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 4, 1999

against the tycoon's business interests. The raid on Sibneft, which was launched and advised by BEREZOVSKY, is just one of three measures used recently to distance the government and YELTSIN from BEREZOVSKY. Managers in Aeroflot, operated by YELTSIN's son-in-law, who have been linked to BEREZOVSKY have been fired and others are being considered. (see article in Business section). In addition, the government has launched bankruptcy proceedings against ORT Television, which is 51 percent state-owned and the remainder by private investors including BEREZOVSKY. In November, 1998, The Prosecutor General's Office seized the assets of ORT and developed a manifest of the station's assets. The inventory was prepared so that the debtor company cannot sell or dispose of its property, that may be used to pay off company debts. ORT reaches 98 percent of the Russians and played a key role in securing YELTSIN's re-election in 1996. Komsomolskaya Pravda said, "BERE-ZOVSKY seems to be losing his battle with PRIMAKOV on all fronts...For BEREZOVSKY, it's now not an issue of political gains or losses, but of survival." Other known BEREZOVSKY assets which may come under attack in the future include LogoVAZ, Nezavisimaya Gazeta, and Ogonek.

Germany Welcomes Russian Interest In EU

· Russian Foreign Minister Igor IVANOV on Tuesday finished his two-day working visit to Germany. He met with German Foreign Minister Joschka FISCHER to discuss the preparation of the European Union-

Russian Federation

Politics

Sibneft Raid Produces Evidence

· A raid Tuesday on the Moscow office of Russia's Sibneft Oil Company and security company Atoll, housed in the same building, has produced evidence that President Boris YELTSIN and his family have been bugged. Russian Deputy Prosecutor-General Mikhail KATYSHEV said, "We have got very good results after carrying out those searches." He added that the Prosecutor General's Office after careful probes had found grounds for instituting a criminal case on Atoll, but much of evidence requires closer checks. It is believed that the evidence includes surveillance equipment and tapes. The investigation is continuing and should it find incriminating evidence against a number of people, they will be brought to trial. KATYSHEV hinted that "important people" will be indicted. The raid was instigated by an article published in Moskovsky Komsomolets which said that business tycoon and Secretary General of the Commonwealth of Independent States (CIS) Boris BEREZOVSKY has spent $3 million on state-of-the-art bugging and surveillance equipment to eavesdrop on YELTSIN and his family and use the material collected to blackmail YELTSIN into protecting the businessman's operations. Sibneft's acting general director Yevgeny SHVIDLER said on Wednesday that the search was in the nature of "demonstrative" to show the commitment of the government Prime Minister Yevgeny PRIMAKOV to crack down on economic crime. It is not a coincidence that PRIMAKOV and the prosecutor general's office started with the Prime Minister's rival BEREZOVSKY, who has wielded his influence with the YELTSIN family to amass a great fortune. Komsomolskaya Pravda said PRIMAKOV has forcefully countered BEREZOVSKY's attempts to manipulate his government with an all-out offensive

Today's News Highlights

Russia

Rus-China To Boost Trade

Aeroflot Sacks Berezovsky Men

Blue Stream Route Endorsed

European Republics

Utel Shares For Sale

Eesti Telekom Bill Rejected

South Caucasus & Central Asia

Ardzinba, War Criminal?

Azeri-NATO Special Relationship

Politics-Economics-Business

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Thursday

February 4, 1999

Intercon's Daily

Russia meeting scheduled for February 18th to 19th in Moscow and of Russian-German top-level consultations. They also focused on international issues, including the settlement in Serbia's Kosovo province. On Monday in Bonn, IVANOV met German Chancellor Gerhard SCHROEDER and handed Russia's Friendship Order to Klaus NOELDNER, former chairman of CARE-Germany charity organization. The Russian Foreign Minister delivered to SCHROEDER a message from Russian president Boris YELTSIN. The contents of the message stressed Russia's the deep interest in the development of the mutual beneficial cooperation with Germany. IVANOV said, "the visit by the German Chancellor to Moscow in the end of February will provide a new impetus for the development of relations between our two countries." SCHROEDER welcomed Moscow's desire to develop, together with the European Union (EU), the economic structures in Russia necessary for a greater economic exchanges. Germany is currently chairing the EU. SCHROEDER intends to discuss with the Russian leadership the expansion of bilateral ties as well as Russia's relations with the EU. In Cologne in June, the EU is scheduled to approve a joint strategy towards Russia, which concentrates on improved economic cooperation with Russia and comprehensive political cooperation. IVANOV will travel on to Bulgaria's capital Sofia.

Economy

Ruble = 23.12/$1.00 (NY rate)

Ruble = 23.14/$1.00 (CB rate)

Ruble = 26.16/1 euro (CB rate)

Rus-China Agree To Boost Trade

· The Chinese and Russian trade ministers met in Beijing Wednesday and agreed that both sides should take concrete measures to boost the declining trade between the two nations. China's Minister of foreign trade and economic cooperation (MOFTEC) SHI Guangsheng expressed to his Russian counterpart Georgy GABUNIA China's interest in jointly utilizing the forest resources of Russia, adding that this could be a new growth area for bilateral trade as China is short of timber. SHI pointed out that China will soon open a trade center in Moscow to promote Chinese products in Russia. China's trade volume with Russia declined to $5.48 billion last year, down 10.5 percent, mainly as a result of the financial crisis and the devaluation of the ruble, GABUNIA said.

"Bilateral trade has huge potential, but the current level of economic cooperation and trade is not in keeping with the strategic partnership between China and Russia nor with the economic size of the two nations," SHI said. GABUNIA is also in China to prepare for the upcoming summit between Chinese Premier ZHU Rongji and Russian Prime Minister Yevgeny PRIMAKOV in Moscow later this month.

Business

Aeroflot Shuffles Out Berezovsky's Men

· Managing director of the Aeroflot air company Valery OKULOV, the Russian president's son-in-law, signed an order on Tuesday sacking commercial vice-president and sales manager Alexander KRASNENKER and department director of air cargo sales Leonid ITSKOV, two men who have been described as having links to business tycoon Boris BEREZOVSKY. KRASNENKER was replaced by Nikolai LEBEDEV, and ITSKOV by Nikolai IVANENKO. In addition, the chief of Aeroflot internal auditing service was instructed to make a comprehensive inspection of departments which are engaged in marketing, sales of air transportation and freight. The company will carry out investigations if breaches of law and violations of labor discipline are exposed. It is believed that KRASNENKER and ITSKOV and other executives in the company are supporters of BEREZOVSKY, whose political influence and close connection to President YELTSIN's family appear to be the target of a crackdown on economic crimes. Several top executives have left Aeroflot to rejoin BEREZOVSKY's major business vehicle LogoVAZ.

There have been more changes discussed, aimed at paring down the group's management committee from 20 to 15 members. Directors have discussed cutting their link with Andava, a Geneva-based company, which BEREZOVSKY is believed to own some shares. Andava handles Aeroflot's foreign earnings. BEREZOVSKY insists that he has no connections to either Andava or Aeroflot. He said, `I don't own a single share. There are so many discussions about my name, people have the impression that I own all of Russia," the Financial Times reported. Aeroflot has officially said that the changes were designed to make its operations more transparent, upon the request of shareholders and the sackings were in response to alleged problems in

When you need to know it as it happens

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Thursday

February 4, 1999

Intercon's Daily

their respective departments. However, today's actions appear much more than strictly an internal matter. Aeroflot's offices were raided in a police action, similar to that which occurred Tuesday at Sibneft. Evidence was reportedly seized during that raid. Once again BEREZOVSKY appears in the cross-hairs of PRIMAKOV's wrath.

Gazprom, ENI Commit To Blue Stream Route

· Russian gas monopoly Gazprom and Italy's ENI on Wednesday signed a memorandum of understanding to build a natural gas pipeline connecting deep under the Black Sea Dzhubga, Russia to Samsun, Turkey, in a route known as the Blue Stream. Gazprom and ENI will each hold a 50 percent interest in the project. A company established for the project will provide 20 percent of the necessary investment, with the remaining 80 percent to be raised through debt financing. A consortium of banks are expected to provide credit guaranteed by SACE, Italy's export credit agency, and other institutions. Saipem, an Italian engineering company, in which ENI holds a 40 percent stake, has been chosen to build the pipeline. Gazprom and ENI will equally be able to use the pipeline's transportation capacity, which will be a minimum of 16 billion cubic meters. The 400 kilometers long pipeline at a depth of 2,100 meters on the bed of the Black Sea is controversial because of its high costs and its geopolitical implications. The pipeline is estimated to cost $3 billion with an additional on shore facilities cost of $1 billion. The Blue Stream will connect Turkey, a NATO member, with Russia and increase Turkey's energy dependence on Russia. The pipeline could also diminish or deny other export opportunities to other Caspian states in the region, including the US supported Baku-Ceyhan route. Russia already exports gas to Turkey, by a pipeline which runs through Ukraine, Romania, and Bulgaria. Gazprom could increase its exports at a low cost by renewing an existing pipeline to Turkey through Georgia, The Wall Street Journal reported. Instead, Russia has chosen the most expensive route. This route will allow Gazprom to secure more export markets using its hard-currency earnings abroad rather than bringing them home to be exchanged for rubles. The pipeline provides ENI with the opportunity to export gas to Turkey from the Karachagnak field in Kazakhstan. ENI and Gazprom also continue joint gas prospecting and extraction in the Astrakhan

region of Russia and are negotiating ENI's possible investment in Gazprom's equity capital.

European Republics

Utel Stake Ready For Sale

· Foreign companies are ready to sell their 49 percent stake in telecommunications company Utel, to their Ukrainian partner, the state-run giant Ukrtelecom. Leonid NETUDYKHATA, Ukrtelecom's director general declined to specify the price. Utel, one of Ukraine's most profitable companies, was formed in 1992 by Ukrtelecom with a 51 percent stake, AT&T and Germany's Deutsche Telekom with 19.5 percent each and Dutch PTT Telecom with 10 percent. Utel registered a net profit of $33 million in 1997 and invested $161 million in 1998 to develop Ukraine's telecommunications network. Ukrtelecom plans to take a government-guaranteed credit abroad to complete the deal.

Estonian Lawmakers Reject Telecom Bill

· Estonian lawmakers on January 28th voted 24 to 14 to remove from the agenda a bill on Eesti Telekom. They urged that privatization plans for Eesti Telekom be revised. The bill would have classified Eesti Telekom as a strategic company, meaning that the state would have to retain a 51 percent stake, RFE\RL Newsline reported. Under current plans, the state will have a 27.3 percent stake and the Finnish and Swedish companies Sonera and Telia 49 percent, while the remaining 23.7 percent of shares available to private investors.

South Caucasus & Central Asia

Ardzinba To Be Charged For War Crimes?

· Nezavisimaya Gazeta Wednesday reported that Tbilisi may ask the UN Security Council to demand that Vladislav ARDZINBA be brought to trial for crimes against humanity allegedly committed during the 1992-1993 Abkhaz war. The opposition Committee of Abkhazia, which represents Georgian refugees, said it intends to appeal to the International Court at The Hague to indict ARDZINBA for ethnic cleansing. The committee argues that it would expedite the restoration of friendly relations between the Georgian and Abkhaz peoples. This possibility had previously been mentioned to ARDZINBA by high level US officials, who visited him in 1998.

When you need to know it as it happens

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Thursday

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Intercon's Daily

Intercon sources report that Russian troops in Batumi, Adjaria held military exercises last week in violation with Russian-Georgian military agreements which require advance notification of any military exercises. The military agreements require two weeks notification of any planned maneuvers, providing information on location, composition of the forces to be used in the exercise, and the character of the maneuvers. This comes at a time when the Adjarian leader Aslan ABSHIDZE is refusing to accept the Georgian-Russian agreement to withdraw Russian border guards from Adjaria in May.

Azerbaijan Seeks Special NATO Relationship

· Baku, Azerbaijan in the post-Soviet era has been described as a boom town. With access to rich Caspian oil, its geo-strategic location, developing democratic institutions, a commitment to a market economy, and an experienced leader, most experts believe that Azerbaijan is on the fast-track to economic independence and a political democracy. However, since the beginning of the year the build up of this boom town has slowed considerably. The experienced, former KGB general and re-elected President Geidar ALIYEV according to Intercon sources is more seriously ill than acknowledged. In today's Wall Street Journal a number of problems have been mentioned including that internal corruption is running rampant and inhibiting development. Its high economic growth is expected to decline from 10 percent in 1998 to 7 percent or less this year. Low oil prices and oil-company cutbacks mean Azerbaijan can not count on big oil revenues for five or six more years. Besides oil companies, other foreign investors are pulling out. A $25 million RJ Reynolds Tobacco Co. factory late last year stopped making cigarettes because of losses due to unfair taxes and smuggling customs. Even Azeri businessmen have been accused of smuggling billions of US dollars out of the country; it is estimated that $4 to $5 billion have been invested in Turkey alone. Presidential adviser Vakhid AKHUNDOV said, "Using the state's liberal foreign exchange policy, people take their dollars out of Azerbaijan illegally preferring to conduct their

business elsewhere. The situation is impossible to control because there are plenty of ways to get the hard currency out of the country." The political and economic situation in Azerbaijan are further aggravated by threats that Russia and Iran are targeting Azerbaijan. This nation is the only former Soviet republic which has ejected Russian troops from its territory. Russia has responded by arming Armenia, which fought a six-year war over the Nagorno-Karabakh region. Russia denies that S-300 missiles and MiG-29 fighter jets are being supplied to the Armenian government. The Russian Foreign Ministry has countered that the weapons are being delivered to Russian bases in Armenia and not Armenia itself. This distinction is lost, given that the majority that serve on Russian bases in Armenia are Armenians. Iran, home to a large ethnic-Azeri population, in January licensed a Caspian oil project, in a move which Azerbaijan viewed as trespassing.

Azerbaijan's foreign policy adviser to the president Vafa GULUZADE called for US support, saying that Azerbaijan would welcome a US or British military base. He said, "The United States is neglecting this problem...[America is] spending billions of dollars [in the region]. You have interests, large interests, and there is a threat to your position." Azerbaijan is frustrated over Section 907, which restricts US aid to Azerbaijan in the military arena. These perceived weaknesses appear to be contributing to additional threats to Azerbaijan's sovereignty. Azerbaijan believes that the US and Turkey, while interested in oil profits, have not supported Azerbaijan in terms of security. The recent trip to Washington of Deputy Foreign Ministry Araz AZIMOV underlines how Azerbaijan is perplexed that the US is not taking a more active role in the region, especially Georgia and Azerbaijan, to protect its own assets. Azerbaijan is seeking NATO's help and plans to appeal to the security organization at their April summit in Washington. AZIMOV supports NATO developing a special relationship with Georgia and Azerbaijan that is short of a full security guarantee, but much more than the existing Partnership for Peace Program.

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

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