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, September 29, 2000

Russian Federation

Politics

Chechen Monetary Commander Seized

· Kremlin spokesman on Chechnya Sergei YASTRZHEMBSKY said that Mumadi SAIDAYEV, a close ally of Chechen President Aslan MASKHADOV, had been seized by Russian troops and Federal Security Service operatives outside of the village of Urus-Martan on September 23^rd. One aide said, "The operation was carried out by the military and security services and, especially important, with the active help of the local population. This is a very serious and notable success." He added, "We believe SAIDAYEV controlled the flow of money coming from abroad for MASKHADOV." The Russian media has said SAIDAYEV, a career officer in the Soviet Army, had taken part in planning a rebel attack on the capital Grozny at the end of the first Chechnya war of 1994 to 1996. They also report that as MASKHADOV's chief of staff, SAIDAYEV planned key rebel operations in the current war. Military sources said he had gathered intelligence, engaged in counter-intelligence, and carried out acts of terror. Russian officials say their latest tactics have focused on seizing or killing key Chechen field commanders. SAIDAYEV appeared to be one of the biggest successes in this hunt. The chief of MASKHADOV's administration Apti BATALOV, was seized earlier this year. Remaining outside the reach of the Russian troops are the most wanted rebel commanders Shamil BASAYEV and Khattab, as well as MASKHADOV himself. Federal forces have also faced nightly attacks in Russian-controlled regions. Over the past 24 hours, two Russian servicemen were killed in an attack in the Chechen capital Grozny, and a Russian border guard was wounded in the Itum-Kale region of southern Chechnya, near the Georgian border, the Gudermes official said.

Security Council Focuses On Spending

· Russia's Security Council at a meeting late Wednesday night focused on military spending and set aside the sensitive issue of establishing military priorities. A broader discussion on the construction of the Russian military was put off until November to allow more time to settle differences between military branches. President Vladimir PUTIN, who chaired the meeting, said that the military should spend its funds more efficiently. He said, "We spend colossal sums of money on the military...And we also allow the military budget to be blurred and sidetracked by questions which have no direct link to military readiness of the army or to providing for its needs." The President added, "We have no right to solve military tasks strictly on the basis of people's enthusiasm and heroism. We cannot any longer simply provide for the army's needs without also providing training with high technology and modern equipment…Our army must be modern and flexible and mobile, battle ready." His comments come all too late for the crew of the sunken Kursk submarine, whose lives might have been saved if modern rescue equipment was readily available. The President promised that there would be more money for the military. The Finance Minister said defense and security would be among the areas to benefit from any increased budget revenue from better oil prices and improved tax collection. In 1999, Russia's defense spending totaled $3.6 billion, compared with US defense spending of $278 billion. The Russian defense budget for 2000 is $5.1 billion,

Today's News Highlights

Russia

Central Bank 2001 Guidelines

P&W To Make Engine In Russia

European Republics

Fitch Raises Estonia's Rating

Latvia Submits 2001Budget

South Caucasus & Central Asia

Kalyuzhny On Caspian Sea

Ramco's Income Rises In Azeri

Kyrgyz Pledges ToPay Loans

Politics-Economics-Business

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Friday

September 29, 2000

Intercon's Daily

compared with annual US defense spending of about $290 billion. The Associated Press reported that Russia's forces are dilapidated, with soldiers getting little training and sometimes going unfed. Pilots don't fly enough to maintain their skills, ships and submarines don't have the fuel to sail, and equipment deteriorates or is stolen or sold.

Economy

Ruble = 27.81/$1.00 (NY rate)

Ruble = 27.77/$1.00 (CB rate)

Ruble = 24.37/1 euro (CB rate)

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Central Bank 2001Guidelines

· The Russian Central Bank Tuesday forecasted further economic growth in 2001. However, it stated that reforms are required to sustain growth ahead of a likely global downturn. According to Kommersant Daily, the macro-economic targets for 2001 include a consumer price index (CPI) of 12 percent to 14 percent verses 18 percent to 20 percent in 2000; gross domestic product (GDP) growth of 4 percent to 5 percent down from 5.5 percent to 6 percent in 2000; and growth in money supply of 27 percent to 34 percent. The Central Bank's general economic guidelines include the prediction that economic growth will slow due to an expected downtown in the global economy; trade surplus will shrink; current account surplus will contract; foreign capital inflows will increase, mainly in the form of foreign direct investment; national foreign exchange re

serves will grow steadily; the Central Bank will smooth ruble volatility and the ruble will rise in real terms; and the demand for rubles will grow as well as the money supply. According to the Bank the government needs to implement necessary reforms for natural monopolies, taxes, energy and telecommunications pricing, and customs tariffs. It calls for the decreasing of state debt burden and a balanced budget. The Central Bank should maintain an interest rate policy aimed at encouraging borrowing, while consumers should be encouraged to spend. The ruble should continue to float and the money supply should be made more liquid. The government approved a Central Bank draft of monetary and credit policy last week, and the bank is to present a finished document to the Russian State Duma on October 1^st.

Business

AGCO-JSC Sarex Sign Farm Equipment Agmt.

· AGCO Corp., the third-largest agricultural equipment maker in the world based in Duluth, Georgia, on Tuesday reached an agreement with JSC Sarex for the manufacturing and sales of tractors, combine harvesters and other farm equipment in Saransk City, Russia. Production of combine harvesters, planters, seed drills, balers, and other types of farm machinery are "under evaluation" through selected enterprises in Russia, the Financial Times reported. In addition, the company will help the Russian Federation obtain $500 million in financing through US, European and other agencies. AGCO Executive Chairman Robert RATLIFF said, "This agreement represents AGCO's commitment to maintaining a long-term presence in Russia. AGCO is looking forward to assisting the Russian government in the development of high-quality, proven equipment." In July, AGCO reported earnings of $4.1 million, or 7 cents a share, after nonrecurring items in the second quarter of 2000, compared with $15.5 million, or 26 cents, for the same period last year.

P&W To Make Russian Helicopter Engines

· Pratt & Whitney Canada Corp., a subsidiary of the US engineering company United Technologies Corp., will invest $50 million to develop an engine for Russian helicopters. The company, a maker of aircraft engines, has already invested $25 million in Russia. It is working in the local market through its

When you need to know it as it happens

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Russian subsidiary, Pratt & Whitney Rus. Pratt & Whitney Canada and Salut, a Moscow engine maker, will develop the engines mostly for Russia's Mi-38, a helicopter still being designed, Bloomberg News reported. It plans to invest $10 million a year for the next five years. Pratt & Whitney Canada Vice President Joseph TOCHETTI said, "We're taking a long-term view of the Russian market." The US based Pratt & Whitney also has its own operations in Russia. In addition to making plane and helicopter engines, it makes space propulsion systems and industrial gas turbines for power stations.

Rosneft To Borrow From EBRD

· Rosneft, Russia's state-owned oil producer, plans to secure an $80 million loan from the European Bank of Reconstruction and Development (EBRD) for environment protection programs in the Far East in 2001, Vedomosti reported. Rosneft and its subsidiary, Sakhalinmorneftegaz, between them hold a 40 percent stake in the Sakhalin-1 offshore project in the Sea of Okhotsk, being developed on production-sharing agreement terms that provide tax breaks to investors. The project, in which ExxonMobil Corp., the world's largest publicly traded oil producer, holds a 30 percent stake, faced delays earlier this year when the Russian government refused to authorize the discharge of liquids during drilling, citing environmental concerns. Sakhalin-1 finished drilling an appraisal well at the Chaivo deposit near Sakhalin Island in August. The well tests allowed the project to estimate the Chaivo deposit holds 280 million tons (2.1 billion barrels) of crude, Prime-Tass news agency reported, citing an unnamed source at the Ministry of Nature Resources.

industries blossoming, supported by substantial inflows of foreign direct investment. Fitch said that specific weaknesses relating to the banking system and the external accounts, which constrained the rating when it was first assigned in 1997, had been addressed. Fitch also upgraded Eesti Uhisbank's Long-term rating to BBB+. The agency added however, that over the longer term a number of structural issues must be addressed, including the need to tackle the environmental damage caused by extensive oil shale use, reducing high unemployment and wide regional inequalities, and completing reforms necessary for European Union membership. On the political side, it said the continuing difficulties in normalizing relations with Russia were a disappointment.

Latvia Submits 2001 Budget To Parliament

· Latvian Finance Minister Gundars BERZINS today submitted the country's 2001 draft budget to parliament. He warned deputies against pushing the fiscal deficit beyond the current planned 1.7 percent of gross domestic product (GDP). The government was forced to backtrack on a pledge to limit the fiscal deficit to one percent of GDP next year¾curtailing it from 4.3 percent of GDP in 1999¾amid increased social and agricultural spending. "The most difficult [challenge] will be...lobbies...seeking to raise spending, but it is important not to destroy the current equilibrium as the submitted budget [expenditure] is already what we can afford now," BERZINS said at a press conference. The 2001 draft budget sees total revenues at 1.436 billion lats [$2.335 billion] and expenditures at 1.503 billion lats. The 2001 fiscal deficit stands at 73.3 million lats. The state budget is expected to go to its first reading on October 19^th and reach its second and final review on November 30^th, BERZINS said.

South Caucasus & Central Asia

Disputed Caspian Field To Be Split 50-50

· Russia's Deputy Minister of Foreign Affairs Viktor KALYUZHNY has proposed that Caspian oil and gas deposits should be split in half, regardless of how the status of the Caspian Sea is settled. He said, "These disputed points should be split 50-50 regardless of whether the future borders will cross (the deposits)." Kazakhstan, Turkmenistan,

European Republics

Fitch Upgrades Estonia's Long-Term Rating

· International rating agency Fitch on Thursday upgraded Estonia's Long-term foreign currency ratings to BBB+ from BBB and its short-term rating to F2 from F3. Fitch said in a statement the ratings had been removed from Rating Watch Positive but the Long-term local currency rating remained unchanged at A, adding that the outlook for all three ratings was now stable, Reuters reported. Estonia has emerged from the past three years in better shape than expected, with new, high-technology

When you need to know it as it happens

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September29, 2000

Intercon's Daily

Azerbaijan and Russia, as well as Iran, are engaged in political talks on the status of the Caspian Sea and its division into national sectors since the former Soviet Union's collapse in 1991. The different countries support various options from sharing the water basin and splitting the sea floor to equally dividing the Caspian Sea into fifths. All five countries claim rights to various offshore deposits. LUKoil Holding, Russia's top oil producer, is exploring the Khvalynskaya offshore deposit, which lays between Russia and Kazakhstan. The oil company has already invested $200 million in the project, drilled two wells and discovered at least 300 million tons (2.2 billion barrels) of crude reserves. Kazakhstan has protested LUKoil's exploration in the area, claiming its right to the same area. KALYUZHNY said, "Kazakhstan understands now that it has to work with Russia as it won't be able to explore in the Caspian on its own. Kazakhstan should return $100 million to LUKoil for its historical [exploration] costs" and work together with the Russian company. Kazakhstan and Russia also are discussing the possibility of jointly exploring the Kurmangazy oil field in the Caspian Sea, which lays in both countries' national sectors. The question of Kurmangazy (offshore field at the border between Russia and Kazakhstan in the Caspian Sea) will also be resolved according to this scheme. KALYUZHNY added, "Azerbaijan and Turkmenistan should also agree on Kyapaz [offshore oil field at the border between the two countries]." He also stressed the importance of the Caspian region to Russia. "The region is of great importance for Russia in all aspects. Russia has an interest in participating in the transport [of oil] and exploration of oil deposits in the region…We do not have imperialistic intentions. The Caspian [region] is a peace zone."

Ramco's Income Increases In Azerbaijan

· Ramco Energy, a UK oil exploration company focused on Eastern Europe and the Caspian, said first-half losses narrowed because of increased income from an oilfield in Azerbaijan at a time of higher crude oil prices. The company lost 21,000

pounds ($31,000), or 0.08 pence a share, in the six months to June 30^th, from a restated 414,000 pounds, or 1.61 pence a share, a year earlier. Sales rose 33 percent to 6.8 million pounds. Ramco benefited from the first full six months of income from its interest in the Azeri-Chirag-Gunashli oil field in Azerbaijan. According to a company statement, "The outlook remains positive as we approach rising winter demand." Ramco surprised markets in July, when it agreed to sell its interest in Azeri-Chirag-Gunashli for $150 million to raise cash for other projects, more than Ramco's value at the time. The sale, to Amerada Hess Corp., completes later this year, and Ramco may buy other producing assets with the proceeds, said Steve REMP, the company's chairman and chief executive, Bloomberg News reported. The company has this year been drilling a prospect in Azerbaijan, Muradkhanli, which has the potential to replace output from Azeri-Chirag-Gunashli, Ramco has said. Production testing will likely begin in October, later than expected, because of technical problems that are now resolved, the statement said.

Kyrgyz Pledges To Repay Loans On Time

· Kyrgyz Finance Minister Sultan MEDEROV today said that Kyrgyzstan is making payments on loans from international multilateral lenders on time, but it is seeking restructuring some bilateral debt. "The country is fulfilling all its obligations on these loans," MEDEROV told Reuters on the fringes of the annual meeting of the World Bank and International Monetary Fund (IMF) in Prague. He said the country's debt burden for 2000 amounted to $86.4 million, of which about $15 million constitutes interest payments on IMF and World Bank loans. Kyrgyzstan warned earlier this year that it could be on the brink of defaulting on its foreign debt, which it said stood at $1.05 billion and exceeded its annual gross domestic product. MEDEROV complained that some of the recommendations given by the IMF and World Bank are "impossible" to follow. He said that Kyrgyzstan should be able to adapt the recommendations to the nation's conditions.

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

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