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, March 23, 1999

alliance commitments with the Serbs.

Prosecutor General Probes Kremlin Documents

· Russian news reported that the prosecutor's office has seized documents from the President's Kremlin administration, in a highly unusual probe. News of the investigation leaked today, despite the fact that the removal of documents, linked to the renovation of government buildings by Mabetex, has been going on for a week. Prosecutor General Yuri SKURATOV's resignation was voted down by the Federation Council on March 17th, after President Boris YELTSIN accepted it in February. Senior Presidential aide Pavel BORODIN said that a number of officials have been questions and denied any wrongdoings. "This is purely political," he said. Novye Isvestia reported earlier that BORODIN tried to force out SKURATOV, after he discovered BORODIN's shady dealings with Mabetex. BORODIN manages the Kremlin's multi-billion dollar empire of country residences, aircraft, hotels, and other properties. BORODIN added, "I see nothing wrong because this has been checked three or four times by the audit chamber, the tax inspectors, and the Finance Minsitry. Let them check some more." In an ominous development in the escalating political scandal, a top Communist legislator Viktor ILYUKHIN today openly accused YELTSIN, his family, and close aides of transferring millions of dollars into offshore bank accounts in Sydney, Australia. He claimed the money was invested in a firm partly owned by YELTSIN's daughter Tatyana

Russian Federation

Politics

Primakov Cancels Crucial US Visit

· Russian Prime Minister Yevgeny PRIMAKOV canceled his "make it or break it" trip to the US today, while flying over the Atlantic Ocean. It was reported that he was on the telephone with US Vice President Al GORE discussing the situation in Kosovo when the trip was postponed. GORE said, "I informed him that MILOSEVIC had rejected our efforts to reach a peaceful outcome in Kosovo," according to a White House press release. It is clear that possible bombing strikes could occur during PRIMAKOV's visit to the US, making diplomatic relations strained. GORE pointed out that the meeting of the US-Russia Joint Commission would be postponed. Russia has long opposed the use of a NATO force in Kosovo. PRIMAKOV earlier said a NATO force would have, "a great destabilizing effect, not just on the situation in Yugoslavia and Kosovo, but also in Europe as a whole." He had warned he would cut his trip short if NATO forces attacked Serbia. "Russia is categorically against delivering strikes on Kosovo, the military action does not have justification from any viewpoint." Consequently, PRIMAKOV will not hold critical talks with International Monetary Fund (IMF) Managing Director Michel CAMDESSUS, World Bank President James WOLFENNSOHN, GORE, and US President Bill CLINTON. It was expected that PRIMAKOV and Finance Minister Mikhail ZADORNOV would have to make a series of concession in order to win IMF money to cover its debts to the IMF and other international lenders. PRIMAKOV had conceded that if he returns empty handed, Russia will be in a dire position. Russia is unable to make the $17.5 billion payment due this year out of expected budget revenues of $22 billion. This clearly puts PRIMAKOV in a precarious position with his coalition government and on maintaining Russia's

Today's News Highlights

Russia

CB Releases Debt Swap Terms

Russia Signs Deere, Case Deals

European Republics

Ukraine-US Ratify Nuclear Deal

Netanyahu Visits Three Nations

Ukrainian Industries For Sale

South Caucasus & Central Asia

Azeri Seizes Russian Plane

Caspian Developers To Boost Oil

IMF Mission In Tajikistan

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DYACHENKO. The Kremlin had no comment on ILYUKHIN's charge.

Skuratov Continues Mabetex Investigation

· Russian Prosecutor General Yuri SKURATOV is meeting today with Swiss counterpart Carla DEL PONTE to share information on the relationship between Russia and Swiss company Mabetex. SKURATOV is preparing a report which is said to expose illegal deals between the Kremlin and Mabetex, which was contracted to do repairs to the Kremlin and other government buildings worth $300 million. Mabetex is also suspected of bribing high officials in Moscow. Mabetex president Behgjet PACOLLI denied his company was involved in any wrongdoing. He added, "We want to put an end to the slander campaign against Mabetex and its partners in Russia." According to Dominic RAYMOND of the office of the Swiss federal prosecutor, the Swiss delegation is not taking to Moscow the materials seized during the search of the Mabetex head office in Lugano on January 22. These materials are being analyzed by Swiss authorities and only after this work is concluded, the Swiss will decide whether to transfer the information to Russia or not.

Economy

Ruble = 24.32/$1.00 (NY rate)

Ruble = 24.29/$1.00 (CB rate)

Ruble = 26.46/1 euro (CB rate)

Value Of Restructuring Deal Reduced

· Russia's Central Bank on Monday finally released some details on the proposed restructuring of short term domestic debt (treasury bills and bonds), which has drastically reduced the value of a previously announced deal. The Bank said that foreign holders of domestic debt can repatriate proceeds at four monthly actions beginning in April for which it will only provide only $200 million of its foreign reserves. The Wall Street Journal reported that the preliminary deal entailed Russia offering $550 million at 11 monthly auctions. This reduced the previous deal valued at three cents to five cents on the dollar, to be worth closer to one cent. Out of the 19 member bank committee representing foreign bond holders, Deutche Bank, Chase Bank Manhattan, and Credit Lyonnaise accepted Russia's deal before the Central Bank had released the final terms. Credit Suisse First Boston (CSFB), estimated to represent about

40 percent of all foreign bondholders, said it would refuse the deal no matter what the final terms were. CSFB has established a Nikitsky Recovery Fund, which will invest in Russian infrastructure projects that generate hard-currency revenue. Russia has given the other hold out banks until April 15th to accept or refuse the new restructuring terms.

Business

Deere, Case Separately Sign Agricultural Deals

· In connection with the Russian-US Intergovernmental Commission session on economic and technological cooperation which was to be held in Washington, DC this week, Russian Deputy Prime Minister Gennady KULIK signed two agricultural deals to buy farm equipment worth $2 billion from John Deere & Co. and Case Corporation. Russia needs grain harvesting combines, multipurpose tractors and processing equipment that would make grain harvesting and storage more efficient.

KULIK and Chief Executive Officer of John Deere and Co. Hans BECHERER signed an agreement Monday at Deere headquarters for the distribution and servicing of farm equipment to Russia. The agreement formalizes responsibilities for financing, distribution, servicing as well as production and investments in the region. Financial experts, representing several major international banks, were included in the negotiations. However, specific details and financial terms were not disclosed. BECHERER said, "This partnership represents a profound step in the revitalization of the agricultural sector of Russia. He added that taking into account Russia's huge potential for agricultural production, this partnership is quite natural for John Deere, a world leader in the production of agricultural machinery. KULIK said, "we are pleased to join in this project with the premier farm machinery company, John Deere, because it is so important to Russia."

For Case Corporation, clinching this deal makes up for an aborted deal for 500 combines, which failed due to the financial crisis in August. Under the deal with Case, it could form joint ventures to make combines, tractors, and farm implements locally in Russia and provide serves for the Russian agricultural sector. Case has not decided whether it will build new plant or use existing Russian plants.

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President of Case, Stephen LAMB said, "We look forward to assisting Russia with the development of a highly efficient, self-funding agricultural sector that assures a continuous supply of equipment and expertise to Russian farmers." He added, "we have more than 5,000 Case units in operation throughout the CIS [Commonwealth of Independent States], along with a network of distributors, sales representatives and service centers." LAMB and KULIK agreed that the aim should be to create an entrepreneurial-style agricultural sector in Russia that can be sustained in the future and serve as a catalyst for additional investment.

the two countries. Kuchma said Ukraine attached importance to expanding cooperation with Israel and supported its efforts in the Middle East peace process. They also signed a treaty on avoiding double taxation and to work out measures to protect Israeli investments in Ukraine. Bilateral trade amounted to $174 million in 1998, up 39 percent from 1997. But Israeli investments in Ukraine total only $12.6 million.

NETANYAHU failed to persuade his Russian counterpart to cease aid to Iran's nuclear and long-range ballistic missile programs. PRIMAKOV stressed, "I can say very plainly and clearly that Russia observes all international export standards and is doing its best to prevent any leaks that might help the proliferation of weapons of mass destruction." He added that to the best of his knowledge, Iran does not have missiles which could strike Israel. PRIMAKOV said he was, "satisfied with the progress achieved in the bilateral relations." "We believe our relations have improved a lot during the time your government has been in office," he told NETANYAHU. The two sides agreed to set up a joint mechanism to supervise the transfer of non-conventional Russian weapons to Iran, in which the Israeli and Russian intelligence services will "exchange information." The Israeli Prime Minister also encouraged Russia to take a more active role in the Middle east Peace process. NETANYAHU said that the sides had discussed some economic aspects of their bilateral relations, especially the problem of investments. It was decided to set up a fund to provide economic guarantees to business partners. PRIMAKOV also said that the government would step up its efforts to combat extremism against Jewish groups.

In Georgia, NETANYAHU and Israeli Foreign Minister Ariel SHARON met with SHEVARDNADZE and participate in festivities marking the 2,500 years of Jewish community life in the country. The Georgian President noted that the visit reached a new level of bilateral relations and cooperation between the two countries. The meetings and talks in Georgia focused on the development of economic and trade cooperation, bilateral political relations, the planned pipeline from Baku to Ceyhan via Georgia, the situation in the Caucasus, in Europe and in the Middle East. NETANYAHU noted that, "Any additional supply of energy resources in the world is always something that is welcomed in Israel." Geor

European Republics

Ukraine Ratifies Nuclear Deal With US

· On Friday, the Ukrainian Parliament ratified a deal with the US, which will allow Ukraine to import needed modern technology to revamp its troubled nuclear industry. Ukraine and US signed the treaty on peaceful cooperation in the nuclear energy field in May 1998. The deal was brokered in March, after US Secretary of State Madeleine ALBRIGHT was able to persuade Ukraine not to participate in the building of the Bushehr nuclear power plant in Iran. A total of five nuclear plants operate 14 Soviet-designed reactors, which generate almost 50 percent of the nation's electricity. US technology will help ensure the safety of its nuclear reactors. Director of the nuclear energy company Energoatom Gennady SAZONOV said, "We welcome the ratification and see that it strengthens our cooperation with the United States and allows us to improve safety of all nuclear equipment."

Netanyahu Tours Ukraine, Russia, Georgia

· Israeli Prime Minister Benjamin NETANYAHU met with Ukrainian President Leonid KUCHMA, Russian Prime Minister Yevgeny PRIMAKOV, and Georgian President Eduard SHEVARDNADZE during a three-day official tour. The focus of his visits are to boost bilateral ties, halt alleged Russia's weapon technology transfer to Iran from Russian companies and institution, visit with Jewish communities of each nation, and discuss the Middle East peace process.

KUCHMA and NETANYAHU signed Sunday a memorandum of understanding on security matters and other documents on military cooperation between

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gia and Israel signed an agreement to expand military cooperation.

Ukrainian Industrial Giants To Be Privatized

· The Ukrainian government has ordered that 12 industrial giants be prepared immediately for sale to private owners. Specifically, the government is offering a 53 percent stake in the Illich Metallurgical Plant, a 52 percent stake in the Odessa Oil Refinery, and a 29 percent stake in the Turboatom, which manufactures nuclear power plant equipment, RFE\RL Newsline reported. It appears that the government is hoping to entice back foreign investors and raise revenues to pay off debts obligations.

South Caucasus & Central Asia

Azeri Seizes Russian Cargo Plane

· Azerbaijan Custom officials have seized a Russian AN-124 Cargo plane, carrying six MiG-29 jet fighters, which landed in Baku for refueling. The plane also carried other military equipment and 30 pilots and technicians. Initially, the crew said they were going to Yugoslavia, a Russian ally under an international arms embargo. Later, they said their destination was North Korea; their itinerary confirms this. The Russian Foreign Ministry gave yet another answer, saying the plane was headed to Slovakia. It stated that a Russian plane belonging to the Polyot Air Company was detained at the Baku. The Ministry spokesman Vladimir RAKHMANIN said the plane was performing a flight on the Taldy-Kurgan—Bratislava route carrying a cargo belonging to Kazakhstan to a destination in Brataslava, Slovakia. Two spokesmen at Slovakia's Defense Ministry said they were not aware of any planned MiG deliveries. Russia has not been notified of the reason for the plane's detention.

Caspian Developers To Counter OPEC Cuts?

· While OPEC member nations and four others meet in Vienna today to approve cuts in oil supplies, Caspian Sea oil producers are making plans to boost production and reduce costs. Azerbaijan Interna

tional operating Co. (AIOC) is planning to increase oil supplies through Georgia's Black Sea port of Supsa and Russia's Novorossiisk. It is also seeking to reduce operating costs by more than 15 percent, cutting its capital spending budget almost in half. The consortium is trying to lower production costs from $6 per barrel to less than $3. BP Amoco said it plans to more than double its production to 5.25 million metric tons this year or about 105,000 barrels per day, The Journal of Commerce reported. Caspian producers appear to be bolstering their positions, after a year of dry wells and dropping revenues, before making a decision on the main export pipeline. At a Washington Central Asian-Caucasus Institute Conference on Monday, Turkish Ambassador for Cyprus and Greek Affairs Yigit ALPOGAN said that Turkey is pushing for the Baku-Ceyhan pipeline decision to be made before its elections on April 18th. The decision to be made by AIOC and the Azeri government has been delayed since October. The estimated cost of the pipeline and low reserves have pushed the oil consortium to request incentives from Turkey. ALPOGAN said that Turkey is working to guarantee financing for the project up to $3 billion. A new round of the negotiations on construction of a pipeline to link Azerbaijan's capital Baku with Turkey's Mediterranean port of Ceyhan will resume next week. The director of International Affairs for BP Amoco Michael TOWNSHEND said that negotiations were going very well.

IMF To Monitor Tajik Economic Policies

· An International Monetary Fund (IMF) mission arrived in Dushanbe on Monday to monitor the implementation of the Tajik government's short-term economic program for 1998 to 2001. The mission led by Tapio SAAVALAJNEN will familiarize itself with the basic macro-economic indexes. The IMF mission believes that if the Tajik government ensures the necessary parameters for the implementation of the monetary, tax-and-budget and financial policy, Tajikistan can expect an allocation of $20 million, the second tranche of the credit under the program of enlarged crediting of restructuring.

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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