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

Monday, October 23, 2000

Russian Federation

Politics

Russian Regional Election Bars Rutskoi

· The election for governor in the Kursk region is headed for a run-off round scheduled for November 5^th, after a controversial decision by the court barred incumbent Alexander RUTSKOI from the ballot on Sunday. Participating in the second round will be Communist Alexander MIKHAILOV and President Vladimir PUTIN's envoy in the region, Viktor SURZHIKOV; neither secured the 50 percent support for an outright win. An official from the Kursk election commission said that turnout at the gubernatorial polls was nearly 58 percent, above the required 50 percent. Other officials on Sunday said that three hours before the end of voting turnout was only 41 percent. RUTSKOI has sought an appeal at the Supreme Court. The regional court accused RUTSKOI of misreporting his property and of abusing his official position to help his campaign. RUTSKOI denied both charges. The former vice president, who lead a revolt in 1993 against then Kremlin leader Boris YELTSIN and later was amnesty, fallen out of favor with the Kremlin. Kremlin officials accuse him of poor management of the region. RUTSKOI believes the court decision ruled against him because his initiative to help the families of the sailors who died when the Kursk sank in August infuriated PUTIN. RUTSKOI on Sunday accused his opponents of plotting against him, and suggested they had help from the Kremlin. He called the last-minute court decision a threat to Russian democracy.

US Funds Dismantling of Nuclear Submarines

· Last week, director of the US Department of Defense's Common Threat Reduction Directorate General Thomas KUENNING opened the US-funded nuclear waste processing plant, near the secret

Russian nuclear shipyard in Severodvinsk. This is where the Kursk submarine, which sank in August after an explosion killing all 118 crew, was built. The plant is designed to help Moscow scrap its ageing submarines, and to help the people of Severodvinsk make a living. "The United States really believes that the $17 million that it has invested in this project is money well spent," KUENNING said. The plant, fully paid for by Washington and built by an international consortium, which also included Russian companies, is scheduled to start what are called "hot" tests this week, Reuters reported. It will then be able to process large amounts of low-level radioactive waste, such as reactor cooling liquids, laundry wastewater and radioactive solids, generated in the dismantling of nuclear-powered submarines. "This project will help make the area safer, the Arctic region safer, in fact, the whole world safer for the work that will be done at this plant," KUENNING said. Russian Deputy Atomic Energy Minister Valery LEBEDEV said 185 nuclear submarines across Russia were now waiting to be dismantled, 55 of them already cut up. The plant in Severodvinsk, along with two more similar facilities due to be commissioned later, will help eliminate the problem of low-level waste altogether.

Economy

Duma Approves Budget In Second Reading

· The Russia's State Duma, in a vote of 302 to 129, with one abstention, approved the 2001 draft budget in principle in a sec

Today's News Highlights

Russia

Moscow Oil Company Created

Interros Protests Stinol Sale

European Republics

IMF Rejects Belarus Request

Estonian Economic Statistics

South Caucasus & Central Asia

Chechens Surrender In Georgia

Adamov To Visit Armenia

Kazakh-Turkey Cooperation

Tajik Economic Statistics

Politics-Economics-Business

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Monday

October 23, 2000

Intercon's Daily

ond reading. The only faction in the Duma to oppose the $40-billion draft budget was the Communists, but their votes were not enough to counter pro-government, liberal and centrist factions. This is Russia's first balanced budget since the collapse of the Soviet Union. The Budget predicts a gross domestic product (GDP) to grow at a rate of 7.75 percent. It also called for 29.2 billion rubles ($973 million at the projected average exchange rate of 30 rubles per dollar) of revenues to be redistributed. Many deputies welcomed a proposed redistribution of spending. Spending increases will be in the areas of military (a rise of $452 million), education, and science. In order to afford these increases, the government slashed subsidies to the nation's 89 regions. It will allow regions to keep 99 percent of the income taxes they collect instead of 84 percent. Budget Committee Chairman Alexander ZHUKOV said, "Now that the [redistribution] decisions have been taken, which were supported by the government, chances for the budget passing have become much higher." The proposed budget calls for $42.8 billion in spending and revenues, with no deficit. The third reading is scheduled for December 1^st. The budget also requires approval from the Federation Council before the president signs it into law. The Kremlin wants the budget adopted by the end of the year, and swift passage could help Russia win support from the International Monetary Fund (IMF). This might accelerate debt-restructuring talks with the Paris Club of country lenders.

Ruble = 27.93/$1.00 (NY rate)

Ruble = 27.94/$1.00 (CB rate)

Ruble = 23.37/1 euro (CB rate)

Business

Russian Aluminum Group Buys GAZ Stake

· Sibirsky Alyuminiyum, Russia's third aluminum producer, bought a 15 percent to 23 percent stake in Gorkovsky Avtomobilny Zavod (GAZ), the nation's second-biggest carmaker, Vedomosti reported. Sibirsky, which denies it is buying GAZ shares, showed its interest in the industry when it bought earlier this year a controlling stake in busmaker Pavlovsky Avtobus, based in the Nizhny Novgorod region that's also home to GAZ. Alfa Group, an industrial and financial holding with links to SUAL, Russia's fourth aluminum producer, said it is buying GAZ shares and already owns 5 percent

of the company that makes Volga sedans and the best-selling Gazelle light truck. GAZ shares have risen 42 percent since September 18^th. Sibirsky is merging its assets with aluminum producing assets owned by shareholders of Sibneft, Russia's sixth-largest oil producer, to create Russky Alyuminiyum, which aims to control 70 percent of the country's aluminum production.

Moscow Oil Company Created

· Sibir Energy, a British-based oil exploration company, founded with the City of Moscow a new Russian company to produce and refine crude oil and market refined oil products in the national capital and the surrounding region. Moscow Oil Co., which will unite the assets of city-owned Central Fuel Co. and Sibir's oil- producing assets in Western Siberia, is split evenly between the two partners. The venture also will inherit joint projects with BP Amoco and Royal Dutch/Shell Group, and LUKoil Holding and Tatneft. "The company's assets will be evaluated by an independent auditor, to allow them to be merged by April 2001 at the latest," said Moscow Oil President Shalva CHIGIRINSKY. He added, "We do not know the company's final value, but Russia's oil assets value rose as world prices increased." Moscow Oil was created to increase the share of the city retail market, worth as much as $5 billion in fuel sales a year, supplied by Central Fuel's operations. The company will have about 2 billion barrels of oil reserves, double Russia's average yearly output.

Interros Protest Stinol Sale

· Interros Holding Co. said it will fight Merloni Electrodomesticos' purchase of Stinol for $119.3 million from Novolipetsk Metalichesky Kombinat (NLMK), a Russian steelmaker. Merloni produces Ariston and Indesit household appliances. On Thursday, Interros said that NLMK's management hasn't provided enough information about the sale of Stinol, which Merloni estimates has about 20 percent of the Russian market. Head of Interros Vladimir POTANIN said, "We will try to block any action by management which might effect NLMK's financial situation, and which has not been clearly explained to us. The problem is management isn't explaining what is happening with the company's finances." Merloni's general director, Andrea GUERRA, said the Italian company plans to invest $50 million in

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Stinol over the next three years to increase its market share in Russia.

Estonian Industrial Sales Eased

· Despite the fact that Estonian industrial sales eased in September versus August, analysts see a full-year increase of around 10 percent. According to Reuters, Estonian industrial sales rose 1.2 percent, month-on-month in September for an annual rise of 8.5 percent. The annual nine-month rise was 11.7 percent. August saw a 17.4 percent monthly rise in industrial sales and a 12.8 percent annual increase. The eight-month annual rise was 11.9 percent. "In September there was slowdown of growth... and this is basically what we had been expecting. We think growth will slow a bit [more] in the fourth quarter for a full-year estimate of 10 percent," said Trigon Capital analyst Toomas Reisenbuk. "It is basically because the [comparative] base was much lower in the first half of last year...and you cannot have the same rates of growth [now] because the comparative base will be higher," he added. Hit by the Russian economic crisis, Estonia's economy shrank 1.1 percent last year. The country has recovered, with annual gross growth in the second quarter at 7.5 percent.

South Caucasus & Central Asia

Chechen Rebels Surrender In Georgia

· Georgian President Eduard SHEVARDNADZE announced today that most that the more than 60 Chechen rebels had surrendered to Georgian authorities. Georgian officials were continuing talks with the remaining rebels. The President said, "I think that it will all be over today or tomorrow. I have categorically demanded that this problem be resolved in a peaceful way without bloodshed." Chief of the General Staff, Lieutenant-General Dzhoni PIRTSKHALAISHVILI supervised the operation. Scores of Georgian police and troops were sent to the remote, mountainous region. Georgia's State Minister Georgy ARSENASHVILI said the rebels traveled west from Chechnya to the neighboring Russian republic of Ingushetia, then crossed from Ingushetia south into Georgia on Friday. Georgian forces stopped the men in the Assa gorge, about 40 kilometers (25 miles) from the Pankisi gorge. Russian authorities have complained that thousands of Chechen rebels have found shelter from Russia's military campaign in that region and that Georgia has been operating as an arms corridor for the rebels. Georgia is treating about 20 to 25 rebels who

European Republics

Kazakhoil To Bid On Ukrainian Oil Refinery

· Kazakhoil, the Kazakh oil and gas company bidding for Khersonskyi Naftopererobnyi Zavod, a Ukrainian refinery, may bid for more refineries in the country to boost oil exports to Western and Eastern Europe. The company said that if it decides to supply oil through the unfinished Odessa-Brody oil pipeline, it would need to be refined in Ukraine and then transported to Western and Eastern Europe. Kazakhoil President Nurlan BALGIMBAEV said, "Kazakhstan's oil export capacity is huge, especially during the next 10 years." Ukraine depends on oil and oil product supplies from abroad for more than 80 percent of its overall needs and said it wants to sell majority stakes in its oil refineries to foreign companies, which would be able to secure enough crude oil supplies. BALGIMBAEV met with Ukrainian Prime Minister Viktor YUSHCHENKO Monday. The Odessa-Brody pipeline goes from the Ukrainian Black Sea port of Odessa to the Western border of the country. The government said that more than 50 percent of the pipeline is built. Kazakhoil also said it plans to spend about $90 million to buy Ukrainian pipes for construction of its domestic transportation pipelines next year.

IMF Turns Down Belarus Loan Request

· Following an annual review of Belarus' economy, the International Monetary Fund (IMF) decided to reject the nation's request for a loan. The Fund said that the country must improve its government accounting and banking system, while cutting its deficit. It also called on the Belarus Central Bank to should resist pressure from the government and tighten monetary policy. According to the Fund's statement, "Fundamental progress toward macroeconomic stabilization and sustainable growth will require implementation of a comprehensive reform program, including tight macroeconomic policies and a coherent structural reform agenda," before lending could be resumed. The last time the country was able to borrow from the fund was 1995. Belarus' economy is expected to shrink by 6.3 percent, despite the growth of 7 percent in Russia. In addition to cutting its deficit, which will be 1.1 percent of gross domestic product this year, the country needs to improve the management of its fragile banking sector.

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needed urgent medical treatment. One rebel had died during their nine-day march, most likely from previous injuries. The youngest rebel was 17 years old, with the average age of those who surrendered at 32 years old. The rebels had been seeking safe passage to Azerbaijan or Turkey. The Kremlin's spokesman Sergei YASTRZHEMBSKY has stated that Russia will seek the extradition of some of the rebels, who are accused of being under the command of Ruslan GELAEV and committing terrorist acts. He pointed out that Russia has cooperated with Georgian demands to hand over suspected participants in assassination attempts against SHEVARDNADZE. It should be noted that Georgia has more than three times sought the extradition of the former head of Georgian security service Igor GIORGADZE, who is wanted for organizing the terrorist attack against SHEVARDNADZE on August 29, 1995. Despite frequent appearances on Russian television, Russian authorities insist GIORGADZE is not within their borders. Prime News Agency has reported that the Georgian intelligence has always known GIORGADZE's location.

Mkhedrioni leaderJABA IOSELIANI said that the rebel incursion could be a Russian conspiracy. He believes that the Russians let these rebels cross through the border as a provocation and reason for conflict to spread beyond its borders. The Russian Federal Border Service has denied allowing the Chechen rebel group to cross into Georgia.

Adamov To Build Bilateral Ties With Armenia

· Russian Nuclear Minister Yevgeny ADAMOV arrived in Yerevan to attend a session of the CIS Interstate Commission for Peaceful Uses of Nuclear Energy and to discuss the bilateral relations. The minister is also a co-chairman of the Rus-Armenian Intergovernmental Commission for Economic Cooperation. ADAMOV stressed that he will discuss the "further advancement of the bilateral economic ties." He added that, "Although the commission does not convene frequently, it functions in a working regime and controls the whole range of

issues. The Russian ambassador to Armenia, the Armenian ambassador to Russia and us are trying to promote things." The Minister noted that he would use his trip to meet with the leadership of Armenia and to discuss questions tackled by the intergovernmental commission. ADAMOV said he would not go to the Armenian nuclear power plant. "I have rather good information about the developments there, and the director of the nuclear power plant will take part in the commission's work. So I see no reason to visit the power plant," he noted.

Kazakh-Turkey Commit To Cooperation

· Kazakh President Nursultan NAZARBAYEV and his Turkish counterpart Ahmed Necdet SEZER on Thursday renewed their commitment to strengthen economic and military cooperation. Turkey is the third largest investor in Kazakhstan with $1.5 billion, followed by the US and Great Britain. The trade volume between Kazakhstan and Turkey reached $300 million in the first six months of this year and is expected to total $500 million by the end of this year. The two Presidents said they would strive for the target of $1 billion in bilateral trade. SEZER and NAZARBAYEV exchanged views on bilateral cooperation in areas, such as the political situation in Central Asia and regional security. Turkey supports Kazakhstan's plan to construct an oil pipeline from Kazakhstan's Aktau to Turkey's Ceyhan and expressed the hope that it could join the construction. The Presidents signed a joint statement on fighting terrorism, drugs, and religious extremism.

Tajik Economic Statistics

· Tajikistan posted a trade surplus of $85.7 million in January-September, compared with a surplus of $22.6 million in the same period of 1999. Exports over the same period totaled $573.2 million. Imports totaled $487.5 million. Tajikistan's consumer prices rose by 7.5 percent in September after a 5.9 percent rise in August. In September, 1999, consumer prices fell by 1.4 percent. Tajikistan's industrial output rose 10.1 percent in January to September over the same year-ago levels.

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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