DAILY REPORT ON RUSSIA

AND THE FORMER SOVIET REPUBLICS

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Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Friday, August 11, 2000

that is going to be created will be able to deter an aggression of any scale," MANILOV stressed. This has been at the center of a dispute between Defense Minister Igor SERGEYEV and the chief of General Staff, General Anatoly KVASHNIN. Any decisions on a structural change of the armed services will be passed on the basis of the current conceptual documents approved by the Russian president. These documents include a concept of Russia's state policy in the field of military construction up to the year 2005. It envisages a transition to only three armed services between 2001-2005, Itar-Tass reported. MANILOV stressed that the transition did not mean the strategic missile troops would be liquidated or the country's nuclear shield would be damaged. Vremya Novostei reported, "The range of views is impressive¾from threatening words about everyone being sacked to more neutral talk about a compromise with everyone getting less."

Tuleyev Saved From Poisoning Scheme

· The Russian Federal Security Service (FSB) has arrested four suspects in Moscow and Novosibirsk in Siberia and accused them of planning to poison Kemerovo Governor Aman TULEYEV. Alexander TIKHONOV was one of four people arrested Monday. Police searched his apartment later finding a cache of weapons and ammunition, RTR Television reported. TIKHONOV, a Soviet biathlete who won team gold medals in four straight winter Olympics, from 1968-1980 and an individual silver medal in

Russian Federation

Politics

Russia Accuses Halo Trust Of Espionage

· Russia has accused the Halo Trust, a British charity that specializes in mine clearance, of spying and aiding Chechen rebels, The Guardian reported, citing the Federal Security Service (FSB). Halo, which was endorsed by the late Princess Diana, worked in Chechnya between 1997 and 1999, training rebels to lay and clear mines and use other explosives, the FSB said. Halo Trust opened its office in Chechnya in 1997 with the help of Chechnya's President Aslan MASKHADOV without permission of Russian authorities. The charity employed Matthew MIDDLEMIS, a British career intelligence officer accused of spying for the North Atlantic Treaty Organization. Halo Director Guy WILLOUGHBY said, "We just completely deny this sort of allegation, that we were in any way supporting mine laying or any form of terrorist activity. We were running a standard humanitarian mine-clearing organization." The British foreign office warned Halo, which is not working in Chechnya at present, to stay out of the republic though officials said the work the charity had done in Kosovo and Cambodia was very valuable.

Kremlin To Determine The Military's Future

· First Deputy Chief of the Russian Armed Forces General Staff Colonel-General Valery MANILOV said the Russian Security Council is meeting today to work out a fundamental approach to problems of military construction in Russia. He noted the main task of the military reform was to ensure an effective balance between the strategic nuclear and the conventional forces as the main components of deterrence against an aggression. Conventional forces are in poor shape¾low on cash, short of modern equipment and demoralized. "The balance

Today's News Highlights

Russia

Russia Request Steel Review

Sibneft Raided By Tax Police

European Republics

Lazarenko Still Detained In US

Ukraine's Reserves Reach $1.2B

South Caucasus & Central Asia

NY Summit Focues On Pipelines

Vaziani Base Withdrawal

Kazakh Attacks Big Business

Uzbek Forces Kill 15 Rebels

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August 11, 2000

Intercon's Daily

1968, is now a businessman. FSB officials said they had foiled an attempt to assassinate TULEYEV, who came in fourth in the March presidential elections. The assassins had been promised $700,000 for the hit. Officials believe the attempt was linked to a dispute in the aluminum industry, between Roman ABRAMOVICH's Siberian Aluminum and the MIKOM conglomerate. The FSB searched MIKOM's offices in Moscow in connection with the probe. The director of MIKOM, Mikhail ZHIVILO, was reported missing Tuesday. TULEYEV and MIKOM had clashed frequently. TULEYEV was instrumental in declaring the MIKOM conglomerate, including Kuznetsk Metallurgical Combine and the Novokuznetsk Aluminum Plant, bankrupt earlier this year. The Governor assigned representatives from Siberian Aluminum to take over operations. On RTR Television Tuesday, TULEYEV said, "When I took over the region three years ago, it was in the hands of criminal mobs…Professional criminals sat on the boards of directors at numerous companies."

Russian Reactor Shutdown

· An emergency alarm went off Tuesday at a nuclear power plant in northwest Russia, but no radiation leaks were reported, Leningrad Atomic Energy Station officials said. Experts said faulty electrical wiring within the alarm system apparently set off the signal, not a reactor problem, the Itar-Tass news agency reported. The alarm went off at the Number 4 reactor of the plant in Sosnovy Bor near St. Petersburg. A spokesman with the Atomic Energy Ministry had no information about the cause of the alarm. The reactor was not in operation at the time. The plant has four graphite-cooled reactors like the one that malfunctioned during an experiment in 1986, trigging the Chernobyl nuclear accident. Most newer reactors are water-cooled which is considered safer, the Associated Press reported.

Economy

Russian Economic Indicators

· Russian foreign currency and gold reserves rose $400 million to $23.6 billion in the week ending August 4^th, as the Central Bank bought dollars with rubles to prevent the currency from strengthening further. The reserves are at the highest level since 1997, when reserves peaked at about $24.5 billion.

Reserves rose $200 million to $23.2 billion in the week ending July 28^th. Russia's money supply fell by 4.1 billion rubles ($147.8 million) in the week ending July 31^st, the Central Bank said. Russia's money supply rose by 2.3 billion rubles ($83 million) in the week ending August 7^th. Russian Central Bank Chairman Viktor GERASHCHENKO said the Central Bank is printing, "large amounts of rubles."

Ruble = 27.7/$1.00 (NY rate)

Ruble = 27.70/$1.00 (CB rate)

Ruble = 25.17/1 euro (CB rate)

Nov Dec Jan Feb Mar Apr May Jun Jul

Russian Request Review Of Steel Exports

· Russian trade officials, under pressure from major Russian steel makers, have requested that Washington reopen negotiations on limits on Russian steel exports. Yevgeny MANAKIN, deputy director on trade policy department at Russia's Economy Ministry said, "This agreement does not fit the interests of all of our exporters." The US Commerce Department said, "Right now we're trying to confirm a date in September," to consider changing a 1999 pact that slashed Russian steel shipments to the US. US producers and workers, such as US Steel Corp. and Bethlehem Steel Corp., claimed that Russia was dumping steel on the US market at below fair market prices. The July

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1999 deal called for Russia to halt shipments of hot-rolled steel to the United States in 1999 and gradually increase them over the five-year life of the pact. Russia agreed in December, 1999, to cap shipments of cold-rolled steel used in products ranging from automobiles to household appliances. Russian steel exporters have diverted about 5 million tons of steel products, worth about $1 billion, from the US market over the past year, Bloomberg News reported. Last week, executives of Russia's second- and third-largest steel producers, Magnitogorsky Metallurgichesky Kombinat and Nopolipetsky Metallurgichesky Kombinat, warned in a letter to Vice President Al GORE and Russian Prime Minister Mikhail KASYANOV about a possible withdrawal from the suspension agreement. Roger SCHAGRIN, a Washington lawyer for the US steel industry said, "The way domestic industry is performing…I don't think there will be anyone interested in changing the terms of the Russian quota agreement…If Russians want to make this a big issue, then I'm sure that industry and the steelworkers union will remain pretty solid in our defense."

Business

The Untouchable Gets Raided

· Russian Tax Police on Thursday raided and seized documents from the Moscow headquarters of oil company, Sibneft. Roman ABRAMOVICH, owner of the Sibneft controlling state and considered a member of former president Boris YELTSIN's inner circle, had appeared to be off the radar of Tax Police. At a Kremlin meeting in July between President Vladimir PUTIN and Russia's leading oligarchs, businessmen noted that the Tax Police practiced favoritism, pointing to the fact that ABRAMOVICH's interests remained "untouched" from investigations. PUTIN pledged to distance himself from preferential treatment. Despite the orderly probe on Thursday, the low profile news coverage and absence of ski masks and weapons, commonly donned by the tax militia, illustrate that some measure of favoritism may still exist. However, the Financial Times points out that the mere raid suggests that Sibneft has lost some of the political protection it once enjoyed. The raid followed up on accusations from the Finance Ministry that Sibneft had paid less in taxes than all of its competitors at the end of July. A company spokesman confirmed the raid, but

stressed that the Finance Ministry's figures were inaccurate. He said that Sibneft paid more taxes that two other oil groups. He added, "Sibneft…does not benefit from any privileges or exemptions."

Sibirsky Aluminum To Diversify Business

· Roman ABRAMOVICH's Siberian Aluminum, Russia's third-largest aluminum producer, set up an automobile subsidiary Ruspromavto as a part of a plan to diversify its business, Vedomosti reported. The company earlier acquired a controlling stake in Pavlodarsky Avtobus, a bus producer based in central Russia, which currently makes about 400 buses a month. Siberian Aluminum is seeking vehicle production assets to ensure it has a market for its aluminum supplies.

EBRD Reviews Financing For Gazprom

· The European Bank for Reconstruction and Development (EBRD) in September will review $250 million in financing for Gazprom, Russia's natural gas monopoly, to upgrade pipelines and improve its accounting system. The EBRD said it plans to provide a $150 million loan, with a group of banks lending the rest. "We have to change lots of pipes and modernize compressor stations," said Gazprom spokesman Anatoly BABAYEV. "We also plan to improve communications with our subsidiaries to have access to their accounting databases." Gazprom operates 150,200 kilometers of pipelines in Russia. The company, which holds most of Russia's total 46.9 trillion cubic meters of gas reserves, accounts for about 25 percent of the world's gas production. Gazprom repaired 668 kilometers and reviewed 12,100 kilometers of pipelines in 1999. The bulk of the financing will go towards pipeline projects, with a small portion earmarked for improving accounting systems. Better communications within Gazprom will help improve, "the corporate reporting and transparency of Russia's largest company," the EBRD said.

European Republics

Latvia's Unemployment Rate Falls

· Latvia's unemployment fell by 2,084 people in July from June, as more people found summer work, the Central Statistical Bureau reported. The unemployment rate fell from 8.4 percent in June to

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Friday Intercon's Daily August 11, 2000

8.2 percent in July. In July, 98,496 people were registered as unemployed, compared with 100,580 people in June.

Lazarenko Still Detained In US

· Former prime minister Pavel LAZARENKO is still detained in the US, where he is accused of money laundering. He has been charged with 31 counts for violating US legislation. In Kiev, the ex-premier was also charged with illegal currency operations, squandering budget funds, abusing position and participating in a criminal group. The US and Ukraine are working on negotiations to sign extradition legislation, according to the Ukrainian Foreign Ministry. There are at present no legal grounds for the extradition between the US and Ukraine.

Ukraine's CB Reserves Reaches $1.2 Billion

· The Ukrainian Central Bank's hard currency reserves have reached $1.222 billion from $1.190 billion last week. Sergei YAREMENKO, director of the Central Bank's currency regulation department, said the Bank had bought $1.050 billion this year on the interbank currency market, allowing it to service foreign debt and increase reserves to $1.222 billion. The Central Bank's first deputy chairman, Anatoly SHAPOVALOV, said reserves were $1.190 billion on August 3^rd. Last month, the Central Bank said Ukraine spent $750 million in the second half to service foreign debts, compared to $995 million spent in January to June. Ukraine had initially hoped for loans from the International Monetary Fund and World Bank to help make the payments, but the two lenders froze support last year over slow reforms. Ukraine has so far failed to unlock new funds.

South Caucasus & Central Asia

Millennium Summit Focuses On Pipeline

· Georgian President Eduard SHEVARDNADZE, Azeri President Geidar ALIYEV, and Turkish President Akhmet SEZER will meet in New York in September at the Millennium Summit. The meeting will be dedicated to the realization of the Baku-Tbilisi-Ceyhan Main Export Pipeline project. These issues along with other international issues were discussed between SHEVARDNADZE and his new strategic adviser for international oil and gas

projects, former vice-president of Chevron company Edward CHOW. The two also touched on a project for extraction of energy carriers in Georgia. President of Georgian International Oil Corporation (GIOC) Giorgi CHANTURIA stressed at the press-conference that as the strategic adviser to Georgian President, CHOW will actively join in the working out of new, up-to-date structure of the GIOC, will be consulting Georgian specialists in building a new oil terminal and large oil refinery in Supsa, Prime News Agency reported.

Russia Withdraws 49 Units From Vaziani

· A second train with Russian military technology, withdrawing from Georgia according to the Agreement on Conventional Armed Forces in Europe, will be sent from Vaziani in September, according to head of the press-center of the Group of Russian Forces in the Caucasus Alexander LUZKEVITCH. He said the first shipment of 49 units of military technology has already been transported from Adjaria to Novorossiisk and Tuapse by two Russian paratrooper vessels. By year's end, Russia will withdraw 335 units of military technology¾tanks, armored cars, artillery units.

Russian military bases in Vaziani and Gudauta must be closed before July 1, 2001. Russia and Georgia will hold a fourth round of negotiations on the handover to Georgian side of immovable property, rented by Russian military bases in September. Georgia's Defense Ministry hinted that the Caucasus nation may raise the issue of material compensation for Georgian share of soviet military fleet, military aviation, and other military technology illegally withdrawn from the country. The amount is over $ 10 billion. As a source in Georgian Defense Ministry told Prime News Agency, the given issue always irrigates Moscow, but Georgia will still attempt to receive material compensation.

Kazakhstan Attacks Big Business

· Following Russia's lead cracking down on business oligarchs, Kazakh President Nursultan NAZARBAYEV issued a new attack on big business, urging companies to pay their taxes. On national television Tuesday, the President said, "I want to say again that these companies must work openly and honestly, transparently, and so

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that revenues are published and that they themselves report to the Revenues Ministry." Kazakh investors are under pressure to halt the practice referred to as "transfer pricing." Officials say they are exporting goods to their own offshore subsidiaries at reduced prices to avoid paying tax. Reuters reported that NAZARBAYEV singled out Tengizchevroil, Russia's LUKoil, oil producer Mangistaumunaigaz, and metal companies belonging to Eurasian Bank. He urged Chevron Corp., Agip Ltd., Eni, BG Group, and Texaco to be more open with their activities. NAZARBAYEV said, "They are our friends, we support them, they are working at our large enterprises. We want to create the right conditions, to help them, and we will support their work, if their operations are in line with the laws of Kazakhstan. Let them take this as my presidential warning." On Friday, Central Bank Chairman Grigory MARCHENKO said, "We can either reconcile ourselves to being a banana republic and be exploited or we must establish civilized relations with large companies...which are working in Kazakhstan and using transfer pricing." He added, "It is clear that there is capital flight from Kazakhstan. We can argue about its extent but the fact remains that 70 percent of this happens through transfer pricing."

Western lawyers in the resource-rich Central Asian state say that Kazakh laws are vague on transfer pricing and need to be improved before the government can take investors to task. Official figures show that Kazakhstan exported around $875 million in goods to offshore havens the British Virgin Islands and Bermuda in the first five months of the year, making them its most important export destination after Russia. Kazakhstan's Revenues Ministry and the Prosecutor General have been carrying out a detailed study into the tax practices of the country's largest firms for two months. The results are expected to be publicized by the end of August.

Uzbeks Surround and Kill 15 Gunmen

· Uzbek authorities said Wednesday they would wipe out a group of up to 100 Islamic gunmen who

had invaded across the country's mountainous southern border last weekend. The militants crossed into Uzbekistan from Tajikistan, a claim that Tajikistan rejected, saying the militants could not have slipped past border guards. According to the Associated Press, the rebels are believed to be followers of an Islamic separatist movement with aims to create a religious state in the mountains where Uzbekistan, Tajikistan and Kyrgyzstan merge. Uzbekistan's military troops killed 15 rebels and the remaining militants are trapped in a gorge 300 miles southwest of the Uzbek capital, Tashkent. Uzbek forces are pounding the militants with air and artillery raids, but will not launch a ground attack to avoid government casualties, said a spokesman with the Uzbek Defense Ministry. However, the BBC quoted the Islamic Movement's Takhir Yuldash as claiming that dozens of the government soldiers had been killed and several taken hostage.

Bakhodyr UMAROV, a spokesman for the Uzbek Foreign Ministry said, "We don't intend to enter into polemics with bandits and terrorists. We can make them understand only one way, which means using force to destroy them." The US called on the Uzbek government to exercise "maximum possible restraint" while defending its territorial integrity. But Richard BOUCHER, State Department spokesman, also said the governments of the region should work together to combat terrorism." Central Asia's states are growing increasingly nervous over militant Islam in their region, which they claim is the main threat to their security, the Financial Times reported.

Itar-Tass today reported that a special operation conducted early Thursday morning destroyed all the terrorists, who crossed over from Tajikistan. Uzbek troops captured a lot of arms, ammunition and medicines. They found graves of terrorists killed in previous clashes. Officers of the republican prosecutor's office started identifying the dead.

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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