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 25, 2000

ons and arms are being shipped through the base in Batumi.

Politics

Kursk Divers Recover Three Bodies

· After five days of using a stream of pressurized water mixed with diamond dust to slice through a 2 1/2-inch-thick steel plate for a hole through the Kursk's double hull submarine, 356 feet below the surface in the cold waters of the Barents Sea, Russian Northern Fleet commander Vyacheslav POPOV gave the go ahead of a deep-sea diver to enter the sunken submarine. The diver was only able to swim about 15 feet before being stopped by a narrow passageway. No remains of the crew were initially visible. Another group of divers entered the 8^th and 9^th compartments, where three bodies were recovered amongst the debris. Their bodies have been removed from the hull of the submarine and placed into a container that is waiting to be lifted to the surface. It is believed that the majority of the bodies are thought to be in the 1^st compartment of the submarine. The divers must contend with darkness, currents, floating debris and confined spaces. The head of the Russian Navy, Admiral Vladimir KUROYEDOV, had earlier warned that he might cancel the recovery effort because of the danger of divers ripping their pressure suits or cutting their air hoses on mangled equipment and debris. Experts are examining video footage from a robot camera to determine if it is safe enough to reach the bodies.

Russian Federation

NEWSFLASH

Defense Ministry Plane Crashes Near Batumi

· A Russian Defense Ministry Il-18 transport plane, with 64 passengers and 11 crewmembers, crashed today near the Georgian port of Batumi. Although the cause of the crash is not immediately known, it is believed that the plane was specially chartered for officers, their wives, and children on a course headed from Chkalovskoe Airport near Moscow to Batumi. The plane crashed into the Adjaria Mountains, while attempting to land in "difficult weather conditions," said Alexander SILAGADZE, head of the civil aviation agency Sakaeronavigatsiya. Communication with the Defense Ministry aircraft was lost at approximately 8:20pm and later local eyewitnesses heard a large explosion and saw the plane diving down towards the mountain range. Preliminary information shows that the accident could have been due to pilot's error, but investigators are not excluding the possibility of a terrorist act. A spokeswoman for Russia's Emergencies Ministry said there is no information on whether anyone on board survived the crash. Prime News Agency has confirmed that there are no survivors. The list of passengers is being verified as well as the cargo's manifest. "There is some confusion in the charter flights lists of passengers," in general, according to the officer on duty. The Emergencies Ministry is sending a special team of rescuers and investigators to the scene of the crash. A delegation from the Defense Ministry is headed to the crash-sight as well. Despite Georgia's independence, Russia maintains a military base in Batumi. Russia is in the process of withdrawing troops and arms from two bases in Georgia, Vaziani and Gudauta, in accordance with an agreement reached in Istanbul in November, 1999. The weap

Today's News Highlights

Russia

S. Korea Rejects Soviet Subs.

Alrosa Buys UES Power Plant

European Republics

Estonia Debates 2001 Budget

IMF To Visit Kiev

South Caucasus & Central Asia

Georgia Customs Detains Drugs

Azeri Passes 2001 Budget

Kyrgyz-Uzbek Comm. Meets

Tajik Sentences Four To Death

Politics-Economics-Business

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Wednesday

October 25, 2000

Intercon's Daily

Weather conditions continue to threaten the divers as overnight storms are predicted in the area. The Kursk sank August 12^th, after two explosions during exercises in which the sub was meant to fire torpedoes and a cruise missile. The cause of the accident has not been officially determined. KUROYEDOV is insisting that the Kursk sank due to a collision with another foreign submarine. On Tuesday, he told RTR Television, "I am 80 percent sure it was a collision with another submarine. In the next two months, I will make up the other 20 percent and will announce to the world who it was."

S. Korea Rejects Russian Submarines

· South Korea has rejected two Russian nuclear submarines, offered by Moscow to account for half of its debts to Seoul. Russia owes more than $1.5 billion to South Korea. The two nations had reached an agreement that Moscow could pay half the loan in military hardware. South Korea has determined that the two ageing nuclear submarines are not up to naval standards. It says that the submarines failed to meet requirements for navigation and logistics in port, among other tests. Russia apparently must find modern military hardware more to the liking of South Korea or seek funds to pay the debt outright.

Economy

Ruble = 27.90/$1.00 (NY rate)

Ruble = 27.92/$1.00 (CB rate)

Ruble = 23.12/1 euro (CB rate)

Russian CB Considers "S" Accounts

· Russia's Central Bank will soon decide what is to be done with rubles frozen in so-called "S" accounts of foreign investors in restructured domestic securities, a Finance Ministry official said today. Deputy Finance Minister Bella ZLATKIS told an investment conference the ministry had sent a letter on the problem to Central Bank Chairman Viktor GERASHCHENKO on Tuesday and he promised to answer in two weeks. Russia restructured its domestic debt of about $40 billion after the 1998 economic crisis, offering a mixture of cash and securities. Rubles, which foreign investors received from the restructuring, were placed in special "S" accounts. ZLATKIS said the Finance Ministry had proposed three options for solving the problem: introducing quotas (for repatriating funds), hard

currency auctions, or new securities issues. Russia has already held several dollar auctions for "S" account holders, where the hard currency was snapped up at above market rates. It has also held auctions of securities with very low yields, the proceeds from which can be repatriated, as a means for foreign investors to take their money home, Reuters reported. ZLATKIS gave no figure for the amount of funds in "S" accounts, but said it was significant.

CB Chairman To Change Refinancing Rate?

· Russian Central Bank Head Viktor GERASHCHENKO on Friday said he saw grounds for cutting the bank's refinancing rate by 2.0 to 3.0 percentage points. He said, "The situation with interest rates and the level of inflation offers the opportunity to lower the rate by 2.0-3.0 percent." The current rate is 28 percent. Prime Minister Mikhail KASYANOV has said he expects consumer price inflation to be about 19 percent in 2000, after 36.5 percent in 1999. But GERASHCHENKO declined to say when the rate change could take place, saying it would only happen after the Central Bank board had gathered a quorum. He added that the ruble rate would be, "more or less stable," pointing to the expected continuation of healthy payment balances and export receipts.

Business

Alrosa Buys UES Power Plant

· Alrosa, which produces a quarter of the world's diamonds, will pay $100 million for an incomplete power station from a unit of Unified Energy Systems (UES), Russia's power monopoly. UES subsidiary Yakutskenergo's sale of 66.34 percent of shares in Vilyuskaya GES-3, on which construction began in Soviet times, has angered UES minority shareholders, who want more control over the sale of the power monopoly's assets. Alrosa and UES said the transaction isn't completed and that the money will be paid to Yakutskenergo over several years. Alrosa will use 85 percent of energy produced at the power station, originally planned to supply Alrosa's facilities, once it is completed in 2002. UES said Vilyuskaya GES-3 brought losses of 250 million rubles ($9 million) a year. The company will spend money from the sale on improving equipment at Yakutskenergo, Vedomosti reported. Minority shareholders have criticized a manage

When you need to know it as it happens

Politics-Economics-Business

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Wednesday

October 25, 2000

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ment plan to reorganize UES by separating its power generating assets from the distribution network, then selling some of the generators.

Russky Alyuminiy Seeks Export Route

· Russky Alyuminiy, a company consolidating control of more than 70 percent of Russia's aluminum production, plans to start the metal shipments across the northern seas to cut railway transport costs, Vedomosti reported. The company pays about $175 per ton of aluminum to ship the metal to ports by railway. The metal maker plans to save as much as $17 per ton by shipping metals for exports from Siberia across the Arctic by water. Russky Alyuminiy agreed with Murmansk Sea Shipping and Yenisei River Shipping to transport 100,000 tons of aluminum, or about 5 percent of its total production next year.

EDF To Bid On Ukrainian Power Distributor

· Electricite de France (EDF), Europe's largest electricity producer, may bid for controlling stakes in some of Ukraine's seven regional power distributors later this year, Ukrainian daily newspaper Kievskie Vedomosti reported. Ukrainian media reported earlier this month that US-based AES Silk Road also may bid for some stakes in seven of the country's 27 regional power distributors. Ukrainian Prime Minister Viktor YUSHCHENKO met late last week with Electricite de France and AES Silk Road managers to discuss the terms for the sales. The government hopes to raise $250 million for the seven stakes of between 51 percent to 75 percent and won't sell them for less than $132 million. Credit Suisse First Boston's local unit is advising the government on the sale.

IMF To Visit Kiev

· John ODLING-SMEE, director of the European II Department at the International Monetary Fund (IMF), is expected to arrive in Kiev on November 3^rd for talks with Ukraine's government over a resumption in lending to the country, Ukrainian daily newspaper Kievskie Vedomosti reported, citing First Deputy Prime Minister Yuri YEKHANUROV. The government expects that the talks over resumption of lending will take place on November 4^th, YEKHANUROV said. The IMF froze making payments under its $2.6 billion, three-year Extended Fund Facility loan in September 1999, citing a slow pace of reforms in the former Soviet republic. Ukraine's debt owed to the IMF decreased to $1.99 billion as of September 30^th, from $3.06 billion a year ago, according to the IMF.

EBRD To Visit Ukraine In November

· Jean LEMIERRE, president of the European Bank for Reconstruction and Development (EBRD), will arrive in Ukraine for loan talks in November. Ukrainian government spokeswoman Natalya ZARUDNA said, "The EBRD's president has accepted an invitation to come to Ukraine and we have reached a principal agreement that the visit will take place in November." She said the talks would focus on a loan aimed to help Ukraine complete two nuclear reactors at Rivne and Khmelnytsky nuclear power plants. The two new reactors are to replace generating capacity that will be lost after the planned closure of the troubled Chernobyl nuclear power

European Republics

Estonia's Parliament To Debate 2001 Budget

· The Estonian lawmakers will debate the government's 2001 draft budget today. The government has planned revenues and expenditures to be balanced at 29.4467 billion kroons. However, it has admitted that lawmakers still need to find another 150 million kroons in revenues or spending cuts in order to achieve the balance, which is required by law. Estonia's Moderates, one-third of the ruling coalition, have said they are unhappy about the level of social spending in the 2001 draft budget but do not see the issue as a barrier to its approval in parliament or a threat to government stability. The Finance Ministry last month raised its 2001 economic growth forecast to 5.5 percent from a 5.1 percent projection in April. Inflation in 2001 is seen at 4.1 percent. The ministry has said it expects the budget to stay in balance next year. Analysts, who have reviewed the budget, have described it as solid. Merita Securities analyst Mika ERKKILA said, "If you look at the external environment, euroland and Sweden, which are the most important markets, the outlook is somewhat softer...The domestic environment can make up for this so it is important to have a balanced budget," Reuters reported. The Estonian Central Bank has called on the government to secure state budget surpluses in 2001 and 2002 to compensate for the recent budgetary shortfalls.

When you need to know it as it happens

Politics-Economics-Business

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Wednesday

October 25, 2000

Intercon's Daily

plant set for December 15^th. Chernobyl was the site of the world's worst civil nuclear disaster in 1986. Reforming of the ailing energy sector is one of the key conditions required to secure disbursement of the loan, Ukrainian officials say.

South Caucasus & Central Asia

Georgian Customs Detain Drug Shipment

· Georgian Customs and Border Guard officials have detained a truck headed from Azerbaijan to Pankisi Valley, supposedly carrying humanitarian aid to Chechen refugees. After a thorough inspection, officials discover only narcotics and syringes.

Marneuli Airdome Upgrading Project Begins

· The Turkish-funded modernization of Marneuli Military Airdrome nearby Tbilisi will begin this week. The Georgian Defense Ministry said that Turkey has allocated a $1 million grant for the modernization of Marneuli Military Airdrome. Deputy Defense Minister Grigol KATAMADZE signed an agreement to this affect in Ankara over the weekend.

Azeri Parliament Approves 2001 Budget

· The Azerbaijan's parliament on Tuesday approved a 2001 budget which projects a deficit of two percent of gross domestic product, little changed from this year's budget. The 2001 budget calls for spending of 4.596 trillion manats ($1 billion at the projected average exchange rate for the year of 4,600 manats to the dollar) and revenues of 4.175 trillion manats. Azeri President Geidar ALIYEV, who has to ratify the budget, is expected to approve the document as his supporters dominate the legislature. Finance Minister Aviaz ALEKPEROV said the deficit would be covered by using a World Bank credit equivalent to 160 billion manats, revenues from privatization amounting to 200 billion manats as well as Treasury bill issues. Tax revenues from the Azeri State Oil Company (Socar) are set at 1.320 trillion manats. The budget envisages industrial output growth of 4.5 percent and annual inflation of four percent. Industrial output grew 5.8 per

cent in the first nine months of this year, while inflation was 1.8 percent. Defense accounts for the biggest spending category, at 539.5 billion manats, reflecting the country's continuing territorial conflict with neighbor Armenia over the disputed region of Nagorno-Karabakh. Deputy Economy Minister Oktay AKHVERDYEV said foreign investment would increase in 2001 to $945 million from $600-$700 million in 2000.

Uzbek-Kyrgyz Commission Meets In Tashkent

· A meeting of the Uzbek-Kyrgyz Government Commission opened in Tashkent on Tuesday. Representatives will discuss bilateral relations between the two countries, based on the September visit of Uzbek President Islam KARIMOV to Kyrgyzstan. This includes problems of promoting commercial and economic cooperation between the two countries, international freight carriages, expansion of contacts between the customs services of the two countries, cooperation in agriculture, development of relations on the international scene, and promotion of cultural and humanitarian ties. Deputy Prime Minister and Foreign Trade and Industry Minister Esengul UMARALIYEV is leading the Kyrgyz delegation. The Commission will plan for its next meeting in Bishkek.

Four Sentenced In Tajik For Attempted Coup

· The Tajik Supreme Court on Tuesday sentenced to death four people and jailed 59 others for participating in an armed revolt in 1998. The official said the accused had participated in the coup attempt of 1998 when forces led by Tajik Army Colonel Makhmud KHUDOIBERDIYEV managed to seize parts of the ex-Soviet state's northern Leninabad region for several days. Dozens of soldiers and civilians died in fierce fighting during the coup, which came just a year after the end of Tajikistan's 1992-1997 civil war. KHUDOIBERDIYEV managed to escape and is believed to be hiding in a neighboring state. The court official said the four men sentenced to death would have the right to appeal to President Emomali RAKHMONOV.

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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