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, October 11, 2000

Russian Federation

Politics

US House Votes For Cutting Aid To Russia

· The US House of Representatives passed a resolution on Tuesday which called on President Bill CLINTON to cut financial aid to Russia, if it does not immediately release US businessman and former Naval intelligence officer Edmond POPE. Arrested in April on charges of espionage, POPE has been held in Lefortovo Prison. He is due to go on trial as early as next week and could face up to 20 years in prison if convicted. POPE is accused of trying to obtain underwater missile technology from a Russian scientist. The House resolution, which is not binding and has no companion legislation in the Senate, calls for US officials to try to block Russia's entry into the World Trade Organization and opposes rescheduling millions of dollars of Soviet-era debt owed by Moscow to the US unless POPE is released. The Speaker of Russia's State Duma Communist Gennady SELEZNYOV, told reporters the House resolution was "crude interference in our criminal procedural legislation. President CLINTON, it seems, has decided that America can do anything it wants. This cannot stand. The Americans should send over fewer spies. Then we can waste fewer resources catching them and proving their guilt."

Chubais Challenges House Corruption Report

· Former Russian Cabinet member and chairman of Unified Energy Systems of Russia (UES) Anatoly CHUBAIS is denying allegations in a Republican report that he is tied to corrupt deals. CHUBAIS was responsible for Russia's privatization programs in the mid-1990s. He was also accused in news media reports of accepting a book fee from a bank connected to one of the winners of a key privatization. He hasn't been charged with any crime. The report accused US President Bill CLINTON's administra

tion of ignoring corruption in Russia and doing little to nurture a market economy there. In a September 30^th letter to Representative Christopher COX (Rep.-CA), who chaired the committee, CHUBAIS insists on seeing the evidence and is threatening to meet any accusers "in a court of law." He claims the report contained, "blatant mistakes." CHUBAIS stated, "As I have never been involved in any corrupt act, I would kindly appreciate you telling me by whom, when and under what circumstances you were provided with these baseless and irresponsible allegations."

Economy

EBRD Warns Corruption Harms Economy

· The European Bank for Reconstruction and Development (EBRD) warned Russia that pervasive corruption, opaque business practices, and abuse of shareholder rights cloud its long-term economic recovery, as it approved tight conditions for future lending, The Wall Street Journal said, citing the EBRD's policy document. The EBRD Board released a new strategy document for Russia. The review of the EBRD's Russia policy, agreed last week, is critical of the 2.4 billion euros ($2.1 billion) in past Russian lending. The Bank said that a number of projects had fallen short of acceptable standards and, "put the reputation of the bank at risk," the document says. The EBRD has committed 3.1 billion euros in 130 transactions over the last 10 years to projects in Russia. The EBRD Board is

Today's News Highlights

Russia

EBRD Warns Of Corruption

Sidanco To Sell Siberian Assets

European Republics

Lith. Coalition Gov't Presented

Ukraine's Industrial Production

South Caucasus & Central Asia

Georgia To Sign Pipeline Agmt.

OPIC Provides Loans For Hotels

Turkmen To Resume Supplies

CIS Collective Security Meets

Politics-Economics-Business

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October 11, 2000

Intercon's Daily

demanding higher corporate governance from borrowers, improvement in Russia's legal system, greater respect for shareholders rights and clear business practices. EBRD spokesman Jeffrey HIDAY said, "This is a much tougher strategy and it's very plain." EBRD President Jean LEMIERRE emphasized the Bank's commitment to Russia. He said, "The Bank suffered through the 1998 crisis, as did many people, but we did not leave." The document welcomes President Vladimir PUTIN's economic strategy, but warns that the, "Russian reform environment has long been volatile, characterized by rapid advances and setbacks, ambitious plans and weak implementation." "In addition, the frequency of intimidation, extortion, even physical threats in business or legal disputes adds a dimension to investment risk that is unusual for most other countries," the Financial Times reported. LEMIERRE said that, "severe weakness in the rule of law continues to undermine investment, both domestic and foreign." The EBRD will invest $700 million this year, more than three times its 1999 commitment, of $217 million. The Bank has provided loans amounting to $500 million to small business projects in Russia over the last five years. The Bank also may lend $250 million to Gazprom, Russia's gas monopoly, to help it modernize its pipelines and $150 million to LUKoil Holding, Russia's top oil producer, for crude and oil products export projects. Gazprom's facility review has been repeatedly delayed, while LUKoil's loan was put on hold. The EBRD has demanded that Gazprom clarify its relationship with client companies including Itera and is holding LUKoil's loan until it meets international accounting standards. The EBRD plans to provide ruble-denominated facilities for borrowers that do not want to take risk in hard-currency borrowing. The EBRD plans to cooperate with the Federal Security Commission to develop corporate governance code and securities code for Russian companies.

Ruble = 27.94/$1.00 (NY rate)

Ruble = 27.85/$1.00 (CB rate)

Ruble = 24.28/1 euro (CB rate)

Business

Slavneft Seeks Japanese Loan

· Rus-Belarus joint oil producer, Slavneft, is seeking a $280 million loan from Japan's Export-Import

Bank within the next month to modernize Slavneft-Yaroslavnefteorgsintez. Demuri TSKHAKAYA, director of Slavneft's operations in northwest Russia said, "It is about 80 percent certain that we will sign the agreement with the Japanese in the next month...to modernize the Yaroslav Refinery." Slavneft owns a 50.9 share in Yaroslav, its largest refinery, while Tyumen Oil Company, Russia's fifth oil producer, holds a 40 percent stake. Slavneft is also negotiating with European banks for an $80 million loan to modernize Mozyr Oil Refinery in Belarus. TSKHAKAYA did not name the European banks. Slavneft holds a 42.5 percent stake in the refinery. Last week, Slavneft signed an agreement with the Belarus government to go ahead with a $120 million modernization of the Mozyr Refinery, and the oil company is asking for tax breaks on buying new equipment. Slavneft also plans to invest $24 million in the St. Petersburg area over the next 18 months to develop its wholesale and retail network, TSKHAKAYA said.

AvtoVAZ Workers Strike Over Reorganization

· AvtoVAZ workers are expected to widen a weeklong strike today to protest plans to reorganize Russia's biggest carmaker, The Moscow Times reported. The walkout began in the department that produces car seats and over the weekend gained support from the head of the All-Russia Trade Union, as well as from a parliamentary deputy from the Samara region where the plant is based. Union members said the reorganization is a threat to the 120,000-person workforce. They also are demanding an increase in their average salary from about $100 a month. AvtoVAZ has been in negotiations with General Motors Corp. to form a joint venture.

Sidanco To Sell Siberian Gas Assets

· Russian oil producer Sidanco announced plans to sell its 5.6 percent stake in Rusia Petroleum, an exploration company with rights to develop the Kovyktinskoye gas field, which holds an estimated 1.4 trillion cubic meters of gas, in the Irkustk region. Sidanco will use the cash to pay debts to shareholders by early 2002. Sidanco President Robert SHEPPARD said in September Sidanco made its first, $30 million payment on debt to shareholders. The oil producer must pay about $100 million to shareholders, most of which will be paid next year. He added that the Rusia Petroleum stake, "neither

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a critical nor a core asset for Sidanco. There is a market out there for it." Rusia Petroleum needs about $10 billion investment to extract gas and build pipelines to China. Sidanco was forced into bankruptcy in early 1999 over total debts of $452.6 million. The company left bankruptcy early this year when shareholders debts were restructured. Since then the company paid all its debts to external creditors, including a $153.6 million loan from a group of investment banks led by Dresdner Bank and National Westminster Bank.

industrial sectors confirms the stability of general economic growth and forms a solid basis for sustained growth in 2001," it said. In January-September, industrial output fell only in the fuel sector by 8.6 percent and in electricity generation by 0.3 percent. The State Statistics Committee had said earlier that industrial output rose by 12 percent in the first eight months of the year, compared with the same period of 1999. For 2000 as a whole, the Ukrainian government, which expects gross domestic product to rise by three to four percent, forecasts industrial output to grow by some seven percent.

South Caucasus & Central Asia

Georgia To Sign Baku-Ceyhan Agreement

· The signing of the agreement between Georgia and the sponsor group of the Baku-Tbilisi-Ceyhan Main Export Pipeline is planned for October 18^th in Tbilisi, according to president of the Georgian International Oil Corporation George CHANTURIA. The sponsor group includes BP Amoco, Itochu, and Ramco. He told Prime News Agency that Azerbaijan will sign the same agreement in Baku on October 16^th, while Turkey will sign it on October 19^th in Ankara. Azerbaijan State Oil Company's (Socar) President Natik ALIYEV said that this month US and Turkish companies will receive permission from the Azeri government to start geodesic works for the Baku-Tbilisi-Ceyhan Main Export Pipeline route. He said that works will cost $120 million. CHANTURIA stressed, "With signing this document by the country-owners of the territory, the preparation stage is practically over and new, practical realization stage is starting." According to him, the detailed engineering will start soon which will last only a few months. CHANTURIA said that after signing the agreement, the office of the engineering group will open in Tbilisi.

OPIC Allocates $26M For Georgian Hotels

· The US Overseas Private Investment Corporation (OPIC) has allocated $26 million for loans to Georgia to renovate and build two hotels in Tbilisi, the US Embassy said in a news release. An agreement signed between OPIC and the US-Georgian joint venture Hotel Tbilisi envisages renovation of the historic 85-year-old Hotel Tbilisi, converting it into a 123-room hotel, and construction of a new 120-room hotel and multi-purpose office building on the central Freedom Square. Both hotels will be

European Republics

Lith. Coalition Gov't Presented To Adamkus

· A proposal for a New Union-Liberal Union coalition government has been presented to Lithuanian President Valdas ADAMKUS. The two parties, which received the second and third-most seats in Sunday's parliamentary election, have agreed to share the top two political posts in the coalition agreement, expected to be formally signed on Thursday. Rolandas PAKSAS, a former prime minister with the ruling Conservative party who is now the leader of pro-market Liberal Union, was likely to become prime minister, while Arturas PAULAUSKAS, the head of the New Union, was to take the parliamentary speaker's position. ADAMKUS has to approve the next prime minister. The Social Democratic Party, led by Algirdas BRAZAUSKAS won the most seats Sunday, but failed to win a majority needed to form a government. "This looks very strange when we, the group that grabs the biggest share of the vote, are forced into the opposition," BRAZAUSKAS said. The Social Democratic Party won 51 seats (31 percent), New Union earned 29 seats (19 percent), and Liberal Union won 34 legislative seats (17 percent), as parliamentary seats are determined by individual as well as by party vote totals. The two runner-up parties were able to secure a majority with 71 seats, after the small Center Union, Farmers' Party, and several independent legislators promised to join them, the Associated Press reported.

Ukraine's Industrial Output Rises

· Ukraine's industrial output grew by 11.6 percent in the first nine months of this year compared with the same period in 1999. The government said in a statement that industrial output rose by 8.2 percent in September, compared with the same month of 1999. "The positive trend in production in most

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managed by Marriott International Inc., Reuters reports. "With a respected partner such as Marriott, OPIC looks at this project as one beneficial to both US business and Georgia's efforts to establish a sound financial infrastructure," OPIC president George MUNOZ said. The Hotel Tbilisi is scheduled to open in early 2001 and the hotel on Freedom Square is expected to be completed next autumn. OPIC provides investment support to small, medium and large US businesses expanding into emerging markets around the world.

Azeri Airlines Receives Boeing Jet

· The state carrier of Azerbaijan, Azerbaijan Airlines (AZAL), on Monday received the first of two Boeing 757-200 jet liners. Boeing said the plane, powered by two Rolls Royce engines, was delivered to AZAL at the Baku International Airport and the second plane is due in November. The 757-200 is capable of transporting 239 passengers in a one-class configuration up to 7,240 km (4,525 miles). The two planes are part of a deal signed between AZAL and Boeing in 1998, reached with the participation of Azerbaijan's President. Boeing gave no financial details, but the state newspaper quoted US ambassador Stanley ESCUDERO saying the planes cost a total of $120 million, $66 million of which would be financed by the US ExImBank.

Turkmenistan To Resume Gas Supply

• Turkmenistan agreed to supply 35 billion cubic meters (bcm) of gas to Ukraine by the end of 2001, including 5 bcm this year, Bloomberg News reported. Turkmenistan shut off gas supplies to Ukraine last summer after the Ukraine failed to pay for 8.8 bcm supplied between January and May 1999. Ukrainian President Leonid KUCHMA and Turkmen President Saparmurat NIYAZOV agreed to resume supplies during KUCHMA's official visit to Turkmenistan last week. Ukraine will pay $38 per 1,000 cubic meters for this year's gas supplies making 60 percent of the payment with goods and construction projects. In 2001, Ukraine will pay $40 per 1,000 cubic meters, making 50 percent of the

payments with construction projects and goods deliveries. "Ukraine will build...a $30 million fertilizer factory, a $75 million gas compressor station and a railway bridge across the Amu Darya River at a cost of $124 million," the official said. "These will cover the bill for gas supplied last year." He added Ukraine would also supply gas pipes worth $100 million to Turkmenistan to cover the rest of the arrears.

CIS Security Council Discuss Five-Year Plan

· The leaders of Russia, Kazakhstan, Kyrgyzstan, Tajikistan, Belarus, and Armenia, which make up the Collective Security Council of the Commonwealth of Independent States, met in Bishkek to discuss a blueprint for joint military operations in the region over the next five years. Kyrgyz President Askar AKAYEV said, "Forming a modern and effective collective security system has acute importance for the Central Asian region, which has become the main target of military attacks by international terrorists and religious extremists. The situation is aggravated by the unsettled conflict in Afghanistan and it poses a serious threat to the national security and stability of each of the Central Asian nations." Russian Defense Minister Igor SERGEYEV did not give details on the security pact forces' numerical strength or where they would be deployed. Russia has deployed about 25,000 troops in Tajikistan near the Afghan border. These forces have been put on alert amid fears that more 100,000 Afghan refugees could spill across the border to flee the approaching fighting. Kazakhstan, by far the largest, most powerful and stable country in the region, has backed Russia in warning of the Taliban threat, as have Belarus and Armenia. Kyrgyzstan has become a target of continual forays by Islamic militants, seeking to infiltrate Uzbekistan and build a radical Islamic state near the Fergana Valley. Uzbekistan withdrew from the CIS Collective Security pact and joined GUUAM. Russian Vladimir PUTIN has visited Uzbekistan and Turkmenistan, two nations where Moscow's influence is waning. Uzbek President Islam KARIMOV has recently cautioned against increasing Moscow's role in the region.

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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