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Baltic Report: February 13, 2002


13 February 2002, Volume 3, Number 4
REGIONAL
IMF PREDICTS FASTEST GROWTH FOR BALTICS AFTER EU ACCESSION.
The International Monetary Fund (IMF) believes the Baltic states will enjoy the fastest economic growth in the coming years if they are admitted to the European Union in 2004, BNS reported on 25 January. Assuming that they successfully enter the EU in 2004, the IMF predicts that Latvia's gross domestic product (GDP) will grow by 4.5 percent in 2002 and by 6 percent in 2003-06, Estonia's GDP will increase by 4.1 percent this year and by 5.5 percent in 2003-06 while Lithuania's will grow by 4 percent this year, by 4.8 percent in 2003, by 5.3 percent in 2004, and by 6 percent in 2005 and 2006. The IMF also mentioned a scenario in which the Baltic states are admitted to the EU in 2004, but their economic development becomes hindered by external factors. In this case, Latvia's GDP would grow by just 2.5 percent this year and by 4 percent in 2003-06, Similar figures for Estonia would be 2.1 and 3.5 percent, respectively while Lithuania's GDP would increase by 2 percent this year, by 2.8 percent in 2003, by 3.3 percent in 2004, and by 4 percent in 2005 and 2006. If the Baltic states are admitted to the EU after 2006, the IMF predicts that Latvia's GDP in 2002 would grow by 4.5 percent, by 5.5 percent in 2003 and would gradually decrease to 5.2 percent in 2006. Similar figures for Estonia would be 4.1, 5, and 4.7 percent, respectively while Lithuania's GDP would increase by 4 percent this year, by 4.3 percent in 2003, by 4.5 percent in 2004, and by 4.8 percent in 2005 and 2006.

ESTONIA
PRESIDENT APPOINTS NEW GOVERNMENT.
Arnold Ruutel signed a decree on 27 January appointing the government Reform Party Chairman Siim Kallas presented to him two days earlier, ETA reported. Kallas will have eight ministers from the Center Party and five from the Reform Party in his cabinet. Yielding to criticism expressed by several newspapers and opposition parties that he lacked credentials for the post, finance minister candidate Meelis Polda (Center Party) withdrew his candidacy on 24 January to avoid damaging his party's reputation. The Center Party replaced him with its parliamentary faction's deputy chairman, Harri Ounapuu, whom Kallas praised as having suitable experience as a parliament deputy, minister, and bank manager.

PREMIER CONSIDERS GIVING UP TAX-FREE REQUIREMENT IN EU TALKS.
Prime Minister Siim Kallas told the media after the first meeting of his cabinet on 29 January that he expects to complete the membership negotiations with the EU by the end of this year, ETA reported. He suggested that the government might not ask for the 6 1/2-year transition period for tax-free trade that his predecessor Mart Laar had requested citing the precedent set by Sweden and Finland in 1993. The loss of tax-free trade would directly influence Estonian shipping firms, aviation, transport, as well as its tourism industry, and would likely result in requests for government assistance by these sectors. Tax-free trade accounts for 46 percent of the total income of passenger ships operating between Tallinn and Helsinki, and the abolishment of tax-free trade would result in an increase in the price of tickets and a decrease in the number of passengers. The Tallinn airport, which took out loans for its recently completed renovation, would lose about 10 percent of its turnover and be forced to raise airport-use taxes, leading to a boost in ticket prices.

ESTONIA AND SWEDEN SIGN CLASSIFIED INFORMATION AGREEMENT.
Defense Minister Sven Mikser and his Swedish counterpart, Bjorn von Sydow, signed an agreement in Tallinn on 30 January on the protection of classified information, BNS reported. The agreement lays down the conditions for exchanging classified information and its protection in each country. Estonia has signed similar agreements with the United States, Latvia, Lithuania, Norway, Germany, Italy, Denmark, Poland, and Finland, and is preparing them with a dozen additional countries, including Britain and Greece.

PARLIAMENT AMENDS EXPORT RULES IN TAX-FREE ZONES.
The parliament unanimously approved on 31 January an amendment to the value-added tax (VAT) law that allows fishing firms to resume exports to Russia via tax-free zones, ETA reported. Estonian fish-processing firms have an annual turnover of 2.5 billion kroons ($138 million) and export 85 percent of their production -- 70 percent via tax-free economic zones. President Ruutel signed the amendment that same day. Tax-free zones were set up to reduce the price of Estonian exports and make them competitive in Russia, where imported Estonian products are subject to doubled tariffs. Suspecting that this could provide an opportunity for VAT fraud, the Finance Ministry convinced the parliament to require VAT payments for all products exported from these zones, as of 1 January 2002. The higher costs resulting from VAT payments led to lower sales by Estonia's fish processors, forcing the companies to suspend operations and send more than 2,000 workers on forced vacations.

NEW SOCIAL AFFAIRS MINISTER CALLS FOR CHEAPER MEDICINES.
Shortly after assuming her new duties, Siiri Oviir said that Estonia needs to revise its prescription drug policy to reduce the price of medications, thus making them more available to people, ETA reported on 29 January. She noted that the price of medications has increased 2.8 times over the past five years, and that one-fifth of the Sick Fund resources are being spent on expensive drugs. Oviir suggested that medicines permitted in the EU could be allowed into the Estonian market without any additional laboratory tests. She also said cheaper analogs of the more expensive drugs should be allowed, and that medicines produced in former socialist countries are "not necessarily poisonous." But she added, "this, however, should not mean that we should let low-quality drugs into our market."
* The congress of the Center Party on 26 January in Tallinn re-elected Edgar Savisaar as party chairman by a vote of 1,841 to 62 with 27 ballots declared invalid and 150 ballots taken but not returned, BNS reported on 28 January. He was the only candidate as parliament Deputy Chairman Peeter Kreitzberg was nominated, but declined to run. At Savisaar's proposal, the congress reappointed Kreitzberg and Sven Mikser as deputy chairmen. Savisaar said that the party's goals are to win the local elections in the fall and the parliament elections in March 2003.
* Prime Minister Kallas told reporters on 29 January that he does not regard the continuation of state-funded high school education in Russian beyond the 2007 deadline as agreed in the coalition agreement of the Reform and Center parties a big problem, BNS reported. On the other hand, Pro Patria Union parliament deputy Lauri Vahtre called this policy "treason against the nation."
* The parliament adopted on 30 January a law on transplanting organs and tissue, ETA reported. Social Affairs Minister Oviir said that organ transplanting should take place only as a last resort and that transplanting must not significantly endanger the life and health of either the recipient or the donor. The law forbids offering payment to an organ or tissue donor.
* Moody's Investors Service upgraded the senior unsecured debt rating of AS Hansapank from Baa1 to A2, a ranking which for the first time exceeds Estonia's national rating, BNS reported on 29 January. Moody mentioned three reasons for this: the creditworthiness of the bank, enhanced by the large (58 percent) stake held by Swedbank, the probability that there would not be any generalized moratorium if the Estonian government defaulted on its own foreign currency obligations, and Hansapank's special access to foreign exchange because the bank's majority shareholder is domiciled in Sweden, an Aa1-rated country. Hansapank was also given a deposit rating of Baa1/Prime 2 and the financial strength rating of C- with a stable outlook.
* Preliminary figures indicate that the agricultural sector had a successful year in 2001, ETA reported on 25 January. Compared to 2000, the production of milk and eggs increased by 9 percent to 687,200 tons and 276 million eggs respectively, while the slaughter weight of cattle and poultry rose by 5 percent to 90,160 tons.
* The Citizenship and Migration Board issued the first 162 ID cards on 28 January and is reviewing the applications of a further 1,700 individuals, ETA reported. The first cards were issued to the current and previous presidential couples. The cards currently will be only useful for visual identification of the owners, but in the future will have other functions such as permitting the filing of income tax via the Internet.
* The Finance Ministry announced on 31 January that Estonia had a budget surplus of 396 million kroons ($21.9 million) or 0.4 percent of GDP in 2001, ETA reported. In 2000 the state had a budget deficit of 879.6 million kroons, but in 2001 revenues climbed by 13.6 percent while expenses rose by only 9.1 percent.
* AS Tallinna Sadam (Port of Tallinn) announced on 30 January that its turnover last year totaled 888.5 million kroons ($18 million) with net profit 434.3 million kroons, BNS reported. The company's board chairman, Riho Rasmann, noted that 32.3 million tons of goods passed through the port and he hoped that with improved relations with Russia this could increase to 43 million tons by 2006.


LATVIA
IMF PRAISES LATVIA'S ECONOMIC GROWTH.
The IMF Executive Board praised the pace of the development of the Latvian economy in 2001, saying in its assessment that it was one of the best economies among EU applicant countries, BNS reported on 28 January. The growth, it said, reflects Latvia's long-standing commitment to macroeconomic stability and the success of earlier structural reforms in creating a flexible and resilient market economy. The IMF said that although the slowdown in the global economy is likely to place greater stress on Latvia's external current account, the Latvian authorities should continue their privatization of large-scale public enterprises and the fight against corruption. However, the IMF expressed reservations about Latvia's 2002 budget and its expansionary fiscal policy, which projects a deficit of 2.45 percent of GDP, since this could exacerbate the external current account deficit. In the report the IMF recognized the spending needs associated with trying to join the EU and NATO, and expressed support for Latvia's desire to gradually reduce the tax burden on its economy.

MINISTER URGES JOINT BALTIC PLATFORM FOR EU AGRICULTURE NEGOTIATIONS.
Agriculture Minister Atis Slakteris called for a meeting with his Estonian and Lithuanian counterparts to discuss a possible joint Baltic position on EU agricultural issues, BNS reported on 30 January. His action was prompted by a European Commission draft proposal released the same day that foresees that, upon admission, new EU members would receive just 25 percent of the agricultural subsidies given to current EU members, and that it would take 10 years for new members to reach an equal standing. Slakteris complained that the EC recommendations are discriminatory, and asked how Latvian farmers can possibly compete in a single common market while receiving 75 percent less in subsidies than their colleagues.

JUSTICE, INTERIOR AFFAIRS AGREEMENT WITH SWEDEN SIGNED.
Latvian Justice and Interior Affairs Ministers Ingrida Labucka and Mareks Seglins signed an agreement on cooperation in justice and interior affairs with Swedish Justice Minister Thomas Bodstrom in Riga on 31 January, LETA reported. The agreement calls for cooperation in information and experience exchange, expert visits, and technical assistance in judicial and interior affairs. The two countries agreed to pay particular attention to developing the existing twinning agreements between the courts, and exchanging experience in court administration. They will also heighten cooperation in the law enforcement sector, providing support for the development of Latvia's crime registry as well as the fight against corruption.

LATVIA'S WAY HOLDS 12TH CONGRESS.
Prime Minister Andris Berzins told the 12th Congress of Latvia's Way in Riga on 26 January that the country has been very successful under the current government and that the party should be successful in the fall parliament elections, LETA reported. Receiving support from 422 out of the 431 delegates, Berzins was re-elected as party chairman. In the elections for deputy chairman, Ivars Godmanis defeated Andrejs Pantelejevs and Janis Gaigals. The congress adopted a resolution "On Securing the Status of State Language," which expressed conditional support for proposed amendments to abolish language requirements for candidates to the parliament and local councils, as long as the status of the state language is simultaneously strengthened by other laws. It also approved other resolutions calling for higher wages, lower social taxes, and improved access to health services.

KYRGYZSTAN ASKED TO ALLOW PEACEKEEPING CONTINGENT USE OF ITS FACILITIES.
The Foreign Ministry has addressed a request to its Kyrgyz counterpart for permission for the Latvian army unit that will serve in the international peacekeeping force in Afghanistan to be allowed to use the Manas International Airport in Bishkek, ITAR-TASS reported on 29 January. The Kyrgyz leadership has already granted the U.S. and France use of that airport, and similar requests by Canada, Australia, Denmark, South Korea, Poland, Italy, the Netherlands, Turkey, Spain, and Norway await a decision.

CABINET APPROVES ACTION PLAN FOR IMPLEMENTING EC PRIORITIES.
The government approved on 29 January an action plan for implementing the priorities included in the European Commission's 2001 progress report, LETA reported. The plan, worked out by the Foreign Ministry with the assistance of other ministries, restates the priorities and criticisms mentioned in the EC's progress report and assigns responsibility to various institutions for resolving these deficiencies. The institutions will be required to report on their efforts at each meeting of the European Integration Bureau, which the cabinet has tasked with completing the national program for integration into the European Union.
* Along with nine other new ambassadors, Latvia's Ambassador to Russia Normans Penke presented his credentials to Russian President Vladimir Putin on 31 January, LETA reported. Putin said that the development of long-term Latvian-Russian cooperation will depend on the observance of democratic standards concerning the situation with human rights and ethnic minorities and affirmed: "Our compatriots in Latvia must feel that they are respected and full-fledged citizens that participate in the country's social and political life."
* Foreign Minister Indulis Berzins began his first official visit to Switzerland on 30 January in Zurich where he met Swiss businessmen and mass media representatives at an event organized by the Swiss Investment Agency SOFI, LETA reported. The next day he discussed bilateral relations and Latvia's EU integration with his Swiss counterpart Joseph Deiss and Swiss National Council President Lilliane Maury Pasquier. Latvian and Swiss officials signed a convention on evasion of double taxation for income and capital taxes.
* Representatives from the Albanian Foreign Ministry traveled to Riga on 31 January and held talks with Foreign Ministry Deputy State Secretary Ivars Pundurs and other ministerial officials as well as directors from the European Integration Bureau. Both parties expressed interest in boosting exchange of mutual visits and political consultations, as well as boosting economic relations.
* On 31 January the first SAPARD (Special Accession Program for Agriculture and Rural Development) project was signed in Latvia, BNS reported. The project under the SAPARD sub-program on diversification of rural economy by promoting alternative income sources will grant a farm 100,000 euros ($86,000) to improve a hotel on the western shore of the Gulf of Riga in Kurzeme. Latvia expects to get 22.7 million euros from this year's SAPARD program.
* Finance Ministry Deputy State Secretary Inguna Sudraba on 31 January signed financial memorandums for two EU Instrument for Structural Policies for pre-Accession (ISPA) aid projects with a total value of 55.27 million euros, BNS reported. One project will provide 10.65 million euros for repairing a 6.3-kilometer-long section of the Via Baltica highway from Riga to Adazi, while the second will spend 44.62 million euros to improve the water supply system of 18 communities located near the Daugava, Gauja, and Salaca rivers in Vidzeme.
* The European Court of Human Rights (ECHR) accepted for review a petition from Russian citizen Tatyana Slivenko against the state of Latvia in accordance with three articles of the European Convention on Human Rights, LETA reported on 25 January. Slivenko's petition says that her family was ordered to leave Latvia in 1994, breaching her inviolable right to family life and freedom of movement. Latvia noted that the Slivenko family was ordered to leave Latvia under the provisions of the Latvian-Russian agreement on the withdrawal of the former Soviet military because its head, Nikolai Slivenko, was a Soviet military officer.
* Bank of Latvia President Ilmars Rimsevics submitted to the parliament's Budget and Finance Committee on 28 January the nomination of Andris Ruselis, vice president of the Balta and Latva insurance companies, as his deputy, BNS reported. Contrary to the previous arrangement under which the central bank vice president also acted as the bank's board chairman, Ruselis will not be required to chair the board.
* Latvian Commercial Bank Association President Teodors Tverijons told a press conference on 30 January that 2001 was the most successful year for commercial banks in terms of profit. LETA reported. Pre-audit profits were estimated at 49.57 million lats ($76.8 million), or 11.26 million lats more than in 2000. Commercial banks' assets increased 28 percent, compared to 2000, and totaled 3.46 billion lats. The amount of loans issued by banks increased 51 percent, up to 1.64 billion lats. The amount of deposits attracted by banks grew by 25 percent, up to 233 billion lats.
* Riga Mayor Gundars Bojars proposed on 29 January to liquidate the Riga Housing Privatization Commission in order to quell protests that arose in the city council when it was asked to approve the nomination of "Equal Rights" leader Tatyana Zhdanoka as its head, LETA reported. .Rightist council members protested the nomination because Zhdanoka had been a leader of the anti-independence Interfront movement in Latvia in the early 1990s.


LITHUANIA
PRESIDENT PLEASED WITH U.S. SUPPORT FOR NATO MEMBERSHIP.
In an interview broadcast on Lithuanian radio on 30 January, Valdas Adamkus expressed satisfaction with his meetings the previous day in Washington with U.S. Secretary of State Colin Powell and Speaker of the House of Representatives J. Dennis Hastert, BNS reported. It was the president's third visit to Washington in two weeks. Adamkus interrupted his vacation in Mexico to take President George W. Bush up on his invitation to attend the State of the Union Address, which he listened to as a guest of honor in Hastert's box. In earlier talks, Powell praised Lithuania's preparation for NATO membership and inquired about its relations with Russia. He also approved of Lithuania's decision to hand over to the world Jewish community 309 Torah scrolls that were rescued during the Nazi and Soviet occupations. Powell also accepted an invitation to visit Lithuania. Adamkus also heard support for Lithuania's entry into NATO at a meeting with the speaker, which was attended by Congressman Doug Bereuter, the head of the House delegation to the NATO Parliamentary Assembly.

PARLIAMENT CONCLUDES FALL SESSION.
The parliament ended its fall session on 25 January by approving on a vote of 108 to two, with one abstention, an amendment to Article 119 of the constitution that would extend the term of local council deputies from three to four years and allow noncitizens permanently residing in Lithuania to elect and be elected to local councils, ELTA reported. To complete the amendment process, it must be approved a second time in three months by two-thirds of the parliament (94 deputies). The session also ratified by an unanimous vote the 1999 Criminal Law Convention against Corruption, and voted to turn over more than 300 rescued Jewish Torah scrolls -- which are currently being stored in the National Mazvydas Library in Vilnius -- to the Jewish society Hechal Shlomo in Jerusalem.

RUSSIA TO SUSPEND TIGHTER CONTROL MEASURES ON LITHUANIAN HAULERS.
Lithuanian Deputy Transportation Minister Valerijus Panamariovas told a press conference on 28 January that in talks with Russian Customs Committee Chairman Mikhail Vanin in Moscow on 25 January, he and Customs Department Director Valerijonas Valickas succeeded in obtaining a suspension until 30 April of the tightened customs control measures on Lithuanian commercial trucks, BNS reported. Late last year, Russia announced that some Lithuanian transport companies had carried goods to their customers in Russia without paying customs duties, and that Russia was establishing tighter control over Lithuanian carriers as a result. On 17 January, Russia introduced a mandatory convoy procedure for all consignments from Lithuania, which resulted in greater costs and delays. During the meeting Lithuania agreed that the Lithuanian national road carriers' association, LINAVA, and the Russian carriers' association, ASMAP, would draw up a schedule for the payment of compensation to Russia for the lost revenues.

GDP UP 5.7 PERCENT IN 2001.
Statistics Department Chairman Algirdas Semeta announced preliminary data on 29 January indicating that the gross domestic product (GDP) of Lithuania in 2001 was 47.8 billion litas ($11.95 billion), or 5.7 percent greater than in 2000, ELTA reported. The Lithuanian Finance Ministry had forecast a GDP growth of 4.8 percent, while the International Monetary Fund and European Union had predicted a 4.5 percent rise. The greater-than-expected increase was primarily due to a rise in GDP of 7.9 percent in the fourth quarter. Total industrial output sales (without valued-added and excise taxes) in 2001 were 26.6 billion litas, an increase of 16.9 percent compared to 2000, but agricultural production declined by 8 percent. Semeta mentioned that the construction sector recovered, with construction projects increasing by 4.7 percent. He also noted that exports in 2001 grew by about 20 percent and exceeded the results of 1997 for the first time since the Russian financial crisis.

PREMIER SAYS DON'T EXPECT ECONOMIC MIRACLE FROM EU.
Algirdas Brazauskas told a press conference in Vilnius on 31 January that while he will try to gain greater EU support for agriculture, it would not be realistic to expect an "economic miracle" based solely on EU subsidies, "Lietuvos rytas" reported the next day. He noted that the protests by farmers' organizations over the EC's draft proposal calling for new EU members to be limited to just 25 percent of the subsidies given to current EU members are not realistic. With only half of the arable land currently cultivated, the proposed EU subsidies would be greater than the support of 40 litas ($10) per hectare of grain crops that Lithuania currently provides. He estimated that various EU programs would increase this support to 125 litas per hectare in 2004. Brazauskas was pleased that EU assistance to Lithuania in 2004 through structural and regional funds, direct payments, support for rural development, and for the closure of the Ignalina Nuclear Power Plant would reach about 2 billion litas, or about a third of the national budget, under the proposed plan.
* President Adamkus discussed bilateral cooperation in business and culture with Mexican President Vicente Fox on 24 January in Mexico City, BNS reported. They also exchanged views on the international situation and the possibilities of strengthening bilateral cooperation within international organizations. The presidents attended the signing by the two countries' foreign ministers of an agreement on cooperation in culture, education, arts, and sports. Adamkus spoke at the Academy of Diplomats in which he presented Lithuania as an attractive economic partner. The next day he met with businessmen in Mexico City and then traveled to the Guanajuato State for talks with Governor Juan Carlos Romero Hicks and local businessmen. Adamkus will remain on vacation in Mexico until 12 February.
* French Minister for the Civil Service and Administrative Reform Michel Sapin told Finance Minister Dalia Grybauskaite in Vilnius on 25 January that the decommissioning of the atomic power plant at Ignalina is not only a concern of Lithuania, but of Europe, ELTA reported. He promised to draw the attention of other French government officials to the financial side of the issue. In talks with Interior Minister Juozas Bernatonis, Sapin spoke about a possible Lithuanian-French partnership in public administration and training of civil servants.
* Deputy Foreign Minister Giedrius Cekuolis during a visit to Ottawa on 28-30 January discussed NATO enlargement, bilateral relations, and regional cooperation of the Baltic Sea states with officials of Canada's Foreign Affairs and International Trade, and Defense departments, BNS reported. He also met with advisors of the Canadian prime minister, members of the House of Commons, and head of the Canadian delegation to the NATO Parliamentary Assembly Carolyn Parrish. Cekuolis also delivered a lecture at Carleton University about Lithuanian foreign policy and met with the local Lithuanian community.
* An international delegation of Jewish organizations headed by Israel's Deputy Foreign Minister Rabbi Michael Melchior formally received 309 Torah scrolls and fragments which had been stored in the Martynas Mazvydas National Library on 30 January, ELTA reported. The Torahs will be handed over to the Israeli association Hechal Shlomo, a center for Jewish religious and spiritual heritage. At the ceremony, parliament Chairman Arturas Paulauskas stressed that Lithuania was not "returning, but rather transferring" the Torahs because Lithuania had never seized the holy books, but had simply conserved them. The Mazvydas library is retaining 58 Torah scrolls and fragments as a testament to Lithuania's cultural heritage.
* An Albanian delegation, headed by Foreign Ministry European Department head Arqile Sota, held talks on bilateral Lithuanian-Albanian relations and their further development, promotion of economic ties, priorities of both countries foreign policy and Euro-Atlantic integration, as well Lithuania's chairmanship at the Council of Europe on 30 January with Audrius Bruzga, the director of the Foreign Ministry's first bilateral relations department, ELTA reported.
* The oil company Mazeikiu Nafta (Mazeikiai Oil) on 29 January announced an unaudited loss of 277.2 million litas ($69.3 million) for the year 2001, based on U.S. generally accepted accounting principles (GAAP), BNS reported. The company's general manager, Jim Scheel, said that a fall in refining margins on world markets, a sharp decline in crude oil and oil product prices, and a fall in light product sales in Lithuania were the most important factors for the losses.
* The Agriculture Ministry announced on 30 January that last year food exports rose by 22 percent compared to 2000 to 1.71 billion litas ($428 million) while imports increased by 9 percent to 1.81 billion litas, BNS reported. The negative trade balance of 97 million litas in 2001 was less than a third of the 303 million litas deficit in 2000.
* The governmental Strategic Planning Committee headed by Prime Minister Brazauskas decided on 31 January to hand over the struggling former Soviet military base in Zokniai near Siauliai to the country's air force, BNS reported. Plans to establish a Siauliai Free Economic Zone (FEZ) at the base failed and it now has debts of 177 million litas ($44.25 million).
* A joint Lithuanian and Polish work group agreed on 31 January to give more attention to improving railroad transport between both countries (along the route Vilnius-Warsaw via Kaunas) which is to be integrated into the EU transportation system, BNS reported. Lithuanian Deputy Transport and Communications Minister Arijus Ramonas promised to put into operation trains with adjustable axle wheels on January 2003, and ensure daily round-trip travel from Vilnius and Warsaw. Lithuania also pledged to convince Latvia and Estonia to join the project.


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