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 8, 2000

Russian Federation

Politics

Audit Chamber Declares UES CEO Illegal

· Russia's parliamentary Audit Chamber on Wednesday said the chief executive officer of Unified Energy Systems (UES), Anatoly CHUBAIS, was illegally appointed to run the nation's state-controlled power monopoly, Vedomosti reported. The auditors said the UES chief executive officer must be appointed directly by the government, as was the case before CHUBAIS was elected to the post by the company board in June, 1998. They also said Russian President Vladimir PUTIN's approval last year of CHUBAIS as chief executive officer wasn't the same as a government appointment, as is required by law. The auditors also have challenged last year's change to the UES charter that a vote by 75 percent of shareholders is needed to approve or dismiss the chief executive. The chamber said this should be a government prerogative, by law. PUTIN has the final say in legal battles over UES. The chamber, which investigates management of state property and government spending at the request of legislators, has no authority on its own, though it can recommend to prosecutors and the government to initiate charges or further investigations.

PM On New Russian-Slovak Pipeline

· Russian Prime Minister Mikhail KASYANOV and Slovak Economy Minister Lubomir HARACH on Wednesday discussed building a new gas pipeline by-passing Ukraine. According to a government spokesman, building the new pipeline across Slovakia will enable transportation of Russian gas from Yamal to Europe, by-passing the territory of Ukraine, which is reportedly stealing gas it pumps westward. Slovakia showed special interest in the idea of building the pipeline. Slovakia has announced

already it attaches great importance to the project. Assessing results of a session of the Russian-Slovak intergovernmental commission on scientific, technical, economic and cultural cooperation, Mikhail KASYANOV and HARACH praised agreements on deliveries of oil products from Russia to Slovakia, on students' exchanges, and on cooperation among small and medium enterprises signed during the session. The commission decided that Russian business people would take part in privatization processes in Slovakia.

Economy

Banking Reform On The Rise This Fall

· Russian Prime Minister Mikhail KASYANOV said Russia will boost reforms in the banking sector this fall. He explained, "The reform in the banking sector will be carried out at a faster rate from this autumn taking into account the existing laws. I have already discussed this with the president." The Prime Minister expressed his concern over the situation in the national banking sector, noting that "first of all, there is a need to create competition" in the market of banking services. He said the Russian government should "specify positions for the sake of mutual understanding" with the International Monetary Fund (IMF). "Russia at present has no problems of principle with the IMF," he noted adding that the Fund had no questions to Russia, when it formulated its monetary, tax and budget policies back in January and February.

Today's News Highlights

Russia

Norisk To Sell Palladium

BP Experiences Trouble Again

European Republics

Lith. Buys Siemens Equipment

South Caucasus & Central Asia

GUUAM To Build Closer Ties

Soros Supports Anti-Corruption

Railway Transport Chevron Oil

Kazakh Borders Undefeined

Investment In Kazakh Metal Falls

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September 8, 2000

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KASYANOV made it clear that Russia does not receive IMF credits today because of high oil prices in the world market.

Norilsk Nickel To Sell Palladium To Japan

· Norilsk Nickel, the world's biggest palladium producer, signed contracts to sell palladium to Japanese buyers through to the end of the year, according to Norilsk's First Deputy General Director Dmitry ZELENIN. Norilsk will this month start delivering palladium under the contracts. Norilsk exports PGMs through the country's sole precious metals exporting agency, Almazjuvelirexport (Almaz), which is also responsible for signing contracts with customers. Almaz started negotiating contracts with Japanese consumers in July. Mitsui & Co. Ltd, which previously bought the metal from Norilsk under yearlong contracts, refused to sign a contract this year because of high prices. Palladium prices more than doubled over the past 12 months, reaching a record on August 2^nd at $847.50 an ounce, as Russia restricted supplies to keep prices high. Russia supplies about two-thirds of the world's palladium, used by carmakers for pollution control devices, as well as by jewelers, dentists and producers of electronic equipment. Japan accounted for about a quarter of global demand last year.

Ruble = 27.84/$1.00 (NY rate)

Ruble = 27.87/$1.00 (CB rate)

Ruble = 24.08/1 euro (CB rate)

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Business

BP Amoco Experiences Trouble Again

· BP Amoco's $484 million investment in Sidanco, a Russian oil producer, is under threat after Alliance Group, a company led by Chechen oil trader Mursa Bazhaev, assumed control of Sidanco's third-largest oil unit Varyeganneftegaz, Bloomberg News reported on September 4^th. In a confidential letter sent to Russian President Vladimir Putin, Sidanco President Robert Sheppard said Sidanco can't regain control of Varyeganneftegaz even though Sidanco paid off the last debts of the company in early July. "Alliance Group is trying by all means to get Varyeganneftegaz bankrupt and put it under their control, violating the law and infringing the legal rights of the state of Sidanco shareholders," the letter read. Sheppard appealed to Putin to "please give us your support in restoration of legality and justice in the situation." Losing its third-largest oil producer Varyeganneftegaz wouldn't be fatal to Sidanco, but would set another bad precedent against sound property rights in Russia, western investors say. BP Amoco spokesman Howard Chase said the company was "disappointed" in recent Russian court rulings. "We are disappointed that the court did not approve the company's coming out of bankruptcy even after its debts have been paid," he said. "Sidanco is continuing to try by all legal means to get the company back."

Andrei Rumiantsev, an adviser to Alliance Group, denied that the company had broken any laws while trying to get control over Varyeganneftegaz. While the production company has paid all its debts, Sidanco has invested so little in recent years that regional authorities are threatening to withdraw some of its operating licenses. "We are ready to invest, we have plans," Rumiantsev said. Alliance repeatedly offered to buy Varyeganneftegaz from Sidanco, but all offers had been rebuffed, he added.

Russky Alyuminiy To Build Power Station

· Russky Alyuminiy, a company trying to take over 70 percent of Russia's aluminum assets, is in talks with a Siberian power producer to jointly build a $1.5 billion power station, Kommersant Daily reported. The company is negotiating with Irkutskenergo to restart construction of the Boguchansk hydroelectric plant in Siberia, stalled in 1992 because of lack

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of financial support. Russky Alyuminiy proposed setting aside $500 million worth of its payments to Irkutskenergo to pay for construction. Unified Energy Systems (UES) Russia's power grid, currently gets 15 percent of Russky Alyuminiy payments to Irkutskenergo as a commission fee. Irkutskenergo said the plan to finish building the power plant needs UES approval. Russky Alyuminiyum is being created through the consolidation of the aluminum smelters owned by Sibirsky Alyuminiy, Russia's third aluminum producer, and aluminum companies owned by shareholders of Sibneft, Russia's sixth oil producer. The merger also links the assets of Boris BEREZOVSKY and Roman AMBRAMOVICH.

Ukraine, Azerbaijan and Moldova), alongside the UN Millennium Summit, agreed on Wednesday to improve transport links and create a free trade zone, which has eluded the larger Commonwealth of Independent States since its inception. They also pledged to work towards restoring the centuries-old "silk route" trade link enabling the free movement of goods, people and capital between Europe, the Caucasus region and Asia, Reuters reported. Ukrainian President Leonid KUCHMA explained, "Things have truly changed. We have grown and it is now time to form something concrete. The entire world, and Europe in particular, is moving towards integration. We need to create a real free trade zone. What has emerged from the CIS is no more than talk."

Leaders approved a memorandum for the countries' presidents to hold annual meetings and for their foreign ministers to meet twice yearly. Georgian President Eduard SHEVARDNADZE said, "It was very important to set down the principle of regular meetings and establish transport as a priority. Our main task is to set up a corridor to Asia."

Soros To Support Anti-Corruption Programs

· Famous US businessman and philanthropist George SOROS said that he is ready to participate in financing new anti-corruption programs in Georgia. According to the press secretary of Georgian President, Kakha IMNADZE, SOROS made this announcement during the meeting with Georgian president Eduard SHEVARDNADZE in New York Tuesday. According to IMNADZE, SOROS supported the aspiration of Georgia to combat the corruption. The famous businessman said that he will continue supporting other programs that are already started in Georgia.

Railway Transports Chevron Oil

· In August, Georgia's Railroad transported 304,200 tons of oil, extracted by American company Chevron in Kazakhstan, to Batumi, Prime News Agency reported, citing Georgian Railroad Ltd. From January through August, the Georgian Railroad has transported 2.2 million tons of Chevron oil. Transportation of Chevron oil by Georgian Railroad started in 1997. At that time, tariffs for the conveyance of a single ton was $7.80. Today it is equal to $5.

European Republics

Lietuvos Telekomas Buys Siemens Equipment

· Lietuvos Telekomas, Lithuania's dominant telecommunications company, said it signed a 13 million litas ($3.25 million) agreement with Siemens to install new digital telephone exchange equipment. Tapio PAARMA, director general of Lietuvos Telekomas said, "The new equipment will replace the first digital exchanges, operating in Vilnius since 1988. The new exchanges, to serve 44,000 subscribers, will be installed by the end of this year." The Siemens equipment will allow Lietuvos Telekomas to use digital subscriber line, or DSL, technology to increase data transmission speeds over regular copper phone lines. The investment is part of $230 million spent mostly on the upgrade of phone networks over the past two years. PAARMA said that by the end of this year the Lithuanian capital's telephone network will be 90 percent digital and it will be fully digital by mid-2001. Lietuvos Telekomas is 60 percent-owned by a joint venture of Finland's Sonera Oyj and Sweden's Telia. The Lithuanian government, which sold 25 percent of the company's shares in a June initial share sale, retains a 10 percent stake. The European Bank for Reconstruction and Development (EBRD) owns 7.7 percent and the Lietuvos Telekomas Group has a 4.7 percent stake.

South Caucasus & Central Asia

GUUAM Pledges To Build Closer Ties

· The leaders of GUUAM (Georgia, Uzbekistan,

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Azeri Prepares Management Contracts

· Azerbaijan said it is offering 25-year trust management contracts for aluminum producer Azeralyuminiy and the capital's power grid, Bakelektroset, in an effort to speed up sales of state assets. The country said it will take bids from potential managers for Azeralyuminiy, which comprises two alumina plants and a base metals refinery until October 6^th. Bids for the power grid are open until November 24^th. Mayil RAGIMOV, head of the economic policy department in Azeri President Geidar ALIYEV's administration said, "Giving state assets in trust management to private companies is a step towards the privatization, because the managing company may buy the asset in the future." Last month, ALIYEV signed a law that sets the general framework for selling the largest state companies for cash rather than for earlier-distributed vouchers. Azerbaijan hopes to lure foreign investors into industries beyond oil and gas. To win the right to manage Azeralyuminiy, companies will have to prepare a plan to overhaul the producer to triple its output to 150,000 metric tons of aluminum a year, which would include at least a $10 million investment during the first year and repayment of about $1.6 million in wage arrears. The State Property Ministry's legal department said that the trust management tenders are the first stage of the government's plan, which also includes investment tenders, auctions, direct sales and sales through bankruptcy procedures at later stages.

Kazakhstan's Borders Remain Undefined

· Kazakhstan does not expect to reach any border agreement with its neighbors until at least 2007. Beigali TURARBEKOV, head of the commission for marking out the borders today said, "Naturally I can only speak approximately about the timeframe. But the length of our common borders with neighboring states is over 14,000 kilometers (8,750 miles). I can tell you that with China alone we've been having talks for nearly 10 years, and the Chinese border is around 1,700 kilometers long." Kyrgyzstan also has a 1,050 kilometers border with Kyrgyzstan,

a 400 kilometers border with Turkmenistan and another 2,150 kilometers with Uzbekistan, while the Russian frontier is the longest at 7,200 kilometers. Its Caspian Sea coastline accounts for the rest of the 14,000 kilometers. So far only 700 kilometers of the border with Russia have been agreed. Talks with Turkmenistan have only just started, while complications lie ahead in negotiations with Uzbekistan, TURARBEKOV said. "There's a village which is in Uzbek territory, but its inhabitants are Kazakh citizens. The approximate date [for resolving the problem] is somewhere around 2007 or 2008," Reuters reported.

Investment In Kazakh Metals Falls

· Direct foreign investment in Kazakhstan's mining and metallurgy sector has fallen by nearly half last year and is not expected to recover this year, the deputy head of Kazakh investment agency Kazinvest said on Monday. Maksat MAMASHEV told a news conference that investment in metals fell to $67 million last year, a level that he described as "catastrophic." He said, "Out of the total volume of direct investment of $1.1 billion last year, $67 million is insignificant." Kazakhstan is rich in a large number of metals, but the bulk of foreign investment has been directed to the oil and gas industries. This has raised fears that Kazakhstan is becoming over-dependent on energy. MAMASHEV blamed the fall in investment on unfavorable world market conditions, which he said only started to improve late last year, and what he called stringent state policies with regard to the tax obligations of metallurgical enterprises. Kazakhstan is holding a major metals conference and exhibition, Kazmin/Kazmet 2000, which started Thursday.

Kazakhstan To Open Caspian Ferry

· Kazakhstan plans to open a Caspian Sea ferry crossing to Iranian ports on September 13^th, according to the Kazakh Ministry of Transport and Communications. The Mercury-2 ferry capable of taking more than 30 railway freight cars onboard will run between Kazakhstan and Iran.

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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