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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, August 18, 2000

Russian Federation

Politics

Rescue Efforts Continue; Time Is Running Out

· Rescue efforts continue in the Barents Sea, where 118 sailors are trapped in Russia's most modern nuclear submarine. Late Thursday night after ten attempts, a Russian capsule landed on the submarine. It was unable to link with the escape hatch, which was damaged on August 12^th after an explosion or a collision. The cause of the accident is still unknown. However, Russian officials today said that "irrefutable data" pointed to a collision. But the object or ship that collided with it has not been identified. Ships in the area during the training exercises reported hearing large explosions underwater, which they said were distinct from a collision. Jane's Defense Weekly expert Paul BEAVER told Reuters, "NATO warships monitoring the Barents Sea naval exercises report hearing two explosions late on Saturday. There is increasing evidence that at least one explosion ripped through the boat's hull. The first explosion sounded like a torpedo or other naval weapon detonating."

British and Norwegian rescue teams are on their way to assist in the rescue with special equipment. Russia initially insisted it was capable of rescuing the sailors. Britain is providing an LR5 submersible capsule and a Scorpio underwater device. Some hope in the rescue effort was renewed, after video footage showed that the submarine was leaning only 20 degrees, not the 60 degrees previously reported. The lesser angle will improve the chances of a British capsule linking with the submarine. However, the Kursk is sinking bow-first into the sandy sea floor. Norway is providing a special team of divers and helicopters. The US and France also offered assistance. The military finally asked for help on Wednesday, after Russian President

Vladimir PUTIN ordered the military to accept all offers of foreign assistance in the rescue operation. Russian officials are also meeting NATO representatives in Brussels to discuss the technical aspects of the rescue mission.

Many Russians complain that PUTIN waited too long before asking for outside help. Vyacheslav KUZMICH said, "They hid it [the sub accident] from us for two days. The most disgusting part is that aid was offered and they rejected it. Now they're powdering our noses and telling us stories. These are state criminals. I would hang them all," The New York Times reported. A local political commentator said, "We wouldn't accept help from the British. PUTIN is in Sochi on vacation. PUTIN isn't leaving Sochi. The sailors on the Kursk are prisoners of his pride." "The behavior of our President is immoral," said Boris NEMTSOV, head of the reformist parliamentary group. PUTIN defended the decision to delay informing his countrymen about the crisis, saying the two days were essential for sailors to find out what exactly was happening. PUTIN will return to Moscow, after attending the Commonwealth of Independent States (CIS) Summit in Yalta.

Tenet Visits Moscow, Agenda Unknown

· The head of the US Central Intelligence Agency (CIA) George TENET arrived in Moscow today, a spokesman for Russia's Federal Security Service (FSB) said. It was not clear whether TENET's visit was in any way connected with the crisis over the Kursk nuclear

Today's News Highlights

Russia

CIS Summit Opens In Yalta

Rossiisky Kredit Debt Approval

LUKoil Discovers Caspian Oil

Aeroflot To Receive US Loan

European Republics

Two Bombs Explode In Riga

South Caucasus & Central Asia

Project Harmony Funds

Zhvania Meets Zhu In Beijing

Kyrgyz Troops Free Climbers

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submarine, which sank August 12^th, trapping 118 sailors. TENET's visit was planned before the accident in the Barents Sea. Interfax news agency described it as an "official visit." The US Embassy could not immediately be reached for comment. The CIA and the FSB regularly exchange information on topics of common interest like terrorism and drug traffic.

Security and Economy Dominate CIS Talks

• Leaders of the Commonwealth of Independent States (CIS) opened an informal summit in Ukraine's Black Sea resort of Yalta today to discuss security and economic problems, Reuters reported. At the previous meeting held in June, the CIS leaders unanimously agreed to boost economic ties and intensify efforts to fight terrorism and extremism, but experts say concrete results are coming slowly.

Presidents of Azerbaijan and Armenia, locked in a decade-long Nagorno-Karabakh dispute, are expected to meet. "The meeting with Azeri President Geidar Aliyev is most important to us," said Vahe Gabrielyan, spokesman for Armenian President Robert Kocharyan. Russian Presidential administration representatives said Georgian President Eduard SHEVARDNADZE and Russian President Vladimir PUTIN discussed mutually related issues, including Abkhazian and Ossetian conflicts and Russian military bases on Georgian territory. Deputy head of the Russian President administration Sergei PRIKHODKO noted that the Chechen issue remained untouched, but financial issues and Georgia's debt to Russia in particular were discussed. Presidents promised to have the finance ministers meet in the nearest future to solve these problems. SHEVARDNADZE also invited PUTIN to visit Tbilisi. The Georgian President still plans to meet with Ukrainian, Armenian and Azeri Presidents to discuss issues of cooperation.

President PUTIN was scheduled to meet the leaders of Kyrgyzstan, Uzbekistan and Tajikistan, which currently face an uprising of Islamic rebels on their common border, but Uzbek President Islam Karimov and Kyrgyz President Askar AkaYev did not attend the summit. PUTIN was scheduled to meet with Moldovan President Petru Lucinschi. Ukrainian President Leonid Kuchma was expected to discuss with PUTIN Ukraine's debts for natural gas supplies. "There are many problems, espe

cially in the energy sector. We are hanging in mid-air in this respect," he said. Belarus leader Alexander Lukashenko who seeks to forge a "union state" with Russia, is criticizing Moscow for the slow pace of integration efforts. Turkmen President Saparmurat Niyazov did not come to Yalta because of a "busy work schedule." Putin and Kazakh President Nursultan Nazarbayev discussed bilateral economic relations, the timetable of political contacts at different levels and also preparation for a Customs Union meeting to be chaired by Kazakhstan, Itar-Tass reported. According to Reuters, PUTIN, who has been fiercely criticized by some Russian media over the Kursk rescue operation, will not attend a plenary session scheduled for Saturday. He arrived in Yalta in this morning, but will travel to Moscow later today.

Russia Not To Join OPEC

· The Russian Foreign Ministry on Wednesday said that Russia hasn't applied to join the Organization of Petroleum Exporting Countries (OPEC). Foreign Ministry spokesman Alexander YAKOVENKO, said, "Russia actively cooperates with OPEC and participates as an observer at meetings of the ministers. At the same time, the Foreign Ministry has not submitted any application to join that organization." Fresh speculation about Russian membership in OPEC followed comments by Venezuelan President Hugo CHAVEZ, who said OPEC would maintain "contacts" with non-OPEC nations oil exporters, such as Russia, Oman, Norway and Ecuador, with the aim of integrating certain countries into the grouping. Ecuador left OPEC in 1992 and the other countries have said in the past that while they maintain contacts with OPEC, they do not have any intentions of joining the group.

Economy

Russian Economic Indicators

· Russian foreign currency and gold reserves fell $100 million to $23.5 billion in the week ending August 11^th; the first decline since mid-February. The reserves are near the highest level since 1997, when reserves peaked at about $24.5 billion. Reserves rose $400 million to $23.6 billion in the week ending August 4^th. Russia's money supply rose by 2.3 billion rubles ($83 million) in the week ending August 7^th, the Central Bank said. Russia's money

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	supply grew by 12 billion rubles ($432.1 million) in the week ending August 14^th. Ruble = 27.77/$1.00 (NY rate) Ruble = 27.73/$1.00 (CB rate) Ruble = 25.15/1 euro (CB rate) Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Rossiisky Kredit Debt Plan Approved · A Russian court approved Rossiisky Kredit Bank's plan to restructure millions of dollars of foreign and domestic debts, Kommersant Daily reported. The court upheld an amicable settlement between the bank and institutional creditors negotiated in April by the state agency for bank restructuring, or ARKO. Some Rossiisky depositors then sued to overturn that agreement. The ruling may set a precedent and speed up other debt restructurings, the newspaper noted. "This is a major decision," said ARKO President Alexander TURBANOV. "It gives us the basis for thinking...the restructuring of other banks through amicable settlements will go well." The amicable agreement offers Rossiisky Kredit creditors a 10 percent cash payment, plus dollar and ruble bonds in exchange for the rest of their original claims. Rossiisky Kredit, once among Russia' top 10 banks, stopped meeting its obligations in the second half of 1998, after the government's domestic debt default and the devaluation of the ruble.	Business LUKoil Discovers Caspian Oil · Russia's top oil producer, LUKoil Holding, announced it discovered oil in the second well it drilled in the northern Caspian Sea region. The company earlier drilled an appraisal well in another part of the field, which found an estimated 300 million tons or 2.2 billion barrels of crude reserves. In June, the company started to drill the second well in an area known as the Yuri Kurchagin. LUKoil President Vagit ALEKPEROV said, "We have received positive results from the oil well at Yuri Kurchagin," Bloomberg News reported. International oil companies are competing for exploration projects in the Caspian Sea, believed to hold vast reserves of oil and gas. LUKoil formed a joint exploration company with Yukos Oil Company and Gazprom, Russia's natural gas monopoly, to search for reserves outside of the northern Caspian field and possibly in Iran's sector of the Caspian Sea. Tyumen-Ivanhoe End Tura Petroleum Dispute · Simon KUKES, President and Chief Executive Officer of Tyumen Oil Company, and David MARTIN, Chairman of Ivanhoe Energy Inc., on Augst 10^th announced an agreement to end their disputes over their Tura Petroleum joint venture on the Kalchinskoye oil field in Western Siberia. Under terms of the agreement, the owners of Moscow-based Tyumen Oil will acquire Ivanhoe Energy's 50 percent stake in Tura Petroleum to gain 100 percent ownership of the joint venture's assets. Ivanhoe Energy, of Calgary, Canada, received a payment of $29.022 million. Both companies agreed to cease all legal action in the dispute over the transfer and ownership of the production licenses. KUKES said in a company press release, "We are pleased to acquire these valuable assets for the benefit of our shareholders and to proceed immediately to increase production while decreasing costs at the Kalchinskoye field. Aside from the operational benefits, this agreement is another sign of our commitment to resolution of contractual disputes in a mutually amicable manner." MARTIN said the agreement, "frees important management resources and provides Ivanhoe with additional capital which we will immediately begin deploying to advance current oil and gas projects in California, Texas, and China, and to international ventures such as


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		Friday Intercon's Daily August 18, 2000

	gas-to-liquids projects." Tyumen, which initially held a 50 percent interest in the Tura Petroleum joint venture through a subsidiary company, is among the world's top 15 private oil companies. Aeroflot May Receive US Loan · The US Export-Import Bank could approve next week guarantees for the first $100 million of a $1.2 billion loan to help Aeroflot order 20 new civilian planes from Russian plane maker Ilyushin. If the US bank approves guarantees for the loan installment in a meeting on August 24^th, it would still require approval by the US Congress, which would take another 30 days. The Russian government, which is participating in the financing, also must approve the loan. "If everything goes well for us, we will be able to deliver the first plane to Aeroflot in the first quarter of 2001," said Alexander RUBTSOV, general director of Ilyushin's financing arm, Ilyushin-Finance. The US bank suspended talks on the loan in the first half of last year, because of Russia's financial problems following its 1998 default on domestic and foreign debt. The money had been tentatively awarded to Aeroflot, Russia's biggest international airline, allowing the carrier to order the first three IL96M/T aircraft from Ilyushin. Aeroflot planned to use the money to buy engines and equipment from United Technologies Corp. and avionics from Rockwell International Corp. EBRD To Restructure GAZ Loan · The European Bank for Reconstruction and Development (EBRD) plans to consider in September restructuring a $65 million loan owed by Russian carmaker Gorkovsky Avtomobilny Zavod (GAZ). The carmaker defaulted on the EBRD loan last year and has been trying to negotiate a restructuring, which could include exchanging the debt for equity in the carmaker. Vladimir BASOV, GAZ's financial director told Reuters that the EBRD will not consider the issue until late September. The EBRD office in Moscow declined to comment, though a source close to the bank said GAZ had not yet proposed a satisfactory restructuring plan. BASOV added that GAZ's board of directors had not discussed a share issue, which would be needed for a debt-for-equity swap, at a meeting on Monday. GAZ, Russia's second-biggest carmaker, plans to set up a new unit to coordinate sales through its		existing dealership network. GAZ and Russia's Avtobank will have a 40 percent stake each in the new company, with the remaining 20 percent stake held by dealerships and GAZ shareholders. GAZ sells cars through dealerships in 150 Russian cities, which are coordinated by 12 regional sales offices. Tobacco Production Rises · Russian tobacco production rose about 30 percent in the first half from the same period in 1999, The Moscow Times reported. About 100 producers manufactured 151 billion cigarettes in the first six months, said Vasily TEREVTSOV, general director of Tabakprom Association of Tobacco Producers. Production levels have been about 250 billion cigarettes to 270 billion cigarettes since last year, after foreign companies invested about 2.5 billion rubles into 10 major factories. Foreign companies producing cigarettes in Russia include Philip Morris Cos., the world's largest tobacco company, RJ Reynolds Tobacco Holding Inc., British American Tobacco Plc, the world's second-largest cigarette maker and Gallaher Group Plc, the top British cigarette maker.

			European Republics Latvian Bombs Injure 38 People · Two explosions Thursday night at the Centrs Shopping Mall in Latvia's capital Riga injured 38 people. The explosions went off minutes apart on the first floor near the Norwegian-owned Rimi Baltija supermarket in an area where people can check their bags while they shop. It ripped through crowds of shoppers during rush hour, the Associated Press reported. Criminal Police Chief Valdis PUMPURS was one of those injured. Three of the wounded remain hospitalized, including two women with severe burns over some 50 percent of their bodies and deep lacerations. Latvian police said they're investigating whether rival mafia groups were involved in the blasts, but are not limiting their search for suspects. Police spokesman Krists LEISKALNS said they were seriously considering the possibility that the bombings were a terrorist attack or a business dispute. Latvian President Vaira VIKE-FREIBERGA condemned the attack and said she was confident police would find the bombers. Latvian Prime Minister Andris BERZINS

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was cutting short his holiday in France and returning home to deal with the bombings.

Latvia has experienced several minor bombings, since regaining independence in 1991. Targets of these minor attacks include monuments commemorating Latvian independence and others marking Soviet-era war victories. In May, two bombs exploded in a Stockmann Oyj department store in the Estonian capital Tallinn, wounding four people. A bomb in a Moscow underground passageway killed 12 people last week.

South Caucasus & Central Asia

US Allocates Funds For Project Harmony

· The US State department allocated $741,304 for realization of the next level of Project Harmony planned to start August 29^th in Tbilisi and regions of the country. Business Development, Agriculture, Social medical aid, and non-government organization candidates will take a test and the winners will travel to USA for a month long seminar project. Candidates will be chosen from Kutaisi, Batumi, Zugdidi, Telavi and Rustavi. In 1997 to 1999, the US government allocated $2,224 for the Project Harmony in Georgia. During this period about 300 persons visited US for the qualification improvement seminars.

Sino-Georgian Relations Strengthened

· Georgian Parliamentary Speaker Zurab ZHVANIA met with Chinese Prime Minister ZHU Rongji in Beijing. ZHU said the Chinese Government attaches great importance to Sino-Georgian relations, which have witnessed steady and healthy progress during the past eight years since diplomatic ties were forged. ZHVANIA said Georgia also highly stresses its relations with China and is willing to deepen mutual understanding and trust between the two peoples through mutually beneficial cooperation. Georgia is grateful for China's support to its national sovereignty and territorial integrity, and will continue to follow the One-China Policy. As to

economic and trade relations, ZHU expressed the hope that cooperation will increase. ZHVANIA thanked China's unconditional assistance, and said Georgia is willing to carry out cooperation with China in areas such as textile, water power and transportation.

Kyrgyz Troops Free US Climbers

· Kyrgyz troops have freed four US mountain climbers held hostage by rebel Islamic fighters in the Turo pass, along the border with Tajikistan. "During the fighting, four hostages were freed — four American climbers," a spokesman said, without giving any further details of where or when they were released. Earlier this week, Kyrgyz troops rescued four Germans as well as Russian, Ukrainian, and Uzbek climbers. The Kyrgyz Defense Ministry didn't rule out that militants are still holding other mountaineers in the pass. Late last week, a group of rebels entered Kyrgyzstan and neighboring Uzbekistan from bases in Tajikistan. The rebels clashed with government troops with heavy losses reported on both sides. The government says more than 25 Kyrgyz troops have been killed in clashes over the past week. The rebels are thought to be members of the Islamic Movement of Uzbekistan, which opposes Uzbek President Islam KARIMOV.

The Daily Report on Russia and the FSU

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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

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