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

Tuesday, November 28, 2000

Russian Federation

Politics

Push For Legal Reforms, Judges Get Raise

· Russian President Vladimir PUTIN has pledged to increase funding for Russia's judicial system and called for creating new forms of courts, renewing the effort to implement legal reforms. Human rights activists have attacked Russia's criminal system for under-funding, a bias towards conviction, and the poor conditions in which prisoners are held. About one million Russians are packed into the country's overcrowded and dilapidated jails. PUTIN has called for reducing the length of pre-trial detention, which can be more than three years. Foreign and domestic businesses have questioned the independence of judges, criticized the civil courts, and raised concerns over the protection of property rights. Speaking to the fifth annual judicial convention, PUTIN said that spending would be increased by a third in 2001 and that the government had approved a salary raise for judges and public prosecutors of about 20 percent. Diedrik LOHMAN from Human Rights Watch noted that low salaries had made judges dependent on local authorities. He added that many judges remain from the Soviet-era with old styles of working practices. Head of the Supreme Court Vyacheslav LEBEDEV has said that legal reform is being implemented far to slowly, even though it began nine years ago. PUTIN called on judges to be more aggressive in trying to establish the rule of law. He said, "The aggressiveness and decisiveness of our judicial system has slipped and it has begun to get bogged down in interdepartmental arguments." The President said the judges were over-worked and underpaid, noting that more than five million Russians pass through the country's courts each year.

Economy

Federation Council Fails To Debate Taxes

· Russia's Federation Council, made up of regional governors and heads of local legislatures, ended its latest session on Friday without considering two bills that would amend some chapters of the new tax code. The Federation Council will reconvene or December 20^th or 27^th, meaning that the changes might not take effect until the second quarter or second half of 2001. Alexei ZABOTKINE, chief economist at UFG brokerage pointed out that, "The issues that were postponed on Friday mainly have to do with regional budgets...It will not have any impact on next year's federal budget. The regional governors have just complicated their situation." The amendments, approved earlier by the Russian State Duma, would introduce a regional five percent profit tax, on top of a federal 30 percent tax, to compensate regional coffers for local taxes that have been scrapped. A second bill would help to streamline the tax system. Sergei SHATALOV, first deputy finance minister in charge of tax reform, has said the regional budgets would lose 77.5 billion rubles ($2.78 billion at the current exchange rate) if the additional regional profit tax were not passed.

Tax Breaks For Energy and Metal Firms?

· First deputy finance minister in charge of tax reform Sergei SHATALOV on Friday said that the government planned to gradually reduce taxes on users of natural resources. The government

Today's News Highlights

Russia

LUKoil Delays GAAP Publishing

Gazprom Predicts 2001 Exports

Chernogorneft Sues 1999 Sale

European Republics

Ukraine's Power Shuts Down

South Caucasus & Central Asia

Rus-Georgian Visa Regime

Shell Hopeful Of Oil In Inam

Turkmen Not To Attend CIS

Politics-Economics-Business

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Tuesday

November 28, 2000

Intercon's Daily

plans to eliminate within five years, if not sooner, a 10 percent tax aimed at replenishing the mineral resource base, and to replace the current average 8 percent royalty, or mineral use tax, with a 6 percent tax. The royalty may be scrapped altogether for low profit fields and deposits, which are difficult to exploit, SHATALOV said. "As we expect them to pay taxes in full, we are ready to lower the tax burden considerably," he said. This could lead oil, gas, and metal producers to reap rich rewards from a key tax cut. Analysts said oil and gas producers currently paid royalties amounting to as much as 30 percent to 40 percent of their total tax bill. "These proposals are very advantageous for oil companies. The two taxes are among the biggest taxes that oil companies have to pay," said Steven DASHEVSKY, an oil analyst at Aton brokerage. According to DASHEVSKY's estimates, abolishing the mineral restoration tax alone would give oil companies at least $1.3 billion in additional investment in 2001. "The new measures will streamline taxation in the sector considerably, and what is more important, it will give the companies new much-needed investment possibilities," he said. Under the current complicated tax system, this tax is used as an indirect way for the government to finance exploration of mineral resources. Producers may get up to 100 percent of the tax returned to them for this purpose, but analysts said they currently get only 30 percent to 50 percent. The government launched its radical tax reforms this summer and plans to get parliamentary approval of new proposals by July, 2001, to use them as a basis for drafting a 2002 budget.

Ruble = 27.86/$1.00 (NY rate)

Ruble = 27.87/$1.00 (CB rate)

Ruble = 23.86/1 euro (CB rate)

Business

LUKoil Delays Publishing GAAP

· Russia's top oil producer, LUKoil Holding said it would publish its financial results to Generally Accepted Accounting Principles (GAAP) in the next two months, the Financial Times reported. Previously the oil firm said it would publish the results by the end of November. According to a company statement, "Staring with 2001, its is planned that both the annual and interim financial statements of

the company will be prepared according to US GAAP standards on an ongoing basis."

Gazprom Predicts 2001 Gas Exports

· Russian gas giant Gazprom plans to increase gas supplies to hard currency markets from 130 billion cubic meters (bcm) this year to 135 bcm in 2001, according to Gazprom board member Yuri KOMAROV. He said the company planned to increase supplies to Western markets to 200 bcm annually within the next 10 years. KOMAROV added that he did not expect Russian independent gas producers to get access to Gazprom's pipeline export network ¾ as required by the International Monetary Fund (IMF) ¾ any time soon. KOMAROV said there were free capacities inside Russia, but none on export pipelines. "Those who want to export natural gas will have to build additional capacity jointly with us or individually. So far there are a lot who want to export, but few who want to invest," he said. He expected gas export revenues to double this year to some $11 billion from $6.5 billion in 1999, Reuters reported. KOMAROV declined to give a figure for projected revenues in 2001, saying only that he did not expect a substantial fall in gas prices during the first half of 2001.

Chernogorneft Sues To Cancel 1999 Sale

·Chernogorneft, once Sidanco's largest oil producer, sued to overturn the sale last year of its assets to rival Tyumen Oil Co., Russia's fifth oil company. Chernogorneft was sold one year ago at auction for $176 million to a subsidiary of Tyumen, Bloomberg News reported. Both Sidanco and its subsidiary were undergoing bankruptcy procedures at the time. Interros Holding Co., a financial-industrial group controlled by businessman Vladimir POTANIN, owns 44 percent of Sidanco, while BP Amoco holds 10 percent. Tyumen shareholders last December agreed to sell Chernogorneft's assets back to Sidanco in return for a 25 percent stake in Sidanco. The transaction didn't happen by the announced deadline of October 15^th, as the two sides disagreed over details of the share swap plan.

European Republics

Ukraine Power Stations Shut Down

· Bad weather knocked down power lines in

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Tuesday

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Ukraine, forcing two nuclear power reactors to automatically shut down, leaving only six of the country's 14 generating units in operation. Ukraine relies on nuclear energy for 50 percent of its electricity but a cold snap snuffed out power lines across the country on Monday. Alexander MAISTRENKO, spokesman for the atomic energy agency Energoatom said there was no increase in radiation levels at any affected station. The shutdowns included the last functioning reactor at Chernobyl three weeks before it was due to be taken out of service forever on December 15^th. Chernobyl's last functioning reactor provides the country with around five percent of its power. It is believed that the reactor will not go back on-line before its permanent shutdown date.

Meanwhile, the European Bank for Reconstruction and Development (EBRD) plans to approve a $215 million nuclear power loan for Ukraine in two stages. An estimated 23 shareholder countries will recommend that the EBRD Board approves the loan at the next meeting on December 7^th. Preconditions for the loan, however, have not been satisfied. Ukraine has not implemented western safety standards at the reactors nor has it earned the resumption of lending from the International Monetary Fund (IMF). The EBRD also insists that the borrower of the funds, Ukraine's Energoatom should received at least 40 percent of its revenues in cash.

South Caucasus & Central Asia

Georgian-Russian Visa Regime

· On November 14, 2000, the Ministry of Foreign Affairs of Russia issued a statement on the unilateral imposition of a visa regime in Georgia. This document stated, "The Russian Federation retains the right to accommodate the interests of residents in border regions due to humanitarian reasons." The purpose of this statement was to unilaterally implement a series of simplified rules for the Russian-Georgia border in certain parts of the territory of Georgia, specifically Abkhazia and Tskhinvali region (former South Ossetia) under the banner of humanitarian needs. These actions taken by the Russian Federation to single out territories where secessionist wars occurred in which the ethnic cleansing of Georgian ethnic citizens was accomplished through the, "decisive support from the

Russian military and special services…" amount to a Russian annexation of portions of Georgia. These areas are, "still under the control of separatist groups… infringes upon such basic principles of the international community as to constitute interference in the internal affairs of a sovereign state." This was the interpretation of the Parliament of Georgia in their presentation last week to the NATO parliamentary assembly. They further described Russia's actions as, " a violation of the integrity of Georgia's state borders." They concluded that, "Georgia, as a sovereign country, retains the right to refer to adequate international measures in response to such an aggressive decision made by the Russian Federation."

Georgian Foreign Minister Irakli MENAGARISHVILI and Russian Foreign Minister Igor IVANOV on Friday met in Moscow to discuss the controversial introduction of a visa regime for travel between the two states. IVANOV stressed that Russia is interested on having the regime based on a bilateral agreement. He said, "Any visa regime should not prevent bilateral dialogue. It should prevent those who want to use this transparency in their own goals. We want discuss this issue with the Georgian side in such atmosphere." He added that Russia would not issue any ultimatums. Earlier in the week, however, Russian officials spelled out conditions under which Moscow would drop its insistence on a visa regime. The demands called on Georgia to adopt a "neutral" position in the Chechen conflict, accede to the Eurasian Economic Community created last month on the basis of the Commonwealth of Independent States (CIS) Customs Union, moderate its negotiating position on the closure of the Russian military bases in Georgia, and take into consideration Russia's interests in the export of Caspian oil and gas. It is not clear whether the latter requirement means that Russia wants Georgia to pull out of the Baku-Ceyhan oil pipeline project, RFE\RL Newsline reported. MENAGARISHVILI said that Georgia will never agree to such demands. Kremlin adviser Sergei YASTRZHEMBSKY, however, stressed that the introduction of a visa regime with Georgia was based on "national security" issues. He said a visa regime will help prevent Chechen gunmen from entering Russian territory.

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On Monday, Georgian President Eduard SHEVARDNADZE, which declared the three-month delay was reached in negotiations for the introduction of the visa regime, which is expected to be introduced on December 5^th. Russia's Foreign Ministry claims that the President, "was misinformed by the workers of his administration and Georgian MIA [Foreign Ministry]." The Russian side also pointed out that it will simplify visa requirements on border crossing with Georgia on the Abkhazian and South Ossetian portions of the border. Russian embassy consulate will be able to issue up to 500 visas daily. The cost of the visa is estimated to be between $10 and $50, depending on the type. Georgian citizens who came to Russia before December 5^th or who live permanently in the Russian Federation can go from Russia to Georgia and other CIS states without visas until March 1, 2001. Russian citizens, including servicemen stationed in Georgia and their family members, can cross the Russian-Georgian border only with an international travel passport.

New travel agreements between CIS member states are expected to be signed later this week in Minsk at a summit of heads of state. Russia plans agreements on unimpeded travel with members of the Eurasian Economic Community taking in Russia, Belarus, Kazakhstan, Kyrgyzstan and Tajikistan. Under these accords, citizens of those states, irrespective of where they live, would have the right to enter, leave, transit, move around and stay in those community states without visas.

Shell Hopeful Of Oil In Inam Field

· Royal Dutch/Shell Group has expressed hope that it will find enough oil to justify the Baku-Tbilisi-Ceyhan pipeline when it begins drilling an appraisal well in the Inam field in the Caspian Sea in two weeks. The exploration work is expected to be completed in late February. Shell estimates that the field may hold more than 1 billion barrels of oil or 10 trillion cubic feet of gas. Gavin GRAHAM, Shell's regional vice president for Central Asia said, "If the

oil price remains buoyant in 2001 and production is underpinned by one or two new discoveries, then there's a good chance that the [pipeline] project will move forward." International oil companies have been hesitant to back the project, doubting that Azerbaijan's fields can provide enough oil to make the pipeline commercially viable. The US is promoting the pipeline, which would bypass Russia and Iran, as a way to boost Azerbaijan's and Georgia's ties with Turkey and the West, as well as reduce their dependence on Russia. The governments of Turkey, Azerbaijan and Georgia are backing the pipeline. BP Amoco, a company which leads the only group of companies which already produces oil off the Azeri shore, and some of its partners agreed to spend $25 million on an eight-month basic engineering study of the project last month.

GRAHAM said, "If Inam is a success and Shell continues to play a leading role in OKIOC [another Caspian field under exploration], we will look very closely at Baku-Tbilisi-Ceyhan as an evacuation route." Shell acquired 25 percent in the Inam field earlier this year, after it bought equal stakes from the UK's Monument Oil & Gas and Russia's Central Fuel Co. for a total of $36 million. BP Amoco holds another 25 percent, while Azerbaijan's state-owned Socar owns 50 percent.

Turkmenistan Not To Attend CIS Summit

· Turkmen President Saparmurat NIYAZOV will not take part in the forthcoming meeting of the Commonwealth of Independent State (CIS) Council of heads of state in Minsk on December 1^st, as he intends to deliver a lecture devoted to the role and meaning of Turkmenistan's neutral status. The Cabinet Monday discussed preparations for the fifth anniversary of the UN Security Council resolution on Turkmenistan's neutrality on December 12, 1995. According to NIYAZOV, Turkmenistan has no special interest in the CIS summit agenda. The development of provisions about the formation of the CIS counter-terrorist center is incompatible with Turkmenistan's neutral status.

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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