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

Tuesday, March 30, 1999

Russian Federation

Politics

Primakov Mission To Belgrade Fails

· The meeting between Russian Prime Minister Yevgeny PRIMAKOV and Yugoslav President Slobodan MILOSEVIC in Belgrade went well over the scheduled amount of time, lasting six hours and producing what Russia calls encouraging signs toward a compromise. PRIMAKOV's mission was "to coordinate steps [with MILOSEVIC] which could help find a political solution to the conflict which has emerged because of NATO's military action," according to Russia's Foreign Ministry. MILOSEVIC said he will cut back his forces in Kosovo and allow refugees to return to their homes, if NATO halts its airstrikes. He said he is ready for constructive peace talks and outlined six criteria necessary for talks to begin, primarily the end of bombing. An unnamed diplomat said that PRIMAKOV and MILOSEVIC discussed, "a wide range of questions—political, military-political and security." PRIMAKOV's negotiations were preceded by Foreign Minister Igor IVANOV and Defense Minister Igor SERGEYEV's meetings with their Yugoslav counterparts. Following these talks, PRIMAKOV flew to Bonn for talks with Germany Chancellor and holder of the European Union rotating Presidency Gerhard SCHROEDER. He briefed SCHROEDER on his talks with MILOSEVIC and presented new proposals. Despite Russia's belief that MILOSEVIC's offer was a "good start," SCHROEDER said these proposals were unacceptable and no basis for settlement. British Prime Minister Tony BLAIR prior to the talks said, "For every act of barbarity, every slaughter of the innocent, MILOSEVIC must be made to pay a higher and higher price." Britain's position is that any deal to end fighting in Kosovo must ensure refugees fleeing the region could return with an international guarantee for their safety. Foreign Secretary Robin COOK said

NATO would not support the idea of a unilateral Yugoslav cease-fire in Kosovo which left Belgrade's forces in charge of the region. US Secretary of State Madeleine ALBRIGHT told IVANOV that a precondition for the return to diplomacy is an end to the slaughter of ethnic Albanians in Kosovo. It is unclear whether this message was passed on to PRIMAKOV, who is acting as a lone peace maker without coordinating his negotiations with the international community, as he did before in Iraq.

Primakov Paid By Iraq For Nuclear Information

· According to an investigative article in The New Yorker magazine by Seymour HERSH, British intelligence discovered that Prime Minister Yevgeny PRIMAKOV received a payment of at least $800,000 from Iraqi deputy Prime Minister Tariq AZIZ to help Iraq obtain strategic materials for its nuclear weapon stockpile. This confirms CIA suspicions that PRIMAKOV had been receiving payments from Saddam HUSSEIN. In the 1960s, PRIMAKOV formed a close relationship with Saddam, when the Russian official was a reporter for Pravda in the Middle East. UN weapons inspector Rolf EKEUS learned how close that friendship was, when he alerted PRIMAKOV to evidence that Russia was smuggling illegal contraband to Iraq. The Russian Foreign Minister at the time, said his government was not involved in any illegal smuggling and promised to conduct an investigation. EKEUS said he never reviewed any results of that investigation and that secret codes used by the Russians were subsequently changed. The

Today's News Highlights

Russia

Russia -IMF Loan Agreement

Rosvooruzhenie's 1998 Profits

European Republics

WB Loans Ukraine $110 Million

Gazprom To Reduce Supplies

South Caucasus & Central Asia

Aliyev Releases Cargo Plane

Exxon-Azeri PSA Effective

IMF Reviews Kyrgyz Economy

Tajik Joins Interstate Council

Politics-Economics-Business

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Tuesday

March 30, 1999

Intercon's Daily

New Yorker further reports that PRIMAKOV later hindered US efforts to monitor Baghdad's illegal weapons program. In addition, the Sunday Telegraph newspaper of London reported in February that Russia and Iraq had signed an arms deal worth $160 million to reinforce Iraq's air defenses. Any deal Russia made with Iraq would violate the UN arms embargo. EKEUS said, "It is clear that Russia is making a serious effort to control events. Saddam will get a bomb, because these materials are floating in. Everyday, they are more advanced." The Russian ambassador in Washington denied all charges of corruption against PRIMAKOV. Foreign Minister Igor IVANOV said that the report is an attempt to divert popular attention from NATO raids on Yugoslavia. "They believe that all means will do in this dirty game and they are using such unscrupulous methods. They want to divert attention from the bombing. They think that people will discuss that nonsense and forget about the aggression. No, they will not."

Yeltsin's State of Union Address

· Speaking publicly for the first time since a long hospitalization in late January, President Boris YELTSIN presented the annual State of the Union address to a joint session of the parliament. He spoke with an even voice and looked well for 20 minutes, assessing Russia's situation and outlining priorities for the year. The presidential address consisted of three sections: the economic reforms—the choice between past and future; society and power at the turn of the century; Russia and the world on the threshold in the third millennium. He said that Russia's economic crisis was intensified by the government's inability to collect taxes and control the budget deficit. "Russia's difficulties must not be blamed on the market economy, but on the ugly transitional system stuck halfway between the central planning and free market economy." He pointed out that economic reforms need to be carried out and mistakes which have been made corrected. He noted that mistakes had been made in the 1999 budget, which should be reviewed every three months. YELTSIN has set two difficult tasks which are now confronting the nation. "The first is to overcome the crisis by preserving entirely economic and political freedoms...The second is the forming of new authorities," which would guarantee free and fair parliamentary and presidential elections. YELTSIN reaffirmed Russia's course for a peaceful settlement

to the situation in Yugoslavia. YELTSIN said that the Balkans crisis, "calls not for emotional assessments, but rational and responsible actions." He added, "Russia has made its choice. We shall not allow ourselves to be drawn into the military conflict." This state of the union address unlike others in years past is not likely to shift policy decisions or the momentum in the financial markets. YELTSIN's influence has declined since he handed over responsibility for the day-to-day activities of governing Russia to Prime Minister Yevgeny PRIMAKOV. Following the state of the union address, YELTSIN met with speaker of the Russian State Duma Gennady SELEZNYOV, speaker of the Federation Council Yegor STROYEV, and the president's chief of staff Alexander VOLOSHIN. The president pointed to the need to resume the regular holding of meetings of the four, the leaders of the branches of the executive and legislative authorities.

Economy

Ruble = 24.19/$1.00 (NY rate)

Ruble = 24.18/$1.00 (CB rate)

Ruble = 25.94/1 euro (CB rate)

Russia-IMF Reach Loan Agreement In Principle

· Russian Prime Minister Yevgeny PRIMAKOV and International Monetary Fund (IMF) Managing Director Michel CAMDESSUS after a three hour meeting on Monday reached an agreement in principle on the allocation of loans. The agreement was reached after the IMF dropped its insistence that the government target a primary budget surplus of 3.5 percent of the gross domestic product (GDP). Russia promised to reach a primary budget surplus of 2 percent of GDP in 1999. Alexei ZABOTKIN an economics analyst at United Financial Group in Moscow, said, "Two percent could be a feasible figure for Russia barring any further political crises." The IMF and Russia also approved other key elements of the economic program of the Russian government and the Central Bank for 1999 and subsequent years. Neither side specified how much the IMF might provide. It had earlier been reported that Russian officials were seeking as much as $8 billion, but were likely to secure only $4.8 billion, just over the amount Russia owes the IMF this year. The IMF is sending a mission to Moscow next week to finalize the details. The IMF has called for Russia to tighten its already austere budget for 1999 and boost tax collection,

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demanding that Russia postpone proposed tax cuts and levy heavier export tariffs on Russia's powerful energy barons. The IMF mission and the government must prepare a joint policy statement to be presented to the IMF board of directors for approval as early as April 24th. The first installment is not expected until later next month. One news agency suggested that Russia could receive four installments of $1.2 billion each. The agreement with the IMF, although not finalized as yet, will spur talks between Russian and the Paris and London clubs on the restructuring of our debts and the possibility of unlocking an additional $2 billion to $2.5 billion in cash from the World Bank, Japan, and other international credit agency. The financial lifeline will help Russia meet its $17 billion in foreign debt due to be paid off this year.

Business

Rosvooruzhenie Exports In 1998 Total $2.3B

· Director General of the Rosvooruzhenie company Grigory RAPOTA announced today that weapons exported by the Rosvooruzhenie company totaled $2.3 billion in 1998. In connection with declining volumes of weapons trade and growing competitiveness on the world market the company does not intend to multiply exports of military hardware in the near future. RAPOTA said the company's potential is rising and if the rules of fair play are observed on the world market a certain growth in weapons exports is quite possible. The "portfolio" of the company's orders from 1999 to 2004 has been estimated at $8.5 billion to $9 billion. Rosvooruzhenie is open for cooperation with all countries but, being a representative of the state and working on government's orders, it strictly follows international sanctions recognized by Russia, against countries where weapons supplies are banned, RAPOTA said. "In this case, we have to sacrifice our economic interests, but in the process of lifting sanctions we shall develop military-technical cooperation with any new or former partner," the Rosvooruzhenie Director said. In light of the beginning of NATO airstrikes, RAPOTA said that Rosvooruzhenie will act within the framework determined by the Russian government. "If the government adopts a decision to supply weapons to Yugoslavia the Rosovorruzhenie company jointly with the Russian Defense Ministry and enterprises of the military industrial sector will be

ready to fulfill this task." He noted that, "at present, morally outdated Soviet- made air defense equipment dating back to the 1970s to 1980s has been used in Yugoslavia." The Yugoslav army has neither modern facilities for radio electronic warfare nor automatic control system which multiplies the effectiveness of air defense systems.

European Republics

WB Loans Ukraine $110 Million

· The World bank has provided $110 million in loans to Ukraine. Approximately, $100 million is to be spent to develop entrepreneurship in the country, while $10 million will help restructure the financial sector. Another $40 million is expected to be earmarked for Ukraine's coal mining sector. These loan programs have already been ratified by Ukraine's parliament. The Bank's move to implement these programs, follows a decision by the International Monetary Fund (IMF) to resume aid to the Country. The IMF is restarting a $2.2 billion loan to Ukraine and disbursed an installment of $153 million. Ukraine's government is desperate for loans; it believed that it might default on its $2 billion foreign debt due this year. In January 1999, the Ukrainian Central Bank had only $685 million in reserves. Ukraine's economy has been shrinking since the Soviet collapse and Russia's economic and financial crises last Fall.

Gazprom To Reduce Supplies To Ukraine

· Russian gas monopoly Gazprom is considering the possibility of reducing the transport of natural gas supplies through Ukrainian. Gazprom chairman Rem VYAKHIREV told International Monetary Fund Managing Director Michel CAMDESSUS that beginning in 1999, the company will transport about 14 to 15 billion cubic meters of gas through its northern transport corridors, such as the new gas transportation system Yamal-Europe, whose first section is to be completed by autumn 1999.

South Caucasus & Central Asia

Menagarishvili Leaves For Ukraine

· Georgian Foreign Affairs Minister Irakly MENAGARISHVILI is scheduled to leave today for an official three-day visit to Ukraine. It is planned that he will meet Ukrainian President Leonid KUCHMA, parliament chairman Alexander TKACHENKO, Foreign Affairs Minister Boris TARASYUK, and other

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Ukrainian officials. They will consider aspects of development of cooperation between the two countries and Ukraine's participation in the implementation of the Eurasian transport corridor.

Aliyev Releases Cargo Plane But Not MiG Jets

· Azeri President Geidar ALIYEV has approved the release of the Russian cargo plane Ruslan and its crew which was detained at Bina airport in Baku on March 20th. According to the Russian diplomats, the decision to release the plane and the crew was adopted late on Monday at a meeting between ALIYEV and visiting Moscow Mayor Yuri LUZHKOV. The meeting was attended by Russian Ambassador to Azerbaijan Alexander BLOKHIN and heads of Azeri power structures. The six MiG jets and spare parts along with the pilots and 30 passengers will remain in Azerbaijan, presidential advisor on foreign policy Vafa GULUZADE said. The Azeri Security Ministry opened a criminal investigation over the transportation of the six-Kazakh-owned MiG fighters after finding discrepancies between the customs documents, flight logs and passengers' testimonies about the destination of the cargo. According to documents from the airplane, it was headed for North Korea from Kazakhstan, but it is unclear why the plane was so far west from both countries. ALIYEV again expressed his dissatisfaction at Russia's policy of providing armaments to Armenia, while simultaneously seeking to mediate a solution to the Nagorno-Karabakh conflict. LUZHKOV said Moscow is interested in expanding direct trade and economic contacts that were started by a frame accord signed by Moscow in 1993.

Exxon-Azeri PSA Effective

· In an Exxon press release Monday, Exxon Corporation said the production sharing agreement on the Araz-Alov-Sharg offshore exploration block in Azerbaijan sector of the Caspian Sea became effective on March 23rd. Exxon said that Exxon South Caspian Ltd. unit acquired a 15 percent participating interest in the exploration block, located about 110 miles south-southeast of Baku. The block covers an

area of about 550 square miles in water depths ranging from about 1,300 feet to about 3,000 feet and has potential for significant hydrocarbon reserves. Socar retains a 40 percent interest, BP Amoco retains a 15 percent interest, Statoil a 15 percent interest, TPAO a 10 percent interest, and Alberta Energy Co. 5 percent interest.

IMF Recommends Tight Belt For Kyrgyz

· The International Monetary Fund (IMF) on Monday encouraged Kyrgyz leaders to adopt a tighter budget for 1999, in order to, "alleviate the impact of the current economic crisis on the poorest and most vulnerable segment of the population." The IMF executive board issued a statement after the completion of its annual review of Kyrgyzstan. It said that last year's debt should be reconciled, but the state should continue its commitment to health and education. The IMF also urged Kyrgyzstan to continue structural reforms outlined in its 1998 IMF loan arrangement and speed up the privatization of state-run industries, including Kyrgyz Airlines. The IMF praised that state for raising interest rates and allowing its currency to depreciate.

Tajik Joins Interstate Council

· Tajikistan has joined an agreement on the Interstate Council of Kazakhstan, Kyrgyzstan, Uzbekistan and its institutions. Tajik presidential press-secretary Zafar SAIDOV said that Tajik President Emomali RAKHMONOV had issued a decree on accession, "in accordance with the Protocol signed on March 26, 1998, which envisages Tajik accession de jure to the Treaty on creating a single economic space between Kazakhstan, Kyrgyzstan and Uzbekistan." The press secretary said that the Tajik Foreign Ministry had been instructed to notify the Executive Committee of the Interstate Council about the Tajik accession.

The Daily Report on Russia and FSU

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