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

Tuesday, October 26, 1999

problems with Islamic militants. "We oppose any manifestations of international terrorism, of political and religious extremism, which jeopardize the security of the society and people in our countries. Our Union is open for any CIS [Commonwealth of Independent States] country, which shares its principles and is ready to assume in full volume the commitments drawn from the adopted documents," the Declaration said. Leaders of the five nations signed the Moscow Declaration which includes 10 documents aimed at harmonizing their legal systems to allow for the smoother functioning of the Customs Union and agreed to coordinate their value-added tax regimes and railway tariffs. According to the declaration, the main objective of integration on the present stage is the completion of the creation of the Customs Union, which is an indispensable condition for the upsurge in the development of the national economies, the improvement of living standards and the promotion of steady democratic development. Participants in the meeting expressed resolve to ensure the fulfillment of the priority tasks within the framework of the development of integration processes for the near future. Russian President Boris YELTSIN said the Customs Union should be the engine of further integration among the 12-nation CIS grouping, which replaced the Soviet Union.

Economy

Duma Passes 2000 Budget In First Reading

· The Russian State Duma in a vote of 244 to 86 approved the Russian budget for 2000 in the first reading. The budget must be ap

Russian Federation

Politics

Russia Warns US Of New Arms Race

· Russian first deputy defense minister Nikolai MIKHAILOV warned the US that Russia has enough weapons to overwhelm any anti-ballistic system Washington builds. The Washington Post reported today that the Russian military may be short on resources, such as funds, but it has the "technical capabilities" to meet any challenge. He said, "our arsenal has such technical capabilities" to "overcome" anti-missile defense. He added, "This technology can realistically be used and will be used if the United States pushes us toward it." Russian options include increasing the number of warheads on each missile. To collect additional warheads, Russia could slow the dismantling process of existing weapons. The Russians could also convert certain single-warhead missiles into multiple-warhead devices.

He noted that possible amendments to the 1972 Anti-Ballistic Missile Treaty (ABM) could lead to a new arms race. His comments follow meetings and negotiations between the US and Russia last week in Moscow. The ABM pact outlaws defense systems designed to shoot down enemy warheads. The US wants to change this, building a limited defense system against any possible attack from "rogue states" such as North Korea and Iran. US President Bill CLINTON said he will decide next Summer whether to authorize a missile defense system.

Custom Union Sign Moscow Declaration

· Leaders of the five Custom Union states, Russia, Kazakhstan, Kyrgyzstan, Tajikistan, and Belarus met in Moscow today and vowed to unite against terrorism and religious extremism. Russia is battling Islamic rebels in Chechnya; Tajikistan is recovering from a long civil war, and Kyrgyzstan is overcoming

Today's News Highlights

Russia

LUKoil Tender Closes Today

Rus Business Conf. In Brussels

European Republics

Ukrainian Election In Turmoil

EU-Baltic Joint Energy Systems

South Caucasus & Central Asia

Georgia To Apply To NATO 2005

Azeri Ministers Resign Over NK

Central Asian Military Exercises

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October 26, 1999

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proved in four Duma readings, passed by the Federation Council, and singed by President Boris YELTSIN to become law. The Russian budgetary process usually continues well into the new year. With parliamentary elections scheduled for December 19th and deputies busy with their political campaigning, it is more unlikely the Duma will approve the budget before the end of the year. The Duma rejected the first draft budget last month, complaining that it gave too much money to the federal government and too little to the regional districts and the military.

According to First Deputy Prime Minister Viktor KHRISTENKO, the new version of the draft budget sets revenues at 797.2 billion rubles and spendings at 855.1 billion rubles. The budget deficit will be just over one percent of the gross domestic product (GDP), while the primary surplus is targeted at 3 percent GDP. These parameters are within International Monetary Fund (IMF) guidelines. Finance Minister Mikhail KASYANOV said, "We will have to discuss additional revenue with the IMF experts again and prove our arguments are reasonable." The spendings were distributed among the five priority sectors in the following way: spendings on the national defense and security will amount to 27 billion rubles, financial assistance to budgets of other levels will be increased by 3 billion rubles, assistance to the agro-industrial complex will be increased by no less than 4 billion rubles, investments in the industrial sector will be increased by no less than 2 billion rubles and the financing of fundamental and other scientific research will be increased by no less than 1.5 billion rubles. New sources of financing have been found, including the increase of revenues coming from international activities (3.2 billion rubles), the payment of debts to Russia, attraction of tied credits (3.2 billion rubles), additional export-import regulation (5.7 billion rubles), improvement of the domestic tax system and effective management of property (no less than 6 billion rubles).

Ruble = 25.71/$1.00 (NY rate)

Ruble = 25.7/$1.00 (CB rate)

Ruble = 27.21/1 euro (CB rate)

Business

Lukoil Tender Ends Today

· The tender for a 9 percent stake in Russia's

biggest oil company LUKoil closes today, with results to be announced by Friday. If the sales is successful, it will be Russia's biggest privatization since December 1998, when German gas distributor Ruhrgas purchased 2.5 percent of Russia's gas monopoly Gazprom for $660 million. The Federal Property Fund set the starting price for the LUKoil stake at $200 million, with an additional investment requirement of $240 million attached to the terms. Dow Jones Newswire reports that the investment requirement includes cash earmarked for investment in LUKoil's projects offshore Kazakhstan, in the Caspian Sea and Azerbaijan, as well as for LUKoil subsidiaries in Russia.

Russia Business Conference Ends In Brussels

· The 12th International Business Conference on "The Problems of Russia's Transition to the Market Economy in Financial and Banking Fields" ended in Brussels on Monday. It discussed the Russian transition to market economy in the financial and banking spheres, including the Central Bank's measures to curb inflation and increase duties on raw materials export, Russia's relations with international organizations and the scandal connected with the Bank of New York. It was attended by some 150 Russian bankers, company executives and statesmen, including Russian Economics Minister Andrei SHAPOVALYANTS, Central Bank adviser Mikhail ZADORNOV, Central Bank Chairman Viktor GERASHCHENKO, Tax Minister Alexander POCHINOK, Duma deputy Oleg MOROZOV, chairman of the State Duma Budget Committee Alexander ZHUKOV, and Georgy GABUNIA, as well as a dozen of Belgian guests. The conference has been organized by Vice President Yuri BASARGIN of the FINAS company.

Russian Central Bank chairman Viktor GERASHCHENKO told the Brussels conference that the Bank may consider lowering the refinancing rate before the end of the year. "If the annual inflation rate is under 40 to 45 percent, there will be reasons to lower the refinancing rate," he said. The refinancing rate must be positive with regard to inflation. The current refinancing rate is 55 percent. GERASHCHENKO believes the refinancing rate plays no special role in the economy at present as banks do not borrow money from the Central Bank at this rate. The Bank estimates that the 1999 inflation rate will equal 38 percent and the rates of

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growth of money supply to 43 to 50 percent. It had previously predicted the 1999 inflation rate at 30 percent, and increase of money supply at 18 to 26 percent. Consumer prices had gone up in Russia by 31.5 percent over the first nine months of the year, while the actual increase of money supply equaled to 33 to 34 percent.

land and Estonia participated in a two-day conference in Helsinki on Monday. Participants noted that cooperation in the energy field is a key factor in facilitating political stability, economic growth and stable development in the Baltic region. A joint statement gives special attention to the integration of gas and energy markets and stresses the need to increase investments and bring closer the organizational legal norms in different countries. The involved countries are invited to take measures to use energy more effectively, improve the nuclear safety and transform to environmentally protected systems. Finnish Trade and Industry Minister Erkki TUOMIOJA described the energy sector as a concrete example of the implementation of the EU northern dimension concept and noted Russia's important role in supplying energy carriers, in particular energy and gas, to EU countries.

South Caucasus & Central Asia

Georgia To Apply To NATO In 2005

· Georgian President Eduard SHEVARDNADZE, in an interview with the Financial Times, said that Georgia plans to apply for NATO membership by 2005. He said, "I cannot say for certain, but one thing I know is that if I am re-elected for my second term in next April's elections, we will be knocking very hard on the door [of NATO]." The President stressed that Georgia's commitment to integrate with European and Western institutions is not an action designed against Russia. He said, "we want to be friends and good neighbors." He also pointed out that, "no one should regard Georgia or the Caucasus as part of the sphere of influence of anyone." Georgia has been negotiating the withdrawal of several thousand Russian troops and four military bases, eliminating Russia's presence on its territory. Russian border guards have already been replaced with Georgian troops, partially trained with US support. Georgian Foreign Minister Irakly MENAGARISHVILI said, "The fact that Russia opposes NATO membership [for Georgia] I view as Russia's problem, which is to be over come by Russia itself."

Azeri Ministers Resign Over NK Principles

· Azeri Foreign Minister Tofik ZULFUGAROV resigned after the session of national security council held Monday. Head of the Azerbaijan president's secretariat Eldar NAMAZOV has also submitted a

European Republics

Ukrainian Election Campaign In Turmoil

· The left-of-center group of four on Monday agreed to back Yevhen MARCHUK as their candidate of choice, and then the remaining three members were supposed to withdraw for the race. Alexander TKACHENKO, one of the four, said, "This step gives a clear example of unity aimed at overcoming the crisis for the sake of Ukraine' prosperity." However, Socialist Party chief Alexander MOROZ later that day said he would not withdraw, at least not yet. MARCHUK and MOROZ are considered to be the leading candidates of the Kanev Four. MARCHUK served as Ukraine's Security Service chief before his term as prime minister and MOROZ is a former parliamentary speaker. MOROZ said, "I fully back the position of the Kanev Four," claiming that his party, "has confirmed its demand to me to continue the struggle for being elected to the second round," to deprive incumbent President Leonid KUCHMA leftists votes. The Kanev four was formed in August as a center-left alternative to KUCHMA. The President has dismissed the alliance as having no chances of winning. Nonetheless KUCHMA has been fighting an uphill battle against a worsening economy, widespread corruption, and huge wage and pension debts. The other main candidates opposing front-runner KUCHMA are Natalia VITRENKO, an extreme leftist and the only female candidate, and Communist Party leader Petro SIMONENKO. Most analysts do not expect any of the 15 candidates to win outright in the first round and forecast a runoff vote in mid-November.

EU-Baltic States To Integrate Energy Systems

· The European Commission and representatives of the adjacent countries have agreed to create an effective, economically and environmentally strong integrated energy system in the Baltic region. Energy Ministers of Germany, Denmark, Iceland, Latvia, Lithuania, Norway, Poland, Russia, Sweden, Fin

When you need to know it as it happens

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resignation statement to President Geidar ALIYEV. The information was confirmed by Azeri representatives for Prime News Agency. Interior Minister Ramil USUBOV and adviser to president for national issues Idayat ORUJIEV warned about the resignations at last Sunday session of the National Security Council. State adviser for economic issues Vakhid AKHUNDOV also announced his intention to resign. These resignations follow the departure of the president's main foreign policy advisor Vafa GULIZADE. Resignations of high-ranking officials may continue. Deputy chairman of the party Public Front Zelimkhan MAMEDOV said its doesn't matter weather the ALIYEV approves resignation statements of his closest supporters, or not, what matters is that the dissatisfaction with the President is growing. Intercon sources report that the two high-ranking officials' resignation was caused by a disagreement of principles in the Nagorno-Karabakh conflict settlement. ZULFUGAROV and NAMAZOV objected to Azerbaijan's conciliatory position in peace negotiations. They believe Azerbaijan is preparing to make major concessions to the Armenians. Nagorno-Karabakh declared independence from Baku in 1988 a tried to unite with Armenia. The brutal war killed 35,000 and left 1 million homeless. Baku and Yerevan have failed to reach a final peace settlement since signing a cease-fire agreement.

US First Deputy Secretary of State Strobe TALBOTT is arriving in Baku today to continue a dialogue on the Nagorno-Karabakh settlement, after meeting with acting chairman of the Organization for Security and Cooperation in Europe (OSCE) Knut VOLLEBAEK. TALBOTT will meet with ALIYEV on the Azeri-Armenian conflict. TALBOTT is accompanied on his trip by Stephen SESTANOVICH, Special Adviser to the Secretary of State for the New Independent States; Carey CAVANAUGH, the co-chairman of the Minsk group of the OSCE from the US; and John ALKIND, an official of the National Security Council. TALBOTT and the persons accompanying him will spend one day in Baku and will then head for Yerevan where they will have talks with Armenian

President Robert KOCHARYAN. The US has intensified attempts lately to bring the positions of the two sides closer together and urge them to sign a peace framework agreement at the forthcoming OSCE summit in Istanbul on November 18th.

Kazakhs Round Two Elections

· According to preliminary information from the Kazakh Central Electoral Commission, 2.8 million people participated in the second round of the election of deputies to the majlis or the lower chamber of the Kazakh parliament on October 24th. This makes 49 percent of the Kazakh electorate. The Kazakh parliament consists of two chambers — the senate and the majlis, which work on a full-time basis. The majlis is made up of 77 deputies, whose term of office is five years. During the first round of the parliamentary election on October 10th, 547 candidates contested 67 seats in the majlis at one-seat constituencies. Nine political parties were vying for 10 seats. According to the CEC's Tatiana OKHLOPKOVA, those ten seats were distributed filled by: the Republican Party of Otan (Fatherland) with four seats, and the Communist Party, the Agrarian Party and the Civil Party of Kazakhstan with two seats each. The remaining parties did not receive the 7 percent of votes needed to be represented. 20 deputies to the majlis were elected at one-seat constituencies on October 10th. The greatest turnout was registered in the Akmolinsky Region (55.6 percent). The turnout was low in Astana (only 24 percent) and in Almaty (a little more than 20 percent).

Central Asian Military Exercise Begins

· Russia, Uzbekistan, Tajikistan, Kazakhstan and Kyrgyzstan started military exercises today in Bishkek. The exercise, which is scheduled to end on November 2nd and uses the conflict in southern Kyrgyzstan as an example, is aimed at protecting the security of the members of the Commonwealth Independent States (CIS). In August, nearly 1,000 illegal armed Islamic fundamentalists invaded southern Kyrgyzstan's Oshskaya from Tajikistan, threatening the stability and security in Central Asia.

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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