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Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Thursday, August 19, 1999

Russian Federation


Bank Of NY Laundered Russian Mob Money

· From October to March some $4.2 billion in more than 10,000 transactions passed through one account at the Bank of New York in what is believed to be a major money laundering operation by Russian organized crime. Federal investigators estimate that as much as $10 billion may have flowed through related accounts since early last year. The New York Times reports that inquiries are still in the preliminary stages, but many believe this could become one of the largest money laundering operation ever uncovered in the US and the first time that a major US financial institution was penetrated by Russian organized crime. In a statement, the Bank of New York said it is cooperating with authorities and declares, "There are no allegations of wrongdoing by the bank." The bank has suspended two employees, Natasha Gurfinkel KAGALOVSKY and Lucy EDWARDS; both are senior officials in the bank's Eastern European division and married to Russian businessmen. EDWARDS' husband, Peter BERLIN, had authority over the Benex account at the Bank of New York. Benex has been linked to a Philadelphia-based company YBM Magnex, a front for Semyon Yukovich MOGILEVICH. MOGILEVICH, a suspicious and ruthless figure, has been linked to arms trafficking when the Soviet Army withdrew from Eastern Europe. Weapons were purchased from Russians leaving from East Germany and in turn sold to Iran, Iraq, and Serbia. The volume of transactions through the accounts is extraordinary. The Federal Bureau of Investigation in it initial round of subpoenas issued to the bank for the Benex account produced 3,500 pages of transactions. The FBI was alerted to the money laundering practice at the Bank of New York more than a year ago by British authorities. They believe that some of the money from the

account went to pay contract killers and drug barons. The New York Times said it will take months before the investigators sift through the documents and penetrate the complex web of off-shore companies and holding companies to determine precisely where the money came from and where it was disbursed.

Putin Meets With Former Prime Ministers

· Russian Prime Minister Vladimir PUTIN on Wednesday invited recent past prime ministers under YELTSIN to meet with him on a range of subjects. The Prime Minister talked with Viktor CHERNOMYRDIN, Sergei KIRIYENKO and Sergei STEPASHIN. Also attending the meeting on behalf of the Kremlin was presidential chief of staff Alexander VOLOSHIN and Anatoly CHUBAIS, chairman of the board of the United Energy System of Russia. Missing, however, was Yevgeny PRIMAKOV, who announced on Tuesday that he would lead the Fatherland-All Russia coalition. According STEPASHIN, who last week became the fourth premier to be sacked by YELTSIN, the group discussed, "how to make sure that Vladimir PUTIN keeps his job as long as possible." Rumors surfaced that the group was forming a new center-right pro-Kremlin coalition, but STEPASHIN denied this. CHERNOMYRDIN noted that the meeting also touched on the situation in Daghestan, where Russian troops are fighting Islamic rebels, and consultations on Cabinet staffing.

Today, PUTIN met with YELT-SIN to discuss, "new personalities in the new Russian government." YELTSIN

Today's News Highlights


World Bank Funds Misused

Exxon Suspends Drilling

Rus-Boeing On Aircraft Design

Putin Outlines Gas Relations

South Caucasus & Central Asia

Russia Admits Bombing Mistake

Georgian-US Naval Exercises

US Grants Azerbaijan $500,000

Astana Wants MiGs Returned

Karimov Sets Election Dates




August 19, 1999

Intercon's Daily

said, "We discuss in detail every candidate, in order to avoid mistakes this time." PUTIN said that the President had approved the list of ministers he submitted. PUTIN will announce that Cabinet's new make-up Friday. It is believed that First Deputy Prime Ministers Nikolai AKSYONENKO and Viktor KHRISTENKO will remain in their posts. The status of the financial team, the acting Finance Minister Mikhail KASYANOV and international financial institutions envoy Mikhail ZADORNOV, remains unclear.


Ruble = 24.62/$1.00 (NY rate)

Ruble = 24.6/$1.00 (CB rate)

Ruble = 25.8/1 euro (CB rate)

WB Funds Misused: PR, Offices, And Salaries

· According to the Moscow Times, the Russian government has "grossly misspent" billions of dollars from the World Bank on public relations companies, swank officers and generous salaries. Mikhail DELYAGIN, who served as former economic adviser to President Boris YELTSIN and former first deputy prime minister Boris NEMTSOV, said, "There is no control over the disbursements of World Bank money in Russia." DELYAGIN also advised former first deputy prime minister Yuri MASLYUKOV and is currently an adviser for First Deputy Prime Minister Nikolai AKSYONENKO. DELYAGIN said, "The amount of money provided to finance a project itself was often reduced to infinitesimal levels." He noted that 75 percent of World Bank fund allocated to develop the Russian securities market were disbursed to public relations companies. In general, he said up to 30 percent of World Bank funds disbursed to a project go to pay salaries, while another 20 to 30 percent is spent on office rent or overhead expenses. Alexander SHAMRIN, director of the Federal Center for Project Finance, which is responsible for monitoring execution of the World Bank projects, said "There is no evidence to support all of the facts as stated by DELYAGIN. The government has tightened control over the disbursal of the World Bank money in the past year." However, other officials in the Finance and Economics Ministry on the condition of anonymity are hinting at misuse of funds, influence of lobbies, and government sabotage of various planned World Bank projects. The World Bank's representative in Russia Michael CARTER plans to discuss the allegation in detail with reporters on

Friday. News of the misuse of funds follows a scandal earlier this year when government officials admitted that Central Bank reserves including International Monetary Fund money has been stashed in an obscure off-shore account.

Cabinet Reviews 2000 Draft Budget

· Russian Prime Minister Vladimir PUTIN in a Cabinet meeting called for a "realistic and forward-looking" budget for 2000, to restore the trust of the population, raise living standards, and increase economic activity in the state. He said the draft 2000 budget is a "global, conceptual issue of the development of Russia." Acting Finance Minister Mikhail KASYANOV presented the proposed budget and the Cabinet agreed in part on the ideology for the budget. According to a planned average ruble exchange rate of 32 rubles to the dollar, Russia predicts its net foreign borrowing to be $558 million. This foreign borrowing figure leaves out $6 billion of borrowing from international financial institutions. Specifically Russia plans to borrow $2.6 billion from the International Monetary Fund, $1 billion from the World Bank, $500 million from Japanese banks, and $1.65 billion in tied loans. Foreign debt servicing is projected at 3.18 percent of gross domestic product (GDP). The deficit will be 57.87 billion rubles ($25 billion), just 1.12 percent of the GDP. Inflation is seen at 18 percent, against 30 percent in the 1999 budget and 50 to 100 percent now expected for this year. The draft budget envisages 743.55 billion rubles ($23 billion) in revenues, about 14.18 percent of GDP and 801.42 billion rubles in spending, about 15.71 percent of GDP. Privatization sales are expected to raise 18 billion rubles ($563 million) to help cover the budget gap. The government plans to sell 10.93 percent of LUKoil, 71.25 percent of Rosneft, 85 percent of Onako, 25 percent minus two shares of telecommunications firm Svyazinvest, and 25 percent of Transnefteprodukt, and oil pipeline firm. Acting Economic Minister Andrei SHAPOVALYANTS said Russia's industrial output is expected to grow by 3 percent to 4 percent, and the GDP by 1.5 percent in the year 2000. Russian exports are expected to show an annual growth of 6 percent between 1999 and 2002. SHAPOVALYANTS believes that, "the year 2000 may become a turning point in the economic development of Russia and may consolidate the stabilizing factors, which have already become evident." The Finance Ministry is still working on the

When you need to know it as it happens




August 19, 1999

Intercon's Daily

draft budget before it is to be submitted to the Russian State Duma on August 25th.


Exxon Suspends Sakhalin I Drilling

· Exxon Corporation has suspended drilling at its $15 billion Sakhalin project due to an environmental and legal dispute with the government. The company halted the drilling after the State Ecological Committee failed to back its drilling plan for an oil well in the Sakhalin I project. According to The Wall Street Journal the dispute centers around how Exxon would discharge mud and other byproducts brought up during drilling, which Exxon planned to release into surrounding waters as is allowed by Russian law and is an, "accepted international environmental practice." Exxon said extensive monitoring of the discharge from other wells over a three-year period ending in 1998 showed it, "does not harm the marine environment." Since drilling can only be conducted in the summer months, the suspension will delay drilling for at least one year, with $9 million in lost preparation spending, and resulting in hundred of lost jobs. Exxon holds a 30 percent stake in the Sakhalin I project and is the operator. The consortium also includes two Russian companies and a Japanese concern. In a statement Exxon said that despite progress in reforming the country's legislation and regulation, "this decision makes it apparent that much more remains to be done before we can proceed with the significant investments."

Boeing-Russia Work On Joint Aircraft Design

· The US Boeing Corporation has embarked on a new stage of cooperation with Russian aircraft-makers in a project of joint aircraft designing, the director of Boeing's Russia and CIS engineering programs Sergei KRAVCHENKO said. A group of designers of Russia's Ilyushin Aircraft Company had started to re-design the passenger plane Boeing 767 into a cargo plane. Thirty-five engineers will take part in the project at Boeing's design center in Moscow, which was opened in 1997 when 12 Russian engineers started the work to re-design the interior of the passenger Boeing 777 plane. "Our Russian colleagues have a huge experience of re-designing the passenger plane Il-96M into a cargo one, Il-96T. This experience will doubtlessly help the implementation of the project of creating a cargo

variant of Boeing 767," KRAVCHENKO said. He said Boeing would increase the number of Russian specialists involved in the project from 30 to 60 by the end of this year.

Putin Outlines Relationship Toward Gas

· Before being confirmed Prime Minister, Vladimir PUTIN outlined the new government's relations with gas monopoly Gazprom and other natural monopolies. He said, "Like it or not, natural monopolies are the basis of our economy. This is why we must act very careful in this field." PUTIN declined to say whether the government will insist on the separation of Transgaz from Gazprom. "I am not prepared to answer this question yet. But I think it can be solved without Gazprom." He noted that the state cannot reduce its influence on issues concerning the management of Gazprom. PUTIN said he will consider renewing discussion on the creation of a large oil holding in Russia.

South Caucasus & Central Asia

Russia Admits Bombing Mistake

· Russia admitted on Wednesday it had mistakenly bombed Georgia on August 9th. Russia said that it was in pursuit of rebel fighters in Daghestan. A Russian Foreign Ministry said, "It was found that, in connection with military operations against bandit groups in Daghestan, there was indeed a mistaken bombing by a Russian jet with a container of anti-personnel mines." Russia also said it was willing to consider financial compensation for those who suffered losses from the bombing. Three people were wounded in the bombing of Zemo Omalo by the Daghestan border. Georgian State Minister Vazha LORDKIPANIDZE said on the national television on Wednesday evening that these actions had been carried out by the pilots "by mistake" as part of an operation to mine roads leading to Dagestan. The statement added, "Expressing its sincere regret in connection with the incident, the Russian side apologizes to the Georgian side and informs them that all necessary measures to prevent such incidents in the future will be taken." The incident was investigated by Russian and Georgian military experts who heard witness reports and visited the Akhmeta district where the air raid had taken place. The investigation established that a Russian plane had indeed dropped

When you need to know it as it happens




August 19, 1999

Intercon's Daily

a container with land mines by mistake in connection with the anti-terrorist operation in Dagestan. Parliamentary Speaker Zurab ZHVANIA said the apology indicates a desire for "new neighborly and civilized relations with Georgia." Russia has offered to patrol the Georgian border with Chechnya and Daghestan. Georgia has refused.

Georgia-US Naval Exercises

· The first Georgian-US naval exercise was held in the Georgian port of Poti on the Black Sea on Saturday. The exercise involved five Georgian coast guard ships and the US coast guard ship Dallas with a Dolphin helicopter aboard. The purpose of the maneuvers was to practice the protection of the shoreline, search and rescue operations, and small boat exercises. The US ship left Poti for Varna, Bulgaria, later that day.

Azeri Gets $500,000 TAD Grant

· Azeri Prime Minister Artur RASIZADE, State Oil Company (SOC) president Natik ALIYEV, US Energy Secretary Bill RICHARDSON and US Trade and Development Agency (TAD) Director Joseph GRANDMAISON signed an agreement for a US $500,00 grant to Azerbaijan. The money will be used to draw up a feasibility study, by US company Merichem Chemicals and Refinery Services LLS, for the modernization of some of the operations of the oil refinery Aznefteyag built in Baku more than 100 years ago. It will estimate how much the modernization of the Baku oil refinery and environmental protection measures will cost. The deal is the last phase of Azerbaijan-US talks on cooperation in the field of energy held between Azeri President Geidar ALIYEV and RICHARDSON. The SOC president said the discussion at the talks focused mainly on three issues: the Baku-Ceyhan oil pipeline to the Turkish Mediterranean shore, the trans-Caspian gas pipeline from Turkmenistan to Turkey via Azerbaijan and Georgia, and the border between Turkmenistan and Azerbaijan in the Caspian Sea. The SOC president said the talks in Baku also showed progress in the resolution of questions concerning

the sea border between Azerbaijan and Turkmenistan with the mediation of the US Administration.

Kazakhstan Wants MiGs Returned

· Kazakh Ambassador to Tokyo Tlevkhan KABDRAKHMANOV on Friday during a meeting with the director of the European and Oceania department Mutsuioshi NISHIMURA stated that Kazakhstan has asked North Korea to return the 20 Soviet-made MiG-21 fighter jets, which were earlier sold to North Korea stirring a scandal both in Astana and abroad. The planes are worth $40 million. NISHIMURA also asked Kazakhstan to take measures to prevent further sales to North Korea of combat equipment. Having agreed with Tokyo claims, the Kazakh ambassador did not say what was Pyongyang's reaction to the request to return the earlier sold MiG-21 planes. Neither did he elaborate on any details of the deal, which marred Astana's ties with its major economic partners and donors, including the US, South Korea and Japan. Early in August, President Nursultan NAZARBAYEV fired Defense Minister Mukhtan ALTYNBAYEV and chairman of the National Security Committee Nurtai ABYKAYEV for a "blatant violation of the rules of selling military equipment." Under an international convention that Kazakhstan has signed, it has pledged not to sell arms to North Korea.

Karimov Sets Presid., Parliamentary Elections

· Uzbekistan's President Islam KARIMOV today announced that Uzbekistan will hold a parliamentary elections on December 5th and a presidential elections on January 9, 2000. According to the Constitution, the presidential term is for five years and one person cannot hold the office for more than two consecutive terms. The Uzbek parliament consists of 250 deputies who were elected in December 1994, for a five year term, representing four political parties. The deputies are scheduled to confirm the election dates during Friday's sessions.

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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When you need to know it as it happens