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, February 5, 1999

involved prostitutes and criminal connections to a Moscow Mafia group. KOVALYOV denied the accusations, but was sacked from his post anyway. The question is will the latest Justice Minister to be removed SKURATOV be the next one to be indicted.

Chechnya Adopts Islamic Law

· Chechen President Aslan MASKHADOV has given into opposition pressures and signed an order adopting Islamic law. On Wednesday, MASKHADOV revoked the parliament's legislative functions and ordered the body to cooperate with Muslim leaders to write an Islamic constitution within three months. The opposition accuses the President of being too sympathetic with Russia and threatened to oust him, if he didn't meet their demands. Karavan SAIYEV, a fields commander with the government, said, "If we do not introduce Islam now, under the next parliament and president things will get even worse." The order will change all aspects of Chechen life, including education and the military. It still isn't clear whether the Chechen Islamic state will reflect the strict regime of the Taliban in Afghanistan or a milder version. While opposition supporters celebrated outside the Congress, others were not as excited. One Chechen woman said, "I wish I'd been killed in the war...Those who could afford to leave Chechnya have already done so, and we have been left here absolutely defenseless."

Economy

Duma Passes Budget In Final Reading

· In its fourth and final reading, the Russian State Duma today approved Russia's

Russian Federation

Politics

Ministers Speculate Who Will Be Sacked Next

· Deputy Prime Minister Gennady KULIK today speculated that Prime Minister Yevgeny PRIMAKOV is the most likely of members of the government to leave his post if President Boris YELTSIN reshuffles his government. Kommersant Daily, part owned by Alexander SMOLENSKY, suggested that Finance Minister ZADORNOV, KULIK, and First Deputy Prime Minister Yuri MASLYUKOV could lose their post in a Cabinet reshuffle. KULIK even stated the PRIMAKOV hinted he was ready to resign at the World Economic Forum in Davos last week. ZADORNOV denied that he has plans to resign. YELTSIN's representative to the Russian State Duma Alexander KOTENKOV said, "There are no decisions and no decrees are being prepared on removing any deputy prime ministers." He added that speculation over the President's health and uncertainty between YELTSIN and PRIMAKOV was a provocation meant to disrupt approval of the budget.

YELTSIN, head of the presidential administration and secretary of the Security Council Nikolai BORDYUZHA, State Duma speaker Gennady SELEZNYOV, and Deputy Prime Minister Yuri MASLYUKOV will attend a meeting of the Russian Security Council, which will discuss priority measures to stabilize the nation.

Kovalyov Charged With Gross Embezzlement

· Russian former Justice Minister Valentin KOVALYOV, who was dismissed from his post after a sex scandal in July, 1997, was arrested in Moscow today on charges of misuse of funds and illegal possession of a pistol. The Interior Ministry stated that KOVALYOV was put in custody in the Butyrskaya isolation jail. The scandal surrounding KOVALYOV

Today's News Highlights

Russia

CB Allocation Info. Withheld

Pimakov Demands Payments

Berezovsky Business Raided

European Republics

Belarus Stron Industrial Growth

Baltic States Consider Economy

South Caucasus & Central Asia

Morningstar Visits Georgia

Azeri, Georgia Hold On CIS Pact

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February 5, 1999

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1999 budget in a vote of 308 to 58, with six abstentions. The budget passes after an earlier amendment which cut the presidential administration spending by 20 percent instead of the originally approved 40 percent. The amendment ended a row with the Kremlin, which President YELTSIN threatened to veto the budget. The budget will now be passed to the Federation Council for approval and then to YELTSIN for signing Deputy head of the budget committee Vladimir NIKITIN warns that there may be disagreement in the Federation Council over distribution of funds between the federal and regional governments. The budget calls for total revenues of 473.82 billion rubles ($20.5 billion) and spending of 575.9 billion rubles, giving a deficit of 2.53 percent of gross domestic product. Addressing the Duma, Prime Minister Yevgeny PRIMAKOV pledged continued support to the real economy, social benefits, and the fight against crime and corruption. He said, "There will be a strengthening in the fight against crime and corruption. You have already seen that some people do not like this, but we will stubbornly continue along this path and no one will turn us from it," referring to raids of his rival Boris BEREZOVSKY's businesses. The Prime Minister said that forming a Russian development bank to support industry and an agency to restructure the bank sector are top priorities of his government.

Ruble = 23.12/$1.00 (NY rate)

Ruble = 23.14/$1.00 (CB rate)

Ruble = 26.2/1 euro (CB rate)

Sep Oct Nov Dec Jan Feb

Central Bank Allocation Info. Withheld

· Before resigning earlier this week, Prosecutor General Yuri SKURATOV, in a letter to the parliament reported in the Moscow Times, said that the Central Bank paid a tiny obscure offshore company, The Financial Management Company, to manage some $50 billion in foreign currency reserves and credits from the International Monetary Fund (IMF). The Financial Management Company managed the bank's money from 1993 to 1998. SKURATOV said that the Central Bank was responsible for the financial collapse in Russia on August 17, 1998. He added that the Central Bank sold state property abroad in direct violation of Russian law and gave its employees frivolous perks. These include a 600 million rubles social fund and use of official bank credit cards with credit limits of $5,000 to $15,000 for the purchase of personal items. SKURATOV had targeted his investigation on former Bank chairman Sergei DUBININ among other top officials. Current chairman Viktor GERASHCHENKO has accused the prosecutor general's office of trying to damage the Bank's reputation with what he called unfounded accusations against its top managers.

In connection with the prosecutor's office the Accounting Chamber is also conducting an investigation of the Central Bank's activity with regards to allocation of funds from an IMF disbursement in July of $4.8 billion. They believe that the sensitive evidence is being kept secret by the Central Bank, IMF, and the US Treasury. This disbursement is of particular interested because it was the first time that the Fund issued the loan to the Central Bank and not to the Russian government. The money was deposited by the Central Bank in their account at the National Bank of New York. From there $1 billion went to the Russian Finance Ministry and the rest appears to have paid for US treasury bills, The Journal of Commerce reported.

GERASHCHENKO is withholding evidence on a legal technicality and it appears the other players, the US and IMF, are protecting the men who made decisions prior to the economic collapse. These men include, DUBININ, Anatoly CHUBAIS, Yegor GAIDAR, and Sergei KIRIYENKO, all former officials who Washington hopes will come to power again replacing the PRIMAKOV government.

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CIS Must Pay Energy Debts

· Russian Prime Minister Yevgeny PRIMAKOV said that Commonwealth of Independent States (CIS) which consume Russian-produced fuel must pay their debts or keep their policies in line with Moscow's. "We cannot pile up these debts indefinitely strictly for political reasons, as not all of our debtors are in a political accord with us," PRIMAKOV told his Cabinet. He instructed Minister for the CIS Boris PASTUKHOV to develop a strategy on how negotiations should be held with debtor nations, including suspending oil and gas deliveries to the worst payers. Board Chairman of the Russian Unified Energy Systems (UES) Anatoly CHUBAIS said that debts owed by CIS energy consumers to Russia have exceeded $640 million. He pointed out that, "a certain breakthrough had been made in payment of overdue debts by the CIS countries," by means of paying off overdue debts, turning over part of property belonging to energy sectors of the CIS debtors countries to Russia. Russia has agreements with Ukraine and Belarus to receive food as payment for part of the debt for gas supplies. Comment: PRIMAKOV's increasing strident demands for NIS countries to follow Russia's lead within the CIS or pay their debts to Russia is the latest effort to coerce agreement rather than obtain consensus. These short-sided tactics can only make enemies out of their neighbors and potential friends.

Business

NFQ, Another Berezovsky Business, Raided

· Prosecutors on Thursday searched the office of an advertising company reportedly belonging to Russian oil-to-media tycoon Boris BEREZOVSKY. The NFQ Advertising Company had been working on a contract for the Aeroflot Russian Airlines. It is believed that this raid as well as searches at Sibneft and Aeroflot are being used to gather evidence against BEREZOVSKY on economic corruption charges. "Such operations are conducted upon investigator's decisions and data about them are made public only upon their completion," a police officer explained. NFQ spokesman Igor MALOV said that the company head Boris GOLDMAN was in the office speaking to investigators in the presence of his lawyer. GOLDMAN said that the police behaved correctly and seized, "charter documents and all

documents about contractual relations with Aeroflot," made a property inventory, but arrested none of its staffers. NFQ was engaged in an advertising campaign for the airline three years ago and now has, "a small agreement with it about outdoors advertising." He is meeting again with prosecutors today. Prosecutors are also questioning former defense minister Yevgeny SHAPOSHNIKOV. When he was head of Aeroflot, he directed to airline to channel hard-currency earnings to a Swiss company half owned by BEREZOVSKY. Other Aeroflot officials, accused of violating foreign-currency legislation and office abuse, have been involved in an investigation since January 18th.

European Republics

Belarus Leads CIS Industrial Growth

· According to information of the Russian and CIS statistics committees, Belarus had 1998's biggest industrial production growth among the former Soviet republics, registered at 11 percent. The growth of industrial production in Kyrgyzstan and Tajikistan exceeded eight percent. The lowest growth, 2.2 percent, was registered in Azerbaijan. Six countries of the Commonwealth of Independent States, including Russia, registered a drop in industrial production. Moldova's industrial slump was the biggest, amounting to 11 percent. Next was Russia with a 5.2 percent drop, then Georgia with 2.7 percent, Armenia with 2.6 percent and Ukraine with a 1.5 percent decline. No data is available on Turkmenistan's industrial figures.

Baltic Premiers Discuss Single Economic Space

· The Prime Ministers of the three Baltic states are meeting in the Lithuanian capital today to discuss the creation of a single economic space. Vilis KRISTOPANS of Latvia, Mart SIIMANN of Estonia and Gediminas VAGNORIUS of Lithuania are expected to exchange opinions on the strengthening of military cooperation between their countries and on prospects for admission to NATO and the European Union. The Prime Ministers will discuss joint fight against crime, as well as cooperation in education, culture and the social sphere. Resolutions are expected to be passed on all issues discussed at the one-day meeting.

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South Caucasus & Central Asia

Morningstar, Georgia Discuss Caspian Oil

· US special adviser for Caspian issues Richard MORNINGSTAR met in Tbilisi on Wednesday with senior Georgian officials. MORNINGSTAR described the talks as "fruitful." These talks concentrated on the transportation of Caspian oil and gas to international markets across Georgian territory. MORNINGSTAR said that intensive talks are underway with the Turkish government on how to make the planned Baku-Ceyhan oil export pipeline "economically lucrative," RFE\RL Newsline reported. He stressed that the route via Iran is not an alternative, adding that oil companies engaged in exploiting Azerbaijan's Caspian oil, "had to face up to harsh economic realities." MORNINGSTAR expressed hope that conflicts will not jeopardize the exploitation of the oil pipeline from Baku to Supsa.

Georgia, Azerbaijan Delay Signing Security Pact

· The foreign ministers of Russia, Belarus, Armenia, Tajikistan, Kazakhstan and Kyrgyzstan on Thursday confirmed their readiness to participate in the Commonwealth of Independent States (CIS) Security Treaty at the CIS Council of Foreign Ministers in Moscow. Uzbekistan on Wednesday announced that it would terminate its membership to the security group when it expires in April. Uzbekistan's Foreign Minister Bakhodyr UMAROV said Tashkent opposes Russia's military activity in some parts of the commonwealth. He added that, "The Collective Security Treaty, in its current form, does not meet present-day requirements, and does not perform its functions." In response Russian Prime Minister Yevgeny PRIMAKOV, speaking at a Cabinet meeting, demanded that CIS countries that can not support Russia's policies should promptly pay their debts to Russian firms, particularly in the energy sector. PRIMAKOV's statements alter the previous Russian position and clearly state that the organization led by Russia in which other members follow. In the past, Russia described the organization as a cooperative

body. He bluntly said to member countries, You do it our way or pay your debts to us and get out. Azerbaijan presidential adviser Vafa GULUZADE hinted that Azerbaijan should consider not extending its participation in the security agreement because the treaty failed to end Armenia's aggression against its fellow CIS state, Azerbaijan. Azeri Foreign Minister Tofik ZULFUGAROV said, "It is unlikely that Azerbaijan will join the CIS Collective Security Treaty."

Georgia said it would reconsider its membership to the security pact, if reforming amendments are made. Georgia's Foreign Minister Irakly MENAGARISHVILI said, "Georgia for more than two years has declared the Tashkent Agreement in its current form or condition does not coincide with the political reality within the countries of the Newly Independent States (NIS)." He stressed that is why Georgia is insisting on the adoption of this CIS Security Agreement to this reality or a drastic revision of key ideas of the agreement. "The Tashkent agreement under current formulation has not worked and Georgia itself has experienced this failure concerning its territory integrity as well as other issues including the illegal Russian removal of military equipment worth approximately $8 billion." He added that Georgia does, "not accept the formulation of external threats and the definition of external borders as defined by Russia. Unfortunately we have not begun this adaptation process within the CIS and that is why Georgia finds it unacceptable to sign this agreement at this time." Comment: At a time when alternative energy sources and low oil prices are available, and Russia's tough attitudes infuriate its neighbors, particularly in the South Caucasus, PRIMAKOV's proposal could backfire. This heavy-handed coercive approach to members of the NIS can only further aggravate relations and drive them away. Western nations should to take heed of PRIMAKOV's threats and consider retiring debts from NIS of those who wish to remove themselves from the increasing pressures of Russia. Russia could then receive the aid which its needs and the sovereignty of the NIS could be bolstered by removing this lever for blackmail.

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

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