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

Monday, March 8, 1999

Witnesses said only a few Chechen policemen were around at the airport during the incident. Moscow blasted the Chechen leadership for lax airport security and urged the immediate release of SHPIGUN. Senior Interior Ministry officials were angered by the fact that their Chechen failed to answer their telephone hotlines for several hours after the kidnapping. Passengers aboard the ill-fated plane say they believe the kidnapping was in retaliation to harsh sentences handed down to two Chechen women terrorists, who had been sentenced to 19 years in prison for the 1997 bombing of a Russian railway station. No one or group has claimed responsibility or demanded a ransom. Chechen authorities set up an investigative body to find out the hostage's whereabouts.

Russian Interior Minister Sergei STEPASHIN said his ministry, the Federal Security Service (FSB) and the Defense Ministry are working in a coordinated effort to rescue SHPIGUN. Interior Ministry regards the abduction as a challenge to Russia's law and order services which vowed that their response will be tough. In a further sign of increasing tensions, all Russian government officials, about 30 and their security guards, have been evacuated from Grozny. This development follows news that Russia has placed its Interior Ministry and special forces troops on alert in the North Caucasus. Special military checkpoints on the border with Chechnya have been fortified and television reports say additional troops are being moved to the region. STEPASHIN on

Russian Federation

Politics

Yeltsin To Drop The Other Shoe?

· Since the decision to propose the removal of Boris BEREZOVSKY from his post as Commonwealth of Independent States' Executive Secretary, political analysts have speculated that Russian President Boris YELTSIN may take measures to even out the playing field by "dropping the other shoe," in this case Prime Minister Yevgeny PRIMAKOV. Izvestiya newspaper, owned by LUKoil oligarch Vagit ALEKPEROV, on Saturday said, "The President does not make asymmetric firings," alluding that YELTSIN's mighty ax will fall again. The same day YELTSIN's deputy chief of staff Oleg SYSUYEV publicly criticized PRIMAKOV's complacency. He said, "It seems to me that Yevgeny Maximovich should be advised to be more critical of the performance of the government because this position of complacency can make the prime minister and ourselves miss something that is of key importance." His statement has fueled rumors that YELTSIN is ready to launch a series of high-level firings. SYSUYEV noted that firings are, "the prerogative of the President. It is impossible to guarantee any pattern here that could lead anyone to believe they are in the government forever."

Shpigun Kidnapped In Chechnya

· Russia's Interior Ministry's representative in Chechnya Major General Gennady SHPIGUN was abducted Friday as he was boarding a plane at Grozny's airport bound for Moscow. A member of the airport's security said abductors boarded the Grozny-Moscow plane, while another group of abductors in two cars waylaid the plane at a point of the runway where it was to take off after taxiing. Terrorists jumped from the plane together with the captive and moved in the direction of the Tersky mountain range.

Today's News Highlights

Russia

CB Audit Shows Shady Deals

Lukoil, Gazprom Bond Issues

Rybin Survives Attack

European Republics

Estonian Parliament Election

South Caucasus & Central Asia

Georgia On CIS Consolidation

Armen-Georgia Defense Co-op

The Caspian Strategic Fish

Politics-Economics-Business

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March 8, 1999

Intercon's Daily

Moscow Television today said that Russia should impose an economic blockade on Chechnya and cut all communication, air, and rail connections. He said if there is any hostile response by Chechnya, Russia will respond with military action. In a vigorous response, Chechen President MASKHADOV said that STEPASHIN's statement was a declaration of war. He said that STEPASHIN has blood on his hands and should be aware that Chechens will meet force with force. Shamil BASAYEV said that if Chechnya responds in kind, STEPASHIN will be the first target.

Spies To Save Democratic Russia?

· The Communist Party dominates the Russian State Duma. Yevgeny PRIMAKOV, former head of the external intelligence arm of the KGB is appointed Prime Minister. He then in turn appoints of the KGB agents to influential positions in the government, the presidential administration, state-run industries, and the media. The Communist Party campaigns for the statue of "Iron" Felix DZERZHINSKY the KGB founder, to be returned to its place in Moscow's Lubyanka Square. In short, this adds up to the resurgence of the KGB. Novaya Gazeta journalist Alexander MINKIN wrote, "In my opinion, it is better to be a KGB general than an IMF [International Monetary Fund] agent. You'd agree that when we talk about a KGB general there is a hope he will act in the interests of Russia. But there is not the slightest hope that the agents of the IMF will be concerned about our welfare." The KGB emerged as a "state within a state" out of the Russian Chekists, who carried out STALIN's purges, mass deportation, persecution of dissidents, and acted to destabilize regimes abroad. Russia has reached rock bottom if it believes that these measures will establish a more democratic state. PRIMAKOV supporters argue that security services can restore the state's authority and prevent the disintegration of the country. Meanwhile, former victims of the Cheka and KGB say that there can't be a return of the KGB since the KGB never went away. Sergei KOVALYOV, a deputy and human rights activists, said the KGB may have been renamed [Federal Security Service], but it has not been reformed. It is still dedicated to the principle that the presumed interests of the state will always trample over the rights of the individual. "Names of organizations change but people do not change, nor do their methods of operation. I think that the problems caused by the oligarchs can be solved by legal

means. But when these struggles are carried out by illegal means then we are moving away from the sphere of strict observance of laws into the field of political manipulation. That is the road to a national tragedy, a national catastrophe," the Financial Times reported.

Economy

Ruble = 23.09/$1.00 (NY rate)

Ruble = 23.01/$1.00 (CB rate)

IMF Stance Unswayed

· International Monetary Fund (IMF) Managing Director Michel CAMDESSUS and Chief Economist Michael MOUSSA said the IMF is not changing its approach to Russia. The Fund said it will defend its stance and understanding of the situation in Russia, regardless of who represents Moscow at the talks. This Spring Russia is due to pay the IMF $4.8 billion within the framework of the payment of credits, granted to it earlier. IMF Director of the External Relations Department Shaylendra ANDJARIA said that the IMF is not especially concerned over the coming payment deadline. ANDJARIA confirmed that in order to secure the support of IMF, Russia should adopt a program that deserves confidence. He stressed that the IMF negotiates with governments and not individuals. It is the economic policy, pursued by the authorities, which is important for IMF, and not the people who are at the wheel, or who are in charge of the talks, ANDJARIA said. Prime Minister Yevgeny PRIMAKOV and CAMDESSUS will meet in Washington on March 24th.

CB Audit Shows Shady Deals

· An internal audit of the Russian Central Bank shows that billions of dollars worth of foreign currency was sent out of the country and into a shadowy offshore financial network managed by Financial Management Co. Ltd (Fimaco). The Washington Post reports today that internal audit documents show a risky handling of Russia's dwindling currency reserves from 1993-1998. It appears that some of the money may have sneaked back into the Russian treasury bond market in 1996, a move that may be illegal. Russian authorities are looking to see whether the reserves were used for private gain. Audit documents indicate the data concerning profits from offshore investments are missing and that the Russian Central Bank lacked control over the billions of

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dollars sent out of the country. Central Bank Chairman Viktor GERASHCHENKO has listed as state secrets five parts of a report prepared the Auditing Chamber, the State Duma's investigating body. It is believed that these parts involve the Bank's use of hard current reserves, its payroll, its pension fund, and its use of International Monetary Fund monies. According to internal bank documents, "There is a lack of control over Fimaco's administrative and financial activity from the Central Bank. The Central Bank does not have as its disposal information about the shareholders of Fimaco. In reality, the Central Bank did not exercise control over the quality of management of the currency reserves and, in fact, jeopardized them."

Business

Lukoil, Gazprom Bond Issue

· Russian Deputy Finance Minister Oleg VYUGIN on Friday confirmed that Russian oil giant LUKoil and gas monopoly Gazprom are planning to issue ruble bonds to holders of treasury bills and short-term bonds (GKOs-OFZs) of Russia's domestic debt. He said, "These plans are very profitable for all parties—for these companies because they provide an opportunity to get refinancing, for the government it is a good opportunity to resolve the problem of debt restructuring, for investors it is a good opportunity to use resources in the best way." LUKoil representatives said that their bond issue will have a possible five-year maturity for investors taking part in a restructuring of the GKO-OFZ debt. VYUGIN said that he expects Russian authorities to adopt details of the domestic debt restructuring within two weeks. Russia's offer is to swap the debt for 10 percent in cash and short-term bonds, 20 percent in three-year non-interest bearing bonds and 70 percent in four or five year paper, with a sliding coupon. The deadline for bids to accept the debt-swap was extended last Wednesday from March 5th to April 15th.

Oil President Survives Attack

· The president of the Eastern Oil Company, Yevgeny RYBIN, survived a gunfire attack Friday night by staying for another 15 minutes at a party. A spokesman at the Moscow interior regional directorate on Saturday said that unknown attackers opened submachine and grenade launcher fire on RYBIN's car parked near the house in which he was partying outside Moscow. The explosion left his two body

guards who were waiting for him with wounds and burns. This was the second time RYBIN had been the target of an attack. He was in the entrance of his house in November when submachine fire was opened on him and went above his head. RYBIN said his death was wanted by leaders of one of Russian major oil companies.

European Republics

Preliminary Estonian Election Results

· Preliminary results of Sunday's Estonian parliamentary elections show that the Estonian Center Party (ECP) won more than 25 percent of the vote, which will give the party between 25 to 30 members in the 101-seat parliament. Although former prime minister Edgar SAVISAAR's party won a narrow majority, it is unclear whether President Lennart MERI will choose ECP to form a government. MERI will make his decision when the final official results are released on March 17th. SAVISAAR's confrontational style may keep his party from being chosen to form a government. The Reform Party, the Moderates, and the Fatherland Union may gain 20, 17 and 16 seats respectively. This Right-Wing alliance was proud of its showings, since they may create a coalition and gain the right to form a new government. The united opposition has said they may look to the ruling Coalition Party to bolster their majority and avoid authoritarian SAVISAAR's leadership. SAVISAAR has been deemed undemocratic after it was revealed that as interior minister he secretly taped conversations of top officials in 1995. The leftist Country People Party and Prime Minister Mart SIIMANN's Coalition Party earned seven seats each. Only one Russian party, United People's Party, passed the five-percent barrier, which may give the party five to six members in the parliament. None of the remaining five parties and 19 independents finished above the minimum five percent of the vote required to gain a seat in the parliament.

South Caucasus & Central Asia

Georgia Against Consolidation Of CIS

· Georgian President Eduard SHEVARDNADZE, during his visit in Tokyo expressed opposition to plans by Russia to consolidate the Commonwealth of Independent States (CIS). He advocated the reduction of Russia's influence in the Caucasus

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region. SHEVARDNADZE said Georgia is considering a multipolar security framework in the Caucasus by reinforcing ties with the North Atlantic Treaty Organization (NATO) and the Organization for Security and Cooperation in Europe. Rather than security cooperation, the CIS should prioritize economic relations and move toward the creation of a free-market zone among its 12 member states. "We should not set up an organization that would restrict the sovereignty of its members," he stressed, adding his country will not take part in moves promoted by Russia and Belarus to reintegrate the CIS. Regarding the CIS Collective Security Treaty, SHEVARDNADZE said that the treaty had lost its purpose since its members now have their own armies. Georgia is considering quitting the treaty, following the lead of Uzbekistan and Azerbaijan which have said they will leave the CIS's collective security arrangement. While discounting any possibility of Georgia's being admitted into NATO within the next decade, SHEVARDNADZE confirmed it was his country's intention to escape Russia's orbit and enter the Atlantic alliance in the future. The Georgian President denied any possibility of Georgia hosting Turkish military bases. "Categorically no. This question has never been discussed, and never has the Turkish side as much as hinted about such possibility," he said. Georgia has been recently building up military contacts with Turkey. Georgian Deputy Defense Minister Grigol KATAMADZE and the Turkish General Staff's logistics chief Dursun BAKI on Thursday signed a five-year agreement on cooperation and mutual assistance between the Georgia and Turkish defense ministers.

Georgia-Armenia Talk On Defense Cooperation

· Armenian Defense Minister Vazgen SARKISYAN, who arrived in Tbilisi on a two-day visit, met with Georgian Defense Minister David TEVZADZE. During the talks, the sides discussed development of cooperation between the two defense ministries. The Defense Ministers expressed a need to step up work of expert groups to draft documents, providing for development of cooperation between the two

nations in the sphere of defense. These talks follow TEVZADZE's visit to Armenia on Sunday. Later in the day, the Armenian minister held a meeting with Georgian parliament speaker Zurab ZHVANIA. SARKISYAN will be received by Georgian Minister of State Vazha LORDKIPANIDZE on Tuesday.

Sturgeon Caspian's Big Strategic Fish

· The US State Department has estimated that the Caspian Sea could contain up to 200 billion barrels of oil and 7,000 billion cubic meters of natural gas. Russia's Foreign Ministry estimates 124 billion barrels of oil-equivalent of the region, including gas. But the dispute over the Caspian Sea is far more than a mere prediction of reserves. Besides oil and gas reserves, the Caspian Sea is home to caviar-producing sturgeon. Disagreement among the sea's littoral states regarding rights to the sea, have long plagued and delayed pipeline developments. In February, Turkmenistan signed a contract with PSG, an American consortium of General Electric and Bechtel, for a gas pipeline under the Caspian Sea to Turkey. Russia objects to this pipeline because the Sea basin is prone to earthquakes and shifting seabed might rupture the pipeline, destroying the sturgeon's habitat. Sturgeon lovers also object to the Caspian pipeline from Kazakhstan to Azerbaijan. Failure to build the pipeline endangers plans to build the Baku-Ceyhan route through Georgia. This route is dependent on Kazakh oil volumes, since Azeri deposits are not commercially viable. Regional experts believe that Russia's environmental stance is a farce. There are two reasons to doubt Russia's position. The first is over-fishing not oil is the main threat to the sturgeon. The second is that Russian gas monopoly Gazprom has plans to build a pipeline under the Black Sea, which is more prone to seismic activity. The Financial Times reports that Russia has been involved in pipeline politics in an effort to monopolize the export routes and therefore control the region's oil. However, the smaller independent states have been trying to break their dependence on Russia by building pipelines that avoid Russia.

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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