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, November 30, 2000

Russian Federation

Politics

New Money Laundering Scandal Emerges

· The US General Accounting Office (GAO), the investigative arm of Congress, has submitted to the Justice Department a new money laundering case involving more than $1.4 billion through Citigroup and Commercial Bank of San Francisco bank accounts over a nine-year period covering 1991 through January, 2000. The case states that Citigroup failed to follow federal guidelines to prevent money laundering, specifically the know-your-customer rule, and allowed $850 million in suspicious Russian funds to be funneled through 136 accounts. Citigroup said that it had found no evidence of illegal actions, but acknowledged internal oversight on enforcing its anti-money laundering policies. General counsel to Citigroup Michael ROSS said, "Citibank is committed to being at the forefront of anti-money-laundering efforts." Citigroup said it, "detected no illegal activity" in the 136 accounts held by a Russian businessman, which are now closed. The New York Times and The Wall Street Journal today identified the Russian businessman as Georgian-born Irakly KAVELADZE, who described the GAO investigation as a "witch hunt." ROSS also said, "It is clear in hindsight that our systems an tracking procedures were not sufficient to detect the nature and extent of his relationship with us." Commercial Bank of San Francisco allowed $600 million to flow through 100 accounts, according to the GAO investigation. Former president of Commercial Bank Rob FULLER said, "To our knowledge there was no illegality by us."

The money-laundering scheme, apparently to avoid taxes, involved the setting up of US shell corporations in Delaware to move money from abroad into the US banking system and then back into foreign

accounts, The Washington Post reported. Of more than $800 million wired from abroad to Citibank, more than 70 percent was wired back out of the US. Of the $600 million deposited at Commercial Bank, more than 50 percent came from abroad, and most was transferred out of the US. The GAO reports states, "These banking activities raise questions about whether the US banks were used to laundered money…Citibank did not conduct due diligence." In addition the report notes that two Russians bought about 9 percent of Commercial Bank's stock for $1 million in March, 1995, and Commercial Bank made one of them a director of the bank and head of private banking and the international department. He resigned in December, 1999, effective January 14, 2000. While he was a director, 40 percent of total bank deposits came from customers referred by Euro-American Corporate Services Inc. and International Business Creations. These entities created companies in the US for Russian brokers and established bank accounts for them.

This investigation follows the 1999 investigation, which found Russian businessmen and organized crime groups illegally laundering $7 billion through the Bank of New York.

Economy

Russia Able To Pay, But Seeks Paris Club Rescheduling

· Economic Development and Trade Minister German GREF has said that Russia needs to reschedule its for

Today's News Highlights

Russia

Berezovsky To The Rescue

Major Shares Fall

Svyazinvest Stakes For Sale?

European Republics

Estonia's Budget Gap Shrinks

Minsk Prepares For CIS Summit

South Caucasus & Central Asia

EU Disapproves Of Visa Regime

WB Pays For Silk Road Markers

Yukos Seeks Turkmen Oil-Gas

Politics-Economics-Business

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Thursday

November 30, 2000

Intercon's Daily

eign debt to the Paris Club of creditors, estimated at $42 billion, in order to meet its peak payments due in 2003. The government has not made provisions for some $3 billion due in 2001. He said that rescheduling should be negotiated with the assistance of Germany, which has a 40 per cent share in the Club. Government officials have called for a rescheduling of the debt, in line with an earlier agreement with the London Club of creditors, which involved a debt write-off. Germany has maintained a tough stance that it will not write-off any of the debt citing the growth in the country's coffers due to high world energy prices. GREF today said the Russian government is developing an economic policy, which would suit the European market and make Russia an economic part of Europe, Reuters reported. Russia's Prime Minister Mikhail KASYANOV, a former foreign debt negotiator, is due to fly to Berlin on Friday for talks with German Chancellor Gerhard SCHROEDER on bilateral trade relations and possibly the debt issue.

Presidential economic advisor Andrei ILLARIONOV agrees that a debt restructuring could further economic growth. He, however, took a more pessimistic approach. "We should be more interested than anyone else in paying as much as possible to foreign partners today to support economic growth, which is obviously fading. By paying today, we sterilize the monetary base which is pushing internal prices up and puts pressure on the exchange rate, curbing our economic growth." ILLARIONOV said that the forecast for economic growth set at 7 percent is unsatisfactory due to the positive economic environment. The gross domestic product only grew 3.2 percent in 1999. He said the government failed to take advantage of high commodity prices and the impact of the ruble devaluation, which could have lead to faster economic growth, the Financial Times reported. He said the Russian economy risks being less competitive in the longer term as extra revenues from high commodity prices push the domestic currency up, slowing growth. ILLARIONOV noted, "We are in a position where we show our unwillingness, not our inability to pay foreign debts under conditions which cause perplexity with our creditors. No one is saying it is an easy task [to pay debts in full and without a restructure], but it is a task which can be met."

Ruble = 27.85/$1.00 (NY rate)

Ruble = 27.92/$1.00 (CB rate)

Ruble = 24.28/1 euro (CB rate)

Business

Berezovsky To The Rescue

· Russian tycoon Boris BEREZOVSKY today granted $3 million to the Sakharov Museum, which was expected to close on Friday due to lack of funding. BEREZOVSKY said he was making the donation to protest alleged government moves toward authoritarianism. The museum, dedicated to dissident and Nobel Peace prize winner Andrei SAKHAROV, contains exhibits chronicling Soviet persecutions and post-Soviet human rights abuses. These include letters SAKHAROV wrote from internal exile, barbed wire from Gulag labor camps, and drawings from Chechen refugee children. BEREZOVSKY said helping the Sakharov Museum, "Is not only an honor, but unfortunately is very pressing in the context of today's situation in Russia. Today, the society is again facing the problem of defending fundamental rights and freedoms," the Associated Press reported. BEREZOVSKY has accused Russian President Vladimir PUTIN of cracking down on freedoms won since the collapse of the Soviet Union.

LUKoil, UES, Surgutneftegaz Shares Fall

· LUKoil Holding, Russia's biggest oil producer, fell as much as 13.3 percent, or $1.40, to $9.15, the lowest since December, 1999, as investors moved to sell emerging market stocks they see as risky following falls in global markets, strategists said. Unified Energy Systems (UES) shares fell as much as 10 percent, or 0.9 cent, to 8.1 cents, the lowest since December, 1999, as investors are concerned about the protection of minority shareholder rights. UES shares have fallen nearly 40 percent in the past month. Surgutneftegaz fell as much as 13 percent, or 2.9 cents, to 19.1 cents, the lowest since December, 1999, on concerns management of the third-largest oil producer won't share an estimated $2.5 billion profit with shareholders.

Russia To Sell More Svyazinvest Stakes

· Russia is considering a further sale of a minority stake in Svyazinvest, the national telecommunications holding company, after a planned reorganization. Alexander BORODIN, in charge of the prop

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erty, transportation and communications department at the State Property Ministry said the sale of a 25 percent minus two shares probably would take place as an auction in which foreign investors could bid. If there's enough political support, the government may even sell more, he said. "The capitalization of the company will increase during the reorganization so it is more likely to be sold after the reorganization," which could take two to three years. The government is considering a plan to reorganize Svyazinvest by merging most of its 80 subsidiaries into seven regional units. The company estimates its market value will increase to $3.8 billion from about $2.2 billion at the end of August once the reorganization is completed by the end of 2002. The government sold a 25 percent plus one share stake in 1997 for $1.9 billion. It has long postponed the planned sale of another stake of 25 percent minus two shares, citing unfavorable market conditions.

A lack of sufficient crude oil supplies contributed to Mazeikiu posting an 89.5 million litas ($22.8 million) loss in the first nine months of the year after a loss of 130.9 million litas in full year 1999.

Estonia's Budget Gap Shrinks

· Estonia's Finance Ministry today said the government sector budget deficit at the end of October was 212.8 million kroons ($ 11.8 million), a 21.3 percent drop from 270.5 million kroons the month before. "In October revenue collection improved significantly. Revenues from tax on turnover were relatively very high and reached 10.7 percent of the annual plan. Improved collection of revenues has continued into November," a ministry statement said. Consolidated budget revenues in the January-October period came to 24.94 billion kroons, 79.3 percent of the plan for the year. In October, alone revenues were 2.57 billion kroons or 8.2 percent of the annual plan, the ministry said. Budget expenditures in the 10-month period were 25.15 billion kroons or 79.9 percent of the annual plan. October expenditures were 2.52 billion kroons or 8.0 percent of the plan for 2000. Estonia's 2000 budget was passed ¾as it must be by law ¾balanced at 28.531 billion kroons. The Finance Ministry has said the deficit will end the year at 1.3 percent of gross domestic product or 1.1 billion kroons.

CIS Minsk Summit Highlights Sideline Talks

· The summit of the Commonwealth of Independent States (CIS) will meet in Minsk on Friday. Only 11 of the 12 CIS presidents are expected to attend the session, which will focus on a common policy on fighting terrorism and money laundering and setting down the organization's legal base. Turkmen President Saparmurat NIYAZOV will not attend the summit. Most leaders expect little from the group, which has failed to implement most of its decisions since its was created after Soviet rule collapsed. The summit, however, will provide an opportunity for bilateral sideline talks. Of particular interest are gas negotiations between Ukraine and Russia, as well as Russia and Georgia's talks on implementing a visa regime. Georgian President Eduard SHEVARDNADZE expects that Russia will exert the maximum psychological pressure on the nation of Georgia, while he is meeting with Russian President Vladimir PUTIN. This could include, but is not limited to, electricity blackouts or reduction of fuel supplies, as well as civil disobedience.

European Republics

Mazeikiu Nafta Seeking Supplier Alternatives

· Lithuanian oil concern Mazeikiu Nafta is holding negotiations today with a delegation from Kazakhstan's government and oil industry on the sale of Kazakh oil to Mazeikiu's refinery and crude oil exports through its Butinge oil terminal. Mazeikiu and Kazakhstan's Karazhanbasmunai (KBM), operated by Canadian Nations Energy, signed in July a contract for a three-year oil supply deal expected to go into effect in 2001. Mazeikiu received over 600,000 tons of Kazakh crude last year while the 2001 deal initially called for future supplies reaching 100,000 to 120,000 tons per month. Mazeikiu was forced to shutdown its refinery this weekend due to the lack of crude deliveries from Russia. Jim SCHEEL, Mazeikiu Nafta's director general, pointed out that this interruption of crude oil deliveries occurred at the same time when we are trying to agree on a long-term supply contract with LUKoil. "The essence of this agreement is the ability of LUKoil to supply 6 million tons a year of crude oil." On Tuesday, a 50,000-ton order, enough to run the refinery for three days, arrived as part of a Russian contract for 430,000 tons of crude to be delivered in November. Earlier this year, Mazeikiu reached a five-year deal with another Russian concern Yukos to export another four million tons of crude annually through Butinge, which has a capacity of eight million tons.

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South Caucasus & Central Asia

EU Expresses Indignation On Visa Regime

· The European Union (EU), in an official statement signed by member states and Bulgaria, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Romanian, Slovakia, Slovenia, the Czech Republic, and Turkey, expressed indignation at the conditions of the introduction of the visa regime between Russia and Georgia. It stressed that Russia's plan to simplify the visa regime for residents of Georgia's breakaway provinces of Abkhazia and South Ossetia goes against the principle of territorial integrity of Georgia. Russian Foreign Minister Igor IVANOV denied that Russia was giving special treatment. He said, "This is not so ¾the mitigated regime is being introduced at the stretch of the border adjacent to our border. This is our sovereign right and it is dictated by humanitarian considerations. The atmosphere should not be distorted and fuelled." He called on Georgia not to create a tense atmosphere, as the current visa policy ends on December 5^th. IVANOV said, "We are not going to wall off from Georgia, but at the same time no country of the world can calmly observe how the border is becoming a corridor, " for criminal elements of various sorts. At a Security Council meeting on Wednesday devoted to state border-guarding policy, President Vladimir PUTIN called for a border of good neighborliness. IVANOV stressed, however, that, "barriers must be made for those who would like to carry out illegal actions across our border." Consular representative of the Foreign Ministry Gennady BESSONOV noted the proposed minimum tariffs for visas. A one-time visa for a period of three months if issued in a normal regime (i.e. seven or more days beforehand) will cost $10, and when a visa is to be issued urgently (one or two days beforehand) $20. A tourist visa will cost $15. A multiple visa for a term of one year will cost $60. No group visas will be issued. Georgian citizens in Russia and Russian citizens in Georgia will be able to leave the country before March 1, 2001 by the

documents by which they entered it.

WB To Fund Kazakh Silk Road Landmarks

· The World Bank has approved $440 million of funding for Kazakhstan to restore historical landmarks along the Great Silk Road, Bulat MUKHAMEDZHANOV, deputy director of the Silk Road Company, told a government meeting Wednesday. The Cabinet was discussing a state program to revive the Silk Road's historical centers, conservation, and continuous development of the cultural heritage of Turkic-language countries and the establishment of a tourism infrastructure. Tourist and ethnography centers will be set up at historical landmarks. Kazakhstan Prime Minister Kasymzhomart TOKAYEV recalled that the UN Educational, Scientific and Cultural Organization had discussed the problem of reviving the Great Silk Road in Paris in 1987. The World Tourist Organization (WTO) turned to the issue in 1994. "The road has been recognized as a priority in the development of tourism," the Prime Minister remarked.

Yukos Seeks Turkmen Oil and Gas

· Russia's second largest oil company Yukos has issued a purchase request for crude oil and gas condensate from Turkmenistan. Yukos head Mikhail KHODORKOVSKY met with Turkmen President Saparmurat NIYAZOV on Tuesday. A Turkmen Energy Ministry official said the crude could be delivered by tanker across the Caspian Sea and Yukos wanted to ship it by barge up the river Volga to Samara, where it has refining capacity. He added that Yukos was looking into the possibility of exploring the Turkmen sector of the Caspian shelf. Turkmenistan exported 1.2 million tons of crude in the first nine months of this year, or over 30,000 barrels per day. Most was exported under location swaps through Iran. The main buyers were Italy, Iran, Azerbaijan and Britain. Turkmenistan produced six million tons (145,000 barrels per day) of crude and gas condensate in the first 10 months of this year, Reuters reported.

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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