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, June 15, 1999

Russian Federation

Politics

Russians In Kosovo: Strategic Or Spontaneous

· US Secretary of State Madeleine ALBRIGHT and Defense Secretary William COHEN are leaving for Helsinki, Finland to hold separate talks with their Russian counterparts Foreign Minister Igor IVANOV and Defense Minister Igor SERGEYEV on Russia's role in the international Kosovo peacekeeping force (KFOR) and the stand-off between NATO peace keepers and 200 Russian troops occupying the airport at Pristina. On Monday, Bulgaria, Romania, and Hungary refused airspace to six Russian military aircraft, which were attempting to reinforce troops at the airport with 600 paratroopers. Russia is seeking control of a sector in Kosovo, while NATO insists on a unified command under NATO.

In a surprise deployment, Russia sent in 200 troops into Kosovo ahead of NATO forces. This action violated a promise made earlier by Russia to wait until NATO forces had entered the war zone. Confusion surrounds as to who ordered the Russian deployment. Russian media suggest that Russian Prime Minister STEPASHIN and IVANOV were not aware of the of troops' movement. However, today, STEPASHIN praised the efficient coordination between various departments on the Kosovo issue, but few believe this is the case. It could also have been ordered by some rogue Russian generals longing for a Cold War type stand-off with NATO forces and leading speculation as to who is running the country. Irrespective as to who initiated the troop movement, at the very least President Boris YELTSIN can use this event to shake-up his government as well as the world, while keeping everyone on their toes. Unpredictability has always been a hallmark of YELTSIN's leadership style. Unfortunately, unpredictability on the world stage is dangerous and

counterproductive. No matter who ordered the deployment and the circumstances surrounding the move, it is evident that the decision while spontaneous has reasserted the Russian factor into the NATO deliberations on Yugoslavia and was most likely a coordinated decision between the Russian and Yugoslav military. The question remains whether Russia has considered the consequences of its actions. At first, the deployment forced the international community to recognize Russia as a nation to be reckoned with and signaled its Serbian brothers that Russia had not totally abandoned them. It also was a signal to the world that Russia, in a limited way, can asset itself. Clearly, some former Soviet republics are watching these developments very closely. But as the days continue, its capability and resolve to maintain this position will be brought into question both by internal and external forces. All of this raises the frightening prospect that the Russian military is operating without civilian control and government direction. Recent events in Georgia suggest that this is the case. On May 21st, arrests were conducted on coup plotters in Georgia who were planning to assassinate Georgian President Eduard SHEVARDNADZE and other leaders of his government. Intercon sources report that confessions have been obtained which directly link the alleged perpetrators with high level meetings in Moscow with the Russian general staff and military intelligence. There is growing realization within the West that the Russian military is out of control. The Washington Times quoted a senior national security official

Today's News Highlights

Russia

Duma Delays Gas Tax Debate

2000 GDP Growth Set For 1.5%

Rus-China To Build 4WD Trucks

Berezovsky Empire To Expand

European Republics

Solana Appoints Kiev Officer

Baltic Leaders Consider NATO

South Caucasus & Central Asia

Georgia Participates In Drill

Armenia Attacks Azerbaijan

Politics-Economics-Business

Page

Tuesday

June 15, 1999

Intercon's Daily

saying, "The Russians are making mischief again. Either this is a covert operation by the Russians, or the civilian leadership can't control the military. Neither one of those is good for the West." However, the question remains open on how the West can respond to help the Russian government, while curbing the excesses of the military. In light of the violation of the agreement on ground forces in Kosovo, concern grows surrounding the control over, not only the military, but its thousands of strategic nuclear warheads as well. Reports from Russia indicate military units have been forced to sell off weapons and equipment to earn cash. A 1996 CIA reports that looked at unauthorized use of nuclear weapons by the Russian strategic forces stated that the military is "demoralized and corrupted." The report added that civilian leaders could lose control of the nuclear arsenal to the military which continues to view the US as its "main enemy."

Duma Delays Gas Station Tax Vote

· The Russian State Duma has delayed further a vote on the controversial new tax on gas stations from Wednesday to Thursday. Duma speaker Gennady SELEZNYOV explained, "The fact is that the draft has not yet been distributed to all committees and factions...Alexander ZHUKOV [budget committee chairman] has said that they've only just finished work on the document and are distributing it today." ZHUKOV said the law will be reviewed in an edition hammered out by a three-party conciliation commission of members of the Duma, Federation Council and government. He refused to forecast the likelihood of the law's getting through the Duma. The new taxation law is part of the package of economic reforms which are a condition for International Monetary Fund lending. Prime Minister Sergei STEPASHIN, after meeting with President Boris YELTSIN, said that the President had approved government measures aimed at limiting fuel price hikes. He added that First Deputy Prime Minister Nikolai AKSYONENKO will hold talks with the heads of major oil producing and refining companies on Wednesday.

Economy

Ruble = 24.27/$1.00 (NY rate)

Ruble = 24.25/$1.00 (CB rate)

Ruble = 25.29/1 euro (CB rate)

Currency-Trading Restrictions To Be Lifted

· Central Bank chairman Viktor GERASHCHENKO on Friday announced that Russia will lift its currency-trading restrictions in July. The International Monetary Fund (IMF) has urged Russia to eliminate the special currency-trading session limited to importers and exporters, as a condition for receiving the $4.5 billion loan. The Associated Press reported that the restricted-access trading session has helped prop up the ruble and boost the hard currency reserves of the Central Bank. The Bank buys dollars at a low rate during these special sessions, which is counter to IMF policies. Peter WESTIN, an analyst at the Russian European Center for Economic Policy said that the drop of the ruble could be avoided if the Central Bank issues ruble-denominated bonds, which would suck up extra rubles from the market. The parliament has also tentatively approved a bill to help prevent a fall of the ruble by issuing ruble bonds. This bill is only part of the package of reforms necessary to qualify for the IMF loan. The Duma has given initial approval to only two of the required 30 bills. Prime Minister Sergei STEPASHIN has warned that the failure to qualify for the IMF loan, "may be fatal" for Russia and "will mean the collapse" of Russian statehood. STEPASHIN is due to meet IMF Managing Director Michel CAMDESSUS in St. Petersburg tonight.

GDP Expected To Grow 1.5 Percent In 2000

· Economics Minister Andrei SHAPOVALYANTS said at the first meeting of the governmental Economic Council today said that the Ministry believes that the budgetary parameters are valid, provided that gross domestic product (GDP) growth makes 1.5 percent at a conservative estimate, to 5.1 billion rubles. SHAPOVALYANTS said GDP could grow by 2000 even by three percent, to 5.3 billion rubles, and the budget revenue might prove above the conservative estimate. If this is the case, the Economics Minister said federal spending could be increased. According to the Finance Ministry, tax returns will total 635 billion rubles in 2000, or 10 billion rubles more than projected in the budget, if GDP grows. Higher returns in the value added tax are expected to account for most of the increase in tax revenues, by six billion rubles, and the income tax is expected to build up revenues by 1.2 billion rubles. The Economics Ministry predicts inflation to be 10 percent in 2000 and 8 percent in 2001. Industrial

When you need to know it as it happens

Politics-Economics-Business

Page

Tuesday

June 15, 1999

Intercon's Daily

production growth is estimated to make 6 percent by 2000, and growth in agriculture 4 percent. The ministry projected a 7 percent growth in investment by 2000.

Business

Rus-China To Produce Cross Country Truck

· Russia's Ural Automobile Factory and China's Inner-Mongolia No. 2 Machinery Plant have signed an agreement to form a joint venture for the production of a cross-country truck for both military and civilian purposes. The first 25 vehicles will be off the assembling line this year. Chinese economic and military department sources say they have been testing the truck for half a year. According to the plan, some 500 trucks of different models will be produced annually. They are designed to travel under especially bad conditions like minus 45 degrees centigrade temperatures or in 1.7 meters of water or on a 43-degree slope. It is meant especially for China's Xinjiang Uygur and Tibet autonomous regions and other remote mountainous areas. In Russia, it can be used as a platform for 300 different weapons.

Rus-France Aero-space Cooperation

· Deputy General Director of the Russian Aero-Space Agency Alexander MEDVEDCHIKOV said at a Russian-French symposium with the theme Europe-CIS Space Cooperation on Friday that Russia and France are working together in a scientific cooperation which they hope to enhance into a broader joint space exploration. MEDVEDCHIKOV said that the Starsem joint venture had been the most successful in launching satellites with the use of Russian-made Soyuz boosters. There were also three successful launches of the Globalstar satellites. Other areas of the Russian-French cooperation are the creation of navigation systems and systems of remote probing of the Earth, the joint design of new rocket-boosters and launches of satellites to circum-terrestrial orbits, the cooperation in the construction of the international space station and joint scientific programs. Russia hopes that its Glonass project will be chosen by the European Union (EU) countries for a European satellite navigation. Russian and French organizations will suggest the project at a sitting of the EU transport ministers this week. The ministers are to make the final choice of the European navigation system.

Rosvooruzhenye Sales Reach $1.08 Million

· Russian Rosvooruzhenye company announced that foreign currency proceeds reached $1.08 million by early June. The company's press service said, the exports between January and May, 1999 exceeded the average indices of the past five years. The overdue credit indebtedness of Rosvooruzhenye to defense plants has been cut from $217 million to $25 million. Rosvooruzhenye is contributing to 85 defense plants allowing them to participate in five international arms shows in Russia, the United Arab Emirates, Brazil, Singapore and the Czech Republic. Rosvooruzhenye is taking part in the LeBourget, France air show between June 12th and 16th.

Promexport Contracts Reach $670 Million

· Promexport's contracts to export military services and products have reached $670 million already this year. Director of the state-owned company Promexport Vyacheslav FILIMONOV said these contracts cover a full range of military products and involve over 80 factories in the Russian defense sector. Promexport has concluded over 100 contracts, including 1998 obligations to deliver military products of the Russian defense and the hardware decommissioned in the Russian army's reform. Draft contracts earmark for exports a $300 million worth of arms and the military hardware of the Russian army, of which every third is from the air defense system. FILIMONOV said 1998 sales made $120 million, with 30 percent of contracts being for deliveries of the air defense hardware. Promexport cooperates with over 30 countries, including India, China, Egypt, Angola and Turkey. "Promexport is ready to comprehensively develop cooperation with countries of this region," FILIMONOV said.

Berezovsky Media Empire To Expand

· Russian business tycoon Boris BEREZOVSKY will soon own a controlling share in Moscow's TV-6 television company, Segodnya reported on Wednesday. TV-6 President Eduard SAGALAEV, according to the newspaper, said he has decided to sell a "sizable portion" of his shares to BEREZOVSKY and the companies that he controls. SAGALAEV declined to name either the amount of the shares he will sell or the price. He and BEREZOVSKY each possess a 37.5 percent stake in the company, RFE\RL Newsline reported. BEREZOVSKY is also linked to Nezavisimaya Gazeta.

When you need to know it as it happens

Politics-Economics-Business

Page

Tuesday

June 15, 1999

Intercon's Daily

European Republics

Solana Appoints Kiev Information Officer

· NATO Secretary General Javier SOLANA today announced the appointment of Natalie MELNYCZUK as Kiev Information officer. She will work at NATO's information and Document Center. The Center provides the Ukrainian public information on NATO and security issues in general. Prior to her appointment, MELNYCZUK was manager of the US-Ukraine Foundation of the USAID funded project providing information and comparative policy perspectives to deputies of the Ukrainian Parliament. She specialized in analysis of Eastern Europe, working with US, Ukrainian, and Russian academic and non-governmental organizations. MELNYCZUK has also worked with Latin American, Asian, and African governments.

Baltic Defense Mins. On Involvement In NATO

· Defense ministers of Baltic and Northern countries at an annual meeting in Riga concluded that they will have to play a more active role, take more responsibility, and show more independence in their part in NATO operations. Head of the Latvian Defense Ministry Girts KRISTOVSKIS said that Latvia is prepared to send a unit of 12-14 engineer troops and police to Kosovo, which will require more than 350 thousand lat. He said there had been no invitation from NATO headquarters yet, but it would most surely be forthcoming. NATO assistant secretary-general Klaus-Peter KLAIBER said that Latvia may become a member of NATO before it joins the European Union. He said much of this depends on Latvia's will and effort to comply with NATO requirements. KLAIBER, on a two-day visit to Riga, poke highly of the political support Latvia had given to NATO actions in the Balkans. Armed forces of the Baltic countries are being developed with direct support from Nordic countries. The ministers agreed on Monday on the status of the Baltic military college opened in Tartu, Estonia. Today, the ministers are participating in the conference on EuroAtlantic secu

rity in the 21st century. KLAIBER will attend the Latvian prime minister's address to the conference.

South Caucasus & Central Asia

Georgia Participates In NATO Maneuvers

· Four NATO member states, France, Greece, Turkey and the US, and three partner countries, Georgia, Romania and Bulgaria, are participating in NATO's fifth Maneuver in the Cooperative Partner series hosted by Bulgaria, while Azerbaijan and Albania have sent observers. The maritime war games, scheduled to last 14 days, are intended to coordinate goals and objectives and establish uniform requirements for operational capabilities. "The Alliance believes this type of exercises to be extremely important despite the considerable decrease in the size of present exercises," Colonel Robert WESLEY, director of the exercises and chief of the allied headquarters said. He noted that the decrease in size is due to operations in Kosovo. Ukraine announced Monday morning that it would not send its two ships, and gave no reason for the pullout. A patrol cutter of the Georgian Navy, with 42 Georgian servicemen including seven cadets of the Batumi Naval Academy, will participate in the drill.

Armenia Attacks Azerbaijan For Four Hours

· Armenian gunmen attacked Azerbaijan for four hours on Monday. The Azeri Defense Ministry said up to 300 Armenian guerrillas tried to mount an offensive against its units in the west of the country by using firearms, mortars and large-calibre machine-guns. The ministry said two Azeri officers were killed and four wounded in the attack. It said Armenian guerrillas' losses were much heavier, but did not elaborate. Having met resistance from the Azeri side, the Armenian gunmen had to retreat to their original positions. The Azeri Defense Ministry said all responsibility for this incident in the conflict zone, where cease-fire had been holding on the whole since May 12, 1994, lies on the Armenian side, Itar-Tass reported.

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

available for non-profit institutions.

Daily Report on Russia is for the exclusive use of the subscriber only. Reproduction and/or distribution is not permitted without the expressed written consent of Intercon. Daily Report on Russia Ó copyright 1999, Intercon International, USA.

When you need to know it as it happens

Politics-Economics-Business

Page