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 5, 1999

Russian Federation

Politics

Troops Take Control Of Northern Chechnya

· Russian forces have taken control of the northern third of Chechnya, in an attempt to split the breakaway republic. As Intercon predicted, troops have advanced to the banks of the Terek River, which creates a natural border, just 25 miles north of Grozny. Thomas de WAAL, author of the book on the 1994 to 1996 war in Chechnya, said the north was traditionally more pro-Russian than the mountainous south of the republic, the Financial Times reported. The northern region, however, was alienated by Russia during the previous war and is the birthplace of Chechen President Aslan MASKHADOV. Prime Minister Vladimir PUTIN said, "The operation is far from being over, it's just one of its stages...Its final goal is the total destruction of terrorists and their bases on the territory of Chechnya." Russia is seeking to impose a security zone around the rebel region to prevent Islamic militants from another attempt to infiltrate neighboring Daghestan. He also proposed moving the thousands of Chechen refugees to the Russian controled northern part of Chechnya. Two Russian jets were shot down by Stinger-type Zenith rockets. One pilot died when his Su-24 ground attack jet was downed near the town of Urus-Martan in southwest Grozny. A crew member ejected by parachute and is missing in action. Another jet, an Su-25, was downed near Tolstoy-Yurt village in northern Chechnya. That pilot ejected and was rescued by Russian forces. The Russian side has suffered losses of 4 soldiers and 22 are reported to be injured, in the ten days of fighting, while over 300 Chechens have been killed and about 106,000 have been displaced. Chechnya has suffered from the Russian air raids with severe damage to villages and infrastructure. Russia on Monday rejected an offer by the Organization for

Security and Cooperation in Europe (OSCE) to help mediate between Moscow and the breakaway republic of Chechnya. Moscow, "does not need mediators in talks with the constituent members of the Russian Federation," Deputy Foreign Minister Yevgeny GUSAROV said. Chechnya has invited Georgian President Eduard SHEVARDNADZE to mediate talks. He said he'd be happy to mediate, but only if Russia agrees to it. MASKHADOV still wants to meet with President Boris YELTSIN. "If I met the Russian President, I would open his eyes in half an hour to this adventure of his inner circle in the run-up to the presidential election," MASKHADOV told Komsomolskaya Pravda. He added, "I think the beginning of this war is directly linked to the political situation in Russia and the struggle for power."

Patrushev Briefs Yeltsin On FSB Work

· Federal Security Service (FSB) Director Nikolai PATRUSHEV briefed Russian President Boris YELTSIN today on the FSB's work in the North Caucasus, the investigation of terrorist acts in Buinaksk, Moscow and Volgodonsk, and the results of the CIS Council of the leaders of the security and special services of the CIS member-states at their meeting in St. Petersburg on September 30th and October 1st. He said that suspects involved in the terrorist acts have been tracked down, detained, and arrested. Interpol warrants have been issued for other suspects who are still at large. He noted that special services and law enforcement bodies have stepped up their surveillance of possible terrorist targets.

Today's News Highlights

Russia

Sibneft Shows Profit

Inkombank To Sue BONY

European Republics

Lith. Considers Iranian Crude

Kiev-Tbilisi Deepen Relations

South Caucasus & Central Asia

US-Russia Against Ardzinba

Georgia To Join WTO

Supsa Terminal Fills 24 Tankers

Azeri To Create Oil Fund

Politics-Economics-Business

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Tuesday

October 5, 1999

Intercon's Daily

PATRUSHEV pointed out that "two persons of Slav extraction" were recently detained in Ingushetia "in the process of preparing an act of terror in Vladikavkaz." The St. Petersburg meeting yield positive results and the adoption of a statement for joint efforts to fight terrorism.

Matviyenko Not To Run For President

· Russian Deputy Prime Minister Valentina MATVIYENKO on Monday turned down an offer to run as the Kedr environmental movement's presidential nominee. Earlier today, the leader of Kedr, famous film-maker Ivan OKHLOBYSTIN, said his movement is going to campaign for a woman president of Russia. He suggested the nomination to MATVIYENKO. The deputy prime minister first heard about the offer on television. "I am very thankful to the Kedr movement for the kind attitude to me and for appraisal of my work, but I am not planning to run for president. I have never spoken about that and it is extremely unexpected for me," MATVIYENKO said. However she believes that there should be a woman among presidential candidates. She added, "I always approved of Galina STAROVOITOVA's longing when she back then announced that she was going to run for president only to prove that there are women politicians who can work and feel the country's problems as good as men...We have a lot of bright women politicians." She said it was likely that there will be a female presidential candidate, but noted its is still too early to tell.

Economy

Ruble = 25.49/$1.00 (NY rate)

Ruble = 25.9/$1.00 (CB rate)

Ruble = 27.77/1 euro (CB rate)

London Club Talks Continue

· Russian Deputy Prime Minister Ilya KLEBANOV in London said that talks between Russia and the London Club of creditors will continue October 6th on restructuring $32 billion of debt. The Russian delegation will include Vneshekonombank head Andrei KOSTIN. It is still unclear whether Finance Minister Mikhail KASYANOV, who has been leading talks, will attend this next round. He is actively working with the Russian State Duma for the passage of the 2000 draft budget. At the last round of talks, Russia made a new restructuring proposal and the London Club agreed to consider writing off some of the Soviet-era

debt. KLEBANOV expressed the confidence that Russia and western financial creditors can achieve considerable progress in their financial relations before the winter State Duma elections. "The elections in the State Duma should be held in the atmosphere of stability and not disturbance. The government's task is to ensure stability and the successful dialogue with the London Club is one of the inalienable aspects of this task," he added.

Business

Sibneft Turns Ruble Devaluation Into A Profit

· Russia's sixth largest oil company, Sibneft, has stated that it reversed a first-half loss of 1998 into a profit this year. The Wall Street Journal reported that in line with international accounting standards, Sibneft had a net income in the first half of $63.8 million, compared with a loss of $60.3 million over the same period in 1998. Revenue fell to $621.6 million from 1.12 billion because of the devaluation of the ruble. However, the oil industry has gained more than any other sector from the 75 percent devaluation of the ruble in August, 1998. Sibneft President Eugene SHVIDLER said, "Although the oil price only really started to rally in the second quarter, the combination of cost cutting, devaluation gains, and efficiency improvements means Sibneft has a sound base from which to grow." Prices of crude oil have grown from $9 in January to $22 per barrel.

Inkombank Depositors To Sue BONY

· Inkombank depositors are planning to file in a Manhattan federal court a $500 million lawsuit against the Bank of New York (BONY) for a fraud scheme. Depositors claim that the BONY owes $500 million or more from losses and that it assisted the now bankrupt Russian bank in embezzling their deposits. The BONY lacked internal controls and high ranking bank officials may have helped Russian organized crime launder and misappropriate bank deposits. The lawsuit will seek class action certification on behalf of those that deposited funds in Inkombank from 1991 through October 1998. "Not only were BONY officers and employees passively aware that management of Inkombank was embezzling bank funds, at times, BONY officers and employees participated, directly and indirectly, in schemes and sham transactions which were calculated solely to embezzle," a draft version of the lawsuit alleged. A spokesman for BONY declined to comment. The

When you need to know it as it happens

Politics-Economics-Business

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BONY was Inkombank's primary US correspondent bank from 1992 until its license was revoked in 1998. The Central Bank of Russia audited Inkombank in 1996, and found it violated several laws. In October 1998, when the Central Bank revoked the bank's license, Inkombank was unable to pay depositors.

Ukraine Plans For Zero Growth In 1999

· Ukrainian Deputy Prime Minister Sergei TIGIPKO said on Thursday that, "If the current trends remain, the country can end the year with the zero growth of the GDP (gross domestic product)." Ukraine plans to stop economic slump this year and provide the basis for a future growth in order to meet the demands of the International Monetary Fund (IMF) and the World bank. After attending the annual meeting of the IMF and the World bank in Washington, TIGIPKO noted that both institutions are urging Ukraine to ensure an economic growth. They also suggested that monetary stabilization should be accompanied by tough fiscal policies and structural reforms. Kiev pins its economic growth hopes on increased exports and the development of small and medium-sized businesses. For the first time in eight years, Ukraine had a positive trade balance and some 50 thousand small-sized businesses had been launched. Gold reserves grew from to $1.6 billion from $1 billion in February. The major problems are posed by debts. Ukraine still owes its creditors over $3 billion to be paid in 2000.

Kiev-Tbilisi Ready To Deepen Relations

· Georgian President Eduard Shevardnadze held talks with his Ukrainian counterpart Leonid KUCHMA in Kiev on Saturday. The Georgian President expressed satisfaction with the talks and said Georgia is, "ready to deepen the partnership in all spheres." SHEVARDNADZE and KUCHMA signed a joint declaration to voice the mutual support to foreign political priorities, including the integration with European economic and political institutions. The finance and economic ministries also signed agreements, as well as a decision to avoid dual citizenship. SHEVARDNADZE stressed that the North Caucasian developments will not affect the Georgian-Ukrainian projects. The two presidents reaffirmed their readiness to deepen economic cooperation through joint projects, primarily the Eurasian transportation project. KUCHMA and SHEVARDNADZE agreed that the GUUAM association (Georgia, Ukraine, Uzbekistan, Azerbaijan and Moldova) will not become a superstructure or a military-political bloc. They said GUUAM pursues purely economic interests. SHEVARDNADZE welcomed the possible participation of Ukraine in the UN's peacekeeping efforts in Abkhazia. Speaking of the Commonwealth of Independent States (CIS), the presidents said it should take a

European Republics

Lithuania Looks To Iran For Crude Oil

· Lithuanian Economic Minister Eugenijus MALDEIKIS on Monday held talks with Iranian oil officials over the possibility of buying crude oil for the Baltic states' only oil refinery, Mazheikiu Nafta. He declined to say how much crude Lithuania was considering importing. The refinery has a capacity of 15 million tons per year. Mazheikiu Nafta was forced to shut down twice this year due to crude supply cut-offs from Russia. State owned Mazheikiu Nafta is in the process of being privatized to US energy group Williams. MALDEIKIS said he hoped the deal would be concluded this week during Williams International President John BUMGARNER's visit. He believes that there are only small technical difficulties left to be decided. Former Lithuanian President Algirdas BRAZAUSKAS and a group of politicians, including former prime minister Kazimera PRUNSKIENE, and scientists on Monday asked the government to stop the deal with Williams. In an open letter to the government, the group complained that the agreement would damage Lithuania's economy, adding the decision was made with the former government "behind closed doors" without competition. BRAZAUSKAS, politicians and scientists, who signed the letter, called on the government of Rolandas PAKSAS not to sign the deal with Williams and announce a new tender for the privatization of Lithuania's oil sector "on more preferential terms for the country." Meanwhile, Russian oil firm Yukos has raised a counter offer against rival LUKoil's offer to take a stake in Mazheikiu Nafta. Yukos director Yuri GOLUBEV has proposed that Yukos buy 12 to 12.5 percent of the oil refinery's stake and supply 10-years guarantees from six to eight million tons of crude per year for the refinery and re-export at the Butinge terminal. Yukos has also held talks with Williams. LUKoil had offered to guarantee six million tons annual on the condition it would be allowed to take a 33 percent stake and a share in the operational control of the firm.

When you need to know it as it happens

Politics-Economics-Business

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Tuesday

October 5, 1999

Intercon's Daily

more active part in the settlement of conflicts. KUCHMA noted that, "if we want the Commonwealth to last long, in which Ukraine and Georgia are vitally interested, we should use the potential of the CIS for active regulation of conflicts in the post-Soviet space. Russia and other CIS countries should show their willingness to do this."

South Caucasus & Central Asia

US-Russia Speak Out Against Abkhaz Elections

· The US State Department issued a statement, stressing that neither the United States, nor any other country recognize the independence of Abkhazia or the outcome of its elections on October 3rd. The US State Department recalled that the UN Security Council had adopted Resolution No.1255 on July 30, 1999, which said that, "in the current situation the holding of elections in Abkhazia was absolutely unacceptable and illegal." It prolonged the stay of the UN observer mission in Georgia. The US State Department urged the Georgian and Abkhazian sides, as well as the countries which participate in the negotiating process, to resume their attempts to settle the conflict. The vote it says only proved ineffective and detrimental to the settlement of the conflict. Russian Foreign Minister Igor IVANOV said that, "Russia firmly sticks to the principle of recognizing the territorial integrity of Georgia and regards Abkhazia as its component part."

Georgia Prepares For WTO Membership

· A decision on whether Georgia will be accepted into the World Trade Organization (WTO) is to be announced on Wednesday in Geneva. Ahead of the announcement a Georgian delegation, headed by State Minister Vazha LORDKIPANIDZE including State Property Minister Michael UKLEBA, Trade of Foreign Economic Relations Minister Tamara BERUCHASHVILI, State Custom Department chief Tamaz MAGLAKELIDZE, arrived in Geneva to participate in a WTO session, Prime News Agency reported. On Wednesday will meet with WTO Director General Mike MOORE. Accession to the WTO

will have to be ratified by the Georgian parliament and then after 30 days Georgia's membership will come into force. UKLEBA pointed out that WTO membership will help Georgia resolve foreign trade disputes with the help of WTO mechanisms, which supports smaller states against the discriminatory measures of stronger states. He added that the membership will assist Georgia in reaching its transit potential and become more attractive to investors.

Supsa Terminal Transport 2.261 Million Tons

· The Georgian Supsa terminal has successfully transported 2.261 million tons of early Caspian oil by 24 tankers during the period from April 17th to September 30th, according to Vice President of Georgian International Oil Corporation Irakly KELBAKIANI. He said that the state budget has already received over $3 million from oil transit and by the end of this year, "it is forecast to receive $4.8 million," Prime News Agency reported.

Azerbaijan To Create Oil Fund

· Acting on the recommendation of the World Bank, Azerbaijan has announced plans to set up a reserve system, or oil fund, based on revenues from foreign oil consortia operating in the country. The World Bank said this would help monitor oil revenues and increase transparency as well as attract more investors to the oil rich nation. An oil fund will also protect the Azeri economy from the effects of fluctuations in the price of oil. Economic Minister Namik NASRULLAYEV said that a special commission will present a proposal for the oil fund to President Geidar ALIYEV at the beginning of next year. In 2000, Azerbaijan expects to begin receiving $100 million to $150 million annually from taxes on the first profits generated by the BP Amoco-led consortium Azerbaijan International Operating Company (AIOC). By 2005, Azerbaijan's revenues from the AIOC contract will jump to $1 billion annually.

The Daily Report on Russia and FSU

will not be published on October 11,1999

in observance of Columbus Day

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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Daily Report on Russia is for the exclusive use of the subscriber only. Reproduction and/or distribution is not permitted without the expressed written consent of Intercon. Daily Report on Russia Ó copyright 1999, Intercon International, USA.

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