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

Monday, July 26, 1999

Russian Federation

Politics

Russian Spies Resume Cold War Level In US

· The Washington Times today reported that the CLINTON Administration has warned Russia to voluntarily reduce the large number of intelligence officers operating in the US or face diplomatic repercussions or expulsions. US Ambassador James COLLINS issued that warning to Vladimir PUTIN, the former KGB domestic spy chief and now head of Russia's Security Council. COLLINS told PUTIN that Russian intelligence staffing in the US had returned to "Cold War levels," and that the spying was undermining relations. The Washington Times reports that half of the 124 diplomats posted to the Russian Embassy here are engaged in intelligence work. In additions, spies are working out of the Russian mission to the UN and consulates in San Francisco and Seattle. Russian intelligence activities include recruitment of government officials, attempts to steal political and military secrets, and acquisition of high technology with civilian and military applications. Former intelligence director for the White House National Security Council during the REAGAN administration, Kenneth DE-GRAFFENREID, explained that Russian spying has continued at aggressive levels since the end of the Cold War based on Moscow's goal to seek high technology military, political and economic secrets. He said, "We can only clamp down so much from a security perspective. The way we can make up for it is with better counter intelligence and reducing the size and access of the foreign intelligence threat." In May, the US State Department ordered a Russian intelligence officer working at the UN mission in New York to leave the US, after he was caught spying. In a tit-for-tat action, Russia in June expelled Lt. Col. Pete HOFFMAN, the assistant Army attaché in Moscow. The issue of current spy levels has been

discussed twice between PUTIN and COLLINS and once between PUTIN and White House National Security Adviser Samuel BERGER. Most likely, the US warning will again be reiterated during the talks between Prime Minister Sergei STEPASHIN and Vice President Al GORE this week in Washington.

Yeltsin Rushed To The Hospital

· Russian President Boris YELTSIN was rushed to the hospital today, for the second time in a week. The reason for the trip to the Central Clinical Hospital was not released. Presidential spokesman Dmitry YAKUSHKIN said it was, "quite natural that the President is trying to use his vacation time for medical checkups." YELTSIN has been on vacation for over two weeks. He is scheduled to hold a number of working meetings today at his countryside residence Gorki-9 near Moscow. It is not clear whether these meetings will be reschedule.

In the wake of the President's continued health problems, rumors of successors are growing. Moscow mayor Yuri LUZHKOV has been cited as a possible candidate as well as former prime minister Yevgeny PRIMAKOV. Prime Minister Sergei STEPASHIN on Saturday said he is not going to run for president in 2000. He said, "This is not part of my plans."

Kapysh Assassinated In Vasilyevsky Ostorv

· Pavel KA-PYSH, managing director of the Baltic Financial and Industrial Group was assassinated by unidentified

Today's News Highlights

Russia

Russia Raises Oil Export Duties

Stepashin Visits Boeing

European Republics

LUKoil To Supply Kiev Fuel

US Considers KFOR Aid

South Caucasus & Central Asia

IMFApproves $45M Loan

Azeri Receives Turkish Loan

Wolf Holds Energy Meetings

Kyrgyz-Kazakh Oil Contacts

Politics-Economics-Business

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Monday

July 26, 1999

Intercon's Daily

people this morning, when he was driving in Vasilyevsky Ostrov. Itar-Tass reported that the oil tycoon's armor plated jeep driving along the Universitetskaya Embankment was fired on with a grenade launcher and two Kalashnikov submachine guns. The grenade was used to blow apart the back of the vehicle. The front of the jeep was riddled with bullets, although the bullet-proof glass did not shatter. The weapons were left at the scene of the crime. Police are counting on eyewitness accounts, particularly from a tourist bus which passed during the incident. They are hoping some of the tourists were running video cameras. The Police are speculating that KAPYSH's murder is connected to his professional business activities. According to Novaya Gazeta, KAPYSH last May voiced concerns over threats leveled against him and feared for his life. The Baltic Financial and Industrial Group is the biggest oil trader in the north-west area of Russia. St. Petersburg police instituted a criminal case against several companies this month, including the Baltic Group, in connection with orchestrated actions with provoked a patrol crisis on the St. Petersburg market last April and May. The Baltic Group is embroiled in several other arbitration trials.

Economy

Ruble = 24.23/$1.00 (NY rate)

Ruble = 24.22/$1.00 (CB rate)

Ruble = 25.51/1 euro (CB rate)

Foreign Debt Accounts For 90 Percent Of GDP

· Russia's foreign debt stands at some $150 billion, or 90 percent of its gross domestic product (GDP), according to a document released Friday by the Russian government and the Central Bank. In an economic policy memorandum for 1999 handed over to the International Monetary Fund, the government's scheduled foreign debt payments are projected to amount to about 90 percent of the federal budget revenue, "well beyond any realistic threshold for repayment capacity." Russia is "seeking a re-scheduling on debt-service obligations on external debt accumulated prior to January 1, 1992, the effective Paris Club cutoff date for debt of the former Soviet Union, while paying in full obligations accumulated by Russia since then." The Russian government also pledged to "continue to make best efforts" to reach agreement with the remaining holders of GKO treasury bills and OFZ bonds, who did not take part

in a restructuring plan for this debt. "Where agreement cannot be reached, we will honor obligations according to the original terms, although the transferability of proceeds from such payments will be subject to restrictions," the statement said. The document also said that the government would keep inflation under 50 percent until next December. The hard currency component of the country's current accounts will be increased to 8 percent of GDP by the end of the year by sharply cutting imports, while gross reserves will probably remain unchanged. The government and Central Bank forecast a drop of 2 percent in GDP in real terms this year.

Russia Raises Oil Export Duties

· Russian Prime Minister Sergei STEPASHIN said Friday that he has signed a resolution raising rate of the export duty on crude oil by 5 euros per ton to 7.5 euros per ton. The move was made to make more crude oil available on the domestic market, STEPASHIN said. Proceeds raised from the duty will be used to shore up working capital at the oil companies and to complete the construction of new wells. The decision came amid reports of a looming crisis of gasoline shortage blamed on increased exports, lower output in Russian refineries, and rising oil demand on the domestic market. By mid-July, gasoline prices have increased in 50 regions of Russia, of which 13 have experienced a price increase of more than 10 percent.

Business

Stepashin Urges End To Media War

· Russian Prime Minister Sergei STEPASHIN Friday urged two of the country's largest television stations to make peace rather than "discredit Russia before the world community" by attacking each other. STEPASHIN repeated his dissatisfaction over the media war unleashed by the ORT and NTV national television channels, run respectively by media tycoons Boris BEREZOVSKY and Vladimir GUSINSKY. The ORT attacks started last week when the channel claimed NTV was hopelessly in debt. NTV fought back, accusing BEREZOVSKY of crony-capitalism politics that threatened to turn Russia into a "banana republic." The Prime Minister said, "I feel ashamed for the information war of the recent days, not even a war but rather a vulgar informational squabble." He said the country's airwaves or newspaper pages are often turned to a disgraceful feud,

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a war of personal, basically mercantile, interests, and that "journalists are used as gladiators, warping the souls and the hearts of television viewers, radio listeners and readers...The high degree of the freedom of information, the unconditional right to its distribution implies a high degree of responsibility." "Mass media heads should be answerable before society. All this is happening in a country facing a critical period of its development, a country with a history of tragic events, a country which has not yet freed itself from the bondage of various ideological clichés and social illusions. And the most absurd thing is that this freedom is becoming a powerful element of self-destruction. Let us think about it," STEPASHIN warned.

Stepashin Reviews Boeing Production Lines

· Russian Prime Minister Sergei STEPASHIN arrived in the US on Sunday, beginning a three-day visit with a tour of the aerospace giant Boeing Company in Seattle, Washington. He reviewed the Boeing-767 and Boeing-777 production lines. Russia supplies about 20 percent of the 13 million pounds of titanium, a metal Boeing uses in its commercial aircraft. He stressed the need to continue cooperation with Boeing in the field of aviation and aerospace. STEPASHIN said Russia is engaged, "not only in purchasing jetliners for Aeroflot. I am very glad that our scientists and specialists are actively invited here. They work to improve units and engines of Boeing planes. It seems to me that such cooperation is most promising from the viewpoint of revitalizing the Russian economy." STEPASHIN noted the trade and economic cooperation between Russian and the US West Coast is developing along three main lines: cooperation with the Boeing firm, development of the east-west trade route, as well as cooperation in oil production. During his stay in Seattle, the Prime Minister had talks with Microsoft and attended a dinner given on his behalf by the governor of the state of Washington.

Meanwhile, a loan being made to Russian carrier Aeroflot by the US Export-Import Bank is to be the topic of discussion by the STEPASHIN-GORE Russian-American Commission for Economic and Technological Cooperation. The commission will discuss whether the loan, which is to fund the production and supply of aircraft to Aeroflot, will be tied to a decision by the Russian government to reduce customs duties on Boeing-767 aircraft. Aeroflot intends to

lease about four of the Boeing-767 aircraft but has come under intense pressure to reduce the number of foreign aircraft its leases in order to purchase Russian-made IL-96-300 aircraft. The Funds from the Export-Import Bank loan would be used to finance production of the Russian aircraft in a project valued at over $1 billion.

East Line Offers Route To Namangan

· Russian Air company, the East Line will now offer a direct shuttle flight between Moscow and Namangan, Uzbekistan. This is the first direct route between Moscow and the Fergana Valley. Before now a traveler could get to Namangan only from towns in western Uzbekistan. The air company plans cargo shipments as well to deliver Uzbek melons and watermelons to the Russian capital. The passenger flights of the economy class will be made every Thursday on board a Tu-154 or an Il-62.

European Republics

Lukoil To Supply Ukraine With Fuel

· After a meeting between Ukrainian President Leonid KUCHMA, Prime Minister Valery PUSTOVOITENKO, and Russian Lukoil President Vagit ALEKPEROV on Friday, it was announced that LUKoil will sell Ukraine 300,000 tons of fuel to help alleviate fuel shortages threatening the agricultural harvest in the bread Basket nation. State-supported farmers have complained that the government hasn't provided them with enough fuel to complete the harvest. Fuel traders say the shortage was caused by the government's imposition of price controls on low-octane fuel used by farms and the reduction of gasoline production in Russia.

Separately, ALEKPEROV said LUKoil was prepared to invest a "solid" amount of money for developing Ukraine's LiNOS oil refinery, one of Ukraine's largest. Russia, Ukraine, and Kazakhstan are exploring the prospect of forming a consortium for joint usage of the LiNOS plant, ALEKPEROV said. The Ukrainian government, which currently owns 67.41 percent of LiNOS, in June announced plans to sell a controlling stake to Russia.

US Reviews Aid For Ukraine's KFOR Force

· The US is considering rendering aid to Ukraine to ensure its participation in KFOR, but no decision has been reached so far. A representative of the US

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Defense Department on Wednesday explained that a necessity for Ukraine's participation in the international peacekeeping force was prompted by US interest in having Ukraine perform such a role, which would be a logical continuation of Kiev's participation in the Partnership for Peace program. The representative believes that as a part of KFOR, Ukraine would gain some experience and demonstrate its adherence to cooperation with NATO, which is one of the major tasks of NATO's partnership program.

South Caucasus & Central Asia

IMF Approves $45M Loan To Georgia

· The International Monetary Fund (IMF) on Friday approved a $45 million payment from its loan to Georgia. The Fund warned Georgia about its poor tax collection rate and protracted delays in paying wages and pensions. The IMF predicts that Georgia's economy will grow some 2 percent this year, down from 6 percent in 1999. Tax collection in Georgia was 9 percent of gross domestic product in 1998, one of the lowest in the world. Deputy Managing Director Shigemitsu SUGISAKI said, "Directors stressed the importance of an orderly servicing of Georgia's substantial external debt. They regretted the limited progress for discussions on Georgia's debt to Turkmenistan and strongly emphasized the need for an early resolution of this long-standing issue." Reuters reported that the IMF also increased the total volume of its loan by $7.5 million to $232.6 million. The loan was first approved in February 1996. It expires in August.

Georgia Prepares For Cohen's Visit

· Georgian President Eduard SHEVARDNADZE today hailed the upcoming visit of US Defense Secretary William COHEN to Tbilisi. According the President, he intends to discuss matters related to the development of bilateral relations, the strengthening of Georgian security and pressing regional issues. A concrete agenda to be discussed during the visit of the Pentagon head scheduled for August 1, 1999 "has not yet been defined," SHEVARD

NADZE told a briefing at the State Office. "The US has certain interests in Georgia and in the South Caucasus as a whole," the Georgian leader noted.

Azerbaijan Receives Turkish Loan

· The Azeri Defense Ministry on Saturday received $3.5 million from close ally Turkey. A Turkish delegation headed by Major-General Sharafetdin TELYAZAN signed an agreement for "material and technical support" for the Azeri armed forces. A statement released by the ministry did not stipulate what the money will be used for. It has been assumed that part of the money will cover the cost for 30 Azeri soldiers to a Turkish battalion taking part in the NATO-led peace mission in Kosovo. NATO Secretary General Javier SOLANA on Thursday invited an Azeri unit to participate in the joint operation. The Azeri Defense Ministry has not determined a date for deployment of the troops. Senior Azeri officials have said they would welcome NATO airbases and troops to guard against Russian and Armenian threats. NATO has not fully responded to this statement.

Wolf Meets Over Caspian Energy

· US presidential adviser on Caspian energy John WOLF visited Baku last week and met with Prime Minister Artur RASIZADE and officials at the State Oil Company (SOCAR), according to the Azeri Embassy. Ambassador WOLF expressed satisfaction with ongoing talks on the Main Export Pipeline (MEP) along the Baku-Ceyhan route and with, "Azerbaijan's constructive approach," to the Caspian Sea division. The sides also discussed Azerbaijan's participation in the proposed Trans-Caspian Pipeline in light of recent discoveries of vast gas reserves in the Azeri offshore field Shah-Deniz.

Kyrgyz-Kazakhstan Establish Oil Contacts

· Acting President of the Association of Kyrgyz Oil Traders Georgy CHERVONOV said that due to the increase on Russia's oil export duty, Kyrgyz oil dealer have established contacts with Kazakhstan's oil refineries. The duty rise could have affected the Kyrgyz economy five years ago when more than half of all the fuel products were imported from Russia.

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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