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 4, 2000

Economy

Russian Economic Indicators

· Russian foreign currency and gold reserves rose $200 million to $23.2 billion in the week ending July 28^th, as the Central Bank bought dollars with rubles to prevent the currency from strengthening further. The reserves are at the highest level since 1997, when reserves peaked at about $24.5 billion. Reserves rose $700 million to $23 billion in the week ending July 21^st. Russia's money supply expanded by 1.4 billion rubles ($50.4 million) in the week ending July 24^th, the Central Bank said. Russia's money supply fell by 4.1 billion rubles ($147.8 million) in the week ending July 31^st. The money supply, which includes cash currency in circulation plus required reserves, fell to 417.3 billion rubles from 421.4 billion rubles on July 21^st.

Russian Finance Ministry officials said Tuesday that Russia posted another budget surplus in July. This is the seventh month in a row that the government has been in the black. The Finance Ministry said that the surplus in July amounted to 17.8 billion rubles ($640 million). That figure represents 3.4 percent of gross domestic product (GDP), well above both the average of 1.6 percent for the first half of the year and on target to reach the planned budget surplus figure of 3 percent for the year.

US To Limit Russian Uranium Imports

· The US International Trade Commission (ITC), in its latest five-year review, agreed on July

Russian Federation

Politics

Russia Begins Withdrawal From Georgian Base

· Russian forces are removing 10 tanks, 13 armored personnel carriers, and 26 other pieces of military hardware from the Vaziani base inside Georgia and has reached an agreement for the withdrawal from Gudauta. This is in line with commitments made at the Organization for Security and Cooperation in Europe (OSCE) summit in Istanbul for the withdrawal of two out of four of Russia's bases; the other two being Batumi and Akhalkalaki. As of today, there is no firm schedule for the withdrawal of military equipment and troops from Gudauta, despite the deadline of July, 2001. No inspections by international observers have occurred at this base. OSCE military observers from the US arrived in Tbilisi to monitor the transportation of vehicles from Vaziani.

Altogether Russia will withdraw 35 tanks, 97 armored personnel carriers, 16 artillery systems and 51 vehicles among other military hardware. Russian Armed Forces General Staff Valery MANILOV explained that tanks, armored cars, artillery will be loaded on the railway platforms and transported to Batumi. From Batumi the military technology will be transported to Russian ports Novorossiisk and Tuapse, Prime News Agency reported. According to Russian foreign and defense ministries, Russia will leave at its military facilities and bases in Georgia a total of 153 tanks, 241 armored personnel carriers and 140 artillery systems by December 31^st. The US will provide $10 million for the base withdraws, while Great Britain has allocated 100 thousand pounds

Today's News Highlights

Russia

AvtoVAZ Tax Case Dropped

European Republics

Latvenergo Privatization Split

Ukraine Ready For WB Approval

South Caucasus & Central Asia

Citizens' Union Discuss Budget

IMF Awaits More Indicators

Armenian Industrial Output

Kazakh Denies Oversea Accts.

China-Uzbekistan Form NV

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Friday

August 4, 2000

Intercon's Daily

26^th to continue protecting the American uranium industry from cheap imports of the commodity from Russia. The ITC ruled that terminating a 1992 anti-dumping suspension agreement that limits imports of Russian uranium would significantly harm the US uranium industry and USEC Inc., the privatized government company that supplies enriched uranium fuel for commercial nuclear power plants, Reuters reported. "We have long contended that terminating the Russian suspension agreement would undermine the domestic industry. We're pleased that the Commission agreed," USEC said. The ITC's action follows a June 28^th Commerce Department ruling that held uranium would be dumped in the US market, if the suspension agreement was terminated. The ITC's decision was the last step in sustaining that agreement. The agreement limits imports of Russian uranium products except when matched with new US production of uranium, or when the commodity is delivered under contracts that existed at the time the suspension agreement took effect almost a decade ago. However, imports of enriched uranium are still allowed under a special US program to dismantle Russia's vast nuclear weapons stockpile.

Ruble = 27.8/$1.00 (NY rate)

Ruble = 27.73/$1.00 (CB rate)

Ruble = 25.16/1 euro (CB rate)

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Business

Tax Probe Against AvtoVAZ Dropped

· A spokeswoman for the Prosecutor General's office on Thursday announced that it found "no basis" for allegations that the nation's largest carmaker, AvtoVAZ, evaded taxes by underreporting its sales. She said the matter had been referred back to Tax Police for further review but, "The case no longer exists." This is the third high profile business case to be dropped in two weeks. Last month, federal Tax Police filed charges against unnamed officials at the carmaker, claiming that the company had evaded paying taxes on some 200,000 vehicles in 1996 by stamping false serial numbers on them. Prosecutors said the Tax Police didn't have enough grounds for such a decision. AvtoVAZ produces Lada sedans and Niva sport-utility vehicles. The company produced 650,000 vehicles last year and has been negotiating a joint venture with General Motors Corp. AvtoVAZ is reportedly controlled through shell companies by Boris BEREZOVSKY, one of the Russia's so-called oligarchs. President Vladimir PUTIN has vowed to cut the lucrative ties that many tycoons cultivated with the Kremlin under PUTIN's predecessor, Boris YELTSIN. Cases have been launched against several major companies this summer, including LUKoil, Norilsk Nickel, Gazprom and Media Most.

In June, authorities arrested tycoon Vladimir GUSINSKY, head of the Media-Most media holding company and charged him with cheating the state of some $10 million in a privatization deal. GUSINSKY was held for four days in a notorious Moscow prison, before being released. The case against GUSINSKY was unexpectedly dropped on July 26^th.

Meanwhile, LUKoil Holding's lawyer Vadim SMIRNOV said a Moscow court ruled that tax charges against LUKoil Holding have no merit. The court found LUKoil not guilty of any tax nonpayment or underpayment, SMIRNOV said. The court, however, has yet to issue a final ruling. Tax authorities filed the charges following an audit of LUKoil operations between 1997 and 1999; on July 11^th tax police said they were investigating the president of LUKoil President Vagit ALEKPEROV.

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European Republics

Latvenergo Privatization Splits Coalition Gov't

· A split on plans to privatize the state-owned utility, Latvenergo, was widened this week when two of the government coalition's four ruling parties, Latvia's Way and the People's Party, successfully backed opposition sponsored legislation in parliament obstructing the privatization plan. Fatherland and Freedom party chairman Maris GRINBLATS said, "Government stability should not be affected by this vote. But we will also in the future keep our own strict stance in issues which we consider dubious." Reuters note that the vote marks a setback for Prime Minister Andris BERZINS, a member of the People's Party, who promised to speed up privatization in the Baltic state when he took office in May. "This was a logical outcome. I am not disappointed as we have seen democracy at work,"' he said. BERZINS' Latvia's Way has 21 seats in parliament while the Peoples' Party has 24. Fatherland has 16 seats and the New Party eight, giving the government 69 of the 100 seats. The decision to block privatizing the company threatens further international lending. The World Bank has set an end of 2001 deadline for restructuring Latvenergo, as one of the conditions for a three-year $120 million loan package signed in March. As a result of Thursday's vote Latvenergo and all its assets are to be put on a list of strategic state-owned firms, which cannot be sold to the private sector. The privatization setback also appears to derail a recently proposed merger with Estonian Eesti Energia.

Ukraine Prepares For WB Board Approval

· A Ukrainian delegation and World Bank officials earlier this week in Washington have reached an agreement on a three-year cooperation program. Cooperation with the International Monetary Fund and the Bank is vital for Ukraine, which has low foreign currency reserves and is dependent on loans for economic growth. The agreed upon program will be sent to the World Bank's board of directors for approval on September 12^th. Ukrainian officials had earlier estimated the three-year program at $1.5 billion. The delegation's spokesman Gennady HARMASH said, "all technical obstacles" had been removed through the negotiations. He stressed that, "A recently held audit showed there was no evidence of the misuse of World Bank funds

in Ukraine." Earlier this year Ukrainian officials said the country might receive about $370 million from the World Bank by the end of the year, including some $70 million under a coal sector adjustment loan and a $100 million installment of a financial sector loan. The World Bank has disbursed about $1.9 billion to Ukraine since independence in 1991.

South Caucasus & Central Asia

Georgia's Draft 2001 Budget Discussed

· Chairman of the parliamentary financial-budgetary committee Zaza SIORIDZE said that the draft state budget-2001will be discussed today at a meeting of the Citizens' Union parliamentary representatives. According to him, parliament must turn in the discussed draft state budget to Georgian President Eduard SHEVARDNADZE before September 1^st. A final draft state budget is to be turned in to parliament by the executive branch before October 1^st. The draft state budget-2001 contains structural additions, compared to the state budgets of previous years. The revenue part of the state budget-2001 makes up 810.2 million lari, including 721.6 million lari of own revenues. The expenses part is 1.26 billion lari, Prime News Agency reported.

IMF Requires More Progress In Georgia

· The International Monetary Fund's (IMF) Georgian representative Christopher LANE on Wednesday said that a new mission would not visit Georgia before October, disappointing Georgia's hopes for new loans. Georgia feels that its recent economic improvement justifies new lending. The government has met revenue targets for two months and predicted lending would resume this year. LANE said that a longer track record and more action were required. "We are encouraged by the Georgian government's recent steps, but we need to see more progress," LANE said. The IMF has urged Georgia to strengthen its governance, combat rampant corruption, and improve tax collection. June revenues were better than earlier in the year but no improvement on June 1999. "It's not a great achievement," LANE said, adding that the Fund wanted to see budget plans fulfilled for five months in a row before talking about new aid. LANE also criticized harsh tax collection measures. Authorities seized money from taxpayers' bank accounts without

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warning, he said. "It is tax harassment. If revenues increased by these measures, that also is not a great achievement," he said. He also said the government had to deliver on commitments to repay wages, pensions and social benefits as well as strike new agreements with foreign creditors on its crushing debt burden.

Ukraine's Yushenko To Visit Georgia

· Ukraine's Prime Minister Victor YUSHENKO is scheduled to arrive in Tbilisi for an official visit on Saturday to boost bilateral relations. He said trade turnover between Ukraine and Georgia made up $18.6 million during 5 months of 2000, against the $ 8.1 million figure of the same period of last year. YUSHENKO said that the increase in cargo turnover was due to the increase of export from Ukraine to Georgia of agricultural production - sunflower seeds and oil, ethyl spirit, cigarettes and of railway carriages. Import from Georgia to Ukraine increased almost twice, by means of agricultural production also - tea, wines, Prime News Agency reported.

Armenia Registers Industrial Growth

· Industrial output in Armenia increased by 22 percent during the first six months of 2000 compared with the same period for 1999, Noyan Tapan reported. Exports of such products rose by 21 percent, or 4 billion drams ($7.3 million), compared with last year. First Deputy Industry and Trade Minister Ashot SHAHNAZARIAN told Armenian State Television that the number of people currently employed in the industrial sector has risen by 8,000 since last year to 34,000. He noted the importance of the reactivation of mining, smelting, and chemical sector plants, including the giant Nairit chemical plant, which is now operating at a profit.

Kazakhstan Has No Overseas Accounts

· Kazakh Finance Minister Mazhit ESENBAEV on Monday stressed that the government has no bank accounts in foreign countries, including Switzerland where officials say they have frozen accounts connected with the country. According to an article

in The New York Times, he called the claims that Swiss authorities froze Kazakh accounts, "absolute rubbish." Swiss officials claim that the accounts were frozen at the request of the US, which is investigating bribery links between US oil companies and top Kazakh officials. Reports have said the accounts were controlled by or available to Kazakh President Nursultan NAZARBAYEV, head of the state oil company Nurlan BALGIMBAYEV and Akezhan KAZHEGELDIN, a former prime minister. BALGIMBAYEV has denied any wrongdoing. The Wall Street Journal reported in July that KAZHEGELDIN received a $6 million payment in 1997 and tried unsuccessfully to return it. The Finance Minister said, "In accordance with the current legislation, the government cannot have bank accounts abroad." All foreign transactions are carried out through correspondent accounts held by the National Bank of Kazakhstan. National Bank Chairman Grigorii MARCHENKO has similarly denied any knowledge of the frozen Swiss accounts.

China-Uzbekistan Form First JV

· China and Uzbekistan established their first joint venture, the Uzbek Market Co., Ltd., in Beijing today. The Shanghai-based new joint venture is a result of joint efforts from six Uzbekistan companies, including an exchange center for goods and material, an auto industry corporation and a chemical industry corporation, and Chinese companies. Shenli Group based in central China's Henan Province and the Chinatex Non-Cotton Yarns and Fabrics Import and Export Corporation are the Chinese shareholders of the joint venture. Akrom MUHIDOV, chief of the Uzbek Foreign Economic Coordination Department, said the joint venture will expand trade between China and Uzbekistan, and rejuvenate "the glorious Silk Road" that linked the two countries for centuries. "It is a historical event, and will inject new vigor to the development of bilateral relations," MUHIDOV told Xinhau News. Chinese statistics show that Sino-Uzbek trade volume reached $24.40 million in the first six months of this year. This is a rise of 11.3 percent, over the same period last year.

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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