DAILY REPORT ON RUSSIA

AND THE FORMER SOVIET REPUBLICS

INTERCON INTERNATIONAL USA, INC., 725 15th STREET, N.W., SUITE 903,

WASHINGTON, D.C. 20005 -- 202-347-2624 -- FAX 202-347-4631

Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Thursday, September 2, 1999

Russian Federation

Politics

US Investigates Moles In Bank Scandal

· The Federal Bureau of Investigation is checking into a plan whereby Russian organized crime groups may have placed moles into Western banks and securities firms to help them launder money. The Wall Street Journal reports that authorities have expanded the investigation into the Bank of New York money laundering scheme from simply accounts to individuals. The decision from this move comes from a similar case at a BankBoston Corp. branch where a young representative, Oksana GALCHANSKAYA, processed transactions through several accounts held by Russian organized crime members in New York. It reports that accounts, "were frequently replenished with large wire transfers from accounts in New York and Switzerland," controlled by one of the co-defendants, according to the indictment. GALCHANSKAYA was dismiss after an FBI sting operation revealed that over a 2.5 year period undercover agents handled a total of $2.7 million in cash to the defendants and received in return checks from more than 64 different bank accounts. The government has moved to seize a series of bank accounts connected to the case at Citigroup Inc.'s Citibank, First Union Corp.'s CoreStates Bank, Chase Manhattan Corp.'s Chase Manhattan Bank and BankBoston.

Meanwhile, Lucy EDWARDS, who was fired from the Bank of New York in connection with the scandal and claims that she vouched for her husband Peter BERLIN's Benex Company but did not disclose they were married, denies that she was a mole for the Russian Mafia. Mr. KINGHAM, the couple's lawyer said, "The notion that she was a plant for anybody is absolutely false. She had a distinguished career at the Bank of New York."

New Party Formations

· The Central Election Commission on Wednesday registered a new bloc named Stalinist Bloc: Workers' Russia, Officers for the USSR. The bloc was created by the public movement Workers' Russia, the all-Russian political organizations The Union of Officers, and The People's Patriotic Union of the Youth. Leaders of the first three associations, Viktor ANPILOV, Stanislav TEREKHOV and the grandson of Iosif STALIN, Yevgeny DZHUGASHVILI, are the first three candidates on alliance's list of to run for parliament. ANPILOV expressed satisfaction that the Central Election Commission, "had found no faults with the new bloc." The main goals of the bloc are formulated in its manifest and include abolishment of presidency, restoration of the power of the working people in the form of soviets, revision of the results of privatization, nationalization of banks, and establishment of state monopoly on foreign trade.

In addition, former YELTSIN bodyguard Aleksandr KORZHAKOV has formed a new political bloc with Aleksandr BAZHENOV of the Russian People's Movement, Fatherland leader Boris TARASOV and Christian Revival Union leader Vladimir OSIPOV to be called Russia's House. The new group announced it will not form an alliance with the KPRF. Russia's House will seek, "to establish a people's patriotic power" and advocate Russian historical traditions in public life.

Authorities Arrest Nuclear Smuggling Group

· Undercover Russian authorities have arrested

Today's News Highlights

Russia

Foreign Debt To Reach $166B

LUKoil Predicts Export Rise

Tyumen To Issue Bonds

European Republics

Kazakh-Ukraine On Oil Transport

South Caucasus & Central Asia

US-Georgian Summit Sept 23rd

Armen-Kazakh Sign Accord

Kazakh Privatization Sales

Politics-Economics-Business

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Thursday

September 2, 1999

Intercon's Daily

a woman who attempted to sell the officers radioactive metal stolen from defense factories and facilities of the Russian Pacific Fleet in the Primorsky region of Russia's Far East. The woman carried the radioactive metal in a simple shopping bag wrapped in newspaper without any protective covering. The asking price for the metal is up to $60,000. She was connected to a group which has been systematically selling stolen radioactive material. Six of the robbers were arrested in a joint operation by police, the regional branch of the Federal Security Service and the Pacific Fleet's counterintelligence. The regional administration's press service said six kilograms of uranium-238 was seized from the bandits and some nickel. Radiation from the uranium batch was 2,500 times the maximum permissible level.

Russia-US To Discuss Security Issues

· Russian Defense Minister Igor SERGEYEV and US Defense Secretary William COHEN will meet in Moscow on September 13th to discuss a number of security issues, including Y2K computer glitch, START-II and START-III nuclear weapons reduction treaties, modifications to the 1972 Anti-Ballistic Missile Treaty (ABM), and the peacekeeping operation in Kosovo. The ratification by the Russian State Duma of the START-II treaty continues to be the most acute problem in Russian-US relations in the sphere of the limitation of strategic offensive armaments. Russian-US contacts on that problem were frozen after the US and NATO started a military operation against Yugoslavia. Moscow strongly opposes changes to the ABM treaty for fear that it could spark a new arms race. The US, however, believes that a modification is necessary due to changes in the status of nuclear weapons owning nations. The US wants the changes to permit the building of a limited missile defense system. Leonid IVASHOV, head of the international military cooperation department of the Russian Defense Ministry also noted that Russia, "is worried by the fact that the US and NATO are trying to establish order in the Balkan Peninsula, keeping away from that process the Balkan countries themselves." He described the imposing by the US and NATO of their understanding of the situation in the Balkan Peninsula as "a very dangerous trend." Experts believe that COHEN will try at his meetings in Moscow to persuade Moscow that cooperation with NATO within the framework of the Russia-NATO founding act should be resumed.

Meanwhile, on the day after the 50th anniversary of the first Russian atomic test, Prime Minister Vladimir PUTIN said that nuclear weapons, "remain fundamental for the country's security, a guarantee for keeping peace in modern geopolitical conditions." He called for the maintaining and improving the nuclear arsenal is critical for the government. He said, "if we do not keep them [weapons] over the coming five to seven years, then the situation in our country will change in a radical way." PUTIN said, "[the development of] nuclear weapons was never an aim in itself...the development was always in response to the challenges of the times."

Economy

Ruble = 25.22/$1.00 (NY rate)

Ruble = 25.87/$1.00 (CB rate)

Ruble = 27.33/1 euro (CB rate)

Foreign Debt In 2000 To Reach $166B

· Russia's foreign debt in 2000 will reach a total of $166.2 billion, according to a program on foreign borrowing for next year that was sent to the Russian State Duma along with the draft budget. The foreign debt at the start of 1999 was $156.6 billion. Debt on loans provided by foreign countries will be $71.8 billion at the start of 2000, up from $68.9 billion at the start of 1999. Debt on loans from foreign banks and companies is projected at $38.1 billion, compared with $36.1 billion on January 1, 1999. Debt on loans from international financial organizations will be $22.4 billion, a slight increase from $22.2 billion at the start of 1999. Debt on Central Bank loans will be $6.8 billion, up from $2.3 billion on January 1st. Government securities denominated in foreign currency will remain unchanged at $27.1 billion. Under the program submitted to the State Duma foreign borrowing will increase to $177.6 billion by the start of 2001, and loans provided by foreign countries will be $78.3 billion. Meanwhile, Russia will provide $400 million in loans to foreign countries next year. They include $124 million to China, $110 million to Vietnam, $50 million to Yugoslavia, $41.4 million to Croatia, $16 million to India, $12 million to Bulgaria, and $10 million to Cuba. Russia's internal debt will reach 648.3 billion rubles ($27.65 billion) by 2000, but the amount is expected to drop to 593.181 billion rubles ($23.97 billion) by the beginning of 2001.

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Business

LUKoil Predicts A Rise In Exports

· Russia's biggest crude oil producer LUKoil is predicting a rise in exports before the end of the year that will boost domestic oil prices toward world levels. Vice President of LUKoil Leonid FEDUN said that technical pipeline capacity limits on oil exports in Russia had been overcome this year and will lead to an increase in foreign sales from the current level of 30 percent of crude production. He said, "The border between the domestic and international market is disappearing. Despite all the attempts by the government to limit exports, more will be exported. That will result in reduction in domestic oversupply, to be replaced by a shortage," the Financial Times reported. On Tuesday, LUKoil released half-year figures under Russian accounting standards showing pre-tax profit of 7.8 billion rubles ($314 million). Since January, the Russian demand for petrol had risen 11 percent. FEDUN also said that LUKoil is not considering any new Russian acquisitions. However, the company is also actively seeking foreign investments in eastern Europe, the Middle East, China, and Iraq.

Tyumen Oil To Begin Bond Sale

· Russia's sixth-biggest oil producer, Tyumen Oil Company (TNK), will begin its second sale of its 2.5 billion ruble bond issue on September 9th. The size of the second group of bonds with a nominal value of 1,000 rubles totals 1.34 billion rubles, the Dow Jones Newsline reported. The price of the bond will be determined at an auction to be held on the Moscow Interbank Currency Exchange (MICEX) on September 9th. The sale will close on September 22nd at the latest. The five-year bond carries a 7 percent coupon and put options after two, three, and four years into maturity. The bonds are hedged against currency risk and backed with oil export contracts to French company Total Fina. At its first bond auction, Tyumen sold 46 percent of the 2.5 billion ruble issue, with the price of one bond settling at 912 rubles and yielded at 12.5 percent.

ber 17th to 18th for an official visit. The main focus of talks between NAZARBAYEV and Ukrainian President Leonid KUCHMA will be the transportation of Kazakh oil via Ukraine. Along with oil transportation, NAZARBAYEV is also expected to discuss the prospect of establishing an international consortium with the participation of Russian and Kazakh oil suppliers on the basis of the Lisichansk-based oil-processing plant Linos. This plant is capable of processing 18 million tons of oil a year, is practically at a standstill due to the lack of feedstock. Six million tons of oil a year is enough to ensure the plant's effective operation. Alexander MARTYNENKO, press secretary of the Ukrainian President, said on Wednesday that, "Kazakhstan's participation in the supply of oil to the Linos has been practically confirmed."

South Caucasus & Central Asia

Georgia-US Summit; Suspicious Connections

· The White House on Wednesday issued a strong statement in support of the Georgian government and announced that Georgian President Eduard SHEVARDNADZE will meet with US President Bill CLINTON on September 23rd. The two leaders will discuss the present state of relations between the US and Georgia, and the ways to expand the bilateral cooperation. SHEVARDNADZE will be visiting the US to speak before the United Nations General Assembly. According to the White House statement, "The United States strongly supports the sovereignty, stability, and territorial integrity of Georgia, and recognizes in particular the critical role that President SHEVARDNADZE plays in promoting prosperity and democratic development for all the people of Georgia." This official statement outweighs claims made in the Georgian press by Chairman of the Supreme Soviet of Adjaria Aslan ABASHIDZE, who opposes the SHEVARDNADZE government and the Citizen Union Party, that he has the support of the US through ties with the CLINTONs and the RODHAMs.

Last month Hillary RODHAM-CLINTON's two brothers, Hugh and Tony, met with ABASHIDZE, known for his opposition to the SHEVARDNADZE government and his close association with shady characters and dubious business dealings, especially the sale of Georgian merchant Marine ships. He is also closely linked with the Russian military base in Batumi and to the most revanchist forces within the

European Republics

Ukraine-Kazakhstan On Oil Transportation

· Kazakh President Nursultan NAZARBAYEV of Kazakhstan is scheduled to visit Ukraine on Septem

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Russian Federation. The First Lady's brothers were featured on Georgian television appearances praising ABASHIDZE and the city of Batumi and formalizing a business deal. ABASHIDZE announced that a Georgian-American joint venture will be formed for the production of Georgian Hazelnuts. While on the visit, Tony RODHAM became ABASHIDZE's grandson's godfather. This has been interpreted as an attempt to boost the legitimacy of ABASHIDZE's political party Rivial within Georgian before the October Parliamentary elections. He claimed in a press conference on August 31st to have the CLINTON's support. According to Prime news he stated, "The United States renders its support to democratic process and not to totalitarian regimes. It is a bluff that the central authorities of Georgia enjoy anybody's support, whereas the representatives of these authorities blatantly violate human rights." Meanwhile, head of the Georgian Communist Party Pantalemon GIORGADZE and his son Igor GIORGADZE were said to be withdrawing their support of ABASHIDZE in an apparent attempt to further conceal ABASHIDZE's true proclivities to Russia and the forces which seek to reverse Georgia's reform process. Intercon sources report that the letter of invitation issued for the Georgian visa of RODHAM's visit to Georgia was requested by a suspected money launderer whose Bank was shut down for illegally operating in the US without a license. Another source stated that the RODHAM's were invited to visit Georgia by the former representative of the Liberty Bank in New York and found it suspicious that they would be in contact with a man of such reputation. In addition, it should be noted that President Bill CLINTON met Grigori LOUTCHANSKY in 1993, at a fund-raiser, currently a close friend of ABASHIDZE who describes himself as ABASHIDZE's economic advisor. LOUTCHANSKY is connected with the Russian Mafia and has in the past been linked with money laundering and allegedly to nuclear smuggling. According to The Washington Post, LOUTCHANSKY, in 1995, was invited by the Democratic National Committee to a fund-raiser at the Hay-Adams Hotel in Washington, which he could not

attend because the State Department would not issue him a visa. LOUTCHANSKY has been described in the book One Point Safe, by former CIA Director WHOOSLEY, as one of the ten most dangerous men in the world.

Armen-Kazakhstan To Sign Friendship Agmt.

· Armenian President Robert KOCHARYAN left for an official visit to Kazakhstan to hold talks with his counterpart President Nursultan NAZARBAYEV. They are expected to sign a friendship and cooperation agreement and a joint statement. Armenian and Kazakh delegations will sign a string of accords on cooperation in customs, trade and banking fields. KOCHARYAN will meet delegates of Kazakhstan's Armenian community. The Armenian delegation includes ministers for transport, energy and state revenue. KOCHARYAN will be accompanied by businessmen who will meet their counterparts for discussing economic deals.

Kazakh Privatization Sales

· The Kazakh Finance Ministry and the Committee of State Property and Privatization announced today tenders for the selection of advisers for the sale of strategic investors of the government stake in the share of capital for various companies. The companies for sale are the following: Manguistaumunaigas an oil extractor at 30 percent stake; Aktobemunaigas an oil extractor at 25.2 percent; Ust-Kamenogorsk Group of Titanium and Magnesium Enterprises at 15.5 percent; Kazzinc a zinc extractor and processor at 27.64 percent, and Kazakhmys a copper extraction and processing plant at 35 percent. Information on the conditions, list of required documentation and more information is available at www.kazinvest.com. Proposals, to be received by September 20th, should contain a bidder profile, experience in the field, brief resumes of the main participants, and proposals on the sale scenarios

The Daily Report on Russia & FSU

will not be published on Monday September 6th,

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

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