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 9, 1999

Russian Federation

Politics

Interior PM Sacked, Replaced With FSB Head

· For the fourth time in 17 months, Russian President Boris YELTSIN sacked his Prime Minister, Sergei STEPASHIN, and his entire government, replacing him with Vladimir PUTIN, director of the powerful Federal Security Service and secretary of the top advisory Security Council. In a televised address to the nation, YELTSIN also anointed PUTIN his successor. YELTSIN said, "He [PUTIN] will be able to unite those who will renew the great Russia in the 21st century." He added, "I have confidence in him. I want those who will go to the polls next July to have confidence in him as well." PUTIN immediately announced, "I will undoubtedly run for president." YELTSIN's endorsement, however, could be the "kiss of death," since his popularity in Russia is so low. PUTIN, a former KGB spy based in Germany, is known as "The Grey Cardinal" for his work and deals behind-the-scenes in the country's security agencies. He is believed to be close with the President's inner circle and have ties to business tycoon Boris BEREZOVSKY and former first deputy prime minister Anatoly CHUBAIS. He stressed the need to rebuild the security services, which has been neglected since the collapse of the Soviet Union. He also said there will be no major change to the financial team, the Cabinet, or the government's foreign policy. PUTIN has little political experience, except his early work in the local St. Petersburg government. The Russian State Duma is likely to consider the acting prime minister's nomination on August 16th. The Moscow News weekly had earlier speculated that the State Duma would never approve PUTIN as prime minister, which would prompt YELTSIN to disband the lower house of parliament and then quickly resign, leaving PUTIN as the acting president of the Russian Federation.

STEPASHIN said, "I told the president that I have been, am, and will remain with him until the end." It is not fully clear why YELTSIN sacked STEPASHIN; no formal reason was given. Political analysts suspect it could be a combination of the following reasons: failure to stabilize the Caucasus conflict, in ability to stop the merger of the All Russia Party and Fatherland movement and prepare for parliamentary elections, and the President's jealousy over the prime minister's warm welcome on recent foreign trips. Former deputy prime minister Boris NEMTSOV said, "It's hard to explain this madness. The people have grown tired of watching an ill leader, who is not capable of doing his job."

Patrushev Appointed Acting FSB Director

· Russian President Boris YELTSIN today appointed Nikolai PATRUSHEV acting head of the Federal Security Service (FSB). PATRUSHEV graduated from the instrument- making department of the Leningrad Ship-Building Institute in 1974 and served as state security officer, including as Chief of the Federal Security Service in the Republic of Karelia until 1994. PATRUSHEV also held the position of chief of the personal security directorate, Head of the Organizational and Inspecting Department of the FSB of Russia, Deputy Chief of Staff of the Russian President, Head of the Russian President's Main Controlling Directorate. In October, 1998, he was appointed First Deputy Director of the FSB.

Yeltsin Signs Election Decree

· The decree announcing December 19th as the date for elec

Today's News Highlights

Russia

Cabinet Reviews 2000 Budget?

Skoda To Produce Felicia Model

European Republics

Ukraine To Pay Gas Debt

IMF On Lith. Economic Position

South Caucasus & Central Asia

Shell To Form Turkmen Venture

Shell Joins Trans-Caspian Work

New Uzbek Ambassador To Tajik

Tajik Formalizes Econ. Policy

Politics-Economics-Business

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August 9, 1999

Intercon's Daily

tions to the Russian State Duma was signed today by Russian President Boris YELTSIN. The announcement of the election date effectively opens the election campaign and dissipates rumors that YELTSIN would postpone the parliamentary elections. Last week, the Fatherland Party, led by Moscow Mayor Yuri LUZHKOV, and the All Russia Party of powerful regional governors reached an alliance to put forward the same candidates for the parliamentary and presidential election. The All Russia-Fatherland alliance has put pressure on the Kremlin forcing a major disadvantage in the elections late this year and the presidential race next June. Later this week, the Justice Ministry is expected to release the list of parties and political movements, eligible for participating in the Duma elections. YELTSIN is expected to meet with Head of the Central Electoral Committee, Alexander VESHNYAKOV, later today.

Conflict In The Caucasus Escalates

· Russian troops and police units entered into its third day of armed confrontation with hundreds of Islamic militants, who on Friday seized several villages including Rakhat and Ansalta near the border with Chechnya. Nearly 2,000 civilians left the villages and crowed the central square of Makhachkala, Daghestan's capital. The weekend's events followed two weeks of squirmishes between police and Islamic militants. Former prime minister Sergei STEPASHIN, Russian Armed Forces Chief of general staff ANATOLY KVASHNIN, commander of interior troops Vyacheslav OVCHINNIKOV, and Interior Minister Vladimir RUSHAILO held talks with Daghestan officials in Makhachkala. He ordered the KVASHNIN and the OVCHINNIKOV to "normalize the situation" in the North Caucasus region of Daghestan. He told them to deal with the problem with "maximum effectiveness," but did not elaborate. STEPASHIN vowed there would be no new war in North Caucasus, but said any attempts by radical Islamists to seize parts of the region would be dealt with swiftly. "Bandits are bandits. One needs to tackle them appropriately. We have the forces and means. I don't see any other way...Russia will not repeat its mistakes in the North Caucasus." Russian helicopter gunships fired on the rebels Saturday and Sunday. Four police officers have been killed and 15 wounded in Sunday's battle. Daghestan officials said that reconnaissance groups were trying to find out who the rebels were representing and what kind

of weapons arsenal they have. It is suspected that the men are Muslims under the command of Chechen field commanders Shamil BASAYEV and Emir AL-HATTAB, who support independence for Russia's mostly Islamic republics in the Caucasus. It is believed that they are armed with two armored personnel carriers, an anti-tank gun, air defense systems, and a large supply of firearms. STEPASHIN said, "Today, the situation in Daghestan is very difficult. I think we could really lose Daghestan." STEPASHIN's inability to stabilize the region can be seen as one of the reasons for his sacking. His latest strikes are viewed as an attempt to assert his authority. STEPASHIN played a controversial role in the 1994 to 1996 Chechen War and earned the title of "rosey-cheeked hawk." In this battle, he claimed that, "No more Russian soldiers will die there."

Economy

Ruble = 24.4/$1.00 (NY rate)

Ruble = 25.29/$1.00 (CB rate)

Ruble = 26.27/1 euro (CB rate)

Market Reacts To Stepashin's Sacking

· The Russian share market reacted negatively to the sacking of Sergei STEPASHIN and his Cabinet by a drop in the quotations of Russian companies share. Their shares dropped by 2 percent from Friday's closing, before the resumption of operations in the Russian trading system. The difference between quotations of purchase and sale before the opening of operations reached 10 percent, which demonstrates further uncertainty. The turmoil in the Kremlin sent the euro lower against the dollar in late Asian trading today, slipping to 1.0712 late in the session, down from 1.0757 late Friday in New York. The euro to yen exchange rate also fell and was trading around 123.00.

Cabinet Had Been Set To Review 2000 Budget

· The Russian Cabinet had been expected to review the final draft of the 2000 budget. Finance Minister Mikhail KASYANOV said the budget revenue is planned to be 687 billion rubles with an expenditure of 763 billion rubles. He expects the ruble to trade at an average of 32 to the US dollar in 2000. Annual inflation is predicted to remain between 18 percent and 22 percent. Ministers were called on to continue their work in an acting capacity, despite its removal. It is not clear whether the Cabinet will meet today.

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Business

Skoda-Izmash Form Joint Venture

· Skoda Auto, the Czech carmaker owned by Germany's Volkswagen, and Izmash are forming a joint venture to assemble its popular Felicia model. Skoda and the Russia government followed up a letter of intent signed in December, with the signing of an agreement on Thursday. Skoda will set up a pilot assembly plant in Russia to overcome high tariff barriers and build on its position as the country's top imported brand. Skoda will invest $275 million over five years to eventually produce 80,000 cars a year. The Financial Times reports that the deal was delayed several times due to Russia's financial crisis. Skoda said that it will produce only "a few thousand," cars this year.

Russia-Germany Sign Space Launch Accord

· Russia's state-owned arms exporting company, Rosvooruzhenie, and Germany's Bremen-based OHB-System GmbH have signed an agreement concerning cooperation in the launches of space missions. Talks between the two sides in Germany have resulted in an understanding on the conditions under which the Russian Strategic Rocket Service will launch the scientific CHAMP, META and BIRD devices for OHB-System GmbH from Russia's Plesetsk cosmodrome in 2000. OHB-System GmbH's ABRIKSAS and MegSat satellites were successfully put into near-Earth orbit from Russia's Kapustin Yar facility last April, and this encouraged OHB-System GmbH to work more actively with Rosvooruzhenie.

Cabinet, the International Monetary Fund (IMF) concluded that Lithuania had achieved impressive progress in the macroeconomic stabilization and the transition to market, but quick cooling started in Lithuanian economy in the second half of last year. Consultations are held every year with all member-countries of the IMF. The actual economic growth in Lithuania stopped in the fourth quarter of 1998, although an impressive economic growth index of 5.1 percent was achieved last year. According to the preliminary information, the gross domestic product of Lithuania dropped by 5.75 percent in the first quarter of this year, as compared to the first quarter of 1998. Slower economic development rates have not resulted in a price rise in Lithuania. Lithuania's inflation dropped to 0.5 percent in June on an annual basis. Experts believe that is caused by the re-targeting of supplies from Russia to the domestic market, a larger exchange rate of lat to West European currencies, and a smaller domestic demand. The rise of the exchange rate resulted from the national currency's linkage to the US dollar. In the opinion of experts, that linkage and the whole currency regulation regime have proved their worth against the background of recent financial shocks. On the whole, the International Monetary Fund evaluates positively the privatization in Lithuania and its economic accounts.

Estonia's Economic Indicators Revised

· The Estonian Finance Ministry announced the that gross domestic product (GDP) in 1999 will rise by only 0.4 percent, sharply down from the figure of 2.2 percent, which itself was a revision of the original forecast. On a more positive note, the inflation rate of 1999, was revised from 4.5 percent to 3.7 percent. The Finance Ministry also predicted growth at 4 percent to 4.5 percent and inflation at 3.6 percent to 4 percent for the year 2000.

South Caucasus & Central Asia

Conoco Adjgas To Transport Natural Gas

· Georgian deputy fuel and energy Minister Teimuraz TSABADZE said that a Georgia-US-Turkey joint venture plans to build facilities in three years to liquefy and transport up to 1.2 million tons of natural gas. The project will be led by Conoco Adjgas, a joint venture of US Conoco, Adjar Gas and Turkish firm Erdal Aksoy. He said that Conoco had not yet signed

European Republics

Ukraine Pays ING Barings Bond

· On Thursday, Ukraine's Finance Ministry announced it had paid $88 million cash to investors in a $155 million bond issued by ING Barings. The remaining investors will be paid in D-Mark-denominated international bonds to be issued on August 20th. The International Monetary Fund (IMF) is expected to scrutinize the source of the $88 million, the Financial Times reported. The Fund made it clear that only a small amount of Ukraine's reserves may be used to pay off investors.

IMF Is Pleased With Lithuania's Econ. Position

· After holding consultations with the Lithuanian

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the deal, but plans to invest $250 million in the project over three years. The project envisages setting up infrastructure for transporting natural gas from Russia, then storing, liquefying and marketing it through the Black Sea port of Batumi to Turkey. Conoco Adjgas plans to reconstruct existing LNG storage and distribution facilities and to build a loading terminal in the port. TSABADZE said, "The facilities will be able to handle volumes of 150,000 tons of the product annually at the initial stage, but the volume will rise to 1.2 million tons in three years."

Shell To Form Turkmen Consortium

· Shell Exploration BV, a unit of Royal/Dutch Shell, on Friday signed a strategic alliance with the government of Turkmenistan to explore and develop Turkmenistan's gas reserves. Under the agreement, Shell will form a consortium with Turkmenistan state operating companies TurkmenGaz and Turkmeneft, which will negotiate a production-sharing agreements for license areas in western, central, and eastern Turkmenistan. The consortium will identify gas fields to supply the trans-Caspian Gas Pipeline. It will also work to increase gas evacuation through existing pipelines in Iran and Russia.

Shell Joins Trans-Caspian Gas Pipeline Project

· Royal/ Dutch Shell signed a letter of intent on Friday with pipeline company PSG International to join forces on the Trans Caspian Gas Pipeline project from Turkmenistan to Turkey via the Caspian Sea, Azerbaijan, and Georgia. The two companies, on a 50-50 basis, will lead the development of the pipeline with the capacity of 16 billion cubic meters of Turkmen natural gas a year. PSG, which includes US Bechtel Enterprises and General Electric Capital Structure Finance Group, has already secured an agreement with Turkmen on legal and commercial framework for its pipeline project with preliminary financing, tariff structures, gas field designation and the provisional pipeline corridor. The $2 billion pipeline is due to be ready in 2002. The consortium is hoping to be raised from the US Export-Import Bank, French, Japanese, German, and Italian credit orga

nizations, as well as the World Bank. This project provides an opportunity for the US to push its objective of a non-Russian, non-Iranian pipeline from the East to the West, providing more independence for the former Soviet republics. James BALL, managing partner with London-based consultant Gas Strategies said, "When Shell gets involved, it says something about the credibility of the [trans Caspian] project."

Uzbek-Tajik To Strengthen Relations

· Uzbek Ambassador Extraordinary and Plenipotentiary to Dushanbe Bakhtiar URDASHEV presented his credentials to Tajik President Emomali RAKHMONOV on Friday. Uzbekistan and Tajikistan pledged to strengthen bilateral relations. URDASHEV stressed this during his talk with the Tajik President. The Uzbek ambassador said, "There are communities of migrants living in some regions of Tajikistan who appeared here as a result of force and propaganda pressure."

Tajik Formalizes Economic Policy

· The Tajik state debt to Russia has been cut from $300 million to $160 million. An agreement to this effect is being drafted, according to a memorandum on the economic policy of the Tajikistan submitted to the International Monetary Fund (IMF). Tajikistan has been implementing an economic stabilization program in cooperation with the IMF since October, 1997. Economic growth reached 5 percent in Tajikistan and the inflation dropped to 3 percent in 1998, as compared to 164 percent in 1997. However, this year the price rise mounted again. This is due to smaller exchange rate of the national currency caused by lesser prices on fundamental export articles and the financial crisis in Russia. Key goals of Tajikistan's economic program for the near future is to keep the inflation at 13 percent in 1999 and 7 percent in 2000, to achieve a 5 to 6 percent growth of the GDP over that period and to enlarge the gold and foreign currency reserves. In late March, the gold and foreign currency reserves reached $52 million, mostly due to easy-term loans from the IMF and World Bank.

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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