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

Friday, October 20, 2000

Russian Federation

Politics

Senate To Hold Hearings On Secret Arms Pact

· The CLINTON administration is refusing to cooperate with US Senate investigations into a 1995 arms agreement with Russia negotiated by Vice President Al GORE and former prime minister Viktor CHERNOMYRDIN. The Senate expects to hold hearings next week to probe the legality of the agreement. The New York Times reported on October 13^th that GORE promised the US would not interfere with Moscow's fulfillment of existing sales contracts for conventional arms to Iran on condition such sales would end by the end of 1999. The report said Washington agreed not to penalize Moscow under a 1992 law banning arms sales to countries the United States views as exporters of terrorism. The Washington Times reported Tuesday that CHERNOMYRDIN urged GORE in a classified "Dear Al" letter on December 9, 1995, to keep Russian nuclear cooperation with Iran confidential and said it was, "not to be conveyed to third parties, including the US Congress." The White House said last week the weapons involved were "antiquated," posed no threat to the US, and that the agreement had achieved its main purpose of stopping new Russian weapons sales to Iran. However, Russia continues to sell arms to Iran over protests of the CLINTON administration. This was evident in a letter the newspaper also obtained from Secretary of State Madeleine ALBRIGHT to Russian Foreign Minister Igor IVANOV. The Secretary's letter also indicates that Russian sales to Iran should have been subject to sanctions under US law but were not because of GORE's agreement with CHERNOMYRDIN. White House press secretary Jake SIEWERT denied the administration was involved in a "secret agreement" with the Russians

and said the Senate hearings are meant to embarrass GORE, the Democrats' presidential candidate, ahead of the election on November 7^th. Senator Sam BROWNBACK (Rep.-KS) counters that, "Without an explicit act of Congress, the vice president did not have the power or authority to commit the United States to ignore US law." Senator Orrin HATCH (Rep.-UT), chairman of the Senate Judiciary committee said, "I believe the US Congress and the American people deserve...a full explanation from the administration of all the details regarding this highly questionable agreement."

Pope's Espionage Trial Resumes

· The Moscow Courts resumed the trial of US businessman Edmond POPE behind closed doors today. POPE's lawyer, Pavel ASTAKHOV, has said the former navy intelligence officer would declare his innocence in a 40-page statement to be read out in court. Russia accuses POPE of illegally obtaining secrets about a high-tech torpedo. Pope says he was doing legal research into military technology that is openly sold. POPE has been in jail since April, and could face 20 years if convicted. Washington says POPE should be released on health grounds, due to his rare form of bone cancer, and says it has seen no evidence he broke Russian laws. POPE's trial began on Wednesday but was in recess on Thursday to give the defense a chance to draw up a list of doctors and procedures for a medical test. The court is expected to decide whether POPE can receive medical checks for his

Today's News Highlights

Russia

CB Forex, Reserves, Money

Tyumen Receives New Deadline

Police Raid UES, Restore Power

European Republics

S&P Affirms Lith. BBB- Rating

South Caucasus & Central Asia

Georgian Corruption Figures

Russo Murder Is Suspect

MEP Documents Finalized

US House Holds Genocide Vote

Politics-Economics-Business

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October 20, 2000

Intercon's Daily

disease. ASTAKHOV said a series of defense motions were denied today, including a request to tape the proceedings and a motion for certain documents to be admitted into evidence which POPE says show his innocence. On Wednesday, Judge Nina BARKINA denied motions to grant POPE a jury trial, to allow him to cross-examine the key witness and to give him a civilian translator instead of one provided by Russia's FSB (Federal Security Service), Reuters reported. The witness, Anatoli BABKIN, who provided the basis of the case against POPE and sold him the torpedo information, according to Russian court is in "critical condition" and most likely will not live through the trial. ASTAKHOV has said the conduct of the trial so far has ruined POPE's hope of a fair hearing.

Economy

Ruble = 27.93/$1.00 (NY rate)

Ruble = 27.95/$1.00 (CB rate)

Ruble = 23.41/1 euro (CB rate)

CB Forex, Gold Reserves, Money Supply

· Russian foreign currency and gold reserves rose for a sixth week to a record $25.5 billion in the week ending October 13^th, the Central Bank said. The reserves rose $200 million to the highest level since the fall of the Soviet Union in 1991. The reserves rose $300 million in the week ending October 6^th to the previous record of $25.3 billion. The Central Bank said the money supply, which includes cash currency in circulation plus required reserves, expanded to 454.8 billion rubles ($16.3 billion) in the week ending October 16^th. The money supply grew by 7.6 billion rubles ($272.3 million).

Business

Sidanco Gives Tyumen New Deadline

· Sidanco's board has issued a deadline of 10-days to rival Russian oil company Tyumen Oil Company (TNK) to exchange Chernogorneft, a former Sidanco subsidiary, for a 25 percent of newly issued shares in Sidanco. TNK has rejected a previous agreement calling for 25 percent of existing shares. TNK has said that new shares could be canceled by a court challenge. TNK acquired Chernogorneft last year at a bankruptcy auction. Dmitry USHAKOV, Sidanco's chairman of the board said, "The only legal way to accomplish

this transaction is to follow the earlier agreement. Tyumen's shareholders have not demonstrated a clear desire to complete this transaction by the October 15^th," the original deadline. The board of directors said Tyumen must sign by October 27^th the assets transfer agreement. It asked Sidanco management to work on plans to win back Chernogorneft's assets through legal action should Tyumen not sign by that date, Bloomberg News reported. Vladimir BOBYLEV of Tyumen said, "We are against Sidanco issuing new shares but we support the assets swap. We will turn up in court if necessary."

Sidanco is also seeking to regain control of the assets of Kondpetroleum, once Sidanco's largest subsidiary by reserves. Tyumen unit TNK-Nyagan bought the oil producer for $50 million in October 1999, during bankruptcy proceedings. Kondpetroleum produces about 3 million tons of oil and holds 824 million tons of reserves in western Siberia. It accounted for 13 percent of Sidanco's oil production before the parent holding began to lose control of some of its assets in late 1998.

Police Raid UES To Restore Electricity

· Local police from the Tambov region raided the Unified Energy Systems' (UES) subsidiary Tambovenergo unit to force UES to restore power to deadbeat customers. The local government in the city of Tambov in central Russia ordered police to take over parts of UES subsidiary Tambovenergo and forcefully restore electricity supplies, after the company cut power to local users Tambovenergo customers, including housing units, were warned repeatedly to pay their debts, UES said. UES Spokesman Andrei TRAPEZNIKOV stated, "The Tambov government's actions are an outright breach of Russian laws. Instead of helping energy companies cut off non- payers, in line with the law, police are obstructing," our work. UES has started cutting off non-paying customers across Russia, including local governments and the army, as it attempts to improve its finances, raise the level of cash revenue it collects to 100 percent and prepare itself for a reorganization that will involve sales of its power generating units. Chief Executive Officer Anatoly CHUBAIS has said eradicating barter and non-payments has provoked opposition from regional governors and business people accustomed

When you need to know it as it happens

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to paying with goods or avoiding payment entirely for years with no consequences. UES is owed about 140 billion rubles ($5 billion) by its customers, Bloomberg News reported.

of $120 per month in bribes. Multiplying that figure by the number of businesses in Georgia (about 50,000) and the figures are staggering at $6 million per month in bribes and $72 million per year. A UN Development Program study reveals that 40 percent of the incomes of the Georgian people are derived from illegal business. More troubling is a statement from the Group for Corruption of the Council of Europe (GRECO) to Deputy Prosecutor General Anzor BALUASHVILI that current legislation, especially on economic crimes, is inadequate to eliminate corruption. Georgian President Eduard SHEVARDNADZE has established an anti-corruption commission, which has completed its survey of corruption in Georgia and will report those findings to the public shortly.

Journalist's Murder Is Suspect

· The body of Italian journalist Antonio Russo, who was found dead along the highway to Ujarma village in 40 kilometers from Tbilisi, will be flown to Italy today. RUSSO's mother, Italy's Ambassador Micelangelo PIPPANI, and a representative of Italy's Radical Party Mariono PUSTAKINO met with Georgian Prosecutor General Jamlet BABILASHVILI Thursday. Head of the Criminal Investigation Department of the Georgian Prosecutor General's office Orde BEBIA said the investigation is focusing on several theories. RUSSO's apartment appeared to have be ransacked and items stole from the apartment have not been found yet. These items included a computer, satellite radiotelephone, camera, and shot film. Speculation is growing as to why the journalist was murdered. Georgian Human Rights Activist Giorgi KERVALISHVILI believes that Russian intelligence may have arranged for RUSSO's murder, due to his "fair" coverage of the war in Chechnya an the situation of Chechen refugees, RFE\RL Newsline reported. BEBIA does not exclude that RUSSO could have been eliminated by the officers of foreign intelligence services.

Turkey Signs On To Baku-Ceyhan

· The multinational deal to build the Baku-Tbilisi-Ceyhan Main Export Pipeline has been finalized with the signing of three key agreements by Turkey and the group of sponsor companies. Prime Minister Bulent ECEVIT said at the signing ceremony in Ankara, "The most important project of the 21st century is now ready to be launched." Similar agree

European Republics

S&P Affirms Lith. BBB- Long Term Rating

· Standard & Poor's (S&P) today affirmed the Republic of Lithuania's BBB- foreign currency long-term rating, adding the outlook for the country remained stable. The international rating agency said Lithuania's ratings reflected the country's political commitment to return the budget deficit to a moderate level as well as its relatively benign general government debt burden. It added the country's increasing integration of political and economic structures into international organizations was helping to support the rating. "In particular, the EU's [European Union] decision last December to start accession negotiations will give additional momentum to structural reforms in Lithuania," the agency said in a statement. But it stated that Lithuania remained vulnerable to external shocks given the size of its economy, adding that substantial development was needed, which could put pressure on government finances in the medium term. Lithuania's A-3 foreign currency short term rating, its BBB+ local currency long-term rating and its BBB- foreign currency long-term rating were also affirmed, Reuters reported.

South Caucasus & Central Asia

Georgian Corruption Looms Large

· On October 13^th, Georgian Parliament Deputy Vasily MAGHLAPERIDZE presented devastating results on annual property declarations submitted by 400 Georgian officials. The Caucasus Report noted that analysis showed that 80 percent of officials either classified themselves as rich, with 178 officials declaring property over 1 million lari ($500,000), or poor, with 189 officials declaring an average income of lower than subsistence level of 6.25 lari (about $3) per month. Chairman of the Parliament Zurab ZHVANIA has charged MAGHLAPERIDZE to draft legislation to remove property declaration loopholes. On Monday, a World Bank survey released a report showing that 65 percent of Georgian businessmen pay a minimum

When you need to know it as it happens

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ments with the Azerbaijan International Operating Company (AIOC) were signed earlier this week by Azerbaijan and Georgia. The US and Turkey have long been pressing for the construction of the Baku-Ceyhan pipeline to export Caspian oil to world markets. Washington prefers it to alternate routes through Iran or Russia. The project is estimated to cost $2.4 billion. Turkey has pledged to cover any expenses above the $2.4 billion estimate. AIOC President David WOODWARD and the representatives of Unocal, Ramco, Delta Hess and Japan's Itochu, signed the Host Government Agreement, the Turnkey Agreement and the Guarantee Document, which were also signed by Turkey's Energy Minister Cumhur ERSUMER, the head of the state-owned pipeline company Botas Gokhan YARDIM, and Treasury Secretary Selcuk DEMIRALP.

Hastert Yanks HR 596 From Floor Vote

· The US House Republican leader on Thursday pulled the House of Representatives back from taking a decision on House Resolution 596 acknowledging the genocide of Armenian during the collapse of the Ottoman Empire, which would have negatively affected the US' relationship with Turkey and other states in the Caucasus region, by not allowing a floor vote. The resolution would be the first official position the US Congress has taken on the conflict. The resolution recognizes "the systemic and deliberate annihilation of 1.5 million Armenians," during their deportation from Turkey during World War I. Speaker of the House Denis HASTERT (Rep.-IL) cited a written request from US President Bill CLINTON, which said that the vote may adversely impact the situation in the Middle East. According to the letter, CLINTON stated, "We have significant interests in this troubled region of the world: containing the threat posed by Saddam HUSSEIN; working for peace and stability in the Middle East and Central Asia; stabilizing the Balkans; and developing new sources of energy. Consideration of the resolution at this sensitive time will not only negatively affect those interests, but could undermine efforts to encourage improved

relations between Armenia and Turkey¾the very goal the Resolution's sponsors seek to advance…Ultimately, this painful matter can only be resolved by both sides examining the past together."

The timing of the measure was a potential problem for the US top maker of commercial helicopters, Textron Inc., which is in negotiations with Turkey for the sale of 145 helicopters estimated at about $4.5 billion. Turkey had said the bill's passage would have "serious bilateral repercussions" for US-Turkey relations. Energy Minister Cumhur ERSUMER had warned that the US House decision could overshadow the US-backed Baku-Tbilisi-Ceyhan Main Export Pipeline. Turkish officials had alluded to commercial, political and military sanctions against the US, its closest diplomatic and military ally, if the resolution is passed. This could have included prevent the US Air Force from access to the Incerlik Turkish Airbase, used to enforce the no-fly zone in Northern Iraq. Turkey welcomed the abandonment of the House resolution. A Turkish daily Hurriyet's headline read, "Friendship wins, hatred loses."

JBIC Signs Loan Agreement With Uzbekistan

· The state-run Japan Bank for International Cooperation (JBIC) Tuesday signed agreements to provide loans to Uzbekistan. The governmental bank, as well as Fuji Bank and Sumitomo Trust & Banking Co., will extend a total of about 7.5 billion yen to the National Bank for Foreign Economic Activity of Uzbekistan to help upgrade a cotton mill in the country. JBIC will cover 60 percent of the total. Under the arrangement, equipment and services will be bought from Japan's Marubeni Corp.

CORRECTION: In the article Georgia-ICF Review Economic Reforms, published on Wednesday, please note that David OWEN represents the International Monetary Fund (IMF), not the International Currency Fund.

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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