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 8, 2000


Russian Federation

Politics

Babkin Changes Testimony In Pope Trial

· Pavel ASTAKHOV the lawyer for Edmond POPE, who has been accused of spying, announced today the key witness for the prosecution Anatoly BABKIN is changing his testimony. POPE, the former Naval intelligence officer turned businessman, was arrested in April on grounds that he obtained classified data pertaining to a high-speed Russian torpedo system from BABKIN, a professor at Moscow's Bauman Technical Institute. BABKIN's initial testimony provided the crucial evidence to charge POPE. BABKIN in a letter said, "I recant my testimony concerning Edmond POPE, which I gave under pressure, having a grave heart condition preceding a heart attack. I signed the protocol of my interrogation without even reading it. In the same condition and also under pressure, I read my testimony before the video camera. In fact, I have never met Edmond POPE face to face and have not given him any sensitive information. Edmond POPE himself has never asked me to give any kind of sensitive data. ...Herewith I am asking [the court] to consider my testimony concerning Edmond POPE to be not corresponding to reality." BABKIN's wife has also said that the Federal Security Service (FSB) pressured her husband to give the initial testimony; a claim the FSB denies. ASTAKHOV has repeatedly demanded that BABKIN be called as a witness in the trial, but the court refused. He may now seek to expand that demand to include BABKIN's wife. ASTAKHOV added that the recanting of testimony shows that the case against POPE is a hoax. "The letter completely ruins the testimony on which the whole case has been built," ASTAKHOV said. The FSB domestic intelligence branch maintains that it has enough strong evidence against POPE, with or

without BABKIN's testimony. Today, POPE's lawyer said he would ask that a special court session be held in BABKIN's apartment because he is recovering from a heart attack. POPE's condition has also been under extreme pressure. He has suffered two seizures during the trial from pain connected with his rare bone cancer. The trial has been suspended twice due to POPE's health. The courts, however, have refused to let US medical experts examine POPE.

Chechen Rebels Attack Russian Building

· Chechen rebels blew up a local administration building in the Staropromyslovsky district outside the capital Grozny, which serves as the headquarters for Russian forces trying to crush the Chechen insurgents. Rebels opened fire at the office of a Russian military commandant. One soldier was killed and another injured in the attack. Ten other servicemen were injured when a railway-inspection trolley hit a mine, the Associated Press reported. These incidents further highlight the rebel's continued ability to launch devastating attacks in Russian-held territory. Russian officials still claim that the insurgents are on the verge of defeat. Some 2,500 Russian servicemen have died in the conflict, according to the military. Critics claim the toll is substantially higher.

Economy

IMF On Russian Debt Rescheduling

· The Wall Street Journal today reported that the International Monetary Fund (IMF) is preparing a new agreement

Today's News Highlights

Russia

Gazprom-Itera Relationship?

European Republics

Turkmen Gas Supplies To Kiev

Ukraine CB Gross Reserves Rise

South Caucasus & Central Asia

Georgian Economic & Reforms

Chachkhiani Arrested

Armenian Military Budget Funds

Kazakh CB On Tenge Status

WB Loan To Kazakhstan

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Wednesday

November 8, 2000

Intercon's Daily

with Moscow that could help Russia reschedule about $40 billion in Soviet-era debt. A team of IMF economists arrived in Russia on Monday to lay the groundwork for an agreement that signals a new departure for IMF-Russia relations. The IMF is seeking a cash-free program under which Russia would agree to a raft of economic reforms and targets in return for the go-ahead from the IMF to begin debt-restructuring talks with the Paris Club of creditor countries. In 1999, the IMF froze a $4.5 billion loan package to the country after delivering the first $640 million installment. Russia was accused of lying to the IMF in the past, of stashing Central Bank funds offshore, and of failing to meet various reform promises.

Ruble = 27.79/$1.00 (NY rate)

Ruble = 27.80/$1.00 (CB rate)

Ruble = 23.83/1 euro (CB rate)

Business

Gazprom Called To Define Relations

· In a letter addressed to Gazprom's chief executive Rem VYAKHIREV and management, former finance minister Boris FEDOROV, who represents foreign shareholders demanded that Gazprom disclose the group's relationship with Itera, a Florida-based gas company, before a crucial board meeting later this month. In October, the directors were barred from transferring assets of diluting any of its holdings in any of its subsidiaries without the approval of the board. Shareholders also want to know why Gazprom is transferring its reserves and gas licenses to Itera. FEDOROV said in his letter, "According to sources inside Itera, in 1999 Itera made profits of $3 billion form the sale of 67 billion cubic meters of gas. Most of this gas was supplied by Gazprom. Why is Gazprom selling gas to Itera, when its own production is falling and its has to buy gas from Turkmenistan to fulfill its own obligations?" The letter further points out that Itera has rapidly grown to become the third largest gas producer in Russia. "In 2000 Itera intends to produce 20 billion cubic meters of gas, which is 1,170 percent higher than its production in 1998. But at the same time as Itera's production is growing, the volume of Gazprom's own production is falling. Existing information gives reasons to believe that Itera's reserves comprise assets acquired from

Gazprom." FEDOROV also notes that a company, in which Itera owns a 40 percent stake, has acquired a license from Gazprom to supply gas to Sverdlovsk region. Itera's presence is also growing in the former Soviet Republics, particularly Georgia. FEDOROV's demands are backed up by the European Bank for Reconstruction and Development (EBRD) which is demanding Gazprom to clarify its relations with Itera before the Bank releases a $250 million credit to Gazprom.

European Republics

Turkmen Resumes Gas Supplies To Ukraine

· Turkmenistan resumed natural gas supplies to Ukraine, more than a year after the shipments were cut off due to payment arrears. "The supply of Turkmen gas to Ukraine resumed at the beginning of November," the Turkmen Khabarlary news agency said. "As per the terms of an agreement signed on October 4th between President Saparmurat NIYAZOV and Ukrainian President Leonid KUCHMA, the buyer of the hydrocarbons will be state firm Neftegaz Ukrainy." Turkmenistan said last month that Kiev had pledged weekly payments of $7 million in cash and $9 million in goods for the gas. In return, Turkmenistan agreed to deliver 240 million cubic meters of gas every week. Total supplies will amount to five billion cubic meters this year and 30 billion meters in 2001. The price is fixed at $38 per 1,000 cubic meters, rising next year to $40. Turkmenistan last May shut off the gas taps, saying Ukraine would first have to pay $315.5 million for energy supplied between January-May, 1999.

Ukraine's CB Gross Reserves Rise

· Ukraine's Central Bank gross reserves rose to $1.205 billion as of November 7th from $1.119 billion on September 20th, Sergei YAREMENKO, the head of the bank's currency regulation department, announced on Tuesday. YAREMENKO told Reuters that liquid currency reserves had firmed to $1.108 billion from $1.012 billion in September. Ukraine's hard currency reserves have been steady since the start of the year, despite scarce foreign financing. In September 1999, the International Monetary Fund (IMF) froze its $2.6 billion program over slow reforms. The Ukrainian government has still failed to convince international lenders to unlock foreign loans.

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Meanwhile, the Central Bank has replenished its reserves, purchasing hard currency on the interbank market. "Since the start of the year we have purchased $1.272 billion, including $134 million in October," said YAREMENKO. The Central Bank uses its reserves to service foreign debts. YAREMENKO expects that the interbank market will remain stable through year's end and that the gryvnia currency was likely to fluctuate around 5.44 gryvnia per dollar. The government had originally expected the gryvnia to slip to around 6.02 gryvnia to the dollar by the end of the year. The gryvnia, which was quoted at around 5.21 per dollar in January, has been relatively stable all year largely due to tight administrative controls on the market. In January, the Central Bank removed the rigid trading band for the gryvnia against the dollar, but simultaneously imposed tight controls on the interbank market, limiting all currency trading to a special two-hour daily session.

South Caucasus & Central Asia

Georgia's Economy And Necessary Reforms

· Georgia's Economic, Industry, and Trade Ministry predicted that before the end of this year the growth rate of the GDP will make up approximately 3 percent and the level of inflation will not exceed 7 percent. Prime News Agency reported that the GDP growth rate will remain at last year's level. GDP had previously been predicted to reach 4 percent. Nonetheless, reaching 3 percent is an achievement given that Georgia has had to recover from a serious drought this summer. Agricultural products such as fruits, vegetables, grains, wines, oils, tobacco and spices are the largest of economic sectors of Georgia's GDP. Industries include manganese mines, cola seams, crude oil and gas production, as well as food processing. The number of registered enterprises in Georgia increased 7 times over the last seven years. The Economics Ministry noted that 84.4 percent of production and trade is from the private sector, while 8.2 percent is from the government. The non-government sector employs 51.6 percent of those employed in production, including in large, medium, and small enterprises. Georgia's minimum subsistence level for one average working man in September reached 113.2 lari a month. The State Department of Statistics the subsistence minimum

for an average consumer in September was 99.3 lari and for an average family of four was 197 lari.

In a September report prepared by Leszek BALCREOWICZ, the Polish advisor to Georgian President Eduard SHEVARDNADZE pointed out Georgia's potential and those areas in need improvement. Georgia's benefits are its strategic location, strong allies, competent officials in key positions, strong institutions, spirit for entrepreneurship, the collapse of the "social state," completion of judiciary reform, and political stability. The report pointed out that Georgia is still combating the effects of the Russian financial crisis in 1998. In 1999, only 70.5 percent of estimated tax revenues were collected and tax revenues constituted only 11.6 percent of GDP. In the 1st quarter of 2000, collected tax revenues constituted only 71.2 percent of the forecast ones. The target for 2000 is to for collection to reach 14.7 percent of GDP. The report pointed out, "poor tax collection and low budgetary revenues not only teachers, pensioners, but also the public officers, including police and tax officers do not get their wages and salaries on time…This makes the public officials even more vulnerable to corruption." On this issue the report concluded that, "As far as the tax system is concerned it appears that there are too many taxes; tax regulations are vague and unstable. This creates high compliance costs, especially for small firms; and in turn produces tax evasion (informal economy), and corruption. A comprehensive overview of the tax code that will allow its simplification and stabilization is therefore of great importance." The reform of the Tax Administration is scheduled to be completed by June, 2001. It noted that the new Tax Administration will have had been tested and much better paid that previous tax inspectors." The other key area which BALCREOWICZ cited as needing, "to improve substantially," is the Customs Administration. "If the borders are out of control, then contraband may flow freely into the country and importers remain in the informal economy, i.e. they are not registered and do not pay any taxes (including profit tax)." The report called on the Customs Administration to implement radical reforms similar to the Tax Administration. (See Chart)

Former Georgian Energy Director Arrested

· The former director of Sakenergo, Emzar

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Wednesday Intercon's Daily November 8, 2000

Kazakh CB On Tenge Status

· Kazakhstan's Central Bank head Grigory MARCHENKO today said the oil-rich state's tenge currency was slightly overvalued, but added that no immediate measures were planned to push the exchange rate down. The tenge today was trading at 142.89 per dollar, a level that it has more or less maintained since the beginning of the year. "We believe that...the tenge is slightly overvalued. The exchange rate is slightly higher than it should be in order to ensure equilibrium on the market. From our point of view the exchange rate should be about 144 tenge to the dollar," MARCHENKO said. Kazakhstan was forced last April to devalue its currency, after it came under tremendous pressure after the collapse of the Russian ruble in August, 1998. Higher oil and metals prices have brought a flood of dollars into the country. Russia is Kazakhstan's main trading partner and also a competitor for oil and metals markets. MARCHENKO did not say if the current exchange rate was hurting Kazakh exports. He noted the Central Bank had no plans for large-scale intervention though it has bought small amounts of dollars on domestic currency markets throughout October to keep the buoyant tenge from rising substantially. "This is an attempt to nudge the market along. It does not mean that we are going to furiously start buying until the exchange rate falls to 144 tenge to the dollar," he said. "If the market reacts, fine, if not we shall go on as before."

WB Considers Loan To Kazakhstan

· The World Bank is considering lending Kazakhstan up to $900 million over the next three years to finance health care, irrigation and road building projects in the Kazakhstan, a Bank official said today. World Bank representative in Kazakhstan Kadir YURUKOGLU told a briefing the loans, part of a three-year aid strategy, were being considered by the board of directors and would likely be approved by February, 2001, Reuters reported. He said the size of the loans would depend on the economic situation in Kazakhstan, which depends heavily on oil exports. "Currently we are working on a program for $500 million for the next three years, but if oil prices go down, it could be as much as $900 million," YURUKOGLU said. He added that the money was intended for investment projects such as agriculture and health care, as well as for conducting structural reforms.

CHACHKHIANI, was called to the Georgian prosecutors' office for an interrogation November 5th. He was arrested and charged with embezzlement of 7.75 million lari ($3.9 million) and abuse of office. Georgia Today reported that, "CHACHKHIANI was involved in financial abuses, in which he drew up questionable contracts with energy suppliers delivering to Georgia, at a price far higher than the market value. The parties then split the difference." CHACHKHIANI had been the subject of other investigations since 1997. In July, the newly appointed chairman of the Control Chamber Sulkhan MOLASHVILI placed CHACHKHIANI on the list of the ten most corrupt energy bosses and renewed the investigation. Further arrests are expected, according to an unnamed source in the prosecutors' office. Georgian President Eduard SHEVARDNADZE stressed that the new campaign to eradicate corruption, which is supported by philanthropist George SOROS, will not be confined to just the energy sector. Comment: The arrest of CHACHKHIANI, recent appointment of Misha SAAKESHVILI as Justice Minister, improvements in tax and customs collection and the recent parliamentary hearings on Interior Minister Kakha TARGAMADZE, all point to a cautious, but effective effort by President SHEVARDNADZE and the leadership of the Citizens' Union Party of Georgia to implement the anti-corruption program promised during the recent political campaigns. The new emphasis on economic development and work of the anti-corruption commission are positive signs that movement is occurring in the fight against corruption.

Armenian Military Budget Funding

· Armenia's Defense Minister Serzh SARKISYAN said in an interview with Hayots Ashkhar that funding for the armed forces in 2000 has been "adequate" and will remain "almost the same" next year. He said that while the current level of funding is "satisfactory," it does not allow for the procurement of new weapons systems, noting that the existing ones, "may become obsolete tomorrow." He said that the current level of funding is sufficient to ensure that the army is able to perform its duties and that servicemen do not lack food, uniforms, and medical care. SARKISYAN added that, "the army is a structure that can never have a surplus of funds, and there are no superfluous expenditures in the army."

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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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