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, February 11, 1999

Russian Federation

Politics

Rus-US Disagree On Nuclear Issues

· The Russian Nuclear Minister Yevgeny ADAMOV admitted Tuesday that Russia is feeling pressure to cease its cooperation with Iran due to US sanctions against the Russian three scientific institutes. In his words, the Russian cooperation with Iran has two targets: firstly, to employ Russian specialists in permitted areas and, secondly, to take part in the strategic development of Russian economics to the East. ADAMOV said, "When the Americans try to bar us from works on joint problems with Iran which are permitted by the international community, we, naturally, resist." The construction-repair for the Iranian Bushehr nuclear power plant started last year. The number of Russian scientists employed in the project has increased to 900. The US believes that Russia is passing nuclear weapons know-how to Iran through building this plant and other bilateral seminars with nuclear experts.

Director of the Central Intelligence George TENET in a hearing before the US Senate Armed Services Committee earlier this month testified that he is especially worried over, "the security of Russian WMD (weapons of mass destruction) material, increased cooperation among rogue states, and more effective efforts by proliferants to conceal illicit activities." He said that while there were some positive signs of Russia's performance early last year, it was not "sustained improvement." TENET said, "expertise and material from Russia has continued to assist the Iranian missile effort in areas ranging from training, to testing, to components. This assistance is continuing as we speak, and there is no doubt that it will play a crucial role in Iran's ability to develop more sophisticated and longer range missiles."

Russian-Italian Prime Ministers Meet

· Russian Prime Minister Yevgeny PRIMAKOV met with his Italian counterpart Massimo D'ALEMA Tuesday to discuss bilateral relations and the strengthening of trade ties. PRIMAKOV said after talks, "With the help of Italy, we want to boost our relations with the European Union." He said the talks were extensive, adding that Italy was one of Russia's largest partners in Europe. D'ALEMA noted that it is the duty of the world community was to support the Russian government and to evaluate in a correct way the problem of Russia's debt to international financial institutions and individual countries. He also reaffirmed Italy's readiness to consider the possibility of further rescheduling the external debt of the former Soviet Union, which Russia assumed. D'ALEMA also met with a number of party and regional leaders, including Yegor GAIDAR, Vladimir ZHIRINOVSKY, Alexander LEBED, Moscow Mayor Yuri LUZHKOV, State Duma Speaker Gennady SELEZNYOV, and Grigory YAVLINSKY. D'ALEMA said that his government was doing everything it could to create better conditions for Italian investments in Russia. Italy, Russia's sixth larger export partner with a turnover of 14 trillion lire ($8.5 billion), comes only 12th in terms of investment. Accompanying him on his visit is a delegation of Italian businessmen, who assessed Russia's financial and economic standing and searched for new ways of cooperation. The delegation consisted of presidents and executive managers of Italy's biggest companies including car-maker Fiat, energy-producer ENI, machine-

Today's News Highlights

Russia

CB Pledges Floating Ruble

Gov't To Lift Import Surcharge

European Republics

Estonian Telecom IPO

LUKoil-Latvia

South Caucasus & Central Asia

Georgia-Abkhaz Resolution Talks

Russia To Hand Over Arms

CIS To Revise Security Treaty?

Trade Barriers In Central Asia

Politics-Economics-Business

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Thursday

February 11, 1999

Intercon's Daily

building factory BREDA, chocolate plant Ferrero, and several haute-couture brands. Despite Russia's financial crisis, two joint projects continue. Gazprom and ENI have agreed to build the Blue Stream pipeline and Fiat and GAZ last year signed an agreement to make Siena and Marea cars.

D'ALEMA had trouble laving Russia Wednesday. Apparently, Russian President Boris YELTSIN's airplane side-swiped the Italian DC-9 plane on the runway. The Russian plane rammed into the tail of the Italian jet, knocking a wingtip off and damaging the fuselage, forcing the Italian government to send a replacement jet to Moscow to pick up D'ALEMA.

Religious Freedom For Jehovah's Witnesses?

· The right of religious freedom in Russia is being questioned in a case before a Moscow civil court against the Jehovah's Witnesses. A 1997 law on religion restricted nontraditional denominations. Last August Patriarch of the Russian Orthodox Church Alexsei II called for the ban on proselytizing faiths, particularly those that try to lure people away from the, "religions of their ancestors." The New York Times reports, according to the complaint, the Jehovah's Witnesses have violated the 1997 law by preaching religious discrimination, breaking up families, withholding medical treatment—all in the name of their, "one true religion." Prosecutors are prepared to bring more than 21 witnesses to testify the damage brought by Jehovah's Witnesses on their family, life, and finances. Increasingly interesting is written testimony provided by a top expert from the Serbski Center for Social and Forensic Psychiatry, notorious in Soviet times for its "treatment" of dissidents, who found that, "the teaching and activity of Jehovah's Witnesses contains factors that may lead to neuroticism and a state of depression." Religious and human rights groups are closely watching this case. They believe it is the first significant attempt to use the law to restrict worship. US Secretary of State Madeleine ALBRIGHT is also monitoring the case because the US Senate has a law that links US aid to Russia to religious freedom.

Economy

Ruble = 22.76/$1.00 (NY rate)

Ruble = 22.79/$1.00 (CB rate)

Ruble = 25.81/1 euro (CB rate)

Uneximbank Begins Eurobond Talks

· Russia's Uneximbank on Wednesday started the first round of negotiations in London with a committee of Western investors over the restructuring of the bank's outstanding $300 million debts on its Western issue of Eurobonds. Uneximbank is the first Russian bank to declare that it is unable to make payment on Eurobonds. London bankers are predicting that oil company Sidanko, the prized asset of the Vladimir POTANIN empire and owned by Uneximbank, will have to undergo complex structural changes. One ING Baring banker predicts that Boris JORDAN will be sacked as chairman of the Sidanko board of directors to be replaced by a nominee of Western corporate creditors of Uneximbank. The process of bankrupting Sidanko is gaining momentum, as enormous financial infusions into the company would be required to keep it going, in addition to a twofold layoff of its personnel and closures of several oil wells, he said. The financier added that most shareholders of Sidanko are interest in Kovykta oil field which is more than 50 percent in control of British Petroleum. Other Sidanko assets which may be restructured are shares of the Irkutsk administration, Irkutskenergo joint stock company and Angarsk Petrochemical Company.

Government To Lift Import Surcharge

· At a meeting of the commission on protective measures in trade and customs-tariff policies, chaired by First Deputy Prime Minister Yuri MASLYUKOV, it was decided that the government will lift the 3 percent surcharge on imports. Earlier, the government proposed to establish the 3 percent surcharge on import until December 31st of this year. The tax on the import of all commodities was first imposed on August 15, 1998, but was abolished after the August 17 crisis for a number of basic food products and goods. The government regulation lifting the surcharge will be signed in shortly.

CB Pledges To Keep Ruble Floating

· The Russian Central Bank today pledged to keep the floating ruble exchange rate in 1999, and to interfere with "administrative measures" only in case of a financial crisis. The Central Bank said that the floating ruble will, "ensure the stability and predictability of the exchange rate." The Bank stressed that to control the ruble exchange rate it, "will, first and foremost, use market economy instruments of the

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currency policy—currency interventions, changes in interest rates, deposit transactions, and only in cases of crisis phenomena on the currency market, which threaten to destabilize the whole financial and credit system, will it be forced to resort to administrative methods of influencing the situation." The Central Bank will continue fixing the official exchange rate of the ruble to foreign currencies based on the market exchange rate. The Central Bank predicts that the current exchange rate will not radically change in the first half of the year.

capacity of 16 million tons. This will allow to double the transit transportation of Russian petroleum to the West across Latvia. Construction is estimated to cost $500 million, but oil transportation is expected to bring huge revenues to Latvia's budget. The project will be conducted by a consortium of the European Bank of Reconstruction and Development (10 percent), Russian oil companies (40 percent), Western companies (20 percent) and Belarus firms (10 percent). Latvia is negotiating the deal with Sibneft, Sidanko, Yukos and some others. According to KOGAN, LUKoil is ready to invest in Latvia's and Lithuania's oil sectors. He noted that LUKoil wants to actively participate in the companies in which it invests. Lithuania has granted controls over the pipeline operation to one US firm, and Latvia is going to retain management with its businessmen. ALEKPEROV will visit Estonia on Thursday and Lithuania on Friday. He added that LUKoil will consider participation in WPS. Russian Fuel and oil Ministry must approve oil export plans.

South Caucasus & Central Asia

Georgia-Abkhazia Work Toward Resolution

· Georgian President Eduard SHEVARDNADZE on Thursday had a confidential meeting with visiting representative of Georgia's break-away autonomy Abkhazia, Sergei BAGAPSH. It is believed that SHEVARDNADZE and BAGAPSH discussed the settlement of the Abkhazian conflict, including the creation of conditions for the secure return of the Georgian refugees and the maintenance of the cease-fire regime in Abkhazia. These closed-door talks were held in connection with the session of the Coordinating Council of the Geneva talks on the settlement. Participating in this round are Georgia's State Minister Vazha LORDKIPANIDZE, Abkhaz representative BAGAPSH, Russian Deputy Foreign Minister Leonid DRACHEVSKY, UN and OSCE officials and delegations from the US, Germany, France, and Britain, as members of the UN Secretary-General's Friends for Georgia. Coordinating Council is considering Abkhazia's initiative to begin unilaterally the process of returning Georgian refugees to the Gali region of Abkhazia starting March 1st, security problems in the region, and Abkhazia's economic revival and compliance with the agreement on cease-fire in the conflict zone. The issue of security and protection for Georgian refugees is key to the Georgian

European Republics

Estonia Completes Telecom IPO

· On Wednesday, Estonia completed the sale of 24 percent state in Estonia Telecom, the national telecommunications operator, raising 3.06 billion kroons ($221 million) in the biggest international equity offering in the Baltic countries, the Financial Times reported. Heavy demand increased the issue price to 85 kroons per share and valuation of the company at 11.7 billion kroons. The shares are to be listed on the Tallinn stock exchange and in London in the form of Global Depository Receipts (GDRs). The tender was oversubscribed by 15 times. International investors were given 30.9 million of the 36 million shares on the offer. Demand from United Kingdom and US investors is a signal continued interest in emerging-market privatizations. The company is in part owned by Telia of Sweden and Sonera of Finland, with a combined stake of 49 percent, while the state retains slightly over 27 percent.

Latvia Invites LUKoil To Join WPS Project

· Latvia has invited Russia's major oil company LUKoil to stretch oil pipelines from Russia via Belarus and Latvia to Europe, Heim KOGAN, the general manager of LUKoil's office in this Baltic state said on Monday. LUKoil President Vagit ALEKPEROV is meeting with executives from Latvian oil terminal firm Ventspils Nafta, which has launched Western Pipeline System (WPS) to attract financing for the project. KOGAN said that the sides will discuss the project, but it was unclear whether an agreement will be signed or not. The project has already been approved by the Latvian government. The pipeline would transport 18 million tons of oil annually through Latvia's Venspiels (increasing to 36 million tons) to stretch the parallel to the previous pipeline with the

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Thursday

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Intercon's Daily

side. The session in Tbilisi will also consider questions concerning the energy sector, transport and conditions for the opening of joint Georgian-Abkhazian enterprises.

Rus-Georgia Discuss Transfer of Military Arms

· Georgian Defense Minister Lieutenant-General David TEVZADZE and Russian First Deputy Defense Minister Nikolai MIKHAILOV on Wednesday met to discuss the transfer of Russian military objects located in Georgia to the Armed Forces of Georgia. MIKHAILOV earlier this week toured Russian military and naval bases in Georgia in order to prepare a list of military objects to be handed over. He noted that the list was approved by the leadership of the Russian Defense Ministry and had been submitted to the government. Georgian Foreign Minister Irakly MENAGARISHVILI also held talks with Russian Deputy Foreign Minister Leonid DRACHEVSKY, who said the aim of his visit was, "to discuss Georgian-Russian relations and find a solution to existing problems," RFE\RL newsline reported.

Kazakhs Favors Revision To CIS Security Treaty

· Kazakhstan's Foreign Minister Kasymzhomart TOKAYEV on Monday called for a partial revision of the collective security treaty of the Commonwealth of Independent States (CIS). He stated that Kazakhstan respect Uzbekistan's sovereign choice to withdraw from the security treaty. He noted that some articles of the treaty should be revised to adapt it to the current situation of the CIS, while acknowledging that the collective security treaty is of great importance for CIS members to coordinate action in handling crises. Members of the treaty share duties of common defense and should unite to eliminate dangers that threaten the security, territorial unity and sovereignty of any member of the pact or world peace. The majority of the signatories have expressed their readiness to renew the treaty, with Uzbekistan backing out and Georgia and Azerbaijan undecided on the issue. One of Uzbekistan's reasons for not renewing the treaty is that it disagrees with Russia's policies of deepening integration of the

former Soviet republics and opposes Russia's military activities in some parts of the CIS. In response, Russian presidential representative to the CIS Ivan RYBKIN said that Russian military bases on the territory of CIS countries are in compliance with international legislation. Russia's military presence in Armenia is legally fixed, but that Russia's presence in Georgia and Tajikistan is legalized by special agreements, carried out on a multilateral or a bilateral basis, and is mostly of a temporary character.

Trade Blockades In Central Asia

· Kyrgyz President Askar AKAYEV has accused his neighbors of establishing trade blockades in an effort to save themselves from Russian economic and financial fallout. Kazakh Prime Minister Nurlan BALGIMBAYEV today announced a 200 percent tariff on imports of all beverages, tobacco, butter, margarine, mayonnaise, and yeast from Kyrgyzstan. He said that limiting imports from other former Soviet republics would be an integral part of the government's economic plan for 1999. On January 11th, Kazakhstan imposed an outright ban on imports of 23 categories of Russian foodstuffs, encompassing most imports from its neighbors. Uzbekistan is considering similar trade barriers against Kyrgyz goods. AKAYEV believes these barriers are being built up because Kyrgyzstan is the first of the CIS to join the World Trade Organization (WTO). "There are problems in connection with joining the WTO. It has caused an unfortunate reaction from our partners in the CIS. Let me say directly: the countries of the CIS are sparing no effort to organize an economic blockade against us...This is a tendency toward the traditional habit of punishing anybody who moves forward." Meanwhile, Russia, Ukraine, and Kazakhstan have started membership talks with the WTO.

The Daily Report on Russia

and Former Soviet Union

will not be published February 15th

in observance of President's Day

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

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