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

Friday, September 24, 1999

Russian Federation

Politics

Russia Continues Air Campaign

· Four Russian planes continued attacking the Chechen capital of Grozny and the surrounding areas today. Missile-bombing strikes were aimed at a TV tower in Grozny, an oil refinery, a gas reprocessing plant, several villages, and column of cars near Samashki. Eleven has been killed, twenty injured and heavy damages have been reported by the Chechen side as a result of the air strikes. The raids destroyed several apartment buildings and targeted military airfields that are no longer in use. Director of Grozneft Oil Company Sheikhahmed EDILOV said that over the past 24 hours Grozny's oil refinery was destroyed by bombs. Further targets included the village where Chechen President Aslan MASKHADOV lives. Chechen Foreign Minister Ilyas AKHMADOV said that Russian airplanes were bombing the facilities, which are of vital importance for the republic and which "have absolutely nothing to do with the so-called illegal armed units." The strikes have caused an estimated 300,000 Chechens to flee their homes, according to the Chechen Emergencies Ministry. Russian Prime Minister Vladimir PUTIN defended the Russia's airstrikes on the Chechen territory. "It is a war which international terrorism has declared on Russia to seize from it several territories that are rich in natural resources...We will pursue the terrorists everywhere." He added that the terrorists were, "trained, financed, and sent from foreign countries." Interior Minister Vladimir RUSHAILO backed up these statements saying that the militants want to create, "a criminal province where they would train international terrorists, smuggle arms and narcotics, hold hostages for ransom and organize large scale financial and other scams with impunity." PUTIN also noted that, "What happened in Chechnya several years ago will not be repeated. You will find out what

we plan to do in the next few days," but said that there is no plan to invade Chechnya.

Duma Considers New Tax Bills

· The Russian State Duma today is considering a package of tax bills. The government, which sent them to the lawmakers together with the federal draft budget for the year 2000, hopes that the bills will significantly boost revenues. The Duma will debate the first reading of the amendments to the effective laws on the principles of Russia's tax system, value-added tax, and income. Deputies are also planning to discuss the amendments to the law on Federal Security Service bodies in connection with the measures to prevent acts of terror. Other documents on the house agenda include amendments to the law on principal guarantees of children's rights in the Russian Federation, which envision additional social protection of the children living in northernmost regions or territories with the same status. Deputy Prime Minister Valentina MATVIYENKO was invited to inform deputies about the measures taken by the Cabinet to improve the country's pension system.

Economy

IMF Predicts Growth For Russia In 2000

· The International Monetary Fund's (IMF) World Economic Outlook released on Wednesday said that the Russian economy will post growth in 2000. Output is predicted to rise 2 percent next year, with inflations falling to 23 percent from a projected 88 percent in

Today's News Highlights

Russia

Bids For LUKoil Stake Accepted

European Republics

Rus- Belarus United Power Grid

Baltic Exchanges To Join Norex?

Kuchma Ukraine's Dictator?

South Caucasus & Central Asia

Shevardnadze Honored By NDI

BP Applies For Third Azeri Well

Kyrgyz Strike Militant Camps

Karimov To Run In Next Election

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Intercon's Daily

1999. It said, "Some recent developments suggest that the economic decline is being reversed." These positive predictions, however, are only possible if Russia follows an strong economic program concentrating taxation and the banking system reforms. IMF Managing Director Michael CAMDESSUS said Thursday the Fund's program is working in Russia. He said that for the time being Russia is "overperforming," its program. He repeated earlier statements that there is no evidence IMF loans to Russia were diverted through Bank of New York accounts, which are under investigation. Russia is due to receive the second $640 million tranche in a $4.5 billion aid package next month. The IMF executive board is slated to discuss the matter in late September. US Treasury Secretary Lawrence SUMMERS said Russia had indeed outperformed many economic forecasts, but much remained to be done. "Russia has not yet established a satisfactory or solid foundation for sustained economic growth. And the achievement of such a foundation requires more progress than we've yet seen." SUMMERS had recommended a halt of IMF lending to Russia until firm safeguards are put in place and all funds properly accounted for. Russia's international financial envoy Mikhail ZADORNOV said it would be "unjust" to suspend assistance because of uproven allegations of money laundering. He stressed, "Any delay would be unjust at a time when we are not only ful-filling our program with the IMF but over-fulfilling it." ZADORNOV added that the scandal stories had, "damaged the reputation of the country as a whole." A continued battle against corruption and capital flight, ZADORNOV said would prevent normal development of Russia's economy and will remain the number one challenge for the future government and future president.

30 Percent Of Trade Are Illegal Operations

· The Trade Ministry said that illegal trade in Russia accounts for about 30 percent of the total trade turnover and selling prices are unjustifiably high because of the imperfect system of goods flow. The regulation of the development of trade infrastructure in Russia is decentralized, which results in disproportionate growth of its elements. According to the ministry, about one million independent economic entities are engaged in domestic trade (compared to 5,000 before the reform). Ministry experts believe that the low level of capital concentration (about 90

percent of Russia's small and medium-sized enterprises operating in trade) explains low competition between trade structures in the market.

Ruble = 25.39/$1.00 (NY rate)

Ruble = 25.28/$1.00 (CB rate)

Ruble = 26.58/1 euro (CB rate)

Apr May Jun Jul Aug Sep

Business

Property Fund Begins Accepting Bids For LUKoil

· The Russian Federal Property Fund on Wednesday began accepting bids for the purchase of 1 percent of LUKoil shares. First Deputy State Property Minister Sergei MOLOZHAVY announced that the starting price of one LUKoil share will be 170 rubles. Offered for sale will be 7.5 million shares. Revenues from the sale of shares are expected to exceed $40 million. The results of the auction will be announced on November 29th. MOLOZHAVY said if the auction goes "normally," the Fund and the State Property Ministry will become even more confident of a possible sale of 0.9 percent of Gazprom shares. He did not rule out that the government may consider selling a small package of shares in the United Energy System of Russia as well if these auctions are successful. MOLOZHAVY said plans to sell 19 percent of Slavneft shares and a 25 percent stake plus one share in Rosneft are almost complete.

European Republics

Rus-Belarus To Create United Power Grid

· Russian Prime Minister Vladimir PUTIN has signed a resolution approving the draft agreement

When you need to know it as it happens

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between Russia and Belarus for the creation of the United Power Grid. The agreement says that the parties will create on a voluntary basis the United Power Grid, which will "make it possible to use in the most effective way the energy carriers and electricity-generating capacities of both power systems." The power systems of both countries will work in a single technological regime. No special management authority will be created. Control boards of the power systems of both countries will be assigned to exercise everyday control over the functioning of the United Power Grid. The agreement provides for the creation of a coordinated mechanism of the formation of tariffs on energy carriers, including electric and thermal energy and capacities, which ensure the functioning of the common wholesale electricity market of Russia and Belarus, as well as profitable work and development of the United Power Grid.

Baltic Exchanges To Join Norex Alliance?

· The Tallinn, Riga and Vilnius exchanges are considering ways to increase their cooperation with and plans to join the Norex Alliance, as well as new ways to improve market information and attract foreign investment. The Baltic exchanges have suffered from poor liquidity and low name recognition. They operate with different systems and currencies, making the process confusing. To alleviate these deterrents to foreign investors, Tallinn and Riga have started a real-time link, giving brokers the ability to simultaneously view prices and trading activity on both markets. Vilnius is expected to join this link later this year. The Baltic exchanges are considering cross market membership and the creation of a common trading system and a common list of Baltic blue-chip securities. In addition to these possible changes, the small exchanges, with a total capitalization of $3.13 billion, are considering joining the huge Norex Alliance, which has a capitalization of $325 billion. The Financial Times reports that in joining Norex, the Baltic exchanges would gain access to 70 percent of the Nordic equity market through one trading system, known as SAX2000. The Estonian exchange appears to be the closest to membership, with Latvia and Lithuania still considering their move. Dalia JASULAITITE, vice president of the Vilnius stock exchange said, "In general [we are interested], but it will depend on the conditions. There are technical, financial, and legal problems. We might not be able to afford it."

Ukraine's Parliament Calls Kuchma A Dictator

· Ukraine's parliament on Thursday passed an appeal accusing President Leonid KUCHMA of creating a dictatorship. Parliament claims that the authorities are doing their best to secure KUCHMA's victory in the forthcoming presidential elections set for October 31st, and that other candidates do not have equal opportunities in the election campaign. The statement accused KUCHMA of turning the government into his "campaign headquarters." For the third day in a row, television and radio broadcasts of parliamentary debates were blocked. Deputies have called this action the presidential administration's attempt at a media block out. The opposition dominated parliament on Tuesday was scheduled to debate wage and pension arrears, which would have provided opposition candidates an opportunity to criticize KUCHMA's policies. All of his top challengers hold seats in the parliament. State channels refused to show the debate and postponed it until October 12th. In addition STB, an independent television channel that had been in talks with deputies to broadcast sessions instead of the state channel, has had its banking accounts seized in late August. KUCHMA commented that his opponents' accusations stem from "hysteria" and the fear they might lose in the presidential election.

South Caucasus & Central Asia

Shevardnadze Honored With NDI Award

· Georgian President Eduard SHEVARDNADZE was honored on Thursday night at the National Democratic Institute (NDI) with the W. Averill Harriman Democracy Award for progress in building and independent, democratic state. SHEVARDNADZE has restored peace and economic growth to most of his country since the mid-1990s, surviving armed military gangs, mutiny in the armed services, and two assassination attempts. When Eduard SHEVARDNADZE returned to Georgia in 1992, his homeland was near disintegration and convulsed by ethnic warfare. The country's statehood, its very existence, were at stake. President SHEVARDNADZE met these seemingly insurmountable challenges through what he described as a policy of "democratic transformation, national reconciliation and peaceful settlement of conflicts". Today, Georgia, under President SHEVARDNADZE leadership, offers the most promising example of democratic development among the

When you need to know it as it happens

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states of the former Soviet Union. Georgia continues to contend with external and internal forces seeking to undermine its territorial integrity, and obstacles to sustained economic and political reform are formidable. Yet a written constitution grounded in democratic principles is in place and peaceful polls have yielded a popularly elected president and parliament. In contrast to those leaders inordinately concerned about their image, President SHEVARDNADZE remains committed to building institutions. The Georgian parliament enjoys nearly equal authority to the presidency and has not hesitated to assert that authority. Georgia remains a work in progress. But the progress achieved, and the promise of the future, owe much to SHEVARDNADZE. US President Bill CLINTON led tributes at the NDI's 13th annual dinner, toasting SHEVARDNADZE for leading Georgia through its democratic transition. CLINTON and SHEVARDNADZE met earlier in the day at the White House holding talks on the progress of democratic reforms and regional issues. SHEVARDNADZE said that it is too soon to judge the regional implications if Russian troops continue to clash with Islamic militants in Chechnya. He said, "Let us not hurry. Let us give some time for the situation to unfold." The Georgian President described his nation's relations with the US as "excellent." US first lady Hillary Rodham CLINTON was also honored for promoting democracy abroad.

BP Amoco Applies For Third Gas Well License

· BP Amoco has applied for a license to extend its exploration drilling program on the Shah Deniz gas field in the Azerbaijan sector of the Caspian Sea for a third well in 2000. The major and its partners are currently drilling the second Shah Deniz well which is scheduled to be completed in mid October, to coincide with the end of the three-year exploration license. However, BP Amoco is to extend its exploration with this third well. It had expected to find oil on the site, but instead struck gas and was uncertain about finding an outlet for the reserves. Turkey is an obvious end destination for the gas, given its huge growth and energy demands in the coming years.

However, Turkey has existing contracts with Russia, Iran and Turkmenistan. Shah Deniz has estimated gas reserves of up to 400 billion cubic meters and 730 million barrels of oil.

Kyrgyz Launches New Attacks On Gunmen

· Kyrgyzstan jets have renewed its air campaign against Islamic militants hiding in the southern mountains with 13 hostages, including four Japanese geologists. Officials say that strikes, which occurred Wednesday night on rebel groups near the villages of Sai and Syrt in the Osh region claimed the lives of 30 rebels. The militants entered Kyrgyzstan on August 22nd, led by Uzbek warlord Dzhuma NAMANGANI. The rebels are trying to fight their way to Uzbekistan, where they aim to overthrow the government. Kyrgyz troops with the help of its neighbors have prevented the militants from moving forward. The military of Kazakhstan also delivered missile and bombing strikes against the rebels. Russia has provided military equipment, but said it would not send troops. Kyrgyz has had to call up reservists to fight the rebels. Kyrgyz President Askar AKAYEV said that the militant rebels, estimated at several hundred strong, want to establish an Islamic state that would incorporate parts of Kyrgyzstan, Uzbekistan, and Tajikistan.

Karimov To Run In Presidential Elections

· Uzbekistan's incumbent President Islam KARIMOV will run for another term in January 2000. He has been nominated a presidential candidate at a congress of the Dedicated Men (Fidokorlar) political party. The congress met in Tashkent Thursday. Fidokorlar was founded in 1998 and has become the republic's fifth political organization. Presidential elections are scheduled for January 9, 2000. KARIMOV was elected for the first time in 1990 at a session of Uzbekistan's Supreme Council. On December 29, 1991, KARIMOV was elected President by a countrywide vote on an alternative basis. In 1995, KARIMOV's presidential mandate, set to expire in a year, was extended until 2000 on the strength of a nation-wide referendum.

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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