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 30, 1999

Russian Federation

Politics

Fears Of Another Chechen War Mounting

· Words, rhetoric, and actions of Russian officials and the military are all raising fears that the air raids on Chechnya, now in its eighth day, will grow into a large scale war. Defense Minister Igor SERGEYEV and Prime Minister Vladimir PUTIN have both stated that they can not rule out the prospect of a ground war. PUTIN boasted that "Combat operations in Chechnya are already under way." Russian troops have taken control of hills and mountains just inside the border with Chechnya. He added that Russia does not recognize the border with Chechnya since it is all a part of Russia, and therefore the Federation's military can move in and out of Russia as it sees fit. PUTIN has agreed to talks with Chechen President Aslan MASKHADOV, but only if, "Chechen leadership finally to condemn terrorism, clearly and firmly, and to express their readiness to hand over criminals." Meanwhile, Chechnya has enlisted some of the warlords on Russia's most wanted list. Despite their split earlier this year and Shamil BASAYEV's involvement in the two incursions into Daghestan, MASKHADOV has appointed him in charge of the Eastern front. Chechnya claims that the bombing campaign has killed over 300 civilians and caused tens of thousands of refugees to flood into neighboring regions, including Ingushetia. President of Ingushetia Ruslan AUSHEV said any ground attack in Chechnya would be, "negative...We need to fight terrorists and bandits, but not like a bull in a china shop. Rather, we should treat like colleagues, normal Chechens who want to fight terrorism." Refugees are in desperate need of tents, food, clothes. Support for the new campaign has been waning as Russians recall the embarrassment and devastation after its failure to win the 1994 to 1996 Chechen War.

Economy

Gold And Currency Reserves Remain At $10.9B

· Russian gold and currency reserves didn't change in the period from September 17th to 24th, amounting to $10.9 billion, according to information of the Department of External and Public Relations of the Central Bank. As compared with early 1999, when the volume of gold and currency reserves stood at $12.2 billion, reserves have fallen by 10.7 percent.

Russia Accepts New Lending Terms

· First Deputy Prime Minister Viktor KHRISTENKO, who led Russia's delegation to the annual meeting of the International Monetary Fund (IMF) and the World Bank in Washington this week, said that Russia is ready to comply with new conditions for issuing it another installment of the $4.5 billion IMF loan. The new terms have been outlined in a Group of Seven communiqué due to allegations that Russian capital and IMF loans were laundered through private accounts at the Bank of New York. These terms include the adoption of more efficient finance controls as well as a request that the Central Bank provides monthly audits on its management of gold and currency reserves. KHRISTENKO said technicalities of Russia's complying with the communiqué's provisions and control mechanisms would be laid out in Washington in a few days. Another request is for Russia's Central Bank and commercial banks to adopt international accounting standards. He said the communiqué, "is not a guide to action, but Russia is

Today's News Highlights

Russia

Russia Accepts New G-7 Terms

Menatep Declared Bankrupt

Sakhalin Oil Spill Possible

European Republics

Belarus Consumer Prices Rise

CIS Interior Mins. Meet In Kiev

South Caucasus & Central Asia

Chukhua To Be Extradicted?

Rodham Nut Deal Continues?

LUKoil Bids In Kazakh Sell-off

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ready to understand the situation and, in the spirit of cooperation, to take additional measures to demonstrate the openness of all our operations." Russia will use this second installment, expected to be considered by the IMF board in early November, to again make a debt payment to the Fund.

Ruble = 25.08/$1.00 (NY rate)

Ruble = 25.05/$1.00 (CB rate)

Ruble = 26.66/1 euro (CB rate)

Business

Menatep Declared Bankrupt

· A Moscow court declared Menatep bank bankrupt on Wednesday. Menatep was Russia's seventh largest in terms of assets, before last August's economic crisis, RFE\RL Newsline reported. The same day, a top official with the Agency for Restructuring Credit Organization (ARKO) announced that it would be unable to revive SBS-Agro without a further injection of government monies. According to The Moscow Times, the Central Bank has already disbursed 6.5 billion rubles in soft credits to SBS-Agro to try to keep the failing bank alive.

Sakhalin Oil Spill Possible

· On Tuesday, the Oka receiving tanker unexpectedly moved away from the Molipak oil producing platform on the Sakhalin shelf. At the time, crude oil was being pumped into the tanker. In pulling away from the platform, the tanker was supposed to trigger an automated control device installed on the Molipak platform to discontinue the pumping of oil extracted from the shelf. A rescue ship and helicopter are monitoring the surrounding waters to determine if any oil spilled during the process. The Russian Emergency Situations Ministry and other agencies monitoring all incidents at sea were informed about the incident as well. According to the rescuers, unplanned separation of a receiving tankers and floating oil-extracting platforms occurs frequently in world practice. Usually some oil is spilled in the process. The Molipak platform has been producing oil on the Sakhalin shelf since July.

materials, including energy carriers, is the main reason for the rise of consumer prices in the country. "It is difficult to explain to people that yesterday Russian oil cost $40 and today it costs $160. But if we increased consumer prices accordingly, i.e. four-fold, our people would not sustain it," LUKASHENKO said Wednesday night. The President stressed that the government was doing its best to keep the price growth on the level of 5 percent to 6 percent a month, although it is extremely difficult. "It is hard to do two things at a time—to keep the prices down and not to destroy domestic producers," he said. According to the information of the Belarus Statistics Ministry, the average monthly growth of consumer prices was 109.8 percent this year, which is twice as much as the forecast figure. The August figure was 107.1 percent. In September, it is predicted to be close to 10 percent.

CIS Interior Ministers Meet In Kiev

· Interior ministers of the Commonwealth of Independent States (CIS), CIS Executive Secretary Yuri YAROV, as well as delegates of the Interpol and the Bureau for Coordination of Fighting Organized Crime opened a two-day meeting today in Kiev to discuss joint anti-corruption measures, Ukrainian Foreign Minister Viktor KRAVCHENKO said. The meeting will review a memorandum on relations between the CIS Council of Interior Ministries and the Interpol, and nomination of the Council's new representative to the CIS Executive Council. Russian Interior Minister Vladimir RUSHAILO is planning to propose speeding up the creation of a unified anti-terrorist center within existing CIS bodies. However Ukraine will not sign any documents under which it should form part of any CIS bodies. On the sidelines of the meeting Ukrainian and Georgian security officers are meeting to discuss the situation in Chechnya, without Russia. The Russian representative was furious about the meeting.

South Caucasus & Central Asia

Georgia Calls For Extradition Of Chukhua

· Georgian Security Services are negotiating with their Vladikavkaz counterparts on extradition of Georgian national Nugzar CHUKHUA, who is suspected of participating in an assassination attempt on Georgian President Eduard SHEVARDNADZE. Georgian Prosecutor General Dzhamlet BABILASHVILI confirmed on Tuesday that CHUKHUA

European Republics

Belarus Consumer Prices Rise

· Belarus President Alexander LUKASHENKO is claiming that the growth of prices of imported raw

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is on the wanted list as a suspect in the attack on SHEVARDNADZE's motorcade in Tbilisi on February 9, 1998. If he is extradited to Georgia, an adequate investigation and trial will be possible. CHUKHUA was detained in Vladikavkaz on suspicion of planting the bomb which exploded in Vladikavkaz's market this March, killing almost 50 citizens. CHUKHUA was known to have escaped Georgia after the attack on SHEVARDNADZE and to hide in the North Caucasus, including a while in Chechnya. Georgian investigators said that CHUKHUA admitted of his involvement in the assassination attempt and told details of its preparation as well as the Vladivkavkaz bombing plans. Two bodyguards of SHEVARDNADZE and one attacker, a Chechen resident of Dagestan, died in the shoot-out which ended the attack. Georgian Security Services have arrested ten people who were indicted as participants in the attack. Most were said to be supporters of Georgia's late president Zviad GAMSAKHURDIA. Georgian investigators said they ascertained that terrorists had been trained at a base in Chechnya.

Rodham Hazelnut Deal Continues?

· Chairman of Georgian Argo-Holdings LLC (www.argoholdings.com) Vasil PATARKALISHVILI in Tbilisi announced Wednesday evening in an interview on Rustavi 2 (RUS2) television program that the deal to produce hazelnuts is continuing despite political pressures. Representatives from Adjaria have declared that the participation of US President Bill CLINTON's brothers-in-law, Tony and Hugh RODHAM, has already been decided. On September 17th, Intercon reported that the RODHAM brothers had withdrawn from this $118 million hazelnut deal, after US National Security Advisor Sandy BERGER persuaded them that the deal could damage bilateral relations with Georgia, the CLINTON Administration, and First Lady Hillary CLINTON's possible bid for the New York Senate seat. The RODHAMs in August visited Batumi for business talks with PATARKALISHVILI and Adjarian political leader Aslan ABASHIDZE, whose economic adviser Grigori LUTCHANSKY is described by former CIA director James WOOSLEY as one of the most dangerous men in the world. ABASHIDZE used the visit and many press and media appearances to boast that this business deal was more important for Georgia than the Caspian Oil Pipeline and a sym

bolic endorsement of political support from the US President. The RUS2 program also commented that with the linkage between ABASHIDZE and the "alleged Russian mobster" LUTCHANSKY, concerns also developed "that the $118 million hazelnut investment was a money laundering operation conducted by international mobsters" (RUS2). These concerns are logical since many Russian and other criminal money laundering operations involve investment in agriculture and food producing industries. Now, PATARKALISHVILI is claiming that Tony RODHAM has again met with ABASHIDZE and held negotiations concerning the hazelnut project (RUS2). He said, "The Project has never stopped and it'll never stop. During these past two weeks we are working on our business plan. This project will never stop." Adjarian authorities added that the RODHAMs do "have $118 million to invest but Argo-Holdings will need to attract additional funding to reach that level of investment". In a new development, PATARKALISHVILI claimed that Adjarian government had "already provided Argo-Holdings with $4 million", up from $1 million that he had previously claimed ABASHIDZE had committed. Argo-Holdings also claims to have rented 4,500 hectares of land in Western Georgia. It is peculiar since this is not in the Adjarian region but in an area of traditional opposition to SHEVARDNADZE. This added to the speculation that it is all a political ploy to embarrass the Georgian government. The Chairman also said that he has been forced to make some restructuring which, "will ensure that the project will develop in the manner which is not harmful for the First Lady and or the CLINTON Administration." PATARKALISHVILI said, "We were surprised by the attempt to turn this deal into a political issue." One wonders how else it could be interpreted since according to him (RUS2) all the capital has not yet been raised, the business plan is still being worked upon and as PATARKALISHVILI himself pointed out "the deal will proceed despite that it will operate without a profit for ten years or more". Comment: Many questions are raised by this interview: why is the Adjarian government investing $4 million in a project outside its region when it owes millions to the central Georgian government? Where does this money come from? When ABASHIDZE claimed support of the US through the President's brothers-in-law and Argo-Holding purchased land for the Hazelnut crops in a region which is hostile to Georgian President Eduard SHE

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VARDNADZE, the politically motivated posturing was bound to surface. Residents of the this region are known Zviadists, who support Georgia's late president Zviad GAMSAKHURDIA. Clearly, the CLINTON Administration has come out in support of SHEVARDNADZE and is even considering increasing US aid to Georgian border guards. Finally, who would invest over $100 million in a business deal that will not give back positive returns for over ten years at best? It is very doubtful that the deal will proceed with the RODHAMs, especially since the Georgian procurator's office announced last night a link between LUTCHANSKY, ABASHIDZE and the investigation into the unlawful sale of the Georgian Merchant Marine fleet for roughly $110 million. Maybe this is where the investment money is originating?

Georgia To Receive Romanian Ship

· Georgian Deputy Defense Minister Grigol KATAMADZE Tuesday announced that during a meeting with Romanian Defense Minister Victor BABYUK, it was decided that Romania will present Georgia with a military vessel in the near future. The 60 meters long vessel, which was modernized in 1987 has an air Defense system on board and a capacity of 542 tons, Prime News Agency reports. KATAMADZE was visiting Romania from September 21st through September 26th for deepening military cooperation of Romania and Georgia. Agreements on cooperation in military-technical sphere and staff training have been prepared and may be signed during the 1999 exposition planned to be held in Bucharest on October 26th to 28th.

Caucasus Neighbors Fear Spill Over

· Russia's southern neighbors have expressed serious concern that the military air raids and violence in Chechnya and Daghestan could spill over into their nations. Many are concerned not only that fighting may contribute to a build up of Russian troops in their territory or air space, but also that it could prove detrimental to economic and political relations. Georgian deputy foreign minister Georgi BURDDULI said, "We believe that there could be

dangerous provocations from Russia. Anything could happen," the Financial Times reported. At stake for Baku is a western outlet for its oil through the Baku-Novorossiiks pipeline which has been shut down since June. Political relations could be complicated since Chechen President Aslan MASKHADOV has asked Georgian President Eduard SHEVARDNADZE to be a mediator in Russian-Chechen negotiations. Tbilisi and Baku were quick to condemn the infiltration of separatists, Islamic militants, and the terrorist acts, bombings of apartment buildings, which both nations have had to deal with in Abkhazia and Nagorno-Karabakh. Russian air raids have forced more than 60,000 Chechens to flood into the neighboring Russian republic of Ingushetia. Azeri foreign minister Araz AZIMOV said, "We support the territorial integrity and sovereignty of Russia, but no one wants a humanitarian crisis. We condemn terrorism, what ever form it may take, or wherever it happens, but the reaction to it should be an adequate one." Both Georgia and Azerbaijan have strongly denounced claims that they have provided transit and arms to the Islamic militants. In Yerevan on Wednesday, SHEVARDNADZE said, "If weapons have turned up in Chechnya, including the most modern ones, they...seep from Russian bases and are sold by Russian military officers. There are no other sources."

LUKoil Interested In Tengizchevroil Stake

· Russia's LUKoil has expressed its interest in acquiring a stake in international operating consortium Tengizchevroil. The government of Kazakh Prime Minister Nurlan BALGIMBAYEV has announced the sell off of 40 percent of its 25 percent stake in Tengizchevroil, which operates the huge Tengiz oil field in western Kazakhstan. The oil field has reserves of 4 billion barrels and produces an average 210,000 barrels per day. LUKoil's vice president Leonid FEDUN said, "Yes, we are interested, but in my opinion the price they have talked about is excessive." FEDUN did not disclose the government's asking price, but local media report it to be close to $1 billion. The government hopes the revenues from the sale will fill part of the budget gap.

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

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