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

Thursday, August 3, 2000

Russian Federation

Politics

Russian Forces In Chechnya Violate CFE Treaty

· A British Defense Committee report presented to the House of Commons on Wednesday criticized Russia for violating the Conventional Forces in Europe (CFE) treaty signed by 30 nations at the summit in Istanbul in 1999. The treaty places "national ceilings" on equipment each country is permitted to have and "territorial ceilings" limiting where the military equipment can be stationed. Russia has an estimated 3,600 combat vehicles and artillery pieces on its southern flank, which includes Chechnya. British representatives also criticized Russia for baring or refusing weapon inspections. The report said, "Russia needs to be told unambiguously that such refusals are unacceptable and that they risk undermining the good faith needed for any treaty to remain effective." It adds, "There will be no gain in ratifying early if Russian then treats the new limits with cavalier disregard. Many countries have yet to ratify the CFE treaty. The UK, along with its allies, should…press the new Russian administration to ratify the agreement on the basis of full compliance with its terms," the Financial Times reported. Comment: This is clearly one of the byproducts of Georgian President Eduard SHEVARDNADZE's recent visit to Britain in July. He held a series of high level meetings, during his visit. Included on the agenda were discussions on Russia's behavior on the Russian-Georgian border in Chechnya, its disregard for CFE limits, and the extra-legal status of Russian bases on Georgian territory. The question remains whether British Prime Minister Tony BLAIR will use his warm relationship with Russian President Vladimir PUTIN to positively influence the Kremlin to meet its CFE commitments.

Duma Committee Considers State Council

· Anatoly LUKYANOV, the chairman of the Russian State Duma's State Development Committee, said his committee is likely to consider proposals for the creation of the State Council later this fall. He said that President Vladimir PUTIN's approval of the idea reflects "an obvious manifestation of the president's concern for the unity of the country." LUKYANOV said that he believes the State Council should be an "expanded version" of the existing Russian Security Council and be headed by the president, RFE\RL Newsline reported.

Kovalyov Indicted For Embezzlement

· The Prosecutor General's office filed an indictment Tuesday against former Russian Justice Minister Valentin KOVALYOV on charges of embezzlement, bribe-taking and illegal possession of a weapon. KOVALYOV, who was ousted by then-President Boris YELTSIN in July 1997, will be tried at Moscow's City Court. A date for the trial has not been set, court spokeswoman Yekaterina KUDRYASHOVA told the Associated Press. YELTSIN ousted KOVALYOV shortly after national television news programs aired video that appeared to show the justice minister cavorting with naked women in a Russian bathhouse. KOVALYOV said the tape was a fake. Media reports said the bathhouse was frequented by one of Russia's most notorious mafia gangs, implying links between these groups and the justice minister. Indictments were also handed down against a KOVALYOV aide

Today's News Highlights

Russia

WB Mission To Arrive In Sept.

Audit Chamber Targets Gazprom

European Republics

Ukraine's Reserves Total $1.19B

Ukraine Warns Of Rising Inflation

South Caucasus & Central Asia

Chow Appointed Presid. Adviser

Opposition Attends CEC Meeting

Karimov Appoints Key Minsters

Tajik Boosts Aluminum Output

Politics-Economics-Business

Page

Thursday

August 3, 2000

Intercon's Daily

and the head of the legal foundation, charged with bribery and embezzlement.

Economy

Ruble = 27.83/$1.00 (NY rate)

Ruble = 27.74/$1.00 (CB rate)

Ruble = 25.16/1 euro (CB rate)

Russia Raises Fuel Export Duties

· Effective Wednesday, the Russian government increased export duties on crude and fuel oil to generate extra revenue for the budget. According to Deputy Prime Minister Viktor KHRISTENKO, Russia raised indefinitely the crude export tax 35 percent from 20 euros to 27 euros ($24.8) per ton. The export duty for fuel oil was raised 67 percent from 12 euros to 20 euros per ton. The government expert commission recommended the Cabinet raise gasoline and diesel export duties from 20 euros to 25 euros per ton for gasoline and 15 euros per ton for diesel beginning in mid-September. Peter BOTOUCHAROV, assistant director for global research at Dresdner Kleinwort Benson said, "An expectation of a slow erosion of international oil prices and the imposition of higher export duties on oil and oil products should allow Russia to maintain its impressive fiscal and export performance…As we all know, this is key to keep Russia's debt payment capacity at a reasonable level." Russia is the world's third largest oil supplier, producing 304.8 million tons (2.2 billion barrels) of oil in 1999 and exporting 111.2 million tons of crude, the biggest earner of export duties for the country, Bloomberg News reported. The state budget will additionally receive about $300 million until 2001 if these duties stay in place, according to United Financial Group brokerage estimates. The Trade Ministry said on Monday that in the first five months of 2000 Russian gas oil exports to hard currency markets fell 8.3 percent to 9.9 million tons from the same period last year, while motor gasoline exports leapt 82.8 percent to 1.6 million tons.

WB Mission Expected In September

· The World Bank on Tuesday announced that it will send a special mission to Russian in September to discuss structural reform measures underpinning future lending to Russia. "I expect that there will be a further mission in September to assess the progress [in implementation of the government's

structural reforms]," Michael CARTER, World Bank director for Russia said. He added the World Bank was pleased with the passage of the government's crucial tax reform package by parliament, but the authorities should undertake further structural changes before the bank makes a decision on new lending. World Bank Eastern Europe chief Johannes LINN said on July 6^th the World Bank was ready to lend about $1 billion to Russia to support economic reforms, but he gave no precise timeframe. Discussions on the government program and its implementation and actual loan talks would take some time, and the bank may send yet another mission to Moscow before it made a definite decision about the loan, CARTER said. "I certainly hope it will happen before the end of this year," he added.

Business

Audit Chamber Targets Gazprom

· The State Audit Chamber, a parliamentary agency that oversees spending of state money, has launched an investigation into Russia's gas monopoly Gazprom's gas sales and tax payments in 1999 and 2000. The probe will include two subsidiaries Mezhregiongaz, a unit that markets gas within Russia, and Gazexport, which exports gas to Europe. Vladimir KRAVTSOV, the chamber's inspector explained, "This will be a complex investigation of Gazprom by three auditing departments. We will check the company's financial activity in the internal and external markets as well as tax payments." Audit Chamber Deputy Chairman Yuri BOLDYREV said the agency also will look Gazprom's cooperation with Itera Holding, a Moscow-based gas trading company. However, KRAVTSOV said it's not clear if Itera will be part of the Gazprom probe. "Itera is an independent company, which can purchase gas from any of Gazprom subsidiaries. Gazprom expects its gas production to decline by 5 percent to 520 billion cubic meters this year from 545.6 billion in 1999. Itera plans to more than double its gas output to 16.2 billion cubic meters of gas this year, up from 6.6 billion produced last year, Bloomberg News reported. The chamber's probes come after tax police and prosecutors started investigating other large companies and top executives, part of President Vladimir PUTIN's effort to stop tax evasion and limit the political influence of big business.

When you need to know it as it happens

Politics-Economics-Business

Page

Thursday

August 3, 2000

Intercon's Daily

Rosneft Subsidiary Starts Drilling Offshore

· Sakhalinmorneftegaz, a subsidiary of Rosneft, Russia's state-owned oil producer, started drilling at the Astrakhanovskaya field as a part of Sakhalin-4 project in the Far East. BP Amoco, the world's third-largest publicly traded oil company, is interested in the project developed under so-called production sharing terms, which provide tax incentives to investors. The Atlantic Richfield Co. (Arco), the seventh-largest US oil company before BP Amoco agreed in April to buy it for $33 billion, earlier left the Sakhalin-4 project. The Sakhalin-4 project deposits hold an estimated 123 million tons of oil and 540 billion cubic meters of gas reserves.

Viktor KALNYK said stable prices for imported fuel kept food and service prices in check last month. In July, the government raised its annual inflation forecast to between 28 percent and 29 percent by December from 19 percent, blaming a lack of IMF money to help stabilize the economy. The forecast was approved after consumer prices rose 3.7 percent in June from May. KALNYK added that lending is one of the most important influences for keeping inflation in check because the government will need more hard currency for importing more fuel in the fall. He stressed, "We need new loans [from the IMF] at least by October."

A Ukrainian delegation, led by First Deputy Prime Minister Yuri YEKHANUROV, are visiting Washington DC. They are expected to meet the IMF Managing Director Horst KOEHLER, World Bank President James WOLFENSOHN, US Treasury Secretary Lawrence SUMMERS, and US State Department officials. The government sees "no economic reason" for further postponement of lending from the IMF, Kalnyk said. Ukraine said it expects to obtain two payments of between $250 million to $260 million each before the end of the year.

South Caucasus & Central Asia

Chevron VP Appointed To Advise President

· In a ceremony on July 28^th, Chairman of the Georgian parliament Zurab ZHVANIA, during a recent visit to Washington, DC, signed a contract with former Chevron vice president Ed CHOW to become a strategic advisor to Georgian President Eduard SHEVARDNADZE. He will advise the President on gas pipelines and energy issues. At the same ceremony Georgian Ambassador to the USA Tedo JAPARIDZE and Trade and Development Agency (TDA) director Joseph GRANMAISON signed an agreement between the Georgian government and the TDA. TDA will cover CHOW's salary for his advisory role. Prime News Agency reported that CHOW is already in Tbilisi holding business meetings. CHOW's experience and authority will promote the development of relations with foreign companies.

Georgia To Legalize Shadow Economy?

· Georgian President Eduard SHEVARDNADZE in his weekly radio address on Monday said that as

European Republics

Ukraine's Reserves Reach $1.19 Billion

· The Ukrainian Central Bank's hard currency reserves grew from $1.035 billion on June 30^th to $1.190 billion as of August 3^rd, according to First Deputy National Bank Chairman Anatoly SHAPOVALOV. He said that last month the Central Bank had replenished its reserves with a total of $240 million bought on the interbank currency market. He declined to say what amount of dollars the Central Bank had purchased so far this year, Reuters reported. "We have not received any external financing since September last year," SHAPOVALOV said. In September, 1999, the International Monetary Fund (IMF) froze a $2.6 billion loan program due to Ukraine's slow reforms. Ukraine is to spend is to spend $750 million in the second half of this year, compared to a total of $995 million spent in January-June. A Ukrainian government delegation headed by First Deputy Prime Minister Yuri YEKHANUROV is currently visiting Washington, seeking renewed financing from the IMF, which would enable Kiev to get more loans from other lending institutions and request a $500 million restructuring deal from its sovereign creditors.

Ukraine Concerned Inflation Could Rise

· The Ukrainian government said consumer prices were unchanged in July from June. It warned, however, that inflation will accelerate in the fall, if the International Monetary Fund (IMF) fails to unfreeze its $2.6 billion lending program for Ukraine. That lending program was frozen in September 1999, due to lack of reforms. Acting Economic Minister

When you need to know it as it happens

Politics-Economics-Business

Page

Thursday

August 3, 2000

Intercon's Daily

part of the ongoing crackdown on corruption, a special government program has been drafted to legalize the shadow economy. The government approved that program at a meeting on July 28^th, the Caucasus Press reported. According to Economy, Industry and Trade Minister Vano CHKHARTISHVILI, the "black" economy accounts for 27 percent of gross domestic product (GDP), Prime News Agency reported. He said the measures to legalize it focus on differentiated tax rates, liberalization of fiscal policy, improving auditing, and the conduct of economic experiments in specific regions.

Itera Holding Reviews TbilGas Project

· Itera Holding company President Valery OTCHERTSOV noted during a review of its plans for TbliGas, that more than $100 million to $150 million is needed to rebuild TbliGas' networks. He predicted that Itera would not receive a profit from the project for 13 years. The buying of TbilGas, which is planned by Itera is a "very expensive pleasure," said OTCHERTSOV. He said Tbilisi is a big city, its economy will recover and finally the population of the capital will be able to pay for gas delivery. Itera Holding was ready to finish TbilGas network privatization process in Spring to have time to get ready for winter, but it was delayed because of the indecision of the Georgian side, Prime News Agency reported. He stressed that as a result only 2 months are left to finish the reconstruction works through Tbilisi.

Azeri Welcomes Opposition To CEC Session

· RFE\RL Newsline reported that six opposition representatives on the 18-strong Azerbaijan Central Electoral Commission attended a session of that body for the first time on Tuesday. These representatives abandoned a self-imposed boycott declared last month to demand amendments to the election legislation. The CEC session was devoted to the financing of the election campaign. This positive development demonstrates that the Azeri government is reaching out to the opposition. The government is responding to concerns, which have

been raised by the international community. Azeri President Geidar ALIYEV has pledged to create conditions for ensuring free and fair parliamentary elections on November 5^th.

Karimov Appoints Key Ministers

· Uzbek President Islam KARIMOV appointed three key ministers Wednesday in the latest Cabinet reshuffle. Rustam AZIMOV was named deputy prime minister in charge of economic affairs. He previously served as a chairman to the National Foreign Economic Affairs Bank. AZIMOV will keep his portfolio as Finance Minister. Meanwhile, Agriculture and Water Resources Minister Turop KHOLTAYEV was promoted to the post of deputy prime minister in charge of agriculture and related industries. The third appointment was of Rustam SHOABDURAKHMANOV, who was named Minister of Macro-economics and Statistics. SHOABDURAKHMANOV, previously first deputy minister of macroeconomics and statistics, had already worked for the presidential administration.

Tajik To Boost Aluminum Output

· Tajikistan's Economic Minister Yakhyo AZIMOV on Wednesday said the Central Asian state planned to produce 300,000 tons of aluminum in 2000, up from around 230,000 tons last year. His forecast was at the top end of previous targets of 290,000 to 300,000 tons. This target was announced by officials at the Tursunzade Aluminum Smelter, Tajikistan's sole producer. "In 2000 Tajikistan's aluminum plant will produce 300,000 tons of aluminum, a rise of 30.9 percent from 1999," AZIMOV told a ministry meeting in the capital, Dushanbe. "In 2005 we forecast raising this volume to 346,000 tons." He added that he was concerned that the plant was consuming more electricity than had earlier been planned. Tursunzade has a nameplate capacity of 517,000 tons of aluminum, but output there peaked in 1989 at 416,000 tons. The plant is limited by the alumina it receives from Kazakhstan and Russia. Aluminum is Tajikistan's most important source of foreign currency, followed by cotton.

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