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 9, 2000

Russian Federation

Politics

Testimony Retraction Rejected By Court

· Edmond POPE's lawyer Pavel ASTAKHOV said that a Russian Court has rejected Anatoly BABKIN's, the key witness against POPE, retraction of his earlier testimony. BABKIN said in the letter, "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. Judge Nina BARKINA turned down ASTAKHOV's request to enter the letter as evidence in the case. POPE's lawyer said, "The court hopes that BABKIN will come to testify in person." ASTAKHOV has continually asked for BABKIN to stand as a witness. This demand has been turned down due to BABKIN's poor health after suffering a heart attack. POPE is also in ill health and has been denied examination by an English-speaking doctor.

Following the news of BABKIN's letter, RTR Television showed video footage of four men sitting in what it said was POPE's hotel room in Moscow and talking about a "proposal." It said the footage showed BABKIN handing POPE state secrets. The exchange was voiced over by comments in Russian and one could not hear what the two men were

saying. RTR said was POPE talking to his boss about obtaining information on Russian rocket fuel, ostensibly top secret know-how. Comment: In today's Russia, as during the Soviet period, laws appear to serve expedient political ends and not the law itself. Businessmen visit Moscow at your own risk!

1994 Reporter Murder Trial Opens

· The murder case of Dmitry KHOLODOV, an outspoken reporter for Moskovsky Komsomolets, went to trial in a military court today, accusing five former and current military intelligence officers (GRU) of participating in the 1994 murder, the Associated Press reported. Russian media criticized prosecutors for taking so long with the probe, saying it reflected the government's inability or unwillingness to solve Russia's many violent crimes. Judge Alexander SERDYUKOV rejected pleas from the defense for additional investigation and for the defendants to be released on bail. KHOLODOV had been investigating corruption in the military's intelligence service when a briefcase supposedly provided by an informant exploded in his hands and killed him on October 17, 1994. His newspaper said the explosion was a contract hit connected to KHOLODOV's work. Russian media have suggested that the suspects were trying to protect or impress superiors accused of corruption.

Russia-Libya Intergov't Commission Meets

· Russian Emergencies Minister Sergei SHOIGU is taking part in the fourth meeting of the inter

Today's News Highlights

Russia

IMF-Russia Loan Talks

Rosneft's Chechen Oil Firm

European Republics

Lith. Economic Statistics

Ukraine To Cut Corporate Tax?

Belarus To Sign Currency Pact

South Caucasus & Central Asia

Another Energy Official Arrested

Caspian Sea Resources Conf.

Kazakh To Review 2001 Budget

Politics-Economics-Business

Page

Thursday

November 9, 2000

Intercon's Daily

governmental Russo-Libyan commission on trade, economic and scientific cooperation in Tripoli. SHOIGU will also meet with secretary of Libya's Supreme People's Committee for External Relations and International Cooperation Abdel Rahman SHALGAM and with leader of the Libyan Revolution Muammar QUADDAFI. The two sides will discuss the draft interstate program for commercial and economic cooperation for the period up to 2010. A broad range of questions of the oil-and-gas complex, nuclear power, transport, agriculture and banking will also be touched on. Russia's participation in an international tender to build the surface structures of Libya-Italy gas pipeline, in the reconstruction of the engineering system of Tajur Nuclear Research Center and in the construction of the Sultan nuclear power station will also be decided. The Russian side also intends to participate in the construction and repair of highways and airports. During the talks the participants in the delegations will also discuss Russia's supply to Libya of aviation equipment of the new generation: Il-96, Il-114, and Tu-204 aircraft and Mi-171 and Mi-26 helicopters. Russia also expressed the readiness to help Libya build a multifunctional civilian purpose earth satellite Libsat, Itar-Tass reported.

Economy

Ruble = 27.79/$1.00 (NY rate)

Ruble = 27.75/$1.00 (CB rate)

Ruble = 23.93/1 euro (CB rate)

IMF Mission Begins New Talks In Russia

· An International Monetary Fund (IMF) mission, which arrived in Moscow on Tuesday, started talks with Russian Finance Ministry officials on Wednesday. The mission is scheduled to discuss Russia's state debt and tax system with Deputy Finance Ministers Bella ZLATKIS and Mikhail MOTORIN. The Fund stopped a $4.5 billion loan to Russia last year, saying the government had not implemented structural reforms. The Russian economy has beat recovery expectations from the August, 1998 financial crisis. It has posted strong economic growth, a healthy trade surplus, and has been making regular payments to its foreign debt obligations. As of August, Russia owed the IMF about $12 billion. Economic Development Minister German GREF pointed out that Russia has been, "getting by without foreign credits," but still needs, "a credit that

could be allocated in the event of Russia facing an unfavorable economic situation." Russian news agencies have reported that a two-year cooperation program will be discussed with the IMF. The IMF says a new program could be supported by "a precautionary standby arrangement."

Lyudmila KHRAPCHENKO, an economist at Alfa Bank in Moscow stressed that Russia hasn't implemented a banking reforms, a key IMF requirement. The IMF has insisted the Central Bank sell stakes in its foreign subsidiaries, after an independent audit last year found the Central Bank exaggerated its foreign currency and gold reserves in 1996, by including $1.2 billion held in an offshore subsidiary of its French unit, Bloomberg News reported. The government earlier this month said the Central Bank should get rid of its foreign subsidiaries by 2002 and its stake in the foreign trade bank Vneshtorgbank by 2003, and divest itself from Sberbank by 2005, the Russian media reported. The government also has proposed increasing the role of state banks in lending to agriculture and other projects. "The IMF will react negatively to this. They think it'll strengthen the monopoly of state banks," KHRAPCHENKO.

Business

Rosneft To Create Chechen Oil Firm

· A spokesman for state oil firm Rosneft announced on Wednesday that it plans to create a Chechen oil company with the right to export all the crude it produces to finance the restoration of the war-torn republic. The company, Grozneftegaz, would be 51 percent owned by Rosneft and 49 percent owned by the Chechen authorities. Rosneft started to rebuild the Chechen oil industry in January, but its president ordered a halt to the process after a Russian government representative in Chechnya signed a decree in May subordinating the infrastructure to the Chechen authorities. The spokesman declined to estimate the crude oil reserves in Chechnya and possible extraction volumes.

Gazprom Calls For Increase In Prices

· Russia's natural gas monopoly Gazprom asked the government to increase domestic gas tariffs by 35 percent, arguing that it needs extra revenue to fund investment in production, Vedomosti reported. The government increased gas prices by 15 per

When you need to know it as it happens

Politics-Economics-Business

Page

Thursday

November 9, 2000

Intercon's Daily

cent in April, after raising them by the same amount in October, 1999. Industrial users now pay between 224 rubles and 400 rubles per 1,000 cubic meters in Russia. Last month, the company's board of directors discussed a five- year program aimed at increasing domestic gas prices to boost profit and raise funds for investment to halt declines in production as some gas fields are due to be decommissioned because of depletion. The company plans to ask the government to increase gas prices by 50 percent in 2001. Gazprom estimates gas production will stabilize at about 530 billion cubic meters a year over the next five years after falling this year by about 20 billion cubic meters to 520 billion cubic meters.

local market, Reuters reported. In September net forex sales stood at $28.5 million. However the Central Bank's total foreign reserves, which include repurchase transactions, edged up $2.3 million, 0.2 percent, to $1.351 billion at the end of October from $1.349 billion in September. According to a Central Bank statement, "The major factor behind the rise (of total reserves in October) was the $31.5 million worth of repo deals transacted [by the Central Bank] with non-residents." In September, the Central Bank carried out no repurchase deals. The total reserves were also favorably affected by the government's foreign currency holdings with the Central Bank, which rose some 3.1 percent throughout October to $242.8 million.

Ukraine Calls For Cuts In Corporate Tax

· The Ukrainian government has urged the parliament to approve changes to tax laws in the near term aimed at reducing the tax burden for companies. The government has prepared a draft bill which foresees a one percentage point cut in the current 30 percent profit tax from January, 2001. Under the draft, the government plans to lower profit tax by one percentage point annually until it reaches 25 percent. The government is also planning to reduce income tax gradually. Ukraine initially planned to introduce a completely new tax code to relieve the tax burden for companies from January, 2001. However, it is not clear when this comprehensive reform will get on the parliament's agenda. Government officials say changes in current tax laws would help to start the process of reducing the tax burden for companies quicker as it could take several years to implement the new tax code, even if it is approved by the end of the year. International companies have stayed away from Ukraine due to bureaucratic red-tape and corporate taxes.

Rus-Belarus Currency Pact

· The prime ministers of Russia and Belarus will sign two agreements to establish a single currency on November 14^th at a Council of Ministers session of the Union of Russia and Belarus in Moscow. The first document will establish the Russian ruble as the Union's single currency starting from January 1, 2005. The second agreement will introduce a new single currency starting from January 1, 2008. The documents provide for establishment of a single emission center that will be located in Moscow

European Republics

Lithuanian Economic Statistics

· The Lithuania's Statistical Office reported that the nation's producer prices rose 0.9 percent in October from September, led by oil products. This figure is 12.7 percent higher than in October, 1999. In September, producer prices rose 2.2 percent from a month before and 13.9 percent from a year earlier. Rising the highest for the month were prices for oil products, which climbed 5.8 percent from September. Manufacturing prices rose 1.1 percent in the month. Prices for mining and quarrying dropped 3.4 percent in October from September, while prices for electricity, gas, and water supply remained stable. In the January-October period, producer prices rose 5.5 percent.

Lithuania's net foreign currency reserves declined 2.2 percent to $1.32 billion in October. On October 13^th, the Central Bank lowered its obligatory reserve requirement for banks to eight percent of their liabilities on deposit with the Central Bank from 10 percent to free funds and boost competitiveness in the local banking sector. That resulted in a $22.9 million or 19.8 percent drop of their currency reserve deposits with the Central Bank to $92.6 million in October. The net foreign currency reserves were further depleted by the Central Bank's net $9.8 million sales to commercial banks in foreign exchange operations last month. Due to Lithuania's currency board system and the litas' four-to-one peg to the dollar, net foreign exchange sales are a key measure of dollar demand on the

When you need to know it as it happens

Politics-Economics-Business

Page

Thursday

November 9, 2000

Intercon's Daily

starting in 2005. Beginning in 2008, the Union will have another unified currency, the name of which is yet to be specified. By next April the two countries will prepare an agreement on a unified securities market. Russian Deputy Prime Minister Viktor KHRISTENKO said the, "Introduction of a single currency demands implementation of a series of conditions also written into the agreements¾the main principles of monetary-financial, structural and tax policy."

South Caucasus & Central Asia

Another Former Sakenergo Official Arrested

· The former deputy general director of Sakenergo (Georgian Energy Generation) Giorgi MAKASHVILI was detained by Georgian State Security officers. He is accused of stealing state property. MAKASHVILI's arrest follows the detention of former Sakenergo director Emzar CHACHKHIANI on November 5^th for embezzling 7.75 million lari ($3.9 million). 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." Prime News Agency reported that Sakenergo in 1998 cost the Georgian state budget a 452,250 lari loss. According to the head of the investigation service Mevlud BAKASHVILI, several other officials of Sakenergo will be detained for the same violations in the near future. Rooting out corruption in the energy sector is a significant step for Georgia and its leading Citizens' Union Party, which has committed itself to fully implementing the anti-corruption program.

Caspian Sea Resources Conference

· The first international oil and gas conference Management to Caspian Oil opened in Baku today. The main topic of the conference will be discussion of various concepts and methods of managing the oil and gas resources of Caspian Sea. Russian Deputy Foreign Minister Viktor KALYUZHNY, Spe

cial adviser to the US President John WOLF, and diplomats from regional countries are expected to participate in the conference. Azerbaijan's President Geidar ALIYEV is scheduled to make a presentation. KALYUZHNY said, "Russia is ready for talks on the status of the Caspian Sea with all the coastal nations." He intends to discuss with Azerbaijan leaders, in the course of his upcoming consultations with them, some problems linked with the cooperation of the two countries on the Caspian Sea, to concert their stands, and to consider the legal status of the sea. KALYUZHNY noted that the Azeri side had agreed to draw up a bilateral declaration on the Caspian Sea.

Kazakh Parliament Debates 2001 Draft Budget

· Kazakh Finance Minister Mazhit YESENBAYEV submitted the government's 2001 draft budget to Kazakhstan's parliament for debate today. He said that the draft budget is realistic and stable. The Finance Minister said the government's chief purpose in drafting the budget was to ensure the economic growth and higher living standards for the population. The index of consumer prices for 2001 is expected at the level of 6.9 percent. The average annual exchange rate has been predicted at 152.7 tenge to the dollar. Gross domestic product (GDP) for 2001 is forecast in the volume of 2,535 billion tenge ($17.7 billion) with the real growth of four percent, Itar-Tass reported. Revenues are planned to be 406.2 billion tenge ($2.8 billion), or 16 percent of GDP. Expenditures under the budget will amount to 462 billion tenge ($3.2 billion), or 18.2 percent of GDP. The budget deficit in 2001 will amount to 55.8 billion tenge ($391.1 million). Nearly one third of the budget that amounts to 148 billion tenge ($1 billion) is to be spent on social security, with a 30-percent growth of minimum wages, and a pension accounting for $30 meant to make up for proposed inflation. The draft budget allocates some 27 percent, or 124 billion tenge to security, with 1 percent of the GDP, or some $175.2 billion. This figure is twice as much as what was allocated in 2000 for the army.

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

available for non-profit institutions.

Daily Report on Russia is for the exclusive use of the subscriber only. Reproduction and/or distribution is not permitted without the expressed written consent of Intercon. Daily Report on Russia Ó copyright 2000, Intercon International, USA.

When you need to know it as it happens

Politics-Economics-Business

Page