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Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Tuesday, August 8, 2000

deeply shocks all of Russia. I share the pain of all those whose nearest and dearest died as a result of this terrifying tragedy. I grieve together with them." PUTIN had decided to set up a center to investigate the blast after meeting Interior Minister Vladimir RUSHAILO, Defense Minister Igor SERGEYEV, the first deputy director of the Federal Security Service (FSB), and head of the Emergencies Ministry, Sergei SHOIGU. Police have stepped up security across Russia, especially in the country's North Caucasus region, fearful of renewed attacks by Chechen rebels.

New Tax Code Signed Into Law

· Russian President Vladimir PUTIN announced at a joint meeting of the Cabinet and presidential administration that he signed the new Tax Code into law on Sunday. PUTIN said that signing the new tax code was, "the most important event in the country's life." He explained that the guidelines of the new tax code are to lower taxes rate, reduce tax categories and expand the foundation of taxation for increasing tax collection and enhancing business activities. The new tax code will introduce a flat income tax of 13 percent, value-added tax, consumption tax, reduce payroll and pension fund taxes, and other measures designed to boost the troubled Russian economy. It will introduce more western-style practices, including counting expenses, travel, and advertising as tax deductible. All social charges will be consolidated into one social security tax. Other parts of the package include eliminating loopholes

Russian Federation


Bomb Explodes In Pushkin Square

· A bomb exploded in an underground walkway in Pushkin Square during the start of the evening rush hour, killing at least seven and injuring 51 people, according to the Russian Emergency Ministry. This is one of the busiest areas in Moscow, adjoining two major streets and three subway stations. The passage is the only way to cross central Moscow's busy Tverskaya Street at rush hour; it also serves as an entrance to the Metro. Later, a second bomb was found and defused. There has been no claim of responsibility. Police are treating the blast as a terrorist attack, with immediate suspicion centered on Chechen rebel forces. The explosion came two days after the August 6, 1996, anniversary of the rebels' capture of Grozny. Chechen separatists had threatened attacks to mark the anniversary. On Sunday, Chechen President Aslan MASKHADOV said he would take revenge against Russia. However, following the explosion, MASKHADOV denied any involvement. Moscow Mayor Yuri LUZHKOV said the Chechens could be to blame. "The nature of the crime is obvious — the explosion hit in a place packed with people at rush hour," LUZHKOV told reporters at the scene. Police were placed on heightened alert and ordered to check the many underground passageways around Moscow. Authorities and security officials have blocked of the area and started an investigation. Traffic above ground was stopped and entrances to the walkway were closed.

Russian President Vladimir PUTIN has already sent his condolences to the victims of a blast. He said, "With all my heart, I console the victims and the families of those who were victims of the explosion in the center of the capital. This explosion

Today's News Highlights


Rus-Italy Agree On Soviet Debt

Transneft Oil Export Fee Raised

European Republics

WB To Lend Ukraine $1.9B

Industrial Production Rises

South Caucasus & Central Asia

Russia Bombs Near Georgia

UzbekFights Terrorists In Mts.

Nazarbayev Sacks Ministers

Kyrgyz Court Frees Kulov




August 8, 2000

Intercon's Daily

such as income tax exemptions for soldiers and judges. The new 13 percent flat tax, which would take effect next year, replaces an existing progressive tax rate ranging from 12 percent to 30 percent. The consumption tax for alcohol and vodka will rise to five percent with the rate for beer up to 10 percent, while the index of tobacco probably tops to 50 percent. The government believes that the lower rates will cut tax evasion and encourage Russians to invest domestically, rather than sending billions of dollars to foreign bank accounts. Tax evasion is a major problem in Russia, with most businesses and private citizens avoiding tax altogether or underreporting their incomes. Foreign investors have regarded Russia's complicated tax regime as one of the main impediments from doing business in Russia. The Finance Ministry is expected to submit its 2001 budget draft to the Cabinet in accordance with the new tax code.


Ruble = 27.73/$1.00 (NY rate)

Ruble = 27.71/$1.00 (CB rate)

Ruble = 25/1 euro (CB rate)

Italy Agrees To Reschedule Soviet-Era Debt

· Russia said it reached agreement for the rescheduling of Soviet-era debt for 1999 and 2000 with Italy, according to Russian Deputy Finance Minister Sergei KOLOTUKHIN. Italy is Russia's largest creditor after Germany, and accounts for about $5.5 billion of Russia's debt to the Paris Club of 18 creditor governments. Russia must reach bilateral agreements with all members of the Paris Club by the middle of September, KOLOTUKHIN said. Germany has vehemently ruled out any outright debt forgiveness. Russia owes Paris Club creditor governments about $42 billion in Soviet-era debt. In August 1999, the Paris Club agreed to give Russia a two-year break from debt payments. This is contingent on Russia signing agreements with each member government to reschedule payments.

Transneft Oil Export Fee Raised

· The Russian government raised by 25.2 percent transport fees charged by Transneft, Russia's state-controlled oil transportation monopoly, for exporting oil. Transneft shipped 299.4 million tons of oil of the total 304.8 million tons produced by Russia's companies in 1999. The increase will

become effective on August 10th, with revenues going to cover construction projects, including the Baltic Oil Pipeline System, which will transport Siberian crude to the Baltic Sea. The project needs $460 million in investments and will initially transport 12 million tons (88 million barrels) of oil per year starting in early 2002. The government may also allocate $20 million for construction in 2000. Commission spokesman Vladimir MILOV noted, "Transport charges make up only a maximum 5 percent share in the price of oil."

The government approved Transneft as the sole owner of the future pipeline's assets. Oil companies hope to reverse this decision and secure stakes in the venture. Yuri IVANOV, director of oil transport department at Yukos Oil Co. said, "We will fight for satisfaction. We were promised shares in," the pipeline venture.

Putin Backs Railway Break-up Plan

· Russian President Vladimir PUTIN has lent his support to a plan proposed by Railway Minister Nikolai AKSYONENKO to break up the nation's railways by spinning off unprofitable units and increasing efficiency. The ministry plans to separate subsidiaries such as service and construction units from transport units and social services, including hospitals and schools. The ministry's advisory board will discuss the plan on Wednesday. "We need to transform Russia's railroads into a government-owned joint stock company. At the same time we have to ban the company from selling shares" to outside investors, AKSYONENKO said. The ministry's plan is part of Russia's economic development program through 2010 drafted by Economics Minister German GREF and approved by the government. Russia has 40,000 kilometers of rail lines. The Railway Ministry this month increased by an average 18.5 percent domestic transport fees. Passenger fares will increase by 25 percent starting September 10th. Railway revenue rose 60 percent in the first half of this year to 116 billion rubles ($4.2 billion) from the same period last year, the Prim-Tass news agency reported.


Lockheed Issues $25M Loan To Energomash

· Lockheed Martin, a major aerospace corporation, has issued a long-term $25 million loan to its

When you need to know it as it happens




August 8, 2000

Intercon's Daily

Russia's partner, Energomash company. Energomash's general director Boris KATORGIN said in an interview with Space News weekly that the US State Department had permitted the loan deal, and the Russian Central Bank is finalizing a schedule on which the loan will come to the Russian company. KATORGIN said the loan would go into modernization of Energomash's facilities for production of RD-180 engines which are installed on the US' Atlas rockets designed by Lockheed Martin. The first RD-180-propelled booster rocket Atlas-3 was successfully launched on May 25th. The joint venture RD-Amros, which as set up by Energomash and Pratt & Whitney, also plans to manufacture slightly modified RD-180 engines to be used on rockets for placing payloads in orbit on orders of the US government.

US Provides Alrosa Loan For Equipment

· The US Export-Import Bank agreed to provide $7.83 million of loan guarantees for Alrosa, a Russian company that produces almost all of the nation's rough diamonds, to acquire mining equipment from Caterpillar Inc., the world's largest maker of construction and earth-moving machinery. Chase Manhattan Bank will provide the loan. Alrosa plans to use the machinery at its diamond mines in the Nyurba region in Siberia. De Beers, which controls two-thirds of the world's diamond trade, said it may offer new loans to Alrosa, as it pushes to extend a sales pact with the producer of one-quarter of the world's diamonds beyond the agreement's expiration next year.

Meanwhile, Alrosa sold 500 million rubles ($18 million) of six-month bonds, yielding 26 percent. Previously in 1999, Alrosa sold 500 million rubles of six-month bonds, yielding 39.5 percent. The company sold another 500 million rubles of bonds, yielding 27.5 percent in June 2000. In 2001, the company may sell as much as 1.5 billion of one- or two-year bonds and create a liquid market for its bonds.

Finance Ministry and Central Bank are continuing talks on other terms for the 10-year restructuring. The final agreement is expected next month, MITIUKOV said. "We have signed a basic agreement. The most important [thing now] is to agree on the instrument [of the rescheduling]," MITIUKOV said. The rescheduling of the government debt to the Central Bank is one of key conditions for resumption of lending from the International Monetary Fund (IMF) under a $2.6 billion, three-year loan.

A governmental delegation, led by Deputy Premier Yuri YEKHANUROV, has returned from Washington, after holding meetings with the IMF. The international lending agency has not promised to resume lending. Ukrainian government officials maintain that the country can do without international financial assistance this year, but independent observers assert that Kiev will need foreign funds to purchase fuel and energy resources to avoid shortages during the winter, RFE\RL Newsline reported.

WB Lending To Ukraine Could Reach $1.9B

· The World Bank could release up to $1.9 billion in loans to Ukraine over the next three years, according to Dusan VUJOVIC, head of the World Bank's team visiting the country. The Bank will release the loans, if Ukraine qualifies for resumption of lending from the International Monetary Fund (IMF), continues reforms, and fulfills specific loan conditions. VUJOVIC said, "The whole World Bank program is estimated at $1.9 billion in the next three years, if Ukraine keeps in line with the moderately optimistic scenario of its development." The Bank is currently considering a new three-year lending strategy to Ukraine and expects to approve a key $750 million loan before the end of the year. World Bank President James WOLFENSOHN is expected to visit Ukraine in early October for more talks over the future loans. This visit was arranged after he met with a Ukrainian delegation in Washington last week. The delegation also held talks with the IMF. It is still unclear when the Fund will renew lending, because Kiev has not fulfilled all of the conditions.

Ukrainian Industrial Production Rises

· Ukraine's State Statistics Committee released a report showing that Ukraine's industrial production rose 4.2 percent in July from June and was up 16.1 percent from July, 1999. In the first seven months, industrial production rose 11.7 percent

European Republics

Ukraine Reschedules Debt To CB

· The Ukrainian government reached agreement on rescheduling 9 billion gryvnia ($1.65 billion) that the Finance Ministry owes the Central Bank, according to Finance Minister Igor MITIUKOV. The

When you need to know it as it happens




August 8, 2000

Intercon's Daily

from the same period in 1999. Production of building materials rose the most in July from June, increasing 14 percent, while electricity production rose 13.5 percent, and the papermaking and wood-processing industry reported a 9 percent increase. Production of chemicals declined the most in July from the previous month, dropping 2.2 percent, while output in the fuel- making industry decreased 1.9 percent and output in the food-making industry fell 0.1 percent. The government raised its industrial output forecast to 6.5 percent from between 4.5 percent to 5 percent growth initially expected. Industrial production increased 4.3 percent in 1999 from 1998, Bloomberg News reported.

South Caucasus & Central Asia

Russia Bombs Chechens Near Georgia

· Russia fighter jets, with the supposed purpose of destroying Chechen rebels, launched bombs along the Russian-Georgian border. Russian warplanes hoped to attack suspected rebel positions and to destroy mountain paths used by insurgents. Russian authorities have repeatedly claimed that rebels are sneaking into Georgia for rest, reinforcements, and new weapons and artillery. Georgian authorities and the OSCE mission of observers have strongly denied these accusations.

Uzbek-Tajikistan Fight Mountain Terrorists

· Uzbek law enforcement agencies reported that an estimated 70 to 100 gunmen crossed the Uzbek-Tajik border through a high mountain pass and clashed with Uzbek troops in the Surkhandaryinskaya region on Monday. Terrorists exchanged fire with Uzbek troops while trying to seize several villages. Uzbek authorities believe that the terrorists had been trained in Afghanistan and armed with sniper rifles, night-vision devices and grenade launchers. Uzbek and Tajik law enforcement agencies have blocked the terrorists and are taking measures to eliminate them. Border guards, interior troops, and Defense Ministry units are working to prevent the gunmen from further

entering Uzbek territory. The gang is believed to be part of a Moslem force, which opposes Uzbek President Islam KARIMOV. In 1999, gunmen invaded Kyrgyzstan with the aim of overthrowing the Uzbek government. Instead, they were forced back after releasing several hostages. In February, 1999, KARIMOV escaped a series of bomb explosions in Tashkent, which he blamed on Moslem radicals.

Kazakhstan President Sacks Ministers

· Kazakh President Nursultan NAZARBAYEV has sacked Transport and Communications Minister Serik BURKITBAYEV and Labor Minister Nikolai RADOSTOVETS, according to decrees published in the official press today. He named Karim MASIMOV, head of the state Halyk savings bank, as the new Transport Minister, while Alikhan BAIMENOV, of the presidential administration, was appointed the new Labor Minister. No reason was given for the reshuffle.

Court Frees Kyrgyz Opposition Leader

· A Kyrgyz military court Monday acquitted and released Felix Kulov, a top opposition leader, accused of fraud, embezzlement, and abuse of office. This decision ended a secretive trial that human rights groups called politically motivated. After his release, Kulov reiterated his stance that the case against him was trumped up. His arrest in March sparked demonstrations and protests. The case had drawn Western criticism. The US State Department as well as several human rights groups had demanded Kulov be released.

Kulov leads one of the country's largest party Ar Namys, or Dignity. He had hoped to use this position as a springboard for a presidential run. During the parliamentary election, KULOV lost his bid for a parliamentary seat last year in a run-off, accusing the government of rigging the election. Kulov is considered a top potential challenger to President Askar Akayev in presidential elections scheduled for October 29th. Russia's Interfax news agency reports that KuloV will take a week to decide whether to stand against Akayev in October.

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