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

Monday, October 2, 2000

Russian Federation

Politics

Russia Builds Strategic Relations With India

· Russian President Vladimir PUTIN departed from Moscow today for New Delhi, India to forge a "strategic partnership," boost trade, and sell arms. PUTIN's administration has been seeking ways to rebuild a network of ties to balance Moscow's relations with the West. India and China are the key targets in these plans. PUTIN said, "Russia can only welcome improving relations between India and other countries, including the United States."

The two nations enjoyed warm relations during the Soviet-era, when New Delhi and Moscow had a largely patron-client defense supply relationship. Arms sales likely to be signed during PUTIN's visit could amount to $1 billion altogether. However, Moscow and Delhi are looking at ways to diversify their economic cooperation. PUTIN has said 132 projects, mostly on high-technology, space and energy, have been finalized ahead of his visit. Bilateral trade between India and Russia grew 17.2 percent in the first half of 2000 compared to the year-ago period. But the annual turnover of some $1.5 billion in 1999 or $2 billion planned for 2000 is still a far from what both nations aimed at, and is heavily dominated by Russia's export of non-ferrous metals, coal and fertilizers and Indian export of rice, tea, coffee and textile. Russian Atomic Energy Minister Yevgeny ADAMOV pointed out that Russia hopes to sign a contract with India for the construction of a nuclear power plant at Kudankulam. However, ADAMOV said, "no nuclear contracts will be signed," during PUTIN's visit. The Indian plant, scheduled for launch 2008 to 2009, could cost $1.5 billion to $2 billion to build.

Economy

Russia-EU Discuss Strategic Gas-Oil Ties

· European Commission Chair Romano PRODI and Russian President Vladimir PUTIN on Thursday discussed the idea of a "strategic partnership" on energy involving long-term contracts. PRODI has briefed European Union (EU) finance ministers at their monthly meeting this weekend on the prospects of doubling imports of gas from 100 million tons of oil equivalents a year and increasing in other purchases, including oil and electricity, the Financial Times reported. European reliance on oil has prompted high oil prices well above $30 per barrel. Executives of oil companies have expressed support for building the relationship with Russia. The newspaper points out that agreements between the EU and Russia would have to cover the construction of new oil and gas pipelines and involve countries though which these would pass. The deals could also include EU technology to improve exploitation of oil and gas reserves. Commission spokesman Jonathan FAULL said the idea under discussion was, "that we should transform what is currently an important commercial relationship into a long-term strategic partnership from which both parties stand to gain considerably. The exploratory talks, which are under way between the Commission and Russia, will continue. There will be a discussion of this matter in the Commission on Wednesday when energy policy and oil policy in particular are discussed…" He added that these

Today's News Highlights

Russia

European Republics

South Caucasus & Central Asia

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Monday

October 2, 2000

Intercon's Daily

contracts, "would involve major participation by private companies as well as public authorities in investment and assistance in Russia in order to assist in the stabilization of the Russian economy." The topic of sharply increasing energy imports was also discussed between PUTIN and German Chancellor Gerhard SCHROEDER. Russia currently supplies about 20 percent of the EU's gas and 16 percent of its oil.

Oil Stake Purchase May Push Ruble Higher

· Yevrotek's, a subsidiary of Tyumen Oil Company, purchase of an 85 percent stake in Onaco for $1.08 billion could cause the ruble to rise against the dollar. The founders of Yevrotek are Renova, one of Russia's major metal trading companies, and Alfa Group, one of Russia's major industrial and banking groups, both shareholders of Tyumen Oil. Yevrotek has 10 days after the agreement to pay for Onaco in rubles. However, Tyumen will want the ruble to weaken so it doesn't pay too much for each ruble it buys, Vedomosti reported. Tyumen has two other options. Alfa Bank could try to bypass the foreign exchange market by dealing directly with the Central Bank, or Tyumen could ask for a dollar credit from Alfa Bank.

Ruble = 27.75/$1.00 (CB rate)

Ruble = 24.42/1 euro (CB rate)

Business

Gazprom Cuts Supplies To Regions

· Gas supplies to several Russian regions were cut off on Saturday, including in the Siberian city of Omsk. Independent NTV Television said talks between city officials and natural gas monopoly Gazprom on resuming gas and fuel oil supplies had stalled. Gas supplies have also been cut sharply to the entire southern region of North Ossetia. Kazbek KARGINOV, first deputy premier of the province, urged Gazprom to reschedule the debts before winter sets in, the Itar-Tass news agency said. Store managers said demand for electric heaters, stoves and teapots had spiked since the gas was shut off. The cutoffs highlight Russia's chronic web of nonpayment, in which large companies and government agencies don't pay cash for energy, raw materials and taxes. This non-payment system drags down the economy.

Ikea Subsidiary To Invest In A Russian Factory

· Sved Wood, a subsidiary of Swedish furniture maker IKEA, will invest $10 million in a wood-processing plant in Russia's Leningrad region, Delovoi Peterburg said, citing government officials. The agreement was signed on Wednesday at a press conference during Swedish Prime Minister Goran PERSSON's visit to the Leningrad region. The factory probably will start work by the end of 2001. It is the first step in plans by IKEA, the world's largest furniture retailer, to begin making furniture in the former Soviet Union. Russia, which has the largest timber reserves in the world, is trying to change from being an exporter of raw timber to the more lucrative timber processing market.

Kraft To Produce Potato Chips In Russia

· Kraft Foods International, a unit of Philip Morris Cos., will spend $25 million to produce potato chips in Northwest Russia, raising its investment in the area to $35 million, Delovoi Peterburg said. Construction is expected to start in the middle of next year on a potato chip factory in Novgorod, about 100 kilometers southeast of St. Petersburg, with completion scheduled for a year later, according to Novgorod Governor Mikhail PRUSAK. In early October, Kraft Foods will open a $10 million coffee packaging plant in the Leningrad region to produce Jacobs and Maxwell House coffee brands for the local market. Philip Morris, the world's top tobacco company by sales, has invested nearly $500 million in tobacco manufacturing in Russia, and $340 million in tobacco production in Kazakhstan in Central Asia.

European Republics

Ukraine Finds 113,432 Soviet Bombs

· The Ukrainian Emergencies Ministry announced today that mine-clearance experts have uncovered a huge arsenal containing more than 100,000 Soviet-made Air Force munitions buried at a former air base. "Mine-clearance experts from the Defense and Emergencies Ministries have extracted 113,432 shells...and have already destroyed 15,180 of them," ministry spokeswoman Tatyana POMAZANOVA told Reuters. A Defense ministry spokesman said the munitions were made in the Soviet Union in 1979-1980 and had been slated to be destroyed in Soviet times, but former commanders of the unit failed to carry out the order and buried the ammunition instead.

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Ukraine Approves Debt Policy

· Ukraine's Cabinet approved a proposed debt policy plan for 2001-2004, which calls for a decrease in state debt, Kievskie Vedomosti reported, citing First Deputy Finance Minister Petro HERMANCHUK. The plan was approved after Ukrainian President Leonid KUCHMA criticized the government for increasing debt during in the past years. The Cabinet wants to set up a special fund for managing Ukraine's state debt, adding that the government plans to borrow more domestically than abroad. Ukraine's state debt was at $10.563 billion as of July 1^st, compared with $12.437 billion early this year, according to Ukrainski Novyny news agency. In September, Ukraine's Cabinet agreed with the Central Bank to reschedule 10.5 billion gryvnia (about $1.9 billion) in debts the Finance Ministry owes the bank, a prerequisite for more loans from the International Monetary Fund, Bloomberg News reported.

Kuchma Sacks Foreign Minister

· Ukrainian President Leonid KuchmA signed a decree last week sacking Foreign Minister Boris Tarasyuk, "in connection with the transfer to another job." Observers speculated that Russia was pressing for Tarasyuk's dismissal because he was too friendly toward NATO and the West, and pressed for Ukraine to strengthen its independence from Russia, the Associated Press reported. "There is no intrigue in this," Kuchma said. "I want to be absolutely honest in saying that [TARASYUK] has done an awful lot as Foreign Minister." He said Anatoly Zlenko, Ukraine's ambassador to France, characterized by Kuchma as a "diplomat from the roots", will be appointed as a new Foreign Minister.

Reuters quoted Mykhaylo Pohrybynsky, Director of the Center of Political Research, as saying that Tarasyuk's departure may reflect Kuchma's irritation at Ukraine still being portrayed in the West as a laggard in reforms, plagued by corruption. He said, "Ukraine's foreign policy, dictated by its strategic location and proximity to Russia, was unlikely to change. "Ukraine has no choice, the policy will be pro-Western no matter who is minister." According to Pohrybynsky, "The only thing a new minister could change is establishing closer economic ties with Russia, but not political ties."

Belarus Opposition Protests Against Poll

· Several thousand Belarus opposition activists marched through Minsk on Sunday, threatening to boycott next week's parliamentary election to protest political repression, the Associated Press reported. Most opposition candidates were barred from running in the October 15^th vote on registration technicalities, and some opposition parties have been banned. The demonstrators urged a boycott of the vote to protest the lack of opposition representation on the ballot, a crackdown on independent media and the arrests of anti-government leaders under authoritarian President Alexander Lukashenko. Lukashenko, an ardent admirer of the defunct Soviet Union, dissolved Belarus' previous, opposition-led legislature in 1996, and replaced it with a body of his supporters. They are coming up for re-election for the first time this month. A total of 574 candidates have been registered to run for 110 seats in the National Assembly.

South Caucasus & Central Asia

12 Georgian Prisoners Escape

· It is estimated that at least 12 Georgian prisoners escaped from the maximum-security Republic Prison Hospital in Tbilisi on Sunday. The escapees include Guram ABSANDZE, a former finance minister accused of organizing an attack on Georgian President Eduard SHEVARDNADZE in 1998, Vakhtang (Loti) KOBALIA, former Commander in Chief of the National Guard under the late President Zviad GAMSAKHURDIA, his top ally Feniks (Georgy) GULUA, and Zurab EJIBIA, who fired an anti-tank missile at the presidential motorcade in February, 1998. KOBALIA and GULUA were serving sentences for crimes committed as the leaders of a 1993 uprising, when they tried to restore GAMSAKHURDIA to power. KOBALIA was sentenced to death for treason and for murdering a journalist working for an American television company, but his sentence was commuted to life imprisonment. GULUA was sentenced to 15 years.

Investigators initially believed that the prisoners escaped through a 30 meter-long underground tunnel leading from the hospital ward to the outside. However, suspicion is rising that the tunnel was a ruse. One theory supposes that the prisoners, with the help of outsiders, organized an effort to bribe

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officials and may have walked freely from the prison. Adding to this theory, GULUA's wife said in court that her husband, "would never risk to escape from prison by an underground tunnel, as he has always suffered from claustrophobia". If the prison break was organized with the help of outsiders, hospital staff, and prison officers, concern grows that another attempt to destabilize Georgia could be at hand.

Presidential spokesman Kakha IMNADZE said the President had described the escape as "an unprecedented bandit act" that could not have taken place without the "obvious assistance" of officials in the hospital. He added that, "By doing this they [the hospital staff] helped the forces who attempt to destabilize the situation in the country and threaten its safety." Reuters news correspondents on the scene report seeing sacks of sand and shovels clearly visible in the escapees' rooms, just down the hall from the office of the hospital's director. Investigators have been called to the scene and prosecutors are questioning the relatives of the fugitives. The wife of ABSANDZE and his 17-year-old son categorically refused to arrive to testify Sunday night.

Several prison hospital workers are being held on suspicion of assisting the inmates' escape. Kakha TARGAMADZE, Minister of the Interior, stated that it is impossible that the prison hospital administration did not notice that ABSANDZE's room, which was located near the office of the prison hospital administrators was full of earth taken out of the tunnel. He also pointed out that it is impossible for a 30-meter tunnel be dug out in one night. He doubts that all escaped prisoners used the tunnel. The Minister believes that part of the escaped convicts left the prison with the help of certain authorities in the hospital. Detainees include the doctor on duty Revaz ZHGENTI and hospital administrator Tengiz KIRTADZE. Police are still searching for the fugitives, which include convicted murderers, kidnappers, and terrorists.

Chairman of the parliament's Defense and Security committee Revaz ADAMIA stated that Sunday's escape is a clear example of the inefficiency of Georgian law enforcement organizations.

AES Silk Road Seeks Armenian Energy Stakes

· American company AES Silk Road, which already owns the Tbilisi power networks, is interested purchasing Armenian energy shares. American energetic Company AES Silk Road representative in CIS countries John HUFFAKER declared that AES always prefers to buy 100 percent of the stock companies, but if this level is not achievable, it works to achieve the closest result of the first goal, Prime News Agency reported. He said that foreign investor involvement in the Armenian energetic sector will help start the regional cooperation in energetic sphere. "AES has good position in participating in the similar processes in the neighboring countries", HUFFAKER mentioned. Swiss-Swedish concern ABB, Spanish Union Fenosa, and French Electricite de France are also expressed interest in purchasing stakes in the Armenian power networks.

Turkmen Fills Russian Gas Contract

· Turkmenistan has completed the main contract for gas supplies to Russia this year, according to a Turkmenneftegaz corporation spokesman said. Under the agreement between the Turkmen government and Russia's gas monopoly Gazprom, the gas volume totaled 20 billion cubic meters. The deal was traded by the international energy corporation Itera. Turkmenistan will continue supplying gas to Russia under an additional contract for another 10 billion cubic meters. Itera and Turkmenneftegaz concluded this agreement in September. The new gas will cost $38 per 1,000 cubic meters.

The Daily Report on Russia and the Former Soviet Republics

will not be published on Monday October 9^th

in observance of Columbus Day.

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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