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

Tuesday, February 9, 1999

Russian Federation

Politics

Russia Attacks NATO Expansion

· Russian Deputy Foreign Minister Yevgeny GUSAROV attacked NATO's plans to strategically expand, demanding recognition of a "red line" around borders of the former Soviet Union and rejection NATO membership for former Soviet republics. He said, "The red line principle, which means that membership of the former Soviet republics in NATO is inadmissible, remains fully valid. We do not possess the right to veto this process, but we have not changed our negative attitude to it, and have the right to express our opinion, and to insist that it is heeded." GUSAROV stressed this firm opinion to a top-level meeting of NATO defense ministers, senior officers, and security experts. He added that NATO expansion, already approved for Poland, Hungary, the Czech Republic, would undermine security and stability in Europe, the Financial Times reported. In sidelines talks with Hungarian Foreign Minister Janos HERMAN today, Russian Deputy Foreign Minister Alexander AVDEYEV confirmed Russia's opposition to NATO's expansion plans, stating that NATO's enlargement is threatening with drawing new division lines in Europe. The Russian side stressed the necessity of NATO's new members fulfilling the item of the NATO-Russia Founding Act, providing for non-deployment of the alliance's substantial forces or military infrastructure on their territory. The Hungarian side said it was eager to develop relations with Russia, and AVDEYEV and HERMAN touched upon a schedule for future political contacts. They discussed trade and economic relations, and Moscow admonished Budapest for imposing tariffs and other measures that are hampering the development of mutual trade, and called for their lifting. Russia still has not accepted its invitation to attend the 50th anniversary summit of NATO in Washington in April.

Economy

Ruble = 23.05/$1.00 (NY rate)

Ruble = 23.05/$1.00 (CB rate)

Uneximbank Officially Defaults

· Russia's Uneximbank has officially declared itself in default of its huge Eurobond obligation, making it the first Russian institution to renege on Eurobond debt. The Russian government has defaulted on $40 billion in domestic bonds and missed payments on Soviet-era debt, but continues to service its Eurobonds. The bank has informed creditors its Eurobonds, worth $250 million in debt, must be restructured. Uneximbank said in a statement that it intends to meet all its obligations, but urged creditors to agree to a restructuring of the debt. The bank's press secretary Tuyana ONGOTOYEVA today said that Uneximbank plans to restructure its debt to Eurobond holders on the principle of equal treatment of all creditors. Uneximbank on Thursday will hold a briefing meeting with foreign Eurobonds holders to negotiate the debt restructuring in London. The bonds, which mature in August 2000, were issued in 1997. Uneximbank made its last Eurobond payment on August 1, 1998, two weeks before the government defaulted on treasury debt and devalued the ruble. Analyst argue that Uneximbank's default could trigger other Russian groups to default. Oil group Tatneft came close to defaulting on Eurobonds but arranged a restructuring. The banking branch of Vladimir PO-TANIN's financial industrial group, Uneximbank is in

Today's News Highlights

Russia

Gazprom-ENI Seek Credits

Oil Merger Critical To Industry

European Republics

Latvia Determined To Join NATO

Ukraine FM To Redeem T-Bills

Ukraine Builds Pipeline For Debt

South Caucasus & Central Asia

Georgia To Combat Extremism

Shevardnadze On 1998 Attack

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the process of merging with two other giant, faltering Russian banks, Most and Menatep, to form a united bank, Rosbank. POTANIN's most prized asset oil company Sidanko, in which BP Amoco owns a 10 percent stake, is facing bankruptcy proceedings, due to low oil prices and the financial crisis in August.

US-Russia Steel Negotiations Continue

· The US Commerce Department says US and Russian officials in Rome continue to discuss a "suspension agreement" that would cap Russian steel exports to the US. Both sides hope any agreement would result in a cap on Russian hot-rolled steel exports to the US in exchange for the US dropping an anti-dumping case against Moscow. Today's meeting in Rome comes ahead of Friday's announcement by the department on its preliminary anti-dumping and countervailing duty findings against hot-rolled steel imports from Russia, Japan and Brazil. US officials have greater flexibility to deal with Russian steel exports compared to Japan and Brazil, since Russia is not a member of the World Trade Organization (WTO), the United Press International reported. The US Commerce Department noted that for December 1998, imports of hot-rolled steel products from all countries decreased 67 percent from November's import levels, while imports of these products from Russia decreased 90 percent.

Business

Gazprom-ENI Form JV To Attract Financing

· Russian gas monopoly Gazprom and Italian energy group ENI will form a joint venture to attract $1.2 billion in credits to build the Blue Stream gas pipeline to Turkey. This pipeline, laid at a depth of 2,100 meters under the Black Sea, would run from Russia to Turkey with a capacity of 16 billion cubic meters per year. The Blue Stream would Russia's only direct line to paying markets. Reuters reported that under an existing agreement Italian import-export credit agency Sace will guarantee $800 million of the $1.2 billion. Underwriters of the credit include Italian banks Mediocredito Centrale and Banca Commerciale Italiana and Germany's West LB. One official said, "The remaining $400 million may be guaranteed by German agency Hermes and Japanese Eximbank." He added that the joint venture will be set up in a country with a stable tax regime, a vital consideration in the event of a sharp fall in gas prices. Russia and Turkey signed an intergovern

mental agreement in 1997, under which Russia is to deliver 360 billion cubic meters of gas over 25 years between 2000 and 2025. Russia hopes to retain its role as Turkey's primary gas supplier. Turkey's gas demand is predicted to double from 10.1 billion cubic meters in 1997 to 19 billion cubic meters next year and 54 billion cubic meters in 2010, The Journal of Commerce reported. Besides the challenge of finding financing to back the project, Georgia has raise questions over whether a consensus is needed from Black Sea states for construction, which is the same argument Russia has used in the Caspian Sea.

Generalov Expresses Urgency For Oil Merger

· Fuel and Energy Minister Sergei GENERALOV told the Russian State Duma on Monday that the state must take three active measures to save the Russian oil industry. He said, "The crisis in the Russian oil industry affects not only the energy but also the economic security of the state." His plan calls for: first, improving the system of taxation; second, strengthening state management and regulation in the oil sector; and third, improving the oil sector's structure. The state should also address the problem of non-payments, primarily non-payments by budgets of different levels, GENERALOV said. He believes that the oil industry can be stabilized by way of creating a state oil company through the consolidation of Rosneft, Slavneft and Onako. The state owns controlling interest in all three companies, which extract a total 10.6 percent of all oil in Russia. Kondpetroleum, Chernogorneft and the Angarsk Oil Refinery, which have been privatized and now face bankruptcy may be offered a deal to join the merger in exchange for their shares. GENERALOV said that it is not clear yet whether the Tyumen Oil Company will join the alliance. The Tyumen Oil Company continues to insist on its consolidation only with Slavneft. The total oil reserves of the future state oil company are estimated at 1.6 billion tons, which will last more than 50 years. If other oil companies decide to join the new company, its reserves may exceed 2.7 billion tons, which means more than 66 years.

European Republics

Latvia Steadfast To Joining NATO

· Despite a statement made by German Chancellor Gerhard SCHROEDER on Saturday that the NATO Alliance needs a period of consolidation before

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accepting new members, after Hungary, Poland, and the Czech Republic, Latvia remains steadfast to joining NATO. A Latvian Foreign Ministry spokesman said, "NATO has declared its open door policy and Latvia's goal remains the same, to join the alliance in the foreseeable future." The Alliance indicated it will not accept any new members at its next summit in April in Washington. Latvian President Guntis ULMANIS said, "I have no doubt that NATO expansion cannot be stopped. It will continue." ULMANIS believes that this process cannot be impeded by the statements made by Russian politicians and statesmen. The spokesman added, "The Cold War is over and we believe there are no more dividing lines [nor] red lines in Europe. That's why we certainly support NATO-Russia cooperation which we believe is a step toward a future more stable Europe." Former Soviet satellites Latvia, Lithuania, and Estonia have all expressed that NATO membership is vital to ensure that they will never again come under Moscow's control.

Georgia has also expressed an interest in joining the alliance. Georgian borderguards will participate in international military exercises "Sea Breeze-99", scheduled for Fall, 1999, within the framework of the NATO Partnership for Peace Program. Chairman of Georgia's Borderguards Lieutenant-General Valery CHKHEIDZE has met with the leadership of the International Atomic Energy Agency (IAEA) and visited the NATO headquarters, as well as met with the leadership of the state border guarding service and the Defense Ministry of Austria. At NATO headquarters, CHKHEIDZE stressed Georgia's interest in the NATO Partnership for Peace Program.

Ukraine To Redeem Treasury Bills

· Ukraine's Finance Ministry last week told domestic banks that it will redeem $51 million worth of government treasury bills maturing in February in several installments between May and September of this year. The Association of Ukrainian Banks on Monday warned that this could cause a run on the banks. The Association said, "The conversion order was approved without consulting the banks, without taking into account their liquidity level, and it threatens to cause panic in the financial market," the Financial Times reported. Treasury bills make up virtually all of the short-term liquid assets of the Ukrainian banking system. Ukraine's financial situ

ation is partially due to the country's failure to meet conditions for a $2.2 billion loan from the International Monetary Fund (IMF). Since November, three monthly installments of the loan have been frozen. Ukrainian National Bank Chairman Viktor YUSHCHENKO optimistically said, "We expect a tranche worth $157 million by the end of the first quarter...The IMF will discuss the issue of Ukraine from March 5th to March 10th." YUSHCHENKO was in Washington last week for talks with the Fund.

Ukraine To Build Pipeline For Debt

· Neftegaz Ukrainy spokesman Artur KHUBAR on Friday said that Ukraine will build a new branch pipeline between Ananyiv near Romanian border and the Black sea port of Izmail to write off the debt it owes to Russia for gas deliveries. The 550 kilometer section will be part of a new gas pipeline from East Europe to Turkey and the Balkans. The project is to be implemented by 2002 with its cost estimated at $250 million. The prime contractor of the project is Neftagaz Ukrainy. With the new section of the pipeline operational, the Russian gas monopoly Gazprom will increase its gas exports by 25 cubic meters per year. The Ukrainian side plans to raise the transit dues for Gazprom from the current $1.09 per a thousand cubic meters of gas transported over each 100 kilometers, to $1.75, Itar-Tass reported.

South Caucasus & Central Asia

Georgia To Combat Extremism

· Georgian President Eduard SHEVARDNADZE on Monday said that political extremism should be, "eradicated from our planet's political life." He stated that, "On our part, I would like to reassure [everyone] that Georgian authorities will not allow the existence of any extremist groups of any such organizations that will be directed in any manner or any form against Russia, its authorities as well as against neighboring countries." He added, "It is well known that I do not accept any kind of violence, war or revenge, but I am determined to declare unconditional war against political extremism, terrorism, aggressive separatism, and against most certainly corruption, which is the activator of all these negative activities." Georgia in early 1998 launched a presidential campaign against graft and corruption which SHEVARDNADZE believes is the root to extremism and the violence that follows. He called on the

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international community to pool their efforts jointly to combat extremism using lawful and constitutional methods. In response to an article published in Sunday's The New York Times on corruption and steps Georgia has taken since its civil war, The Georgian Republic reprinted the entire article with the following editorial comment, "It is a most serious reminder to our government, to every honest citizen and our entire society, that it is of utmost importance to fight corruption and root out this ill." The writer says that despite, "strong presidential measures to overcome the evil of corruption, the signal from across the ocean is just another indication that: overcoming internal problems of Georgia is not only a domestic issue." He points out that, "Georgia's internal circumstances determine its foreign image."

Shevardnadze Comments On 1998 Attack

· Georgian President Eduard SHEVARDNADZE in his weekly national radio address on Monday commented on the assassination attempt on his life one year ago today when his motorcade came under fire in the capital Tbilisi and the forces within Georgia that foster violence. He said, "workers of security of the Georgian president at the price of their life rescued not only the head of state but the whole country from a new civil standoff and chaos." One of his bodyguards was killed when the motorcade was waylaid by a group which was said to have been through special training at a base near the settlement of Avtur in Chechnya. Thirteen Georgians, arrested and charged with participation in the attack, will soon go on trial in Georgia. Georgian investigators worked with the assistance of the Russian Prosecutor-General's Office and from Chechnya's law and order services. A thorough presentation on the security of SHEVARDNADZE was aired on the Discovery Channel last month in a program called "Protecting The President." It described both assassination attempts in August 1995 and February 1998. Georgia's former finance minister Guram ABSANDZE, who was in the government of late President Zviad GAMSAKHURDIA, was arrested in Russia's Smolensk region on the warrant of the Prosecutor-

General's Office and handed over to Georgia in March of 1998. Georgian investigators said he was one of masterminds behind the attack on Shevardnadze. ABSANDZE is implicated in funding preparations for the attack. Georgia is still waiting for Russia to deport Igor GIORGADZE, who fled Georgia for Russia just following the 1995 attack. He is wanted under an Interpol warrant [A-641/12-1995], issued September 26, 1995. GIORGADZE has been traveling free in Russia, despite repeated request by the Georgian government for his deportation. GIORGADZE continues to conduct anti-SHEVARDNADZE propaganda through support found in the Russian media. Recently, in the Russian newspaper Zavtra, a huge picture of GIORGADZE in a general's uniform was published in what is described as his pre-election campaign. GIORGADZE forecasted his victory with the article's title "The Future Is Ours," echoing posters found in Zugdidi on SHEVARD-NADZE's birthday. GIORGADZE continued to talk about his destabilization plan for Georgia. The repeated parading of GIORGADZE before the Russian media, has clearly backfired on Russia. Georgia's refusal to re-sign Commonwealth of Independent States (CIS) security documents at the CIS summit last week is seen as part of the political blow-back against Russia for these hostile actions. In response to Georgian pressure, the Russian Foreign Ministry official representative Vladimir RAKHMANIN on Monday criticized the Zavtra publication as containing "impermissible" material for civilized journalism that attacks the President of Georgia. This article violates the acceptable standards of civilized journalism, especially when directed, "at the head of a friendly state." Comment: Russia is attempting to mend fences and bring Georgia back into the CIS fold. Whether this can happen without the Abkhazian resolution and the extradition of GIORGADZE remains to be seen.

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

Daily Report on Russia is published Monday-Friday (excluding holidays), by Intercon International, USA. Subscription price for Washington, D.C. Metro area: $950.00 per year. A discount is

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