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DAILY REPORT ON RUSSIA

AND THE FORMER SOVIET REPUBLICS

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

WASHINGTON, D.C. 20005 -- 202-347-2624 -- FAX 202-347-4631

Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Monday, May 12, 1997

Russian Federation

Politics

Russian-Chechen Peace Treaty Signed

· Russian President Boris Yeltsin and Chechen leader Aslan Maskhadov today signed a peace accord in Moscow aimed at putting a definitive end to 400 years of hostilities between Russia and the northern Caucasus region. "We have signed an accord of historic significance, finally putting a stop to 400 years of history," Yeltsin said at the signing ceremony.

Today's accord builds on a temporary cease-fire reached in January 1997. The accord calls for a normalization of ties between the two governments and says that both sides renounce the use of force to resolve disputes.

Under the accord, Russia pledges to withdraw all troops from Chechnya, while the Chechen government agrees to put off the question of full independence for the republic until the year 2001.

The agreement opens the way for talks between Maskhadov and the Russian government on economic aid to war-torn Chechnya, as well as promising progress on talks related to the transport of Azeri Caspian Sea oil across Chechen territory.

NTV Journalists Kidnapped in Chechnya

· A film crew from Russian independent television NTV was taken hostage by six armed men near the Chechen village of Samashki on Saturday, reported Itar-Tass. The crew included special correspondent Yelena Masyuk, cameraman Ilya Mordyukov, and sound engineer Dmitri Olchev.

This latest in a string of kidnappings of journalists in Chechnya came only two days before a scheduled

meeting between Russian President Boris YELTSIN and Chechen leader Aslan MASKHADOV, but did not stop them from signing a peace treaty.

Finnish Prime Minister in Moscow

· Finnish Prime Minister Paavo Lipponen today arrived in Russia for a two-day working visit to meet with his Russian counterpart Viktor Chernomyrdin, Federation Council speaker Yegor Stroyev, and Moscow Mayor Yuri Luzhkov. "Russia is eager to expand its commercial and economic cooperation with Finland," Russian Trade Minister Mikhail Fradkov told Prime-Tass today.

Talks are now under way between Russia and Finland on several new intergovernmental agreements, including an accord on cooperation in standardization and certification, and technology. During LIPPONEN's visit, a protocol is expected to be signed on financing investments.

In 1996, the trade turnover between Russia and Finland grew by 24 percent, reaching $4.7 billion. Russian exports grew by 23 percent—to $2.2 billion, and imports—by 34 percent ($2.5 billion). The bulk of Russian exports to Finland are fuel and raw materials. Russian imports from Finland are mainly food products, but deliveries of equipment and transport facilities are accounting for a growing proportion of imports.

Last year, Russia accounted for only seven percent of Finland's total trade, compared with about 20 percent in the mid-1980s.

Today's News Highlights

Russia

Leaked CIA Report on Nukes

Berezovsky on First Strike

Grachev to Brussels?

Yeltsin on Housing Reform

McDermott-$112 Mln for Sakh.

South Caucasus & Central Asia

Aliyev to Visit the US

IFC Invests in Georgian Water

Tajik Telecoms Tender

UN Anti-Drug Effort in C. Asia

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Happenings This Week

¨ The president of the Parliamentary Assembly of the Council of Europe (PACE) Leni Fischer arrives in Ukraine on May 12 for a three-day official visit. She will meet with Ukrainian President Leonid Kuchma, Prime Minister Pavel Lazarenko, and other top officials.

¨ Belarus President Aleksandr Lukashenko arrives in Kiev on May 12 for a two-day official visit. He will meet with his Ukrainian counterpart Leonid Kuchma, Parliament Speaker Aleksandr Moroz, Prime Minister Pavel Lazarenko, and other officials. He may also meet with PACE President Leni Fischer while in Ukraine.

¨ The 10-member Economic Cooperation Organization (ECO) will hold a meeting in the Turkmen capital of Ashgabat this week, beginning on May 13. One of the main topics of discussion will be financing for a project to build a Turkmenistan-Turkey-Western Europe pipeline. The ECO includes Iran, Kazakhstan, Kyrgyzstan, Pakistan, Tajikistan, Turkey, Turkmenistan, and Uzbekistan. Kyrgyz President Askar Akayev will not take part in the ECO summit because of a death in his family. Kyrgyzstan will be represented by Premier Apas Dzhumagulov. Iranian President Ali Akbar Hashemi Rafsanjani arrived in Turkmenistan on May 11 for the ECO summit, as well as bilateral talks, but cut short his visit on May 12 to deal with a major earthquake in his country.

¨ Russian Defense Minister Igor RODIONOV will visit the US on May 12_16. He will meet with Secretary of State Madeleine ALBRIGHT, Defense Secretary William COHEN, and possibly President Bill CLINTON.

¨ UN Secretary-General Kofi Annan will pay an official visit to Russia from May 14_18. The Moscow talks will center on Russia's relations with the UN, particularly participation in peacekeeping operations and reforms of the UN secretariat.

¨ Ukrainian President Leonid Kuchma is expected to pay an official visit to the Washington on May 14_16. Kuchma will meet with President Bill Clinton and conduct the inaugural meeting of the US-Ukraine Binational Commission.

Leaked CIA Report Says Nukes Not Safe

· A highly-classified CIA report on the safety of Russia's nuclear arsenal suggests that the Russian military is having serious problems controlling its nuclear command and control system, reported the Washington Times today. The CIA report found that the system is dangerously outdated and poorly maintained as a result of a shortage of funds, a situation that has "often" led to major equipment failures, said the Washington Times.

The report was written in response to warnings from Russian Defense Minister Igor RODIONOV in February that the lack of adequate funding was causing a weakening of the equipment control system for the country's nuclear arsenal. The 13-page report, completed in March and entitled "RODIONOV's Concerns about Nuclear Command and Control," is a follow-up to a similar CIA report of September 1996 on the prospects for unauthorized nuclear use in Russia. It also identified a number of other serious concerns including power outages, communication failures, low officer morale, and psychological weariness of strategic rocket troops, which could be dangerous to Russia itself.

The leaking of this new report, on the day of RODIONOV's arrival in Washington, comes at an inconvenient time for the CLINTON administration.

Natl. Security Concept Says 1st Strike OK

· Russian Security Council deputy secretary Boris Berezovsky told Ekho Moskvy radio on Friday that the new national security concept adopted by the Russian government reserved Russia's right to implement a first use of nuclear weapons in the event of a conventional armed attack. "We are not speaking of making a first nuclear strike in order to secure advantage, but if we are driven into a corner and are left with no other option we will resort to nuclear weapons," he said in the radio interview.

"This is absolutely a responsible attitude, an attitude in conformity with the present situation," he added.

Grachev to Become NATO Representative

· Former Russian Defense Minister Pavel GRACHEV will probably be appointed as Russian representative to NATO headquarters in Brussels, reported RIA Novosti today. Citing "well-informed sources" in the Federation Council, the news agency

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	said the idea of such an appointment has been actively discussed among Russian leaders during the last week or so. Vitaly CHURKIN is the Russia's current representative to NATO. At the time of GRACHEV's dismissal from the government in June 1996, he was reportedly offered the NATO position, but refused it. Apparently, he has now changed his mind about the post. Economy Ruble = 5,753/$1.00 (NY rate) Ruble = 5,769/$1.00 (CB rate) Ruble = 5,748\|5,790/$1.00 (buy\|sell rates) Yeltsin on Housing & Utilities Reform · Russian President Boris Yeltsin made a rare appearance at a government meeting today, weighing in on the issue of reforming the system of subsidies for housing and public utilities. "The Russian people have paid a high price for seven years of reforms and we cannot let this situation remain like that during the realization of housing and public utilities reform," he is quoted by Itar-Tass as saying. The president noted that housing subsidies cost the government 119 trillion rubles a year, the equivalent of four percent of gross domestic product. "This money is being spent ineffectively and unfairly," he said. He also pointed out that reform of this sector was too important for the government to make mistakes, as it did during the privatization program. At the conclusion of today's meeting, YELTSIN signed a presidential decree on the general guidelines of the reform effort and instructed the government to prepare a draft decree on additional measures for housing and utilities reform. Business McDermott Gets $112 Mln for Sakhalin Stake · New Orleans-based oil company McDermott International Inc. announced today that it received about $122 million for the sale of its 20 percent stake in the Sakhalin Energy Investment Company Ltd., said a company press release. The amount includes the $110 million sales price, which the company announced on April 10, plus about $12 million in repayment of McDermott International's cash calls	since January 1997 as a member of the Sakhalin Energy consortium. McDermott's 20 percent interest in Sakhalin Energy was acquired by the other members of the consortium, which holds licenses in the Piltun-Astokhskoye and Lunskoye fields, offshore Sakhalin Island in the Russian Far East. The members and their current holdings are: Marathon Sakhalin Ltd. (37.5 percent), Mitsui Sakhalin Development Co., Ltd. (25 percent), Shell Sakhalin Holdings B.V. (25 percent), Diamond Gas Sakhalin B.V., a subsidiary of Mitsubishi Corp. (12.5 percent).
		South Caucasus & Central Asia Azerbaijan's Aliyev Invited to the US · The US has invited Azeri President Geidar ALIYEV for the first official visit to Washington since Azerbaijan became independent in late 1991, reported Reuters today. ALIYEV has twice visited the United Nations in New York, but has never been invited for an official visit to Washington. An Azeri presidential spokesman said the visit is likely to take place in July or August. Azeri officials hope that the visit will bring warmer relations between Azerbaijan and the US and help remove US legislation barring US government aid to Azerbaijan until it ceases a blockade on Armenia. IFC Invests in Georgian Mineral Water · The International Finance Corp. (IFC) has approved its first investment in the Republic of Georgia, said an IFC press release today. IFC will invest up to $2.9 million in the equity of the Georgian Glass and Mineral Water Company, a joint venture between Georgia's TBC Group and Dutch and French investors. The Company produces and distributes the famous Borzhomi mineral water, which comes from springs in Georgia's Borzhomi Valley. IFC's investment will help finance a $10 million investment program to modernize and upgrade an existing glass bottle manufacturing plant and two existing mineral water bottling facilities. The financing will also provide support to the Company's distribution systems in Georgia and the CIS. In addition to IFC's direct investment, the balance of the project cost will be provided by existing share


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holders and the First Regional Investment Fund, a private investment fund partially sponsored by the IFC and managed by Baring Asset Management.

Tajik Telecoms Tender Planned

· The Tajik Communications Ministry said today that it is organizing an open international tender to select a joint venture partner for national operator TajikTelecom, reported United Press International (UPI). The tender winner will establish a new national telephone operator, which is expected to receive a license to provide local, national, and international fixed services for a minimum of 20 years and exclusively provide national and international fixed services for a minimum of 10 years. The tender is being organized with the help of the European Bank for Reconstruction and Development (EBRD).

The Ministry also said it plans to cooperate with TajikTelecom to differentiate the services provided by TajikTelecom and the new operator to prevent direct competition. It will also commit to total capital expenditure of $65-$85 million during the first five years of operation and construct a national digital overlay network.

The deadline for expressions of interest is May 25, 1997. Deadline for tender registration and submission of consortium details is June 20, 1997.

The Communications Ministry has selected as its advisers a consortium led by Barents Group.

UN Anti-Drug Effort in Central Asia

· Stepped up control of illegal drug trafficking along the smuggling routes connecting northern Afghanistan with Russia and Eastern Europe is the aim of a new project launched on May 8 in Osh, Kyrgyzstan, said the UN Information Service. The subregional law enforcement project, developed with the UN International Drug Control Program (UNDCP), aims to strengthen interdiction capacities through cooperation among the law enforcement agencies of Kyrgyzstan, Tajikistan, and Uzbekistan.

As a result of increasing enforcement vigilance on the part of Iran and Pakistan along the southern borders of Afghanistan, the three Central Asian Republics are increasingly finding themselves in the middle of a newly- expanding trafficking route linking Afghan opium producers to Russian and East European markets.

The current project focuses on the trafficking route, leading from Khorogh (Tajikistan) to Osh (Kyrgyzstan). The Korogh-Osh route, which is over 1,500 kilometers long and records traffic of more than 2,000 trucks per month, is widely believed to be the most commonly used way to smuggle a large portion of the opium produced in Afghanistan, estimated at over 2,400 metric tons annually.

Weak enforcement capacities coupled with economic and political difficulties—especially in civil war-torn Tajikistan—make the Central Asian subregion increasingly attractive for drug traffickers. Illicit traffic continues to escalate, endangering not only the health of the local population, but further adds to the political, economic, and social instability of the region, according to the UNDCP.

The $2 million, UNDCP-sponsored project will support cross-border cooperation between the law enforcement agencies of the neighboring provinces of the three cooperating nations (Murgab in Tajikistan, Osh in Kyrgyzstan, and Andizhan in Uzbekistan). It will also strengthen the drug control capacity of four border posts and three local police forces, as well as improve telecommunications facilities.

The launching ceremony in Osh also included the first session of the Regional Law Enforcement Coordination Committee, involving the law enforcement agencies of the three countries. The ceremony concluded a two-day meeting of experts from the three countries, the UN, the European Union, and high-level officials of the Russian Interior Ministry and Federal Border Guard Service to review the regional drug situation and discuss further steps.

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

Svetlana Korobov, Contributing Editor

Daily Report on Russia is published Monday-Friday (excluding holidays), by Intercon International, USA. Subscription price for Washington, D.C. Metro area: $895.00 per year. A discount is

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