RussiaRussia ReviewReview GRIFFIN CAPITAL 20 December 1999

IN BRIEF Contents

“Between the conception And the creation IN BRIEF 1 Falls the shadow.” POLITICS AND GOVERNMENT 3 MACROECONOMY 4 FINANCE 5 “The Hollow Men”, T. S. Eliot MEDIA AND COMMUNICATIONS 7 ENERGY 21 Dancing Bear SPORTS 27 Delivers Reformist Duma UPCOMING EVENTS 30 INDEX TO THIS ISSUE 31 Based on the count of over 82% of votes cast, the pro-Kremlin Unity, or Medved (“Bear”), party is expected to occupy about 30% of the Duma, while the Union of Right Forces - its closest pos- sible ally - is likely to control approximately 10% of the Duma. The Communist Party will be forced to become more pragmatic as its aging supporters expire along with their memories. Only an alliance between the Communists and Luzhkov could threaten implementation of mar- ket reforms in .

“Medved ... clearly stands for support of government policies and support for the continuation of the power of the Kremlin.”

Martin Diggle, Director Brunswick Warburg brokerage

A “feel good” party, Unity, was created ninety days before the election. Often referred to as a virtual party, Unity is a stage-managed, non-ideo- logical, opportunistic coalition of regional - ons who can deliver a vote, “Action Man” Sergei Shoigu (photogenic head of the recently created Ministry of Emergency Situations), Kremlin in- sented by the Fatherland All Russia party of siders and an Olympic-gold wrestler cobbled to- former Primer Minister Primakov and gether to resist the threat to the Kremlin repre- Mayor Yuri Luzhkov. Griffin Capital New York +1 212 759-6678/fax 759-6783 [email protected] This material is compiled for the private information of the recipient, and neither Griffin Capital nor its affiliates are soliciting any action or making any recommendations based upon it. This material is based on information provided by sources we deem reliable including , Bloomberg, PRNewswire, Prime-Tass, Kommersant, Vremya, CentreInvest Research,Euroweek, ABN AMRO, com- pany data and other sources, but we do not represent that it is accurate or complete and it should not be relied upon as such. This information does not have regard to the specific investment objectives, financial situation or the particular needs of any individual or entity who may receive this material. Investors should seek financial advice regarding the appropriateness of investing in any securities or implementing investment strategies discussed or recommended in this material and should understand that statements regarding future prospects may not be realised. Vol. II, No. 12 page 1 of 34 RussiaRussia ReviewReview GRIFFIN CAPITAL 20 December 1999

IN BRIEF (Continued) Half the Duma seats are apportioned among the candidates of parties receiving at least 5% of “Primakov’s image of stability the votes. The remaining half are allocated to has been replaced by the macho image the individual candidates first past the post in of Putin, their particular district. Both Boris Berezovsky a dynamic leader defending Russia and former Prime Minister Viktor Chernomyrdin and returning it to a great power.” won parliamentary seats.

Andrei Piontkovsky Combined, the pro-government coalition will Center for Strategic Studies have 55-57% of the votes in the next Duma. Based on the preliminary results of the Duma The greatest surprise was the Union of Right elections, Unity, the Union of Right Forces, and Forces. Considered an outsider by many ex- Yabloko will likely control the majority of the perts, Right Forces gained about 8% of the vote, Duma. The Zhirinovsky block, which at first surpassing its liberal competitor, Yabloko. glance looks a nationalist party, can be expected to go along with the pro-government parties. “It is clear that the situation in Chechnya Thus, the Duma can be considered reformist for is the key to the whole political process in Russia”. the first time since the beginning of economic reforms in Russia in 1992. Turnout was 107 mil- Anatoly Chubais lion, over 55%. Leader Union of Right Forces and Former Deputy Prime Minister These results are positive for portfolio investors in the immediate to mid-term. Many view the Boys To War .... election as a referendum on the war in Chechnya. Once Grozny falls, the West will for- get Chechnya and normal relations will resume. We expect the new Duma will be much more expeditious with production sharing agreements and possibly a bankruptcy law. That is, unless history repeats itself.

Five years ago, on 31 December 1994, Russian troops launched a major offensive against the Chechen capital of Grozny. Within five days, more than 2,000 Russian troops were killed in house-to-house fighting, undermining Russian domestic support for the war. What has Russia’s leadership learned from watching Kosovo? “Information is an essential part of any war effort, as important as rockets, as artillery, as troops.”

Boris Berezovsky, ORT Television Moscow, 10 December

Vol. II, No. 12 page 2 of 34 RussiaRussia ReviewReview GRIFFIN CAPITAL 20 December 1999 IN BRIEF (Continued) Today, with Chechnya raging on the back pages, the Kremlin family is firmly in power and reform- ists appear in the ascendent.

For Putin, a successful military operation would launch him into the presidency. Most Russians would consider him a national hero who deci- sively solved the Chechen problem and spurned the West.

Since taking a back seat to NATO’s incursion in Kosovo, Russians have condoned defiance of the West. In fact, Prime Minister Putin, and his virtual party POLITICS AND GOVERNMENT “Unity” have tremendously benefited from West- ern opposition to the Chechen war. His popu- larity has skyrocketed because Russians con- 18 Dec (Interfax): Yevgeny Primakov announced sider any politician who defies the West a “na- he’ll run for president in the June election. tional hero”. In any event, once the Chechen “anti-terrorist” campaign is over, the West will Russia to Lend $150 million forget Grozny and focus its attention on Putin’s to Yugoslavia positive qualities. 16 Dec (www.tanjug.co.yu): Yugoslavia will re- “If Europe should ever be ruined, ceive a $150 million loan from Russia by the end it will be by its warriors.” of the year, according to Yugoslav Foreign Trade -Montesquieu Minister Borisloa Vukovic, reported state-owned Yugoslav agency Tanjug. Sunday’s election brought a dramatic shift from the left to the center. We expect the Duma will 14 Dec (Interfax): Prime Minister Putin declared become more pragmatic, emphasizing concrete that he would continue market reforms if he were solutions, not ideological debate. Legislators elected president. ...Comment: Putin has finally can act on tax reform, bankruptcy law and re- announced his position on future economic policy form of the banking system. if he becomes president. A combination of lib- eral economic views (compliments of Union of However, one would be well advised not to take Right Forces leader and former Deputy Prime reform for granted. The Unity party is a tempo- Minister Chubais) and his unrelenting assault on rary construct and exists only in name. The Chechnya may be well received in the Duma. same people who conceived the Unity party also Putin is viewed as a strong “locomotive” for fu- introduced unprecedented capital flight and ture market reforms and as an enforcer of “law crippled Russia’s banking sector, conceived and and order” based on his decisive moves against benefited from loans for shares and arranged a Chechen militants. His policies will ultimately very pliable cabinet around the retiring president depend on which groups have the greatest in- Yeltsin. Time to close the gate and introduce fluence over him after the presidential elections the rule of law now the horse is out of the barn. in June.

Vol. II, No. 12 page 3 of 34 RussiaRussia ReviewReview GRIFFIN CAPITAL 20 December 1999 POLITICS AND GOVERNMENT (Continued) 2 Dec (Bloomberg): Moscow Tax Police said 14 Dec (Interfax): A bomb exploded in the lift of they dropped a criminal investigation against the a nine-story apartment block in St. Petersburg. local office of Ernst & Young LLC, the world’s No one was injured. third largest accounting and consulting firm, because it’s paid all of its taxes. 9 Dec: Russian authorities lost radio con- tact with a passenger plane flying over the Last month, Ernst & Young said the city’s tax Russian this morning, Interfax reported, police opened a criminal investigation against citing the Emergency Situations Ministry. The its management for tax evasion. The company An-14 aircraft was on a test flight following re- today said police called off the investigation on pairs with three crew members and four spe- 25 November because Ernst & Young had actu- cialists on board. A search and rescue opera- ally paid all back taxes and penalties as of 1 tion is being carried out, the agency said. November.

9 Dec: Deutsche Bank AG Chief Executive Rolf An earlier court ruling concluded the company Breuer said Russia has no immediate need to didn’t owe the 40.1 million ($1.5 million ) reduce the $32 billion in Soviet era debt owed to the city’s tax service said it must pay, after con- bank creditors, Russia daily Vremya reported. ducting an audit of the company’s books from Breuer, speaking at a conference on debt yes- 1995 to 1997. The court reduced the penalties terday in Frankfurt, said: “Russia, in connection to 3.1 million rubles, the company said. with the continuous rise in oil prices, doesn’t have an immediate need for lowering the volume of “This is a situation which proves once again that its debt to private creditors.” The tone of the the Russian tax system requires additional im- meeting between the Russian delegation and provement,” said Alexander Ivlev, director of its bank creditors became more political after marketing at the Moscow office of Ernst and Russia stepped up its war in the breakaway Young. “There are many cases of tax authori- southern republic of Chechnya. ties and businesses reading the same legisla- tion differently. We found a mutually beneficial Russia is the world’s third largest oil producer solution.” and the government has reached record levels of revenue collection this year helped by taxes MACROECONOMY on oil companies. ECONOMIC INDICATORS 20 December: (Interfax, Bloomberg) Yeltsin to Head Supreme Council of the Russia- Union • Russia’s industrial production rose 12.9% in November from the same 8 Dec (Prime-TASS): According to the agree- month last year. ment between Presidents Yeltsin and Belarus President Alexei Lukashenko, Yeltsin will be • Russia’s monthly inflation rate de- appointed the head of the Supreme Council of creased to 1.2% in November from 1.4% the Russia-Belarus Union in January 2000. The in October. It fell to 1.2% in August from union process will occur gradually over ten years. 2.8% in July and 1.9 percent in June, 2.2% in May, 3% in April and 2.8% in Ernst & Young Tutored March. by Moscow Tax Police

Vol. II, No. 12 page 4 of 34 RussiaRussia ReviewReview GRIFFIN CAPITAL 20 December 1999

MACROECONOMY (Cont’d) “The West’s denunciation of our policy • Russia’s foreign and gold re- in Chechnya is the only core reason serves rose by $300 million to $11.8 for the IMF board decision to billion in the week ending 10 December. put off consideration of the disbursement.” The reserve low for the year is $10.8 bil- lion in April. About 2/3 of reserves are in Anton Siluanov cash and 1/3 in precious metals. Department Chief Russian Finance Ministry • Russia raised 39.1 billion rubles in taxes in cash in November and aobut 20 bil- lion rubles in customs fees. In October, it Receives collected 36 billion rubles in taxes and $453 million IMF Credit 16.5 billion rubles in customs fees. The Tax Ministry said it is aiming for a record 14 Dec (Bloomberg): Kazakhstan received a 40 billion collection in December. $453 million credit line from the International Monetary Fund to support its efforts to balance • Russia’s money supply rose by 12.1 bil- its budget and keep inflation under control, the lion rubles ($451 million) and totaled 284.7 fund said. billion rubles in the week ended 14 De- cember. The IMF praised Kazakhstan, the largest of the former Soviet republics, for pulling itself out of 6 Dec (Interfax): Inflation in Russia amounted recession sparked by regional instability, includ- to 34.8% in the first 11 months of 1999. …Com- ing the devaluation of the Russian ruble in 1998. ment: The government managed to avoid “brib- ing” the voters by printing money, which is al- Kazakhstan should continue the floating ex- ways a good sign. change rate regime, the pursuit of monetary policy geared toward further reducing inflation “Society should understand and strict fiscal policies, the IMF said. very well that there are no fairy tales any more. The government’s 2000 budget is a “credible You cannot become rich and happy stepping stone towards” fiscal independence, by just printing money.” said Shigemitsu Sugisaki, IMF deputy manag- ing director. Interview with The Financial Times The country is expected to pull out of a two- 12 December 1999 year period of negative growth in 2000, when the fund predicts the economy will grow by 3 percent. FINANCE For 2001, the economy will grow by 3.5 per- The IMF continues to withhold disbursement of , followed by 4 percent growth in 2002, the a $640 million tranche pending Russia’s satis- fund said. That rate is double the fund’s 2 per- faction of new loan conditions imposed after the cent growth prediction for all of Eastern Europe. Bank of New York funding scandal. Some Rus- sians feel the story was an American fiction. To combat a “culture of non-payment”, the gov- ernment will focus on increasing tax collection

Vol. II, No. 12 page 5 of 34 RussiaRussia ReviewReview GRIFFIN CAPITAL 20 December 1999 FINANCE (Continued) intend to accept unless it runs into economic trouble. and reforming the tax code, the fund said. “We will not be using this money unless a turbu- Kazakhstan, with yearly output of $19.4 billion, lent external environment makes us,” said Pe- borders Russian and China and is about four ter Vinkelis, economic counselor at the Latvian times the size of the US state of Texas. embassy in Washington. “This is a message to the outside world to raise our credibility and cred- Inflation is expected to lessen in 2000 to 9 per- itworthiness in international markets” and im- cent from 16.9 percent for the second quarter of prove prospects for obtaining a World Bank loan. 1999, the fund said. issued two eurobonds this year and may Under the IMF’s program for monetary policy, try to issue more bonds next year, Vinkelis said, Kazakhstan’s will “leave monetary adding that he isn’t authorized to provide more policy unchanged for the year ahead” and inter- details. vene in foreign exchange markets only to pro- tect its foreign reserves, the fund said The conditions Latvia will follow in exchange for the IMF “standby” loan are “expected to would Kazakhstan is home to vast mineral resources, hold the ruble to a rate between 27 and 30 rubles including oil, gas, coal, uranium and gold. The to the dollar to the end of this year. IMF urged the country to continue its efforts to- ward trade liberalization and praised The refinancing rate was set at 55% on 10 June, Kazakhstan’s elimination of tariffs. a 5% cut from the previous rate and remained at this level at 20 December. Kazakhstan’s current account deficit - the broad- est measure of trade because it includes finan- Russian MoF Pulls cial transactions as well as goods and services - Rich T-bill Auction will remain at 2 percent of output for the next two years, but will then decline as exports grow, the fund predicted. 14 Dec (Interfax, Bloomberg): Russia’s central bank today canceled its sale of four new trea- “From the Russian point of view, sury bills, intended to raise as much as 6 bil- compromise [with the IMF] lion rubles ($223 million), because investors is politically too costly were demanding yields higher than the bank was and the immediate reward offering. - $640 million - is too paltry.” First Deputy Finance Minister Alexei Kurdin Goohoon Kwon announced on 10 December the Finance Minis- Senior Economist try would sell three zero-coupon bonds to com- ABN AMRO mercial banks to provide a short-term instrument for their cash according to Interfax.

IMF Provides Latvia The bills, to be offered to foreign investors hold- Standby Facility ing proceeds from the government’s domestic debt swap, would have matured in April, June, 10 Dec (Bloomberg): The IMF approved a $4.5 September and November. The bonds matur- billion loan to Latvia that the Baltic country doesn’t ing in April were priced to yield between 2 per-

Vol. II, No. 12 page 6 of 34 RussiaRussia ReviewReview GRIFFIN CAPITAL 20 December 1999

Alfa Bank has said it’s now the fourth-largest FINANCE (Continued) bank in Russia after two state-controlled banks cent and 4 percent, those maturing in June be- and . It’s chairman is Mikhail tween 6 percent and 8 percent, those maturing Fridman. in September between 10 percent and 13 per- cent and those maturing in November between 9 Dec: Russia’s State Agency for Bank Recon- 16 percent and 18 percent, Interfax reported. struction, ARKO, is considering selling 4 billion rubles ($148.9 million) of bonds, guaranteed by After canvassing the market, the sale was can- the government, to the EBRD after 1 July, the celled because the yield was “too high and Russian daily Vremya reported, citing ARKO doesn’t correspond with the interest rates on President Alexander Turbanov. The govern- other instruments ... and the average rates on ment included guarantees on that amount for the interbank market,” the central bank said in ARKO in the Federal budget for 2000. If the a statement. EBRD buys the bonds, its input into reorganiz- ing Russian banks will be greater than the The CBR’s failure to place the bonds, however, government’s, which set aide 1 billion rubles for is not regarded as a threat to the Russian fed- ARKO in the 2000 budget, the paper said. eral budget because they were originally de- signed to control banking liquidity, not to finance MEDIA AND COMMUNICATIONS the budget deficit. Mobile phone manufacturer Nokia became the Alfa Bank Russia’s Fourth Largest biggest European company by market capitali- zation this week, exceeding BP Amoco. 10 Dec (Bloomberg): Alfa Bank, Russia’s fourth- largest bank by assets, said it will open 19 Telia/ Merger Cancelled branches next year to lure more individual cli- ents after many of the country’s biggest banks 16 Dec (www.telenor.com): Telenor and Telia collapsed in the past year. cancelled merger negotiations today. Telenor is the lead foreign investor in Russia’s VimpelCom The bank will open the new branches in Russia’s mobile voice operator. regions, where Alfa dominates the retail mar- ket. The bank said it opened 14 regional of- “I strongly regret that it was not possible to carry fices, half of which were financed in part by the out a successful merger between Telenor and government’s bank restructuring agency. Telia. In the current situation, it was the right thing for the Government to reverse the decision,” says Hundreds of banks collapsed after the govern- Telenor/Telia’s CEO Tormod Hermansen. ment defaulted on $40 billion of Treasury debt and abandoned its defense of the ruble in Au- “For everyone involved - the two countries’ gov- gust 1998. Alfa weathered the crisis, restruc- ernments and the two companies - the condi- turing a $77 million loan in July, and meeting all tions for a businesslike successful merger have payments on its $175 million Eurobond. been mutual respect and equality between the two parties carrying out the merger. When one The agency promised the bank 1 billion rubles of the parties clearly demonstrates that these ($37.6 million) earlier this year, in exchange for conditions are no longer decisive, then unfortu- a portion of Alfa’s shares, to help the bank de- nately the whole basis for the merger is gone,” velop its network. says Hermansen.

Vol. II, No. 12 page 7 of 34 RussiaRussia ReviewReview GRIFFIN CAPITAL 20 December 1999

MEDIA AND COMMUNICATIONS (Continued) for telecommunication investments in the Cen- tral European countries, helping them to develop “Telenor will now utilise its expertise within the fixed and mobile networks on a cost-effective Mobile, IP and Business communication areas and durable basis, improving their communica- to follow its previous strategy and ensure its tions links with neighboring countries and facili- strong position in the home market and take tating their integration with the European Union.’ positions in the European and international mar- ket. I am not worried about Telenor’s ability to The loan signed today brings EIB lending in develop in a positive way, even though a merger to EUR 232 million. Previous loans with Telia is no longer possible,” says helped finance a wide range of infrastructure and Hermansen. environmental projects, in particular ports, roads, airport, railways and gas supply facilities. The Telia/Telenor Competitors EIB is also assisting the development of small Exploit Problems and medium-size enterprises through its global loans (credit lines) to the Lithuanian banking 16 Dec (www.rdsl.co.uk): Telenor/Telia’s current sector. disagreements on the merger of the firms is ben- efiting competitors, with NetCom, mobile firm, Ericsson Starts publishing whole page adverts saying that it Russian Mobile SET Project spends time on customers, not fighting. 17 Nov (www.ericsson.com): Ericsson an- NetCom is using this opportunity to push sales nounced today that it has signed a Memoran- before Christmas 1999. There are as yet no dum of Understanding with Visa International to figures to show whether NetCom will manage to develop mobile e-commerce solutions. “We’re take advantage of the situation and take market cooperating not just on the technical side, but share from Telenor. MCI WorldCom is already also participating in the various standards bod- trying to take advantage of the situation, MCI ies,” said a spokesman. WorldCom has just established operations in and the current disagreements between Jean-Louis Siegwald, of Ericsson’s business Telenor and Telia are helping the firm gain mar- development unit, said that Ericsson is starting ket share. a project in Russia called Mobile SET to tackle this question. “SET is about the fixed environ- EIB Supports Latvian GSM ment. We want to use Visa to help us leverage Operator with EUR45 Million Loan it into a mobile environment”. www.eib.org/pub/press/1999/pa050.htm The European The partnership, effective as of today, aims to Investment Bank (EIB), is lending EUR 45 mil- establish standard protocols for mobile e-com- lion (1) to UAB Bité GSM, the private mobile tele- merce. Ericsson and Visa will develop secure phone operator in Lithuania. The funds will help payment solutions working on the basis of WAP, to expand the mobile telephony links and also Bluetooth, EMV (Europay-MasterCard-Visa) and to set up a data and internet network. The new SET (Secure Electronic Transaction) protocols. loan brings total EIB support to Lithuania’s GSM The partnership will encompass testing proto- network to EUR 67 million. types and working on standards committees. They will develop SET for a mobile environment. Commenting on the loan, EIB Vice President Wolfgang Roth said: ‘The EIB is a major lender The first area of cooperation will be the Ericsson

Vol. II, No. 12 page 8 of 34 RussiaRussia ReviewReview GRIFFIN CAPITAL 20 December 1999

MEDIA AND COMMUNICATIONS (Continued) gests investors will focus their attention in the near future on such “less liquid” telecoms. Bluetooth-enabled wireless wallet, which Siegwald said would be demonstrated in the first 16 Dec (Bloomberg): Bashinformsvyaz said it half of next year. The wallet will feature smart earned 140.73 million rubles of 24 kopecks a card readers, which can communicate with a share, for the nine months ended 30 Sept 1999, bluetooth enabled mobile phone. compared with earnings of 124.55 million rubles or 76 kopecks a share, in the same period a MTS seeks external financing and considers an year earlier. IPO on NYSE. Rumors about the possible 2000 IPO are becoming more and more real. Revenue was 835.35 million rubles, compared with 633.14 million rubles. Mobile TeleSystems (MTS) is Russia’s leading cellular operator, providing services in dual-band 16 Dec (AK&M): KhantyMansiyskokrtelecom 900/1800 standard. MTS leads the national wire- is preparing to implement per-minute metering less market in terms of customer base. It has of its local telephone network next year. …Com- hired ING and Deutsche Bank for financial and ment: According to management, the local tele- marketing consulting. It is likely the company will phone network has a sufficient digitalisation rate offer shares on the NYSE in order to repeat rival to implement new billing procedure without sub- VimpelCom’s experience in raising capital for stantial additional Capex for metering equipment. business expansion and to maintain its high The company intends to perform marketing re- operational standards in competitive environ- search for optimal rates. ment. VimpelCom Reports MTS is incorporated as a closed joint-stock com- pany. This legal status does not require substan- 142% Subscriber Increase tial public transparency and the company is un- willing to reveal its operational or financial state- 15 Dec (www..ru/en/report/p991215.html): ments at this time. The company is rumored to Open Joint Stock Company “Vimpel-Communi- have greater profit margins than VimpelCom due cations” (“VimpelCom” or the “Company”) to the latter’s financially risky “$49” program (NYSE: VIP) today announced financial results (Russia Review, October 1999). VimpelCom’s for the third quarter and nine months ended stated goal is to boost share at the expense of September 30, 1999. The Company also re- short-term operating losses. ported that as of today, its Moscow GSM and D-AMPS subscriber base is approximately 16 Dec (Prime-TASS): The Ministry of Com- 300,000, representing a growth of approximately munications nominated the best telecom 142% since the beginning of the year. companies of 1998. The Ministry’s special com- mission named Kaluga Electrosvyaz, Vladimir As of September 30, 1999, VimpelCom had over GTS (a subsidiary of Vladimir Electrosvyaz) and 197,300 subscribers on its Moscow GSM and Rybinsk Electrosvyaz (a subsidiary of D-AMPS networks. This represents a growth of Yartelecom) best operators. AO “Morion” was approximately 39% over the 141,600 subscrib- named the best telecom equipment manufac- ers reported at the end of the third quarter of turer. The companies were chosen based on 1998 and a growth of approximately 59% over operational and investment effectiveness, mar- the 124,000 subscribers reported at the end of keting and research capabilities, and the results 1998. As of September 30, 1999, the Company’s of technical innovations. We believe this sug- Moscow GSM subscriber base was approxi-

Vol. II, No. 12 page 9 of 34 RussiaRussia ReviewReview GRIFFIN CAPITAL 20 December 1999 MEDIA AND COMMUNICATIONS (Continued) Company’s EBITDA margin for the third quarter MEDIA AND COMMUNICATIONS (Continued) of 1999 was approximately 22%, a decrease mately 56,100, an increase of 167% from the from the approximately 42% EBITDA margin 21,000 GSM subscribers reported as of Decem- reported in the same period in 1998. ber 31, 1998. As of September 30, 1999, pre- paid subscribers constituted approximately For the third quarter of 1999, the Company re- 54% of VimpelCom’s Moscow subscriber ported a net loss of $2.6 million, or $0.10 per base. Management believes that the number share ($0.08 per ADS), compared to a net loss of prepaid subscribers as a percentage of the of $43.9 million, or $2.28 per share ($1.71 per Company’s overall Moscow subscriber base will ADS), reported in the same period in 1998. Each continue to increase in the future. Average ADS represents 0.75 of one share of common monthly airtime usage per subscriber was stock. approximately 130 minutes in the third quar- ter of 1999, and average revenue per user Total operating revenues for the nine months (ARPU) was approximately $95 in the same ended September 30, 1999 were $172.5 million, period. a decrease of 42% from the $299.9 million re- ported in the same period in 1998. Total net op- VimpelCom’s subscriber base has increased in erating revenues (net of revenue-based taxes) 1999 largely as a result of an influx of prepaid were $163.2 million for the nine months ended card subscribers who have been attracted to September 30, 1999, a decrease of 44% from VimpelCom’s innovative marketing and promo- the $288.9 million reported in the same period tions campaigns. The Company recently expe- in 1998. rienced a surge in subscriber growth through its prepaid “phone in a box” program, which allows The Company’s operating loss for the first nine customers to buy an activated phone “off the months of 1999 was $9.7 million compared to shelf.” At the same time, VimpelCom has con- operating income of $89.6 million reported for tinued to target traditional post paid subscribers the first nine months of 1998. The Company’s that have historically used more airtime and gen- net loss for the nine months ended September erated higher revenues for the Company as com- 30, 1999 was $13.3 million, or $0.61 per share pared to prepaid users. ($0.46 per ADS), compared to net loss of $13.7 million, or $0.71 per share ($0.53 per ADS), re- VimpelCom’s total operating revenues for the ported in the same period in 1998. third quarter of 1999 were $56.9 million, a de- crease of 45% from $103.9 million reported in During the third quarter and the first nine months the same period in 1998. Total net operating of 1999, the Company experienced a decrease revenues (net of revenue-based taxes) were in operating revenues and EBITDA as compared $53.0 million in the third quarter of 1999, a de- with the same periods in 1998. Selling, general crease of 47% from the $100.6 million reported and administrative expenses for the third quar- in the third quarter last year. The Company’s ter of 1999 decreased 30% to $18.3 million com- operating loss for the third quarter of 1999 was pared to $26.0 million reported in the same pe- $1.7 million, a decrease of $32.5 million from riod in 1998. The absolute decrease in selling, operating income of $30.8 million reported in the general and administrative expenses in the third same period a year ago. quarter of 1999 was due primarily to a decrease in personnel-related costs as well as an overall EBITDA for the third quarter of 1999 was $11.7 decrease in business activity. million, a decrease of 72% from $41.7 million reported in the same period in 1998. The For the third quarter of 1999, the Company re-

Vol. II, No. 12 page 10 of 34 RussiaRussia ReviewReview GRIFFIN CAPITAL 20 December 1999 MEDIA AND COMMUNICATIONS (Continued) to launch its Garuda satellite in early 2000. The venture is 34% owned by Pasifik Satelit corded a $1.7 million provision for doubtful ac- Nusantara (Indonesia) and 33% owned by counts receivable (representing 3.1% of net op- Lockheed Martin (Los Angeles, CA). erating revenues) compared to $6.2 million (rep- resenting 6.2% of net operating revenues) in the Thuraya Satellite Telecommunications (Abu same period in 1998 during which the Russian Dhabi) plans to launch its satellite in May 2000 financial crisis commenced. This 73% decrease and to start services in September 2000. in provision for doubtful accounts receivable Subhash Chandra’s ASC Enterprises Ltd. (Lon- was due to an improvement in the quality of don) plans to launch its Agrani satellite, focus- the Company’s customer base as compared ing on India, for a 2002 in-service date. Chandra to the third quarter of 1998. To a lesser ex- and .S. wireless entrepreneur Craig McCaw tent, this was due to an increase in the num- have teamed to bail out ICO Global Communi- ber of the Company’s prepaid subscribers, cations (see related story this issue: “Bottom an increase in the proportion of revenues from Fishing Billionaires Bail Out Troubled ICO”). roaming and a general decrease in the Company’s operating revenues. The Company Media Most Sells to ; believes that its provision for doubtful accounts Repays $42.2 million Loan receivable is conservative and adequate.

VimpelCom expects to report a net loss for the Media Most, a Russian holding company that fiscal year ended December 31, 1999 and for owns national television channel NTV, repaid the first half of 2000 due to the implementation $42.2 million owed to state-owned of its new strategy which, in the short-term, Vnesheconombank, Russian brings increased expenses and continued fall- Interfax reported on 14 December, siting a com- ing ARPU associated with the increase in pre- pany press release. Media Most said it retired paid subscribers. the debt in line with a court order.

Regional GEOS Revive Media Most had weeks earlier been given five days to repay the loan or face property arrests Mobile Satellite Telephony by court bailiffs, Russian media reported.

15 Dec (www.rdsl.co.uk): Regional geostationary Venesheconombank sued Media Most for miss- satellites (“geos”) being set up by several op- ing interest and principal payments on $60 mil- erators are expected to revive the reputation of lion in loans it called in July. A court later ruled mobile satellite telephony in 2000, following the Media Most must pay, even though its holds the fall into financial difficulty of ICO Global Com- same amount in unredeemable defaulted Min- munications and Iridium, both low Earth orbit istry of Finance bonds. (LEO) constellation operators. The Moscow Times reported on 8 December that The geo systems, which will cover specific geo- Media Most would sell about 13 percent of its graphical regions, will be able to offer handsets shares to OAO Gazprom, the country’s gas for $400-800 and prices of $0.50-1.00/min vs monopoly, and a current shareholder of Media the LEO handsets’ $1,500-3,000 price and Most. After the sale, Gazprom will own about $1.50-3.00/min call charges. 35 percent of NTV and less than 20 percent of Media Most. Gazprom, the world’s largest gas Asia Cellular Satellite (ACeS) (Indonesia) plans company, bought 30 percent of NTV in 1996.

Vol. II, No. 12 page 11 of 34 RussiaRussia ReviewReview GRIFFIN CAPITAL 20 December 1999

IP-based network, in which Global Crossing has MEDIA AND COMMUNICATIONS (Continued) invested about $800 million, provides high band- Access to NTV’s downstream Ku-band sat- width services using DWDM technology for up ellite capacity, and its extensive network of to 100Gbit/s transmission capacity. The Ber- rights-of-way, will enable Gazprom to extend muda-based company hopes to upgrade to its broadband right-of-way throughout Rus- 400Gbit/s early next year. sia and its primary export markets in Europe (see Russia Review, November 1998 and re- Global Crossing’s ring is one of a number of new lated feature in this issue under “Media and Com- rings being built in Europe. Phase one, cover- munications”). ing 7200 km, will be ready for customer use in January, with Swisscom and Cable & Wireless The previous day, Media Most announced it having already signed up to take capacity. “I would sue the Russian government in interna- can assure you we have a few more [custom- tional courts to force it to redeem as much as ers] in the pipeline,” said Wim Huisman, presi- $400 million of Ministry of Finance bonds, The dent of Global Crossing Europe. Moscow Times reported. The fourth ring, incorporating six German cities, If Media Most wins its case, and if affiliated bank is expected to open late in the first quarter of Most Bank wins a similar case over $100 million 2000. The final ring takes in Zurich, Milan, of MinFin bonds, it would raise the prospect of Marseilles, Lyon and Turin, and is expected to the government having to meet billions of dol- be operational sometime in the third quarter of lars of debt payments falling due at once. The next year. media group, which helped back President ’s reelection bid in 1996, decided to sue Huisman hinted that expansion was planned next abroad because of frustration with the Russian in and Scandinavia. Global Crossing has court system, The Moscow Times said. recently acquired the U.K.’s Racal Telecom and Frontier in the U.S. Annunziata said: “Our strat- Russia defaulted on $1.3 billion in MinFin Se- egy is to buy dark fiber facilities and then build ries 3 bonds which matured in May, and has pro- and control it ourselves. Or if there’s a carrier posed a restructuring plan. A Russian court ruled we think is the right value we will acquire them.” this autumn Media Most couldn’t use defaulted government bonds to repay a $60 million debt Facilities-based Global Crossing stresses that its units owe to state-owned Vnesheconombank. its network is fully owned. “We own 100% of our network in Europe, we own 100% of our net- Global Crossing Lights Up work in North America,” said Annunziata. “We European Network felt it was appropriate that we bring in another partner when we tackle the Asian market.”

14 Dec (www.globalcrossing.com): Global In November, the company announced the $1.28 Crossing today announced the completion of billion East Asia Global Crossing venture with stage one of its pan-European fiber optic net- Softbank and and a JV with work. The first three rings now connect cities in Hutchison Whampoa in Hong Kong. Earlier in the Netherlands, the U.K., , , Ger- the year, it secured a JV with Marubeni giving many and Denmark. it access to Japan.

“We believe it is a truly global opportunity,” said Global Crossing was set up in 1997 as a carrier’s Global Crossing’s CEO, Bob Annunziata. The carrier. Now Annunziata says 40% of the

Vol. II, No. 12 page 12 of 34 RussiaRussia ReviewReview GRIFFIN CAPITAL 20 December 1999 MEDIA AND COMMUNICATIONS (Continued) hold 28% of ICO’s shares and McCaw 46%. Existing ICO shareholders, including former company’s revenues are wholesale and only bond holders, will hold about 26%. 60% retail, but he dismisses suggestions that Global Crossing is trying to compete with its The court’s approval of the deal appears to clear customers. “That’s the way you build these net- the way for ICO to conduct its first satellite launch works out. One day you’re a competitor, one in February, a necessary step to start service in day you’re a supplier.” mid 2001. Observers look for a “medium-rate” 128-200 kilobit-per-second mobile data service Bottom Fishing Billionaires to be added to ICO’s already planned circuit- Bail Out Troubled ICO switched, narrowband products for voice and data. However, McDougal said Chandra and McCaw’s teams were just completing due dili- 13 Dec: ICO Global Communications (Holdings) gence on ICO and had not yet instituted any stra- Ltd. has emerged from bankruptcy proceedings tegic changes or installed their representatives with the backing of two billionaires from oppo- at ICO’s London headquarters. site sides of the globe. Chandra is chairman of the Indian conglomer- U.S. wireless entrepreneur, Craig McCaw, and ate Essel Group. He is a self-made billionaire Subhash Chandra, an international broadcaster with a net worth in excess of $5 billion. He also dominant in Asia, decided to join forces in early owns Zee Telefilms Ltd., a large Asian broad- December to bail out ICO, of London, rather than cast company, and chairs ASC Enterprises, fight over it in court. But the new partners now which is developing the Agrani satellite for In- face the huge task of getting ICO into service dian mobile telephony and fixed services. within about 18 months. Several sources say much more than the agreed bailout funds of $1.2 McCaw heads satellite company Teledesic LLC billion will be needed to get ICO into the global and Eagle River Investments, both of which voice and data services business. are associated with the ICO deal. His wireless empire includes Nextel Communications Inc. Pat McDougal, ICO’s senior vice president of corporate development, said $1.2 billion is the According to Jai Singh, president and chief ex- amount required to reach service start. If the new ecutive of ASC, the two men share a vision and investors have contingency figures of more fund- a strong entrepreneurial drive. ing requirements, those have not yet been put on the table. “McCaw adds a very special strength of his wire- less business expertise and instincts, credibility Under the deal approved on 3 December in a in western financial markets, and his foresight U.S. bankruptcy court, Chandra will provide 38% of right products. Chandra brings to the table of the funding and McCaw - who will also con- his understanding of the developing economies trol the management of the “new” ICO - will pro- markets where a significant part of the ICO mar- vide 62%. “Chandra will work shoulder to shoul- kets will be, what it takes to establish and run der with the wireless pioneer on rebuilding ICO,” successful business in those markets, and a said Chandra’s spokesman Punit Goenka, a vice demonstrated ability to design and run cost-effi- president of satellite development company ASC cient business structures,” said Singh. Enterprises Ltd. Although Chandra’s Agrani satellite project, When the restructuring is complete, Chandra will planned for launch in 2001, is a mobile system

Vol. II, No. 12 page 13 of 34 RussiaRussia ReviewReview GRIFFIN CAPITAL 20 December 1999

MEDIA AND COMMUNICATIONS (Continued) Motorola Gives Iridium a Lift like ICO, a business or strategic connection be- tween them has not yet been established. “While 10 Dec: Iridium LLC, another financially troubled both companies are in the GMPCS [Global Mo- satellite phone operator, said yesterday that a bile Personal Communications Systems] arena, group of investors led by Motorola had commit- they are hardly likely to compete. If so, only in ted $20 million in funding. the Indian market, and that too in a limited fash- ion,” said ASC’s Goenka. “The market potential The money will allow Iridium, which filed for bank- at the prices Agrani is pegged at is far more than ruptcy protection in August, to continue operat- envisaged in the ICO business.” - Agrani is a ing until 15 February 2000, said a Motorola mass market system for lower-cost long distance spokesman. The company is leading a group of calls. unnamed current investors, and has said it will top-up the combined contribution to total $20 Meanwhile, McCaw continues to negotiate for million. control of Iridium LLC which, like ICO, filed for Chapter 11. Iridium faces another bank dead- “Our existing investors have stepped forward to line on 15 December, and while an announce- provide for ongoing operations, while we con- ment of new investment could be made before tinue to have discussions with potential new in- then, the banks also could give Iridium another vestors,” said John Richardson, chief executive extension. McCaw’s aides did not comment on of Iridium. The Motorola spokesman said the the matter, but sources in the financial and sat- funding does not change the conditions the com- ellite communities said it was difficult to see how pany laid out for the financial restructuring of Iridium could be made into a successful busi- Iridium which includes the addition of another ness, other than as a near-term bridge to pro- significant strategic investor. Recent media re- vide some kind of service prior to ICO’s startup ports have speculated that mobile entrepreneur, in 2001. Craig McCaw, is set to invest in Iridium. Last week McCaw teamed with Subash Chandra to Tom Watts, first vice president at Merrill Lynch take a controlling stake in ICO Global Commu- & Co., of New York, said the potential deal “looks nications, which is also in bankruptcy protection. like a repeat of Nextel, where McCaw rescued [another] Motorola mis-execution.” Earlier this week, a spokesman for Teledesic, McCaw’s satellite venture, confirmed the com- On the whole, McCaw’s goals with respect to pany is in talks with Iridium. Iridium remain unclear to outsiders. “Iridium is a loser, unless you can wipe out all debt and fixed Today the Motorola spokesman said that al- costs,” said another Wall Street source, request- though the company is in discussions with other ing anonymity. With ICO, it is easier to see that companies he would not confirm who was in- McCaw is getting a big asset at a relatively cheap volved. price. “His primary markets would be outside North America and Europe, and you can make The $20 million funding is subject to approval money if there is demand, as long as you price from the U.S. Bankruptcy Court for the South- the service correctly.” ern District of New York. Iridium also announced that it has now sold over 50,000 Iridium phones and that Motorola expects to ship its smaller Sat- ellite Series 9505 handset by the end of the year.

Vol. II, No. 12 page 14 of 34 RussiaRussia ReviewReview GRIFFIN CAPITAL 20 December 1999

MEDIA AND COMMUNICATIONS (Continued) based commerce markets, which will be invalu- able as we build on our already strong position 9 Dec (Bloomberg): Elcoteq Network Oyj, the in these new dynamic businesses,” Global Finnish supplier of mobile phone components Crossing Chairman Gary Winnick said. to Ericsson AB, Nokia Oyj and Philips Electron- ics NV, said it is considering building an as- “We are exploring ways to maximize the excep- sembly plant in St. Petersburg. tional value of GlobalCenter, including a possible IPO of a minority stake or through a tracking In a statement published by the company on 19 stock in the near future. No one is better quali- November, Elcoteq said it’s negotiated with offi- fied than Leo to make the most of GlobalCenter cials in St. Petersburg and with the Russian gov- for the benefit of our shareholders,” Winnick said. ernment “about the possibility of building a new electronics plant in St. Petersburg. However, Global Crossing’s consideration of a tracking no decisions about this investment have been stock or IPO of its Internet unit comes as the taken, mainly because of unsolved problems tracking stock idea has caught fire on Wall relating to customs and logistics procedures.” Street. Earlier Monday, after weeks of specula- tion, AT&T confirmed that it would create a track- Elcoteq is building new plants as demand for ing stock for its wireless business early next year phones jumps. The company has 10 plants through an IPO. The No. 3 U.S. long distance outside Finland, including Hungary, , provider, Sprint Corp., has had a tracking stock China and Mexico. Elcoteq plans to assemble for its wireless business for about a year. equipment in Russia and export finished prod- ucts to world markets. A tracking stock is a security tied to the perfor- mance of a single portion of a company’s busi- “While there is a general desire to build a plant ness. It does not represent an ownership stake in St. Petersburg, the decision that our company in the business. Hindery, 52, left AT&T in Octo- took is only a protocol of intention,” said Sergei ber, having spent only about half a year at the Petrov, human resources director at Elcoteq’s No. 1 U.S. long distance company after coming pilot plant in St. Petersburg. “We have no con- aboard as part of AT&T’s acquisition this spring crete date.” of cable television giant Tele-Communications Inc. 7 Dec (Reuters): Telecommunications company Global Crossing Ltd. on Monday named AT&T He had been president and CEO of AT&T Corp.’s former cable chief, Leo Hindery, as head Broadband & Internet Services. Before that of its Internet services unit - the second top-tier he was president and CEO of Tele-Communi- AT&T executive the telecommunications upstart cations Inc. Global Crossing is building a vast has snared in the last year. international fiber optic network as well as ac- quiring telecommunications service providers As chairman and chief executive of such as Rochester, N.Y.-based Frontier Corp. GlobalCenter Inc., Hindery will spearhead the worldwide expansion of Global Crossing’s Global Crossing’s CEO, Robert Annunziata, is Internet business, including a possible tracking also a former AT&T executive. He left AT&T for stock or initial public offering for the unit, Global Global Crossing last February. He had been Crossing said in a statement. head of AT&T’s its huge business services unit.

“Leo brings to GlobalCenter a deep understand- ing of the rapidly growing Web-hosting and Web-

Vol. II, No. 12 page 15 of 34 RussiaRussia ReviewReview GRIFFIN CAPITAL 20 December 1999

Leap’s shares rose 2-3/8 to 51-5/8. The stock MEDIA AND COMMUNICATIONS (Continued) has risen more than sevenfold this year. EBRD Acquires 30% of 6 Dec: BSkyB agreed to buy about a quarter of Kazakhtelecom for £50 million the pay-TV unit of ’s Kirsch group for DM2.9 billion in cash. 6 Dec (www.ebrd.com): Kazakhtelecom, the Kazakh fixed-line and mobile operator, is set to Subscribers to BSkyB’s service pay 7 to 32 be 30% acquired by the European Bank for pounds a month, while Germans with Reconstruction & Development (EBRD) for £50 PremierWorld, KirchPayTV’s newest digital ser- million. vice, pay about 60 marks a month, depending on the level of service. The acquisition will clear the way for the stake to be sold to an overseas partner possibly in 1st- Selling pay TV in Germany may be difficult as half 2000. However, according to industry watch- basic cable subscriptions include 50 free chan- ers, the process may carry on until end-2000. nels. To entice subscribers, Premier is featur- ing unique channels, such as a music channel The EBRD will acquire half the stake from the being developed with Viacom’s MTV Networks. Kazakh government and half from Central Asian Industrial Investments (CAII), affiliate of Kirch has been hunting for cash for the unit, Kazkommertsbank Securities. Following the Germany’s biggest pay-TV provider, as it will rack acquisition, Kazakhtelecom will be 15% owned up DM1.7 billion in startup costs before break- each by CAII and the Kazakh government. ing even in 2002. Late last month, Kirch agreed to borrow DM3 billion from Chase Manhattan 6 Dec (Bloomberg): Leap Wireless Interna- Bank and a group of German banks after shelv- tional Inc., a telephone service company spun ing a DM2 billion junk bond issue earlier this year off from Qualcomm Inc. last year, said it is fac- for lack of interest. ing a lawsuit filed by a Russian wireless com- pany in which it owns a stake. Media Most Group, owner of Russian broad- caster NTV and NTVPlus, recently announced Metrosvyaz Ltd., which is trying to set up a wire- it has been soliciting Western institutional inves- less business in Russia, filed suit in US District tors for funding of its NTV unit. It ended up sell- Court for the Central District of California, alleg- ing 13% to current shareholder, Gazprom, who ing libel and other claims against Leap. Leap, is extending its access to broadband right- which holds a 35 percent stake in Metrosvyaz, of-way throughout Russia and its primary said in September it would stop funding the ven- export markets in Europe. ture. 6 Dec (Bloomberg): Ekaterinburg Long-Dis- Leap said the claims by Metrosvyaz were with- tance, or OAO EMTS, said it will pay an interim out merit. dividend of 1.20 rubles per common share and 7.00 rubles per preferred share with the stock Leap said in October its fiscal fourth-quarter loss trading ex-dividend starting 27 November. widened for the period ended 31 August as it exited failed ventures in Russia. Leap took Ericsson to Trial WAP over TDMA charges of $9.6 million for Metrosvyaz during the quarter. 3 Dec (www.rdsl.co.uk): Rogers Cantel (Canada), wireless provider, and LM Ericsson

Vol. II, No. 12 page 16 of 34 RussiaRussia ReviewReview GRIFFIN CAPITAL 20 December 1999

OAO Svyazinvest, the holding company for most MEDIA AND COMMUNICATIONS (Continued) of Russia’s regional phone companies, approved Telefon (Sweden) have joined forces to trial General Director Oleg Belov’s resignation last WAP over a TDMA network. Trials will start in month, and told the new management to focus early-2000 and services will be offered to a on increasing the company’s value. closed group of some one thousand users. 30 Nov (Kommersant): Mobile TeleSystems The Wireless Application Protocol (WAP) en- (MTS) and VimpelCom have equal tariffs. ables the delivery of an abridged version of the …Comment: MTS introduced a per-second sys- Web over low-capacity networks. WAP devel- tem for billing and VimpelCom simultaneously opment is based on the assumption that the halved its tariffs for inter-mobile calls, resulting small screen of a mobile phone makes band- in the companies offering the same tariffs for width-intensive multimedia applications unsup- mobile services. VimpelCom’s cellular phones, portable. Webmasters will have to design spe- which have been trading in the innovative “box” cial WAP version of their sites, using vector programme, were in high demand in November. graphics instead of bitmaps and precompiled rather than interpreted applets. Vimpelcom added more than 50,000 new sub- scribers, while MTS increased its subscriber The AMPS/TDMA is a global standard with 60% base by approx. 22,000 users. In total, mobile of the world’s subscribers. Ericsson’s AMPS/ operators (including NMT 450 operator Moscow TDMA systems have a 40% market share world- Cellular Communications) increased wireless wide, currently serving approximately 25 million telephone penetration in Moscow by 1%, which subscribers. is in line with cellular growth rates in countries such as the U.K. and Sweden. Neither firm would say how long the trials would last. Rogers Cantel is working with several These considerable increases are seasonal, but banks for personalized services which ensure suggest that all companies have sufficient re- security via WAP and also with content provid- serves to withstand competition as the economy ers for stock quotes and weather information. recovers and incomes increase to allow sub- scribers to boost traffic. Cellular providers seek Meanwhile, Ericsson has announced an agree- to grab the highest possible market share be- ment with Lycos, Internet portal firm, for deliv- fore the presidential elections of June 2000. ery of Internet content to wireless devices. No financial details were disclosed. MTS seeks external financing and considers an IPO on NYSE. Rumors about the possible 2 Dec (The Moscow Times): Russia’s govern- 2000 IPO are becoming more and more real. ment will approve a 67 percent increase in Mobile TeleSystems (MTS) is Russia’s leading monthly charges for household telephone lines cellular operator, providing services in dual-band in Moscow in the next few weeks, The Moscow 900/1800 standard. MTS leads the national wire- Times reported. The government will increase less market in terms of customer base. It has phone rates throughout Russia by an aver- hired ING and Deutsche Bank for financial and age of 10 percent. AO Moscow City Telephone marketing consulting. It is likely the company will Network, the phone company controlled by the offer shares on the NYSE in order to repeat rival city administration’s Science and Technology VimpelCom’s experience in raising capital for Committee, is expected to make a loss of 592 business expansion and to maintain its high million rubles ($24.9 million) this year, the paper operational standards in competitive environ- said. ment.

Vol. II, No. 12 page 17 of 34 RussiaRussia ReviewReview GRIFFIN CAPITAL 20 December 1999 MEDIA AND COMMUNICATIONS (Continued) sales. MTS was incorporated as a closed joint-stock 29 Nov (AK&M): Revenues from Internet ac- company. This legal status does not require sub- tivities in Russia are estimated at $12 mil- stantial public transparency and the company is lion for FY98. …Comment: unwilling to reveal its operational and financial PriceWaterhouseCoopers reported that 1998 GSM-statements. However, reliable sources in- turnover in Internet businesses in Russia totaled formed us that the company had greater profit about $12 million, including $6 million from Web- margins than VimpelCom due to the latter’s fi- mastering, design and hosting, banner adver- nancially risky “$49” program. tisement activities, about $5 million generated by paid information services, and $1million from 30 Nov: AO Vimpelcom, Russia’s second big- e-commerce backed by approximately 100 on- gest mobile phone company, said it sold a record line stores. ISP revenues were excluded. number of mobile phones in November because it introduced a new pre-payment system and Registered subscribers are currently estimated carried out a wide-ranging advertising campaign. at about 2 million. About 5.5 million regularly use the Internet as corporate users from work. VimpelCom signed up 50,000 clients in No- This translates into 0.9% of the global Web cus- vember, its highest monthly figure. The com- tomer base and 1.2% Internet penetration in pany signed up 38,000 mobile phones in Octo- Russia. ber. Its main rivals in the lucrative Moscow mar- ket, the country’s biggest, are AO Mobilnye Beginning in 2000, we expect considerable suc- Telesystemy which signed up 22,600 subscrib- cess in the development of Internet and Web- ers in October and AO Mosckovskaya Sotovaya related services in Svyazinvest’s dependent Svyaz which enrolled 2,200. At the end of No- telecoms. Companies expected to benefit the vember, VimpelCom has boosted its overall most from voice-over-IP are , MGTS, market share to 39 percent from 36 percent in Uralsvyazinform, and SP MMT and PTS, which September, while MTS holds 47 percent from are both founders of a Northwestern near-mo- 48 percent according to reports in Vedomosti. nopoly holding, Telecominvest, which provides Internet services in the region. However, re- The company will slash prices of calls made from ported cash inflows at Internet telecoms could one of its phones to another by 50 percent from1 be significantly smaller than in reality due to cer- December, and expects sales to continue to rise tain financial procedures used at most ISPs to next month. reduce local corporate taxes.

“Our proposal is especially good for those who Svyazinvest Announces are buying a second or third phone for family Year 2000 Plans members, and also for small and medium-sized businesses,” said Nikolai Pryanishnikov, VimpelCom Executive Director, in a statement. 24 Nov (AK&M): Svyazinvest reported 3Q99 “We are counting on growth continuing in De- accomplishments and highlighted its plans for cember thanks to our new marketing initiatives.” the year 2000 and beyond. …Comment: Valery Yashin, the New General Director of Svyazinvest, VimpelCom also said it will give new clients on called a press-conference to highlight some of its credit plan a gift of between $10 and $100 the upcoming events, announce company plans worth of calling time. It’s also increasing the and report 3Q99 financials and statistics. number of stores which sell its phones to boost

Vol. II, No. 12 page 18 of 34 RussiaRussia ReviewReview GRIFFIN CAPITAL 20 December 1999

that in terms of economics there is no point in MEDIA AND COMMUNICATIONS (Continued) consolidating two different businesses. He expects the holding to earn about RUR 7b ($293.7m) of consolidated net income including Svyazinvest and the Anti-Trust Ministry are dis- currency translation differences in 1999. The cussing a shift in the basic telephone tariff struc- holding’s new management is currently consid- ture from 3 to 2 subscriber categories, i.e. from ering whether consolidation can make households, businesses, and state-owned orga- Svyazinvest the only telecom provider in Russia nizations to individuals and businesses. with a uniform share, which includes stakes in each dependant operator. The other option is to We think the likely solution will be to set higher use several (8 to 10) multi-regional operators rates for legal entities than those for state-owned formed on a territorial principle and one transit and budget-financed organizations. As telecoms long-distance provider created on the basis of usually set state subscriber tariffs close to their Rostelecom. Business plans and share swap declared operating expenses per access line and rates for consolidations in St Petersburg, make businesses tariffs much higher than costs, , Rostov, and will be this approach should decrease revenues of op- announced in Q1 2000. The process will take erating companies. about three years and give investors grounds for concern and speculation. It will also create Yashin declared his intention to introduce me- room for market play among the insiders in the tering of local telephone calls for all user cat- sector. egories of each dependent local telephone op- erator. The innovation fully conforms to global Meanwhile, Yashin said that consolidation in the trends. This will have to be unofficially approved Leningrad and Sverdlovsk Regions should be by respective governors to ensure success in completed in Q3 2000. We think the timing is the regions. realistic, since Svyazinvest has more power to put pressure on regional companies. There are Yashin added the tender for the remaining 25% talks about another telecom merger, involving minus two shares is probably postponed for a carriers of , and plans to con- long time, according to Svyazinvest’s General solidate Stavropol Electrosvyaz, Director. He announced that the starting price Kubanelectrosvyaz, Rostovelectrosvyaz, for the second stake should be $9b, while Dagtelecom, Karachaevo-Cherkessk CentreInvest securities estimate the current Electrosvyaz, Ingush and Chechen Telecoms. stake value at about $450m (the first 25% plus This could be a serious threat to investors into one share stake was sold for $1.875b to more liquid stocks, such as the first three com- Mustcom in July 1997). Yashin also stressed panies above. Monopolist Yashin said that the that telecoms will be encouraged to use domes- holding will be calm toward the newly created tically-manufactured communications equipment alternative providers (Transtelecom, GazCom, on their networks. The leading global equipment and EnifCom (by RAO UES), etc.), which de- producers (Siemens, Lucent Technologies, clared their intention to be aggressive on the Alcatel, NEC, Samsung, etc.) have launched market of long-distance telephony. We were joint-venture production in Russia. Their capac- astonished by this remark. It confirms ity allows them to manufacture at least 1m lines Svyazinvest’s indifference toward the Russian a year, which could fully satisfy Svyazinvest’s telecom market and can be attributed to its near demand for modern digital switching equipment. monopoly status. Yashin noted that initial plans to merge Svyazinvest with Rostelecom will not be developed any further. He specially stressed

Vol. II, No. 12 page 19 of 34 RussiaRussia ReviewReview GRIFFIN CAPITAL 20 December 1999 MEDIA AND COMMUNICATIONS (Continued) The following graph shows the correlation between five indicators of portfolio investment activity in Russia and its telecom sector based on publicly quoted share and index values reported through 20 December 1999. The five indicators are i) the widely followed AK&M Index of Russian Telecom shares, ii) shares of Global TeleSystems, Inc., approximately half of whose revenue is derived from its Russian network, iii) ADRs of VimpelCom, Russia’s largest mobile phone operator, iv) the IFC’s Index of Investable Russian shares and v) the Barclays Wireless index (scaled by a factor of 1/3). On 1 October, Global TeleSystems listed its 65% owned Russian operations subsidiary on the Nasdaq as “Golden Telecom” (NASD: GLDN), from which time we included those shares in our monthly report.

Russian Telecoms Proxies

20 December 1999 (20-day Moving Average) 200 180 Barclays AK&M 160 Wireless/ 3 Telecom 140 Index 120 100 80 GTS Group IFC Investable 60 Russia Index 40 Vimpelcom ADRs Index Value or US$/Share 20 Golden Telecom 0

21-12-98 21-01-99 21-02-99 21-03-99 21-04-99 21-05-99 21-06-99 21-07-99 21-08-99 21-09-99 21-10-99 21-11-99 Week of ... Prepared by Griffin Capital

Vol. II, No. 12 page 20 of 34 RussiaRussia ReviewReview GRIFFIN CAPITAL 20 December 1999

ENERGY prices next year. The ruble’s decline of about 76 percent since August 1998 slashed the dol- Dart Departs lar value of domestic payments. Vyakhirev said prices for industrial clients should be raised to 20 Dec (Reuters): U.S. investor Kenneth Dart subsidize lower payments for residential custom- has sold his shares in the three oil production ers. units of YUKOS for an undisclosed price to two -based companies. …Comment: Dart “The pricing and non-payment issues in the do- also announced the discontinuation of legal ac- mestic gas market are the main, perhaps the tions against YUKOS over shareholders’ rights single biggest, challenge to Gazprom within conflicts. The conflicts have tarnished the Russia, constraining its ability to expand an capi- company’s image and lowered its share price in talize on its strong reserves and infrastructure the past. Dart’s decision opens the doors for bases, targeted at the European market,” said YUKOS’s consolidation. Stephen O’Sullivan, director of research at the United Financial Group in Moscow, in a report 18 Dec (Bloomberg): OA Gazprom, Russia’s released this week. gas monopoly, said it signed an agreement to buy 20 billion cubic meters of gas from 17 Dec (Prime-TASS): SIDANCO creditors will next year to ensure there is suf- complete an agreement in January to end bank- ficient domestic supply and increase exports. ruptcy proceedings against the company. The new settlement will reflect the loss of Gazprom will pay $36 per 1,000 cubic meters of Chernogorneft, which was bought by Tyumen gas. The company will pay 40 percent in cash Oil Co last month. and the remainder in goods, said Rem Vyakhirev, chief executive of Gazprom. He didn’t say what US EXIM Postpones $500 million goods would be shipped to Turkmenistan for the Tyumen Credits gas.

“Without gas from Turkmenistan, we wouldn’t 16 Dec (Platt’s): The U.S. Export-Import Bank have enough supplies next winter,” Vyakhirev has postponed a decision to release two U.S.- said. backed credits worth nearly $500m to Tyumen Oil Co until at least 21 December. Gazprom, the world’s largest natural gas com- pany, wants to boost exports to Europe to in- 15 Dec (Interfax): Tyumen Oil Company direc- crease revenue as it struggles to collect pay- tor, Semyon Kukes, said that the company’s ments in cash from domestic clients. Gazprom current shareholders (Novy Holding, which rep- now provides about 30 percent of Europe’s gas. resents and Renova with a 51% Russia is under pressure from international lend- stake) and companies controlled by Sputnik were ers, including the IMF, to reduce barter and in- most likely to win a tender for 49.8% of the com- crease cash payments. pany on 22 December.

Gazprom will collect just 40 percent of payments Chernogorneft Sale to Be Reviewed: in cash from customers in the former Soviet Putin Union. Next year, it aims to improve that figure to 50 percent. Platt’s reported on 14 December that Prime Min- ister Vladimir Putin said allegations that the take- Gapzrom also wants to increase domestic gas Vol. II, No. 12 page 21 of 34 RussiaRussia ReviewReview GRIFFIN CAPITAL 20 December 1999 ENERGY active, such as in Kondpetroleum and Chernogorneft, things ended up getting much over of Chernogorneft by Tyumen Oil Co. was worse and eventually those assets had to be sold unlawful are being investigated by the govern- off, and they were done amid great scandal and ment and may eventually be settled in court. protest from all investors. These two different results show just what each company is about. 9 Dec (Interfax): A Russian court prohibited RAO Transneft, the government-owned pipeline com- “We have no problems or personal vendetta with pany, from shipping crude oil from Alfa Bank Chairman Mihkail Fridman. We just Chernogorneft, the main production unit of have two different ways of doing business. In OAO Sidanco, Interfax reported. the current case, it is not just that they cleverly exploited loopholes in the law, but rather they The court issued the order in a lawsuit brought clearly broke it. This is our opinion, and so we by one of OAO Chernogorneft’s creditors that will continue to defend our position in court, but claimed external management at the company will refrain from making accusations towards our acted illegally. The order prohibits Transeft from competitor.” transporting oil produced using Chernogorneft’s assets. Chernogorneft and Nizhnevartovskneftegaz, a unit of Tyumen Oil Co., are the sole developers Last month, OAO Tyumen Oil Co. bought of Samotlor, Russia’s largest oil field. Chernogorneft in a bankruptcy auction over the objections of BP Amoco Plc and other share- “It’s a very bad signal for investors. holders and creditors. BP Amoco Plc is a company which operates 9 Dec (Bloomberg): , presi- in places like Indonesia and Nigeria, dent of Russia’s Interros group that controls oil and if a company like that says producer OAO Sidanco, commented on his Russia is too hostile company’s conflict with OAO Tyumen Oil Co. a business environment to operate in ... over the bankruptcy and sale of Sidanco’s main that sends an absolutely production unit, OAO Chernogorneft: damning message about what it’s like to invest in Russia.” “It is easy to start dropping hints that we did not run Sidanco properly and that this led to its bank- Bill Browder ruptcy, but it would be a better question to ask Manager of $246 million Hermitage Fund where the financial assets of Chernogorneft went while Sidanco was under control of the external 26 Nov (Prime-TASS): Tyumen Oil Company manager [Alfa Bank]. paid RUR 4.6b ($176m) or $6.6 per share to buy Chernogorneft, a bankrupt subsidiary of “I don’t like unfounded accusations, and so I will SIDANCO, at an auction. …Comment: If up- just say the following. Wherever our company held, this sale would cause SIDANCO to lose has worked, things have gotten better. We have 6m tonnes of oil a year produced by seen this in places such as Udmurneft, which Chernogorneft, one third of SIDANCO’s total has emerged from bankruptcy, and now Sidanco 1998 output. itself is close to emerging from bankruptcy. This is a fact. SIDANCO and BP Amoco (that owns 10% of the holding) to dispute the auction results in “In those places where our competitor has been court, citing previous court decisions that rule

Vol. II, No. 12 page 22 of 34 RussiaRussia ReviewReview GRIFFIN CAPITAL 20 December 1999 ENERGY ( Continued) sia Review, November 1998). the auction illegal. In its turn, Tyumen will de- Gazprom has gas distribution rights-of-way not fend its position pointing to other court rulings to only in Russia but across the whole of the Cen- the effect that the sale was made in accordance tral and Eastern European terrain. It is already with the current Russian legislation. rumored in talks with operators to seal off the region. Control over Chernogorneft is very important to SIDANCO because this was a pre-requisite set We believe carriers planning to build out in by BP Amoco when the latter agreed to help Russia and the former should restructure the holding’s $452.6m debt and sign do it now as those countries, taking a lead from a $217m amicable agreement with its creditors. their Western peers, have already pre-empted The agreement should be signed before May liberalisation by setting duct monopolies in place. 18, 2000, by which time the term of SIDANCO’s external management will be over. If nothing Rights of way in metropolitan areas are the new happens by May 2000, we believe SIDANCO bone of contention for facilities-based players in might attempt to lay hands on financial flows of Europe and one they will find more difficult to its remaining subsidiaries - Udmurtneft and grasp than the wayleaves across borders and in Saratovneftegaz. Currently there is no transfer the countryside. But even in the countryside, pricing in SIDANCO and these subsidiaries en- exclusive rights have been seized up by Global joy high profits and have no foreign debts. Crossing/Racal in the UK. Similarly, Mannesman has Deutsche Bahn’s wayleaves locked up. In its latest official statement, Tyumen Oil Com- pany held out an olive branch to BP Amoco sug- 8 Dec (Bloomberg): Russia plans to complete gesting to form “a long-term strategic alliance an oil pipeline bypassing its war-torn south- with BP Amoco and other [SIDANCO] ern republic of Chechnya by mid-2000, send- investors...to ensure that they do not suffer a ing oil from Azerbaijan to the Russian Black Sea loss from the sale of Chernogorneft”. , an industry official said.

Gazprom Expands Broadband ROW RAO Transneft, the state-owned oil transporta- through Media Most Acquisition tion company, said it decided to raise financing for the $160 million project through transit fees after Russian oil producers rejected a proposal The Moscow Times reported on 8 December that that they invest in the project. Media Most would sell about 13 percent of its shares to OAO Gazprom, the country’s gas “Because of the event in Chechnya we had to monopoly, and a current shareholder of Media stop ”, said Semyon Vainshtok, Most. After the sale, Gazprom will own about chief executive of Transneft. “To ensure trans- 35 percent of NTV and less than 20 percent of port in the future we will complete a pipeline Media Most. Gazprom, the world’s largest gas through Dagestan in about six months.” company, bought 30 percent of NTV in 1996. Transneft shut down oil transit through Chechnya Access to NTV’s downstream Ku-band satellite in June after it failed to protect the pipeline from capacity, and its extensive network of rights-of- criminals drilling holes along the line’s Chechnen way, will enable Gazprom to extend its broad- stretch to siphon oil. Russian troops have been band right-of-way throughout Russia and its bombing Chechnya since September in a crack- Rus- primary export markets in Europe (see down on Islamic rebels who invaded neighbor-

Vol. II, No. 12 page 23 of 34 RussiaRussia ReviewReview GRIFFIN CAPITAL 20 December 1999

ENERGY ( Continued) Gazprom 2000 Non-CIS ing Dagestan in August and whom the govern- Export Revenues ment holds responsible for planting bombs in May Increase to $9.2 billion apartment blocks in several Russian cities. 7 Dec: (Dow Jones): Gazprom expects to earn Since July, Russia has shipped Azeri oil by rail. $9.2 billion on 130bcm of non-CIS export ship- Transneft said it will transport 2.1 million tons of ments in 2000, an increase of approximately one oil from Azerbaijan this year. third from the expected $6.75 billion in non-CIS export revenues this year, said board member At the same time, Russia delayed the construc- Yuri Komarov. tion of a $500 million complex of pipelines and a terminal near the Baltic Sea. However, the company could lose $0.5 billion in 2000 planned export revenues if the government Transneft has raised $68 million through a spe- introduces the gas export fee of 3ECU/1,000cm cial tax on oil producers so far for the $400 mil- that it is currently considering. lion project. Gazprom said its 1999 non-CIS export revenues Transneft said it is protesting plans by AO would be 15% less than in 1998 ($8 billion) be- Yukos, Russia’s second-biggest oil producer cause of decreased world gas prices. In 1999 after OAO Holding, to build a pipeline to Gazprom sold its gas at an average price of $59/ China, saying Transneft should be in charge of 1,000cm. However, due to the fact that the project. Gazprom’s gas prices in the West are linked to oil prices, the selling price increased to $72/ “YUKOS’s involvement in pipeline projects is 1,000cm by year-end and is expected to be at inappropriate,” Vainshtok said. “Those issues an average of $80/1,000cm next year. should be considered by Transneft, a govern- ment-controlled company.” Gas prices tend to track crude oil prices, though lag several months behind. Crude oil prices fell Transneft said it plans to open a representative to a 12-year low last December. Crude oil prices office in Iraq in the first quarter where it will seek have recovered this year, more than doubling contracts with United Nations approval. since December.

Current major YUKOS shareholders are: “The drop in gas prices was linked to the major YUKOS - 16.06% of total charter capital (earlier fall in oil prices,” Komarov said. “We usually 39.49%), Rennington International Associated experience a six- to nine-month lag because we Ltd. (Ireland) - 15.93% (0%), Thornton Services sign long-term contracts.” Ltd. (Island of Man) - 15.93% (0%), Brahma Ltd. (Island of Man) - 11.55% (0%), ZAO “Bank Credit Next year, the company expects revenue to rise Swiss First Boston AO” - 6.94% (17.07%), ZAO on exports of 130 billion cubic meters, he said. “Brunswick Warburg Nominees” - 5.94% Export revenue is forecast to climb to its highest (14.61%). level since 1997, when Gazprom sold $8.5 bil- lion in exports.

Gazprom, the world’s largest natural gas com- pany, exported gas at an average $59 per thou- sand cubic meters this year, with fourth-quarter Vol. II, No. 12 page 24 of 34 RussiaRussia ReviewReview GRIFFIN CAPITAL 20 December 1999

ENERGY ( Continued) Russia has come under fire for its plans to do business with Iran, which the US considers to prices rising to $72. Next year, the company be a possible violation of its Sanctions Act aimed expects to export at an average $80 per thou- at curbing investments in Iran. sand cubic meters. Yergin on Energy Prices Gazprom plans to export 126 billion cubic meters of gas outside the former this year, 8 Dec (Bloomberg): Daniel Yergin, Chairman up 4 percent from 1998. Of that, Gazprom will of Cambridge Energy Research Associates, export 38.5 billion cubic meters to Eastern Eu- comments on the outlook for oil prices, the ris- rope this year, down from 42 billion cubic meters ing interest in natural gas as the fuel of choice in 1998. The company will export 87 billion cu- and prospects for oil investment in Russia. He bic meters to western Europe. spoke at Arthur Andersen’s 20th Annual Energy Symposium in Houston. CERA is an energy The company will export 35 billion cubic meters consultancy based in Cambridge, Massachu- to Germany, its largest market, up form $32 bil- setts. lion last year. Gazprom said it doesn’t plan to sign any new long-term contracts. On the outlook for oil prices: “Our main aim is not to increase exports, but to “The recovery of Asia is one of the things ensure reliable deliveries and optimize trans- that’s been driving oil prices up, just as the port,” Komarov said. collapse of Asia was the number one factor driv- ing prices down.” Gazprom plans to decrease the amount of gas it transports through Ukraine to western Europe “A lot depends on what kind of discipline pro- because its says Ukraine steals gas from its ducers maintain. The issue is, do they stand pipelines. Gazprom aims to reduce transit where they are now or at some point do they through Ukraine to 30 percent of exports from modify and put more oil into the market. Clearly, the current 90 percent by building new pipelines inventories are behind pushed very low at the that bypass Ukraine. moment.” Komarov said Gazprom is having trouble orga- “Oil prices are sustainable ... into the first part of nizing financing for a project to develop the South the new year in the mid-$20 range. But it de- Pars offshore gas field in Iran, which contains pends what the exporters do.” an estimated 210 trillion cubic feet of recover- able gas reserves. Gazprom, together with To- On rising worldwide interest in natural gas tal SA of France and Petroliam Nasional Berhad as a source of energy: of Malaysia, earlier signed a contract to develop the field. “In the ’70s and into the ‘80’s, the technocrat’s answer to energy problems was nuclear power “The project is complex because we are having because that meant you were independent. You trouble organizing financing,” Komarov said. “So didn’t have to depend upon other countries - far all the financing is through Gazprom. It de- that’s why the French loved it. pends on the political climate.” “But it ran into all the problems that we know. So far, Gazprom has invested $100 million in Natural gas is just the opposite because it means the region.

Vol. II, No. 12 page 25 of 34 RussiaRussia ReviewReview GRIFFIN CAPITAL 20 December 1999

ENERGY ( Continued) Last month, OAO Tyumen Oil Co. bought Chernogorneft over the objections of the EBRD integration, it means cross-border connections, and other creditors and shareholders. The it means mutual interdependence. And that’s EBRD says that producer never should have kind of characteristic of the era.” been declared bankrupt and blamed the out- come on a faulty bankruptcy law, corrupt jus- On prospects for oil investment in Russia: tice system and inappropriate activities of a state-owned bank. The sale ensures Tyumen “Certainly, you’d be very hard-pressed to find will own Chernogorneft’s parent, OAO Sidanco, any Western investor in the Russian oil and which BP Amoco Plc, a Sidanco shareholder, gas sector who has a high degree of excite- tried to stop. ment or motivation.” “We are totally disappointed with this “What many people don’t understand is the Chernogorneft case,” Koehler told a group of major reason for the Russian collapse in the foreign journalists. It “could be an example of summer of 1998 was the collapse of oil prices total disorder in the country.” because they’re so dependent upon it. But with prices coming back, there’s a lot of money in The EBRD, which together with a group of banks the Russian oil industry again and that makes lent $35 million to Chernogorneft, had been them feel less need for Western investment and working with other creditors and shareholders partnership. We’ve got to wait for a new presi- on an out-of-court settlement to restructure the dent in there who is focused on making company’s debts and avert bankruptcy. things happen.” Tyumen President Simon Kukes said EBRD Seeks Review of Chernogorneft went bankrupt because it was Chernogorneft Auction mismanaged. Tyumen’s takeover of the oil pro- ducer, by buying its debts and forcing the sale, 6 Dec (Bloomberg): EBRD President Horst was legal, he said. Koehler said he’ll ask the Russian government today for a thorough review of the bankruptcy “If you have good legal people, you find loop- auction of OAO Chernogorneft, which the Bank holes,” Kukes said in an interview. BP Amoco has called a sham. “got the wrong partners and listened to them too long. The former managers got the company Putin told Koehler it’s too late for government into bankruptcy. I saw it falling apart.” intervention because OAO Chernogorneft has been sold and the auction is now in the courts, a Before their meeting, Putin told Koehler he’ll dis- government spokesman said. cuss “any topic you find interesting and provide any information you may need.” Koehler began talks with Prime Minister Vladimir Putin after meeting with central bank Chairman Koehler said that, at a minimum, he wants Putin Viktor Gerashchenko. In addition to discussing to conduct a thorough review of the procedure the oil producer, Koehler said he’ll raise the and determine what went wrong with the sale EBRD’s troubles with OA KamAZ, a truckmaker and who was involved. The nation’s bankruptcy that owes the bank $100 million, and the out- law needs improvement, he said, and the jus- look for further investment in the country. tice system remains flawed.

The EBRD is designing a new strategy for in- Vol. II, No. 12 page 26 of 34 RussiaRussia ReviewReview GRIFFIN CAPITAL 20 December 1999

cial tax breaks for the Blue Stream project by ENERGY ( Continued) Gazprom and ’s Eni SpA. …Comment: Now vestment in Russia and wants Putin’s input as it only a similar approval from the Turkish side is decides its plan. The bank may consider invest- needed to begin construction of a natural gas ment in one or two troubled Russian banks, pipeline from Russia to Turkey across the Black EBRD officials said, though its major focus will Sea. Construction is scheduled to commence probably be on financing for small and medium- mid-December and will push Russia ahead in sized businesses. the race to serve Turkey’s gas market. Blue Stream is competing with another project The EBRD, established in 1991 to help finance planned by Shell, Bechtel Group and General private businesses across the former Soviet bloc, Electric Co. that would export gas from lost about $40 million from investments in Turkmenistan across the . Tax Tokobank and Inkmobank, both once among breaks for Gazprom include exemption from Russia’s top 20 banks, after the government in project-related road tax, value-added tax and gas August 1998 defaulted on its Treasury debt and export duties through March 2015. gave up its defense of the ruble. The ruble sub- sequently fell about 75 percent against the dol- SPORTS lar. Russian international midfielder Valery The bank has continued to lend money to spe- Karpin, who plays for leading Spanish side Celta cific projects in Russia, though it has scaled back Vigo, was on Monday named Russia’s Player its activities in the past year. of the Year.

“Relations between Russia and the bank are developing successfully,” Putin said. “We ap- preciate the real input of the bank into the Rus- sian economy.”

The EBRD expects its total lending to Russia to total no more than 190 million ($192.9 million) this year, and it plans to provide financ- ing of between 400 and 600 million euros next year, with a total annual financing to reach 1 bil- lion euros by 2003, Koehler said, Russia’s Interfax news agency reported.

Koehler also said he will discuss with Putin Russia’s military campaign in the southern re- public of Chechnya, which he says may be dis- tracting the government from economic policies. The IMF has said it may further delay lending to Russia if world opinion is against the fighting in Chechnya.

Blue Stream Receives Tax Breaks

3 Dec (Prime-TASS): The Duma approved spe- Vol. II, No. 12 page 27 of 34 RussiaRussia ReviewReview GRIFFIN CAPITAL 20 December 1999 SPORTS (Continued) to Sofia had a major bearing on the result. Karpin was selected following a survey con- ducted by the oldest Russian sports daily, Sovetsky Sport, of more than 200 of the country’s top football specialists and players.

Moscow Lokomotiv’s midfielder Alexei Smertin took second spot, while Karpin’s Celta teammate, midfielder Alexander Mostovoi, was third.

Russia’s Spartak Moscow beat English Premiership outfit Leeds United in UEFA Cup third round.

At the close of the 1999 ATP tour, Yevgeny Kafelnikov ranked second with 3,465 points, ahead of Pete Sampras with 3,024 points but behind Andre Agassi who holds 5,048 points.

Anna Kournikova remains ranked 12th on the WTA Tour with 1,641 points. Martina Hingis ranks first with 6,074. The 2000 WTA Tour will be increased by $3 million to over $47 million for 62 events.

10 Dec (Reuters): Russian soccer chief Vyacheslav Koloskov said on Friday that Spartak Moscow’s criticism of Leeds United “Why did they cause such a fuss and not play in following their UEFA Cup tie was unwarranted. Moscow?” he asked. “We feel that if we’d had the advantage of a home leg, we would have “Spartak lost their match not because the Leeds won. management created problems for them as they have said but simply because their players “I do not want to take anything away from the missed so many great scoring chances,” Leeds players, it is the management who are to Koloskov said. blame.”

“And I can say this because I’ve been around The first leg was switched to Sofia after Mos- the game for many years,” added the long-serv- cow was hit by a cold snap and the frozen pitch ing president of the . at Dynamo Stadium was judged too dangerous for the players. Spartak lost 1-0 at Leeds on Thursday and went out on the away goals rule following their 2-1 Spartak president and head coach Oleg first leg victory. After Thursday’s match Spartak Romantsev criticised everyone, including the assistant coach Vyacheslav Grozny criticised the Leeds management, UEFA officials and Swed- English side, saying the switching of the first leg ish referee Anders Frisk, for the postponement

Vol. II, No. 12 page 28 of 34 RussiaRussia ReviewReview GRIFFIN CAPITAL 20 December 1999 SPORTS (Continued)

of the match.

“Russia and Europe are playing under a differ- ent set of rules,” Romantsev said at the time. “Again, I want to say that the referees and the English came here with only one goal in mind — to cancel the match. They are allowed to do anything.”

Koloskov dismissed Romantsev’s accusations.

“I don’t agree with his statements,” he said. “I believe the referee was right to call off the match.

Vol. II, No. 12 page 29 of 34 RussiaRussia ReviewReview GRIFFIN CAPITAL 20 December 1999 UPCOMING EVENTS 22 Dec: Bids for 49.8 percent of Russia’s Tyumen Oil Company must be submitted. The starting price, agreed by the inter-ministerial commission is $66.7 million

24 Dec: US$159 million coupon payment on Russia’s ’28 12.75% Eurobond due.

3 Jan: New Year’s Market holiday.

7-19 Jan: Russian Orthodox Christmas observed.

7 Jan: Russian President Boris Yeltsin will celebrate Orthodox Christmas in Bethlehem.

14 Jan: Bellevue, Washington: Doubletree Hotel, iASP Round Table: Service Level Agreements: www.abmitsf.com/home/html

14 Jan: Moscow: Extraordinary meeting of Slavneft shareholders voting to dismiss the presi- dent and board of directors.

20 Jan: Moscow: The first session of the newly elected Russian Duma begins.

24 Jan: Moscow: The coupon on the 2018 11% Eurobond is due.

24-26 Jan: Atlanta, : ICM Conferences: Wireless Broadband: www.icmny.com

26-28 Jan. Essen, Germany Thin Client Technology: www.euroforum.com/pcoindex.htm Peter Altes +49/(0) 211 96 86-420 [email protected]

31 Jan: Moscow: London court hears KamAZ Truck makers case against the European Bank for Reconstruction and Development. KamAZ wants an agreement signed with the EBRD in 1995 to use its assets as collateral for a $100 million loan declared invalid.

2-4 Feb: Cannes: IBC’s GSM World Congress www.gsmworldcongress.com

2-4 Feb: Washington: Satellite 2000: www.phillips.com

14-16 Feb: Hotel Intercontinental Frankfurt: Super Return: The 2000 Private Equity and Ven- ture Capital Summit: www/icbi-uk.com/superreturn

21-23 Feb: London Metropole: IIR’s Next Generation Internet: www.irr-conferences.com/isp/ngi/ splash_static.html

28-29 Feb: , The Holmenkollen Park Hotel Rica: IBC’s 23rd Annual Conference and Exhibi- tion on Offshore Pipeline Technology: www.ibc-uk.com/

27-31 Mar: London Marriott Hotel: IIR’s ASP European Summit : www.asp- summit.com.asp2000.htm

Vol. II, No. 12 page 30 of 34 RussiaRussia ReviewReview GRIFFIN CAPITAL 20 December 1999 INDEX TO THIS ISSUE A Chernogorneft 21, 22, 23, 26 Chernomyrdin, Viktor 2 Agrani satellite 11, 13 China 24 AK&M Index of Russian Telecom shares 20 Communist Party 1 Alfa Bank 7, 22 Alfa Group 21 D An-14 aircraft 4 D-AMPS networks 9 Annunziata, Bob 12 Dagestan 23, 24 Annunziata, Robert 15 Dart, Kenneth 21 Anti-Trust Ministry 19 Deutsche Bahn 23 ARKO 7 Deutsche Bank 4, 9 ASC Enterprises 13 Diggle, Martin 1 ASC Enterprises Ltd. 11 Duma 30 Asia Cellular Satellite (ACeS) 11 ASP European Summit 30 E AT&T Broadband & Internet Services 15 Azerbaijan 23, 24 East Asia Global Crossing 12 EBRD 26, 27 B ECONOMIC INDICATORS 4 Bank Credit Swiss First Boston AO 24 Ekaterinburg Long-Distance 16 Barclays Wireless index 20 Elcoteq Network Oyj 15 Bashinformsvyaz 9 EMTS 16 Bechtel Group 27 EMV (Europay-MasterCard-Visa) 8 Belov, Oleg 17 Eni SpA 27 Berezovsky, Boris 2 EnifCom 19 Black Sea 27 Ericsson 8, 16 Blue Stream 27 Ernst & Young LLC 4 Bluetooth 8 Essel Group 13 Bomb 4 European Bank for Reconstruction & Development BP Amoco 22, 23, 26 (EBRD) 16 Brahma Ltd. (Island of Man) 24 European Investment Bank (EIB) 8 Breuer, Rolf 4 F broadband right-of-way 12, 16, 23 Browder, Bill 22 Fatherland All Russia 1 Brunswick Warburg Nominees 24 Foreign currency and gold reserves 5 BSkyB 16 Fridman, Mihkail 22 Frontier 12 C G Cable & Wireless 12 Cambridge Energy Research Associates 25 Garuda satellite 11 Caspian Sea 27 GazCom 19 CBR 7 Gazprom 11, 16, 21, 23, 24, 27 Celta Vigo 27 Gazprombank 7 Central Asian Industrial Investments (CAII) 16 Geostationary satellites (“geos”) 11 Chandra, Subash 14 Gerashchenko, Viktor 26 Chandra, Subhash 13 Global Crossing 12 Chase Manhattan Bank 16 Global Crossing Ltd 15 Chechnya 23, 27 Global Mobile Personal Communications Systems 14

Vol. II, No. 12 page 31 of 34 RussiaRussia ReviewReview GRIFFIN CAPITAL 20 December 1999 INDEX TO THIS ISSUE (Continued) Global TeleSystems, Inc. 20 Kournikova, Anna 28 GlobalCenter Inc. 15 Ku-band satellite 12 Golden Telecom 20 Kukes, Semyon 21 Grozny 2 Kurdin, Alexei 6 Grozny, Vyacheslav 28 Kwon, Goohoon 6 GSM 9 GSM World Congress 30 L H Latvia 6 Leap Wireless International Inc. 16 Hermansen, Tormod 7 Lithuania 8 Hermitage Fund 22 Lockheed Martin 11 Hindery, Leo 15 Lukashenko, Alexei 4 Huisman, Wim 12 Lukoil Holding 24 Hutchison Whampoa 12 Luzhkov 1 Lycos 17 I M iASP Round Table 30 ICO Global Communications 11 Marubeni 12 ICO Global Communications (Holdings) 13 McCaw, Craig 13, 14 IFC 20 Media Most 11, 23 IFC’s Index of Investable Russian shares 20 Media Most Group 16 IMF 27 Medved 1 industrial production 4 Metrosvyaz Ltd. 16 Inflation 5 Microsoft 12 International Monetary Fund 5 Ministry of Communications 9 Iran 25 Mobile SET 8 Iraq 24 Mobile TeleSystems 17 Iridium 11 Mobile TeleSystems (MTS) 9 Iridium LLC 14 Money supply 5 Islamic rebels 23 Montesquieu 3 Ivlev, Alexander 4 Monthly inflation rate 4 Morion 9 K Moscow City Telephone Network 17 Kafelnikov, Yevgeny 28 Moscow Lokomotiv 28 Kaluga Electrosvyaz 9 Moscow Tax Police 4 KamAZ Truck 30 Mostovoi, Alexander 28 Karpin, Valery 27 Motorola 14 Kazakhstan 5 MTV Networks 16 Kazakhtelecom 16 Mustcom 19 Kazkommertsbank Securities 16 N KhantyMansiyskokrtelecom 9 KirchPayTV 16 NetCom 8 Kirsch group 16 Next Generation Internet 30 Koehler, Horst 26 Nextel Communications Inc. 13 Koloskov, Vyacheslav 28 Nizhnevartovskneftegaz 22 Komarov, Yuri 24 Nokia 7 Kondpetroleum 22 Novorossiysk 23 Kosovo 3 Novy Holding 21

Vol. II, No. 12 page 32 of 34 RussiaRussia ReviewReview GRIFFIN CAPITAL 20 December 1999 INDEX TO THIS ISSUE (Continued) NTV 23 Slavneft shareholders voting 30 Smertin, Alexei 28 O Softbank 12 ORT Television 2 Spartak Moscow 28 O’Sullivan, Stephen 21 Sputnik 21 St. Petersburg 4 P State Agency for Bank Reconstruction 7 Svyazinvest 17, 18 Pars offshore gas field 25 Swisscom 12 Pasifik Satelit Nusantara (Indonesia) 11 Petroliam Nasional Berhad 25 T Player of the Year 27 Taxes 5 PremierWorld 16 Teledesic LLC 13 Prime Minister Putin 3 Telia 7 Private Equity and Venture Capital Summit 30 Thin Client Technology 30 Putin 3 Thornton Services Ltd. (Island of Man) 24 Putin, Vladimir 5, 21, 26 Thuraya Satellite Telecommunications (Abu Dhabi) 11 Q Total SA 25 Transneft 22, 23 Qualcomm Inc. 16 Transtelecom 19 R Turbanov, Alexander 7 Turkmenistan 21, 27 Racal Telecom 12 Tyumen 21 Rennington International Associated Ltd. (Ireland) 24 Tyumen Oil Co 22, 26 Renova 21 Tyumen Oil Company 21, 30 Richardson, John 14 U Rogers Cantel 16 Romantsev, Oleg 28 U.S. Bankruptcy Court 14 Rostelecom 19 U.S. Export-Import Bank 21 Roth, Wolfgang 8 UAB Bité GSM 8 Russia-Belarus Union 4 Udmurtnef 23 Russian Football Union 28 Ukraine 25 Russian Orthodox Christmas 30 Union of Right Forces 1 Rybinsk Electrosvyaz 9 United Financial Group 21 S V S., T. Eliot 1 Vainshtok, Semyon 23 Samotlor 22 VimpelCom 9, 17, 20 Sanctions Act 25 Vimpelcom 18 Saratovneftegaz 23 Vinkelis, Peter 6 Satellite Series 9505 handset 14 Visa 8 SET (Secure Electronic Transaction) 8 Vnesheconombank 11 Shoigu, Sergei 1 Vukovic, Borisloa 3 SIDANCO 21, 23 Vyakhirev, Rem 21 Sidanco 22, 26 Siegwald, Jean-Louis 8 W Siluanov, Anton 5 WAP 17 Singh, Jai 13

Vol. II, No. 12 page 33 of 34 RussiaRussia ReviewReview GRIFFIN CAPITAL 20 December 1999 INDEX TO THIS ISSUE (Continued) Winnick, Gary 15 Wireless Broadband 30 Y Yabloko 2 Yashin, Valery 18 Yeltsin 4 Yeltsin, Boris 30 Yergin, Daniel 25 Yugoslavia 3 YUKOS 21 Yukos 24 Z Zee Telefilms Ltd 13 Zhirinovsky block 2

Vol. II, No. 12 page 34 of 34