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 31, 2000

Russian Federation

Politics

Rus-Estonia Tit-for-Tat Diplomat Expulsions

· Early this morning, the Estonian Foreign Ministry announced that it ordered two Russian diplomats to leave the country in 48 hours, declining to give the names of the Russian officials. Foreign Ministry spokesman Taavi TOOM confirmed the expulsions, but refused to comment on the circumstances. The Russian Foreign Ministry said that the two Russians were accused of "activities incompatible with their status," a phrase used to denote spying. According to a ministry statement, "We completely reject the accusations brought against the Russian diplomats...This is a deliberate provocation which will cause serious damage to Rus-Estonian relations." Shortly thereafter, the Estonian Ambassador in Moscow was summoned to the Russian Foreign Ministry and informed that two Estonian diplomats were being kicked out of Russia also for "activities incompatible with their status." A Russian Foreign Ministry statement said, "We regret that the positive tendency in bilateral relations that has been observed recently has been sacrificed to the ambitions of the Estonian intelligence service…The Estonian side bears all the responsibility." Relations with Estonia have been tense since it regained its independence in 1991. Tit-for-tat expulsions are the common practice of Russia, even after the end of the Cold War. In January, former Warsaw pact ally Poland expelled nine Russian diplomats for alleged spying, a move Moscow responded to in kind by expelling nine Poles.

Alternative Outlets Emerge From Tower Fire

· Officials and experts have determined that the Ostankino Tower can be restored, despite damage to cables from the fire, which was extinguished on Monday. Head of the Russian state construction

committee, Anvar SHAMUZAFAROV, was quoted as saying that only 25 percent of the 149 steel cables that hold the tower together had been damaged in the fire. He also said the government committee had decided the tower would not collapse and that reconstruction work should be carried out. In the meantime, experts are working on alternatives to broadcast news and entertainment to millions of Moscow residents. Back up transmitters are being used as well as antennas that are attached to the Moscow State University skyscraper. Mikhail SESLAVINSKY, first deputy minister of information and press said that there were no spare VHF transmitters available in the city, and setting up new ones would take "at minimum a month." Press Minister Mikhail LESIN conceded Monday that the blaze was a blow for every company involved in the media market ¾advertising firms, communications companies and television stations. The main beneficiaries of the blackout seem to be video rental shops. Although queues were not seen in central Moscow, Russia's RIA news agency said sales of videotapes in one district of Moscow had risen 30 percent. Sales of newspapers have also increased, but only by 20 percent. Those seeking news have also been driven to popular news websites such as RBC, Lenta.ru and Gazeta.ru. RBC, a financial wire, said it had six million visitors to its site Monday - six times the usual amount of daily traffic. Today, after three days of blackout, RTR and ORT Television resumed limited broadcasting via a temporary transmitter fixed to the trunk of the

Today's News Highlights

Russia

Glasnost Foundation Raided

LUKoil To Invest In Bulgaria

European Republics

Rus-Belarus Sign Tax Legislation

UkraineRestores IMF Relations

South Caucasus & Central Asia

Georgia To Buy Czech Tanks

Georgia To Write Off Debts

Armenia-Greece Boost Relations

Eurasia Denies Tax Evasion

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Thursday

August 31, 2000

Intercon's Daily

fire-ravaged Ostankino Tower. RTR and ORT will combine their programs as the transmitter allows broadcasting on only one frequency. LESIN said normal transmission on two other key frequencies, assigned to ORT and Moscow city's TVTs, would resume next week.

A new analysis of Russia's efforts to extinguish the fire reveals several mistakes. Fire fighters were delayed by up to 10 minutes after smoke was first reported. In addition, fire fighters waited for a personal cutoff of power order from President Vladimir PUTIN, even though safety regulations call for an immediate power cut in such fires. "If we had cut the power earlier, we would probably have been able to localize the fire," said fire chief Leonid KOROTCHIK. The 33-year-old tower lacked fire-prevention systems in its hollow shaft, where the burning cables were located, and the numerous short-circuits and pieces of burning cable insulation quickly spread the fire downward, the Associated Press reported.

Human Rights Organization Raided By Police

· Late Monday night, armed, masked police officers broke down the back door of the Glasnost Foundation, a liberal human rights organization, forcing its head, Sergei GRIGORYANTS, and 12 members facedown on the floor. The police, claiming to be part of the 18^th precinct, did not check any documents, rummaged though a bag, and waited for their captain to arrive. When he refused to show GRIGORYANTS his documentation, the captain and commandos left. On Tuesday, the 18^th precinct denied any knowledge of an operation at the Glasnost Foundation. GRIGOYANTS said, "They knew exactly where they were going. This was a conscious, government action aimed at intimidating civil society," The Moscow Times reported. The Glasnost Foundation has been critical of the Chechen War and the Federal Security Service (FSB). It should be noted that the raid occurred on the eve of its annual conference titled "The KGB: Yesterday, Today, and Tomorrow." GIRGOYANTS is a critic of the secret police and spent time in Soviet jails as a dissident.

Economy

WB Mission To Visit In October

· The World Bank plans to send a mission to

Moscow in the middle of October to review conditions for release of a $50 million loan installment for the coal sector. Based on the results of the mission's work, the Bank will decide whether or not to disburse the last $50 million of the so-called social installment of the coal loan, a spokeswoman for the World Bank's Moscow office told Reuters. A total $800 million coal loan, agreed in 1997, is split into social and privatization installments, which are meant to cushion reform in the sector and should go straight to the budget. The World Bank said earlier that the final $100 million installment for privatization would be paid by the end of the year. Michael CARTER, World Bank Director for Russia, said earlier in August that the next mission would arrive in Moscow in September to discuss structural reform measures, underpinning future lending to Russia. The spokeswoman could not confirm whether this mission would arrive as planned or would be delayed.

Ruble = 27.75/$1.00 (NY rate)

Ruble = 27.76/$1.00 (CB rate)

Ruble = 24.69/1 euro (CB rate)

Business

LUKoil To Invest In Bulgarian Oil Industry

· Russia's top oil producer LUKoil Holding plans to invest $150 million in Bulgaria over the next three years to modernize a refinery and develop a fuel marketing network in the region. LUKoil paid $101 million for a 58 percent stake in Bulgaria's Neftochim Refinery late last year. The company further pledged to invest $408.3 million in its modernization and plans to process at Neftochim at least 7.5 million metric tons (54.8 million barrels) of crude a year. Half of the output will be sold in Bulgaria, boosting Neftochim's market share to as much as 25 percent. LUKoil President Vagit ALEKPEROV said, "Our strategy in Bulgaria is to develop a retail network, modernize the refinery, and increase oil sales to neighbor countries". LUKoil is expanding its refining and marketing operations throughout Eastern and Central Europe. The company has already bought stakes in three refineries outside of Russia and is developing a fuel retail network in the Mediterranean.

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European Republics

Rus-Belarus Sign Tax Legislation Agmt.

· Russian Prime Minister Mikhail KASYANOV and Belarus Prime Minister Vladimir YERMOSHIN on Wednesday signed an intergovernmental agreement on unified tax legislation and tax policy in the Union State created by the two countries. The Russian Finance Ministry and Tax Ministry was instructed to work with the authorized bodies in Belarus in accordance with the agreements. Specifically, this covers: single principles and rules of taxation, a list of the main goods, rights, and duties of taxpayers in the Union State, single terms and notions. The Tax Code of the Union State is expected to be adopted by July, 2003. KASYANOV pointed out that the, "situation in Russia and Belarus differs. This is why we adopted a decision today to work out as soon as possible a list of macro-economic indicators that should serve as benchmarks for the integration of our economies." The two prime ministers also discussed how to create a single currency for the union. According to earlier decisions, the Russian ruble will be used as a single currency in the Union from January 1, 2005, and a single currency of the Union will be introduced on January 1, 2008. "We did not consider the question of a single emission center. We have enough time to solve it," KASYANOV said. Russia's Central Bank will extend a loan to Belarus' Central Bank of $200 million and 4.5 billion rubles ($162 million) as a stabilization fund.

Ukraine To Restore Relations With IMF

· An International Monetary Fund (IMF) monitoring mission is expected to arrive in Ukraine in mid-September to assess whether the Fund should resume its loan program, a senior official told Reuters on Wednesday. The IMF postponed the $2.6 billion, three-year Extended Fund Facility loan to Ukraine a year ago, citing a slow pace of reforms. Valery Lytvytsky, a senior advisor to the Ukrainian Prime Minister, said the IMF board of directors would discuss possible sanctions against Ukraine, since an independent audit showed that Kiev had misled the Fund about the size of its reserves to win more loans. The IMF said earlier this year that because data had been misreported, Ukraine had received up to $200 million in funding it would not have otherwise qualified for.

Last week, Ukraine repaid the IMF some $100 million of its earlier granted funds dating back to the audited period of 1997 to 1998, the Financial Times reported Wednesday. Ukrainian President Leonid Kuchma said the decision to return the money was an admission that Ukraine had been at fault when it misinformed the IMF about the state of its reserves. "We have admitted that not everything in our house was in order." Lytvytsky said the government now hoped that returning money would help restore trust in relations with the Fund and win renewed financing. He added Ukraine expected the IMF not to consider renewed lending before October.

Renewed lending from the IMF is vital to Ukraine to be able to approach the Paris Club of sovereign creditors with a request to restructure $500 million in debts, Reuters reported. Foreign loans are also needed to revitalize the economic growth in the country of about 50 million people. "One of the key elements to be discussed with the mission is the budget and economic indicators for next year," Economics Minister Vasyl Rohovy told reporters. First Deputy Prime Minister Yuri Yekhanurov previously said the government might cut budget spending in the second half of the year, if no foreign loans were granted.

Ukraine Considers New Gas Pipeline

· Ukraine is considering a proposal to build a new pipeline to ship natural gas from Turkmenistan to Eastern and Western Europe, making the country less dependent on Russian supplies. The pipeline would go from Turkmenistan at the Caspian Sea through Georgia and Azerbaijan and then cross under the Black Sea to the Ukrainian port of Feodosia. It would then connect with Ukraine's existing pipelines, which already carry Russian gas westward. Ukraine's deputy prime minister for the fuel and power industries Yulia TIMOSHENKO said, "The highest leadership of Turkmenistan has supported all possible (joint) projects with Ukraine that would diversify ways of transporting gas from Turkmenistan to Europe." The government said the new pipeline could be built with investments that could be paid back in six to eight years and help increase gas supplies to Europe amid growing consumption. The construction of the new pipeline, which is expected to have annual income of be

When you need to know it as it happens

Politics-Economics-Business

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Thursday

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tween $1.5 billion to $1.8 billion, would take about three years to complete. The cost of building the pipeline has not been disclosed. Ukraine has been locked in a dispute for years with Russia over $1.4 billion it owes for illegally siphoning Russia's gas that is heading to Western European markets.

South Caucasus & Central Asia

Georgia To Obtain Czech Tanks

· The Georgian Defense Ministry will purchase 11 T-55am2 tanks from the Czech Republic in September. The purchase of these 11 tanks and their transportation will cost Georgia $300,000, Georgian Deputy Defense Minister Grigol KATAMADZE told Prime News Agency. The military equipment was modernized in 1986. The negotiations for the purchase started in 1998, but they were delayed because of the financial problems.

Georgia To Write Off External Debts

· Georgian President Eduard SHEVARDNADZE declared on Wednesday that Georgia will write off its external debts in about two years. Georgia external debt equals about $ 2 billion. World practice is familiar with the debt writing off experience, the President mentioned. He also demanded that Finance Minister Zurab NOGAIDELI give him a detailed accounting of foreign grants and credits. SHEVARDNADZE said the fate of tens of thousands of dollars is unknown because of lack of regulation.

Armenia-Greece Boost Cooperation

· Armenia regards Greece as an important strategic partner and intends to boost military and political cooperation efforts, Armenian President Robert KOCHARYAN Wednesday told a Greek delegation that included military chief of staff General Manoussos PARAGIOUDAKIS. Such increased cooperation isn't directed against any third country, KOCHARYAN stressed. Both countries have tense relations with Turkey. PARAGIOUDAKIS, in a meeting Tuesday with Armenian Prime Minister Andranik

MAKARYAN, said Greece would make efforts to involve Armenia more closely in the NATO Partnership for Peace program.

Eurasia Group Denies Tax Evasion

· Kazakhstan's leading metals firm, Eurasia Group, has denied reports media and government agencies that it was avoiding its tax obligations. Eurasia Group reported that its tax payments were in the range of 16 to 34 percent of sales revenue. It claims that government agencies were "manipulating figures." The Center for Economic Information said the group and other exporters were underpaying taxes through a system of transfer pricing. It said Eurasia's subsidiaries paid only three to eight percent of revenues as tax. Eurasia countered, "We can say in all confidence that this is distorted, false information which aims to mislead the president, the government and society." The group said last year it had paid taxes of 16.6 billion tenge ($139 million), which amounted to 21.5 percent of its revenues. Eurasia, controlled by industrialist Alexander MASHKEVICH, claims that it accounts for almost a quarter of Kazakhstan's gross domestic product. Reuters describes the alleged scheme in which Eurasia and other raw materials exporters sold exports to offshore affiliates at cut-price rates, reducing profits in Kazakhstan. These affiliates are then said to rack up profits by re-selling the items at world prices and pay lower taxes on those profits. The Eurasia Group said, "It is clear that these baseless attacks are motivated not by economic or judicial considerations but by politics and are aimed at ruining the reputation of a conscientious tax payer…We have nothing to hide from the tax police, the Center for Economic Information or from citizens."

The Daily Report on Russia

and the Former Soviet Republics

will not be published on September 4th

in observance of Labor Day.

Paul M. Joyal, President, Editor in Chief Clifton F. von Kann, Publisher Jennifer M. Rhodes, Principal Editor

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