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

Wednesday, September 8, 1999

plan is to upgrade as many as ten MiG-8 and MiG-24 helicopters before the end of this year. The upgrade, sponsored by weapons company Rosvooruzhenie, is carried out under a joint project by defense companies and research centers.

Talbott Holds Security Talks In Moscow

· US Deputy Secretary of State Strobe TALBOTT arrived in Moscow on Wednesday for two-days of talks with Russian Deputy Foreign Minister Georgi MAMEDOV on key issues of international security and disarmament. Specifically, the talks will focus on the prospects for a START-III nuclear weapons reduction treaty and Washington's desire to change the 1972 Anti-Ballistic Missile Treaty (ABM). One unnamed senior Russian military official said, "The Americans are trying to drag us into negotiations on ABM to secure Russian agreement for the United Stated to deploy its own limited national anti-ballistic missile defense." He added, "The Russian side will not go along with this. Our position is that deploying a national ABM system would lead to an arms race, including in missiles." Colonel-General Leonid IVASHOV said altering the ABM treaty could undermine the whole disarmament process. Washington wants to develop a shield to protect its troops and Asian allies from attack by rogue states. Republicans in the US Congress want to ditch the treaty altogether. TAL-BOTT said, "I'm going to be concentrating particularly on strategic matters, laying the ground with my colleagues at the Ministry of Foreign Affairs for talks that are coming up." Defense

Russian Federation

Politics

Bin Laden Financing Daghestan Terrorists?

· Japanese newspaper Mainichi reported that the rebel activities in Dagestan and Kyrgyzstan are financed by huge amounts of money provided by Saudi millionaire Osama BIN LADEN, wanted for terrorism in many European and Middle Eastern countries. The newspaper said BIN LADEN's gangs are training guerrillas, who are taking their "graduation exams" by participating in the offensives led by KHATTAB and other Chechen warlords in Dagestan. Mainichi does not exclude that among rebels are experienced gangs members, who fought in Afghanistan and directly obey BIN LADEN. The newspaper also claims that Chechen guerrillas and Uzbek extremists are trained in camps near the Afghan cities of Jalalabad and Qandahar. Russian President Boris YELTSIN on Tuesday ordered "rapid and harsh" actions against armed rebels in the southern republic of Daghestan. YELTSIN described the rebels as terrorists when he chaired Russia's top security body in the Kremlin to discuss developments in Daghestan, where armed forces and police units are fighting Islamic extremists. He urged troops and police to act, "quickly and harshly." Prime Minister Vladimir PUTIN said, "All our attempts to come to terms with the Chechnya leadership have produced no results. The Chechnya leadership is not in control of the situation in the republic...If we don't take radical steps now, the extremists could penetrate another part of Dagestan." The Russian government has already taken a decision to appropriate considerable monetary funds to Dagestan in connection with the military conflict, sparked off by gunmen. In addition to more funding, Russia is upgrading the first two military transport helicopters for night operations in Daghestan. They will be handed over to the military by September 15th. The

Today's News Highlights

Russia

Three Lawsuits Launched

Deputy Criticizes 2000 Budget

Sidanko Hands Over Rights

European Republics

Putin To Chair Union Committee

South Caucasus & Central Asia

Chkheidze Not To Attend Summit

Kazakh Celebrates Oil Sector

Surplus Gas Goes To Russia

Boeing Sends Planes To Uzbek

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Secretary William COHEN will hold talks with his Russian counterpart Igor SERGEYEV on Monday, and US President Bill CLINTON and Secretary of State Madeleine ALBRIGHT will meet with Russian Prime Minister Vladimir PUTIN and Foreign Minister Igor IVANOV at the Asian-Pacific summit in New Zealand next week.

Three Lawsuits Follow Mabetex Scandal

· As the Mabetex scandal is beginning to unfold, each side is seeking help from their lawyers. Senior Kremlin official Pavel BORODIN is filing a law suit against Italy's Corriere della Sera newspaper following an article about alleged bribes from Swiss construction company Mabetex to the Kremlin, specifically President Boris YELTSIN and his family. His spokeswoman Galina KHAVRAYEVA said, "He is above all seeking an apology for publishing unconfirmed information." BORODIN has denied any wrongdoing in awarding contracts to Mabetex. Last month, Corriere della Sera reported that Swiss prosecutors believe Mabetex paid $1 million which ended up in an account in Hungary for YELTSIN's use. The Kremlin has stated that YELTSIN and his family do not have foreign bank accounts. It also reported that Mabetex or its boss Beghjet PACOLLI paid credit-card bills on behalf of YELTSIN and his two daughters Tatyana DYACHENKO and Yelena OKULOVA. KHAVRAYEVA pointed out that the newspaper published photocopies of documents. "No one has genuine documents, or at least no one can present them." Mabetex is also filing a lawsuit against Felipe TUROVER, who gave the newspapers false information. PACOLLI accuses TUROVER of breaching bank secrecy policies and committing slander. The suit does not specify damages. The complaint also alleges that TUROVER passed documents from a Swiss bank to Russian investigators probing the case showing transactions carried out on behalf of PACOLLI by a Swiss bank, Bana del Gottardo. Prosecutors have asked Swiss banks to provide them information on about 25 accounts, possibly belonging to high-ranking Russian officials. Approximately, 59 Swiss bank accounts have been frozen, a high number by Swiss standards.

While denying the newspapers suggestion that it paid brides to secure contracts, Mabetex is now suing the Russian government for unpaid bills. PACOLLI said, "The money isn't coming. The Russian Federation is no longer paying us. We had to cut

our staff by 60 percent and the company almost went under." He did not specify how much the government owes, but it should be noted that Mabetex did $300 million worth of construction work and renovation on government buildings.

Economy

Ruble = 25.82/$1.00 (NY rate)

Ruble = 25.73/$1.00 (CB rate)

Ruble = 27.28/1 euro (CB rate)

Ruble Reaches New Plateau

· Russia's envoy to the Group of Eight countries Alexander LIVSHITS believes that the ruble will hold at the exchange rate of 25 to 26 ruble to the dollar. He said, "It is possible now that the ruble will go onto a new plateau of 25 to 26 and get stuck there." He pointed out that the ruble had traded between 24 and 25 per dollar through much of the summer. The rate has now slipped due to allegations that the International Monetary Fund (IMF) might delay loan installments because of additional checks on money transfers. LIVSHITS said that the Russian Central Bank has stopped intervening to support the ruble. He stressed there is no reason for the ruble to slide since Russia has a healthy balance of payments surplus, largely as a result of rising world oil prices. LIVSHITS said, "Inflation has recently grown faster than the ruble has fallen. The Central Bank, taking into consideration this gap, has decided that the ruble will lose a little bit of weight sooner or later."

Deputy Criticizes 2000 Draft Budget

· Russian State Duma deputy Andrei MAKAROV Tuesday criticized the 2000 draft budget, calling it a redistribution of money in favor of the federal center. MAKAROV, from the Duma's Committee on Budget and Finance said, "even if a Duma majority agrees to this variant, it is unlikely to pass through the Federation Council." The draft envisions 42 percent of revenue for the regions and 58 percent for the center. "The upcoming parliamentary election will certainly imprint" on the draft's passage through the Duma, and the leftists factions and groups are unlikely to approve it as it stipulates a greater tax burden, MAKAROV said. Deputies may also dislike the plans to increase fuel prices. "We believe that this measure will result in price markups involving all shipments, and therefore all goods, so we doubt that the chamber will pass such unpopular proposals," he

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added. MAKAROV acknowledged that "unceasing bargaining by deputies" is possible in the course of work on the draft budget, in which a number essential provisions may be reviewed and compromised.

Business

Sidanko Creditors Hand Over Rights To Gov't

· In a last ditch effort to stop bankruptcy proceedings against Russian oil company Sidanko, western creditors, including BP Amoco with a 10 percent stake, have accepted a government invitation to transfer their creditor rights to the state. Creditors, led by BP Amoco's Russia vice president Peter CHAROW and Sidanko creditor's committee chairman Wolfgang RUTKE, are meeting with First Deputy Prime Minister Viktor KHRISTENKO today to discuss the proposal and iron out the terms. CHAROW said, "This is uncharted territory; there are no precedents." He added, "We are happy with the initiative of the government and particularly that it was voiced in the context of its willingness to preserve Sidanko as a vertically integrated oil company." The move follows a long battle over Sidanko's top oil producing subsidiaries, Chernogorneft also in bankruptcy proceedings, with top competitor and also creditor of Sidanko, Tyumen Oil Company. In a confidential letter to Prime Minister Vladimir PUTIN last week, BP Amoco chief executive Sir John BROWNE said his company's position would be "untenable" if it lost Chernogorneft to Tyumen Oil Company. He added that this would send, "an alarming message" to foreign companies considering Russian investments. BP Amoco has tried to settle bankruptcy disputes with creditors, but each time Tyumen Oil Company has outflanked the negotiations. Industry analyst Jim HENDERSON of MFK Renaissance in Moscow expressed concern at the transfer of Sidanko's rights to the government without guarantees that it will ever get them back. He said, "Any way you look at it, it's an act, if not of desperation, then at least of last resort. You don't go handing over your rights to vote on your debt unless you absolutely have to."

Minsk to discuss the ties and union formation between Russia and Belarus. PUTIN was appointed chairman of the executive committee of the Rus-Belarus Union. He said that Russia will always consider Belarus its strategic partner, no matter who is heading the state or what domestic problems it is facing. AKSYONENKO, who arrived on Tuesday and held preparatory talks with Prime Minister Sergei LING, expressed the confidence that the solution of economic matters will make it possible to decide the problems of the Union of Belarus and Russia. Agenda items include standardization of legislations of the two countries on indirect taxation. Meeting participants are to examine progress in fulfilling decisions on creating equal conditions for economic entities within the Union as well as implementation of measures on final forming a united customs, scientific and technological space and a united transport system of the Union. Russia and Belarus will sign several documents on border-guard cooperation.

South Caucasus & Central Asia

Chkheidze Gives Reasons For Summit Refusal

· Georgian chairman of the State border guard department Valery CHKHEIDZE has refused to attend a session of the Coordinating Council of Commonwealth of Independent States (CIS) border guard forces' commanders scheduled to open in Bishkek Thursday. Prime News Agency reported that CHKHEIDZE believes cooperation with the USA is far more important then participation in ineffective sessions in the framework of CIS. His refusal was motivated by the protest against the announcement of his Russian colleague Konstantin TOTSKY on possible change of regime at Abkhazian part of Georgian-Russian border and by a busy schedule. He also called "slanderous" and "unreasoned" the announcement by Russian State Duma chairman Gennady SELEZNYEV that arms go to Chechen Muslims in North Caucasus through Georgia. Instead of attending the CIS session, CHKHEIDZE will discuss many important issues of the formation of Georgian border guard forces with the coordinator of the US State Department for aid to new independent states William TAYLOR He said that the CIS Coordinating Council does not provide Georgia with serious financial and material help in the formation of national border guard forces, but the US does through aid and other training programs. CHKHEIDZE

European Republics

Putin To Chair Rus-Belarus Union Committee

· Russian Prime Minister Vladimir PUTIN and First Deputy Prime Minister Nikolai AKSYONENKO met with Belarus President Alexander LUKASHENKO in

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noted that his personal refusal to skip the Bishkek session does not mean Georgia refuses participation in CIS border guard cooperation.

Kazakh Celebrate 100 Anniversary Of Oil Sector

· Kazakh President Nursultan NAZARBAYEV, Prime Minister Nurlan BALGIMBAYEV, and Richard MATZKE, president of Chevron Overseas Petroleum Inc. and a director of Chevron Corp on Friday celebrated the 100th anniversary of the country's oil industry. NAZARBAYEV and MATZKE cut a ribbon reopening the Eurasia bridge, which was a result of a $2 million restoration project funded by Tengizchevroil. The bridge, which crosses the Ural River in Atyrau, connects the continents of Asia and Europe. "Kazakhstan has been a successful leader in attracting western investment in the oil industry and has laid a solid foundation for a bright economic future for its people," said MATZKE. "Tengizchevroil is the leading oil field project in the country, and its success since its inception in 1993 is a testament to the hard work and dedication of all those involved in the project," he added. Through Tengizchevroil's Atyrau Bonus Program, the joint venture has contributed $50 million to provide major infrastructure projects in the area, including a boiler plant, housing for flood victims, and medical clinics. Separately, Chevron was instrumental in bringing $72 million in potential loans to small and medium businesses through the European Bank for Reconstruction and Development. Tengizchevroil, in which Chevron has a 45 percent interest, operates the Tengiz Field in Western Kazakhstan, which is one of the largest oil fields discovered in the last 20 years. Average monthly oil production reached 221,000 barrels per day this summer, and by mid-2000 production is expected to reach 260,000 barrels per day.

Surplus Kazakh Gas To Be Sold To Russia

· Kazakhstan's Minister of Power, Industry and Trade Mukhtar ABLYAZOV said surplus Kazakh gas extracted from Karachagan deposit is planned to be sold through Gazprom to Russia or other countries of the Commonwealth of Independent States (CIS).

He said this version was discussed on Tuesday when Kazakhstan's President Nursultan NAZARBAYEV met with chairman of the board of Gazprom joint-stock company Rem VYAKHIREV. ABLYAZOV said Tengizchevroil companies have over two billion cubic meters of gas. Ways to sell these surpluses through Gazprom to other markets are now being worked out. "Under the existing plan, our gas can be sold to other markets only through Russia, or else to Russia and other countries of the CIS," ABLYAZOV said.

Boeing Delivers Aircraft To Uzbekistan

· The Boeing Company Monday delivered Uzbekistan Airways' first of two 757-200s to be used for scheduled service. Attending this milestone event were Arslan RUZMETOV, director general for Uzbekistan Airways and Doug GROSECLOSE, Boeing vice president for South Asia/Pacific, Africa, and Middle East Sales and Commercial Airplanes Group. Established in 1992, Uzbekistan Airways has grown to become one of the largest carriers in Central Asia. Uzbekistan Airways' current scheduled-service fleet consists of two 767-300ERs, three A310s, three RJ85s, and numerous Russian-built jets. "Because we are already operating the Boeing 767, it makes good business sense to select the 757 to help support our rapidly expanding international system," RUZMETOV said according to a company press release. Boeing concurrently developed the single-aisle 757 and twin-aisle 767, so both share the same common flight deck, technological advancements, and ground equipment to keep operating costs down and operation efficient. This commonality reduces training and spares requirements when both are operated in the same fleet. The 757 and 767 also have a common type-rating, which offers more flexibility and economic benefits such as pilot-pooling and economies of scale for training. "Uzbekistan Airways is operating in an important, emerging area of the world," GROSECLOSE said. "Boeing is pleased to be a part of Uzbekistan Airways' success, and looks forward to contributing to the airline's continued success in the future."

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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