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 5, 2000

Russian Federation

Politics

Chechen Rebels Attack Russian Convoy

· Chechen rebels claim to have devastated a Russian convoy in an ambush attack near a market in Grozny and in the northern town of Shchyolkovskaya. They also clashed with Russian paratroops in the southern mountainous Nozhai-Yurt district. Russian forces countered with plane and helicopter missile strikes in the mountains. Chechen rebels claim to have killed up to 23 Russian soldiers in three attacks on Monday. Official figures say about 3,000 Russian troops have died in Chechnya. The number of rebel and civilian casualties is unknown. Russian troops claim to be in control of the Chechen region, but have been unable to prevent further ambushes or mine attacks. Russian appointed Chechen head Akhmad KADYROV said there is a real chance to achieve the main goals of the anti-terrorist operation in a way that will make separatists and bandits unable to influence the situation in the republic ever again. He is continuing negotiations with field commanders who had the rank of brigadier generals and generals. KADYROV added, "They are bandits," and that it is not enough for them to simply lay down their arms and quit this bloody game, Itar-Tass reported. KADYROV, meanwhile, is preparing for his first official trip abroad to Iraq and Libya. KADYROV will discuss aid for the troubled separatist province with the governments of the two Arab states. KADYROV is a Muslim cleric and former rebel leader who last year switched sides and threw his weight behind Russia's latest military drive to bring Chechnya to heel. Chechnya's pro-independence leaders, who have widespread sympathy in much of the Islamic world, consider KADYROV a traitor.

Conflicting Views On Changing ABM?

· Russian Defense Minister Igor SERGEYEV distanced himself today from earlier proposals made by the head of the Strategic Rocket Forces, General Vladimir YAKOVLEV last month on possible changes to the 1972 Anti-Ballistic Missile (ABM) Treaty. YAKOVLEV said it would be difficult to persuade the United States to ditch its plans for an anti-missile shield and to avoid rewriting the ABM treaty altogether. He proposed introducing an index of strategic weapons as a counterbalance. But SERGEYEV said, "I should like to stress again that Russia's position on the question of the ABM treaty is consistent and unchangeable. Russia will not agree to any "adaptation" of the ABM treaty which would allow national anti-missile defenses to be deployed and thus in fact destroy the treaty." SERGEYEV, a former missile chief himself, seemed to leave little doubt he was disavowing YAKOVLEV's index idea, under which anti-missile systems would be bracketed together with nuclear strike forces, Reuters reported. A country wanting to increase one component would have to make cuts in the other.

Economy

Gref On PSA Progress

· Russian Economics Minister German GREF, following a conference on deregulating the Russian economy said, "The government's work on production sharing agreements is

Today's News Highlights

Russia

Russia To Hold On Privatization

LUKoil Shares Sold On NYSE

Getty Negotiations On Hold

European Republics

Ukraine To Pick Aluminum Bid

Turkey Bars Ukrainian Warship

South Caucasus & Central Asia

CanArgo Expands Retail Units

Troops Sent To Pankisi Gorge

Anti-Corruption In Georgia

Politics-Economics-Business

Page

Tuesday

December 5, 2000

Intercon's Daily

moving along quite well. First, we have to tackle the problem of there simply being no system for managing the PSA [profit sharing agreements]; there is no government body to oversee the PSA." He added that a government commission is considering the problem of the legal basis for PSA. GREF said, "The new system has been approved by the commission for PSA, and there is still enough time to approve it with the Ministry of Energy and for the government to issue a decree, and I think that by the New Year it will be approved. As far as the normative legal base, according to the timetable laid out by the government, we still have time to work on this."

Russia Holds Off On Privatization

· A draft budget amendment, approved by a vote of 267 to 84 with one abstention on Friday, bans the privatization of big companies until a law on the privatization program for next year is passed. Deputies are due to vote on the 2001 draft budget in a third reading later this Friday. Yevgeny ISHCHENKO, deputy head of the Russian State Duma's property committee and one of the authors of the amendment, said the bill aimed to suspend privatization of companies whose assets exceeded $150 million. This would put on hold further sales of natural gas giant Gazprom, LUKoil, Rosneft, and Slavneft. Deputy Prime Minister and Finance Minister Alexei KUDRIN told deputies the government would introduce a draft of next year's privatization program to the Duma soon, but did not specify the date. "It's impossible to stop the privatization process," KUDRIN said, adding sales should not be confined to small enterprises. The government has already budgeted 18 billion rubles ($600 million at the projected average exchange rate for the year of 30 rubles per dollar) of expected privatization revenues for 2001 and is counting on proceeds from state property sales for possible funds to pay foreign debt, KUDRIN said. The government approved the sale of a 6 percent stake of LUKoil with plans for sales of 2.5 percent of Gazprom and a blocking stake of 25 percent plus one share in Rosneft next year.

Ruble = 27.91/$1.00 (NY rate)

Ruble = 27.94/$1.00 (CB rate)

Ruble = 24.70/1 euro (CB rate)

Business

LUKoil Shares To Be Sold On NYSE

· Russian Prime Minister Mikhail KASYANOV signed a decree to sell 6 percent of LUKoil Holding, the nation's top oil producer. KASYANOV on Saturday approved a Property Ministry plan to sell 50 million LUKoil shares. The sale would include shares to be traded on the New York Stock Exchange. As Russian law doesn't allow for that type of state sale, the government will move the shares into a company it sets up that will then sell the shares abroad. The government may need to delay its LUKoil sale plan because lawmakers last week passed a bill banning the sale of large companies until a new state asset sale program is adopted. LUKoil has said it will provide earnings according to generally accepted US accounting standards by January.

Getty Puts Negotiations On Hold

· Getty Petroleum, which last month agreed to sell 1,300 retail gas stations in the US to LUKoil Holding for $5 a share, or $71 million, broke off talks with rival bidder United Refining Company, until its recent bid of $84 million is put in writing. United increased its bid to $6 a share, or $84 million, from $5.75, or $80.5 million, as well as accepted a lease arrangement with Getty Realty, a real estate affiliate of Getty Petroleum. Getty said in the filing that it still could negotiate if United brings a written offer to the table. United said it was, "prepared to proceed with these offers immediately. All tender offer and merger documents are completed and newspaper ad space has been booked for Friday." Getty has offered United "the same termination protections we granted to LUKoil." Those include a $3 million fee and as much as $2 million more in expenses if Getty pulls out of the transaction. A spokesman for LUKoil, Russia's top oil producer, declined to comment about the state of the proposed Getty acquisition.

European Republics

Ukraine To Select Aluminum Winner

· A Ukrainian government committee is expected to choose the winner today for a 68 percent stake in Ukraine's monopoly aluminum maker, Zaporizhskyi Aliuminievyi Kombinat, daily Kievskie Vedomosti reported, citing Ukraine's State Property Fund.

When you need to know it as it happens

Politics-Economics-Business

Page

Tuesday

December 5, 2000

Intercon's Daily

Russian and Ukrainian companies are competing for the stake, according to reports in Ukrainian media. Ukraine said it plans to complete the transaction before year's end. In order to cut production costs and increase output, the aluminum maker said it plans a $200 million reconstruction project and expects the buyer of the controlling stake to invest at least $51 million. The plant, which was built in 1933, is capable of producing as much as 110,000 tons of aluminum a year. It employs 7,200 people.

Turkey Bars Ukrainian-made Warship

· Turkey barred a Ukrainian aircraft carrier "Varyag" from the Bosphorus straits Monday, saying the passage of a warship would breach an international accord regulating use of the waterway "Varyag" and had been sold to China by Ukraine. Navigation through the busy Bosphorus and Dardanelles waterways is unrestricted for commercial vessels during peacetime under the 1936 Montreux Convention. "An aircraft carrier is not allowed to navigate the Bosphorus under the Montreux Treaty. Only commercial ships have the right of free passage under the treaty," according to Maritime Affairs Istanbul Director Ruhan CAKIROGLU. He said the 1,000-foot-long vessel had attempted to pass the straits previously but had been stopped and escorted out of Turkish waters.

Turkey, wary of potential accidents in the waterway that passes through the 10-million strong city of Istanbul, has sought to impose greater control on maritime traffic, and wants to force large vessels to be accompanied by tugs. At a recent seminar hosted by the Center for Strategic and International Studies, the Turkish Embassy estimated that of 55,000 ships, 150 ships pass through the Bosphorus per day, while out of 5,500 tankers, 15 tankers pass through the Bosphorus per day. In addition nearly 3,000 daily ferries and small passenger boats pass the Strait. Data indicates that around 60 percent of all ships transiting the Straits do so without a pilot. An estimated 85 percent of all incidents in the Straits occur on ships without a pilot on board.

South Caucasus & Central Asia

CanArgo Expands Retail Units In Georgia

· CanArgo Energy Corporation announced Sunday that it reached agreement with the Georgian partners in CanArgo's retail gasoline business to

further expand and develop this business by exercising an option to acquire an interest in several existing stations and sites in Tbilisi. These stations and sites are currently owned by CanArgo's Georgian partners, and will now be operated under the CanArgo name and owned by CSOP. CanArgo owns a 50 percent interest in CSOP. CanArgo originally moved into the retail gasoline sector in Georgia in April, 2000 with the formation of CSOP. It is developing three stations. The first is operations; the second is set to open this week; the third will be ready in several months. In addition to these three stations, five further sites have been purchased in prime locations for future development. Under the new agreement seven more locations under varying degrees of completion will now be vended into CSOP by the Georgian partners, with CanArgo investing a further $1.2 million of development capital. The new investment funds will be used to accelerate development of the existing sites, purchase more sites in desirable city regions and begin the development of CSOP's business on the important transit routes through Georgia. With this additional investment of funds CSOP expects to have thirteen operational stations by May, 2001 and twenty completed by December, 2001. CanArgo's business will be boosted by its recent acquisition of a majority interest in the Georgian American Oil Refinery, the only refinery in the region using Western technology.

Dr. David ROBSON, Chief Executive Officer of CanArgo commented, "This acquisition is an important step forward in the development of our downstream business in Georgia. I am very impressed with the work that has been done progressing of our current stations, and look forward to expanding the business further with our Georgian partners in CSOP. With this and our refining activities CanArgo is further strengthening it's strategic position as a significant integrated player in the Georgian petroleum sector, building on our established business position in the country, and complementing CanArgo's active production, appraisal and exploration program in eastern Georgia."

Georgia To Send Troops To Pankisi Gorge

· Georgia will move more police and interior ministry units to the Pankisi gorge of the Akhmeti district for purposes of maintaining order in the region, Itar-Tass reported. Georgian President Eduard

When you need to know it as it happens

Politics-Economics-Business

Page

Tuesday

December 5, 2000

Intercon's Daily

Shevardnadze and parliament speaker Zurab Zhvania are personally supervising the situation in the gorge adjacent to Chechnya, a high-ranking parliamentary official stated on Tuesday. The crime rate is indeed on the rise in the area, but "there is no need to introduce the state of emergency," as law-enforcers are capable of taking effective measures to improve the situation, the official said. The Pankisi gorge has recently been the scene of several kidnappings, cattle thefts, and other crimes. According to local police, criminals based in the gorge are holding 10 hostages, among them two Spanish businessmen and eight citizens of Georgia. Around 5,000 refugees from Chechnya have found shelter in the Akhmeti region.

Corruption Should Be Georgia's Top Priority

· US Ambassador to Georgia Kenneth YALOWITZ has stated that corruption in Georgia is a serious problem and should be its number one priority. Corruption and its impact on Georgia was discussed on Monday at a seminar hosted by the Center for Strategic and International Studies. Professor Larry DIAMOND of the Hoover Institution explained in a PREM Notes publication sponsored by the World Bank that, "Effective and durable corruption control requires multiple, reinforcing, and overlapping institutions of accountability. And where corruption in endemic, these institutions need to be of three kinds: horizontal accountability, vertical accountability, and external accountability. He pointed out that to combat corruption emerging nations must establish independent institutions such as law enforcement bodies, an anti-corruption commission, ombudsman's office, hold public audits, and enforce the law through a judicial system. These are the institutions of horizontal accountability. Vertical accountability includes free and fair elections, where corrupt officials can be voted out of office, and an independent mass media, for the open flow of information. In addition, donor countries can use their power to withhold loans until institutional requirements are met, while international monitoring institutions can evaluate

the effectiveness of anti-corruption programs. These are considered external accountability.

Scot BOYLAND of the US Department of Justice pointed out positive and negatives aspects of Georgia's anti-corruption commission and other reforms. He positively accessed judicial reforms, which included examination of all judges and a rise in their salaries to ensure their independence. He noted, however, that the government then failed to pay those salaries on time. BOYLAND noted the implementation of the conflict of interest law, which entails the reporting of income and assets. This he said is the first such law implemented in a former Soviet state. Unfortunately, he said that Georgia is not enforcing violations with some-kind of punishment. BOYLAND considered it a positive step that Georgia is considering reforming the procracy (prosecutor's office) to make it more accountable. BOYLAND pointed out that the Georgian Anti-Corruption Commission's flaw is that it was created by a presidential decree, making it open to attacks by the opposition that it is being used as a political device of the Citizens' Union Party. He said that the wide representation on the Commission and an even stance against all corrupt officials could give it more respect. He further recommended that members of the Commission be given special security as their positions are critical for the nation, but not always popular.

The seminar also discussed the need to involve civil society in combating corruption, thereby not solely focusing on a top-down approach through government institutions. Comparisons were made to the Sicilian model, in which the Catholic Church and the Education Department worked together to educate secondary school students and society as a whole to oppose corruption. Georgia also needs to re-educate its citizens, who have for decades accepted violating the law as the norm. Later this month, Georgian officials will participate in a UN conference on Fighting Crime and Civil Society in Sicily.

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