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, November 1, 2000

Russian Federation

Politics

Russian-European Military Cooperation

· Secretary of Russia's Security Council Sergei IVANOV expressed an interest in considering a military cooperation with Europe. This consideration is contingent on whether Europe continues with plans for an international rapid reaction force aimed at defusing or preventing conflicts. IVANOV hinted that the planned 60,000-strong force may be used by Moscow as a counterbalance to NATO. He said, "We see this as one outlet of possibly joining forces on security issues in Europe, because many European countries are not in fact NATO members." Russia has supported the enlargement of the European Union (EU), but remains critical of NATO expansion toward its borders. Moscow views that expansion as a security threat. IVANOV's comments follow an agreement between Russia and Europe on Monday to open talks on how Russia might contribute to the EU's new common security and foreign policy. The Secretary underlined the Kremlin's plans to cut Russia's ageing military machine and launch a major restructuring of its Soviet-era command structure. "It is clear that the army needs serious reforms to make it more professional, more mobile and smaller in size," he said. Russian media reports have pegged armed forces reductions at 400,000, or a third of the total, by 2003.

Senators Demand Arms Agmt. Documents

· US Republican Senators on Tuesday kept up the pressure on the US State Department to hand over key documents relating to Vice President Al GORE's 1995 pact with Moscow to allow certain arms sales to Iran. The Senate Foreign Relations Committee, which threatened to subpoena the documents if they were not produced by a Monday deadline, flatly

rejected a State Department offer to show the documents only to Congressional leaders and was weighing on Tuesday whether to go ahead and issue the subpoenas, Reuters reported. GORE's campaign for President has accused Republicans of trying to make political mileage out of the issue ahead of the November 7^th election. Senate Republican leader Trent LOTT (Rep.-MS) said, "We responded yesterday that the offer just to brief Speaker [Dennis HASTERT] and me, and not even allow the documentation, was totally inadequate and unacceptable…But we're working on that. And if we can't get something worked out here before too long, then we would move to a subpoena, probably later on today." Among those demanding the documents were LOTT, Foreign Relations Committee Chairman Jesse HELMS (Rep.-NC), Armed Services Committee Chairman John WARNER (Rep.-VA), and Senator John MCCAIN (Rep.-AZ). Republican critics of the 1995 US-Russia weapons agreement contend that it violated US nonproliferation rules and was kept secret. GORE has denied there was anything secret about it. Administration officials defended the agreement between GORE and former Russian Prime Minister Viktor CHRENOMYRDIN, saying it was consistent with US law and had achieved its main purpose of halting sales of new Russian weapons to Iran. State Department spokesman Richard BOUCHER said, "The policy has worked well in part because it is confidential and because it has sensitive aspects. We offered to provide

Today's News Highlights

Russia

Gazprom Deputy CEO Resigns

Irkutskenergo ToSell Gas Assets

European Republics

Latvian Fiscal Gap Widens

IMF Reviews Ukraine's Reforms

South Caucasus & Central Asia

Chechen Rebels To Be Charged

Itera-Tbligas Negotiations

Observers For Azeri Elections

Kazakh To Probe Oil Refineries

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November 1, 2000

Intercon's Daily

this access to key documents for the [congressional] leadership. They refused the offer, but we'll keep talking to them about how that can be achieved in a way that protects the success of the policy."

Economy

Economic Statistics & Ratings

· Russian consumer prices rose 2 percent in October, as the 2000 inflation rate is set to be as much as a quarter higher than forecast, said Deputy Finance Minister Alexei ULYUKAEV, citing preliminary data. The Finance Ministry will have more exact October figures on Sunday. Annual inflation this year could total between 20 percent and 22 percent, higher than the government's target of 18 percent set in this year's budget. Consumer prices rose 1 percent in August from July, after a 1.8 percent monthly rise in July and a 2.6 percent rise in June. The CPI 2000 forecast stood at 20 percent, compared with the 1999 total of 36.5 percent. The oil output for 2000 is projected to be 315 million tons, while the 1999 totals reached 304.9 million tons. Russia's gross domestic product for 2000 was predicted to grow at a rate of 7 percent, compared with the 1999 total of 3.2 percent. Long-term foreign currency ratings include Moody's B3 established in August 1998; Standard & Poors Eurobonds at B-, and MinFins Series 4-7 at CCC+ foreign currency issuer rating SD; Fitch set a eurobond rating of B and a MinFin Bonds Series IV-V CCC, MinFin Bonds Series VI-VII CCC+, ruble issues of the federal government of Russia - long-term local currency rating B- in August of this year.

Russia To Pay IMF On Time

· Russia has reserved 19,468,867 of Special Drawing Rights (SDRs) ($25.02 million) for a scheduled payment to the International Monetary Fund (IMF) on Thursday, a Finance Ministry spokeswoman said. She said the next payment to the Fund would be made on Friday, ahead of a November 7^th due date, which falls on a national Russian holiday. The Fund expects Russia to pay 132,183,483 SDRs on November 7^th, another 44,928,125 SDRs on November 8^th, and 89,856,250 SDRs on November 11^th, the IMF said. Russia, the IMF's biggest single borrower, owed about $12 billion to the Fund as of the end of August, 2000. Russia has paid more than $3 billion to the Fund this year out of a total $3.6 billion due in 2000.

Ruble = 27.82/$1.00 (NY rate)

Ruble = 27.85/$1.00 (CB rate)

Ruble = 23.87/1 euro (CB rate)

Business

Gazprom Deputy CEO Retires

· Gazprom's deputy chief executive, Valery REMIZOV, turned in his resignation to chief executive Rem VYAKHIREV. REMIZOV was viewed by many as the leading candidate to succeed VYAKHIREV, whose contract expires next May. Rumors of VYAKHIREV's own retirement have been predicted numerous times. Many are speculating why REMIZOV resigned at this time. Ivan MAZALOV, oil and gas analyst at Troika Dialog investment bank in Moscow explained reasons for his resignation, "He was touted to be the government's choice for successor to VYAKHIREV...and he was made a scapegoat during the board of director's investigation of the [Russian natural gas trading company] Itera dealings." Gazprom's relationship with Itera is unclear. Minority shareholders accuse Gazprom of surreptitiously transferring assets to Itera. Some speculate that REMIZOV resigned to take responsibility for the second consecutive year of declining output. Gazprom production will decline 4.7 percent this year, to 520 billion cubic meters of gas, from 545.6 billion cubic meters produced in 1999. The company produced 553.7 billion cubic meters in 1998. REMIZOV will head VNIIGAZ, Gazprom's research and development unit, Vedomosti reported.

Irkutskenergo To Sell Siberian Gas Assets

· Irkutskenergo, a Siberian unit of Russia's Unified Energy Systems, plans to sell its stake in a company part-owned by BP Amoco with rights to a gas deposit of about 1.4 trillion cubic meters, Vremya Novostei said. Irkutskenergo received bids from seven companies for its 12.88 percent stake in Rusia Petroleum, which aims to develop the giant Kovyktinskoye gas field in eastern Siberia. The power generator hasn't decided on a bid. It earlier stated that it will sell the stake to the highest bidder. BP Amoco owns 25.59 percent of Rusia Petroleum, which sold $25 million of new shares last month to fund exploration in 2001. The London-based oil company has said the Siberian gas project, with deposits relatively close to China's potentially huge market, is key to its strategy for Russia. The

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Irkutsk region government holds 13.97 percent of the exploration company. Sidanco, a Russian oil company in which BP Amoco holds 10 percent, owns 5.62 percent of Rusia Petroleum.

IMF Team To Monitor Ukraine

· An International Monetary Fund (IMF) team is scheduled to arrive in Ukraine next week to discuss resuming a loan program. John ODLING-SMEE, head of the IMF's European Department, will lead the team, in what will mark the latest attempt by Ukraine to get its $2.6 billion, three-year program back on track after it was canceled in September 1999. The loan program was cut off due to Ukraine's slow progress in carrying out IMF-mandated reforms. If ODLING-SMEE determines that an IMF loan is a possibility, his visit will be followed by an IMF mission to formally negotiate the loan, spokesman Thomas DAWSON said in Washington. He didn't provide an amount or timetable for the loan. ODLING-SMEE's visit, which comes at the request of the country, is the latest twist in the year-long lobbying effort by Ukraine to get its IMF loan restarted. Unfortunately, Ukraine has been cited by critics of the IMF as an example of how the Fund's loans go wrong. An independent audit of IMF loans to the Ukraine from 1997 and 1998 found that the country overstated its foreign reserves to get disbursements for which it didn't qualify. As a result of the findings, the IMF board decided that any new loans to the country will remain in the IMF's coffers, and be used only to pay back previous loans, Bloomberg News reported.

South Caucasus & Central Asia

Charges Will Be Pressed Against Rebels

· Georgian President Eduard SHEVARDNADZE and Prosecutor General Jamlet BABILASHVILI have stated that the 25 Chechens, who are being treated at the Tbilisi Aviation Plant, will be tried on several charges. The President pointed out that the rebels will not be given refugee status because they illegal crossed into Georgia. BABILASHVILI said Tuesday among the charges pressed against the Chechens are violation of the state border of Georgia, carrying of arms, and privy to an illegal armed formation. This could lead to sentence of up to five years in prison. According to him, 25 Chechens who surrendered to Georgian power bodies nearby the Ingushetia portion of the state border are still in poor health condition, but they are still being questioned for identification. BABILASHVILI said that if any of those 25 Chechens are wanted by Russia than the Prosecutor General's Office of Georgia will discuss

European Republics

Latvia Reviews Widening Fiscal Gap

· Latvian deputies are reviewing proposals that would increase the fiscal deficit to around 3.3 percent of gross domestic product (GDP). Concern is growing over the widening fiscal gap. In its first reading, deputies approved the amended budget, with a total deficit of 129.9 million lats ($209.2 million) or 3.1 percent of GDP. Parliament's budget and finance commission has approved additional spending proposals for extra funding in areas such as education and health spending. The additional spending amounts to around 1.7 million lats ($2.7 million), which would raise the deficit to about 3.3 percent of GDP. The government initially pledged to limit this year's budget deficit to two percent of GDP, but later said it would break that promise due to increased spending on social services, education, and agriculture. Finance Minister Gundars BERZINS had warned the budget commission that Latvia would stand to receive a negative evaluation from the International Monetary Fund (IMF) if the increased deficit was approved. Latvia has a precautionary agreement with the IMF that paved the way for a three-year, $120 million program of structural adjustment loans. Parliament will hold the second and final reading of the budget on Thursday.

Estonia's Deficit Totals 37M Kroons

· Estonia's Finance Ministry reported that the nation's consolidated general budget had a deficit of 36.9 million kroons ($1.98 million) at the end of September, compared with a surplus of 175.2 million kroons at the end of August. Revenues in September totaled 2.45 billion kroons, while spending was 2.48 billion kroons. In the first nine months of this year, the budget deficit totaled 270 million kroons, or 0.32 percent of anticipated gross domestic product for this year. Revenues for the first nine months totaled 22.36 billion kroons, while spending was 22.63 billion kroons. The 2000 budget deficit is expected to account for 1.2 percent of GDP, or below 1 billion kroons.

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their possible extradition to Russia, Prime News Agency reported. Vice-president of the International Caucasus Union of Human Rights Said KHACHIKAEV noted that the Chechens are confident in the fairness of Georgian court, which, "will consider that they had to run away from genocide."

Itera-Tbilgas Resume Negotiations

· The issue of debt coverage between International Company group Itera, closely linked to Russia's Gazprom, and Tbilgas will be discussed during negotiations in Moscow. Tbilisi municipal premier George SHERADZE and Tbilgas director general George GOZALISHVILI will represent Georgia in this matter. Tbilgas told Prime News Agency that it is likely that an agreement will be signed during the negotiations, which will include the terms according to which Tbilisi gas distributing company will be getting natural gas directly from Itera, without Gruzgas mediation. The old debts of Tbilgas to Itera and Gruzgas total $10 million.

Observers For Azeri Parliamentary Elections

· Azerbaijan's Foreign Ministry has announced that more than three hundred foreign observers from twenty-five countries, including Russia, as well as nine international organizations, will monitor the November 5^th parliamentary elections. The Organization for Security and Cooperation in Europe (OSCE) is sending 24 observers to Azerbaijan. Azeri Foreign Minister Viloyet GULIYEV met with OSCE officials based in Azerbaijan on Tuesday and promised that the elections would be fair and democratic. Head of the Presidential Administration Ramiz MEKHTIEV said that an automated information system would be used for the first time to sum up the results of the voting, which will make this process much quicker and more objective. The Central Electoral Commission (CEC) of Azerbaijan reports that twelve parties and one bloc, as well as 408 candidates registered in the single-mandate constituencies are participating in this election. Four candidates on the average will compete for seats in the 125-man parliament of Azerbaijan. The

OSCE's Office for Democratic Institutions and Human Rights said recently that it was "seriously concerned" at election officials' decisions to bar seven political parties from the election, including Azerbaijan's largest opposition group, Musavat. The CEC claimed that some of the signatures on the parties' nominating petitions were forged. It should be noted that the majority of the election commission are members of the ruling New Azerbaijan Party.

Kazakhstan To Receive Highway Loan

· Kazakhstan's Finance Ministry and Saudi Arabia's Development Fund today signed an agreement for a $12 million loan to Kazakhstan for the restoration of a major highway, the road linking the capital Astana and the central city of Karaganda. Kazakh Prime Minister Kasymzhomart TOKAYEV and Saudi Second Deputy Prime Minister Prince Sultan Bin Abdul Aziz AL SAUD held talks over co-operation today. Bilateral diplomatic relations were established in April, 1994. Saudi Arabia was one of the first Arab nations to recognize Kazakhstan's independence. Kazakh President Nursultan NAZARBAYEV paid his first visit to Saudi Arabia in his capacity as head of state in September 1994, during which he met King Fahd Bin Abdul Aziz AL SAUD. The sides then signed a general agreement on co-operation in the economy, investment, technical and culture. NAZARBAYEV is expected to receive Prince Sultan this afternoon.

Kazakh To Probe Oil Refineries

· Kazakh Prime Minister Kasymzhomart TOKAYEV has requested that authorities investigate whether there have been violations of the country's foreign currency law at domestic oil refineries. He finds this issue a priority for the government. Kazakh customs officials revealed a number of law violations at SHNOS, a refinery located in southern Kazakhstan, and at Atyrau, an oil refinery in the western part of the country, Bloomberg News reported. The government predicts that its oil production will almost triple by 2010.

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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