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 7, 2000

Russian Federation

Politics

Rumors Of A Kremlin Reshuffle Spread

· Rumors reported in Russia's local media claim that Russian President Vladimir PUTIN is nearing a decision to re-shuffle his Cabinet and administration. The rumors, which first targeted Prime Minister Mikhail KASYANOV, have now spread to include presidential chief of staff Alexander VOLOSHIN, long associated with former President Boris YELTSIN, Defense Minister Igor SERGEYEV, who may be replaced by a civilian, and even Emergencies Minister Sergei SHOIGU, charismatic head of the national rescue service and newly appointed chief of a pro-government majority party. KASYANOV has flatly denied that PUTIN is about to sack him. He said, "It is premature to talk about a reshuffle. We need to work for at least a year to get right the government structure, its effective management and its very framework. So far, I am happy with the make-up of the cabinet." The Prime Minister did acknowledge PUTIN's criticisms, including the failure to produce a coherent policy on non-ferrous metals and concerns over funds for the military and debt repayment policy. He said, "We made errors, but they weren't critical ones. And there was no critical mass of errors." Andrei RYABOV of the Carnegie Endowment think tank told reporters, "No one has resigned yet. When it happens it will amount to a political revolution, changing the landscape. What the rumors do show is increased confrontation. They are being spread deliberately by special interest groups and their public relations representatives to discredit rivals."

PUTIN's close friend and former KGB agent who now heads the influential Security Council, Sergei IVANOV has been rumored to be a possible replacement for KAYSANOV. Itogi noted, "[IVANOV]

follows in the natural line of the President, who prefers not only close allies in his appointments, but people with a certain mentality in the way they work and make decisions. In more concrete terms, that means people who worked in the KGB." Other candidates to replace KASYANOV include Finance Minister Alexei KUDRIN and Economic Development and Trade Minister German GREF, author of the government's economic plan. Igor BUNIN, general director of the Center for Political Technologies, explains, "PUTIN is vacillating between various views of the future and decisions will reflect the path he chooses. Sticking with KASYANOV shows stagnation, a no-rush approach to reform. KUDRIN or GREF would show a more radical approach. Choosing IVANOV would mean opting for a completely different world view." That world view is more closely associated with a omnidirectional threat perception, not one conducive to improving relationship with the West or for that matter Russia's neighbors.

Economy

WB Loans Could Be In Line With Expectations

· World Bank director for Russia Michael CARTER Wednesday announced that the Bank's planned structural adjustment lending (SAL) could be in line with government expectations in 2001. He said, "I believe that we could disburse as much as $700 million next year of adjustment loans, depending on progress with structural reforms, which is pretty much the

Today's News Highlights

Russia

ORT Raid Questioned

Getty Backs LUKoil Bid

Aeroflot To Build New Terminal

European Republics

Lith. Unemployement Rises

Ukrainian Co. Wins Tender

South Caucasus & Central Asia

Georgia Predicts Stable Lari

Kazakh Passes 2001 Budget

TotalFina Leads OKIOC Develop.

Politics-Economics-Business

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Thursday

December 7, 2000

Intercon's Daily

same as the government expected." Russia's 2001 draft budget, which has passed three of four required parliamentary readings, envisages up to $800 million of SAL. Adjustment loans, which go directly to the budget, would include the remaining $150 million of a second coal loan, agreed in 1997, possibly a SAL-4 and a new coal loan on which the Bank and the government have yet to agree. World Bank Vice President for Europe and Central Asia Johannes LINN said on Tuesday the Bank's strategy for Russia envisaged about $400 million of structural loans next year. "We always speak in terms of fiscal year, which ends in July," CARTER said, adding the difference between a fiscal and a calendar year explained the apparent discrepancy in figures. The Russian economy has been boosted in recent months by high international energy and commodity prices and positive effects of the ruble devaluation after the 1998 crisis. The government should increase taxation of oil companies and continue broad tax reforms, aiming to strengthen the fiscal system, CARTER said. He added that the government should speed up structural reforms to be able to withstand possible negative changes in a global environment.

Ruble = 27.93/$1.00 (NY rate)

Ruble = 27.95/$1.00 (CB rate)

Ruble = 24.89/1 euro (CB rate)

Business

Gunmen ORT Raid Justified?

· On Tuesday, a prosecutor investigator and a team of unmasked gunmen raided Russia's biggest television channel, ORT. Armed policemen burst into the headquarters of ORT public television Tuesday to seize documents relating to video film imports several years ago. ORT managers said they were baffled by the display of force. On Wednesday, Russia's prosecutor general Vladimir USTINOV ordered an inquiry into whether the raid conducted by one of his own investigators was justified, Reuters reported. A source in the prosecutor's office said USTINOV had already dismissed the investigator, Georgy TSABRIYA, from the case focusing on ORT's alleged failure to pay duty on imported videos. The agency said USTINOV had told TSABRIYA to leave the office altogether. ORT is officially state-controlled but has until re

cently been dominated by businessman Boris BEREZOVSKY, now living abroad after prosecutors threatened to charge him with profit-skimming at the state airline Aeroflot.

Getty Backs LUKoil Bid

· Getty Petroleum Marketing Inc. on Wednesday said that its board rejected a takeover bid from a unit of United Refining Co. and still backs an offer from LUKoil, Russia's biggest oil company. The company said in a statement that its board late on Tuesday turned down a bid from the United Refining unit that valued Getty Petroleum Marketing at about $5.65 a share. The board supported the LUKoil bid of $5 a share, the statement said. The LUKoil offer expires at 12 a.m. on Friday. The board believed the LUKoil offer more certain than the United bid. Earlier this week, Getty called off negotiations with United Refining, requesting that the group put their bid in writing. Getty Petroleum also would have had to give LUKoil three days notice to terminate their agreement. "Accordingly, late last night the company ceased discussions with United," the statement said.

Aeroflot Makes Plans For New Terminal

· Russian state airlines Aeroflot and the Moscow government signed agreements for tax breaks and the lease of land needed to build a new air terminal. Aeroflot plans to build a new terminal to divert its passengers from the dirty and crowded 41-year-old Sheremyetevo II airport. Aeroflot said frequent customer complaints about service at Sheremyetevo are forcing it build its own terminal. Aeroflot Managing Director Valery OKULOV has said he wants to have the new terminal look like Heathrow Airport's fourth terminal in London, Bloomberg News reported. The investment needed for the project is about $300 million. Aeroflot has been trying to improve its image internationally, where it is still considered a Soviet-era airline, and at home, where it faces competition from the rest of the 300 airlines created after the breakup of the Soviet state airline.

Russky Alyuminy Receives $170M Loan

· Russia's largest aluminum group, Russky Alyuminy, has received a $170 million credit line from WestLB. The loan will be used to buy raw materials for the production of aluminum and is part of a $300 million syndicated financing that Russky Alyuminy has mandated the state-owned German

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bank to arrange. Russky Alyuminy said in a statement it expected to obtain the remaining sum at the start of next year. "The credit is a result of efforts to increase the company's transparency and the application of international financial methods used by first-rate international companies," Corporate Finance Department Director Oleg MUKHAMEDSHIN said in the statement. "Cooperation with WestLB helps us to approach one of our strategic goals of entering international capital markets," Reuters reported.

agreements must be ratified by parliament. The loan, supported by 261 deputies in the 450-seat parliament, is seen as vital once Chernobyl nuclear power station is decommissioned on December 15^th. The EBRD board approved the loan on October 3^rd. Funds will go to energy generators Dniproenergo, Zakhidenergo, Tsentrenergo, and Donbassenergo. The closure of Chernobyl, site of the world's worst civil nuclear accident in 1986, will mean an immediate loss of around five percent of current generating capacity, Reuters reported. Experts say traditional thermal plants will be able to step up production to compensate for the loss, but Ukraine does not have sufficient energy resources to meet demand and relies heavily on imports.

Ukrainian Truckmaker Wins Tender

· Ukraine's largest truckmaker Kremenchukskyi Avtomobilnyi has won a tender to buy a majority government stake in aluminum producer Zaporizhskyi Aliuminievyi Kombinat for $101.5 million. The State Property Fund said the privately held truckmaker outbid Russia's biggest carmaker, a Moscow-based gas trader, and two other domestic companies. It also agreed to pay the monopoly aluminum producer's $80 million in government-guaranteed foreign debt. The purchase, which was 44 percent higher than the second-highest bid and was more than double the $30.7 million minimum asking price, will provide Kremenchukskyi Avtomobilnyi with the aluminum supplies it needs to make engines and other vehicle parts, Bloomberg News reported. "Although the (aluminum maker) is a very attractive company, we did not expect that the price will increase that much," said Fund spokeswoman Nina BURLIUK. Kremenchukskyi Avtomobilnyi bid for the stake with Swiss metals trader Glencore International, which has been purchasing about 30 percent of the aluminum maker's output during the last nine years. The Ukrainian plant has the capacity to make 260,000 metric tons of alumina and 110,000 tons of aluminum a year. It exports 80 percent of its output. Russia's biggest carmaker AvtoVAZ offered $70 million. Itera-Ukraina, a subsidiary of Itera Holding, which extracts and trades gas in the former Soviet Union, offered $35 million for the stake, while Ukraine's pipemaker, Sumske Metalurhiyne Naukovo-Vyrobnychne Obyednannia imeni Frunze, offered $55.75 million. Ukrainian metal trading company

European Republics

Lith. November Unemployment Rises

· Lithuania's unemployment rose by some 6,600 people in November from October, as more people lost seasonal jobs. According to the Labor Exchange, the annual unemployment rate rose to 12.1 percent in November, up from 11.7 percent in the previous month. In November, 217,400 people were registered as unemployed, compared with 210,800 people in October. The unemployment rate was 9.5 percent in November, 1999.

Lithuanian Currency Reserves Declined

· Lithuania's net foreign currency reserves declined 2.0 percent to $1.29 billion in October, Reuters reported today. The Central Bank's total foreign reserves which include repurchase transactions dropped $47.4 million, 3.5 percent, to $1.304 billion at the end of November from $1.351 billion in October. According to the Central Bank's statement, "The decline of the reserves was mostly affected by the central government transactions in foreign currencies with the Central Bank." In November, the Central Bank carried out repurchase deals worth $10.4 million versus $31.5 million the month earlier that also trimmed its reserves. "The drop was offset by increasing obligatory foreign currency reserves of commercial banks, net investment income, appreciation of foreign currencies against the dollar and a rise of the market value of treasuries," the statement said.

Ukraine Approves $100M EBRD Fuel Loan

· The Ukrainian parliament ratified a $100 million loan from the European Bank for Reconstruction and Development (EBRD) today for the country to buy fuel for power generating companies this winter. According to Ukrainian law all international loan

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UPIK Metalurhiya offered $56.75 million. Ukraine raised 1.7 billion gryvnia from selling state assets so far this year, while it initially planned to get 2.5 billion gryvnia in the entire of the year.

South Caucasus & Central Asia

Stable Lari For 2001 Predicted

· Georgia's Central Bank governor Irakly Managadze stated Wednesday that Georgian lari should be stable next year, enabling the country to meet conditions to unlock loans from the International Monetary Fund (IMF), the country's largest creditor. He also expects positive trends in financial markets to be maintained and doubted that a new visa regime with neighboring Russia will do serious damage to the economy. "The lari rate will be stable next year at about two lari to the US dollar. It is possible to meet this goal," he said. "Our main goal is not a fixed rate, but stable prices," Managadze added. The currency was quoted Wednesday at 1.98 to the dollar. An IMF mission to Georgia in October gave a positive assessment of the country's overall economic situation. The IMF said, however, it wanted more action before taking a final decision on a $150 million lending program.

Kazakhstan Passes 2001 Budget

· Kazakhstan's parliament passed the 2001 budget today, projecting a deficit of 2.2 percent of gross domestic product (GDP), down from this year's 2.7 percent. The budget was passed unanimously in the upper chamber of parliament, and by 56 to four with one abstention in the lower house. Revenues are estimated at 412.4 billion tenge ($2.7 billion at the 157.2 tenge to the dollar exchange rate projected in the budget). Spending was set at 468.2 billion tenge, leaving a deficit of 55.8 billion tenge. The budget envisages four percent GDP growth next year in Kazakhstan and inflation of six to seven percent. Kazakhstan's GDP is expected to grow by nine percent this year on the back of booming commodity exports fuelled by high oil and metals prices. This year's inflation is forecast at eight to

nine percent.

TotalFina To Lead OKIOC Development

· French oil major TotalFina on Wednesday said it was taking the lead of the Offshore Kazakhstan International Operating Company (OKIOC) to develop and explore oil at the East Kashagan field just off the Kazakh Caspian shelf. Menno GROUVEL, vice-president of TotalFina Exploration and Production said, "Our company wishes to present its technical and financial resources to develop this project which one can say will be one of the greatest adventures of the 21st century." Senior Kazakh officials have said the field could contain total reserves of 50 billion barrels of oil, making it competitive with Saudi Arabia. The new leadership could tilt the scales away from the US supported Baku-Ceyhan route toward a southern route through Iran. GROUVEL said, "We have always favored different options to export hydrocarbons from Kazakhstan. The southern route is the most profitable and economically viable." The Kazakh Foreign Ministry said, "The choice of a single OKIOC operator will doubtless influence...the choice of export route for Caspian crude… [TotalFina's position on export routes] seemed the most concrete, taking in account its participation in the feasibility study for the Kazakhstan-Turkmenistan-Iran pipeline. This pipeline could provide economical access to markets in the Asian and Pacific region through the Persian Gulf, to oil producers working in Kazakhstan, particularly on the Caspian shelf." The main points being discussed include pipeline capacity, its cost and the stakes to be held by the respective partners. Estimates show the Iranian route could cost $1.5 billion. The statement was released a day after Stephen SESTANOVICH, special advisor to the US Secretary of State visited Astana to urge Kazakh support for Baku-Ceyhan. He also pledged US assistance to renovate the Aktau seaport from where crude will be shipped to the Baku-Ceyhan route. However, the US support for this route could change with a new BUSH-CHENEY administration, known to be open to southern options.

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

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