DAILY REPORT ON RUSSIA

AND THE FORMER SOVIET REPUBLICS

INTERCON INTERNATIONAL USA, INC., 725 15th STREET, N.W., SUITE 903,

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Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Monday, July 27, 1998

Russian Federation

Politics

Yeltsin Appoints Putin New FSB Head

· Russian President Boris YELTSIN late on Saturday sacked the head of the Federal Security Service (FSB) Nikolai KOVALYOV and replaced him with former deputy head of presidential administration Vladimir PUTIN. No reason was given for KOVALYOV's removal, but Russian media speculate that YELTSIN was not satisfied with the lack of progress in the Caucasus. It is also unclear whether more personnel changes are to follow. YELTSIN warned that the nation could be in for a politically tough time after the summer. PUTIN graduated from the Leningrad State University in law in 1975 and then joined the Foreign Intelligence of the KGB. After the collapse of the Soviet Union, PUTIN was involved in St. Petersburg Mayoral Office and quickly became former Mayor Anatoli SOBCHAK's right hand holding several high ranking posts.

Russian Prime Minister Sergei KIRIYENKO today introduced to the staffers of the Russian Federal Security Service (FSB) their new director, PUTIN. KIRIYENKO said PUTIN's appointment as FSB director is nothing accidental. The new FSB chief is a career intelligence man, experienced in work in special services. At the same time, his work in the Main control agency of the presidential administration enabled him to get knowledge and experience in combating economic crimes. "It is now particularly important to ensure economic security. This is our main, most important task," KIRIYENKO stressed. One government official said that, "The fact that the FSB is now headed by a man who had earlier held the post of the presidential administration's first deputy head shows the attention given by the country's leadership to problems of the secret service and is the reflection of the status the FSB has

now." He added that, "the service has not been led at such a level since ANDROPOV's times."

Meanwhile, head of the Russian Foreign Intelligence Service Vyacheslav TRUBNIKOV arrived in Yerevan Sunday. Today, he will be received by President Robert KOCHARYAN. The agenda for the meeting has not been released to the public. One source told Itar-Tass that the visit is, "of a closed nature." This is the first visit to Armenia by the chief of the Russian Foreign Intelligence Service. Earlier this month, Armenia has been visited by the director of the Russian Federal Border Guard Service and the Defense Minister.

Comment: The appointment of yet another Lennigrad-St.Petersburg-man to a key position, increases the Anatoly CHUBAIS', former first Deputy Prime Minister and government negotiator with international lending institutions, power and influence within the government. CHUBAIS already has Interior Minister Sergei STEPASHIN, also from Leningrad, in the sphere of influence. With CHUBAIS' hand in the government growing stronger, there are rumor's that his arc-enemy financial tycoon and Executive Secretary of the Commonwealth of Independent States Boris BEREZOVSKY is funding striking coal miners, who are calling for the impeachment of YELTSIN. Another CHUBAIS supported Vladimir POTANIN, President of Interros Group, has drawn "battle lines" with BEREZOVSKY, using their media giants as agents

Today's News Highlights

Russia

Kiriyenko-Maskhadov To Meet

IMF To Return In September

Sugar Import Taxes Rise

Gov't To Sell Gazprom Shares

European Republics

Kiev, Paris Agree OnMeetings

Estonian New Visa Rates

South Caucasus & Central Asia

Time For Georgian Reshuffle

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to criticize each other. While a "CHUBAIS man" may now lead the FSB, the nation will most likely continue to fail to control the organization which operates on its own terms. Could Foreign Minister Yevegeny PRIMAKOV be next?

Duma Begins Impeachment Process

· Russian State Duma's commission on impeaching President Boris YELTSIN met on Monday to hear the first of several indictments brought against the president. The commission of the State Duma is to determine whether YELTSIN committed high treason in signing accords with other republics that dissolved the Soviet Union in 1991. Commission chairman Vadim FILIMONOV noted that it, "cannot substitute for bodies of preliminary investigation." Under the Russian Constitution and the Duma's rules of procedure, the commission is not vested with such powers. It can only check whether the president can face criminal charges for what he has done. The commission deputy head, Yelena MIZULINA, said the impeachment move, "complies with all the rules of the procedure, which allows for hearings on all the five points of the indictment." The action group had gathered 217 signatures under the indictment, far beyond the required 150 signatures, she said. The first point, the president is accused of is, "destroying the Soviet Union."

Kiriyenko-Maskhadov To Meet This Week

· Acting on the suggestion of Russian President Boris YELTSIN, Russian Prime Minister Sergei KIRIYENKO plans to meet with Chechen President Aslan MASKHADOV this week. YELTSIN said, "We support the government of the Chechen republic and personally Aslan MASKHADOV. It is not clear where the meeting will take place, but MASKHADOV has stated that it was unlikely that he would go to Moscow again. MASKHADOV said that the meeting would give a, "new impulse," to peace accords signed last year but which has not come to fruition. He said Chechnya's top priority will be to seek action on payment of funds agreed to in the accord. KIRIYENKO said the enforcement of law and order in Chechnya is on the meeting's agenda. Participants in the upcoming meeting are to discuss the economic situation in the troubled republic and its relations with Moscow. Russia, along with the rest of the world, does not recognize the sovereignty of Chechnya.

MASKHADOV survived an assassination attempt

Thursday when a car bomb exploded, injuring many and killing two bodyguards. Chechnya's chief prosecutor old NTV television on Sunday that six people were being held in connection with the bombing. He speculated that the attack was ordered by, "foreign special forces," but he stopped short of naming any countries. Security Minister Aslambek ARSAYEV said that 90 percent of the terrorist act against President Aslan MASKHADOV has been exposed. Some Russian media believe that Saturday's sacking of the head of Russia's Federal Security Service (FSB), the successor of the KGB, Nikolai KOVALYOV may be connected to the continued instability of the Caucasus region.

Meanwhile, four unlikely political figures sent a letter to YELTSIN and the government which was made public today, criticizing the lack of policies concerning Chechnya. Executive Secretary of the Commonwealth of Independent States Boris BEREZOVSKY, Governor of Krasnoyarsk region and former field commander Alexander LEBED, President of Tatarstan SHAIMIEV, and former Prime Minister Viktor CHERNOMYRDIN believe that without a clear policy with Chechnya, Russia is fast appraoching a detrimental point which threatens the nation's unity. Comment: Does this strange unity show that concern for Chechnya and the North Caucasus crosses political battlelines? Or is this move by possible presidential candidate merely a publicity stunt?

Economy

Ruble = 6.2295/$1.00 (NY rate)

Ruble = 6.229/$1.00 (CB rate)

Ruble = 6.186|6.272/$1.00 (buy|sell rates)

IMF To Check on Russia In September

· An International Monetary Fund (IMF) on plans to return to Moscow in September to evaluate Russia's economic performance. At that time, the IMF will decided whether or not to release the remaining $800 million of the first installment plus a second installment of $3.5 billion. Fund representative Martin GILMAN said that by September the IMF wants to see a draft 1999 budget submitted to the Russian State Duma, a reduction in the pension fund deficit, and progress towards meeting 1998 budget targets. The mission will also be checking on tax collection improvements. GILMAN said if the government im

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proves its economic performance in 1999, along with IMF support for the Central Bank's gold and currency reserves, should encourage investors to return.

Sugar Taxes Increase From 25 to 74 Percent

· Beginning August 1st, Russia will increase import duties on white sugar from 25 percent to 45 percent and raw sugar cane from one percent to 75 percent, the Financial Times reported. The rate, expected to remain in place until next January, will further depress the sugar freight market. The move followed protests from Russian sugar producers after a four-fold increase of imports to 2.8 million tons in the first half of 1998. One sugar analyst was quoted as saying that, "Although the taxes has been talked about for a long time, some people didn't believe they would happen."

Kaliningrad To Begin Russian Economic Boom

· Russian Deputy Prime Minister Boris NEMTSOV told industrialists and businessmen in Kaliningrad on Sunday that the Kaliningrad region has a unique opportunity to jump start the Russian economy. He was visiting the region to estimate prospects for the local special economic zone. He said that the federal government does not plan to cancel the law on the special economic zone although some cabinet members believe the region's status is "luxury." Prospects for the special economic zone depends on the local authorities and businessmen, NEMTSOV remarked. He called for the boosted adoption of regional bills on land and the protection of investments. NEMTSOV noted that the region's technological abilities of local industries will create special economic conditions which will attract investment. NEMTSOV and Kaliningrad governor Leonid GORBENKO signed a draft program for the enclave's economic development.

Business

Government To Sell Five Percent of Gazprom

· Russian President Boris YELTSIN on Saturday signed a decree to sell five percent of the natural gas monopoly Gazprom, a move aimed to bolster state coffers while keeping the company under state control. The Kremlin would retain 35 percent share of the state holdings. It is not clear how much the government might raise from selling Gazprom shares. With the company's total capitalization at $9.3 billion, the five percent shares are valued at nearly $500

million. However, many analysts speculate that if the shares are sold to foreign investors and specifically to strategic foreign investors, the government could receive much more from the sale. Under a complex trading plan, foreign investors can not legally purchase domestically traded Gazprom shares. They are restricted to buying Gazprom American depository receipts. Royal/Dutch Shell and Italy's EniSpA have expressed their interest in the sell-off. Last year, Shell was prepared to buy $1 billion of Gazprom convertible bonds, but because of the drop in oil prices the deal was canceled. EniSpA is interested in three percent of Gazprom shares to forge a partnership with the Russian company. Gazprom produces 94 percent of Russia's gas and accounts for a quarter of all the gas produced throughout the world. The company plays a significant political and diplomatic role in Russia and its relations with neighboring nations. The move is a result of pressure from tight finances and international organizations, which have called for the Kremlin to loosen its grip on the monopoly. Russian officials say Gazprom owes the government about 12 billion rubles ($2 billion) in back taxes. State-owned customers of natural gas on the other hand owe the company eight times as much in unpaid bills. Earlier this month, the government threatened to seize Gazprom's assets in an effort to make it pay. Prime Minister Sergei KIRIYENKO and Gazprom chief Rem VYAKHIREV plan to reach an agreement on a tax settlement by August 1st.

European Republics

Kiev, Paris To Agree On New Consultations

· Ukrainian President Leonid KUCHMA and French Foreign Minister Hubert VEDRINE agreed that during President Jacques CHIRAC's visit to Kiev on September 2nd to 4th, Ukraine and France will create a new mechanism of consultations at a high level. On Friday, KUCHMA held talks with VEDRINE, who is currently in Kiev on an official visit. Presidential spokesman Alexander MAIDANNIK said that the two sides, "are expected to create a new regular mechanism of consultations. Such mechanisms have been set up between Ukraine and Poland, and the United States and Germany." The French minister noted that, "France is absolutely convinced in Ukraine's important strategic role for Europe" and stressed the need to support it. KUCHMA confirmed

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that, "European integration remains the top priority in Ukraine's foreign policy."

Estonia Introduces New Visa Rates

· On Saturday, in Estonia new rates of State tax on tourist and business visas became effective. The cost of a single tourist visa is 210 Estonian kroons, and a double one is now 420 kroons. A business visa will cost 2,500 kroons. The fee to expedite visa registration within 24 hours accounts for 200 percent of the ordinary tax. According to an Estonian Foreign Ministry official, citizens of a number of countries will be able to register their entry visas directly at the border. In that case, the fee will be 400 percent of the ordinary one. No fee shall be taken for the registration of diplomatic and service visas. The new rates have been introduced in implementation of the Law on State Tax, which entered into force on January 1, 1998. Tourist and business visas are new to Estonia's consular practice and have been introduced in keeping with the European Union recommendations.

South Caucasus & Central Asia

Georgia Plans Major Reshuffle

· Georgian President Eduard SHEVARDNADZE is taking a bold move to increase the efficiency of implementing reforms and weed out corruption in the government. In recent months, the Georgian parliament has been passing key reforming legislation, but the government's delays have put a damper on the nation's confidence in the SHEVARDNADZE-led government. Professor of International Relations at Tblisi University Alexander RONDELI said, "The current government had lost respect in society. They lacked vision and effectiveness. Their backsides had become glued to their chairs." SHEVARDNADZE is planning a major reshuffle in the government to speed reforms and fight corruption. He said the new team would be installed by mid-August and that many ministers would return to the new line-up. "The Country is entering a new phase of development and in the new stage a certain renewal of the government is needed," SHEVARDNADZE stressed. On Sun

day, he accepted the resignation of Georgian State Minister Niko LEKISHVILI. No reason was given for the resignation, but LEKISHVILI said that he was stepping down to pave the way for SHEVARDNADZE to reshuffle the cabinet. Since then, Economics Minister Vladimir PAPAVA, Finance Minister Mikhail CHKUASELI, and Environment and Natural Resources Minister Nino CHKHOBADZE have submitted resignations. SHEVARDNADZE said, "I hope that each member of the government will take a dignified decision. Many of them, maybe even a majority, will become members of the renewed government. Some will leave, and we will pick new candidates." The President also noted that some of the country's ministries would be merged, possibly creating a "conflict ministry" to deal with the breakaway regions of Abkhazia and South Ossetia. He noted that the defense, security, and interior ministries will be excluded from the reshuffle. Many political observers view the reshuffle positively and predict that it will have little affect on oil pipeline plans across Georgia from the Caspian Sea and Central Asia to the West. Georgia, a critically strategic nation on the old Silk Road transport corridor, has been criticized by international organizations and governments for widespread corruption which impedes its progress. Earlier, SHEVARDNADZE set-up an anti-corruption mission. He firmly believes that corruption has threatened to destroy the nation. "There is no greater enemy than those who scare off foreign investors," SHEVARDNADZE said. Georgia has the highest economic growth among post-communist states of eastern Europe, with an expected 11 percent in 1998. This follows a nearly 90 percent contraction from 1988 to 1994. The Georgian parliament passed a set of laws designed to raise revenues and satisfy International Monetary Fund demands.

Intercon sources report that Georgian Ambassador to Moscow and Abkhaz negotiator Vazha LORDKIPANIDZE will be appointed Georgian State Minister. The appointment is also interpreted as a step toward rendering Georgian-Russian relations in a more positive direction.

Paul M. Joyal, President, Editor in Chief Clifton F. von Kann, Publisher Jennifer M. Rhodes, Principal 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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