DAILY REPORT ON RUSSIA

AND THE FORMER SOVIET REPUBLICS

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Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Friday, September 10, 1999

Federal Security Service (FSB) added that it has discovered elements of trotyl and hexogen at the site of the explosion on the ground floor of the Guryanov Street apartment building. Reuters explained that hexogen is the Russian for cyclonite or RDX (research developed explosive), a substance that is often used by guerrilla groups because of its malleability, low volatility and tremendous explosive power. Moscow Mayor Yuri LUZHKOV said the time of the blast, 23 hours 59 minutes 58 seconds, suggested that an explosive device was used in the act of terror. The Prosecutor's Office has not yet decided to change the determination of the nature of the crime from the one qualified in Article 168 of Russia's Criminal Code as "destruction or damage of property through carelessness" to the one qualified in Article 205 as "terrorism." Prime Minister Vladimir PUTIN today said that the explosion could have been caused by, "negligent storage of explosives or a terrorist action." He said, "If it was a terrorist attack, then we are facing a cunning, impudent, treacherous, bloodthirsty opponent. There have been many attempts to force Russia to kneel down and be intimidated, but it never worked. I do not doubt that nobody will succeed this time either." The Interior Ministry is tightening security not only in Moscow but all over Russia.

Su-25 Fighter Jet Downed In Daghestan

· Russian Defense Ministry officials confirmed the loss of a Su-25 attack aircraft near the Daghe-stan city of Buinaksk and that the pilot who ejected from the

Russian Federation

Politics

Lebed Hints About Presidential Run

· Krasnoyarsk Governor and former Russian general Alexander LEBED stated that a military man should rule Russia. LEBED once served as a national security advisor. In Paris, he said, "DEGAULLE proved excellently that a general can rule the state...In Russia, it is not only possible, but necessary. Nobody will believe in us without a general [in power]. The world does not trust us anymore." He added, "I haven't made any decision yet concerning my participation in the presidential election...I will only run if they need me." LEBED ran for president in 1996, finishing third with 15 percent of the vote.

The Central Electoral Commission on Tuesday received federal lists of candidates of the Fatherland-All Russia, the Communist Party and the Party of Peace and Unity. Former prime minister Sergei STEPASHIN and Yabloko hope to get at least 15 percent of votes at the parliamentary elections to form the third largest faction in the Duma.

Apartment Blast Cause Investigated

· While hope of pulling survivors from the rubble of a nine story apartment building is dwindling, investigators are developing new theories on what caused the massive explosion. The blast, first described as caused by natural gas, killed 90 people, sent hundreds to the hospital, and approximately 60 residents are believed to be trapped under the debris. Emergency Minister Sergei SHOIGU said, "This does not look like a gas explosion, the shock wave was too big. The structure of obstruction is also rather unusual." The shock wave was so strong that it killed three people in the nearby building, SHOIGU added. Russian interior-security chief Nikolai PATRUSHEV stated that the blast was no accident. The Russia's

Today's News Highlights

Russia

IMF Loan Delayed Until October

9 Percent of LUKoil For Sale

VimpelCom Expands Coverage

European Republics

Lith. Opens Parliament Session

Pharmaceutical Conf. Opens

South Caucasus & Central Asia

Georgia Faces Budget Crisis

Socar-GIOC Hold Pipeline Talks

Turkish-Kazakh Trade To Rise

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Friday

September 10, 1999

Intercon's Daily

hit aircraft was rescued. Russian newspapers reported that the aircraft was shot down by Islamic rebels, however the Defense Ministry is insisting that the jet malfunctioned. A special commission has been set up in Dagestan to probe into the crash. The ministry spokesman said, "it is too early to talk about the cause [of the crash] before an investigation is completed." The crash was the first loss of a jet by the Russian air force in over a month of heavy fighting between federal forces and rebels in the southern autonomous republic. The rebels, battling federal forces in at least two regions of Dagestan, earlier fired ground-to-ground rockets, destroying helicopters, but this is the first hint of use of a surface-to-air missile by the militants.

Despite the loss of the aircraft, Russian air force jets continued to attack rebel positions in waves of air raids, as artillery pounded the militants on the ground. Following a nightly fighting, 47 dead bodies of gunmen have been found on the slope of Mount Ekityube in Daghestan. Six Russian Interior Ministry troops were wounded in the fighting. Over the past 24 hours, the joint group of federal forces have destroyed four ammunition dumps, five depots of lubricants, a home-made mortar and a command post of guerrilla forces, and neutralized five pill-boxes on the territory of Dagestan. More than 220 explosive objects have been defused in Botlikh district including 117 artillery shells, 48 mortar shells, 23 engineer landmines, 32 grenades, as well as home-made explosive devices. Russian forces today are focusing their efforts on the village of Gamiyakh, where Chechen field commander Shamil BASAYEV and Jordanian-born Khattab are believed to have their headquarters. Troops have complained that they lack arms to wage a more effective fight against the rebels.

Economy

IMF Loan To Be Delayed Until October

· Despite new information that the macro-economic situation in Russia is better than expected, an International Monetary Fund (IMF) loan installment of approximately $640 million may be delayed till October on technical reasons. The IMF is awaiting the results of a third PricewaterhouseCoopers audit of Russian Central Bank reserves management. Managing Director of the IMF Stanley FISCHER said on Thursday that the IMF chiefs are under no pressure

of any governments of member-countries of the Fund for slowing down the cooperation program for Russia. US Republican are calling for the suspension of IMF loans until it can disprove suggestions that previous loans were misused. There are allegations that US banks were used to launder large sums of Russian money and possible IMF loans. Mikhail DMITRIEV an economist at the Carnegie Moscow Center said there is virtually no way to track IMF monies. "As soon as the IMF money is transferred into the Central Bank reserves or government budget reserves or government budget then it is impossible to distinguish it from any other money. FISCHER defended IMF's support for Russia, repeating there is still no evidence the government misused IMF money. The IMF expert mission, which has just ended in Moscow, reaffirms that Russia fulfills its economic program successfully and even out performs the budget indices, FISCHER said. The IMF executive board is expected to discuss the loan installment at a meeting in early October.

Ruble = 25.71/$1.00 (NY rate)

Ruble = 25.7/$1.00 (CB rate)

Ruble = 27.06/1 euro (CB rate)

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Business

Nine Percent Of LUKoil For Sale

· Russian Prime Minister Vladimir PUTIN signed a resolution on Thursday approving the sale of a 9 percent, or 67 million shares, of the country's largest oil company LUKoil. The government is meeting to determine the launch price for the offer. The winner of the tender will be required to invest $240 million in

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the oil company. LUKoil has benefited from an increase in the price of oil on the international market, as have all Russian oil companies, and announced that net consolidated profits in the first half had risen by more than 200 percent. LUKoil shares traded at $7.55 on Thursday.

Kalyuzhny Still Pushing For Gazprom Seat

· Russian Fuel and Energy Minister Viktor KALYUZHNY is still pushing for a ministry seat on the board of directors of Russian gas monopoly Gazprom, despite an expansion last month which did not include him. He said, "As far as Gazprom is concerned, you know my position there-there should be a representative. But the state decided the way it did: it seems it knows better." At an extraordinary general meeting in August Gazprom expanded the board from four to five state representatives. But there still was no appointment of a KALYUZHNY nominee. On Thursday, KALYUZHNY announced the creation of a position for a deputy minister for gas issues, but did not give details on its responsibilities.

The Fuel Minister also said that Russia will reduce oil export by two million tons in the fourth quarter of 1999. He did not mention how much oil would be exported in the final three months. He remarked that export in the third and fourth quarter would be down by five million tons. KALYUZHNY said that 46 million tons of crude would be marketed domestically. This will help resolve the problem of petroleum products shortages. At the same time KALYUZHNY announced that Russia will raise its oil export duties from 5 euro per ton to 7.5 euro per ton.

VimpelCom To Expand Communications

· VimpelCom, the Russian global system for mobile communications (GSM) 1800 cellular operator, has announced plans to expand its coverage to reach approximately 70 percent of Russia's population. The expansion will take five years and require around $300 million of investment capital. The carrier has successfully applied for a series of GSM 900 licenses to cover Russia. While GSM 900 frequencies cannot carry the call densities that GSM 1800 networks can, base stations can reach for distances up to 20 miles using standard technology and up to six times this distance using so-called extended time slot transmission techniques. This makes GSM 900 very suitable for use over GSM 1800 in non-metro

areas. Glenn WIENER, noted that the $300 million requirement could be raised through shares on the New York Stock Exchange or through a joint technology venture with Telenor or another third party. VimpelCom says that the catalyst for the present discussions between VimpelCom and Telenor was the recent amendment of three of VimpelCom's regional GSM 1800 licenses to include the provision of GSM 900 cellular services. Following a May $162 million investment transaction, Norway's Telenor owns approximately 25.7 percent of VimpelCom's total voting shares. "We can assure our partners and shareholders that building shareholder value is, as always, a central focus in all of our planning. From this perspective, we believe that establishing a measured and strategic presence throughout Russia will enhance our overall competitive strength and value," Dmitri ZIMIN, VimpelCom's president, said.

European Republics

Lithuanian Parliament Starts Fall Session

· The Lithuanian parliament opened its Fall session today. The first item on the agenda of the plenary meeting was the beginning ratification of two Lithuanian-Russian agreements on the state border and the division of the exclusive zone and the continental shelf in the Baltic Sea. The two documents were signed in Moscow on October 24, 1997, by President Boris YELTSIN and the then Lithuanian leader Algirdas BRAZAUSKAS, but the two parliaments did not ratify them. The Lithuanian parliament is the first to start the ratification process. Speaker Vitautas LANDSBERGIS hopes, "that move of Vilnius may prompt the action of the Russian State Duma." Foreign Minister Algirdas SAUDARGAS will present the documents at the parliament for ratification by instruction of President Valdas ADAMKUS. Another item on the agenda is sequestering of the state budget in 1999, due to the aggravated socio-economic situation in Lithuania. Finance Minister Jonas LIONGINAS will suggest to cut the state spending by 450 million litas ($125 million).

Ukraine Hosts Pharmaceutical Conference

· The 5th congress of Ukraine's pharmacists opened in Kharkov on Tuesday and is being attended by 500 delegates and more than 1,700 guests scientists from Ukraine and 34 former Soviet republics and other foreign countries. One of the

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tasks of the Congress is to work out a normative basis for further development of Ukrainian pharmaceutics as well as to demonstrate the sector's investment opportunities. The Congress will discuss a draft State program for the strategic development of Ukraine's pharmaceutical sector for 2005. A Ukrainian Pharmaceutics Exhibition is to be held within the framework of the Congress to involve about 60 companies. There will also be a ceremony to introduce the pharmaceutical firms, new medicinal drugs and publications prepared for the Congress by Kharkov scientists. One hundred and thirty-five pharmaceutical enterprises operate in Ukraine. The republic medicines meets 75 percent of requirements for medicines. About 35 percent of pharmaceuticals are exported to Russia, Asia, Belarus, and Poland. Kharkov is Ukraine's major pharmaceutical center.

South Caucasus & Central Asia

Georgia Faces Budget Crisis

· Georgian States Minister Vazha LORDKIPANIDZE said that Georgia is still struggling to overcome Russia's financial crisis in 1998 and trying to work out severe budget problems. He told the parliament, "Despite many positive tendencies in our economy we are facing the worst problem ever—a budgetary crisis." Last year's crisis cost Georgia an estimated $200 million. LORDKIPANIDZE also pointed out that widespread graft and corruption, a large shadow economy, tax collection shortfalls, big enterprise debts, unpaid budget credits, and heavy debt servicing are preventing the economy from gain ground. The State Minister said revenues in the first eight months of 1999 were 570 million lari ($316 million), 91 percent of the budget total, instead of the planned 628 million lari, while wage and pension arrears totaled 42.8 million lari. Overdue enterprise debts to the state budget reached 356 million lari and unpaid credits to the budget were 105 million lari. The lari has stabilized after being effectively devalued last December, when Georgia complied with international lending demands to stop intervening on the Interbank currency exchange. LORDKIPANIDZE

said, "The lari rate is stable and realistic. The National Bank's currency reserves increased to $173 million from $100 million at the beginning of the year thanks to the right monetary policy." LORDKIPANIDZE added that the government will focus on privatization plans, revising industry and using domestic resources and also to cooperation with international financial organizations.

Socar-GIOC to Hold Pipeline Talks

· The working group of the Azerbaijan State Oil Company (Socar), led by Vice President Valekh ALESKEROV, arrived in Tbilisi for talks on the Baku-Ceyhan oil pipeline construction project. Gia CHANTURIA, president of the Georgian International Oil Corporation, said that the sides are planning to discuss the project prospects and its specific aspects. Georgia still supports this project, because it is essential for the entire region and is beneficial to the country, he pointed out. CHANTURIA denied reports about an alleged adverse effect of the recent earthquake in Turkey on the realization of the Baku-Ceyhan oil pipeline project, stating that "they [those reports] are unfounded."

Kazakh-Turkish Trade Turnover To Rise

· Turkish Vice Prime Minister Devlet BAHCELI, after holding a meeting of the bilateral joint economic commission, said an annual trade turnover between Turkey and Kazakhstan may rise to $1 billion. BAHCELI said the current state of bilateral relations in the trade-and-economic sphere does not fully reflect their inherent potential. The Turkish Vice Prime Minister said last year's trade turnover between the two countries reached $470 million. His opinion is that the world economic crisis had an adverse effect on the onward development of bilateral contacts, but "this is a temporary phenomenon." BAHCELI declared in favor of the transportation of Kazakhstan's oil to the world markets across Turkish territory, emphasizing that "this will be of great benefit to the two countries." BAHCELI also suggested co-mining of gold and its sale on the Istanbul Gold Exchange.

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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