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

Tuesday, September 21, 1999

Russian Federation

Politics

Russian Caucasus Leaders Meet

· Without consulting the Kremlin, Ingushetia President Ruslan AUSHEV, North Ossetia President Alexander DZHASOKHOV and Chechen President Aslan MASKHADOV met late Monday evening in the Ingushi town of Magas. Their talks focused on preventing recent squirmishes between federal troops and Chechen militants from expanding into a major conflict. North Caucasus leader discussed ways that their law enforcement agencies could stop rebels from crossing the Chechen border into neighboring republics. They agreed to hold a wider meeting of regional leaders, including MASKHADOV, next Monday. Analysts believe that the meeting suggests that some of the area leaders are reluctant to impose the Kremlin's strict blockade measures and more anxious to look for a less confrontational way of resolving the border problem. However, AUSHEV later briefed Prime Minister Vladimir PUTIN on the meeting and stressed it was "essential" that President Boris YELTSIN meet with MASKHADOV. Such a meeting had been planned for this summer, but has been delayed and postponed. In an interview with Kommersant Vlast magazine, MASKHADOV said Chechnya was ready for a blockade and would combat any Russian land invasion on its border. He emphasized, "Never again will we allow Russian troops to march to the center of Grozny." Chechen warlord Shamil BASAYEV warned on Monday that he will send "Islamic kamikazes" into Russia if it continues to bomb Chechnya. He said there will be 300 to 400 volunteer kamikazes and their goal will be the "liberation of the Caucasus." The first deputy head of the armed forces general staff Valery MANILOV said that several defensive lines are expected to be set up on the administrative border with breakaway Chechnya. He made it clear that

land operations of the Russian Defense Ministry on the Chechen territory cannot be ruled out.

Congress Holds Hearings On BONY Scandal

· The US House Banking Committee, chaired by James LEACH (Rep. Iowa), today is beginning two-day hearings on the $10 billion Russian money laundering investigation at the Bank of New York. The committee will also look into the impact of corruption on US-Russian economic ties and allegations that International Monetary Fund (IMF) loans were funneled through accounts held by organized crime members at the Bank of New York. The first witness to be called is US Treasury Secretary Lawrence SUMMERS. He earlier called for the suspension of new loans, until a full accounting of previous IMF loans is made. Other key witnesses include former director of the Central Intelligence Agency James WOOLSEY, assistant attorney general and head of the Justice Department's criminal division James ROBINSON, chairman and chief executive officer of the Bank of New York Thomas RENYI, and managing director and deputy general counsel of the Republic National Bank of New York Anne VITALE. LEACH has said the hearings are necessary to put the facts into the public record. He said, "Our goal is not to rehash the past, but to look to the future by examining the past."

A team of Federal Bureau of Investigation officers and a Russian delegations of law enforcement officers last week worked together in Washington to further the investigation. Deputy head of the Fed

Today's News Highlights

Russia

Market Head For Volatile Times

Sakhalin II Oil Tanker Departs

European Republics

Ukraine Freezes Gas Assets

Kiev Submits Draft Budget

US Ambass. Returns To Belarus

South Caucasus & Central Asia

New Thinking, Fair Assessment

Kazakh To Sell Halyk Bank

Turkmenistan Sacks Bank Chief

Politics-Economics-Business

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Tuesday

September 21, 1999

Intercon's Daily

eral Security Service (FSB) Viktor IVANOV said US investigators showed material indicating Russian businesses and banks may have laundered money in the US. This contradict his own comments last week that "US Law enforcement agencies did not show any documents that could confirm reports on the Bank of New York case." First Deputy Director of the Federal Taxation Police Alexander AGEYENKOV said the information which was received by the Russian delegation must be studied more thoroughly. He pointed out that an agreement on joint investigation into a number of facts had been reached between Russian and US law enforcement bodies. Still, no one has been charged for involvement in the Bank of New York case. Russian State Duma Speaker Gennady SELEZNYOV said, "We want to get information from first hand about documents possessed by our US colleagues to find out what is behind the charges expressed—journalists' speculations or concrete bank accounts and names of thieves." Swiss authorities have frozen $16.8 million in Russian accounts suspected to be linked to the money laundering case.

Economy

Ruble = 25.4/$1.00 (NY rate)

Ruble = 25.34/$1.00 (CB rate)

Ruble = 26.32/1 euro (CB rate)

Russian Market Heads For Volatility

· With bomb threats running rampant in Moscow, rumors of another government reshuffle and possible resignation of the president, and money laundering scandals throwing international lending again into doubt, investors may well wait out the Russian market volatility until after the parliamentary and presidential elections. The RTS-I index has fallen 45 percent since it peaked on July 8th. President of Troika Dialog Asset Management, Pavel TEPLUKHIN said, "I think the market will definitely be higher in 12 months' times, but between now and the presidential elections we will see huge volatility and a series of scandals." He added that, "Any improvement in the economic indicators will not significantly improve the price of Russian equities." As Intercon reported, industrial output increased 5.9 percent to 1.756 trillion rubles for the first 8 months of 1999, and inflation is predicted to rise to more than 40 percent by year's end. Ronald NASH, an economist at Renaissance Capital, pointed out that those who

have been making a short-lived profit due to the ruble devaluation are not reinvesting this money. Instead, these companies and individuals are taking their profits outside the country. The Financial Times reports that much of the selling on the stock market is from domestic shareholders with the foreigners sitting out on the sidelines until the situation improves.

Business

Sakhalin II Oil heads For South Korea

· The first tanker of oil pumped by the Sakhalin II consortium, which includes USX Corp's Marathon Oil Co. with 37.4 percent, Japan's Mitsui & Co. with 25 percent, Diamond Gas, a Unit of Japan's Mitsubishi Corp. with 12.5 percent, and Royal/ Dutch Shell Group with 25 percent, left for South Korea, marking the beginning of what Russia hopes to be a profitable oil and natural gas trade with Asian markets. The first tanker held 600,000 barrels of crude. Sakhalin II invested $1.2 billion to reach its first stage of development, which in the future will yield 90,000 barrels of oil per day. Sakhalin II's gas reserves are predicted to bring in total investment of up to $10 billion. Sakhalin II spokesman Alexander ORDJONIKIDZE said the shipment, "proves our project isn't a paper project and that a productions-sharing agreement project can be implemented in Russia," The Wall Street Journal reported. The government has issued production sharing agreements (PSAs) to Sakhalin II and Sakhalin I, a consortium owned by Exxon Corp., Russia's Rosneft, and a Japanese alliance called Sodeco. Sakhalin III, a consortium owned by Mobil Corp., Texaco Inc., and Rosneft, has been waiting five years for a PSA. Russian State Duma has been delaying PSA approvals because many deputies are wary about granting foreigners access to Russia's non-renewable natural resources.

European Republics

Ukraine Freezes Gas Assets

· Ukraine's tax authorities have frozen bank accounts belonging to Neftegaz Ukrainy, which has tax arrears totaling 4.2 billion gryvnia ($938 million) as of the end of August. The move to collect taxes from this state utility came after the International Monetary Fund delayed disbursement of a $92 million install

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ment of a loan in July because Ukraine had missed a budget revenue target. Ukraine received $184 million this month, following an agreement with the Ukrainian government to increase revenue collection. Ukraine has also agreed to audit Neftegaz Ukrainy and publish monthly reports of its transactions. The government has promised to force Neftegaz Ukrainy to sell more gas for cash instead of barter.

Ukrainian Cabinet Submits Draft Budget

· The Ukrainian government on Wednesday submitted a draft 2000 budget to the parliament. Finance Minister Igor MITYUKOV said the next day that Ukraine's debt obligations in 2000 forced the Cabinet for the first time during Ukraine's independence to draft a budget with a surplus. The draft projects the country's gross domestic product (GDP) in 2000 at 150.8 billion gryvnia ($33 billion), with revenues set at 27.1 billion gryvnia and spending at 26.5 billion gryvnia.

US Ambassador Returns To Belarus

· US Ambassador Daniel SPECKHARD is returning to his post in Minsk after being recalled in protest to his eviction from a diplomatic compound 15 months ago. He will take up residence outside the Drozdy compound and the government will pay compensation for the embassy-owned property. SPECKHARD and other ambassadors were forced to leave their homes by the government which explained that urgent sewer repairs were needed. The compound which is adjacent to the presidential residence, has now been declared President Alexander LUKASHENKO's property. Most other western ambassadors returned in January.

South Caucasus & Central Asia

Georgia Calls For New Thinking, Assessment

· Georgian President Eduard SHEVARDNADZE in his speech to the UN General Assembly on Monday called for "new thinking" for a new century and for a fair assessment of the Georgian-Abkhazian Conflict. He said that it was "new thinking" ahead of perestroika and glasnost which caused the collapse of the Soviet Union. "At the threshold of the new millennium, it is necessary that we once again develop `new thinking'—new principles in the relationship between states, and a new approach to common problems and threats." He pointed out that

since his small, but ancient, nation gained independence it has set forth on a path of "building a free and democratic society based on a socially-oriented market economy." In 1992, Georgia became a member of the UN, OSCE, and BSEC, and actively began forming diplomatic relations. The year 1995, SHEVARDNADZE hailed as a turning point, despite an attempted attack on his life, which he describes as a "barbaric act" signaling that not everyone agreed with Georgia's democratic achievements. That year, a new democratic constitution was adopted along with the first parliamentary and presidential elections. The new currency, lari, was introduced and growth in GDP was recorded. Georgia is also proud to be a key nation helping in the revival of the Great Silk Road, connecting East and West, North and South, allowing for the exchange of ideas and the diffusion of culture. SHEVARDNADZE took the opportunity to highlight the adoption of the Silk Road Strategy Support Act by the US Senate, introduced by Senator Sam BROWNBACK. It is aimed at providing assistance to the South Caucasus and Central Asian states in strengthening independence and democratic development as well as building transport infrastructure, including multiple gas and oil pipelines. In April, the Baku-Supsa pipeline opened, through which oil has been flowing toward western markets. In June, Azerbaijan, Armenia, and Georgia signed the Partnership and Cooperation Agreements with the European Union.

Georgia's successes, however, are overshadowed at home by the unresolved Abkhazian conflict, in which nearly 300,000 ethnic Georgian were forced from their homes. The Georgian President said that campaign of genocide and ethnic cleansing was "conducted by Abkhaz separatists with external support...It is unfortunate that unlike the confrontation in the Balkans, the Abkhaz conflict has been given no exposure on world television screens." SHEVARDNADZE said that the involvement of international institutions, UN, OSCE, Russian Federation and the Friends of the UN Secretary General Group of Countries, has not been able to produce tangible results. "One reason for the failure of all attempts to resolve this conflict is that what really happened in Abkhazia has not yet been objectively assessed at the level of the highest international body—the United Nations Security Council." He said that despite 21 UN resolutions, nothing has

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been resolved. SHEVARDNADZE added that in order to speed up the process of Georgian-Abkhazian reconciliation a fair legal assessment must be given. He said, "You can imagine how disillusioned I was when ethnic purging of the Georgian population occurred and remains unpunished within my own country." He said that, "In today's world, an ethical approach in international politics is most justified from pragmatic standpoints as well. It is from the position of morality that we should act if we want to do good for mankind. This should become the pillar of the `new thinking' of the 21st century."

SHEVARDNADZE is giving a speech today in New York at a forum to benefit the E. SHEVARDNADZE Foundation for Democracy & Security cosponsored by the Eurasia Group and Intercon. Later this week, he will hold high level meetings in Washington with the Senate leadership on Capitol Hill and with US President Bill CLINTON.

Azeri Oil Stolen Through Novorossiisk Route

· Director of the Institute for Globalization Problems Mikhail DELYAGIN, on Friday, said that not a single ton out of the 120 tons of Azeri oil pumped in 1999 through Chechnya reached the destination point. The entire amount of oil was stolen. According to DELYAGIN's information, up to 75 percent of Chechnya's revenues were from criminal origin even in peacetime. It resulted from the squandering of federal money, printing of counterfeit dollars, narcotics trafficking, kidnappings. The processing of Russian oil brought Chechnya up to a quarter of its revenues until recently. Chechnya received 65 million rubles for the Russian budget to compensate Chechen Transneft state-owned concern for the expenditures for the transit of Azeri oil. Measures to limit oil supply to Chechnya taken by Russia from the summer of 1998, reduced the incomes of field commanders. Some analyst believe this could be one of the many reasons militants are invading Daghestan.

Kazakhstan To Sell 20 Percent Of Halyk Bank

· Kazakhstan is planning to sell 20 percent of the

state-controlled savings institution Halyk Bank by the end of the year. Karim MASIMOV, the bank's president, said the sale could happen before or after an additional issue of Halyk Bank shares. He expects partial privatization as well as an increase in capitalization. The bank, a successor to Soviet-era Sberbank, dominates the retail savings sector with assets of 45 billion tenge ($333 million) as of the end of June. The sale of 20 percent would leave the state with a 50 percent plus one share in Halyk. The stakes will be offered at a tender to portfolio or strategic investors to the highest bidder. The bank is also planning to issue 6.03 million shares, or 20 percent of the existing equity capital, in order to raise the bank's capitalization. The shares with a nominal value of 100 tenge each, will first be offered to existing shareholders.

Turkmen Leader Sacks Bank Head

· Turkmen President Saparmurat NIYAZOV on Monday sacked the head of the state foreign investment bank Yelly KURBANMURADOV due to growing concerns over the nation's high debts. KURBANMURADOV was dismissed as Vneshekonombank chairman, but will retain his position as deputy prime minister in charge of investment policy. He was replaced by former Central Bank deputy head Aman NURGELDYYEV. At an impromptu meeting with Vneshekonombank management, NIYAZOV said it was failing to attract foreign investment and credits and was not making international debt repayments on time. Western creditors have been warning that Turkmenistan is at risk of having its credit lines cut off, if it fails to meet debt arrears. Reuters reports that Turkmenistan's total external debt soared to $1.8 billion by the start of this year from $700 million two years earlier. Although Turkmenistan maintains huge proven gas reserves, it has little direct access to export markets, forcing it to borrow heavily. NIYAZOV said, "Turkmenistan must never play the role of debtor. The country has the resources to return borrowed money in the strict time period agreed and according to international legal norms."

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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