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

Monday, August 14, 2000

Russian Federation

Politics

Nuclear Submarine Trapped On Ocean Floor

· A Russian nuclear submarine malfunctioned Sunday, sinking to the bottom of the Barents Sea and trapping more than 100 crewmembers. The submarine, named Kursk, was built in 1994 and went into service in 1995; it is one of the newest vessels in the Russian navy. The naval officers were conducting regular navy exercises, when the malfunction occurred. It did not have any nuclear weapons aboard and its two nuclear reactors are shutdown. Head of the navy press service Igor DYGALO said there is no immediate danger of radiation leaks or an explosion. The navy declined to say what had gone wrong with the submarine, describing it only as a "malfunction." NTV Television news, citing unnamed sources, reported that water gushed through the submarine's torpedo tubes during a firing exercise and flooded the front of the vessel. The submarine is leaning 60 degrees on its port side. It added that, the submarine was trapped about 330 feet below the surface. Norwegian Defense officials believe the submarine is at a depth of 500 feet. In an emergency, a submarine would normally surface. But DYGALO said the vessel was forced to descend to the ocean floor, indicating that the crew had lost control. Vladimir GUNDAROV, a submarine specialist at Red Star, the official daily newspaper of the Russian military said a rescue efforts would be extremely dangerous. The crew may be able to use rescue capsules, but in the worst case would have to try to escape by swimming out through the torpedo tubes, he said. "It is extremely risky, but they are all trained to do this," GUNDAROV said. Other reports suggest that a rescue plan could include hoisting the submarine and other under water activities. However, the probability of a successful operation is small. The latest

reports describe the vessel as showing signs of a "serious collision," possibly with a submarine from another country. CNN News reports that a bell or capsule has landed on the submarine's deck and is supplying it with oxygen. Standard rescue procedures call for the crew to be rescued using the bell or capsule, which is lowered onto the hatch of the submarine.

Putin Calls for Shake-up in Armed Forces

· President Vladimir PUTIN has announced a radical restructuring of Russia's armed forces as a part the effort of restructuring of the military to re-design a more realistic strategy for the next 15 years. At a meeting of the National Security Council on Friday, PUTIN called for an improved use of resources and ruled out the requirement for a large weapons stockpile, which previously was needed for a large scale war against NATO. PUTIN demanded an improvement in the conditions of the country's weapons and troops, which continue to operate below their capacity. PUTIN was expected to end a dispute between Defense Minister Igor SERGEYEV and the chief of the general staff Anatoly KVASHNIN over the country's Strategic Rocket Forces, which controls Russia's nuclear arsenal. SERGEYEV supports the maintenance of Russia's large nuclear arsenal, while KVASHNIN emphasizes conventional weapons and forces. According to the Interfax news agency, "A decision was made on the redistribution of financial flows" away from the nuclear forces toward the conventional

Today's News Highlights

Russia

Debt Swap Offer Extended?

Ikea To Build New Factory

Yukos Gets Loan To Pay Debts

Gazprom Sells $106M In Bonds

European Republics

Ukraine To Cut Forex Obligations

Foreign Investment Totals $420M

South Caucasus & Central Asia

Red Cross Workers Freed

Aliyev Signs Privatization Laws

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August 14, 2000

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forces. It gave no further details. But in one of the few concrete statements made after the meeting, SERGEYEV said launch vehicles that carry the country's land-based nuclear missiles would not be phased out early but be used to the end of their expected life-span, which for many is only another three years.

According to military estimates, about 70 percent of Russia's dwindling procurement budget is going towards the development of the country's nuclear forces, with much of the rest consumed by the purchase of parts. On the other hand, federal troop deaths and tactical mistakes in Chechnya have strengthened those who advocate of greater conventional spending, led by General KVASHNIN. Alexander PIKAYEV, a defense specialist with the Carnegie Moscow Center, argues that a rapid shift away from nuclear forces before the US agreement on reduction of nuclear capabilities could weaken PUTIN's domestic standing. According to Financial Times, the levels of spending may be subject to change in the light of international circumstances and any further US nuclear reduction agreements.

Bomb Death Toll Rises, Police Ask For Help

· The death toll from the August 8^th Moscow bombing rose to 12. The bomb exploded at Pushkin Square, the site of hundreds of businesses and an entrance to the Moscow subway, wounding 93 people. Russian authorities are investigating the explosion and have appealed for assistance from the US Federal Bureau of Investigation (FBI). FBI Director Louis FREEH agreed on joint efforts in the investigation. The Russian government said it expects the bomb was a terrorist attack. The Interior Ministry filed a report about the explosion and plans to send it to about 50 countries.

Russian President Vladimir PUTIN has criticized his security advisors for slow progress in the investigation. He met the heads of the interior, defense and foreign ministries and the intelligence services at the Kremlin to discuss the measures taken to track down suspects. PUTIN has called on them to "raise the efficiency" of the investigation. Police noted that they have found no evidence of a Chechen connection and now say political extremists or a crime gang may have planted the bomb, The Wall Street Journal Europe reported. Police are still searching for three suspects witnesses saw flee

ing the scene moments before the bomb exploded. This latest blast is similar to an explosion in a popular Moscow video arcade in 1999. The newspaper added that PUTIN has made law and order a priority of his administration but oversees a security apparatus tainted by graft, incompetence and links to organized crime.

Economy

Ruble = 27.71/$1.00 (NY rate)

Ruble = 27.71/$1.00 (CB rate)

Ruble = 25.11/1 euro (CB rate)

Debt Swap Offer Could Be Extended

· Russia expected to close its offer to swap $32 billion of Soviet-era London Club debt for new Eurobonds as planned on Friday, Deputy Finance Minister Sergei KOLOTUKHIN said. However, Russia is now considering extending the deadline. The exchange appears to be successful for Russia as it moves forward late this year to try to restructure Soviet-era debt owed to the Paris Club of sovereign lenders. He said 80 percent of the London Club debt, held in the form of PRINs principal notes and IANs interest arrears notes, had already been tendered for the swap by Thursday evening. Russia and investors agreed in February to the terms of the offer, in which Russia would issue $18.4 billion of Eurobonds maturing in 2030, in exchange for $29 billion of PRINs and IANs and a further $2.8 billion of Eurobonds maturing in 2010, for overdue interest. The actual exchange is planned to end on August 25^th, Reuters reported.

Moscow To Sell Millions In Eurobonds In 2001

· The city of Moscow will sell $800 million in Eurobonds next year, said Sergei PAKHOMOV, chairman of Moscow's municipal borrowing committee. Moscow wants to sell the bonds to finance payment on other Eurobonds, PAKHOMOV said. The bonds, denominated in dollars or euros, will have maturities of at least five years and carry an annual coupon of between 9.5 percent and 10 percent, the agency reported. Moscow must redeem a lira-denominated Eurobond due May 18, 2001, and a deutsche mark-denominated bond due September 4, 2001.

Business

Ikea To Build Russian Factory

· Ikea, the world's largest furniture retailer, will

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start construction of a furniture factory in Russia's Leningrad region. In February 2001, Swedwood, a company in the Ikea group, will start construction of the factory, in northeastern Russia. Production will start in the summer of 2001. Swedwood will invest about $25 million in the project. In March, Ikea opened its first Russian store, outside Moscow, after investing more than $114.8 million in the country and overcoming customs and other obstacles. The grand opening was a complete success; it even caused severe traffic delays due to the volume of eager customers.

Yukos Gets Loans To Pay Subsidiaries' Debts

· Yukos Oil Company, Russia's second-largest oil producer, secured a $50 million loan from seven banks to pay off some of the debts of its subsidiaries, Bloomberg News reported. The oil company will borrow from a group of banks including: Bank Austria, Commerzbank, Credit Lyonnais, and Standard Bank London Ltd. The nine-month credit was granted at an interest rate of Libor plus 3.25 percent, said Yukos spokesman Maxim PUCHKOV, who added that the company arranged the loan itself. "We did not have a lead manager," he said. "We arranged the facilities ourselves with the banks directly on these conditions." Yukos reported a $1.15 billion profit last year, after a $640 million loss in 1998. The company's oil production for the first half of this year rose by 9 percent to 23.7 million tons, up from about 21.7 million tons produced over the same period last year.

Gazprom Sells $106 Million In Bonds

· Russia's natural gas monopoly, Gazprom, raised $106 million with the sale of six-month bonds on June 30^th to help finance construction of a pipeline to deliver Russian gas to Turkey under the Black Sea. Westdeutsche Landesbank, Germany's biggest state-owned bank, and Deutsche Bank Luxembourg, a subsidiary of Deutsche Bank, Europe's largest bank, managed the sale. The bonds mature December 20^th. Gazprom also borrowed $100 million from Westdeutsche Landesbank. Gazprom's total borrowing increased to 287.1 billion rubles ($10.4 billion) last year from 198.6 billion rubles in 1998. The company's short-term borrowing tripled to 64.8 billion rubles in 1999, from 17.3 billion rubles the previous year.

European Republics

Ukraine May Lower Forex Obligations

· Ukraine's Central Bank may lower the amount of foreign currency earnings that firms are required to sell. One senior bank official said the cut could go from 50 percent to 25 percent. Sergei YAREMENKO, director of the bank's currency regulation department, at a press conference, said this might help Ukraine control money supply and reduce inflationary pressure. "The main problem is that when the [Central] National Bank buys hard currency [on the interbank market] it results in a growth of money supply," YAREMENKO said. The Central Bank bought $1.05 billion this year on the interbank currency market, issuing to the market about 5.5 billion new gryvnias. The monetary base rose to 14.025 billion gryvnias on July 1^st from 13.573 billion on June 1^st. YAREMENKO said further large-scale foreign exchange purchases by the bank might accelerate inflation, which has already exceeded an initially planned level of 16 percent to 17 percent for the whole year. Official data shows Ukraine's inflation reached 18.7 percent in the first six months of this year. The mandatory sale of 50 percent of exporters' foreign currency earnings on the interbank market was introduced along with other measures in September, 1998, in a bid to stabilize the gryvnia.

BNP Dresdner Bank Closes Subsidiary

· BNP Dresdner Bank has closed its Ukrainian subsidiary, according to Ukraine's Central Bank. BNP Dresdner Bank Ukraine returned the licenses for banking in Ukraine to the Central Bank. The subsidiary initially acquired the licenses in 1998, but never started active transactions on Ukraine's interbank market because of the 1998 Russian financial crisis. The International Monetary Fund requires Ukraine's government to strengthen the country's banking system in order to qualify for resumption of lending that was postponed last September due to slow pace of reforms.

Ukraine's Foreign Investment Reaches $420M

· Ukraine attracted $420.1 million in foreign direct investment in the first half of the year, 58.6 percent more than in the same period in 1999, according to the State Statistics Committee. Cash investments totaled $256.3 million in the period, while the rest

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came in the form of immovable and movable assets and securities. As of July 1^st, Ukraine reported total foreign direct investment of $3.59 billion since the country's independence from the Soviet Union in 1991, up from $2.94 billion a year ago. The US remains Ukraine's largest foreign investor, with $629 million, or 17.5 percent of the overall investment in the country. Cyprus invested $338 million, or 9.4 percent, and the Netherlands $329 million, or 9.2 percent, the committee said. Ukraine's food-processing industry remains the most attractive to the investors, with about $728 million, or 20.2 percent of overall investments, followed by domestic trade, with $673 million, or 18.7 percent, and metal processing and machine building industry, with $338 million, or 9.4 percent, the committee said.

South Caucasus & Central Asia

Red Cross Workers Freed

· Two Red Cross workers, Sophia PROCOFIEFF and Natascia ZULLINO, and their driver were released on Sunday, after being held hostage for more than a week in the Pankisi gorge, near the Chechen border. They had traveled to the troubled area to help Chechen refugees. Temur ARABULI, chief of police in the Akhmeta district, declined to say whether or not a ransom was paid for the workers' release. One of the negotiators, Mamuka ARESHIDZE, told Russia's NTV Television that the captors demanded they wouldn't be arrested or tried for the abductions. Authorities have said nothing about the identity of the abductors or their motives. Italy's ambassador to Georgia, Michelangelo PIPAN, said in an interview with private Italian TV network Canale 5 that the captors, "were not Chechen rebels, but in all probability common criminals." Georgian authorities had negotiated with the abductors for several days, and had predicted the workers' quick release. Angelo GNAEDINGER, the ICRC general delegate for Europe said, "What we can say is that the kidnapping by several armed men happened on Friday, August 4^th, and that our three colleagues were held in

several successive places." The Red Cross workers were reunited with their families in Geneva late Sunday night, and the driver with his family in Tbilisi.

The Tbilisi mission of the International Red Cross Committee (IRCC) has not examined the question on repealing its earlier decision on suspending activities in the Pankisi gorge. The IRCC mission reported that the decision on stopping the organization's activities, "remains in force for the time being." However, GNAEDINGER said, "We're in a hurry [to start again]. We don't want the refugees to pay for this." The medical charity Doctors without Borders (MsF) suspended operations near the border last week, following the kidnapping.

Azerbaijan Prepares For Second Privatization

· Azeri President Geidar ALIYEV has signed two key documents setting up the second round of privatization sales. First round focused on the selling of small and medium-sized enterprises, while the second round will include companies in the telecommunications, transport, oil and gas, electricity and metallurgical sectors. The first round has been criticized for official corruption and insider deals. Officials promised to make the second round more transparent. The International Monetary Fund (IMF) has made clear privatization laws a condition for further lending. Many speculate that the success of the second round will depend on how the State Property Ministry implements its instructions. Companies are to be auctioned off by tender or sold directly to the workers' collectives at cut prices or through "individual programs" worked out with big investors, the Financial Times reported. Foreigner are permitted to participate in the state auctions. The President also extended the life of privatization vouchers set to expire on Tuesday, until 2002.

The Daily Report on Russia and the FSU

will not be published

from August 21^st to August 25^th

for Intercon's summer break.

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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