DAILY REPORT ON RUSSIA

AND THE FORMER SOVIET REPUBLICS

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

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Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Friday, September 3, 1999


call for a disengagement with Russia, returning it to the status of a semi-rogue state. Many believe that the chummy relationships between Bill and Boris, GORE and former prime minister Viktor CHERNOMYRDIN, and the two nation's economic advisors has failed to bring about reforms necessary to sustain democracy. In an article in The New York Times, former first deputy prime minister Boris NEMTSOV and president of Eurasia Group Ian BREMMER state that, "The United States has been remiss by supporting the first democratically elected head of the Russian state instead of the process and institution of democracy."

Republican Iowa Congressman and chairman of the US House of Representatives' banking committee Jim LEACH and US Treasury Secretary Lawrence SUMMERS called for a moratorium on lending to Russia. However, the article said that the IMF funding and western support should be redirected. It said that the West should recognize that its funding should be kept away from the corrupt elite and instead should be focused on, "micro-loan program aimed at building a middle class, creating a tax base so that the Government can meet it debt obligations." Estonian President Lennart MERI agrees the West must remain committed to Russian reform no matter how painful and problematic it may be. He believes that Russia has the ability to build itself into a prosperous nation. In an interview with the Financial Times he said, "The 21st Century will be the age of a beautiful, reformed Russia...It will be a Russia that we

Russian Federation

Politics

Russia Responsible For Its Own Fate

· While the Russian money laundering scandal at Bank of New York may have shocked many in the US, Russian citizens have become virtually immune to scandals. Corruption, money laundering, shady book or construction deals, crisscrossing bank accounts, and double bookkeeping, and sexual escapades are all common headlines in the Russian news. Historically as well as today, the scapegoat for regional and national calamities is often the outsider, more precisely the foreigner. Russian politicians, including Foreign Minister Igor IVANOV and Interior Minister Vladimir RUSHAILO, have been quick to blame the Bank of New York scandal on the West. They have touted it either as an effort by the Western media to discredit Russia and its investment environment or as a plan by Federal Bureau Investigation (FBI) officers using McCarthyite tactics to label Russian businessmen as corrupt individuals to boost their own careers and gain extra funding for the agency. This was the same response to a not too long ago CSIS report on Russian organized crime. IVANOV said the scandal is part of a deliberate policy by, "certain circles who do not want Russia to reassert its role as a great power." Russian influential newspaper Kommersant Daily, recently purchased by businessmen Boris BEREZOVSKY, wrote that the Russian mafia had replaced the Soviet threat in Western thought. After meeting with President Boris YELTSIN today, Federal Security Service (FSB) chief Nikolai PATRUSHEV said, "I reported to the President that this of course is a political affair connected mainly with the elections in the US."

It is true some may use the bank scandal to attack the CLINTON administration and Vice President and presidential candidate Albert GORE and others may

Today's News Highlights

Russia

Second BONY Employee Fired

Zadornov Resigns Envoy Post

IMF Mission Completes Study

Petersburg TV License Revoked

European Republics

Litimpek Declared Insolvent

Ukraine Cabinet Predicts Growth

South Caucasus & Central Asia

Armen-Japan Boost Relations

Aliyev Criticizes OSCE

Politics-Economics-Business

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September 3, 1999

Intercon's Daily

have never seen before." He notes that signs of progress include a constitution, which outlines the division of power, and a working parliament, that works to lay down the foundations of a state based on the rule of law. MERI, who was sent with his family to Siberia in 1941, adds that Russia's current failings and above all its refusal to acknowledge responsibility for its totalitarian crimes, prevents Russia from coming to terms with its past.

However, Russia's excuses for its short-comings are wearing thin, particularly in the light that other former Soviet Republics like Estonia are making incredible gains with liberal economics, budgetary discipline, monetary stability, and privatization. While the international community should not abandon its support for Russia, the nation must take responsibility for it own fate. Russia must admit its mistakes, work to reform its bureaucracy, banking sector, and budget, enforce new laws, and combat corruption. BREMMER and NEMTSOV believe, "We should keep our heads about us...Russia's relationship with the West is much more important than presidential politics in either country." Comment: But the West would be best advised to hold Russia accountable whenever and wherever it can. While domestic policy reform is extremely difficult to manage from outside, Russia's foreign policy is an area of more practical influence. Can Russia reform democratically, if it continues its interference in its neighbors, which were once part of the Soviet Empire? We think not. The West would be well advised to firmly press Russia to cease and desist all empirical instincts so it can concentrate its wherewithal within. First to strengthen its ability to govern and second to constrain those who have not grasped the self-imposed limitations of its weakening status and its growing criminal instinct.

Second BONY Employee Fired

· Despite the lack of charges in the Russian money laundering scandal at the Bank of New York, another bank employee has been fired. Russian born Svetlana KUDRYAVTSEV an employee in the eastern European section was dismissed on Tuesday for failing to cooperate with the bank's internal inquiry. She had not been mention as a key figure in the scandal in earlier reports, but is known to have connections to Lucy EDWARDS, the other fired employee, and her husband, Peter BERLIN. BERLIN is linked to at least

nine of the accounts under investigation through his company Benex International. Meanwhile, EDWARDS has threatened to use legal action against the Bank of New York for failing to speak with her first about the scandal before her firing. EDWARDS and BERLIN have denied any wrongdoing.

Economy

Ruble = 25.87/$1.00 (NY rate)

Ruble = 25.82/$1.00 (CB rate)

Ruble = 27.61/1 euro (CB rate)

Mar Apr May Jun Jul Aug

Zadornov Steps Down From Special Envoy Post

· One of the officers with the longest tenure in President Boris YELTSIN's government and administration announced that he will resign. Russian presidential envoy for negotiations with international financial organizations Mikhail ZADORNOV on Thursday said he will step down after the current International Monetary Fund (IMF) mission leaves Moscow. He stressed that his decision is in no way connected with the claim that IMF funds were funneled through the Bank of New York and placed into the hands of Kremlin elite or organized crime leaders. He said, "We have succeeded in fully renewing our relations with international financial institutions. I consider my mission fulfilled." He added that his departure will not harm Russia's relations with the IMF. His resignation must still be approved by YELTSIN. ZADORNOV intends to run for the parliament for the liberal Yabloko party led by Grigory YAVLINSKY. He stressed, "the government must be economically and politically independent and have political responsibility. I will seek that in politics."


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ZADORNOV predicted that Russia will receive the next installment of the $4.5 billion loan. The IMF mission had been checking on the implementation of conditions for further payments. Regarding their investigations, ZADORNOV said, "They will look and see if the conditions are being fulfilled and how the funds are being used. There is no doubt what the conclusions will be." He sees no reason why the Fund would delay the $640 million installment. The decision by the IMF board of directors is expected to be made on September 20th.

IMF Mission To Extend New Loan Installment

· An International Monetary Fund (IMF) mission reviewing the economic situation in Moscow, has agreed to extend to Russia a $640 million installment. The delegation has finished its work under the leadership of Gerard BELANGER and is preparing a report for the board of directors on the performance of the Russian economy in 1999-2000. BELANGER and the IMF team over a week and a half studied the federal budget in 1999, and at the draft budget for 2000. The delegation has agreed upon parameters of the draft 2000 budget and its projected primary surplus, 3.18 percent of gross domestic product. BELANGER held meetings with the Russian presidential envoy to international financial institutions Mikhail ZADORNOV, and with Finance Minister Mikhail KASYANOV, Tax Minister Alexander POCHINOK and Central Bank chairman Viktor GERASHCHENKO. The IMF is ready to issue further loans to Russia despite criticism by American media about loaning Russia.

Business

Petersburg TV's License Revoked

· The Russian Press, Television and Radio Broadcasting, and Mass Communication Ministry has suspended the license of the Petersburg TV and Radio Network and instructed the communications enterprises to suspend the network broadcasting effective Thursday. Mikhail SESLAVINSKY, First Deputy Minister, said the decision was taken in view of the airing of the program Politics: Petersburg's Style by on August 30th. The content of the program focused on a Right Cause rally in a sports area with a concert in attempt to cater to the politically apathetic Russian youth. The program, according to the Associated Press, contained scathing personal at

tacks on politicians, along with scenes of raucous behavior by the youth. The Ministry suspended the license claiming that the report on the Right Cause political movement violated laws on the media and voters' rights and was a typical example of pre-election propaganda. "Propaganda can not only be in favor of something, it can sometimes be against," Ministry chief Mikhail LESIN said. ORT Television received a warning regarding its broadcast of the rally last weekend. Petersburg TV and Radio Network showed the report late Monday. The Press Ministry said, "The government could only assess that as a deliberate defiance." LESIN said that the network's license could be renewed if it explains its coverage and pledges to avoid future violations." St. Petersburg governor Vladimir YAKOLEV sharply criticized the ministry's actions. He said, "This is the beginning of censorship, the war against journalists. You can dislike reporters, but it is inadmissible to act this way, this is arbitrariness." This is the first revocation by the new Press Ministry, which has powers that have not been clearly defined.

Chechen authorities on Thursday banned broadcast of Russia's three major TV channels: NTV (Independent Television), ORT (Public Russian Television) and RTR (Russian Television and Radio), in the territory of the republic. LESIN said that Chechnya's decision was, "an incomprehensible one." He added, "We shall take all necessary measures in order to resume the broadcast."

European Republics

Litimpeks Bank Declared Insolvent

· Lithuania's Central Bank on Thursday declared Litimpeks Bank insolvent. "Taking into consideration that Litimpeks Bank is insolvent and fails to meet prudential requirements, the Central Bank decided to apply to the Vilnius district court, asking it to start a bankruptcy case and revoke its license." The Central Bank said that the fall of the nation's sixth largest bank posed no threat to the banking sector. Analyst, however, said it will add transparency to a rapidly changing sector and put pressure on smaller banks. Litimpeks accounted for only 2.2 percent of the local market. It had assets of 272 million litas, loans worth 77 million litas, and only 30 million litas in individual deposits, which are covered by deposit insurance. On August 13th, the Central

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Bank had suspended Litimpeks' main operations due to liquidity problems. Supremea analyst Silvestras TAMUTIS pointed out, "If the bank cannot find an investor or solve its own liquidity problems, why should it remain on the market." Litimpeks Bank was already shut down once during Lithuania's banking crisis in 1995 to 1996, but it reopened in June, 1996, after major restructuring and recapitalization.

Ukraine Predicts GDP Growth, Low Inflation

· Ukraine's Cabinet approved key economic guidelines for 2000, which are optimistic in view of Ukraine's continuing economic turmoil. The Cabinet on Thursday predicted that gross domestic product (GDP) will grow by 2 percent to a total of 150.8 billion gryvnia. In 1998, GDP contracted by 1.7 percent. In the period of January to May, 1999, the GDP was down 3.5 percent. The forecast also provides for an annual inflation of 12 percent, down from the 1999 projected rate of 19.1 percent. The gryvnia currency is expected to slide down to 5 gryvnia to one dollar. Prime Minister Valery PUSTOVOITENKO ordered the government to finalize the draft of the 2000 budget by September 9th and submit it to parliament by September 15th.

South Caucasus & Central Asia

Armenia-Japan To Boost Relations

· Armenian Foreign Minister Vartan OSKANYAN and Japanese Foreign Minister Masahiko KOMURA signed a joint statement Tuesday agreeing to boost bilateral relations through regular dialogue. The two ministers held talks in Tokyo in which they, "recognize that the existing friendly relationship...has entered a new stage with further possibilities for both countries to enhance their relations and to cooperate in various fields." The Foreign Ministers, "intend to enhance political dialogue between the two ministries through regular consultations at appropriate levels on issues of bilateral and international relations." KOMURA said Japan attaches importance on strengthening ties with Armenia and other nations in the Caucasus region as a "corridor linking Asia and

Europe under its active Silk Road diplomacy." KOMURA conveyed Japan's commitment to provide economic assistance while promising to "positively" consider extending grants-in-aid to Armenia for improving its national medical center. A Japanese mission is now visiting Armenia to finalize the grants. Japan has already offered yen-denominated soft loans and cultural grants to the nation. OSKANYAN thanked Japan for its economic assistance, which it called "very essential" for the Caucasus region. He stressed the importance of promoting "balanced" development of Armenia, Azerbaijan and Georgia because of lingering ethnic conflicts and inequality of national resources.

Aliyev Criticizes OSCE Minsk Group

· Azeri President Geidar ALIYEV sharply criticized the activities of the Organization for Security and Cooperation in Europe (OSCE) Minsk group on Nagorno-Karabakh. The peace process has been stalled since the end of 1998. In a meeting with the group's US co-chairman Carey CAVANAUGH, ALIYEV expressed deep concern over the group's inaction. He believes the latest proposals of the group's co- chairmen on the settlement of the conflict on the basis of the "common state" principle were unacceptable. "We have not agreed and cannot agree with such proposals that mean in a concealed form the recognition of Nagorno- Karabakh's independence," he said. ALIYEV said he is still waiting on new peacekeeping initiatives. ALIYEV stressed, cherished great hopes for the United States in the issue of the settlement of the Karabakh problem, however, "so far there have been no effective steps in this direction on the part of the US. We must not waste time," ALIYEV stated noting that "for the time being, the Minsk group on Karabakh has nothing to propose at the upcoming OSCE summit scheduled for November this year in Istanbul."

The Daily Report on Russia & FSU

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in observance of Labor Day


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