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 28, 2000

Russian Federation

Politics

Ostankino Tower Fire Extinguished

· Moscow city firefighters late Monday night extinguished a two-day fire in the 540-meter Ostankino Tower, the world's 2nd highest tower. Officials evacuated residents in a radius of about 700 meters around the tower, fearing that it will collapse. Visitors were quickly evacuated from the tower's restaurant and observation deck, which were engulfed for several hours as the fire moved down the structure. It is believed that the fire, which started on Sunday, was caused by a short circuit belonging to a paging company. Rescue efforts failed to reach Colonel Vladimir ARSYUKOV, deputy chief of the first service for the city's Northwest District, and Svetlana LOSEVA, the lift operator, who initiated the battle against the fire. The two were killed when the elevator dropped in the fire, Xinhau reported. It has been determined that automatic extinguishers had been in operation, but did not have enough force to put out the fire. Firefighters have had to carry their own equipment to battle the blaze up hundreds of stairs. More than 300 firefighters and other emergency workers were called in to battle the blaze, along with fire trucks and other equipment. Several helicopters circled close to the tower, apparently assessing the situation and checking for damage.

Russian President Vladimir PUTIN said the fire shows the poor state of key infrastructure. "This emergency situation shows the state of vital facilities and the country as a whole," PUTIN said at an emergency meeting with the government in the Kremlin. Late on Sunday, PUTIN met with fire officials, Moscow Mayor Yuri LUZHKOV, and Communications Minister Leonid REIMAN to assess the rescue efforts, the fire damage, and ways to restore

communications for emergency services. The fire has caused television stations' broadcasts to be cut as well as the interruption of pager and radio service. The only local channel still broadcasting is the TNT channel, part of Media-Most holding, via its own local tower. The station carries reports from NTV news, the main independent news channel. Media-Most said it offered to ORT and state-owned RTR Television to use their TNT broadcasting facilities as well as their satellite. Media Minister Mikhail LESIN said it would take two or three days to restore television broadcasts to Moscow, while months would be needed to renovate the tower completely.

In addition to this latest tragedy, a Russian passenger ship collided with an empty barge killing six people and injuring 17 in the Votkinskoye storage lake. In Daghestan, a rumor that a bomb was planted in a market in Khasavyurt set off a stampede killing four people and injuring 17.

Kursk Becomes A Cold Grave

· Russian authorities confirmed on August 21^st that all 118 sailors on board the Kursk nuclear submarine died as it suffered two blasts and sank to the bottom of the Barents Sea. Mikhail MOTSAK, chief of staff of Russia's northern fleet, said, "Our worst expectations are confirmed. All sections of the submarine are totally flooded and not a single member of the crew remains alive." Russian President Vladimir PUTIN declared August 23^rd as a national

Today's News Highlights

Russia

FinMin To Increase Workforce

AvtoVAZ-GM Decision In Oct.

Renault To Expand Production

European Republics

Lith. Seeking Help On Bombing

Ukraine Pays IMF Loan Early

South Caucasus & Central Asia

Georgia To Restructure Debts

Elcibey Given State Funneral

Statoil's Caspian Interest Grows

Politics-Economics-Business

Page

Monday

August 28, 2000

Intercon's Daily

day of mourning. He said, "I bear the full weight of guilt and responsibility for this tragedy." Many families of the sailors said that day of mourning should only occur once the bodies have been recovered. After nearly four days of Russian attempts with outdated minisubs powered by batteries too old to recharge, authorities accepted rescue and recovery assistance from Norway. With high tech equipment, underwater cameras, and expert divers, Norway's Stolt Offshore was able to crack the Kursk's escape hatch in 36 to 40 hours. Seventy one percent of Muscovites polled said Russia should have accepted international assistance earlier. One Admiral admitted that rescue gear was not available because it has been rented out to oil companies, the International Herald Tribune reported. The government has also asked for help in recovering the sailors' bodies in order to give them a proper burial. Experts believe an operation to raise the submarine could be too dangerous, claiming it could be weak and break apart. Environmentalists, however, warn that the submarine is a ticking nuclear time bomb, which could result in a catastrophic disaster. Salvaging the Kursk will likely have to wait until Spring 2001.

Meanwhile, Boris NEMTSOV, leader of the Union of Right Forces, has called for a parliamentary inquiry to find out, "first: the real cause of the catastrophe; and second: did our government and President do everything to save our sailors." PUTIN has rejected resignation letters from Defense Minister Igor SERGEYEV, Admiral Vyacheslav POPOV, and Head of the Navy Admiral Vladimir KUROYEDOV. The President had earlier said that those responsible would be punished. SERGEYEV still claims that damage to the Kursk was caused by a collision with a foreign vessel. Russia's Deputy Prime Minister Ilya KLEBANOV said there were three foreign submarines gathering intelligence in the area at the time of the accident.

Finally, PUTIN's tried to deflect criticism of his own actions during the emergency by launching thinly veiled attacks on the nation's oligarchs. He said the first to defend the Kursk crew and support their families were the same who had, "long promoted the destruction of the army, the fleet and the state." He singled out Boris BEREZOVSKY, who had collected $1 million in support for the families, and

Vladimir GUSINSKY, whose media empire has been critical of Russia's actions to save the Kursk's crew. PUTIN's popularity has dropped from 73 percent to 65 percent, the Financial Times reported.

Economy

Ruble = 27.72/$1.00 (NY rate)

Ruble = 27.73/$1.00 (CB rate)

Ruble = 24.93/1 euro (CB rate)

FinMin Increases Workforce

· Russia's Finance Ministry will add 3,087 new jobs, increasing its workforce by about 5 percent compared with 1999, The Moscow Times reported. Many of the new officials will be paid meager wages, some as low as $29 a month. The figures were based on a Financial Information Agency report that the ministry's budget is about 24 million rubles ($870,000) for Moscow and 615.4 million rubles for the region. Analysts defended the staff increase, saying that the Finance Ministry is one of the few efficient government organizations. They were critical of the low wages. The government's economic reform plan, approved in June, calls for reduced government spending, partially through a reduction in state-funded jobs.

Russian Issues 2010, 2030 Eurobonds

· Russia has closed a debt restructuring deal with the London Club of commercial lenders, issuing 2010 and 2030 Eurobonds and paying some cash on the 2010 bonds in a swap for old debt, the Finance Ministry said on Friday. Under the restructuring, creditors reduced the $32 billion debt, represented by paper known as PRINs and IANs, by 36.5 percent and rescheduled the remainder over 30 years. The Finance Ministry said in a statement that $2.8 billion of 2010 bonds and $18.2 billion of 2030 bonds were issued at closing to holders who tendered PRINs and IANs, Reuters reported. "In addition, 9.5 percent of the principal amount of the 2010 bonds, together with interest thereon from 31 March 2000 to 25 August 2000, was paid to participating holders," it said. Vneshekonombank, the state foreign debt agent, said on Thursday it had transferred $274.8 million to Chase Manhattan Bank for the payment. The government hopes the London Club deal, which followed the 1998 financial crisis, will be

When you need to know it as it happens

Politics-Economics-Business

Page

Monday

August 28, 2000

Intercon's Daily

followed by an agreement on similar terms with the Paris Club of sovereign creditors, but some countries, including Germany, have ruled out a write-off. Germany is Russia's biggest country creditor.

Business

AvtoVAZ-GM JV Decision In October

· Russia's leading carmaker AvtoVAZ expects the board of General Motors (GM) to discuss a business plan for a $575 million joint venture in early October. AvtoVAZ chairman Vladimir KADANNIKOV said a joint venture agreement to build GM's Opel Astra and a new version of AvtoVAZ's Niva off-road vehicle, which has been in the pipeline for years, could be signed this year. He noted, "Everything depends on whether the GM officials prepare all documents requested by the board in time. So far, they are managing to do so." KADANNIKOV said production of the new Niva would start even without an agreement with GM, but it would take four years instead of 18 months with GM's participation in the project. KADANNIKOV said talks with GM were continuing despite a recent attempt by tax police to launch a criminal investigation into AvtoVAZ over alleged production of cars with the same vehicle identification number, Reuters reported. AvtoVAZ has appealed to Moscow's Arbitration Court to rule the tax evasion accusations as groundless, and the next hearing is scheduled for September 7^th.

Renault To Expand Production In Russia

· France's leading carmaker, Renault, plans to expand car production in Russia. In 1999, Renault began assembling Megane cars with the Moscow city government through a joint venture Avtoframos. Renault hopes to produce 2,000 to 3,000 Clio Symbol cars a year. Reuters reports that Renault has invested 627 million francs to adapt the Clio Symbol's design for Russia's harsh weather and road conditions. The new model is expected to go on sale this week. According to Avtoframos' managing director Guy BARA, local assembly of the Clio Symbol model will begin in the next few months.

which killed a woman and injured 34 people. Two bombs exploded in the Norwegian-owned shopping center, Centrs. "We have forwarded letters asking for assistance from 11 states," Krists LEISKALNS a spokesman for the state police said. The countries approached are the United States, Britain, Germany, France, Russia, Sweden, Denmark, Finland, Israel, Austria and Norway. The police want help in five areas of expertise, such as timing mechanisms and types of explosive. No one has claimed responsibility for the blasts and no one has been charged. "We need assistance to analyze material recorded by the supermarket's security cameras ¾where we are already talking to the FBI¾ as well as help in analyzing the explosive and trigger mechanism used," LEISKALNS added. The mall reopened for business on August 22^nd.

Ukraine Pays IMF Loan Installment Early

· Ukraine's Central Bank paid back a $100 million International Monetary Fund (IMF) loan early, to help the country qualify for resumption in the IMF's suspended loan program, according to Prime Minister Viktor YUSHCHENKO. Ukraine voluntarily returned the loan to the IMF, as it wants to end discussions on whether it would have received the loans in late 1997, without misreporting the size of its reserves to the IMF, daily newspaper Kievskie Vedomosti reported. The country wants to "concentrate its attention on renewing the ($2.6 billion, three-year) Extended Fund Facility lending program," YUSHCHENKO said. Price-WaterhouseCoopers, the world's largest accounting firm, found during an audit of Ukraine's Central Bank that the country exaggerated its foreign reserves by as much as $713 million in late 1997, allowing it to obtain $200 million in loans from the IMF it otherwise wouldn't have received. The Fund postponed lending to the country last September, citing slow pace of reforms.

Min.'s Husband Charged With Embezzlement

· Alexander TIMOSHENKO, husband of Yulia TIMOSHENKO Ukraine's Deputy Prime Minister, was arrested on August 18^th and charged with embezzling $800,000 of state money. He is alleged of stealing the money during a gas export operation in the early 1990s. The TIMOSHENKOs co-founded Kub, a company, which conducted the questionable operations. The company is now known as

European Republics

Latvia Seeks Investigative Help

· Latvia has asked 11 countries for help in investigating a mall bombing in Riga on August 17^th,

When you need to know it as it happens

Politics-Economics-Business

Page

Monday

August 28, 2000

Intercon's Daily

United Energy Systems (UES). The Deputy Prime Minister stated that the arrest was politically motivated and was directly linked to her current position. Yulia TIMOSHENKO is responsible for the energy sector. She said, "This is a political actions against me designed by certain businessmen to stop their form that ruins their corrupt schemes and deprives them of their money¾not just for one day, but forever," the Financial Times reported.

South Caucasus & Central Asia

Georgia Seeks To Restructure Debt

· Finance Minister Zurab NOGAIDELI on Friday said that Georgia wants to restructure a $580 million debt to Russia and Turkmenistan in 2000. This would meet an International Monetary Fund requirement that Georgia restructure its $2 billion debt before additional lending is approved. He said, "Negotiations [with Russia] seem to be quite hard, because at preliminary meetings the Russian side has put forth some requests which are unacceptable for us." NOGAIDELI plans to meet with officials in Moscow to resume negotiations on the $180 million debt. If the Moscow negotiations are successful, Georgia's State Minister George ARSENISHVILI will visit Turkmenistan for talks on restructuring a $400 million debt for natural gas delivered between 1992 and 1996, NOGAIDELI said. In 1999, Georgia paid $143.6 million to service debt, 79.3 percent of the sum planned in the budget. Georgia has already reached debt agreements with Armenia, Azerbaijan, Kazakhstan, Uzbekistan, Ukraine, Austria, Iran, and China. The terms for the agreements were similar, NOGAIDELI said, and involved a 10-year repayment period with the first five years at a four percent annual interest rate.

Ex-President Elcibey Dies

· The first democratically elected president of Azerbaijan, Abulfaz ELCIBEY, died on August 22^nd in Ankara, where he was undergoing treatment for prostate cancer. Azeri President Geidar ALIYEV paid his last respects to ELCIBEY at the Academy

of Sciences. ELCIBEY, who was given a state funeral in Baku on August 23^rd and was buried overlooking the Caspian Sea. Tens of thousands of people turned out to mourn Azerbaijan's former president. ELCIBEY served as president between 1992 and 1993, before being forced from office in a military coup. He is known for helping remove Soviet rule, including demanding the withdrawal of Russian troops and the closing of military bases on its territory. He also formed an army, introduced a local currency and changed the alphabet from Cyrillic to a Latin-based one. In 1997 after four years in a self-imposed exile, he returned to Baku and resumed his political activity as chairman of the Popular Front Party, a major opposition force.

Statoil Interest In Caspian Grows

· Statoil, Norway's state oil company, has expressed its interest in the potentially bountiful Caspian region, and its three key projects are moving swiftly ahead. CEO Olav Fjell said, "We consider this area, the Caspian, as the most interesting we're working in abroad, at least for the short-term. That's why we're concentrating top management skills in that area." In June, Statoil joined BP in a sponsor group to build a multi-billion dollar Baku-Ceyhan oil pipeline, Reuters reported. The $2.4 billion project - strongly backed by the US, because it will allow Caspian oil exports to bypass Russia and Iran - has been criticized as economically unfeasible. However, the recovery in global oil prices and several preliminary discoveries in the Caspian have given the project a new hope. "When it comes to timing [for the construction] it is of course very difficult to say, but we will do our part to make it [as soon as possible]," Fjell said. Statoil is a member of the Offshore Kazakhstan International Operating Company (OKIOC), which made a major Caspian discovery this summer in Kashagan. It is also conducting talks with the Azeri government on obtaining an operating license for a new hydrocarbon area in the Azeri sector of the Caspian Sea - potentially Statoil's first project as lead operator in the area.

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

available for non-profit institutions.

Daily Report on Russia is for the exclusive use of the subscriber only. Reproduction and/or distribution is not permitted without the expressed written consent of Intercon. Daily Report on Russia Ó copyright 2000, Intercon International, USA.

When you need to know it as it happens

Politics-Economics-Business

Page