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

Thursday, October 26, 2000

Russian Federation

Politics

Note From Kursk Describes Failed Escape

· Norwegian and Russian divers recovered the bodies of four sailors from the nuclear Kursk submarine on Wednesday. A note found on the body, identified as Lieutenant Captain KOLESNIKOV, reveals important information on the fate of the Kursk's crew, following a massive explosion. It states, "All the crew from the sixth, seventh and eighth compartments went over to the ninth. There are 23 people here. We made this decision as a result of the accident. None of us can get to the surface." KOLESNIKOV also indicates the time as 13:15 and that he is writing the note in darkness. The note did not provided information on the cause of the accident. According to foreign and Russian naval surveillance data, two large explosions were detected in the area of the Kursk at 11:30am on August 12^th. It is believed that the remaining crewmembers died either of hypothermia, drowning, or high pressure. The full text of the note will not be made public. Instead, it will be handed over to KOLESNIKOV's relatives. The note gives credence to early reports that faint tapping S.O.S. was heard several days after the sinking, as Russian rescue efforts failed to link with the submarine. Once joint rescue efforts with foreign entities reached the submarine and water was found in the escape capsule on August 21^st, officials adopted the theory that all crewmembers were killed instantly. The note refutes this, but prompts further questions. Russian Navy chief Admiral Vladimir KUROYEDOV said that divers switched to concentrating on the submarine's ninth compartment. He warned that he might cancel the recovery effort if experts ruled that divers' life was in danger. Further work inside the submarine had been called off today because of

deteriorating weather conditions in the Barents Sea. Government officials say efforts to raise the Kursk will have to wait at best until next Spring.

Russian Il-18 Crashes Killing Over 80

· A Russian military plane Ilyushin-18 (Il-18) crashed on Wednesday night killing over 80 people aboard. The plane crashed 12 miles northeast of Batumi, the site of one of the four Russian military bases in Georgia. A spokesman for Russia's Emergencies Ministry said 82 people, officers and their families returning from vacation, died in the crash. However, Russian Air Force Commander General Anatoly Kornukov was quoted as saying that there were 86 people aboard. Among the victims were 18 women and eight children, one of them a nine-month-old baby. The plane carried classified mail and 1,700 kg of other payload for the 12^th air base of the Russian troops, Itar-Tass reported. On its approach for landing at the Batumi airport the crew reported the expected time of landing to the air traffic controllers and was permitted to begin its descent from the altitude of 3,000 meters. The plane then disappeared from the radar screen and crashed into Mtirala Mountain.

Rescue operations have been started. Georgian President Eduard Shevardnadze is traveling to the region and is expected to visit the crash site later today, his spokesman Kakha Imnadze told Reuters. Shevardnadze spoke to Russian President Vladimir Putin by telephone and expressed his

Today's News Highlights

Russia

Russia To Buy Treasury Debt

Russia To Sell Rosneft Stake

European Republics

LUKoil Wins Oriana Tender

NetCom Invests In Baltkom

South Caucasus & Central Asia

New Ambassador Appointed

Azerbaijan Passes Oil PSA

Fire Telecom In Azeri-Uzbek

Kazakh State-of-Nation Address

Politics-Economics-Business

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Thursday

October 26, 2000

Intercon's Daily

sorrow for relatives of the dead. The two leaders agreed to launch a joint investigation commission. The Kremlin said that Putin also ordered Secretary of the Security Council Sergei Ivanov to set up a special investigation commission. Commenting on the possible cause of the tragedy, Alexander Drobyshevsky, an air force spokesman in Moscow, said the plane had "violated the flight altitude." The head of the Georgian civil aviation agency Alexander Silagadze stated that the plane had veered off course on its approach in "difficult weather conditions." Another official from the Georgian agency Zurab Chankotadze was quoted as saying that the pilot did not make the final turn necessary for approaching the landing strip. "It is so far hard to say whether it was a mistake by the pilot or navigator, or whether the cause was difficult weather conditions," Chankotadze said. Intercon sources report that the pilot was unable to make instrumental landing, as the plane and airport did not have this technical capability. The pilot had to make a visual landing; therefore it is believed that poor weather conditions hindered his ability. The plane was also overloaded. A spokesman for Georgia's air traffic control in Tbilisi said the plane's two black box flight recorders have been found and would be taken to laboratories for analysis.

Capable of carrying 120 passengers, Il-18 has proven itself as a reliable Soviet-era workhorse. It was designed in 1955 and the production ceased in 1970. The planes were used by the Russian military as a submarine hunter and airborne command post, and as a passenger plane by the Soviet national airline Aeroflot. Il-18 crash near Batumi is the third disaster for the last few months for Russia's ill-maintained infrastructure, following the sinking of the nuclear submarine Kursk which killed 118 and a fire that gutted Moscow's Ostankino television tower and killed three.

Economy

Ruble = 27.90/$1.00 (NY rate)

Ruble = 27.89/$1.00 (CB rate)

Ruble = 23.12/1 euro (CB rate)

Russia To Buy Back Treasury Debt

· Russia's Finance Ministry plans to buy back 2 billion rubles to 3 billion rubles ($71 million to $107 million) of treasury debt from the secondary market

in 2001. While the sum is a small part of the country's 575 billion rubles of domestic debt. Bloomberg News cited Vedmosti as reporting that buying back the bills would create a precedent and help restore investor confidence. The Finance Ministry also said it plans to allow foreign investors to repatriate the rest of the funds received last year in the government's restructuring of Treasury bills (GKOs), on which it defaulted in August,1998. The funds were paid into special accounts, tightly supervised by the Central Bank to try and prevent repatriation. Russia's borrowing costs Wednesday fell to the lowest level since the 1998 default, at the sale of 98-day Treasury bills, on a day when the Finance Ministry also made its biggest domestic bond redemption this year. On August 17, 1998, Russia defaulted on about $40 billion rubles worth of GKOs and devalued the ruble, which has lost more than 75 percent of its value against the dollar since them.

Business

Russia Reviews Rosneft Sale For 2001

· The Russian government is considering a State Property Ministry proposal to sell a 25 percent stake in Rosneft, the 100 percent state-owned oil producer, at three different sales in the second half of 2001, Vedomosti reported. The ministry has proposed selling a 10 percent stake through an investment tender, where bidders compete with pledges to invest in the company over a set period. A further 10 percent stake would be sold at auction, and a 5 percent stake would be sold abroad as American Depositary Receipts (ADRs). The government on several occasions in the past three years talked of selling between 25 percent and 75 percent of the state oil company. A 1998 tender for 75 percent of Rosneft, with a starting price of $2.5 billion, failed to attract any bidders as world oil prices fell. Rosneft said nine-month oil production rose 1.3 percent to 9.7 million tons, compared with the same period last year. The company reported revenue of 53.8 billion rubles ($1.93 billion) and pretax profit of 22.1 billion rubles over the first nine months of 2000.

Rusia Petroleum Sells $25M In New Shares

· Rusia Petroleum, an exploration company 25.59 percent-owned by BP Amoco, sold new shares worth $25 million to its shareholders to finance exploration project in 2001. Rusia sold 99.9

When you need to know it as it happens

Politics-Economics-Business

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Thursday

October 26, 2000

Intercon's Daily

percent of 5 million new shares at $5 per share. The company, which holds the rights to develop the Irkutsk region's Kovyktinskoye gas field, which holds an estimated 1.4 trillion cubic meters of gas, will receive 50 percent of the proceeds this month. The rest of the proceeds will be paid by May 2001. The exploration company will offer the remaining 3,000 shares to existing shareholders willing to buy additional shares by November 8^th. All Rusia's major shareholders bid for the new shares. The Irkutsk regional administration and Irkutskenergo, the power generating subsidiary of Unified Energy Systems, Russia's electricity distribution monopoly, are major shareholders, with 13.97 percent and 12.88 percent stakes respectively. Sidanco, which is 10 percent-owned by BP Amoco, holds 5.62 percent in Rusia Petroleum.

Russian company Alpha-Nafta, Sibur, affiliated with Russia's natural gas monopoly Gazprom, and Ukrainian oil trader Asorti, said Alexander BONDAR, head of the Fund. "These are pretty solid bidders, but none of them could offer us such conditions as LUKoil did," BONDAR said, declining to elaborate. The winner agreed to secure stable supplies of raw materials and electricity supplies to the venture, invest at least $37 million for technical reconstruction of Oriana's facilities and reschedule some of the company's more than $100 million debts that it owes to foreign creditors.

NetCom To Invest In Latvia's Baltkom

· Sweden's NetCom, which bought Baltkom GSM, Latvia's second mobile phone company, earlier this month through its Tele2 unit, plans to invest $50 million in the country over the next two or three years. "Tele2 regards Baltkom GSM as an excellent basis for its expansion in Latvia," said Bill BUTLER, the new executive director of Baltkom GSM. BUTLER said Sweden's second-largest phone company would expand the mobile telecommunications network, open Internet portals, media companies and call-processing centers and develop the already existing pre-paid mobile telephone card service. "The aim of Tele2 is to make the main telecommunications solutions available to any person in Latvia at the lowest price," BUTLER said. In the future, NetCom would also like to offer fixed-line telecommunications services, said Johnny SVEDBERG, vice-president of the company. Tele2 agreed to pay $227 million for 100 percent of Baltkom GSM on October 3^rd.

South Caucasus & Central Asia

Georgia Appoints New Ambassador

· Georgia's Parliament has appointed Grigol KATAMADZE, the former the Deputy Defense Minister, to the position of the plenipotentiary ambassador in Ukraine and Moldova. During the discussion of this issue on the plenary session of the parliament the leader of Citizens' Union faction leader Revaz ADAMIA mentioned that KATAMADZE has good and quite close contacts in Ukraine and that Ukraine president Leonid KUCHMA had expressed an interested in his appointment as ambassador, Prime News Agency reported.

European Republics

Turkmen To Resume Gas Supplies To Ukraine

· According to the head of Ukrainian gas and oil company Naftogaz Ukrainy Vadim KOPYLOV, the Turkmenistan government will resume shipments of gas to Ukraine beginning November 1^st. Earlier this month, Turkmenistan agreed to supply 35 billion cubic meters of gas to Ukraine by the end of 2001, including 5 billion cubic meters this year. Ukraine will pay $54 per 1,000 cubic meters for this year's gas supplies from Turkmenistan at the border between Ukraine and Russia. Ukraine will pay for 60 percent of this year's supplies with goods and construction projects. In 2001, Ukraine will pay for 50 percent of the supplies with construction projects and goods deliveries, while the rest is to be paid with hard currency. Ukraine agreed to pay for the supplies every week and if it misses any payment, Turkmenistan will immediately stop deliveries. Turkmenistan last stopped shipments of gas to Ukraine in May, 1999.

LUKoil Wins Oriana Tender

· Ukraine said the local subsidiary of LUKoil Holding, Russia's top oil producer, won a tender to set up a 50-50 joint venture with Ukraine's biggest polyethylene and polypropylene maker, Oriana. Fourteen companies submitted their bids to the tender committee, although only four qualified for participation in the tender, Ukraine's State Property Fund said Monday. LUKoil-Naftokhim won over

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Thursday

October 26, 2000

Intercon's Daily

Azeri Parliament Approves Oil PSA

· The Azeri Parliament approved a production-sharing agreement (PSA) with Moncrief Oil International, Inc. and Turkey's Pet Oil to develop two oil fields. The companies also signed a final agreement on a $50 million loan from the European Bank for Reconstruction and Development (EBRD) to finance the development of the Mishovdag and Kelametdin fields. The project needs $140 million in investments over 25 years to develop the two fields. Natik ALIYEV, the president of the State Oil Company of Azerbaijan (Socar), said the Mishovdag field produced a total of 17.6 million tons of oil since development began, while Kelametdin produced 1.1 million tons. Moncrief Oil owns 49.3 percent of the project, Pet Oil owns 35.7 percent, and Socar has 15 percent.

Telecom Venture In Azerbaijan-Uzbek

· Fire Telecommunications, a global telecommunications concern, Tuesday announced its intent to purchase wireless residential and pay phones from 3eee, Inc. in a deal conservatively valued at $550 million over the next 5 years. The agreement stipulates that both companies will take reciprocating equity stakes of 10% each as part of the strategic partnership. Fire Telecommunications plans to deploy the equipment principally in the Republic of Azerbaijan and Uzbekistan where the Company has secured joint venture relationships with the two governments. John HOLLER, President of Fire said, "Rather than simply finding a supplier, we wanted to find a strategic partner that could share our vision to provide high quality, technologically advanced wireless telecommunications infrastructure where it is desperately needed, around the world." Delivery of the equipment for Fire's infrastructure in Central Asia is required no more than 90 days after the final agreement expected to be signed by December 24^th. HOLLER added, "Moving quickly with a sound partner will allow us to efficiently meet our strategic objectives and dutifully fulfill our corporate mission. We must continue to be fleet footed, deliver on promises, and create

stockholder value." Fire is also seeking arrangements with Azerbaijan and Uzbekistan to provide wireless residential phone, public phone, Internet, cable and paging services.

Kazakh State Of The Nation Address

· Kazakh President Nursultan NAZARBAYEV on Tuesday addressed parliament with the annual state-of-the nation message stressing the need for political reform to keep pace with the economic transformation. NAZARBAYEV gave priority to strengthening the nation's legal system. He signed a decree, "On Measures to Enhance the Independence of the Judicial System." A committee had been set up at the Supreme Court to oversee the work of the courts, rather than the Ministry of Justice as before. "The next step towards an autonomous judicial system will be a bill on the legal status of courts and judges in the republic…Legal reform will also provide for transfer of the penitentiary system from under the jurisdiction of the Interior Ministry to that of the Justice Ministry," NAZARBAYEV said. More authority will be granted to representative power structures to boost political reforms. The Kazakh President announced that the government will increase wages of workers of the budget-financed sectors (with the exception of officials) by 30 percent in 2001. The wages of army, police officers, judicial workers will be increased by 30 to 40 percent, and the minimal pension will reach 4,000 tenge (about $28). He also encouraged private enterprises to consider increasing wages. "The crisis did not give us a chance to tackle seriously the problem of improving living standards of the population. Now the time has come for that." He said the country would adopt its first five-year economic development plan. By the end of the five-year period, the growth rate of the gross domestic product (GDP) will reach 30 percent. Revenues to the state budget will reach 25 percent of GDP. Inflation is predicted not to exceed four to five percent a year. The Kazakh President said, "Describing our economic prospects for the near future, we can say today that they look promising."

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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