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Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Wednesday, September 1, 1999

Russian Federation


Anti-Consumerism Group Behind Bombing

· Russia's Federal Security Service (FSB) has recovered evidence from Tuesday night's bombing of a video arcade, pinning responsibility for the attack on a revolutionary group protesting growing consumerism in Russia. The explosion, located in an arcade on the lowest level of the underground upscale Okhotny Ryad Mall just outside the Kremlin, injured up to 40 people with flying glass and scrap metal at a busy time when teenagers were celebrating the last night of summer vacation. Approximately 24 citizens are still being treated in the Moscow Hospital for serious wounds. A note found at the scene from the Union of Revolutionary Writers states, "A hamburger not eaten to the end by the dead consumer is a revolutionary hamburger. Consumers: We don't like your way of life and we are dangerous to you." The Western style mall features high priced items which are out of reach for most ordinary Russians. The mall was a personal project of Moscow Mayor Yuri LUZHKOV, in an effort to modernize the city. He called the explosion a "terrorist act" by "beasts," who he said should be shot. He noted that the explosion was caused by a bomb with a force equivalent to 150 to 300 grams of TNT. LUZHKOV believes that the attack could be an attempt to discredit his party or linked to the fight between Russian troops and Islamic militants in Daghestan. Police have stepped up security at important buildings and gathering places throughout Moscow. The Moscow prosecutor's office instituted a criminal case under Article 205 of the Russian Criminal Code "terrorism" in connection with the explosion at the mall. Bombings are frequent in Russia and are typically used as scare tactics between rival organized crime groups over turf.

Skuratov Warns Of Investigation Obstruction

· Former Russian prosecutor general Yuri SKURATOV, who was fired not only for an alleged sex scandal but also for his unyielding investigations into the top echelons of power for corruption charges, in an interview with the Financial Times warns that the inner circle of the Kremlin may try to obstruct any investigation into alleged money laundering through the Bank of New York. He said the, "closest entourage of the president does not want an objective investigation. And our security organs fulfill political orders 100 percent. The first source of information about whether this money is criminal or not cannot be answered without the involvement of the Russian law enforcement agencies." SKURATOV was sacked by the Kremlin in March, but has not been dismissed by the Federation Council. During his investigation, SKURATOV's team set up a data base highlighting the investment activity of 800 senior government officials. He agrees with speculation voiced by Mikhail KHORDORSKY, chief of Yukos Oil Company, that the money funneled through the Bank of New York might have come from government officials and Central Bank employees who acting on insider information and sold out of government bonds ahead of the 1998 financial crisis.

The Bank of New York money laundering scandal has raised concerns over new International Monetary Fund (IMF) lending and other aid to Russia. US Treasury Secretary Lawrence SUMMERS today said that Washington will seek a pause in releasing cred

Today's News Highlights


Japan To Resume Lending

AlliedSignal-Aeroflot ACAS Deal

European Republics

Bombers To Pay For Gas Debt

Estonia To Increase Min. Wage

South Caucasus & Central Asia

Ivanov Makes Caucasus Tour

Azeri-Turkey Near Agreement

New Law On KazakhOil

Rebels Release Three Officers




September 1, 1999

Intercon's Daily

its by the IMF to Russia until it was clear whether some of previous loans were siphoned off through the money laundering scheme. Presidential candidate Senator John MCCAIN (Republican-Arizona) in a speech in New Hampshire said that continued IMF lending to Russia is "insanity," adding that loans should be suspended until there is a full assessment of the situation. "You have to show me some benefits of pouring billions of dollars more into a country where it is siphoned out as quickly as it goes in. At some point, Russia is going to hit bottom and then hopefully you will see some economic reforms or you will see some kind of a totalitarian government. To keep giving them billions of dollars borders on insanity." Meanwhile, Democratic candidate Bill BRADLEY, former Senator from New Jersey, said, "American assistance and lending policies toward Russia have been misdirected and ineffective." He added, "Our assistance and lending policies have done very little to further our strategic goals, the needs of the Russian people, or the cause of Russian reform." Russian Foreign Minister Igor IVANOV, the first official reaction to the international probe, believes that the scandal was designed to undermine the country's reputation. He said, "Russia will never agree with Western attempts to cast a shadow over our country using unconfirmed facts."

Defense Mins. Review Joint Air Def. System

· Defense ministers from countries of the Commonwealth of Independent States (CIS) met Friday in Astrakhan, southern Russia, to discuss ways to improve the operation of the joint air defense system. Colonel General Leonid IVASHOV, chief of the international military cooperation department at the Russian Defense Ministry, said the CIS countries have been increasing personnel and materials involved in the joint system. The ministers will further discuss the system's funding. IVASHOV said, "The principle remains the same: Russia covers 50 percent of the spending and other members pick up the rest." The joint air defense system officially includes 10 CIS countries: Armenia, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Russia, Tajikistan, Turkmenistan, Ukraine and Uzbekistan. In practice, however, only Armenia, Belarus, Kyrgyzstan, Kazakhstan, Russia and Tajikistan are actively involved. IVASHOV said the ministers also planned to discuss a new candidate for the post of chief of staff for coordinating CIS defense cooperation, who will be approved at the

next CIS summit. Commander-in-Chief of the Air Force of Russia Anatoly KORNUKOV said that Russia is prepared to deliver modern anti-aircraft defense systems and fighters on terms of a "long-term leasing" to CIS countries. Talks on the possible leasing of antiaircraft guided missile systems S-75, S-125 and S-200 are under way, in particular, with Tajikistan, Turkmenistan, Georgia and Kyrgyzstan, KORNUKOV noted. S-300 complexes are in service outside of Russia in Ukraine, Kazakhstan and Belarus. The meeting, chaired by Russian Defense Minister Igor SERGEYEV, was attended by delegations from Azerbaijan, Armenia, Belarus, Kyrgyzstan, Georgia, Kazakhstan, Russia, Tajikistan and Ukraine.


Ruble = 24.81/$1.00 (NY rate)

Ruble = 25.22/$1.00 (CB rate)

Ruble = 26.67/1 euro (CB rate)

Japan To Resume Lending To Russia

· Russian First Deputy Prime Minister Viktor KHRISTENKO expressed hope that the session of the Russian-Japanese intergovernmental commission on trade and economic problems, due to be held in Tokyo on September 1st, will make headway in bilateral relations. Japanese Prime Minister Keizo OBUCHI announced the resumption of Japanese aid. This involves a grant of another $400 million for the Russian coal industry. The first tranche will amount to $50 million. Tokyo promised to grant $1.5 billion to Moscow in February, 1998. Only $400 million from that sum have been granted so far. The rest of the credit was actually frozen after the financial crisis, which hit Russia in August, 1998. An official at the Japan Export-Import Bank, which is responsible for untied loans said, "We believe that the conditions for resumption have been met." Resume lending by the World Bank and the International Monetary Fund to Russia and restructuring agreements with the Paris Club, also helped to spur Japan's decision. KHRISTENKO arrived at the Narita Airport in Tokyo for an official visit Tuesday. He is leading a delegation that includes governors of three Far Eastern regions of Russia and senior officials of a number of ministries and agencies. A group of Russian business people is also coming to Tokyo in connection with the commission's meeting. Japanese and Russian officials will discuss cooperation a number of spheres, including energy generation,

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September 1, 1999

Intercon's Daily

transport and space exploration. KHRISTENKO will also meet heads of the Foreign Ministry, the Ministry of Foreign Trade and Industry, as well as the Federation of Economic Organizations.


Allied Signal To Supply Aeroflot With ACAS II

· AlliedSignal Inc. has announced that it was selected by Russia's Aeroflot Airlines to supply it with Airborne Collision Avoidance Systems (ACAS II). The new system will be installed in Aeroflot's eight Ilyushin IL-76 transport cargo airplanes, bringing the aircraft into compliance with European mandates. The ACAS II provides flight crews a map-like view of surrounding traffic while electronically tracking nearby aircraft. Rick BERCKEFELDT, a manager at AlliedSignal Aerospace Avionics & Lighting, said, "Aeroflot wanted a cost-effective solution to the ACAS II mandate and our CAS-67A model was that solution." The company already provides Aeroflot with avionics, auxiliary power units (APUs) and wheels and breaks. AlliedSignal Aerospace, a $7.5 billion unit of AlliedSignal Inc., is the largest supplier of aircraft engines, equipment, systems, and services for commercial transport, regional, general aviation, and military aircraft.

mation, the Ukrainian side, in settlements with Russia, plans to keep the price of the aircraft no lower than $25 million per plane. The initial price of a bomber was $75 million when the bargaining for strategic bombers was started by Ukraine and Russia six years ago.

Estonian Minimum Wage To Rise

· Estonia's minimum wage will rise by 12 percent reaching 1,400 crowns (about $95) beginning January 1, 2000. The wage-rising agreement was reached during extensive consultations between the government, unions, and employers on Thursday. The tax-free wage will remain 800 crowns, although unions had insisted that it be raised to 850 crowns. According to the National Statistics Department, the medium wage now is 4,000 crowns. According to union sources, talks are likely to start this year on making the first 1,000 crowns earned each month tax exempt. The single rate of income tax is now 26 percent. The biggest share of expenses for most people is apartment rent. Renting a three-room flat costs up to $100, close to the new minimum wage.

South Caucasus & Central Asia

Ivanov Makes South Caucasus Tour

· Russian Foreign Minister Igor IVANOV is leaving today on a South Caucasus tour. He will begin with talks in Baku, Azerbaijan with Azeri President Geidar ALIYEV and his counterpart Tofik ZULFUGAROV. They are expected to discuss a number of problems, connected with the present state and the development of bilateral relations. Experts from the Russian embassy believe that the settlement of the Nagorno-Karabakh problem will be one of the topics for discussion at the forthcoming Russian-Azeri talks. IVANOV may come with a new proposal for the settlement of the Nagorno-Karabakh conflict. From Baku, IVANOV will travel to Yerevan, Armenia on Friday to discuss Armenian-Russian relations, the framework of the Commonwealth of Independent States, Nagorno-Karabakh, and the military-political and economic cooperation with Armenian President Robert KOCHARYAN and Foreign Minister Vartan OSKANYAN. One embassy official said, "No new problems will come up for discussion." The Russian Foreign Minister's final stop will be Tbilisi, Georgia on Saturday. There he will meet with Georgian President Eduard SHEVARDNADZE, Foreign Min

European Republics

Bombers To Pay Part Of Gas Debt

· Head of the Ukrainian Foreign Ministry's first territorial agency Oleg SEMYONETS on Tuesday said that Ukraine plans to turn over bombers to Russia as part of the payment of the debt for natural gas. He expressed the hope that the matter of the transfer of strategic aircraft complexes to Moscow will soon be ultimately settled. Eight Tu-160 and Tu-95 planes were mentioned to be part of the exchange. The idea of offering Ukrainian bombers to Russia toward the payment of arrears for gas was discussed more than once and endorsed during the fifth meeting of the mixed Ukrainian-Russian commission on cooperation in Kiev. Ukraine owes Russia about $1.8 billion for gas, including the state debt running almost into $1 billion. Ukraine inherited heavy Tu-160 strategic bombers after the breakup of the Soviet Union. These aircraft are regarded as the most modern carriers of nuclear missile weapons. According to the Ukrainian Defense Ministry's infor

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September 1, 1999

Intercon's Daily

ister Irakli MENAGARISHVILI, parliament chairman Zurab ZHVANIA and other officials. Their talks will focus on the development of bilateral relations and the general situation in the Caucasus region as well as the situation in Abkhazia.

Azeri-Turkey Near Pipeline Agreement

· Lead negotiators from Turkey and Azerbaijan last week met officials from the World Bank and its affiliate the International Finance Corporation as well as the US Export-Import Bank and US Overseas Private Investment Corp. to discuss various aspects of the Baku-Ceyhan oil export pipeline. The talks focused on four draft documents that constitute the legal frame work for proceeding with construction of the planned pipeline. Valeh ALESKEROV, who heads the department for foreign investment at Azerbaijan's State Oil Company SOCAR described the talks as successful. However, the Azerbaijan International Operating Company (AIOC), the largest Western consortium operating in Azerbaijan, and the Turkish government have not yet reached agreement on Turkish guarantees to meet additional costs if construction exceeds the planned $2.4 billion. Nor are they agreed on the construction schedule or the division of shares in the company that will operate the completed pipeline. US special envoy for Caspian energy John WOLF plans to visit Turkey, Georgia, and Russia from September 16th to 22nd to promote the Baku-Ceyhan pipeline.

Nazarbayev Redefines KazakhOil

· Kazakh President Nursultan NAZARBAYEV has signed a new law outlining the structure and duties of the state oil company KazakhOil. The law has not yet been made public, but a company spokesman has said KazakhOil has approved its content. RFE\RL Newsline reports that the law defines KazakhOil as a state company in which the state owns 100 percent of its share. It assigns KazakhOil the responsibility for monitoring the work of foreign oil companies operating in Kazakhstan to ensure compliance with Kazakh laws and the terms of their contracts. The new law also includes a provision requiring all oil

companies to engage the services of local companies to provide goods and services.

Rebels Release Three Hostages

· Kyrgyz presidential spokesman Kanybek IMANALIYEV announced today that Islamic militants in southern Kyrgyzstan Tuesday night released three hostages out of 16 people abducted last week. The three, all police officers, were taken to hospital after their release. The rebels did not demand anything in return for releasing the three. General Bolot DJANUZAKOV, who heads the defense and security department within the Kyrgyz presidential administration, said the release was negotiated during talks between the Uzbek militants and local village elders. The remaining 13 hostages include four Japanese mining engineers, a Kyrgyz Commander of Interior troops Major-General Anarbek SHAMKEYEV and soldier, and a Kyrgyz interpreter working for the Japanese. DJANUZAKOV added that the militants' headquarters are in the village of Kojo-Achkan in Batken district. Kyrgyz government troops had sustained an unknown number of casualties during a two-hour gun battle with the militants earlier on Tuesday. Foreign Minister Muratbek IMANALIYEV said Kyrgyzstan has enough force to wipe out armed Islamic invaders. The gunmen are thought to be advancing to Uzbekistan to carry out terrorist acts. Foreign and defense ministers from Kyrgyzstan, Uzbekistan, Kazakhstan and Tajikistan met in the southern Kyrgyz city of Osh on August 28th to discuss joint military action against the terrorists. Kyrgyz's neighbors promised to provide support, including weapons, to the government troops to flush out the Islamic gunmen. Russia has promised assistance in the form of weapons, artillery, SU-24 bombers and Su-25 fighter jets, but will not send its own troops to Kyrgyzstan.

Intercon's Daily Report on Russia & FSU

will not be published on Monday September 6th

in observance of Labor Day

Paul M. Joyal, President, Editor in Chief Clifton F. von Kann, Publisher Jennifer M. Rhodes, Principal Editor

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Daily Report on Russia is for the exclusive use of the subscriber only. Reproduction and/or distribution is not permitted without the expressed written consent of Intercon. Daily Report on Russia Ó copyright 1999, Intercon International, USA.

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