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

Thursday, July 1, 1999

Russian Federation

Politics

Communist Party To Be Banned?

· A combination of recent events taking place in Moscow are raising some troubling prospects. These growing tensions could lead to demonstrations and adverse political consequences. Russian President Boris YELTSIN summoned the Justice Ministry and accused them of not controlling unlawful activities of unnamed political parties. He seemed to be implying the Communist Party. Russian news reported that YELTSIN berated Minister Pavel KRASHENINNIKOV for his inability to dig up evidence against the Communist Party. On Tuesday, Prime Minister Sergei STEPASHIN in a meeting with the Federal Security Service (FSB) bodies made a ominous statement that there exists, "growing threats to Russian internal stability." He did not reveal what threat or any further details. He warned that political parties could resort to violence as parliamentary elections draw near. A pro-government Duma deputy confidently stated earlier that the Duma will soon have a new composition, new faces, a new guard, alluding that the Communist Party may be excluded from the next elections. Liberal-Democratic Party leader Vladimir ZHIRINOVSKY today called for banning the Communist Party. He has accused the Communist Party and Yabloko of stealing money from the country by rejecting laws on alcohol, tobacco and sugar. He believes that the absence of Communists in the Duma will not have a negative impact on its work. ZHIRINOVSKY earlier said that Vladimir LENIN's body will be taken out of the Red Square mausoleum and buried on July 19th. He said he was a member of the commission to bury the father of Communism. However, the commission has not yet been chosen and the decision concerning the burial has not been made public. The rumor of the possible burial of LENIN could spark major public protest supported

and inspired by the Communist Party. Any violent actions could be used as a pretext to ban the Communist Party and remove it from elections. Chairman of the Duma Security Committee Viktor ILYUKHIN said, "It is no secret that decrees banning the CPRF [Communist Party of the Russian Federation] have been drafted," and may be fulfilled in late July or early August. He noted that, CPRF cells all over the country, "are instructed [how to behave] in case of an unconstitutional development." Deputy leader of the Communist Party in the Duma Valentin KUPTSOV said the party has nothing to fear and that any action by the Kremlin would only boost the party's standing. Meanwhile, despite a recess in the Duma sessions until late August, Communists deputies are planning to stay in the Duma by shifts.

Russia Violates More Foreign Airspace

· Russian strategic bombers violated the airspace of the US, Norway, and Iceland on June 25th as part of a claimed mission to fly across the North Pole and fire cruise missiles at targets in southern Russia, The Washington Post reported. Two TU-95 Bear bombers were intercepted by four US F-15 fighter jest and a P-3 patrol plane near Iceland. The Bears have been determined to be within striking distance of the US because they were armed with long range missiles. Two TU-10 Blackjack bombers flew down the Norwegian coastline and Norway also scrambled to meet the air space invaders. Russia has denied allegations that its warplanes violated the airspace of the US and two Scandinavian countries. Before

Today's News Highlights

Russia

Audit Shows Poor Banking

IMF-Russia Sign Agreement

Reduction Weapons Sales Rise

European Republics

EBRD-Transneft On Baltic Lines

Ukraine To Get IMF Installment

South Caucasus & Central Asia

IMF Approves Azeri Payment

Azeri Oil Transported By Rail?

Central Asian Econ. Summit

Politics-Economics-Business

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Thursday

July 1, 1999

Intercon's Daily

this incident it had been 11 years, since a Bear or Blackjack had been spotted in friendly airspace. The violation of airspace happened five days into Russia's West-99 military exercises, that involved up to 50,000 troops from five military districts and three naval fleets. Reports show that more than 30 ships, four submarines, including the nuclear powered Kirov, as well as Russian air force and navy aircraft. Four Russian MiG-29 fighter jets on June 18th entered Georgia's airspace without permission of Georgian authorities. The Georgian Foreign Ministry issued a statement which said the jets were flying from Millerovo Airport in Russia's Rostov region to Erebuni Airport in Armenia. Russia previously violated Georgia's airspace on February 26th and March 6th. Georgia has issued protests through diplomatic channels, but Russia has denied all accusations. Stephen BLANK, a Russian expert at the US Army War College, said, "They [Russia] want to show us they aren't afraid, that they too have missiles, and that they consider [NATO's actions] their main threat." This is the second time in less than a month that Russian military activity surprised NATO forces, raising speculation of President Boris YELTSIN's control over his government and armed forces. Earlier this month 200 Russian troops occupied the Pristina Airport in Kosovo ahead of NATO's peacekeeping force KFOR.

Moskovsky Komsomolet on June 17th, reported that the operation to take over the Pristina Airport was planned by the first division of Chief Strategical Department of the General Staff under the direction of General-Colonel BALUEVSKY. The officers worked under such extreme secrecy that the plan was shown only to Chief of the General Staff Anatoly KVASHNIN, Defense Minister Igor SERGEYEV, and partially shown to YELTSIN, indicating that the military are developing foreign policy and selectively briefing the President on these plans. BALUEVSKY was the same general responsible for Russia's military actions in Abkhazia. The article also pointed out that this same group of officers offered former prime minister Viktor CHERNOMYRDIN a plan to overthrow Georgian President Eduard SHEVARDNADZE and separate Abkhazia from Georgia. The Georgian news agency Prime News on May 25th accused wanted former Georgian security chief Igor GIORGADZE and some of the suspects arrested on May 22nd of holding a series of meetings in Moscow

with leading officers of the Russian Armed Forces Intelligence Service (GRU). GIORGADZE has been accused of organizing an attack against SHEVARDNADZE on August 29, 1995.

Military Officers Arrested

· Two high-ranking officials, Deputy Interior troops commander of the Moscow military district Major-General Viktor ODRINSKY and inspection chief of the Russian Audit chamber Viktor FOMENKO, were detained and put into custody on Thursday on charges of bribery and abuses of office, the Military Prosecutor's office reported. Official charges will be brought against the defendants in ten days.

Economy

Ruble = 24.21/$1.00 (NY rate)

Ruble = 24.21/$1.00 (CB rate)

Ruble = 25.13/1 euro (CB rate)

Secret Audit Finds CB Misleading IMF

· A secret audit conducted by Pricewatershouse Coopers on the Russian Central Bank and its relationship with an offshore investment company shows that Russia misreported its foreign currency reserves to the International Monetary Fund (IMF) by $1 billion. The Washington Post reports today the matter involves a $1 billion internal loan from the Central Bank to the Russian government in 1996. The Central Bank in return was given a promissory note, which it sent to an offshore company, apparently without the knowledge of the IMF. The validity of Russia's financial reports is crucial. This latest discovery could negatively effect the IMF's decision for loaning Russia another $4.5 billion. An IMF mission is in Moscow this week reviewing Russia's economic programs and reforms. Under Article 7 of the IMF's Articles of Agreement, which Russia pledged to uphold in 1992, Russia should provide the Fund its, "official holdings at home and abroad," of gold, and foreign exchange. Earlier it was reported that the Central Bank channelled billions of hard currency reserves through an obscure off-shore management company Fimaco. There is still some uncertainty as to who benefited from the fees and commissions for handling this money and what happened to the profits from such risky deals. Central Bank chairman Viktor GERASHCHENKO, who led the Central Bank in 1993 during the first deposit in obscure off-shore accounts, has vigorously resisted making the docu

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ment public. He has also managed to keep secret other audits on the same subject. The Central Bank has declined to comment on the new findings. Despite these violations, it appears likely Russia will receive new funding because the IMF would rather change Russia's methods than issue penalties.

IMF Approves Russia's Economic Policy

· The Russian government's economic policy for 1999 has received preliminary approval from the International Monetary Fund (IMF). Russia's chief negotiator with international financial organizations Mikhail ZADORNOV and the deputy director of the 2nd European Department of the IMF, Gerard BELANGER on Wednesday signed a joint statement on economic reforms and preliminary conditions for an IMF loan. ZADORNOV said that the Fund expressed satisfaction with Russia's efforts to revive its economy. "We see rather good successes of the government and the Bank of Russia regarding those measures on which we have agreed and are ready for further discussions," BELANGER said. In Salzburg, Prime Minister Sergei STEPASHIN said, "The absolute majority of IMF demands are fair. They are not imposing their position on us. This is fully in line with the Russian program of economic reforms." The IMF board of directors is expected to decide July 14th on the disbursement of new loans to Russia. In late April, the IMF and Russia reached a tentative agreement in Washington on $4.5 billion in loans to Russia to be disbursed over the next 18 months. First Deputy Finance Minister Oleg VYUGIN said Russia is likely to get $1.9 billion this year, with the first installment totaling $630 million.

Business

Reductions Weapons Sales Rise

· The Promexport company has increased deliveries of weapons and military equipment removed from the armed forces' inventories as part of arms reduction agreements. In 1998, the company signed contracts for the supply of armaments and military equipment worth $400 million. It has prepared and commercial proposals and draft contracts for deliveries worth some $800 million to interested foreign clients. Promexport has stepped up its work with Angola, Egypt, India, Yemen, Congo, China, Poland, and Syria. The company said a number of former Soviet republics, including Ukraine and Uzbekistan,

have requested military supplies. Promexport transferred to the Defense Ministry in 1998 and 1999 more than $120 million in net profit from payments by foreign clients for the purchased hardware. The money helped to upgrade and overhaul the army's helicopter, aircraft and armored vehicles, purchase several thousand apartments for officers' families, and finance a number of social programs. Due to the dynamics of order-placing and the amount of processed applications for the purchase of weapons and equipment, the sales of weapons released from army stocks under reduction programs is regarded as an effective direction of military cooperation between Russia and foreign states.

European Republics

Baltic Oil Line Plan Received A Boosted

· The European Bank for Reconstruction and Development's (EBRD) head of natural resources Vittorio JUCKER and Russian state pipeline monopoly Transneft's president Dmitry SAVELYEV on Tuesday signed an accord for cooperation and said a new oil export pipeline to the Baltic Sea would be its first priority. The Baltic Pipeline System is in line with Transneft's long term goals to expand its 50,000 kilometer network to central Europe, the Caspian region, and China. The Baltic line would transport crude from the oil-rich Timan Pechora province, Western Siberia, the Urals and Volga regions to the Gulf of Finland. According to SAVELYEV, the first 100 kilometers of the new line, with an initial capacity of 240,000 barrels per day, will be laid this year. JUCKER said that the pipeline could help establish the Baltics as an oil trading region to rival Rotterdam in northwest Europe or the US' Gulf Coast. "The Baltics could become one of the great oil trading region of the world."

IMF Approves Loan Installment For Ukraine

· The International Monetary Fund (IMF) on Wednesday approved the release of a $115 million installment of its three-year $2.5 billion loan to Ukraine. IMF Deputy Managing Director Stanley FISCHER praised Ukraine for meeting all economic objectives set by the fund last September. At the same time, FISCHER noted that future payments will depend on successful debt-restructuring talks. The release of the installment came after Ukraine and ING Barings agreed to extend the deadline for the

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Thursday

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country's $163 million bond payment until July 9th. "[The IMF] urged the authorities and Ukraine's creditors to persevere in their efforts to reach an agreement on terms comparable to other recent agreements with other creditors," FISCHER said.

South Caucasus & Central Asia

IMF Approves Azeri $15 Million Payment

· The International Monetary Fund (IMF) approved a $15 million payment from its loans to Azerbaijan on Wednesday. The Fund said Azerbaijan has good chances for future growth. It encouraged the nation to ease monetary policy further to cope with "deflationary trends" and stimulate the economy. Deputy Managing Director Shigemitsu SUGISAKI said, "Directors considered that Azerbaijan's medium-term prospects were strong, provided economic reforms were pursued vigorously," Reuters reported. "They stressed, however, that Azerbaijan's oil wealth would not in the long term provide a substitute for determined reform." The government also needs to curb corruption, strengthen the banking sector, and press ahead with privatization. The IMF approved $130 million in loans to Azerbaijan in January to help the Azeri county cope with problems caused by low world oil prices and Russia's economic crisis.

Azeri Oil Transported By Rail

· According to Transneft President Dmitry SAVELYEV, effective today the Transneft will being to transport Azeri oil to the Black Sea by railroad, thereby avoiding the Baku-Grozny-Novorossiisk pipeline. He believes this is the best way to prevent problems in the oil supply due to the unstable situation in Chechnya. However, this alternative has not been communicated to the BP Amoco-led international oil consortium, Azerbaijan International Operating Company (AIOC). Tamam BAYATLY, AIOC spokeswoman said, "At the beginning of June we sent a request to Transneft asking permission to send 200,00 tons of Azeri oil in July through Russia. But so far we have not received an answer from

Transneft." Officials from Azeri state oil company Socar said they expected to discuss details of future rail exports with a Transneft delegation due to visit Baku on July 12th. The conditions of the original agreement between Socar and Transneft are expected to remain the same, including the tariffs. An alternative export route is crucial for Socar, which has 349,000 undelivered tons of oil this year as a result of frequent closures of the pipeline route.

Central Asian Economic Community Summit

· The presidents of Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan pledged more cooperation at a two-day summit held in Bishkek on Friday. The Central Asian Economic Community hopes to make the group similar to the European Union. A joint statement from the summit stresses the need to, "accelerate the processes linked with the economic cooperation of the countries of the region, and to implement the projects intended to revive the economies of the nations affiliated to the community." Kyrgyz President Askar AKAYEV said, "We have signed very many documents, but unfortunately we haven't managed to fulfill many of them." Falling commodity prices and internal politics have undermined progress to form an economic union. Kazakh President Nursultan NAZARBAYEV said, "Our task of creating a single free-trade zone in Central Asia...has been hindered by the economic crisis in all our countries." Uzbek President Islam KARIMOV said, "We must increase cooperation with each other to compensate for the loss of other markets." Summit participants also issued a statement on, "joint actions against terrorism, religious and political extremism, drug trafficking, illegal sales of weapons and explosives." They confirmed their readiness to, "adopt joint programs of their foreign ministries, secret services, and other structures to combat such crimes." The presidents also agreed to extend the term of the rotating presidency of the union, held by Kyrgyzstan, from one year to two years. The group's neighbor Turkmenistan is not a member. Georgia, Turkey and Ukraine sent observers to the summit.

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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