DAILY REPORT ON RUSSIA

AND THE FORMER SOVIET REPUBLICS

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Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Wednesday, October 13, 1999

have captured Chechen villages of Kalinovskoye and Rubezhnoye and cleared them from militants. In the past 24 hours, troops defeated militants in Vedeno, Gudermes and Grozny districts.

Federation Counsel Fails To Dismiss Skuratov

· In a secret vote of 52 to 98, deputies of the Federation Council failed to dismiss of Yuri SKURATOV from the post of Russia's prosecutor general. The dismissal required the approval of 90 deputies. The proposal for discussing the matter was made to the house by the Russian President Tuesday evening. This was President Boris YELTSIN's third request to the Federation Council that the prosecutor-general be removed. Two previous requests discussed about six months ago did not received the required number of votes. SKURATOV was temporarily removed from his post by the President during a criminal investigation into a scandalous videotape. Many deputies have said that the country can no longer remain without the prosecutor general given such a growth in the crime rate. However, a committee meeting Tuesday suggested that the discussion might be put off until a verdict is reached by the Constitutional Court. The Federation Council turned to the Court for specification on the president's constitutional powers regarding prosecutor-general. The Constitutional Court accepted to request for the hearing last week, but the hearing has not been scheduled. Today's session was attended by deputy prime ministers Nikolai AKSYONENKO, Valentina MATVIYENKO and Vladimir

Russian Federation

Politics

Chechen Rebels Make Terrorist Threats

· Chechen warlord and former field commander Shamil BASAYEV has threatened terrorist attacks in response to Russian intervention. He has ordered the creation of a special force for the "physical destruction," deputies to the 1996 parliament of Chechnya and of officials from the governing bodies, now being formed in Moscow, as well as plans for the kidnapping of their relatives as hostages. Illegal armed groups, supported by reactionary and extremist-minded organizations and movements, are using technology to transmit anti-Russian information. Terrorists use some 80 compact satellite telephone communication installations and the Internet for propaganda and information support. Camps and bases are being built in the south-eastern part of Chechnya with food reserves, armaments and medical supplies. In addition, Salman RADUYEV has threatened to attack targets in Russian including nuclear power stations. Federal Security Service official Alexander ZDANOVICH said that the agency has stepped up measures around Russia's nuclear facilities. He believes the threats of further attacks are real. RADUYEV and BASAYEV were headliners during the Chechen War, after masterminding a series of hostage-taking raids in southern Russia.

Russian leaders had avoided answering directly how far they intend to advance into Chechnya. They claim to have plans to destroy the Islamic rebels in Chechnya, but stop short of entering into a repeat of the Chechen War. Defense Minister Igor SERGEYEV, however, on Tuesday said, "The troops will not stop. They will fulfill the task of liquidating armed groups and terrorist bands in the territory. The troops will improve their positioning so as to control the entire situation there." Russian Interior Ministry troops

Today's News Highlights

Russia

BONY VP Kagalovsky Resigns

Lomonosov Privatization Invalid

European Republics

Ukraine Continues Tank Deal

Mazkheikui Head Suspended

South Caucasus & Central Asia

Six UNOMIG Officials Kidnapped

AIOC Considers Transneft Offer

Kazakhstan Election Results

Karimov Nominated For 2000

Politics-Economics-Business

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October 13, 1999

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SCHERBAK, upon the request of Prime Minister Vladimir PUTIN.

Russia Cleaning Up Saturday's Oil Spill

· As much as 300 tons of oil leaked from a tanker when it ran aground in the Neva River near St. Petersburg on Saturday. Two oil-trapping vessels have collected about 4 tons of the oil. The oil slick formed from the leak has not be located, and may have been submerged, the Associated Press reported. This will make it difficult for emergency officials to detect it and clean up the spill. Booms have been put up and vessels to collect oil products are standing by.

Economy

Ruble = 25.74/$1.00 (NY rate)

Ruble = 25.65/$1.00 (CB rate)

Ruble = 27.67/1 euro (CB rate)

BONY Vice President Kagalovsky Resigns

· Senior vice president of the Bank of New York's Eastern European division, Natasha Gurfinkle KAGALOVSKY resigned on Tuesday in a handwritten letter to chief executive Thomas RENYI. The authenticity of the letter is being verified. KAGALOVSKY and Lucy EDWARDS were both put on leave in August, after the international investigation into the money laundering scheme became public, the Financial Times reported. EDWARDS has since been fired and charged last week with operating a wire transfer business without a proper license. KAGALOVSKY came under suspicion due to her marriage to Konstatin KAGALOVSKY, a prominent banker and oil executive, who once served a Russia's envoy to the International Monetary Fund. Natasha KAGALOVSKY has not been charged with any wrongdoing and the bank was not planning any further action against her. According to her letter, she said she had been subject to "painful, baseless rumors," which she had found unfair. KAGALOVSKY adds, "I do understand your concerns about the investigation, but none of them justify leaving me to swing in the wind, when nothing I ever did or didn't do was wrong in anyway."

Meanwhile, Tax Minister Alexander POCHINOK said that "there is one main bank that was at least the ideological center" of the transfer of billions of dollars through the Bank of New York. The aim of the scheme was to hide income from tax authorities.

POCHINOK said that investigators began to focus on Sobinbank after discovering payments made to the bank by Flamingo Bank.

Business

Court Reverses Lomonosov Privatization

· The St. Petersburg and Leningrad Oblast Arbitration Court has ruled that the 1993 privatization of the Lomonosov Porcelain Factory was invalid, in a suit filed by the State Property Committee. It ordered that the factory's private investors, including Kohlberg Kravis Roberts & Co., a multi-billion dollar US investment firm, and the United States-Russia Investment Fund (Tusrif), a US government investment program, to return their shareholdings to the state. This is the first decision of its kind since privatization began in 1992 and could provide foreign investors and additional reasons to shun Russian ventures. The ruling is based on a decision to found a closed joint-stock company, rather than an open one. Foreign investors bought about 60 percent of the shares in Lomonosov, which had sales of about $7 million in 1998. Tusrif paid about $4.25 million for its 25 percent stake. Tusrif said it would appeal against the court order. Alistair STOBIE, Vice President of Delta Capital Management which manages Tusrif said, "It becomes just impossible to formulate an investment strategy when you are not even sure that the assets that you're investing in are not going to be stolen away from you. The fund has written a letter to Prime Minister Vladimir PUTIN for assistance. Chairman of Russia's Federal Securities Commission, Dmitry VASILIYEV, in a public letter to State Property Minister Garit GAZIZULLIN said, "From our point of view, this precedent taken by the State Property Ministry of Russia deprives existing shareholders and investors of the confidence that the state protects them, and calls into doubt their ownership rights to shares and bonds in any Russian enterprises forms as a result of privatization," the Associate Press reported. Factory employees had barred investors from entering the premises, accusing them of failing to produce an investment plan and of seeking to seize the factory museum's valuable collection, The Moscow Times reported. Head of the Factory's workers committee Larissa KOMAGINA last week said, "We believe that non-porcelain specialists and non-Russian people simply cannot lead this Russian national treasure." Foreign investors are accusing Lomonosov mangers of corrupt ineffi

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cient management and coercing some workers into opposing foreign investment. They claims Lomonosov needs $2 million to repair the crumbling factory. Lomonosov, founded in 1744 by the daughter of Peter the Great, produces fine china tea sets and dishes, some hand-painted and gilded with precious metals.

Russia To Export $500 Million Of Arms To Libya

· With the resumption of the Rus-Libyan military-technical cooperation and the lifting of UN sanctions against Libya, Russia plans to annually export up to $500 million worth of armaments and military equipment to Libya. A Russian governmental delegation led by Deputy Prime Minister Ilya KLEBANOV is conducting negotiations in Tripoli on the resumption of military-technical cooperation. The delegation includes Deputy Trade Minister Grigory RAPOTA, representatives of Rosvooruzheniye and Promexport companies. In several years Russia's total annual armaments deliveries to Libya could reach half a billion dollars. The Libyan side has expressed interest in the resumption of Russian deliveries of ammunition and naval equipment.

Mazheikiu Nafta Refinery Vidmantas MACEVICHIUS has been suspended from his post. MACEVICHIUS, appointed in mid-August, replacing Gediminas KIESUS after his surprise resignation, was criticized from the start because of his lack of experience and inefficiency in running the oil industry. He has publicly slammed the business plan of US energy group Williams, which is in the final stages of taking a controlling stake in the refinery. On Saturday, Russia halted crude oil shipments to Lithuania for the third time of this year. Mazheikiu Nafta may be forced to shut down at the end of the week. The company had earlier said that crude supplies of around 60,000 tons may resume as soon as Thursday. A refinery spokeswoman said that the Russian Fuel and Energy Ministry ordered the cessation of supplies due to Mazheikiu Nafta's rejection of a bid by LUKoil to buy a majority stake. Russia's biggest oil company's spokesman Dmitry DOLGOV said LUKoil hasn't suspended deliveries to Mazheikiu Nafta altogether, but it has been curbed substantially. He added that this was not because the government ignored LUKoil's proposal. Instead, he said, "There are simply good export opportunities elsewhere, such as in Germany, and you shouldn't forget the domestic prices are rising, so more is supplied domestically." Mazheikiu Nafta has an annual capacity of 15 million tons. Over the past few years, however, it has run at 30 percent to 50 percent of capacity because of crude shortages.

South Caucasus & Central Asia

Six UNOMIG Observes Kidnapped By Gunmen

· Six members of the UN Observer Mission in Georgia (UNOMIG) and their interpreter were seized by eight unidentified armed men when their helicopter landed in the Kodori Gorge early this morning, about 50 miles from Sukhumi. The gunmen also tried to shoot down the helicopter, but the pilot managed to fly away. The helicopter did sustain some damage. The hostages have been identified as Major Gonzalo AGRELO (Uruguay), Jorgen OLDSBERG (Sweden), Markus STILBO (Switzerland), Peter POPOVBA (the Czech Republic), Georgios KAPRANOS (Greece), and a German sergeant identified only by his surname KRAUS. The abductors have threatened to kill the hostages "one by one" unless they receive $200,000 for each hostage. Georgian Defense Minister General-Lieutenant David TEVZADZE cut short his visit to Ukraine and

European Republics

Ukraine To Fulfill Pakistani Order For Tanks

· Ukraine will continue to fulfill is part of a $650 million agreement signed in 1996 between Ukraine and Pakistan for the delivery of T-80UD tanks. The final batch of tanks will be sent next month, despite the apparent military coup on Tuesday. The tanks will be manufactured at the Malyshev plant this month and a Pakistani commission will test them. Malyshev Director Grigory MALYUK said the Ukrainian-Pakistani contract has helped revive tank production in the plant and started production of spare parts. In terms of prospects for the future, he said the company hoped for a prolongation of the contract with Pakistan and other countries too. Each of the T-80UDs will be equipped with more than 100 technical novelties, and the engine can work at temperature up to 55 degrees Celsius (131 Fahrenheit) and in very dusty conditions.

Mazheikiu Refinery Head Suspended

· Following a meeting between Lithuanian Economic Minister Eugenijus BLINSTUBAS and Prime Minister Rolandas PAKSAS, the Economic Ministry announced that the general director of Lithuanian's

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returned to Tbilisi, due to the hostage crisis. Head of Georgian Armed Forces General Staff General-Lieutenant Jony PIRTSKHALAISHVILI has left for Kodori Gorge, according to deputy defense minister of Georgia Grigol KATAMADZE. Georgia's presidential envoy to Abkhazia Iveri CHELIDZE has also departed for meeting with the kidnappers. He said they have, "made some claims, but I hope we free [the hostages] soon." David TSANAVA, deputy chairman of the Abkhaz parliament in exile, said that the gunmen are the same group of Svanetian militants responsible for a similar incident in July. At that time, members of the Abkhaz government in exile, including TSANAVA, were seized when their helicopter landed in Kodori Gorge, but were released several hours later. There are over 100 UNOMIG observers in Georgia, who are monitoring the truce between the Georgian government and the separatists in Abkhazia. UNOMIG also carries out limited patrolling along the separation line in the Gali and Zugdidi districts and in the Kodori Gorge. The UN Security Council in July approved extending the term of the military observers for another six months. Council members expressed concern at, "the continuing volatile situation in the conflict zone," at the plight of refugees and displaced persons. Georgian law enforcing bodies are taking all necessary measures for release of six UN military observers and their interpreter. Heads of UNOMIG met with the minister of state security of Georgia today.

AIOC Welcomes Baku-Novorossiisk Line

· Azerbaijan International Operating Company (AIOC), has not received an official communication from Russian pipeline operator Transneft on plans to build a Baku-Novorossiisk pipeline bypassing Chechnya. However, AIOC said it would welcome creation of a secured transit of Azerbaijan oil in "northern direction", Prime News Agency reported. AIOC and State Oil Company of Azerbaijan (Socar) executives have repeatedly announced that no guarantees for additional volumes of oil for transportation by the northern route would be given. Transneft earlier said that AIOC would receive a 10 percent stake in a new

consortium, if Azerbaijan would give guarantees for transportation of 12 million to 15 million tons of oil annually. While Azerbaijan welcomes the normalization of oil transportation by Baku-Novorossiisk pipeline bypassing Chechnya, it does not agree to the new terms of Transneft.

Preliminary Kazakhstan Election Results

· Preliminary results of the Kazakh October 10th election for seats in the lower house of parliament have been reported. The pro-presidential Otan party polled 30.5 percent of the party-list vote, the Communist Party 17.8 percent, the Agrarian Party 12.6 percent, and the Civic Party 10.9 percent. Central Electoral Commission secretary Yelena KULESHOVA said that in 70 percent of all electoral districts no candidate received 50 percent of the votes cast. A runoff between the two candidates who polled the largest number of votes will be held in those constituencies on October 24th. These are just the preliminary results, but only the four parties have passed the seven percent margin and can distribute deputy mandates on a basis of party lists, KULESHOVA noted. A total of 5.1 million people , which totals 61.7 percent of the number of electors, took part in the election. OSCE observers pointed to "some complaints" over the voting at the elections to the lower house of parliament. Observers said the election was an improvement over January's presidential election.

Karimov Nominated For 2000 Elections

· Uzbekistan's National Revival party at its congress Tuesday nominated the incumbent head of state Islam KARIMOV as their presidential candidate. The presidential election has been scheduled for January 9, 2000. This is the third party to nominate KARIMOV. Earlier, he was nominated by the Justice and Development of the Motherland parties. The People Democratic party has been the only one which named its leader, Abdulkhafiz DHZALALOV, an alternative to KARIMOV. Established in 1991, it remains Uzbekistan's largest party. Five parties have been approved to take part in the election.

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

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