DAILY REPORT ON RUSSIA

AND THE FORMER SOVIET REPUBLICS

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

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

Thursday, January 14, 1999

Russian Federation

Politics

Four Russian Nuclear Generals Resign

· Four Russian Generals responsible for the nuclear arsenal have resigned following a dispute between Colonel General Vladimir YAKOVLEV, commander of the Strategic Rocket Forces and Lieutenant General Anatoly SOKOLOV, commander of the early warning system. The clash appears to have been incited by cutbacks, mergers between different arms of the services, and the pressure of keeping the military in combat readiness. In his resignation letter to General SOKOLOV, YAKOVLEV wrote, "Given your biased attitude to our branch of the military and personal animosity to me, I consider further service in the armed forces to be pointless." His deputy Lieutenant General Nikolai KARTASHEV, deputy in charge of military training Major General Vitaly DUBROVICH, and deputy in charge of rear services Major General Yuri KABAKOV also resigned, The London Daily Telegraph reported. Their departure is a devastating blow to Russia's early warning systems, which watch for surprise missile attacks, as well as the moral of the military as a whole.

Duma Subcom For Military Budget Increase

· The subcommittee of the Russian State Duma Budget and Finance Committee on Monday called for an increase in the national defense budget, by 1.5 billion rubles or $65.2 million to cover the "minimum requirements" of the Russian Armed Forces. It said that the government could raise the funds for the 1999 federal budget by slashing administrative spending. This decision is backed by the Duma's Economic Policy Committee. Taking into account this increase, total appropriations for the Defense Ministry will amount to 93.7 billion rubles worth $4.07 billion in the 1999 budget, compared with 80.4 billion rubles,

which was worth $13.4 billion in 1998. As of October, 1998, the Defense Ministry said that it received less than half the money it had been allotted for that year. Addressing the subcommittee meeting, chairman of the Duma defense committee Roman POPKOVICH pointed to, "the most difficult state of the Russian Armed Forces." According to the chairman, the total debt of the state to the Armed Forces amounts to 70 billion rubles. Russian Chief of the General Staff Anatoly KVASHNIN in Helsinki said the army has suffered "sweeping" cuts in the last 18 months and reached "super low defense sufficiency" in Russia. He stressed that the Russian armed forces have been reduced to 1,200,000 after 624,000 troops and 300,000 civilian employees have been dismissed from service. KVASHNIN described the Russian army as "semi-professional," because there are 400,000 officers and 200,000 warrant-officers. Duma Speaker Gennady SELEZNYOV said that the Duma will hold the second of four readings of the budget on January 19th and the final reading and passage hopefully by February 4th.

Russia Increases Nuclear Experts In Iran

· Atomic Energy Ministry spokesman Yuri BESPALKO today said that Russia plans to increase

its staff of nuclear workers in Iran at the Bushehr nuclear reactor from 300 to 1,000. Russia claims the increase in staff is aimed at meeting a construction deadline. The Ministry said that civilian reactor is between 30 percent to 40 percent complete at a cost of about $100 million. Moscow and Tehran have repeatedly said that

Today's News Highlights

Russia

US May Halt Space Launches

CB Bails Out Promstroibank

Gloomy OUtlook For Russian Oil

European Republics

CME Buys Ukrainain TV Stake

Ukraine's Privatization Program

South Caucasus & Central Asia

Georgia's Privatization Program

Baku-Ceyhan Attractive Option?

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the plant's only purpose is for generating electricity, but US officials believe Iran is using the reactor as a cover to gain access to Russian nuclear technology.

Meanwhile, Russia's Federal Security Service, (FSB) has investigated allegations by the US that Mendeleyev Chemical Technological Institute, Moscow Aircraft Institute and Research and Development Institute of Energy Engineering have been leaking missile and nuclear technology to Iran and determined that there are no violations of international accords on controls over exports of dual-use technology. FSB senior spokesman Alexander ZDANOVICH said, "As a result of careful work it has been ascertained that there are no violations on the part of these organizations of requirements of international regimes of export control of non-proliferation of weapons of mass destruction and missile means of their delivery." He added the FSB believes, "this situation is a misunderstanding and probably an omission of American special services," implying that US spy work is sloppy. He said the sanctions against the implicated research centers betrayed a "biased attitude of the American side to cooperation of Russia's state organizations with foreign countries, including the Islamic Republic of Iran."

Technology export controls, US sanctions, disarmament, the oil embargo against Iraq, Kosovo and other international issues will most likely be discussed during US Secretary of State Madeleine ALBRIGHT's visit to Moscow on January 25th to 27th. A meeting between ALBRIGHT and Russian President Boris YELTSIN at the US request has not been yet been scheduled. ALBRIGHT will also have talks with Foreign Minister Igor IVANOV and Prime Minister Yevgeny PRIMAKOV. Comment: The juxtaposition of the increase of Russian nuclear scientists in Iran at a time when the US is imposing sanctions on Russian institutions for leaking technology to Iran, does little to reassure those in Washington seeking ways to calm the turbulent waters.

US May Halt Space Launches

· The CLINTON administration is considering revoking permission for Russia to launch US satellites, if Moscow does not crack down on dual technology exports to Iran that could be used for the development of nuclear weapons and ballistic missiles. The US accuses Iran of secretly attempting to acquire or build nuclear arms. US State Department

spokesman James RUBIN today said that cash-strapped Russia, which this year will launch the last of 16 American satellites for which it has received licenses, stands to lose "tens of millions of dollars" in future contracts if the program is terminated. The US threat comes on the heals of economic sanctions imposed on Scientific Research and Design Institute of Power Technology, the Mendeleyev University of Chemical Technology and the Moscow Aviation Institute. US officials have gone out of their way to distinguish between violations by private concerns and by organizations associated with the government, which has promised to stop such trade with Iran by developing a strict system of export controls.

Russian Foreign Ministry spokesman Vladimir RAKHMANIN responded, "We state with regret that the American side is trying to link the continuation of our cooperation in space exploration, which is rather effective and advantageous for both countries, with the alleged cooperation of some Russian institutions with Iran in the sphere of rocket technologies." He called the connection "senseless." He added that cutting back the program will not only hurt US-Russian relations, Russian institutions, but also US aerospace corporations. RAKHMANIN said, "We favor further development of cooperation. Moreover, we believe that the parameters, set by the Russian-American agreement concerning international trade in the sphere of commercial services for space launchings, are not limited."

Economy

Ruble = 21.8/$1.00 (NY rate)

Ruble = 21.45/$1.00 (CB rate)

Ruble = 25/1 euro (CB rates)

CB Bails Out Promstroibank

· The Central Bank of Russia has granted a 1.5 billion ruble ($66 million) stabilization loan to Promstroibank. In exchange, the Central Bank has received a 75 percent stake in the company, the RFE\RL Newsline reported.

Germany, Japan To Assist Economic Stability

· German Chancellor Gerhard SCHROEDER and Japanese Prime Minister Keizo OBUCHI in Bonn on Tuesday announced that Germany and Japan will support Russia's reforms. SCHROEDER said Ger

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many and Japan will assist Russia in economic stabilization. Both leaders have been holding talks focusing on global currency controls. They will hold additional talks this Fall in Tokyo to review measures to prevent more global financial crises.

CIS ISEC Meets In Saratov

· The Commonwealth of Independent States' (CIS) Interstate Economic Committee (ISEC) announced that the ISEC Presidium is meeting in Saratov today to exchange views on inter-regional cooperation and economic integration problems. It will also consider draft intergovernmental documents on an extension of the Treaty for the Pursuance of Coordinated Anti-Monopoly Policy, on the introduction of changes to the common CIS Commodity Classification for foreign economic activities, on a program for scientific and technical cooperation on fundamental and prioritized applied research problems of the CIS agrarian common market. The ISEC Presidium will also discuss draft agreements on measures to prevent and cut short the use of false trademarks and geographical designations, on cooperation of CIS states in the field of periodicals, on the principles and forms of cooperation in the use of archival data. Items prepared by ISEC and sectoral cooperation bodies include a Concept of Partnership between small businesses. Deputy chairman of the ISEC Vladimir NOVITSKY said, "We see in this fact evidence of deep-rooted aspirations [free from political collisions and fluctuations] for the development of cooperation between Commonwealth states and a desire to step up business relations at various levels." This is the first time that an ISEC Presidium meeting is being held in one of Russian regions which maintains direct contacts with CIS countries.

Business

Russia To Supply Saudi Arabia With Telecom.

· A telecommunications factory built in St.Petersburg by Lucent Technologies, an multinational corporation, has started work on an order for Saudi Arabia. The equipment is meant for Saudi Telecommunications Corp., which signed a contract with Lucent Technologies on the development of telecommunications in Saudi Arabia, worth $111 million, company spokeswoman Yelena SHUGALEI said. The St.Petersburg factory assembles and tests equipment for telephone stations, and its annual capacity

is estimated at 400,000 telephone ports with a target to increase production by 100 percent. Before the August 1998 downfall, the plant had sold its production only to Russian partners, but the ensuing economic crisis forced it to seek contacts with foreign markets. The 55-staff factory was opened last May.

Russian Oil Outlook Gloomy

· Vice President of Sibneft Oil Company Konstantin POPOV said Saturday that the outlook for Russia's oil industry is gloomy. He noted that Sibneft's output declined 4 percent in 1998 and its refining operations were cut back by 18 percent. He also said the company had suspended several projects with foreign partners. He pessimistically believes that this situation will remain in the industry for the next two years. Russia's oil sector was badly hurt by the drop in world oil prices, which in turn sent the Russian economy into crisis that led it to devalue the ruble and default on foreign debts. POPOV said, "Russia's oil industry is in no position to be a locomotive for the Russian economy."

European Republics

CME Purchases Ukraine TV Stake

· Central European Media (CME) has purchased a 10 percent of Ukrainian media Studio 1+1 Group for $5 million. The new acquisition raises CME's holding to a controlling 60 percent. It purchased a 50 percent in the 1+1 Group in 1996. In a joint statement, CME president Michel DELLOYE said, "The increase of CME's equity stake in the Studio 1+1 Group is a reflection of CME's long-term commitment to Studio 1+1 and the Ukrainian market." CME plans to consolidate the 1+1 Group, which includes the flagship 1+1 independent television station, into CME's results of operations in the future. CME, founded by US cosmetics heir Ronald LAUDER, has television interests in the Czech Republic, Slovakia, Slovenia, Romania, Germany and Poland.

Ukrainian 1998 Privatization Revenues $105M

· Ukraine's revenues from cash and privatization increased from 76 million gryvnias in 1997 to 360 million gryvnias ($105 million), falling below the government's target. Alexander BONDAR said that the government had planned to receive 1.04 billion gryvnias ($252 million) from cash sell-offs. He said, "We missed the target, but there were both objective

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and subjective reasons for this." The government had planned to raise an additional 140 million gryvnias in December, but the delayed procedure of approving tenders by the Anti-monopoly Committee pushed these sales until this year. This year the government plans to sell off stakes in 445 large and medium sized companies worth 800 million gryvnias.

South Caucasus & Central Asia

Georgia Plans Major Sell-Offs For 1999

· Georgian Property Minister Mikhail UKLEBA today said that Georgia is planning major sell-offs in the power, communications, and transport sectors. Since 1993, Georgia has sold off more than 12,000 small and medium sized companies. Following a development plan by Merrill Lynch, Georgia in 1998 began privatizing its power sectors. The plan calls for privatizing the entire Georgian distribution network and merging distribution companies into three large independent companies, Reuters reported. Last week, Georgia sold 75 percent stake in power distribution Telasi to US company AES for $25.5 million. UKLEBA said, "We plan to sell off or give management control of stakes in these enterprises to serious private investors. He noted that all international tenders will be organized with the participation of well-known foreign investment banks. Georgia plans to hold international tenders for seven major power stations. Funds from these sales, UKLEBA noted, would be used to modernize the industry and pay for energy imports. Telecommunications companies, international long distance operator Sacartvelos Telecomi and local operator Electrokavshiri, will also be sold. In 1998, Georgia raised about 72 million to 73 million lari ($35 million) from privatization sales.

Process On Baku-Ceyhan Pipeline?

· Turkish First Deputy Minister of Energy and Natural Resources Yurdakul YIGITGUEDEN said that progress has been made during two-day negotiations between SOCAR representative Valeg

ALESKEROV, Azerbaijan International Operational Company (AIOC) representative Robin BRANNIGAN and Turkish Ministers of Finance, Treasury, Environmental, and legal officials on the Baku-Ceyhan pipeline. He said, "There are four or five issues to be agreed on before key agreements are prepared for final approval of the countries where the pipeline will pass through...We think all such work will be finished by June." Another round of talks will begin in Istanbul on January 18th. He noted that Turkey must guarantee security of the pipeline and its commercial viability. The project, backed by Azerbaijan and the US is competing with the Baku-Supsa and Baku-Novorossiisk routes. The Baku-Ceyhan is the costliest of the three routes with an estimated price tag of $3.7 billion. AIOC led by BP Amoco and Statoil, has delayed its recommendation on the pipeline route since October. The Azeri government has the final decision. Western oil companies interested in investing in the pipeline are still waiting for details on terms and tariffs from Turkey, the Financial Times reported. Turkey claims that it has already disclosed the terms. The high cost of the pipeline makes it critical that Turkey come up with financial incentives. Western oil companies say that Turkey's insistence that progress is being made is not reflecting the reality of the situation.

YIGITGUEDEN also announced that an international consortium will be formed to build a Baku-Ceyhan oil pipeline and supply Caspian oil to the world market. The consortium will be open to members of AICO and all those wishing to join. The consortium will be set up after an intergovernmental agreement is signed. Intercon sources report that an inter-governmental agreement will soon be signed by Azerbaijan, Georgia and Turkey which will make the Baku-Ceyhan option attractive to oil companies.

The Daily Report on Russia and Former Soviet Republics

will not be published on Monday January 18th in observance of Martin Luther King Jr. Day

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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Daily Report on Russia is for the exclusive use of the subscriber only. Reproduction and/or distribution is not permitted without the expressed written consent of Intercon. Daily Report on Russia Ó copyright 1999, Intercon International, USA.

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