DAILY REPORT ON RUSSIA

AND THE FORMER SOVIET REPUBLICS

INTERCON INTERNATIONAL USA, INC., 725 15th STREET, N.W., SUITE 908,

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Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Thursday, June 20, 1996

Russian Federation

Politics

Yeltsin Takes Revolutionary Steps

· Three of the most powerful figures in Russia's Kremlin—Presidential Security Service (SBP) head Aleksandr KORZHAKOV, Federal Security Service (FSB) head Mikhail BARSUKOV, and First Deputy Prime Minister Oleg SOSKOVETS—were ousted by President Boris YELTSIN today amid allegations that they wielded undue influence over the president and were plotting to cancel the second round of elections. The firings, which followed a confusing night of arrests, charges and countercharges, were announced after a Russian Security Council meeting today, during which Yeltsin presented General Aleksandr Lebed as the new Secretary of the Security Council.

It began at about 5:00pm at the White House when FSB agents, reportedly on the orders of KORZHAKOV and BARSUKOV, arrested two YELTSIN campaign officials—Sergei Lisovsky, wealthy advertising and showbusiness magnate who organized rock concerts and campaign ads for Yeltsin, and Arkady Yevstafyev, a close aide to former Deputy Prime Minister Anatoly Chubais, one of the main organizers of the president's campaign. The men were interrogated harshly for some 11 hours, allegedly asked to give up compromising information on members of YELTSIN's campaign staff and government. FSB officials said they had arrested the two men, on the orders of KORZHAKOV, for attempting to abscond with a half a million dollars in foreign currency, reported Interfax. However, LEBED and CHUBAIS claimed that the arrests were part of an attempt to sow confusion and persuade YELTSIN to cancel the second round of the elections, declare a state of emergency, and retain power by force. Only after LEBED showed up at FSB headquarters in the

early morning hours, were the detainees were released. Reacting to the arrests, LEBED warned that he would prevent any attempt to cancel the election. "Any revolt will be suppressed, and in an extremely tough way. Those who want to plunge the country in to the depths of bloody chaos do not deserve pity," the Associated Press (AP) quoted him as saying.

In an interview early Thursday, CHUBAIS urged YELTSIN to dismiss KORZHAKOV and BARSUKOV, accusing them directly of trying to disrupt the elections and take power violently. "They are in favor of the option involving the use of force—or in simple terms, a coup.... The goal of Mr. BARSUKOV was to change the political system in Russia, to violate the constitution, to keep power without an election," he is quoted by Reuters as saying.

YELTSIN would not comment on the alleged plot to interfere in the elections, merely stating that the men were trying to control him, damaging his image and usurping his power. "All the time I am being reproached for BARSUKOV, KORZHAKOV, and SOSKOVETS. Must the president work for them? They began to take too much on themselves and to give too little," he is quoted by AP as saying.

The dismissal of these three hard-liners will be hailed by Russian liberals, as well as ordinary citizens, foreign observers, and financial analysts, and should further boost YELTSIN's chances of winning re-election next month. KORZHAKOV, long the president's

Today's News Highlights

Russia

Runoff Set for July 3

Ex-Sports Fund Head Attacked

Gen. Makashov in Car Accident

Oil Export Pipelines Planned

Metallurgy Industry Privatized

Assi/Stratton Paper Deal

European Republics

New Lithuanian Land Law

Transcaucasia & Central Asia

Ispat Buys Kazakh Coal Mines

Politics-Economics-Business

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June 20, 1996

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confidant, as well as his bodyguard, was believed to exercise major influence over YELTSIN, have a huge force behind him, and be involved in many illegal business deals and incidents of intimidation. Named SBP head in December 1993, he was given a rank equal to that of a federal minister in April. The shady figure behind YELTSIN worried politicians and the public alike. His suggestion last month that the elections should be canceled caused a furor in Russia, and rumors continued to fly even after YELTSIN reprimanded him for the statement. Yeltsin's campaign chief and former head of the presidential administration Sergei Filatov told Itar-Tass today that Korzhakov allowed himself unsolicited "intervention in Boris Yeltsin's election campaign" which, according to Filatov, overstepped his official duties. "Korzhakov and Barsukov worked against the election of Anatoly Sobchak as the Mayor of St. Petersburg. They kept intervening in the activity of Boris Yeltsin's election council, although the President advised Korzhakov in May not to poke his nose into politics," he is quoted as saying. Filatov added that the two security chiefs feared the growing influence of General Lebed wanted to "push Boris Yeltsin into the background and intervene grossly in the President's personnel policy."

BARSUKOV, who was appointed to replace Sergei STEPASHIN as head of the FSB in July 1995 as part of the fallout from the Budyennovsk crisis, is a close friend of KORZHAKOV. A top official in the former Soviet KGB's Ninth Directorate, BARSUKOV held the post of chief of the Kremlin's Main Protection Directorate (GUO), which is responsible for protecting all government personnel, except the President, since its creation in 1991. He is widely believed, along with KORZHAKOV, to have been one of the main driving forces behind the Russian military intervention in Chechnya.

SOSKOVETS, was one of the most powerful ministers in the Russian government, championing the interest of the military-industrial complex. He was directly in charge of the Ministries of Fuel and Energy, Transport, Communications, Railway, Construction, Health Care and Medical Industry, and Nuclear Power. His removal, while coinciding with the arrest and coup scandal of the other two officials, is likely connected to widespread allegations of

corruption, leveled against him by the Russian press as well as figures within the Russian government. His position was consolidated after the December 1995 parliamentary elections, when the Communists success prompted YELTSIN to fire many top reformers, including CHUBAIS. Intercon reported in January that SOSKOVETS had labeled Russia's economic reform efforts a "negative experience," suggesting a shift in economy policy towards an increased emphasis on economic growth and protectionism. His conservative economic viewpoint was viewed as a break on Russia's market reform efforts and his removal is already being hailed as a possible spur to reform. "Without SOSKOVETS, there will be even less pressure in the government for a relaxation of monetary policy. I would say that depending on who replaces him, his departure can be seen as a positive step in terms of economic reforms," a Western economist, who declined to be named, told Reuters today. "SOSKOVETS had a classic technocratic view of the economy. His sympathies have always been slanted towards those of the industrial lobby," he added.

Comment: The questions of whether President YELTSIN was really running the country and whether the newly-appointed LEBED would have enough power to implement reform and conduct corruption probes have been answered. The expected power struggle between newly-appointed LEBED and the President's entrenched and powerful cronies, particularly KORZHAKOV, will not be necessary now. The strongmen within YELTSIN's inner circle have been ousted. All eyes will be on the President and further efforts at top personnel changes. LEBED and those appointed to replace KORZHAKOV, BARSUKOV, SOSKOVETS, dismissed Defense Minister GRACHEV, and possibly others, could redirect Russia's future, hopefully for the better. Chubais told a press conference today that the dismissals signaled an end to the fight between the democratic and hard-line wings in the entourage of President Boris Yeltsin.

Presidential Runoff Set for July 3

· Russian Prime Minister Viktor CHERNOMYRDIN signed a government order on Wednesday making July 3 a national holiday, paving the way for the second round of presidential elections to be held on that date. The order was issued at the request of

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President Boris YELTSIN and with the consent of his challenger for the presidency, Communist Party head Gennady ZYUGANOV. The Central Electoral Commission subsequently announced that the election would be held on July 3. The purpose of the Wednesday, instead of Sunday, vote is to ensure a higher turnout. Russia's election law stipulates that 50 percent of registered voters must participate in order for the runoff to be valid. This means that over 50 million Russian have to cast ballots. However, in the second round, a candidate is only required to receive a plurality of votes to win.

In addition, a bill, tabled by the Russia is Our Home and Russian Regions parliamentary factions, calls for the polls to be open four hours longer in the second round of presidential elections than during the first. It calls for polls to be open from 6am to midnight, instead of 8am to 10pm. The State Duma will debate the bill on Friday.

Former Sports Fund Head Fyodorov Attacked

· Boris FYODOROV, the former head of the Russia's National Sports Fund (NFS), was shot and stabbed on a Moscow street this week, but he is apparently all right, reported the Wall Street Journal today. FYODOROV, who is also chairman of the National Credit Bank, was arrested last month ostensibly on drug charges, but it was rumored that the real reason was corruption related to the NFS' financial activities. He was subsequently fired from the Fund. Commenting on the assassination attempt, today's Komsomolskaya Pravda pointed out that: "We have already got accustomed that the slightest change at the top is sure to be accompanied with sensational exposes and scandals. Now that the elections have come about, a slight breeze of unwelcome upheavals has started blowing. A season of covert settling of scores has begun among the authorities."

General/Deputy Makashov Hurt in Car Crash

· General Albert Makashov, his wife, daughter, and grandchildren were injured when their Volga sedan had a head-on collision with a smaller Zhiguli car on Tuesday while driving on the Moscow-Samara highway, reported Itar-Tass. Three of the General's ribs were broken and his family was hospitalized, but none were in critical condition. Police sources blamed the accident on the Zhiguli driver, a state farm operator, who is now in intensive

care. The man's wife, two children, and a friend are also in hospital. MAKASHOV ran in the 1991 Russian presidential elections, joined the hard-liners in the October 1993 parliamentary rebellion and served time in Lefortovo prison, before retiring and winning a seat in the Russian State Duma in December 1995 and is a member of the Communist Party faction.

In addition, Communist State Duma deputy Aleksandr Kruglikov was attacked from behind and hit several times on the head with metal rods by two unknown men in his home city of Ulyanovsk late on Wednesday, reported Itar-Tass today. Police told Itar-Tass on Thursday that Kruglikov succeeded in breaking away from the attackers and they fled, and he is OK. Kruglikov is the chief Communist representative in the Ulyanovsk region.

Economy

Ruble = 5,018/$1.00 (NY rate)

Ruble = 5,061/$1.00 (CB rate)

Ruble = 5,042|5,080/$1.00 (buy|sell rates)

Russia to Bolster Oil Export Pipelines

· The vice-president of Russian oil transportation company Transneft Yuri Sipovsky told the participants of the Neftegaz `96 conference in Moscow that the firm plans to build a total of 2,300 km of trunk oil pipelines, reported Itar-Tass. The new pipelines are part of a program to increase Russian oil exports in the next several years to 110-130 million tons a year, he said. According to Sipovsky, the current network of trunk oil pipelines, whose total length is 48,500 km, should be extended, because a number of large oilfields began to be developed in Western and Eastern Siberia, as well as in the North. New oil pipelines will be built along with the construction of new sea terminals and the modernization of the existing ones. Sipovsky said that the Novorossiisk sea port was being modernized. After the modernization is completed, it will be able to handle 15 million tons of oil a year. Another sea terminal will be built on the Black Sea coast, which will handle oil from the Tengiz oil field in Kazakhstan. A project to build a new Baltic pipeline is also being studied.

Denationalization of Metal Sector Complete

· The chairman of the Russian State Committee of the Metallurgy Industry Vsevolod Generalov announced recently that 398 of Russia's 411 ferrous

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and non-ferrous metallurgy companies have been transformed into joint stock companies, reported Finansoviye Izvestia (1996, No. 60). All ferro-alloys and steel pipe producers and ore processing companies have been denationalized, he said, and the share of denationalized companies among rolled steel and non-ferrous metal producers has reached 95 percent. However, Generalov stressed that privatization had failed to result in investment inflow into the metallurgy industry. "Commercial companies, and not strategic investors, have obtained control over the metallurgy companies," he said.

Assi/Stratton Paper Deal

· Swedish pulp and paper company AssiDoman has acquired 50 percent of Stratton Paper Holding Co., a division of Bahamas-based Stratton private investment company, reported today's Financial Times. Earlier this year, Stratton took control of Segezhabumprom, Russia's largest paper bag producer, located in the northwestern Karelia region. The two companies are currently in negotiations with several financial institutions to raise $100 million for an investment program. The program will modernize the Segezhabumprom plant to raise productivity, improve product quality, and lessen the environmental impact. The plant has a capacity of 450,000 tons of bag paper and one billion bags per year, and employs 6,000 people. However, it is currently running at only 20 percent of capacity due to a collapse of demand in Russia, with most output sold on a barter basis. AssiDoman expects the revival of domestic demand to take years, but plans on earlier success with exports.

Lithuania and is a condition of its joining the European Union (EU). However, the amendment applies only to countries from the OECD, G-24 states, and countries with an association agreement with the EU, excluding Russia and other CIS states. This provision was made at the insistence of the right-wing faction in parliament, which feared that the country's eastern neighbors would come to dominate the land market. Agricultural land, another sensitive issue, was also excluded as it is still a large portion of Lithuania's economy and is heavily protected by customs tariffs.

EU-Ukraine Loan Agreement

· The European Union (EU) has agreed to extend a $248 million loan to Ukraine to help improve its balance of payments, with the first disbursement expected next month, reported Reuters. The European Commission said the agreement, signed on Wednesday, came after Ukraine gave sufficient evidence that current economic reforms were on track after difficulties in late 1995 and early 1996.

Transcaucasia and Central Asia

Ispat Buys Coal Mines

· Ispat Karmet, a division of Indian Ispat International, announced on Wednesday that it has purchased 15 coal mines in northern Kazakhstan to supply the Karmet steelworks it purchased last year, reported Reuters. The mines have reserves of over 1.5 billion tons of coal, enough for more than a century of production at current levels. It purchased the mines, a coal enrichment plant, a workshop, and rail facilities for $182 million. Intercon reported in November that Ispat had signed an agreement with the Kazakh government to manage the Karmet steelworks, located in the northern city of Karaganda. The company subsequently purchased the plant. The steelworks has an annual capacity of six million tons, but managers say output is running below half that amount. It accounts for 10 percent of Kazakhstan's GDP. The coal from the mines will also be used for a 465 megawatt coal-fired power plant.

European Republics

Lithuanian Land Law

· Lithuania's parliament voted 109-14, with two abstentions, on Thursday to approve a constitutional amendment allowing foreigners to buy non-agricultural land for business purposes, reported Reuters, citing state news agency ELTA. The amendment was seen as a vital boost to foreign interest in

Paul M. Joyal, President, Editor in Chief Clifton F. von Kann, Publisher Ellen Shapiro, Principal Editor

Alycia S. Draper, Rebecca Martin, Contributing Editors

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