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

Monday, August 30, 1999

the case, was fired on Friday for gross misconduct, violations of the bank's internal policies, falsification of bank records, and a failure to cooperate with inquiries. After raiding her London home, Britain's national crime squad found evidence that EDWARDS' had used the Bank of New York name for dealings unrelated to her job at the bank. She also vouched for Peter BERLIN's Benex Worldwide Ltd. when it was setting up an account, not notifying the bank that BERLIN was her husband. Benex was set up as a trading front for MOGILEVICH, who said, "All accusations of `laundering' controlling the drug trade, prostitution and contract murders is nothing but the raving of the FBI which is trying to obtain more money from Congress to fight the `Russian Mafia.'" He also said that the only money laundering he has ever been involved in is when, "I accidentally washed $5 I'd left in a shirt pocket." EDWARDS' superior Natasha Gurfinkel KAGALOVSKY has not been fired as yet, but is on suspended leave. Ms. KAGALOVSKY and her husband, "wish to state unequivocally that they have never been involved in money laundering in any way, shape or form...Nor do they have any knowledge of such activity," according to a released statement. Mr. KAGALOVSKY is a vice chairman at oil company Yukos and once was a vice chairman of Menatep and Russia representative to the International Monetary Fund (IMF).

The IMF will discuss at its September 20th meeting a second installment $640 million of a $4.5 billion loan, along with a report on allegations that its loans may have been misappropriated. The Fund

Russian Federation

Politics

Russia Joins Bank Of NY Investigation

· The New York Times is now reporting that up to $15 billion linked to Russian organized crime was funneled through the Bank of New York and Republic National Bank. US authorities have seized about $20 million at the Bank of New York along with bank records linked to the scheme. Russia's domestic intelligence agency on Friday joined the investigation, which already includes at least six US government agencies, the Federal Bureau of Investigation, the Department of Treasury and British authorities. Russia's acting prosecutor general Vladimir USTINOV said, "We will open a criminal case if crimes are uncovered that involve Russian nationals or Companies." The agency is investigating 33 Russian companies including Menatep, leading organized crime figure Semyon MOGILEVICH, and several current and former members of YELTSIN's government including YELTSIN's daughter Tatyana DYACHENKO, former chief of Staff and finance minister Anatoly CHUBAIS, and former finance minister Alexander LIVSHITS. Chairman of Yukos and former chairman of Menatep, Mikhail KHORDORKOVSKY is cooperating with investigators. The collapsed bank said, "Menatep never in its history has done any money laundering." KHORDORKOVSKY speculates that Russian government officials took advantage of insider knowledge about the financial crisis and devaluation of the ruble and shipped their bond gains abroad. He seems to be warning Russian politicians that they could be dragged through a more wide ranging investigation. The majority of accounts under investigation at the Bank of New York are in the name of Benex Worldwide Ltd.

Lucy EDWARDS, a key bank employee involved in

Today's News Highlights

Russia

New Political Landscape Forms

Duma Reviews Budget Sept 25th

Gazprom Confirms Officials

European Republics

Rus-Belarus Treaty Submitted

Rus-Ukrainian PM Meet

South Caucasus & Central Asia

Georgia Extends Rus. Mandate

Azeri Gas Turbine Construction

Militants Seize Hostages

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will review how the new government has met IMF conditions. It will address claims in The Wall Street Journal and USA Today that IMF loan money was part of the $15 billion funneled through the Bank of New York. The IMF insists that there has been no misappropriation of funds and that no money was ever paid to Russia via the Bank of New York. The recent installment never even left Washington, since the loan was used to repay previous existing loans. Jim LEACH, an Iowa Republican and chairman of the US House of Representatives' banking committee, called for a moratorium on lending to Russia by the IMF until safeguards are put in place to prevent money from being stolen. Russian Finance Minister Mikhail KASYANOV on Wednesday said that Russia has used every cent of IMF aid as agreed and all of it has been accounted for. "IMF loans have been used for legitimate government purposed, such as helping to finance the budget deficit. They have been made in support of economic programs that addressed the basic problem of the economy."

New Political Landscape Ahead Of Elections

· Russia's political parties are jockeying for positions and forming new alliances ahead of December's parliamentary elections at such a racing pace that it is difficult to keep a score card on leading politicians' moves. A new Union of Rightwing Forces coalition was formed on Sunday at Moscow's President Hotel between Yegor GAIDAR Russia's former acting prime minister, Sergei KIRIYENKO, former prime minister, Boris NEMTSOV former deputy prime minister, Konstantin TITOV, governor of Samara region and head of the Federation Council's budgetary committee, and Irina KHAKAMADA, another leading reformer. Their alliance hopes to gain 5 percent of the necessary votes to gain seats in Russia's State Duma. Former prime minister Sergei STEPASHIN, who was courted by the right, is linking up with Yabloko movement led by reformer Grigory YAVLINSKY. STEPASHIN has hinted that he is considering a run for the presidency in 2000, if his parliamentary bid in December is successful. Former finance minister Boris FYODOROV has also been seen as moving closer to an alliance with center-right party Our Home is Russia, led by Viktor CHERNOMYRDIN, the former prime minister and chairman of Gazprom. The front runner alliance remains the center-left Fatherland-All Russia party led by former prime minister Yevgeny PRIMAKOV. At a rally for the

alliance, PRIMAKOV outlined his policy program calling for a strong state, but ruled out any return to Soviet-era controls on individual freedom or the re-nationalization of industry, the Financial Times reported. He reiterated his call for reforming the constitution to include the post of vice president, possibly a slot for Moscow Mayor Yuri LUZHKOV, if the alliance leads the presidential campaign, and an amendment providing "full security and worthy life" to retiring presidents.

Economy

Ruble = 24.75/$1.00 (NY rate)

Ruble = 24.75/$1.00 (CB rate)

Ruble = 25.92/1 euro (CB rate)

Duma Considers 2000 Budget September 25th

· On Wednesday, the government submitted to the Russian State Duma the 2000 draft budget. Head of the Duma's budget committee Alexander ZHUKOV said, "The budget committee will start working [on the document] at once, from today, while the Duma convenes on September 13th." He added, "We are planning for the budget to be presented to the Duma for a first reading on September 25th." The budget calls for revenues of 745.13 billion rubles ($23 billion at an estimated 32 rubles per dollar rate) and spending of 803 billion rubles, leaving a deficit of 1.13 percent of gross domestic product. ZHUKOV and his counterpart in the Federation Council Konstantin TITOV agree that the budget will not be easily passed. ZHUKOV points out that deputies will argue there is not enough funding allocated for investment in industry, while the Agrarian Party will be dissatisfied with cuts to agricultural funding. He also noted that the draft included a rise in oil export tariffs from 5 euros per ton to 7.5 euros per ton and an export tariff set at 3 euros per 1,000 cubic meters of natural gas. TITOV said that the budgeted distribution of revenues between the center and the regions seriously violates the rights of the region and poorly reflects the interests of Russian regions. Cutting revenues of regional budgets, according to TITOV, may put them on the brink of bankruptcy. "That must not be allowed," he stressed. He believes the optimum proportion must be fifty-fifty, and the budget should try to stick to it for several years. He also expressed doubts that the exchange rate could remain at 32 rubles to the dollar.

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Business

Gazprom Confirms Top Officials

· Russia's gas monopoly Gazprom on Thursday re-elected its top officials and expanded the board of directors. Rem VYAKHIREV was re-elected as chief executive officer. Former prime minister and Gazprom official, Viktor CHERNOMYRDIN was confirmed as chairman of the board of Russia's largest source of tax revenues. CHERNOMYRDIN called to the extraordinary shareholders meeting to elect a board which would better reflect the government's 38.37 percent stake in Gazprom. The state received one more seat on the board, upgrading its presence to five in the 11-member body. Gazprom has been relied on by the Kremlin in times of crisis. For instance it has helped out the government with cash on several occasions to ease huge wage and pension arrears to state employees. Gazprom also controls a number of newspapers likely to influence the upcoming parliamentary and presidential elections. In Moscow, there were rumors that VYAKHIREV was prepared to endorse Moscow Mayor Yuri LUZHKOV and his party. VYAKHIREV has denied having any political preferences. One analyst said, "It looks like VYAKHIREV was asked to show less sympathy toward LUZHKOV and his Fatherland movement and offer more space to the Kremlin's people." LUZHKOV is viewed by the Kremlin as a dangerous political opponent.

Meanwhile, State Property Minister Farit GAZIZULLIN announced the state will sell 3.37 percent of Gazprom in 1999. The head of Federal Property Fund Igor SHUVALOV said the sale would take place if the price of the company's American Depository Shares rose to $11.50 per ADS from around $8.50 now. The tender would take place in two stages: a 2.5 percent stake would be offered by the shareholding controlled by the State Property Ministry and then a 0.87 percent controlled by the Russian Federal Property Fund. Both GAZIZULLIN and SHUVALOV were elected to the Gazprom board.

Belarus and Russia appointing Mikhail VANIN, the chairman of Russia's State Customs Committee, as chairman of the Customs Committee of the Union of Belarus and Russia. YELTSIN and LUKASHENKO confirmed their agreement that the Russian-Belarus Treaty of Union will be submitted for signing at a session of the Supreme Council of the Union of Belarus and Russia after it is put to a nation-wide discussion and subsequently finalized.

Rus-Ukrainian Prime Ministers Meet

· Russian and Ukrainian prime ministers Vladimir PUTIN and Valery PUSTOVOITENKO met on Saturday to address the range of Russian-Ukrainian cooperation, including the issue of Ukraine's debt for Russian gas deliveries and problems of the Black Sea Fleet, delimitation of the border, including the Azov Sea problem. They also studied the implementation of decisions reached at the fifth meeting of the mixed Russian-Ukrainian Commission for Cooperation. The sides discussed the creation of a free trade zone and a project to set up a joint venture to export electric energy to Western Europe. PUTIN said, "We have considered all strategic questions of our bilateral relations and although the questions we considered were quite complicated, the talks were held in a constructive atmosphere." He added that, "There is not a single problem that is unresolvable," in relations between Russia and Ukraine. However, PUTIN said, "We are working intensively and this is why temporary economic problems sometimes arise. But we intend to work on them energetically together for the good of our states." PUSTOVOITENKO stressed the importance of both continuing joint efforts and strengthening Ukraine's payment discipline. He said Ukraine's debt to Russia for the deliveries of natural gas and other energy resources to Ukraine was "a complex problem; both Ukraine's internal problem and an external problem as regards relations with Russia." He stressed that the non-payment problem is a common problem of the two countries but Ukraine bears a larger share of responsibility. "We must behave in a more disciplined fashion with respect to the settlements for the Russian gas," PUSTOVOITENKO said. The total debt for gas is in dispute. Russia believes it is owed $1.6 billion, while Ukraine recognizes only $1 billion of the debt. Anatoly CHUBAIS, board chairman of the United Energy System of Russia, said Ukraine should pay its energy debts which amounts to over

European Republics

Rus-Belarus Submit Treaty For Signing

· Russian President Boris YELTSIN and Belarussian President Alexander LUKASHENKO signed the decision of the Supreme Council of the Union of

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$100 million. "The project is a strategic landmark in all our plans on electricity exports to Western Europe and in the solution of the problem of Ukraine's debt for Russian electricity deliveries," CHUBAIS said.

South Caucasus & Central Asia

Georgia Extends Rus. Peacekeepers' Mandate

· The Georgian National Security Council today has passed the decision to extend the mandate of Russian peacekeepers in Georgia's breakaway province of Abkhazia. The parliament's defense and security committee chairman Rezo ADAMIA a few days ago called for the Russian peacekeeping force staying in the area of the Georgian-Abkhaz conflict. He said the Russian peacekeepers should be allowed to remain in Abkhazia, as their withdrawal at this phase would leave the region with a security void. This harbors new trouble, and "our main goal is not to allow a new destabilization in the conflict zone," ADAMIA said. Meanwhile on Friday, Russian border guard chief Konstantin TOTSKY said Moscow might lift the blockade on Georgia's independent-seeking region of Abkhazia. "The prospect of the Russian side's lifting the Abkhazia blockade are quite real." Russian border guards control said it arrested 80 violators in the first months of 1999. However, paramilitary groups can always cross mountain borders, however well guarded, he added. Russia has the right to define by itself what border regime it wants to have on its border, TOTSKY said.

Azeri Gas Turbine Construction Begins

· The construction of Azerbaijan's first gas turbine station began in Baku on Saturday. It is being built in the area of the Baku Tets-1 thermoelectric plant. In two years, it will fully replace the country's oldest thermal plant which has been in operation since 1902. The new station is being built under a program, which the country's government approved a year ago, for the modernization of the power sector of Azerbaijan. A German bank has provided $50 million in credits to the Azenergo state-run company for the turbine's construction for a term of 14 years at 2.37

percent at annum with a 14-month grace period. According to the project, the power of the gas turbine station will be 100 megawatts, which accounts for 10 percent of Baku's requirements for electric power. This is more than eight times as large as that of the old Tets-1. The gas turbine station will supply heating to three large residential neighborhoods in the capital and repay the investment in 4.5 years.

Militants Seize Four Villages In Kyrgyz

· A state of emergency was declared Thursday in the Batken district in southern Kyrgyzstan to counter Tajik militants that had seized four villages in the district. Kyrgyzstan has applied to Russia for military and technical assistance. Kyrgyzstan's acting Defense Minister Lieutenant-General Nuritdin CHOMOYEV asked for weapons, means of communication and night-vision devices. Local authorities are using loudspeakers to try to persuade the militants to release four Japanese geologists and the commander of the Kyrgyz Interior Troops the militants have taken hostage. The total number of hostages being held is unknown, although the US estimates it to be approximately 100. Earlier Thursday, an air strike was delivered on the militants' bases in the Chon-Alai district of the Osh region bordering on Tajikistan, where 50 militants were believed to be located. By agreement between the Kyrgyz, Uzbek and Kazakh authorities, Uzbekistan and Kazakhstan may assist Bishkek in cases of emergency. Neighboring republics may have assisted Kyrgyzstan in launching the air strikes. The guerrillas are believed to be radical Islamic rebels who are in conflict with the Tajik government. Reports from Bishkek said militants had released four Kyrgyz hostages recently after one cow and several bags of flour were paid for them in ransom and because they could read the Koran. The militants are trying to pass through Kyrgyzstan to deliver weapons to Uzbekistan. They are moving at nighttime using night-vision instruments. Their command effectively employs satellite communications, a military official said. He said the militants are equipped with Kalashnikov submachine-guns and mortars.

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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