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, December 12, 2000

Russian Federation

Politics

Gusinsky Arrested By Spanish Police

· Spanish police today arrested Russian media magnate Vladimir GUSINSKY, who is wanted on an Interpol warrant issued by Russia, for alleged embezzlement. GUSINSKY was arrested in the luxury beach resort of Sotogrande near the southern city of Cadiz. He is being held in a police station in La Lina, pending a decision by Spain's High Court whether to press ahead with extradition proceedings, Reuters reported. The court will then have 40 days to examine Russia's request for GUSINSKY's extradition and approve or reject it, although the Spanish government has final say in the matter.

Russian authorities issued an international arrest warrant for the financier earlier in December after he failed to appear for questioning in November. GUSINSKY was indicted in Russia on November 13^th on charges of fraud. Russian prosecutors accuse GUSINSKY of misrepresenating assets in his Media-Most group when he accepted loans of more than $300 million guaranteed by Russia's natural gas monopoly Gazprom. They say GUSINSKY's companies were legally bankrupt at the time. GUSINSKY has said the charges against him are politically motivated after his independent Media Most group criticized the Kremlin and President Vladimir PUTIN's military offensive in Chechnya.

Russia To Sign UN Crime Treaty

· On Monday, Russia said it will sign a UN treaty aimed at combating international crime, including money laundering and trafficking women for prostitution. President Vladimir PUTIN signed an order directing Sergei IVANOV, head of the government's Security Council, to sign the UN Convention Against Transnational Crime. The convention, approved by

the General Assembly on November 15^th, will be opened for signatures during a conference that begins today in Palermo, Italy. At least 40 countries must sign and then ratify the convention for it to take effect. Countries signing the treaty commit themselves to adopting uniform laws to fight organized crime, strengthen money laundering investigations, and streamline extradition, the Associated Press reported. The treaty also includes measures to protect witnesses who testify against crime groups and holds multinational companies liable if implicated in money laundering cases. Two protocols target the trafficking of women and children, a problem that has spread in Eastern Europe after the collapse of the Soviet bloc. Russia has been the focus of news media reports and criminal investigations regarding alleged money laundering through Western banks.

Economy

Russia Seeks Debt Restructure

· Russia's Prime Minister Mikhail KASYANOV said on December 5^th that the government hopes to restructure its foreign debt with a plan to swap Russia's debt for stakes in Russian companies. He raised the proposal with German Chancellor Gerhard SCHROEDER. The proposal could lead to a substantial rise in foreign ownership and control of Russian companies. KASYANOV told an economic conference, "Perhaps, a swap of debt payment into investments would be carried out...I

Today's News Highlights

Russia

LUKoil-Getty Deal Completed

A Vacation To The Past

European Republics

Latvian October Output Rises

Foreigners Bid On Refinery

South Caucasus & Central Asia

UN Condemns Kidnapping

Georgia's Budget Passes

Baku-Tbilisi Cable System

NK Peace Needed For Stability

Politics-Economics-Business

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Tuesday

December 12, 2000

Intercon's Daily

hope together with Germany we will find a mechanism which could be used by other countries as well in realization of this idea." Russia wants to restructure Soviet-era debts to the Paris Club of creditor nations, estimated at $48 billion, as the government has not made provisions in the budget draft for about $3 billion due in 2001. Russia's 2001 budget draft envisages $10.5 billion to $11.5 billion of foreign debt payment, or about a quarter of the budget, if the Paris Club debt is restructured. Germany, which controls about 40 percent of the Paris Club debt, is owed a total of $22 billion, which includes Soviet and post-Soviet borrowings. Unless the government comes up with the funds, or starts serious restructuring negotiations, it could find itself in default on the debt. Trade and Economic Development Minister German GREF quickly dismissed the possibility of default. "If we fail to agree with the International Monetary Fund (IMF), and consequently, with the Paris Club, we will pay all our debts."

Finance Minister Alexei KUDRIN spoke against transferring shares in major companies to Germany. He said, "There can be no thought of transferring shares of Gazprom, or of other Russian companies with good prospects, to settle Russia's debt to Germany," the Associated Press reported. On Thursday, KASYANOV agreed and pointed out that shares in Gazprom and power grid Unified Energy System (UES) will not be part of the debt for shares deal. KASYANOV elaborated on the debt proposal discussed in Germany, saying German firms could play a big role in Russian manufacturing industry either through joint ventures or fully owned enterprises. He suggested Russia might provide funds for buying buildings, equipment, or land, or for starting capital, rather than make debt payments. German equipment might also be purchased for the plants, he said. "The expected impact would be double: we pay off our debt and in Russia there would be an expansion of existing and new production, growth in revenues and in the number of jobs, tax payments."

Ruble = 27.94/$1.00 (NY rate)

Ruble = 27.91/$1.00 (CB rate)

Ruble = 24.49/1 euro (CB rate)

Business

LUKoil-Getty Complete Deal

· Russian oil giant LUKoil and Getty Petroleum Marketing Inc. on Monday completed a deal, whereby LUKoil would purchase 72 percent of Getty shares at a price of $5 per share for a total value of $70 million. The deal ends a rival bidding war with United Refining over the Getty retail network of 1,300 gas stations in the North Eastern US. Getty rejected United's more lucrative offer of $6 per share. On Friday, a New York State Supreme Court denied a request by United to issue a preliminary injunction to block the deal. Vadim GLUZMAN, chairman of LUKoil Americas Corp. and head of LUKoil's operations in North America, said LUKoil expected to merge with Long Island-based Getty as soon as practicable. "The acquisition of Getty Petroleum Marketing marks the beginning of LUKoil's expected expansion into the US market. We plan to work with Getty's experienced management and employees to build a formidable new company."

AvtoVAZ Offers EBRD Joint Venture Stake

· The head of Russia's carmaker AvtoVAZ said in an interview published Friday in Kommersant Daily that his firm had offered the European Bank for Reconstruction and Development (EBRD) a big stake in a proposed joint venture with US General Motors (GM). "We have offered the EBRD about 20 percent of the joint venture's capital," chairman of AvtoVAZ's board Vladimir KADANNIKOV said. The $500-600 million project, originally aimed to build GM's Opel Astra and a new version of AvtoVAZ's Niva off-road vehicle, has been in the works for years, but to date no agreement has been reached. KADANNIKOV said AvtoVAZ and the EBRD were in talks on the details of the proposal. Earlier the Bank had considered extending a $170 million loan and making a $50 million equity investment in the proposed joint venture. KADANNIKOV said AvtoVAZ had offered a stake of its shares to GM as a collateral under a strategic partnership program, but GM has not yet made any decision. GM has confirmed its interest in the joint venture, but wants the EBRD to share financial risks. KADANNIKOV added that the joint venture might be registered in the first quarter next year. GM has said its board was likely to consider the deal in February.

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KADANNIKOV also said that AvtoVAZ, which needs investments badly, could offer a strategic investor a controlling stake of up to 50 percent plus one share by means of an additional share issue.

Tuesday Tid-Bit

A Vacation To The Past

· Looking for a vacation you can brag about around the water cooler? Sovietski Collection has advertised a fantasy vacation for you Soviet style. President of Sovietski Collection Mitch SIEGLER said, "Your fantasy of flying at mach speeds can become a reality. You'll travel in style, with five days and four nights at Moscow's famous, five-star Metropol Hotel. We'll set you up with everything¾Russian travel visa, special security clearance, safety systems briefing, in-cockpit video and the flight of a lifetime aboard a MiG-29 or a MiG-25, complete with a Russian Air Force pilot as your guide, a veritable bargain at $14,750." The other fantasy vacation is a camping trip, with accommodations for two-dozen of your closest friends in a Soviet Army tent.

Foreigners Bid For Ukraine Power Companies

· Electricite de France, and AES Corp. of the US and are among seven foreign companies bidding for controlling stakes in Ukraine's state-owned regional power distributors, business weekly Investitsionnaya Gazeta reported. The other bidders are Kansai Electric Power Co. of Japan, Spain's Union Fenosa Acex, Bewag of Germany, Cinergy Corp. of the US, and Vychodoslovenske Energeticke Zavody of Slovakia. They submitted bids for controlling stakes in Ukraine's Kievoblenergo, Rivneoblenergo, and Zhytomyroblenergo. The companies are currently negotiating with the Ukrainian government on the terms of the sales and are allowed to visit the distributors. The investors suggest that the government should increase electricity rates and allow power distributors to cut electricity supplies to non-payers. Ukraine plans to sell the first three of six power distributors offered for sale on February 23^rd. Credit Suisse First Boston's Ukraine subsidiary is advising the government on selling the stakes.

South Caucasus & Central Asia

UN Security Council Condemns Kidnapping

· UN Security Council members on Monday denounced the abduction of two UN military observers in Georgia and said they should be released immediately. "Members of the council strongly condemn this unacceptable act as a manifestation of international terrorism and demand the immediate release of the observers," Russian Ambassador Sergei LAVROV said. The military observers, part of a small UN peacekeeping contingent, were seized on Sunday by unidentified gunmen near the village of Verkhnyaya Lata, which is under the control of the breakaway region of Abkhazia. The two hostages have been identified as Lieutenant Colonel Zbigniew BLECHACZ of Poland and Captain Efstathios KOKKINIDIS of Greece. Georgian President Eduard SHEVARDNADZE has pledged authorities would do all they could to secure the observers' release. SHEVARDNADZE said he had dispatched a special representative to the remote northwestern Kodori gorge region, near the Abkhazian border, to help search operations. A UN spokesman in Georgia said the gunmen had not yet issued any demands for the observers' release. UN observers have been captured several times in the past by

European Republics

Latvian October Industrial Output Rises

· Latvian October industrial output rose 5.6 percent year-on-year, beating analyst expectations, as most industries saw production volumes grow, the State Statistics office announced today. Industrial production surged 11.1 percent month-on-month in October, putting the year-on-year rise at 5.6 percent, the statistics office said in a statement. Analysts had earlier said they expected the year-on-year figure to come within a broad range, from a decline of 0.5 percent to a three percent rise. The office added in a statement that total output for the month rose to 140.8 million lats ($227.1 million) from 127.7 million lats in September, Reuters reported. "This October we can see output growth in most of the industries," the State Statistics office said. It said quarrying and mining production rose 55.2 percent year-on-year, followed by the train and ship repairs up 46.4 percent. Clothing production rose 17.4 percent year-on-year and paper output climbed 14.3 percent, while leather goods output declined by 24.6 percent. The statistics office said the monthly 11.1 percent surge in industrial production was largely caused by the start of the heating season, as output of the energy, gas and water supply industry rose 34.1 percent month-on-month.

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residents of the Kodori gorge but have been freed without conditions. The Defense Minister of Abkhazia Vitaly MIKHELIDZE said the kidnapping could be an attempt to extort a ransom.

Georgia Approves Budget In First Reading

· Georgian deputies on Friday approve the government's third draft budget in its first reading. Two earlier drafts were rejected President Eduard SHEVARDNADZE or other "power ministers," complaining that it did not provide adequate funding for their agencies. The current draft sets revenues at 839.7 million lari ($419.8 million) and expenditures at 1.12 billion lari, resulting in a deficit of 277.6 million lari. Approximately 100 million lari of the deficit will be covered by domestic sources and the remained by foreign grants and loans. The passage of the budget by mid-December is a precondition for the disbursal of new International Monetary Fund (IMF) and World Bank loans, RFE\RL Newsline reported.

Baku-Tbilisi Cable System

· Operations for laying the Azerbaijan sector of the fiber-optic cable system Trans-Asia-Europe are being completed, adviser to Azerbaijan the Minister of Communication Aflatun MAMEDOV said. Prime News Agency reported, the adviser stressed that the length of the Baku-Tbilisi portion of the cable is 589 km. Presentation of the system will be held before the end of this year, MAMEDOV said.

NK Peace Needed For Future Stability

· At a meeting on Monday with Azeri President Geidar Aliyev, the US, Russian, and French co-chairmen of the Organization for Security and Cooperation in Europe (OSCE) Minsk Group for Nagorno-Karabakh stressed that peace between Azerbaijan and Armenia will facilitate the resolution of conflicts in Georgia, open up opportunities for building new relations between Turkey and Armenia, and become an important factor of stability in the North Caucasus. American co-chairman Carey

Cavanaugh said maintaining the truce on the line of confrontation between the two Caucasian countries is the main task of the body he represents. He noted that the ceasefire should be preserved until the conflicting sides reach a peace agreement, Itar-Tass reported. President Aliyev stressed that Azerbaijan attaches great significance to maintaining the ceasefire and will do everything it can to observe it. He also confirmed his readiness to continue a dialogue with Armenian President Robert Kocharyan, but called on the Minsk Group to be more active. Earlier, President Kocharyan stated that the Nagorno-Karabakh problem should be resolved on the basis of equality of the conflicting sides. He also stressed that direct talks between the presidents should be accompanied by measures to promote mutual trust between the conflicting sides through joint programs, monitoring and ceasefire.

Kazakhoil Purchases Ukrainian Refinery

· Kazakhoil, Kazakhstan's state-owned oil company, which controls about 70 percent of the country's oil production, said it bought a controlling stake in Ukrainian oil refinery Khersonskyi Naftopererobnyi Zavod. Kazakhoil, through Torhovyi Dim Ukrnaftoprodukt, its Ukrainian subsidiary, won a tender to purchase 60 percent of the refinery for 35 million gryvnia (about $6.4 million), higher than the government's minimum asking price of 29.7 million gryvnia, according to the Ukraine's State Property Fund. First vice-president of Kazakhoil Galiausat KESHUBAYEV said, "Our task is to develop an oil processing market inside and outside," of Kazakhstan. Khersonskyi has been suffering from insufficient oil supplies from Russia. Kazakhoil pledged to supply at least 1.8 million tons a year to the refinery. Khersonskyi has the capacity to refine about 7 million tons of crude oil a year. Kazakhoil said it plans to build a gas station network in Ukraine. Kazakhstan produces 33 million tons of oil a year and is expected to increase production to about 50 million tons by 2005, Kazakhoil said.

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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