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

Wednesday, August 18, 1999

Communist Party Falling Apart

· Tuesday's announcement that former prime minister Yevgeny PRIMAKOV will head the coalition of the Fatherland-All Russia parties is not the only hammer cracking away at the influence and power of the Communist Party. Internal splintering is also destroying the party. Spiritual Heritage leader Aleksei PODBEREZKIN was expelled from the Communist Duma faction on Monday, after some members denounced him as anti-Communist. Communist Party leader Gennady ZYUGANOV said PODBEREZKIN had "effectively left" the faction when he announced his group's intention to run in parliamentary elections separate from the Communist Party. ZYUGANOV and PODBEREZKIN had met earlier in the morning. PODBEREZKIN told Russian Television that, "Hypocrisy and intrigue characterize the Communist Party today." He said that at his party's congress in October, his movement will discuss whether to join the Fatherland-All Russia alliance. He added that other leftists will soon leave the party voluntarily. According to NTV, Duma Security Committee Chairman Viktor ILYUKHIN, another member of the Communist faction and leader of the Movement to Support the Army, said he does not rule out that he, too, will be expelled soon. ILYUKHIN has said that his group is opposed to joining the For Victory alliance, currently being organized by Communist Partly leader ZYUGANOV. In addition, the party's alliances are breaking up. The Agrarian Party has been holding talks with Fatherland-All Russia.

Rus-US Begin START-III Talks

· A US delega

Russian Federation

Politics

Defense Min. Takes Over Daghestan Offensive

· Russian President Boris YELTSIN on Tuesday said he wanted Russia's Defense Ministry, led by Igor SERGEYEV, to play the key role in crushing the invading rebels in Daghestan, instead of the Interior Ministry, escalating the scale and importance of Russia's offensive. The Interior Ministry had been in control of the operation, since it began 12 days ago. SERGEYEV, along with Interior Minister Vladimir RUSHAILO and a group of senior officials from the Defense Ministry, the General Staff and the Interior Ministry arrived in the troubled region of Daghestan to meet with high-ranking federal military officers in charge of the operation against Islamic rebels. In addition to the officials, more troops and weaponry were airlifted as reinforcements. Today, SERGEYEV met behind closed doors with chief of staff for the anti-guerrilla operation Vladimir KAZANTSEV and other generals deployed in Dagestan. Earlier this month, Russia's armed forces chief of staff Anatoly KVASHIN, and several other top generals barely escaped alive, when rebels set their helicopter ablaze with a rocket-propelled grenade. It is not clear whether the Defense Minister will visit the war zone. SERGEYEV's schedule is being kept secret for security reasons. Prime Minister Vladimir PUTIN said he will step up attacks and give the conflict one more week. Despite conflicting reports on casualties, Russia's airstrikes appear to be having some effect. New television footage shows former Chechen field commander Shamil BASAYEV reviewing rebel troops. The fighters faces were tense and weary in contrast to footage released a few days ago. BASAYEV is confident in his forces, most from the Wahhabi Muslim sect. He has declared Daghestan an independent Muslim state and called the fighting a holy war.

Today's News Highlights

Russia

US Banks Leery Of Russia

Privatization Sales Delayed

European Republics

Est. Parliament Reviews WTO

Ukrainian Economic Indicators

South Caucasus & Central Asia

Russia Apologizes For Bombing

Central Asian Summit Aug 24th

Baku-Ceyhan Endorsed

Air Kazakhstan Signs Agreement

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Wednesday

August 18, 1999

Intercon's Daily

tion, led by Under-Secretary of State for Arms Control and International Affairs John HOLUM began three days of talks on Tuesday with their Russian counterparts and a group of specialists, led by department chief on security and disarmament of the Russian Defense Ministry Grigory BERDENNIKOV, on possible amendments to the 1972 Anti-Ballistic Missile Treaty (ABM) and drafting a START-III Treaty for strategic arms reduction. "Despite the fact that the Russian and US Presidents confirmed their commitment to observance of the 1972 ABM Treaty in the Joint Statement at their meeting in Cologne on June 20th, the US President signed a bill on June 23rd authorizing the deployment of a national ABM system. Although Bill CLINTON stated that the final decision on system deployment would be taken next year, the US leadership, in actual fact unilaterally, intends to update it with advantage for itself, if not to kill the operating Treaty," General of the Army Andrei NIKOLAYEV, a deputy to the Russian State Duma said. He added, "We should unequivocally intimate to Washington that we oppose such unilateral actions. Otherwise, Russia will be forced to take adequate measures. Americans should understand that this is not a threat but a normal response of a state concerned over its security." The need for the consultations is in particular prompted by the fact that the US is considering a new national anti-ballistic missile system that is to protect it from missiles of "unfriendly regimes," specifically North Korea, Iran and Iraq. According to a source in the CLINTON administration, participants in the Moscow consultations will, "focus their attention on general modern problems and their significance for the ABM Treaty. I do not think the text of the Treaty will be discussed in detail."

Economy

Ruble = 24.6/$1.00 (NY rate)

Ruble = 24.62/$1.00 (CB rate)

Ruble = 25.88/1 euro (CB rate)

US Banks Still Licking Wounds

· Chase Manhattan Corp., Bank of America Corp., and JP Morgan & Co. all experienced hefty losses when Russia defaulted on its domestic debt and devalued the ruble in August, 1998. To cope with the financial crisis, these banks eliminated staff in Russia, drastically reduced lending, overhauled risk measurement standards and pulled away from trad

ing for their own books. Herb ASPBURY, Chase Manhattan's regional executive for Europe, Africa, and the Middle East said, "We pulled back in terms of the size of staff in Russia, cutting it buy about 60 percent. The doors are open and we are doing a very, very modest amount of business there but we are taking no risk really...We don't want to abandon the country because it is too important but based on the experience of last year, we are not going to be in risk-taking mode." Banks hurt by the crisis are still leery of lending and are doing business only to meet clients' demands, instead of piling up loans and adding employees to their Russian branches. Bank of America before the crisis had a loan exposure at $432 million in 1998, this year it stands at $33 million.

New Shipping Lane Opens

· A new shipping lane for container cargo opened today between Japan's port of Akita, Honshyu island, Russia's port of Posyest and China's city of Yangtze. A Chinese ship will first sail from the Posyest port to Japan with 110 containers aboard. The launching of the new lane is a momentous event for Russia's Primorsky region, where Posyest port is located. The new sea lane implements a project for the regional port's use in trade between Japan and Russia. The Primorsky region's administration over two years has tried to attract to the region cargoes traded by the countries of the Asia-Pacific region. The Posyest port, which until recently has been used in inland shipments, becomes a major junction for the three countries, with new economic prospects opening before the Primorsky region. The Chinese shipping company plans to attract cargoes from three northeastern provinces of China. Another project is to move cargoes between Russia's Khabarovsk territory and South Korea's Donghai port through Posyest. This would provide the Primorsky region with three ports serving international container lines: Nakhodka, Vladivostok and Posyest. The Primorsky region is considered an important link in shipments between the US and China's northern provinces.

Business

Privatization Plans To Be Delayed

· The planned sale of shares in Rosneft, the Tyumen Oil Company, and LUKoil, which was announced in July by then prime minister Sergei STEPASHIN, is now likely to be delayed. Prior to his dismissal, STEPASHIN was poised to sign ordinances setting

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investment conditions as well as the starting price for 9 percent of shares in LUKoil. Those documents have been returned to the State Property Ministry for revision at the request of presidential administration officials, the RFE\RL Newsline reported. Tender terms for the sale of shares in Rosneft and the Tyumen Oil Company were also to have been announced in August.

South Caucasus & Central Asia

Russian Apologizes For Accidental Bombing

· Intercon sources report that the Georgian Foreign Ministry has received a formal apology from Russia for the bombing on August 9th of Zemo Omalo that injured four people. Russia claims that the bombing was pilot error and will pay compensation to the wounded citizens and for other damages. Russia said that its pilot was attempting to bomb rebels fighting in the nearby Botlikh district of Daghestan. The pilot of a Su-25 bomber, along with another Su-25 and MiG-29, inadvertently crossed the Georgian border and dropped cluster bombs. Cluster bombs are plastic anti-personal mines which explode over a 40 hour period. Georgian Foreign Minister Irakly MENAGARISHVILI issued a formal protest to Russia. He called for a thorough investigation, identification of those who made the air raid on peaceful villages. He ordered those guilty parties to be punished. MENAGARISHVILI stressed that it should be determined whether the bombing was a mistake or a planned action. Russia had earlier denied any involvement in the bombing. A team of Russian experts and Georgian officials investigated the bombing area last week. Russia later admitted that the cluster bombs were Soviet-made and banned by international conventions.

Meanwhile, Russian Foreign Minister Igor IVANOV announced he will make an official visit to Georgia on September 3rd to 4th. He will meet with Georgian officials to discuss bilateral relations and the situation in the Caucasus region. IVANOV's visit will be the first of a Russian foreign minister since Yevgeny PRIMAKOV in August of 1997.

Central Asian Summit Set For August 24th

· Central Asian leaders will meet this month at a summit in Bishkek, Kyrgyzstan on August 24th to 26th. Attending the conference will be Chinese President JIANG Zemin, Tajik President Emomali RAKHMONOV along with their counterparts from Russia, Kazakhstan, and Kyrgyzstan. Multilateral and bilateral meetings are being thoroughly prepared now within the framework of the summit. In particular, Russian President Boris YELTSIN will discuss with JIANG trade and the state of their strategic relations, as well as international issues. On the agenda for the third annual summit are topics

European Republics

Estonian Parliament Considers WTO Bills

· The Estonian parliament is meeting today for first-reading debate of a draft law on customs tariffs and a draft law on ratification of the World Trade Organization's (WTO) founding protocol on international trade that Estonia is to meet in order to join the WTO. The parliament's irregular meeting is its second during the summer recess. The first was held on August 11th, at which the critical situation of agriculture was reviewed on insistence of the opposition. Deputies had to make their way into the parliament's building through crowds of farmers, who came from different regions of Estonia to protest their plight. The parliament passed no decision and put off an opposition-motioned rescue program for the agricultural sector until the next session.

Ukrainian Economic Indicators

· Ukraine's State Statistics Committee reported that consumer prices went down in Ukraine by 1 percent in July 1999, while in June they increased by 0.1 percent. Consumer prices of food products decrease by 3.2 percent, tariffs on paid services lowered by 0.7 percent, and prices of non-food goods increased by 1.2 percent. July's lowering of prices is explained by seasonal factors. In January-July Ukraine's inflation amounted to 7.5 percent as against 2.7 percent over the same period of time in 1998. The inflation level planned for 1999, amounts to not more than 19.1 percent as against 20 percent according to the results of 1998. Ukraine's foreign trade volume decreased by 24.6 percent to $10.8 billion in the first half of 1999. The exports fell by 19.5 percent to $5.32 billion, and the imports totaled $5.49 billion. The import of oil into Ukraine increased 15-fold in July as compared with the previous month and that of diesel fuel quadrupled. As a result, the prices of petroleum products went down by 5 percent to 30 percent in over half of Ukraine's regions.

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August 18, 1999

Intercon's Daily

relating to the current international situation, regional security and economic cooperation, so as to further promote their good-neighborly relations and mutually beneficial cooperation. Russian Deputy Foreign Minister Grigory KARASIN noted that the Russian Foreign Ministry, as well as the Russian president's administration, different ministries and departments, first of all from the economic and financial blocs, are actively participating in the preparation of this summit.

Richardson-Wolfe Push Baku-Ceyhan

· US Secretary of Energy Bill RICHARDSON, accompanied by the US administration's Caspian energy policy advisor John WOLFE, held talks in Istanbul to urge Azerbaijan and Turkey to proceed with plans for building the Baku-Ceyhan pipeline. He reiterated the US' support for the Baku-Ceyhan route, thereby avoiding Iran and Russia. Financing the pipeline is the key issue holding back construction. The Turkish government has estimated the pipeline cost at $2.7 billion. However, the Azerbaijan International Operating Co. (AIOC) claims the cost is closer to $3.7 billion. RICHARDSON said it is, "very important" that Turkish and AIOC officials have successful talks next week with financial institutions in Washington, aimed to promote financing of the Baku-Ceyhan. AIOC also has concerns over reaching the one million barrels a day capacity to make the pipeline economically viable. AIOC produces about 100,00 barrels a day and will reach projected maximum of 800,000 barrels a day. RICHARDSON said, "We believe there are enough volumes to make Baku-Ceyhan commercially viable." Chevron and Texaco have expressed an interest in reserving space in the pipeline. They both produce oil from fields in Kazakhstan. From Istanbul, RICHARDSON will travel to Azerbaijan and Turkmenistan to discuss the trans-Caspian gas pipeline linking Turkmenistan with Turkey via Azerbaijan and Georgia. The pipeline's capacity would then reach 30 million cubic meters of gas to be pumped from Turkmenistan and Azerbaijan. "The Time has come to move quickly...We believe that it's time to get closure on Baku-Ceyhan.

We're pursuing an endgame strategy for both Baku-Ceyhan and the Trans-Caspian pipeline."

Kazakh Approves American Int'l Petro Contract

· American International Petroleum Corporation has received notice that the Kazakh State Committee on Investments has approved the operations contract for the development of the Shagyrly-Shomyshty gas field. A Kazakhstan government report estimates proved recoverable gas reserves at 700 billion cubic feet for the 174,000 acre field. The operations contract governs all aspects of the development of the field over the 30-year license period, including the duties and obligations of both the company and Kazakhstan government. In particular, the contract provides the American International Petroleum, which has a 100 percent net working interest in the license, with guarantees for the right to export the gas according to the petroleum code as well as stability of taxes and economic provisions. The initial drilling program will begin later this year with the drilling of two test wells to confirm rates ranging between 2.0 to 5.5 million cubic feet per day. American International Petroleum is holding discussions regarding contractual arrangements for the marketing and export of gas produced from the field, as well as equipment and construction financing for certain segments of the project.

Air Kazakhstan Signs Pact With Lufthansa

· Air Kazakhtan has signed a five-year contract with Lufthansa Technik, a subsidiary of Deutsche Lufthansa, for the maintenance of its two Airbus aircraft. Lufthansa Technik declined to specify the size of the deal. Kazakhstan's national airline includes two Airbus A310 and two Boeing B737. The carrier also flies 64 Tupolev, Ilyushin, and Antonov aircraft. Air Kazakhstan plans to expand its capacities with western-built airplanes.

Daily Report on Russia & FSU will not be published during August 23rd to 27th for Intercon's Summer Break

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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