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

Friday, December 18, 1998

Ushakov Appointed New Ambassador To US

· Russian President Boris YELTSIN on Wednesday appointed Yuri USHAKOV as the new Russian ambassador to the United States. He will also act as Russia's permanent observer at the Organization of American States in Washington. USHAKOV has worked in the Foreign Ministry since 1970 and has assisted the ministry on its interactions with the UN and other international bodies. He will replace Russia's envoy to Washington, Yuli VORONTSOV, who is retiring in January. VORONTSOV was recalled to Russia Thursday in protest of the US and British strikes on Iraq.

Chechnya Issues State Of Emergency

· The Chechen parliament on Tuesday declared a 30-day state of emergency for Grozny. Chechen President Aslan MASKHADOV's request to mobilize the army reservists as part of an anti-crime effort was rejected by parliament. Lawmakers said reservists can only be mobilized in the face of an external threat. However, MASKHADOV proceeded with the mobilization. More than 1,500 reservists have arrived at mobilization centers. Presidential spokesman Maribek VCHAGAYEV said, "no compromise is possible with criminal groups and MASKHADOV advocates touch measures to destroy gangsters." The Chechen government has been reluctant though to confront suspected criminal gangs in the past. It is not clear whether the security forces will take a more aggressive stance this time and risk armed conflict with outlaw groups. Kid-nappings for hard

Russian Federation

Politics

FSB Prevents Nuclear Theft

· Chief of the Chelyabinsk Federal Security Service (FSB) department Valery TRETAYKOV said that his agents prevented the theft and illicit appropriation of 18.5 kilograms of radioactive materials, Itar-Tass reported. TRETAYKOV noted that this operation conducted by FSB agents was one of the most important in the outgoing year. TRETAYKOV pointed out that these nuclear materials might have been used for production of components for nuclear weapons. Measures are being taken to prevent such incidents in future, he said. TRETAYKOV noted that security of the nuclear complex is a concern. Since the collapse of the Soviet Union and the reduction of military spending, huge quantities of fission materials, most of which not subject to immediate processing, have been accumulated on scanty, although heavily guarded territories. "We are being given assistance by the United States to build reliable storage facilities for fission materials. However, this is far from being the permanent measure we need," TRETAYKOV said. Comment: US intelligence reports that Russia is officially providing not only nuclear technology, but also scientific know-how for biological and chemical weapons to Iran. The timing of the Chelyabinsk report is interesting. Russia has denied the US allegations and is seeking to bolster its position by the Chelyabinsk report. What is most interesting is what is not mentioned. Who was arrested and where was the final destination for the nuclear material. Meanwhile, Russian President Boris YELTSIN's special envoy Sergei PRIKHODKO arrived today in Iran for a four-day official visit with President Mohammad KHATAMI, deputy chairman of the parliament Hassan ROUHANI, and deputy chief of presidential staff Mohammad Ali ABTAHI.

Today's News Highlights

Russia

Chernogorneft In Receivership

European Republics

Belarus To Reform Energy

Lazarenko Freed On $3M Bail

South Caucasus & Central Asia

WB/IDA Grant Georgia Credits

Georgia-Abkhaz Talks Resume

Caspian Sea Status Undefined

Kazakh Telecom Merger

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December 18, 1998

Intercon's Daily

currency ransoms has become more frequent. Last week, three British and one New Zealander working for a telecommunications company were beheaded after a failed rescue attempt.

Economy

Ruble = 20.7/$1.00 (NY rate)

Ruble = 20.75/$1.00 (CB rate)

Jul Aug Sep Oct Nov Dec

Western Banks Consider Legal Action

· Thursday's negotiations in London between the Russian government and Western international banks failed to resolve technical issues on the restructuring of domestic short-term debt (GKOs and OFZs) and may have aggravated investors further. Six of the 19 foreign banks have set up an expanded subcommittee to investigate and consider a collective legal claim against the Russian government, demanding the payment of the debt. The subcommittee is led by the Nomura Bank of Japan's general director for emerging markets Daniel Jackson, who confirmed that the subcommittee of banks at the instruction of the larger committee is considering legal alternatives. The impasse at the negotiations is over restrictions on foreign investors to convert ruble-denominated securities into dollars and invest their ruble proceed in meaningful assets, the Financial Times reported. Foreign investors are hoping that the Central Bank and Russia's Finance Ministry will allow holders of treasury bills to invest their rubles into Russian equities. One banks said, "The deal on the table is not satisfactory. The only avenue is to bring new equity into the transaction and incorporate privatization of state assets into the deal."

Bulgak Urges Russian Oil Cos. To Merge

· Deputy Prime Minister Vladimir BULGAK said that Russia's oil companies will merge in 1999, on Wednesday while attending a meeting of the Northwestern Association of Regional Governors in Arkhangelsk. He said Russian oil companies have no alternative, with world oil prices tumbling. "The smaller a company the higher are overheads and the higher are costs of products," he said. BULGAK said Russia has 13 oil companies. Anti-monopolist legislation does no allow the number of oil companies to be less than three. He said he did not know how many oil companies will remain after the amalgamation take place. BULGAK said the government is considering three options: pooling state-owned companies, handing out state-owned companies to private ones, and inducing private companies into mergers. He pointed out that all of Russia's companies received foreign loans by using their oil as collateral. This has forced oil companies to pay back their loans at losing prices.

The Russian government is working on a strategy to develop oil exports to Europe and China, which requires the building of pipelines. Russia accounts for 11 percent of world oil production and 4 percent of world oil exports, and the domestic oil refineries work less than half of their capacities, he said. BULGAK said that the government is considering levying temporary duties on exports of fuel oil. "The duties will be levied for a term of two-three months so as to restrain fuel exports abroad during winter when fuel oil is needed most for heat supplies. The concrete amount of exports duties has not been fixed yet, but it will be established in percentage proportionate to the cost of the exported fuel oil," BULGAK said

Business

Court Places Chernogorneft Into Receivership

· The Wall Street Journal reported today that a Russian court has imposed outside management on oil producer Chernogorneft, a subsidiary of Sidanko and part of Vladimir POTANIN's Interros financial industrial group. A judge placed Chernogorneft into receivership at the request of a group of Russian creditors, thereby placing the property and funds under custody, pending litigation. Sidanko spokesman Oleg SAPOZHNIKOV called the court decision, "illegal" and said the company would appeal the

When you need to know it as it happens

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December 18, 1998

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ruling. Chernogorneft puts out 15 tons of oil per well per day, compared with the Russian average of 8 tons. It accounts for a third of Sidanko's annual production of about 20 million tons. A Chernogorneft spokesman said that the bankruptcy case was filed by Polyplastic over a debt of $40,000, but SAPOZHNIKOV believes that competitor Tyumen Oil, which operate in the same oil field, is behind the case. Tyumen Oil is a property of Alfa Group consortium, headed by Mikhail FRIEDMAN, which lost an auction for a stake in Sidanko to POTANIN in 1996. In the revengeful, warring battle between the heads of financial industrial groups, it appears that the empires oligarchs amassed during the early days of privatization are unraveling. As the gutted out subsidiaries lay in ruins, the real losers are the Russian citizens, who not only lose their jobs, but also the benefits of production.

Court Halts ORT Bankruptcy Proceedings

· The Moscow City Arbitration Court today terminated the procedure on insolvency of the Russian Public Television (ORT) as the Federal Service for Insolvency and Reinstatement (FSDN) had petitioned to revoke its lawsuit. The FSDN Moscow Committee was the orator on the issue. It filed a suit following the failure of the channel to pay 4 million rubles of debt to the city budget. At the closed session of the court, a Federal Service representative petitioned to revoke the lawsuit under Article 37 of the Arbitration Code. The cause of the move is a cancellation of the proxy of the FSDN Moscow division chief.

over the industry. GERASIMOV noted that 100 percent of strategically important electricity transmission lines will remain under state control. Belarus is seeking a minimum of $5 billion in investments to upgrade the sector. Belarus plans to produce 34.2 billion kilowatt-hours of electricity and import another 10.6 billion kilowatt-hours. GERASIMOV said the state has a preliminary agreement with Poland to export electricity. Belarus has the, "export capacity for next year is one billion kilowatt-hours."

Lazarenko Freed on $3 Million Bail

· Leader of Ukraine's Gromada Party Pavlo LAZARENKO was freed from a jail in Geneva, Switzerland after posting a bail of 4 million Swiss francs ($3 million). Before his release, LAZARENKO's lawyer Paul GULLY-HART had to prove that the bail money was from a legitimate source. He was arrested in Basel on December 3rd in connection with an investigation on money laundering. Ukraine officials suspect that $20 million to $40 million of state funds were illegally transferred to Switzerland during LAZARENKO's term between June 1996 and July 1997. LAZARENKO has admitted to moving money to Swiss accounts, but claims that the funds are not dirty money. LAZARENKO had also been detained for violating the Swiss passport regime since he was staying on the Swiss territory with a Panamanian passport. According to information, LAZARENKO left Kiev for Brussels on November 29th with a passport of a citizen of Ukraine. He believes that the Ukrainian government wants to discredit him in advance of presidential elections in 1999. The Gromada party strongly opposed Ukrainian President Leonid KUCHMA.

South Caucasus & Central Asia

WB/IDA Approve Credits For Georgia

· The World Bank on Thursday approved financing totaling $20.7 million for development projects in Georgia. An interest-free credit of $15 million dollars will be provided for Georgia's enterprise rehabilitation project, which will improve the efficiency of private and privatized enterprises. The project will also develop managerial capacity for constant private sector development through publications and a public awareness campaign. There will be support for the creation of associations for enterprises consultants and private enterprise manages. The project

European Republics

Belarus To Reform Energy Sector

· Head of the state energy company Belenergo Valentin GERASIMOV said that, "Starting next year structural reforms in the energy sector will be in amid its privatization. The sector will be split into three branches—power stations, electricity transmission networks, and energy distribution to the regions." He said that the Belarus government along with European energy experts are working out an energy restructuring program through 2010. Under the proposed program, power stations and a few electricity transmission lines would be converted into joint-stock companies. But the state would keep control

When you need to know it as it happens

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December 18, 1998

Intercon's Daily

agreement on the legal status of the Caspian Sea. Russian deputy foreign minister Yuri PROSHIN said, "the positions still differ widely." The deputy ministers signed a joint statement which said that the sides demonstrated "better mutual understanding" on the issue. Azerbaijan and Turkmenistan, "support the complete division of the Caspian Sea, which implies the division of the bed, water and surface of the Caspian Sea." Kazakhstan and Russia, "advocate the division of the sea bed, leaving its water and surface for joint utilization." Iran, "giving preference to the condominium regime [implying the joint utilization of the bed, water and surface] may decide to support the idea of complete division of the sea." Under the present delineation, the national sectors vary in size. The status of the Caspian Sea is still governed by agreements signed by the Soviet Union and Iran in 1921 and 1940. A third meeting on the Sea's status will be held in May in Tehran.

Three Kazakhs Telecom Cos. Merge

· Three private Kazakh telecommunications companies announced a merger Thursday, creating the nation's second largest telecom company called Kazintel, Reuters reported. Kazintel will hold controlling stakes in Arna, a digital telecom operator, Astel, a nationwide data transmission firm, and Ratel, a satellite operator. Arna deputy chief executive officer Mukhtar ABDRAKHMANOV said the merger will allow the new company to be a leader on Kazakhstan's telecommunications market. Kazintel plans to take over 25 percent to 30 percent of the Kazakh telecom market. Competition in this market is limited to satellite, cellular, paging, and data transmission, while state-owned Kazakhtelekom has a monopoly over long-distance, international, and government telecoms services. Astel director Askar YESENGARAYEV said, "In the next two years, we will get the most modern telecoms network in Central Asia." Kazintel officials say the company's operating capital will amount to $20 million by year's end. Kazintel president Murat YUNUSKHODZHAYEV said the company plans to invest $500 million over the next 10 years in development.

will support the creation of new small private businesses by releasing assets from restructured privatized companies.

Another credit of $4.4 million will be used for an integrated coastal management project that will strengthen institutions managing coastal resources by developing, testing, and evaluating methods to effectively integrate environmental planning and management into economic development. The project also obtained a grant of $1.3 million from the Global Environment Facility (GEF). The global development project will help Georgia meet its international commitments under the Black Sea Environmental Program. The two credits will be provided by the International Development Association (IDA), the World Bank's lending arm for poor countries. Since joining the World Bank in 1992 and the IDA in 1993, World Bank and IDA commitments to Georgia total approximately $392 million for 17 projects.

Abkhaz Peace Talks Resume In Geneva

· UN Secretary-General Kofi ANNAN's special envoy for Georgia Liviu BOTA open peace talks in Geneva Thursday between Georgia and Abkhazia. Georgia's State Minister Vazha LORDKIPANIDZE, Abkhazia's de facto prime minister Sergei BAGAPSH, and officials from Russia, Germany, France, Britain, the US, and the Organization for Security and Cooperation in Europe (OSCE) participated in the talks behind closed-doors. BOTA said that the priority is the return of 50,000 ethnic Georgian refugees to the region. He added, "The frequency and intensity of acts of terrorism have increased and the situation is extremely dangerous. Furthermore, as in September, reports of impending hostilities are again being circulated." Comment: With Christmas approaching, military operations in Iraq, and the impeachment vote on US Capitol Hill, the possibility of provocation against the Georgians in Gali cannot be ruled out.

Littoral State Fail To Agree On Caspian Status

· Deputy foreign ministers of Russia, Kazakhstan, Azerbaijan, Turkmenistan and Iran failed to reach an

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

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