign in Chechnya.

Meanwhile, the Russian State Duma today, in a vote of 334 to 27, approved the third law in PUTIN's package to shift the power and influence of regional governors in the Federation Council. This law gives the governors the right to remove lower municipal officials¾exception for some large cities. PUTIN has been pushing to overhaul state institutions and strengthen central authority. He has already appointed Kremlin envoys to oversee the governors. He has also

Today's News Highlights

Russia

Ex-Im Loans Russia $31 Million

UES To Be Supplied By Itera

European Republics

Estonia To Review Resignation

Rus -Ukraine To Hold Gas Talks

South Caucasus & Central Asia

Itera Bids For Tbilgaz

Georgia's Economy Improves

Baku-Supsa Closed For Repairs

Kazakh Police Seize Uranium

Politics-Economics-Business

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Friday

July 7, 2000

Intercon's Daily

created seven new regions along military lines. The Federation Council has already rejected a law approved by the Duma to deny governors the right to sit in the upper house. It has yet to examine the law empowering PUTIN to sack governors, but an upper house committee on Friday recommended rejecting it on grounds that it violated the constitution. The Duma, which overwhelmingly backs the Kremlin's line, however, has made clear it is prepared to override any upper house veto.

Economy

Ruble = 28.05/$1.00 (NY rate)

Ruble = 27.99/$1.00 (CB rate)

Ruble =26.54/1 euro (CB rate)

Oct Nov Dec Jan Feb Mar Apr May Jun Jul

US Ex-Im Loans Russia $31 Million

· The US Export-Import Bank has approved a $31 million loan to the Russian government to be used for purchasing medical equipment. The Ex-Im Bank will back a purchase by a Moscow children's hospital of imagery equipment from privately held Lunceford & Associates Inc., of Idaho, and 20 other US companies. Under the deal, the Ex-Im Bank guarantees a loan from Russian state-owned bank Vnesheconombank, to pay for purchase of Lunceford's sale of X-ray equipment, ultrasound devices and software to the Children's Health of the Russian Academy of Medical Sciences. Funding for health care and hospitals since the collapse of the Soviet Union has been drastically cut short.

World Bank President James HARMON said the loan will, "reinforce positive trends in the Russian economy and support the long-term competitiveness of US exporters in this important market." This is the first Ex-Im Bank loan to the Russian government since it defaulted on $40 billion in treasury debt. Russia is now negotiating a new program with the International Monetary Fund (IMF), after the IMF halted a $4.5 billion program last September.

Russia's Money Supply Expanded

· The Central Bank announced today that Russia's money supply expanded by 3.4 billion rubles ($121.5 million) in the week ending July 3^rd. The money supply, which includes cash currency in circulation plus required reserves, grew to 397.2 billion rubles, from 393.8 billion rubles on June 26^th. The money supply expanded by 3.3 billion rubles ($117.5 million) in the week ending June 26^th. Russian foreign currency and gold reserves rose $500 million to $21 billion in the week ending June 30^th. The Russian ruble for delivery today rose to 27.99 against the dollar in Moscow trading from 28.01, a 6-month high. The Central Bank is printing rubles to buy dollars so that the ruble does not appreciate too fast, making imports cheaper and hurting Russian producers. Printing rubles fuels inflation, while buying dollars increases the inflow of hard currency. Foreign currency reserves rose to $21 billion last week, a three-year high, as it bought dollars with rubles to prevent the currency, near a six-month high, from further strengthening.

Business

UES To Be Supplied By Itera

· Unifed Energy Systems (UES) and Itera Holding, an international gas trading company with links to Gazprom, have reached an agreement whereby Itera will supply 20 percent of UES' natural gas demand for the rest of 2000, the Financial Times reported. UES had previously received supplies from Gazprom, but a $2 billion debt owed to Gazprom has caused a rift. Itera has in the past stepped in between Gazprom and its customers when disputes like these arise. Many questions remain unanswered when studying Itera and its relations. In a May article in The Washington Post, David HOFFMAN describes Itera's dealings as battles carried out, "far from the public view, using shell companies, secret agreements and obscure off

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shore accounts." A Russian businessman further describes Itera as a "parasite" on Gazprom. Senior advisor Jonathan STERN at Gas Strategies points out, "There is no way Itera could get where it is today without very close cooperation with Gazprom and they admit they do have it. The problem is we have no idea of the terms on which they achieved this cooperation and that is the crucial thing. There is nothing gin the public domain which tells us what the terms are."

Itera has also reached an agreement to supply Ukraine with 31 billion cubic meters of gas. It is also holding negotiations with Naftogaz Ukrainy to form a joint venture. In 1999, Itera began supplying Ukraine with one third of its gas needs. In addition, Itera bid for the entire Armenian National Gas distribution center. This was rejected by the Armenian government. Itera has also been linked to a bribery case in Kazakhstan concerning the contract previously controlled by Tractebel of Belgium. The bribe offered to the Belgium Tractebel offical was presented by the notorious Gregory LUTCHANSKY, who has been linked to armed smugglers and reputed criminal activities.

the US. General staff chief, Aarne ERMUS, is now acting commander. This places Estonia in a precarious position as it is working toward NATO membership.

Rus-Ukraine To Hold Gas Talks

· Russia and Ukraine will hold talks after July 10^th on Ukraine's debt for natural gas supplies, Ukrainian Prime Minister Viktor YUSHCHENKO announced. Ukraine will offer Russia, "concrete mechanisms and instruments" for resolving its debt problem and reorganizing transit of Russian gas through Ukraine's territory to Eastern and Western Europe, YUSHCHENKO said at a Cabinet meeting this week. Ukraine admitted earlier this year it was stealing Russian gas from transportation pipelines carrying the gas to Europe. Ukraine said it wants to hire a Western bank to advise it on rescheduling debts owed to Russia, including about $1.5 billion owed for gas and electricity supplies.

South Caucasus & Central Asia

Itera Bids For Tbilgaz

· Itera Holding, an international gas trading company, offered $1.5 million to the government of Georgia's capital Tbilisi for a 75 percent stake in Tbilgaz, the city gas distribution company. Itera plans to invest as much as $250 million for an upgrade of the city's pipelines. AES Corp., the top US power plant developer, offered $1 million for a 100 percent stake in Tbilgaz. Itera plans to deliver 965 million cubic meters of gas to Georgia this year down 12.1 percent from 1.1 billion cubic meters supplied in 1999.

Baku-Supsa Pipeline Closed For Maintenance

· Oil pumping has been suspended from Azerbaijani Baku to Georgian Supsa for regular pipeline maintenance, according to the Azerbaijan International Operation Company (AIOC). The pipeline, which was put into operation in December, 1998, went under its first maintenance operation last summer. The pipeline has already pumped about 6,2 million tons of oil from Azerbaijan to the Black Sea coast of Georgia. Oil is expected to begin flowing to Georgia within the next 10 days. Meanwhile, oil production has been stopped at Chirag oil field on the Caspian shelf of Azerbaijan, 180 kilometers from Baku.

European Republics

Deputies To Debate Defense Chief's Dismissal

· Estonia's parliament will hold an extraordinary session on August 28^th to debate formally dismissing armed forces chief Lieutenant-General Johannes KERT, who resigned last week. President Lennart MERI accepted the resignation without giving any concrete reason, citing only a need for consensus on the country's civil defense policy. MERI's decision has been criticized by a number of deputies, who called for an explanation. The Estonian President gave his reasons privately at a meeting of the State Defense Council on Wednesday. Prime Minister Mart LAAR and Defense Minister Juri LUIK were present at the meeting. The Estonian President does not constitutionally have the right to dismiss the head of the armed forces. MERI requested the special parliamentary session in a letter to parliament Speaker Toomas SAVI, but he will not address the meeting. KERT's resignation came on June 30^th, one day before he was to reassume the position of armed forces chief after he temporarily stepped down for a year of training in

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Friday

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Intercon's Daily

Georgia's Economy Picks Up

· Addressing an enlarged session of the Citizens' Union of Georgia, President Eduard SHEVARDNADZE announced that the Georgian economy is headed in the right direction. He noted that the economy grew 5 percent in the last five months. The growth rate is expected to rise to 8 percent by year-end. According to the President, volume of industrial manufacture in Georgia increased by 11.5 percent this year and the private enterprises have achieved 18 percent growth of manufacture, Prime News Agency reported. These achievements are likely to impress a World Bank mission arriving in Tbilisi on Saturday. The mission, led by the World Bank's Jonathan WALTERS, will study the situation in the energy sector of Georgia.

Georgian media has reported that there are forces trying to destabilize the country. Currently, these forces are under control from a security standpoint. Intercon sources report that preparations are underway to agitate disturbances in the late fall and early winter throughout Georgia with the intent of toppling the government. The assumption on the part of these forces is that the Georgian government's financial situation will continue to erode, leading to a government bankruptcy. The impact of this would be a severe cut back in heating and electricity throughout the country. This could become the means to activate the program of mass protest. If the Georgian government fails to tackle the rampant corruption, which The Wall Street Journal reported on Wednesday as number one in the cost of bribery in the former Soviet Union at 8.1 percent of the average contract, then the potential for civic unrest remains high. However, these early indications of a growing economy and the improved collection of taxes and custom revenues might indicate that the assumptions behind these agitation plans may in fact be incorrect. Only time will tell.

EU Backs Caspian Pipelines Through Turkey

· The European Union (EU) is preparing to back

a $4.8 billion project to build oil and gas pipelines from the Caspian Sea to Europe, running through Turkey, Milliyet newspaper reported. The pipelines will run from Azerbaijan's capital Baku on the Caspian Sea through Turkey and Greece to Italy. The European Commission is expected to announce its official support for the pipeline project today. Turkey is also hoping western oil companies will build a $2.4 billion to $3.5 billion oil pipeline from Baku to the Turkish Mediterranean port of Ceyhan.

Kazakh Police Seize Uranium Rods

· Kazakhstan's National Security Service officers seized 4 kilograms of uranium-containing metal rods from a group of criminals who where planning to smuggle them to Afghanistan. The rods, confiscated on June 29^th, are produced in Kazakhstan, Russia and Ukraine. The rods' radiation exceeded norm 25-fold. Talgat KERIMBAYEV, a Security Service spokesman, said analysis showed that they contained 3.6 percent of enriched uranium-235, which serves as fuel in industrial reactors. The rods have been described as "fresh" as they have not been used in reactors. According a press release from the Security Service, the group is led by an ethnic Uzbek. Criminal proceedings have been instituted against the detained members of the group. This latest seizure of nuclear materials raises concerns regarding poorly secured nuclear facilities in the former Soviet Union.

Turkmen To Supply Afghan With Electricity

· Turkmen Power Minister Ismael AMANOVE and his Taleban counterpart Mawalvi Ahmad JAAN met in Herat on Thursday and reached an agreement whereby Turkmenistan will provide Afghanistan with electricity. According to Taleban radio station Shariat, "After extensive deliberation, both sides decided that the extension of power cables from Turkmenistan to Afghanistan be started in the near future." Turkmenistan is one of Afghanistan's first neighboring countries to invest in the nation, since the Taleban rose to power over three years ago.

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

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