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

Wednesday, September 20, 2000

Russian Federation

Politics

GOP Blasts Clinton Admin.'s Russia Policy

· Twelve Republican leaders in the US Congress released to the public a report today, headed by Christopher COX (Rep.-CA) the Chairman of the Republican House Policy Committee, which claims that President CLINTON's lack of presidential leadership turned the historic opportunity of the collapse of the Soviet Union into a foreign policy disaster. While many may brand this report as self serving given the presidential campaign, the ultimate responsibility for this failure is laid with a troika of subordinate officials which executed, "Russia policy in an elite and uniquely policy making groups without accountability to the normal checks and balances within the executive branch." This so-called policy making troika included Vice President Al GORE, Undersecretary of State Strobe TALBOTT, and Lawrence SUMMERS of the Treasury. The report describes the failure of the CLINTON Administration's policies as one which focused on strengthening the finances of the Russian government and privatizing state monopolies into private monopolies as a strategic error, which failed to build the fundamentals of a free enterprise and legal system. The macro-management of the Russian economy instead of establishing the legal structures, which protect human economic opportunity, ensured that a competitive market economy and a broad tax base for the government doomed their privatization efforts to failure. It added that by using, "lending and aid to plug the gap in the Russian central government's operating budget" the administration, "exposed these funds to theft and fraud." These failures contributed to the economic collapse in 1998. The report says the CLINTON Administration relied too heavily on ties with individual

Russian personalities, instead of establishing better relations within the nation's legislature. The report criticizes the Administration's continued relations with former Russian prime minister Viktor CHERNOMYRDIN and Anatoly CHUBAIS, former finance minister who heads Russia's electricity monopoly, even after they were accused in Russia of corruption. The report also says GORE ignored a Central Intelligence Agency (CIA) report in 1995, containing allegations that CHERNOMYRDIN had accumulated billions of dollars in private assets in his position as prime minister.

According to the 209-page report, the White House botched the, "greatest foreign policy opportunity for the United States since the end of World War II." It states that the US had the opportunity, "to help Russia rapidly become a prosperous, free-enterprise economy allied with the United States. What mainly has occurred is that we have seen a great deal of US taxpayer dollars poured into the Russian central government and it's been all burned up." White House press secretary Joe LOCKHART said in response to the GOP charges Tuesday, "We have worked very diligently over the last eight years to engage the Russians to try to promote democracy and to make the world a safer place."

The report claims that the administration has taken few steps to build the former communist state into a free-market democracy. "The US-Russian relationship is in tatters, characterized by deep

Today's News Highlights

Russia

Rus To Sell Lasers To Iran

Yevrotek Wins Onaco Tender

European Republics

Freeh Visits Latvia

Ukraine Curbs Urktelekom Sale

South Caucasus & Central Asia

Rus. Meddling With S. Ossetia

GeorgianAnti-corruption Program

S&P Raises Kazkommertsbank

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and growing hostility." The fact that Russia is now ruled by a relatively unknown former KGB Colonel illustrates Russia's lack of progress in moving form its Communist past towards the western world.

Russia On Laser System Sale To Iran

· The White House Tuesday said that Russia had suspended a contract to sell Iran sophisticated laser technology that Washington believes can be used to produce fuel for nuclear weapons. The Russian scientific institute claims it will proceed with the sale, The New York Times reported. In an e-mail response to questions from The New York Times, Boris Yatsenko, director of the Science and Technology Center of Microtechnology, a unit of the government's D. V. Efremov Institute of St. Petersburg, stated his institute plans to sell the equipment for legitimate purposes. "As we believe, Iran will use lasers and some electrophysical equipment deliverable by us for the scientific, industrial and medical purposes," he said. Since the equipment was purely for nonmilitary purposes, "we do not need the government's approval," he added.

US Administration officials have been trying for three months to persuade Russia to cancel the sale. They stated that Russia had agreed to suspend, but not cancel, the sale at a meeting of experts in New York earlier this month. According to Reuters, Clinton pressed Putin on the matter both in New York, where the two met on the sidelines of the United Nations Millennium Summit two weeks ago, and in July at the annual Group of Eight (G8) Summit in Okinawa, Japan.

Economy

Ruble = 27.77/$1.00 (NY rate)

Ruble = 27.88/$1.00 (CB rate)

Ruble = 23.64/1 euro (CB rate)

Industrial Output Rises 10 Percent

· Russia's industrial output rose in the first eight months of this year, due to lingering effects from the ruble devaluation in 1998. The State Statistics Committee said that industrial production grew 10 percent, led by machine-tool makers, linoleum producers and bus manufacturers. Analysts believe that the sustained growth illustrates that there are signs of real investment in the economy, The Wall Street Journal Europe reported. Roland NASH, chief

economist at Renaissance Capital, said, "It looks as though companies are doing more than just taking advantage of the fall in the ruble. There are signs of real investment, and it looks like some companies are trying to become seriously competitive." The government expects gross domestic product (GDP) to grow by 5.5 percent for the whole of 2000, after rising 7.3 percent in the first half. The statistics committee said that corporate profits jumped 110 percent in the first seven months of the year, from the corresponding 1999 period. The use of barter, which settled most transactions before Russia's financial crisis, continued to fall, to 26 percent of all transactions in June, from 29 percent in April, 1999. In August, the annual inflation rate was 18.7 percent, down from 18.9 percent in July. The 12-month broad money supply rose at an annualized rate of 53.1 percent in July, up from 48.7 percent in June.

Business

Yevrotek (TNK) Wins Onaco Tender

· Yevrotek, a company owned by Tyumen Oil Company (TNK) was announced by the Federal Property Fund as the winner of the tender for an 85 percent stake in Onaco. Yevrotek's bid was $1.08 billion, more than twice the starting price of $425 million. Analysts had only expected to raise about $600 million from the sale. Other bidders for the Onaco stake included Yukos and Sibneft (whose owners respectively Mikhail KHODORKOVSKY and Roman ABRAMOVICH have close Kremlin ties), Stroitrangaz, TNK-Invest, and Sibir Energy. Federal Property Fund Head Vladimir MALIN noted concerns regarding all the bidders. He said, "All the companies' balances are small and the funds are borrowed. The Federal Security Service (FSB) will look into where the money came from." He added, "There were four bids, three of which were above $1 billion, with the fourth close to the starting price."

The Onaco sale is the first major privatization at auction since an economic crisis hit Russia in 1998, and the first under President Vladimir PUTIN. The President has called for fair privatization sales, which were criticized in the mid-1990s for below value prices and insider deals. The success of this tender paves the way for the privatization of Rosneft and Slavneft. Onaco, the country's 14^th largest oil producer, produced around eight million tons (around

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160,000 barrels per day) of oil last year. TNK has also bought this year a controlling stake in Ukraine's Lysychansk Refinery for about $9 million. Last year's purchases include Kondpetroleum and shares in affiliated companies of Russia-Belarus oil firm Slavneft. TNK made three bond issues and attracted several bank loans in the same period.

nance Minister Igor MITIUKOV will keep his job, despite calls by Prime Minister Viktor YUSHCHENKO to replace him. KUCHMA said, "We did not find a candidate to replace [MITIUKOV] at the post of the finance minister during this transition period," adding that the replacement of MITIUKOV would, "leave the budgetary process to the mercy of fate." MITIUKOV is expected to negotiate with the parliament for approval of the 2001 budget. Finance Minister is also expected to lead the country's talks with the Paris Club of creditors over rescheduling Ukraine's $500 million in debt due this and next year. The Ukrainian President did not comment on why YUSHCHENKO, the former chairman of the Central Bank, requested MITIUKOV's dismissal. MITIUKOV, who has been the finance minister since the new Cabinet was formed early this year, held the same post in the previous Cabinet. KUCHMA said the decision to keep MITIUKOV was approved at a five-hour meeting held by the president, parliament speaker and prime minister in Crimea last month. Two of Ukraine's key ministers, including the economics minister and minister of fuel and power industry, resigned from the eight-month-old Cabinet.

Ukraine Changes Ukrtelekom Privatization

· Head of the Ukraine's State Property Fund Olexander BONDAR on Monday announced that Ukraine has reduced its expectations from a proposed sale of Ukrtelekom stakes. He said that Ukraine hopes to raise $500 million from selling an around 42 percent stake in national telecoms monopoly Ukrtelekom next year, instead of the previous expectation of $548 million by selling a 25 percent stake in the company. Stanislav DOVHY, Ukrtelekom's chairman of the board said around eight percent of shares would be sold to employees and management of the company. The state would keep a 50 percent plus one share stake. The government hopes to use funds raised from Ukrtelekom's sale to help service its crushing foreign debt obligations. The company tops the list of major state assets, which foreign lenders want to be privatized as soon as possible. The sale is also critical to Ukrtelekom's financial situation. DOVHY said, "We can characterize the current situation in the company as a crisis. The company's solvency had deteriorated considerably, we suffer from insufficient liquidity." Ukrtelekom had been hit hard by

European Republics

FBI Director Freeh In Latvia

· US Director of the Federal Bureau of Investigation (FBI) Louis FREEH met with Latvian Justice Minister Ingrida LABUCKA on Saturday. He assured LABUCKA that the US and the FBI could assist in training judges, prosecutors and policemen as well as personnel of the independent bureau for fighting corruption, which is being set up in Latvia. Fighting against corruption, organized crime and drug trafficking is the field of cooperation where the experience of the US could be very useful, the sides noted. According to the Latvian Justice Minister, courts as well as the society have not realized all the degree of danger from drugs, and because of this, they impose light punishment. The FBI chief also discussed cooperation with Latvian police senior officials. During the visit, FREEH will also have meetings with the Latvian President and the prosecutor-general. FREEH is now visiting Lithuania.

Ukraine Submits Balanced Budget

· The Ukrainian government submitted a balanced 2001 draft budget to the parliament for approval, according to Oleksandr TURCHYNOV, head of the parliamentary committee on budget affairs. The government plans to raise 41.389 billion gryvnia ($7.6 billion) in budget revenue for next year. The budget draft is based on current tax laws, while the expected approval of the new tax code in October could have, "another...impact on budget revenue," TURCHYNOV said. Ukrainian President Leonid KUCHMA said earlier this year he would not sign next year's budget into effect, if it didn't take into account a tax cut that is designed to boost business activity in the country, helping the economy to achieve sustained growth.

Ukraine's Fin. Min. To Remain

· Ukrainian President Leonid KUCHMA said Fi

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the gryvnia's depreciation since tariffs had only been raised once in the last three years, while Ukrtelekom had to pay for equipment and repay loans in hard currency. Customers owed billions of gryvnias and thieves stole equipment for scrap metal. "Only recently 48 rural telephone stations were robbed...since the start of the year we have lost 725 kilometers of cables," he said. A foreign investor would help modernize the sector, which is falling ever farther behind the competition, he added.

South Caucasus & Central Asia

Rus. Duma To Hear S. Ossetia Representative

· Russian State Duma deputy Viktor ALKSNIS today during a speech in Tskhinvali to celebrate South Ossetia's 10^th anniversary of independence declared that he will achieve ratification of the bill by the Duma that will allow this former autonomous republic of Georgia to address Russian Government with the plea to accept them into the Russian Federation. He said that this is his "primary goal" for the Duma is to discuss the law on accession of new subjects to Russia. As the Minister of Emergency Situation and Defense of the unrecognized republic of South Ossetia Dmitry SANAKOEV said, "Russia is the main guarantee of stability in the region, so South Ossetia's tight contacts with Russia are a strategic target".

Vice-speaker of Georgian parliament, chairman of the temporary parliamentary commission for Tskhinvali region problems Eldar SHENGELAIA responded to ALKSNIS' statements, describing them as a clear provocation. SHENGELAIA told Prime News Agency that such statements harm the process of peaceful settlement of Georgian-Ossetian conflict. He added that deputies like ALKSNIS travel in the former Soviet Republics with one single reason - to cause instability.

Anti-Corruption Program For Shevardnadze

· The anti-corruption special group today will hand over to Georgian President Eduard

SHEVARDNADZE a document with the basic terms of the Georgian anti-corruption program. The program was drafted by a special group of experts headed by the head of the Supreme Court of Georgia Vladimir CHANTURIA. A member of the group, head of the non-government organization Caucasus Institution of Peace, Democracy and Development George NODIA, told Prime News Agency that the document includes not only the general recommendations, but also the more efficient measures of activating the fight against corruption in the government bodies. NODIA believes that the recommendations of the group will be realized, since the government has a strong political will to put an end to this problem. The full text of the anti-corruption program will be presented to the President at the end of November.

S&P Raise Kazkommertsbank's Rating

· Standard & Poor's (S&P) Tuesday raised its long-term counter-party credit rating on Kazakhstan's Kazkommertsbank from B- to B, after the corporate bank changed its financing policy for equity investments toward a sister company, Central Asian Industrial Investments. S&P also raised its rating on the senior unsecured debt of a related bank Kazkommerts International BV from B- to B, five below investment grade. Kazkommertsbank's outlook remains stable. The ratings agency said Kazkommertsbank's strong commercial position and good earnings profile, when compared with its domestic peers, put it in position to prosper from economic growth. "The potential for higher credit ratings remains limited, however, by continued dependence on wholesale funding, high concentrations in the lending book and funding base, and group investments in industrial concerns," S&P said. Kazkommertsbank, along with Halyk Savings Bank, is one of the two main banks in Kazakhstan. Kazkommertsbank has assets of KT87.5 billion ($634 million) as of June 30^th, Bloomberg News reported.

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

Oleg D. Kalugin, Content Advisor Jennifer M. Rhodes, Principal Editor

Tatyana Kortova, Contributing 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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