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, December 21, 2000

Russian Federation

Politics

UES Restructuring Causes Kremlin Riff

· Confusion and differences surrounding the approval of Unified Energy Systems' (UES) restructuring plan are growing deeper and creating the first split under President Vladimir PUTIN between his administration and government. The riff places the President's liberal economic adviser Andrei ILLARIONOV backed by administration head Alexander VOLOSHIN against UES Chairman Anatoly CHUBAIS, Prime Minister Mikhail KASYANOV, and Trade and Economics Minister German GREF. When CHUBAIS left for talks in London with Vice President of the European Bank for Reconstruction and Development (EBRD) on December 11^th, he was confident that the government would easily approve the restructuring plan. He said, "The program had been worked on for many months jointly with the Ministry of Economic Development and was agreed with the Prime Minister and other ministries." The following day a special meeting was conducted in the absence of CHUBAIS and GREF to discuss the restructuring plan. Present at the meeting was PUTIN, KASYANOV, Finance Minister Alexander KUDRIN, VOLOSHIN, ILLARIONOV, and several regional governors. ILLARIONOV said restructuring UES would be a grave mistake and noted the fall in the company's market capitalization from $9 billion to $3 billion since the plan was announced, the Financial Times reported. After the meeting, ILLARIONOV noted that PUTIN, "expressed concern [about the program] its lack of clarity and transparency and urged to proceed cautiously with the restructuring." In a last minute rush before PUTIN left for Cuba last week, CHUBAIS held a short meeting with the President at the airport. The plan was preliminarily

approved by KASYANOV on December 15^th in a resolution. The final decision has been delayed until February, 2001. The key aim of the restructuring is to spin off power generating assets from the distribution arm to create competition although the state will retain control of the grid. CHUBAIS has pointed out that, if UES reorganizes, sells generators, and collects increased tariffs, it can raise billions of dollars needed to upgrade old plants.

Army Finance Chief Denies Allegations

· Colonel-General Georgy OLEINIK, who is responsible for Russia's military finances, denied allegations of embezzling $450 million. He has been indicted for "abuse of power with grave consequences;" he could be sentenced to up to 10 years in jail if found guilty. In an Interfax interview, OLEINIK said that the main military prosecutor has to understand that the apportioning of the Finance Ministry's budget cannot only be allocated by the chief military financier but also by the Defense Minister. Military investigator Andrei LUTCHENKOV said the position of the prosecutors had not changed. "We have placed charges against him and the investigation is going on. It is his right to make an appeal and complain about the decision." OLEINIK has headed the Defense Ministry's Main Military and Finance Department since October, 1996. LUTCHENKOV has said the OLEINIK investigation covers the involvement of a number of generals in the misappropriation of the $450 million. The others are chief accountant Yevgeny DATSKO and two department

Today's News Highlights

Russia

Fed. Council Approves Anthem

Russia To Resume Payments

Media Most To Be Shutdown

European Republics

OPIC Urges Ukrainian Reform

Latvian To Sell Shipper Stake

South Caucasus & Central Asia

Rus-Georgia Joint Operation?

Kyrgyz Approve Land Ownership

New Governors For Oil Regions

Politics-Economics-Business

Page

Thursday

December 21, 2000

Intercon's Daily

chiefs, Leonid GERASIMENKO and Anatoly VOROBYOV. Under scrutiny is a series of complicated transactions in 1995-96 involving Ukrainian military construction supplies, foreign and Russian companies, and the ministry's finance department.

Federation Council Passes Several Measures

· Russia's Federation Council on Wednesday approved several measures. In a vote of 122 to 12 with two abstentions, the parliament passed Russia's first post-Soviet balanced budget for 2001. The 2001 draft calls for revenues and expenditure of 1.194 trillion rubles ($39.8 billion at the projected average exchange rate for the year of 30 rubles per dollar). It envisages four percent growth in gross domestic product and 12 percent inflation, after this year's government forecasts of seven percent and 21 percent, respectively. The Federation Council, in a vote of 144 to 1 with two abstentions, overwhelmingly approved a law adopting the Soviet anthem as Russia's national hymn. The law had already been passed by the Russian State Duma and now will go before the President for his signature. New lyrics to replace the anthem's one-time praise for Soviet founder Vladimir LENIN and dictator Joseph STALIN have yet to be adopted. The governors also formally approved the country's current flag of red, blue and white stripes, the state symbol of a two-headed eagle and a red banner for use in the army. The Federation Council also endorsed a bill suspending non-ferrous scrap metal exports to January 1, 2005, except exports under international and intergovernmental agreements. The bill now has now to be signed into law by President Vladimir PUTIN, who opposes it. If PUTIN vetoes the bill, the State Duma lower house will have to pass it again with at least 300 of the chamber's 450 votes to overrule the veto. In November, only 277 Duma deputies approved the bill. The Federation Council said international demand for non-ferrous scrap, coupled with the absence of restrictions on exports, and led to an increase in theft of equipment to 74,000 cases in 1999 from around 4,000 in 1993.

Economy

Ruble = 27.96/$1.00 (NY rate)

Ruble = 27.97/$1.00 (CB rate)

Ruble = 25.56/1 euro (CB rate)

Russia To Resume Debt Payments

· Finance Minister Alexei KUDRIN said Wednesday that Russia will resume payments of its twice-defaulted debt to the Paris Club of creditors in 2001, even if it doesn't get the debt relief that it wants, the Associated Press reported. He said, "The government has no intention of deferring payments without an additional agreement. We intend to pay our debts to the Paris Club in full." Last week, KUDRIN received a letter from Paris Club chairman Jean-Pierre JOUYET, who warned Russia to resume payments on its Soviet-era $48.6 billion debt or face "unfortunate damage" to its financial reputation. Russia forcefully negotiated a two-year payment delay on the debt after the 1998 financial collapse. The relief expires on December 31^st, leaving about $3 billion coming due in 2001. Moscow has been seeking to reschedule the debt, and left no provision in the 2001 budget for meeting the $3 billion payment. Instead, the country budgeted for $1.75 billion in loans from the International Monetary Fund (IMF), but no money is forthcoming.

EBRD Lends Vneshtorgbank $30 Million

· The European Bank for Reconstruction and Development (EBRD) on Wednesday said it would lend an additional $30 million to Russia's Vneshtorgbank as part of a fast-growing trade finance program. The revolving credit will allow Vneshtorgbank to refinance pre-export loans it makes to private Russian companies and the EBRD said more credit could be made available to the Russian bank. Vneshtorgbank was the first Russian bank to receive credits under the EBRD's trade facilitation program, under an export guarantee facility. "It was the first Russian bank after the 1998 crisis to participate in our trade facilitation program, and remains the most active user of the program's guarantee facility," EBRD President Jean LEMIERRE said.

Business

Government To Shutdown Media Most

· The Russian government is planning to shutdown Russia's largest private TV network, owned by jailed media magnate Vladimir GUSINSKY. Yevgeny KISELYOV, head of NTV Television, said that there are plans that the shutdown would come on New Year's Eve. He added, "This plan exists. The only thing that I don't know is if this plan comes

When you need to know it as it happens

Politics-Economics-Business

Page

Thursday

December 21, 2000

Intercon's Daily

directly from President Vladimir PUTIN or from somebody close to him." Sergei PARKHOMENKO, editor in chief of the influential news show Itogi, said the government's actions against Media Most and GUSINSKY are an effort to silence dissent in Russia. On Friday, Russian tax authorities filed lawsuits demanding the liquidation and dissolution of Media Most and NTV Television for insolvency for alleged tax evasion. Moscow prosecutors allege that GUSINSKY overstated Media Most's assets to win $300 million in loan guarantees in 1996 from the state-owned natural gas monopoly Gazprom. Prosecutors say Media Most was bankrupt at the time.

fense conversion and an auto dealership. OPIC also supports five regional and four global direct equity funds totaling more than $1.3 billion of committed capital that can invest in Ukraine. OPIC-supported funds have invested more than $84 million in 40 companies in Ukraine. OPIC is a government agency that promotes US exports.

Latvia To Sell Shipper Majority Stake

· The Latvian government approved a plan to sell 68 percent of Latvijas Kugnieciba (LASCO), the country's largest shipping company, to a single investor in a tender early next year. The Latvian Privatization Agency, working with adviser BDO New Markets of the Netherlands, also plans to sell 15 percent of the company in a public offering in exchange for privatization vouchers. Employees will receive six percent of the shares, while the state pension fund will get ten percent. The agency's Privatization Reserve will keep 1 percent. The Agency explained that, "The initial auction price will be sent only after the privatization bidders, within the terms to be announced separately, have submitted expressions of interest and price offerings for the purchase of the shareholding." The government Cabinet will decide the minimum sale price for the shares. The agency's director general, Janis NAGLIS, said the winner of the tender could be known by the end of March and the public offering could start in May. He added that the government hopes LASCO will be bid on by an international, strategic investor. Latvia has several times failed to sell stakes in the shipper either because it set a price that was too high or tried to sell a stake that was too small to attract bidders, local analysts said. The LASCO fleet comprises 58 vessels. Its fleet of 37 tankers accounts for about 76 percent of the company's total revenue. LASCO reported net income of $1.15 million in 1999, up from $854,000 in 1998. It posted a nine-month profit of $4 million, Bloomberg News reported.

South Caucasus & Central Asia

Rus-Georgian Joint Operation In Pankisi?

· Georgian Defense Minister David TEVZADZE, attending the Council of Commonwealth of Independent States (CIS) Defense Ministers in Moscow, is quoted as saying he is prepared to discuss the possibility of holding a joint operation with Rus

European Republics

OPIC Urges Ukrainian Reform

· Overseas Private Investment Corp. (OPIC) president George MUNOZ on Monday encouraged Ukraine to accelerate the pace of its economic and political reforms as the best way to attract US investment to the country. Speaking on the second leg of a week-long trip to Russia, Ukraine and Bulgaria, Munoz said OPIC was eager to expand its already substantial portfolio in Ukraine, but said progress would depend on the pace of reform and Ukraine's willingness to resolve an outstanding insurance claim with OPIC. "OPIC attaches great importance to the success of Ukraine's transition to a democratic state with a flourishing market economy, and there is no doubt that a strong commercial relationship between our two countries provides a foundation for good overall relations…However, OPIC remains concerned about Ukraine's commitment to the type of economic reform and rule of law that is the foundation for creating an enabling environment for investment," he said. MUNOZ noted that further OPIC-supported investment will depend on the resolution of a claim that OPIC paid last year for the expropriation of an investment in Ukraine could have an adverse effect on the investment climate. However, he said that loans could be granted during the next 12 months. Since 1972, OPIC has committed approximately $160 million in OPIC insurance and financing for nine investment projects in the Ukraine, including $138 million in political risk insurance and $22 million in OPIC financing in sectors varying from fiber optics, telecommunications, manufacturing, hotel, office to building management, de

When you need to know it as it happens

Politics-Economics-Business

Page

Thursday

December 21, 2000

Intercon's Daily

sia to rid the Pankisi Valley of Chechen rebels taking refuge there. Many discount this statement because it flies in the face of the Georgian government's position not to expand the Chechen conflict into Georgian territory. Many fear that any introduction of Russian combat troops into Georgia could ultimately be used against the government itself. The idea for a joint operation was proposed by Russia. The Defense Minister said that Georgia does not have an accurate account on the number of Chechens in the area. Kremlin spokesman on Chechnya Sergei YASTRZHEMBSKY said, "it is for sure that large number of gunmen have settled in Georgian Pankisi Valley." Russia has estimated the number of gunmen to be 2,000. He stressed that "multiple facts and evidences show that Akhmeta region of Georgia is not being efficiently controlled by Georgian authorities." According to TEVZADZE, there is no need now for sending additional Georgian armed forces to the Chechen portion of the state border, Prime News Agency reported. Former Georgian head of the national guard Tengiz KITOVANI, who operates a business in Moscow, has warned that the situation in Pankisi Valley could grow into an armed conflict in the future. He said the situation is a "land mine" which may explode any moment. Russia has acknowledged that it intercepted communications in Pankisi between rebel fighters. In its approach to Georgia, Russia predicted that when George W. BUSH is inaugurated, the US will not be interested in the Caucasus and Georgia will lose its support. Russia further urged it to join the Rus-Belarus Union. The Georgian government is not taking this under consideration nor the resumption of its membership in the CIS Collective Security agreement.

In addition, Georgian Health, Labor, and Social Affairs Minister Avtandil JORBENADZE has called the situation in Pankisi Valley an emergency due to the drug trafficking in the Akhmeta and Telavi regions. Georgian Customs officers earlier this year detained a large shipment of drugs coming from Azerbaijan through Pankisi, under the guise of

humanitarian aid. Georgia has been combating this practice, whereby Chechens are raising funds for their military operations through sales of narcotics.

Kyrgyz Approves Farmland Ownership

· Kyrgyzstan's parliament Tuesday voted overwhelmingly in favor of lifting a five-year moratorium on land sales ahead of schedule, making it legal to freely buy or sell agricultural land. Kyrgyz President Askar AKAYEV said, " This will allow rural Kyrgyz, 65 percent of the country's population, to exercise their constitutional right to own land." He said the reform would boost agriculture and lead to seven to nine percent annual growth in the sector. Kyrgyzstan voted in a referendum in 1998 to recognize private ownership of agricultural land, but parliament later slapped a five-year ban on actual transactions. Kyrgyz law forbids the sale of land to foreigners but allows them to hold 50-year leases, Reuters reported. Locals can own a maximum of 50 hectares of land and are not allowed to use it for purposes other than farming.

Kazakh Oil Regions Get New Governors

· Former Kazakh education minister Krymbek KUSHERBAYEV has been appointed governor of oil-rich Western Kazakhstan province, home to the Karachaganak condensate site. The area is rich in oil and contains some of the country's largest foreign investment projects. Karachaganak is worked by a consortium led by BG and Agip, while the neighboring Atyrau province is home to the Tengizchevroil field involving Chevron and ExxonMobil. Environment and Natural Resources Minister Serikbek DAUKEYEV was appointed governor of Atyrau. This summer the Offshore Kazakhstan International Operating Company (OKIOC) said the Caspian shelf off Atyrau could contain some of the world's largest offshore crude.

The Daily Report on Russia and the FSU

will not be published

from December 25^th to January 1^st

for Intercon's Winter Break

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