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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

Wednesday, August 2, 2000

Russian Federation

Politics

Sergeyev At Risk Of Being Sacked

· Speculation is growing, following the sacking of six generals on Monday, that President Vladimir PUTIN may be considering dismissing Defense Minister Igor SERGEYEV, who has been locked in a dispute with Chief of the General Staff Anatoly KVASHNIN. Vladimir KOSAREV, editor of the independent AVN military news agency said, "I think it is likely PUTIN will dismiss both of them." He noted that such replacements could include including Deputy Prime Minister Ilya KLEBANOV, a PUTIN ally who looks after the defense industry, and ex-Security Council chief Andrei KOKOSHIN, who served as a civilian deputy defense minister in the 1990s. KOSAREV predicts that PUTIN will have made his decision by the August 11^th meeting of the National Security Council.

Reuters reports two scenarios as proposed by Andrei FYODOROV, a director at the Council on Foreign and Defense Policy think-tank. FYODOROV said, "One is that it [the sacking of SERGEYEV] happens right after the Security Council meeting… The other is that it happens in September as part of an overall change in the government." Vadim SOLOVYOV, managing editor of the military weekly newspaper Nezavisimoye Voyennoye Obozreniye notes that, "Neither the minister nor the chief of general staff is a member of his team…They are not his people. PUTIN is trying to build his own team. So one of his team should head such a powerful sector as the armed forces. The question is who it will be," said SOLOVYOV, referring to the entourage PUTIN has assembled — including allies from his KGB days and time in his hometown of St Petersburg. Other possible candidates for the defense minister post include Security Council Sec

retary Sergei IVANOV and two of his deputies, Alexei MOSKOVSKY and Mikhail FRADKOV.

Shamsayev Killed; Russian Increase Outposts

· Pro-Russia official in Chechnya, Movsar SHAMSAYEV, was killed when a bomb ripped through his car today. Federal forces alleged that this was part of a campaign by rebels to keep local leaders from cooperating with Moscow and intimidate others who might work with the Russians toward peace. SHAMSAYEV was in charge of agriculture in Chechnya's Urus-Martan region, located 12 miles southwest of the capital Grozny. The Kremlin has struggled to create a pro-Moscow Chechen government, and insurgents have repeatedly targeted pro-Moscow Chechens as well as Russian soldiers and officials.

Russian border-guards have increased a number of outposts along the Chechen part of the Russian-Georgian frontier, according to Head of the Russian Federal Border Service Konstantin TOTSKY. He said, "the measures have been triggered by mountain passes getting easier of access to rebels in summer with the thawing on in the mountains." TOTSKY said that according to reports available, there were up to 6,000 Chechen refugees staying in the Pankisskoye gorge of Georgia. Russia accuses Georgia, the only foreign country bordering Chechnya, of letting fighters bring men and supplies across the border. Georgia and the OSCE observer mission firmly deny that rebels and supplies are

Today's News Highlights

Russia

Platinum-Palladium Prices Rise

Berezovsky ToSell ORT Shares

European Republics

Latvia Receives WB Loan

Kuchma-Niyazov To Talk Gas

South Caucasus & Central Asia

CIS Industrial Output Figures

55th Supsa Oil Tanker Filled

Iran Accepts Division Of Caspian

S&P Raises Kazakh Rating

Politics-Economics-Business

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Wednesday

August 2, 2000

Intercon's Daily

crossing the border into Chechnya. On Sunday, Russian troops backed by attack aircraft and heavy artillery launched search and destroy missions in the southern Chechen mountains near the Georgian border. Attacks on the mountains continued on Tuesday with a massive barrage of rockets and artillery. In a rare detailing of the physical damage caused during the war, a Russian official said Tuesday that about 12,500 houses in Chechnya have been totally destroyed in fighting. Nikolai VASYUTIN, head of the Russian office in charge of Chechen refugees, said that another about 80,500 homes have been damaged.

Economy

Ruble = 27.85/$1.00 (NY rate)

Ruble = 27.77/$1.00 (CB rate)

Ruble = 25.38/1 euro (CB rate)

Platinum and Palladium Prices Soar

· The price of platinum and palladium, a precious metal used by carmakers, soared overnight in trading in New York and Tokyo, on reports that Russia will continue to restrict exports. Platinum, the latest international jewelry fashion rage but also used in catalysts and electronics, climbed to a 12-year peak of $612 an ounce after $592 on Tuesday afternoon. Palladium is used in car catalysts to cleanse noxious gases. The price reached a new all-time high of $855 an ounce on this morning, up from $842 on Tuesday afternoon. Russia, which supplies 65 percent of the world's palladium and 20 percent of its platinum, has cut shipments down to nothing over the last month. One dealer in London said, "The moral of the story is that there's absolutely nothing for sale at the moment...$1,000 for palladium could be 24 hours away." "Prices are increasing but there is not enough of the physical metal," said Yuri KOTLYAR, chairman of Russian metals group Norilsk Nickel, which sells about a third of the world's palladium. "We are the only exporter from Russia now, and we do not have enough metal for the overheated market."

Today, however, Norilsk Nickel said it would start platinum and palladium sales to Japan, the world's biggest importer of the metals, in September or October. Russia's sole platinum group metal export agent, Almazjuvelirexport, offered to sell metal via contracts to Japanese customers a month ago

but the two sides still have to agree a price after four weeks of negotiations. "I think it's a game the Russians are playing. They're holding off on spot sales to force the Japanese to sign long-term contracts on their terms," a dealer told Reuters.

Business

EBRD Buys Vimpelcom Stake

· The European Bank for Reconstruction and Development (EBRD) paid $30 million for a stake in Vimpelcom, Russia's second-largest mobile phone company, and said it expects to expand services in and around Moscow. Bloomberg News reported that EBRD bought the 3.2 percent stake as part of Vimpelcom's offering of shares and convertible bonds. The EBRD made its investment alongside a $51.9 million equity investment by Telenor of Norway. "Vimplecom has been one of the pioneers in the Russian mobile phone market and with our support will continue to improve services," Izzet GUNEY, EBRD's director for telecommunications, said. Vimplecom American depositary receipts rose for sixth day on Tuesday, gaining 1 13/16, or 7.3 percent to 26 5/8. The stock is down 21 percent in the past three months.

Berezovsky To Sell ORT Stake To Gov't

· The Russian government is negotiating the purchase of a stake in ORT Television owned by Boris BEREZOVSKY, a former parliamentary deputy and tycoon considered among the nation's so-called oligarchs. BEREZOVSKY gave up his parliamentary seat last month to protest President Vladimir PUTIN's efforts to undermine the influence of big business. The talks also focus on ORT's debts to the state. ORT won't be included in any new media group BEREZOVSKY forms, unless these negotiations fail. The businessman announced plans recently to merge his media outlets into a single holding that would help protect his political interests. BEREZOVSKY controls a 49 percent stake in ORT; the state has a controlling interest. Observers believe this deal, along with the possible sale of Media Most assets to Gazprom, could threaten media freedom by giving the government greater control over the influential outlets.

Media Most officials denied that the company may be sold to Gazprom. One executive told the Financial Times that Media Most is holding talks with 8 to

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	Wednesday		August 2, 2000
	Intercon's Daily
	10 possible strategic investors. Both Media Most and Gazprom have appointed investment bankers to evaluate Media Most's empire over a two-week period. Media Most has accused the Kremlin of doing "everything" it can to create financial problems for the company. Last week, the Prosecutor General's office dropped an embezzlement case against Media Most chairman Vladimir GUSINSKY.	Prime Minister Viktor YUSHCHENKO. The pipelines though will remain in, "Ukrainian ownership and management," YUSHCHENKO said. "Ukraine by any degree won't ignore Russian interests, including transit [of Russian gas via Ukrainian territory to Europe]," he said. Ukrainian and Russian governments experts are continuing talks in Kiev over Ukraine's $1.4 billion in debt for Russian gas supplies, which rose about $700 million from the beginning of the year, as Ukraine was siphoning Russian gas from pipelines carrying gas through Ukraine to Western Europe. South Caucasus & Central Asia CIS Industrial Output Rises · Industrial output in member countries of the Commonwealth of Independent States (CIS) grew by 9.8 percent in the first six months this year as compared to the same period in 1999, the CIS interstate statistics committee announced Tuesday. A year ago, industrial output in the CIS grew by 2.3 percent compared to January-June of 1998. Growth was registered in every country, except Turkmenistan. Data on Turkmenistan was not available. The growth rate in industrial output for the member countries were: Kazakhstan 16.3 percent; Ukraine 10.8 percent; Russia 10.3 percent; Tajikistan 9 percent; Georgia 9.1 percent; Uzbekistan 6.2 percent; Belarus 5.6 percent; Azerbaijan 4.7 percent; Moldova 3.6 percent; Kyrgyzstan 3.3 percent; and Armenia 2.9 percent. 55^th Supsa Tanker Filled · The 55^th Caspian crude oil tanker was loaded in Supsa since the terminal opened in April 1999. According to an executive at the Georgian International Oil Corporation, Dito NADIRADZE, 86 tons of crude oil were sent to Italy for BP-Amoco, Itochu, Delta, and Turkish Petroleum. Transit cost of 1 barrel oil through Georgian territory is 18 cents. Georgian Revenues Surpasses Target · According to preliminary data, the Georgian Customs Department surpassed the July target of 25.7 million lari. It collected 27.26 million lari for the national budget, according to the Tax Income Department. The national budget got 20.1 million lari from the Tax Department consolidated budget with the total amount of 38.4 million lari. By taxing the

	European Republics WB Lends $36.2 Million To Latvia · The World Bank will lend Latvia $36.2 million to renovate the Latvian capital's heating supply system. The 17-year loan, which includes a five-year grace period, will help finance a project to improve delivery of heat to homes and businesses and make the heat generating plant safer for the environment. "The first disbursement will hardly arrive before September, as the project has to be launched first," said Toms BAUMANIS, a World Bank official in Riga. The total cost of the project is estimated at $138.1 million. The country has received $391.6 million in loans from the World Bank since 1992. Kuchma To Negotiate Turkmen Gas Deal · Yulia TYMOSHENKO, the Ukrainian Energy Minister and Deputy Prime Minister, signed a 10-year agreement with Turkmenistan last week, whereby Ukraine would buy 20 billion cubic meters of gas, increasing to 50 billion meters of gas by 2010. Ukraine's annual gas needs total 80 billion cubic meters. Debts between the two nations will also be rescheduled. Ukrainian President Leonid KUCHMA has criticized TYMOSHENKO, stating that she had exceeded her authority by signing an international gas contract, the Financial Times reported. KUCHMA has announced that he will personally hold talks with Turkmenistan President Saparmurat NIYAZOV in the near future over gas supplies. Turkmenistan stopped gas supplies to Ukraine in May, 1999, after Ukraine paid for only 10 percent of supplies made in the first four months of 1999 and accumulated $280 million in unpaid bills. New Idea For Gas Debt Payments · Ukraine may pay back a part of its gas debt owed to Russia by giving it a part of the nation's gas transportation pipeline as a concession, Interfax-Ukraine news agency reported, citing Ukrainian


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Wednesday

August 2, 2000

Intercon's Daily

tobacco products national budget received 7.56 million lari, from taxing oil products-6.3 million lari. According to Tax Income Department, July plan for pension fund is completed by 100 percent. It is equal to 12.3 million lari total.

Iran Accepts Joint Ownership Of Caspian Sea

· Iranian Foreign Minister Kamal KHARRAZI said Tuesday that Iran prefers a joint ownership of the Caspian Sea resources with other littoral states. He told Russian Presidential envoy for Caspian Sea affairs Victor KALYUZHNY during talks in Tehran, "If countries around the Caspian Sea want to divide [resources], Tehran is ready to accept a complete division with a 20-percent share for the Islamic republic." The five littoral states of the Caspian Sea are Iran, Russia, Azerbaijan, Kazakhstan and Turkmenistan. The states have long called for a legal regime to govern the Caspian Sea, which has high potentials for oil, gas, navigation and fishery. The Caspian is the center of several oil and gas projects, attracting international major companies and investors. According to two agreements signed in 1921 and 1940 between Iran and the former Soviet Union, the sea could be exploited jointly. Since the break-up of the Soviet Union, Azerbaijan, Kazakhstan and Turkmenistan have been seeking a new legal status for the sea. The Foreign Minister reiterated Iran's stance that an organization, comprising the five littoral countries, should be set up to deal with the Caspian Sea issue. KALYUZHNY for his part referred to Iran as "a strategic ally" of Russia, echoing other Kremlin activities firming relations with Iraq, Libya, Yugoslavia, North Korea, and China.

S&P Raises Kazakh Debt Rating

· Standard & Poor's (S&P) raised Kazakhstan's foreign and local currency debt ratings, citing the success of the government's economic policies during the past year. S&P lifted its rating on the country's foreign currency debt one notch to BB- from B+, three notches below investment grade. Moody's Investors Service rates it four notches

below investment grade at B1. The move, which puts Kazakhstan on a par with Jordan, Lebanon and Bolivia, is likely to cut the country's borrowing costs both at home and abroad. The upgrade reflects, "the pursuit of prudent fiscal and monetary policies over the past 12 months," S&P said, in a statement. A steady increase in oil production and the floating of the country's currency, the tenge, has helped boost Kazakhstan's foreign currency reserves to $1.5 billion in mid July from $1.1 billion in April, S&P said. Local currency debt was also raised one notch to BB.

Rus, Kazakh, Kyrgyzstan Joint Uranium Project

· During Kyrgyz President Askar AKAYEV's visit to Russia last week, an agreement was reached that Kyrgyzstan, Kazakhstan, and Russia will create a joint venture to exploit the Zarechnoye uranium deposit in western Kazakhstan. Kyrgyzstan's Kara-Balta uranium-refining plant, which for years has engaged in refining uranium from Kazakhstan, has reached a related agreement on co-founding the joint venture.

Russia-Kyrgyzstan Reach Debt Agreement

· Kyrgyz Prime Minister Amangeldy MURALIYEV announced on Friday that Russia agreed to restructure $150 million in debt owed to it by ex-Soviet Kyrgyzstan. "Russia will restructure Kyrgyzstan's debt to it under favorable conditions," he told a government meeting. The deal was reached during an official visit to Moscow. MURALIYEV said Russia was willing to accept shares in several Kyrgyz enterprises and had already drawn up a list of potential companies. "Russia supports Kyrgyzstan's economic reforms and understands the situation which developed after the 1998 financial crisis," he said, adding that the restructuring would improve the budget situation in the impoverished state. Kyrgyzstan's total foreign debt stood at $1.8 billion at the start of 2000 of which $250 million is owed to former Soviet states. About 40 percent of the 2000 budget expenditure is set aside for debt servicing, Reuters reported.

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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