DAILY REPORT ON RUSSIA

AND THE FORMER SOVIET REPUBLICS

INTERCON INTERNATIONAL USA, INC., 725 15th STREET, N.W., SUITE 903,

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Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Tuesday, October 10, 2000

Russian Federation

Politics

Rus-Kazakhstan Sign Multiple Documents

· Russia's President Vladimir PUTIN and Kazakhstan's President Nursultan NAZARBAYEV on Monday signed agreements cooperation in the oil-rich Caspian Sea region and humanitarian affairs. PUTIN arrived in Astana on Monday for a two-day official visit expected to focus on trade and Central Asian security. Other agreements signed on the first day of the visit regarded the opening a Moscow State University branch in Astana. Kazakh Deputy Prime Minister Daniyal AKHMETOV, and the head of Russia's Unified Energy System of Russia (UES), Anatoly CHUBAIS, announced the creation of a joint venture for the Ekibastuz power station in north Kazakhstan. A 50 percent stake in Ekibastuz will be provided to UES, canceling out Kazakhstan's $300 million debt to the monopoly. The thermal power station in Pavlodar, close to Russia's Siberia, will become the basis of the unified system. "We have managed to resolve not only technical issues but also political [issues] because we are talking about integration in the most important sphere of the economy¾energy," AKHMETOV said after the signing ceremony. CHUBAIS added, "This is not only a project between two companies but a step forward in energy...and Russian-Kazakh relations. Within a month we shall decide all questions¾the debt amount, the assets and how to exchange them." Russia and Kazakhstan plan to eventually create a vertically integrated company called the Ural Heating and Energy Complex, which will unite several Russian power stations with Ekibastuz and two coalmines in north Kazakhstan. This cancellation of debt in exchange for equity in the strategic energy sector has become an important element of PUTIN's

foreign policy wit the states of the former Soviet Union. CHUBAIS has been actively engaged in this. His deal in Kazakhstan comes on the heels of similar visits to Georgia and Ukraine.

PUTIN and NAZARBAYEV also discussed the status of the Caspian Sea. PUTIN stressed that, "all countries interested in the resolution of this problem are our partners, not rivals or competitors. Kazakhstan and Russia believe that there should be no borders on the surface of the Caspian Sea in order not to hinder navigation." PUTIN noted that, "nuances remain in approaches towards addressing problems connected with the protection of the environment and bio-resources." Kazakhstan is negotiating a 10 to 20-year allocation for oil transit to ship crude from the region of Atyrau to the Russian city of Samara. The Kazakhstan government has requested that Russia provide long-term guarantees for oil and gas transit across its territory to ensure shipments to Europe. "Oil transit through Russia is only a tactical solution for Kazakhstan, which will require additional export routes with its output growth," said Vladimir NOSOV, an analyst at Moscow-based Chase Brokerage. "The agreement on Kazakh gas shipments across Russia to Europe will likely provide Gazprom with more favorable terms for transit of gas from Turkmenistan across Kazakhstan." Russia and Kazakhstan are interested in a possible joint venture to transport Kazakh natural gas through Russia to Western export markets. Kazakhstan's gas production is

Today's News Highlights

Russia

Gov't Opposes Ruble Rise

Railways Raise Export Fees

BASF To Invest In Russia

European Republics

Brazauskaus Wins Big

South Caucasus & Central Asia

Baramidze On Russian Relations

Opposition Parties In Elections

Eurasian Economic Community

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October 10, 2000

Intercon's Daily

small, but the country has huge reserves in the Tengiz oil field in the west and the Kashagan field in the Caspian Sea. Kazakhstan produces as much as 7 billion cubic meters of gas a year, of which domestic customers consume about 3 billion cubic meters.

Economy

Ruble = 27.88/$1.00 (NY rate)

Ruble = 27. 92/$1.00 (CB rate)

Ruble = 24.29/1 euro (CB rate)

Gov't Opposes Ruble's Rise

· At a joint meeting of the Tax and Finance ministries today, Deputy Prime Minister and Finance Minister Alexei KUDRIN stated that the government does not think the ruble needs to be strengthened further. He said, "We would not like such a tendency to become stronger, as the strengthening of the ruble reduces the competitiveness of Russian goods and the export potential of Russian goods." He pointed out that the Finance Ministry and the Central Bank are conducting a joint policy aimed at slowing the ruble's rise. KUDRIN said that rubles are accumulating in the market that should be channeled into the industrial sector and used to replace pervasive barter in the economy. The Central Bank has intervened regularly this year and bolstered its foreign exchange reserves, while printing rubles that have boosted money supply sharply. KUDRIN said the government was trying to find new ways of soaking up excess ruble liquidity. "The government is taking extra measures to use the money supply. Part of the extra revenues, for example, is going towards paying off debts." The average ruble rate figured in for the 2000 budget is 32 rubles per dollar.

KUDRIN noted that reduction of Russia's debt burden, specifically debt principal, is the government's "chief task for restructuring the budget." He said that the government will concentrate its efforts on paying off principal in order to lower its cost of borrowing. Russia has just under $150 billion in foreign debt. Debt service of 243.7 billion rubles is the largest single item in the draft budget for 2001, KUDRIN added.

Railways Raise Oil, Metal Export Fees

· Russia's Railway Ministry, effective October

1^st, increased fees charged for exporting oil products and metals, to cover rising operating costs, Vremya Novostei reported. The government increased rail charges for exporting goods by 32 percent for oil products and 22 percent for metals. The Railway Ministry in August increased domestic cargo fees by an average of 18.5 percent. Passenger fares were increased by 25 percent from September 10^th. The Railways Ministry wants to turn part of its operations into a state company and allow private companies to operate, if they buy their own trains. The plan aims to attract investment and increase revenue to fix aging infrastructure. The Railways Ministry employs 1.5 million people in 17 state railroad companies.

Business

BASF To Invest $221.9M In Russia

· BASF, Europe's largest chemical maker, announced it will invest 500 million deutsche marks ($221.9 million) in Russia over the next five years. BASF plans to cooperate on various projects with Gazprom, the Russia's gas monopoly, and its petrochemical subsidiary Sibur. It also plans to set up a joint venture, Elastokam, with Nizhnekamskneftekhim, a Russian petrochemical company, according to BASF's representative to the Commonwealth of Independent States. Nizhnekamskneftekhim, majority owned by Russia's fourth oil producer Tatneft, refines about 7 million tons of oil a year (140,000 barrels a day). Tatneft this week announced a tender for a Western company to build a new refinery at Nizhnekamsk to increase gasoline output. The winner will be announced by year's end, with the refinery to start operations in the second half of 2001. The oil company will invest in the new refinery $150 million a year until 2006, on top of $53.8 million already spent on the project.

European Republics

Brazauskas Struggles To Form Coalition

· Preliminary results of Sunday's Lithuanian parliamentary election showed former Lithuanian President Algirdas BRAZAUSKAS' Social Democratic Coalition taking 51 seats in the 141-member single-member parliament, with the center-right Liberal Union second at 34 seats, and the center-left New Union next with 29 seats. Parliamentary

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Speaker Vytautas LANDSBERGIS' Fatherland Union-Lithuanian Conservative party received only 8.5 percent of the vote, slashing its seats from 70 to 8 seats. Final results will be announced next week. As predicted prior to the election, BRAZAUSKAS' party swept into power, removing Prime Minister Andrius KUBILIUS' right-wing Homeland Union. However, KUBILIUS may play a key role, as no party earned a majority. The Liberals and New Union announced plans to steal the limelight from the Social Democrats by banding together and forming a coalition with independents and small parties. The Liberals and New Union say they think they can find enough MPs to gather a 71-seat majority in the parliament. BRAZAUSKAS quickly moved into gear and said, "We are ready to participate in forming the government. It would look strange that a coalition that won the most seats in parliament would be forced to stay in opposition." BRAZAUSKAS called for forming a "social market economy," and not changing Lithuania's foreign policy regarding the European Union and the North Atlantic Treaty Organization. A total of 56 percent voters out of 2.6 million eligible citizens took part in the elections, in which 15 parties and blocs ran candidates. The new parliament is expected to convene its first session on October 19^th.

South Caucasus & Central Asia

Baramidze Describes Relations With Russia

· Giorgi BARAMIDZE was approved today as the Chairman of the Parliament's Defense and Security Committee, replacing Revaz ADAMIA, who is the new Chairman of Georgia's Citizens' Union Party. BARAMIDZE said that there is no prospect for military cooperation with Russia. In an interview with Prime News Agency, the Chairman said that Georgia's negotiations with Russia will only concern the guarantees of mutual non-attack. He added that despite Russia's frustration with NATO expansion, Georgia will continue relations with the Alliance. BARAMIDZE noted that he will pursue the Russia's pledge made at the Organization for Security and Cooperation in Europe's (OSCE) summit in Istanbul to withdraw from Vaziani and Gudauta military bases. He hopes that the withdrawal from Gudauta, which has been held up by negotiation delays, will be completed by July 1, 2001. BARAMIDZE is against the Russian suggestion to

handover the Gudauta military base to Russian peacekeepers in the Abkhazian conflict zone. He explained that Russia is attempting to use the base to further hamper the Georgian-Abkhazian conflict settlement process.

In an unconfirmed report cited in RFE\RL Newsline on October 6th, the Caucasus Press reported that the Akhalkalaki withdrawal will be completed by the end of this month. Supposedly during Armenian President Robert KOCHARYAN's visit to Moscow last month, reached an agreement to transfer a portion of Russian military hardware from the Akhalkalaki military base in southern Georgia to Armenia and its closing by the end of October. If true, this could indicate plans to inflame the Armenian ethnic population, who are dependent upon employment at the Russian base and are paid in rubles, which negatively affects the local economy.

Meanwhile, Georgian Defense Minister David TEVZADZE received a pledge from his counterpart Akis TSOKHADZOPULOS in Athens, Greece to double the volume of aid to Georgian Naval Forces. In an unrelated development, Switzerland will donate 50 jeeps to the Justice Ministry at the beginning of November, in connection with the appointment of Misha SAAKASHVILI as Justice Minister.

Azeri CEC Reinstates Opposition Parties

· The Central Election Commission (CEC) in Azerbaijan on Sunday announced they would allow opposition parties to participate in the November 5^th parliamentary election. The CEC's action follows a request by President Geidar ALIYEV on Friday and the urging of the US State Department on Thursday. The US State Department said, "The exclusion of two major opposition parties from fielding national proportional lists seriously jeopardizes the potential for the conduct of free and fair elections in November. We urge Azerbaijani authorities to act to allow candidates of these parties to compete through proportional lists as well as in majority constituencies in the upcoming elections." The ban had also been one of the reasons cited by both the Organization for Security and Cooperation in Europe (OSCE) and the Parliamentary Assembly of the Council of Europe not to send observers to monitor the election. The CEC had previously banned Musavat and the Azerbaijan Democratic Party on

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grounds that signatures on registration papers were forged. Eight of the nine suspended parties could now join five already cleared for the poll. Commission head, Mazakhir PANAKHOV said irregularities in the papers of one minor party were too serious to be overlooked. The commission had previously registered only six of 14 opposition parties, drawing sharp criticism from the West. Azerbaijan elects the 125-member parliament by a mixed system, with 100 seats contested in single-member constituencies and 25 on countrywide party lists. The President's New Azerbaijan Party is seen as a likely winner, Reuters reports. Its party list is led by the president's son, Ilkham ALIYEV.

Eurasian Economic Community Formed

· The prime ministers of Russia, Kazakhstan, Belarus, Kyrgyzstan and Tajikistan met in Astana on Friday to approve the formation of a new economic community based on the European Union. Kazakh Prime Minister Kazymzhomart TOKAYEV said, "We signed 13 documents, chief among which was an agreement on setting up a Eurasian economic community. It was approved and will be passed on for consideration by the council of presidents of members of the Customs Union." Russian Prime Minister Mikhail KASYANOV added that talk was continuing about integration, starting with customs issues and going on to coordinating economic policy, including macroeconomic policy and currency and social policies. The Eurasian Economic Community will act, in particular, to warrant the economic security at its borders, struggle with smuggling and other customs offences. According to a statement, the community's objective will be attaining a concerted position of its members in relations with the WTO [World Trade Organization] and other international economic entities, establishing a common payment system and provision of equal access of foreign investment to the parties' markets. The new economic community replaces the existing customs union. Kazakh President Nursultan NAZARBAYEV told a news conference in

Astana's presidential palace after the signing, "The customs union which has existed for five and a half years has become a new international organization. I believe an extremely important event has taken place. This is an...evolutionary transformation on the road to a new model, close to the European Union and other international organizations." Russian Deputy Prime Minister Viktor KHRISTENKO said it would first concentrate on harmonizing tax and customs laws and other administrative tasks. Russian President Vladimir PUTIN hinted that security matters were also behind the new pact. Speaking to students at Astana's Eurasia University, he said terrorism, drug and arms smuggling, and "aggressive nationalism" were Central Asia's biggest threats.

Under the constant threat of invasion from Islamic fundamentalists seeking to overthrow the government, it is important to note that Uzbekistan was not among the Central Asian states to join this community. Uzbekistan President Islam KARIMOV has pointed out that Russia has been warning its neighbors and Central Asian states of threats from Islam fundamentalist and other terrorist groups. In fact, Russia's military offensive in Chechnya has used this theme to justify its own actions. KARIMOV has said that Russia is attempting to use such themes to force the Central Asian nations to seek Russian security assistance. But the costs associated may be to great.

According to Paul GOBLE's analysis appearing Wednesday in RFE\RL Newsline: "On the one hand, the declining importance of the CIS (Commonwealth of Independent States) as an institution effectively frees Moscow's hands to play one of its members or one group of its members off against another in order to regain or expand Russian influence in this region. And on the other hand, this trend appears likely to lead some CIS states, including those in the GUUAM states (Georgian, Ukraine, Uzbekistan, Azerbaijan, and Moldova) to adopt an even more independent line."

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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