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

Wednesday, November 24, 1999

Russian Federation

Politics

Anti-Western Rhetoric On The Rise

· Harvard University Professor Richard PIPES, at a European Forum organized by Herbert Quandt Foundation and the Financial Times in Berlin, has warned of the return of anti-western sentiments in Russia. PIPES served as Soviet affairs director on the National Security Council staff during the REAGAN Administration. The Financial Times reported that a recent public opinion poll showed that 65 percent of the population regrets the dissolution of the Soviet Union. About 69 percent of citizens believe that Russia still has many enemies. The vast majority named NATO as the number one enemy. It is estimated that 78 percent say Russia should remain a great power, and 58 percent say Russia should, "fight foreign influences and seek her own way of development," PIPES said. He believes the west should deal with Russia by showing both, "great sensitivity and great firmness."

Rebels May Make Major Stand At Urus-Martan

· The command of federal forces in the North Caucasus on Tuesday cut off of Chechnya's cellular telephone communications in order to block links between rebel groups. Sources close to the command said this could spell the start to a major military operation. The rebels are holding Grozny, reinforcing their defenses there and around Urus-Martan. Rebel commander Mumadi SAYDAYEV, rejected Russian reports that Chechen fighters were leaving the capital en masse and taking refuge in the southern mountains. He said, "All are in their positions." Chechen President Aslan MASKHADOV said that militants had pledges to stay and fight in Urus-Martan, where rebel ranks have swelled to 3,500. This city may be where militants make a concerted stand against Russian forces. Fighter jets and artil

lery bombed Urus-Martan region, with jets and helicopters flying 86 sorties over the past 24 hours. Russia claims to have destroyed 10 trucks, six defense positions, a communications post, and an anti-aircraft gun. The military has determined that rebel bases are located near the villages of Roshni-Chu, Tangi-Chi, Gekhi-Chu and Martan-Chu. Prime Minister Vladimir PUTIN said, "It is not our aim to encircle the terrorists. Our aim is to destroy them and bring them to justice." However, he did not give an direct answer on how Russia will achieve this goal. PUTIN said, "How we achieve that aim¾encircling them, attacking them, squeezing them out¾that is all for the military leadership to decide on the spot.

Economy

Ruble = 26.47/$1.00 (NY rate)

Ruble = 26.43/$1.00 (CB rate)

Ruble = 27.11/1 euro (CB rate)

Capital Flight Major Obstacle For Growth

· Prime Minister Vladimir PUTIN today said that $1.5 billion to $2 billion flee Russia every month. In a report to the Russian State Duma on the implementation of the federal budget, he stressed that capital flight is a major obstacle to economic growth. Other impediments include "a high level of non-payments and barter, and a lack of investment," he said. Pavel BORODIN, the Kremlin's property manger, called on the Duma to pass a capital-amnesty act as soon as possible. If only 1 per cent of exported capitals

Today's News Highlights

Russia

Blue Stream Deal Signed

Chernogorneft Sale Canceled

European Republics

Baltic Borderguards Meet

Ferry Route Capacity Expanded

South Caucasus & Central Asia

Georgian Foreign Aid $108M

More Cargo Detained In Moscow

Turkmen Gas Exports To Rise

Halyk Opens Beijing Office

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November 24, 1999

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were back in Russia, the country would receive more than $14 billion, which is commensurate with Moscow's debt to the International Monetary Fund (IMF), BORODIN said. He estimates that as much as $1.4 trillion has fled the country in the 1990s, adding that only $400 million have left legally.

Oil Exports Drop In first Nine Months

· Russia's oil exports dropped by 0.4 percent in January-September, as compared with the same period in 1998, making 102 million tons, according to a report from the State Customs Committee and the Russian Statistics Agency. Oil exports revenues have reached $9 billion, which is 11.5 percent more than during the same period last year. An average export contract price of Russian oil increased in January-September from $79 to $88.50 per ton. Foreign countries received 86.8 million tons of oil worth $8.2 billion, which is quantitatively 1.2 percent less than a year earlier. Oil exports to countries of the Commonwealth of Independent States (CIS) grew 4.2 percent, making 15.3 million tons worth $852 million. Experts say that a steep decline in average contract prices was registered in oil trade with those countries as compared with 1998. Foreign states bought Russian oil at an average of $94.2 per ton in January-September, while CIS countries paid $55.80 per ton. Oil exports accounted at the same period for 18.2 percent of Russia's total exports against 15.1 percent for the same period last year.

Business

Gazprom-ENI Sign Blue Stream Deal

· A joint venture company owned by Russia's gas monopoly Gazprom and Italy's state-owned energy company ENI SpA on Tuesday signed a $1.7 billion contract to build an offshore sections of the Blue Stream pipeline connecting Russia to Turkey. The main gas pipeline will link up directly via the Black Sea the largest natural gas deposits in Russia with Turkish consumers, transporting up to 16 billion cubic meters of gas annually. The joint venture, Blue Stream Pipeline Company has contracted Italian-based Saipem SpA, French-owned Bouygues Offshore, and a Japanese consortium, comprising Mitsui Co. Ltd., Sumitomo Corp., and Itochu Corp. to design, engineer, and construct two threads 380-kilometer-long of an underwater section of the pipeline and a compressor station, Beregovaya, on the Black Sea Coast. Mitsui, Sumitomo, and Itochu will

supply $500 million worth of pipeline, almost half the total volume needed. Gazprom and ENI will finance 20 percent of the project, $200 million each, and will seek syndicated loans and export credit facilities to cover the remainder. Deputy Head of Gazprom Sergei DUBININ said the total financing will be in place early next year. The technological challenges of the submerged pipeline raises some concerns for bankers. The agreement will enter into force only after an intergovernmental agreement between Russia and Turkey on tax breaks for the project is signed. DUBININ said, "The investment decisions of Snam and ENI hinges directly on the signing of this additional protocol to an intergovernmental agreement on gas deliveries dating from 1997, which would guarantee tax breaks to the project...Without a resolution to this problem with taxes, Snam's decision cannot be taken for granted." Turkey has said it will only sign it, if Russia approves a separate Russian-Turkish intergovernmental agreement on avoiding double taxation. The construction on the Blue Stream pipeline will be completed in 2002. The contract signing follows only days after Azerbaijan, Georgia, and Turkey endorsed a protocol for the building of the main export pipeline from Baku to Ceyhan, which appeared to lock Russia out of Caspian oil exports.

Court Cancels Chernogorneft Sale

· A Siberian court on Tuesday canceled the impending sale of Russian oil company Sidanko's subsidiary Chernogorneft, after an intervention by Sputnik Funds. According to the court decision, "It is ordered that the temporary management of Chernogorneft be stopped from selling the business of Chernogorneft or any part of it or any other disposal [of its assets]." The battle over Chernogorneft, which controls one of Siberia's richest oilfields, has been characterized as either a case of asset-stripping or a clever hostile corporate takeover bid, Reuters reported. Sputnik Funds, a Western shareholder of 10 percent of Sidanko, applied to the court to have the sale stopped. The investment Funds took this step after its attempt to bid in the auction, scheduled for Friday, had been met by a refusal to grant access to documentation. BP Amoco, another 10 percent shareholder in Sidanko, has declared that the sale would have been illegal. Sputnik chief Boris JORDAN further pointed out that another court in Odintsovo near Moscow, blocked

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the sale after an individual aided by Sputnik had claimed the holding company owed some of Chernogorneft's debt. Sputnik also sued in a US court for damages against another oil firm, Sidanko's rival Tyumen Oil Company, alleging it was using illegal tactics to take control of Chernogorneft. Tyumen has said that it is making a successful hostile takeover and denies any wrongdoing. As of Monday, there were only five companies registered to bid on Chernogorneft, including TNK-Nizhnevartovsky, a Tyumen subsidiary.

Duma Calls For ORT Audit, Accounts Frozen

· The Communist-dominated Russian State Duma has confirmed its decision to audit ORT, a television company said to be controlled by oil-to-media tycoon Boris BEREZOVSKY. The Russian government owns 49 percent of ORT. Two factions, center-right Our Home Is Russia (NDR) and the ultra-nationalist Liberal Democratic Party, walked out in protest against the Duma's refusal to cancel its Friday decision to audit ORT. Moreover, the Duma even refused to put the two factions' proposal on the agenda. Their motion was backed by 135 deputies, with 179 against and three abstentions. NDR faction leader Vladimir RYZHKOV said the Friday voting contained procedural violations, and NDR members who were opposed to the bill were counted as in favor of it. Liberal Democratic leader Vladimir ZHIRINOVSKY said the Duma's Friday decision had undermined its reputation. On Friday, the lower house agreed with a proposal by the Audit Chamber to suspend, "all kinds of financial payments and clearing operations" with ORT accounts because of the TV company's failure to fulfill the Chamber's instruction of July 19, 1998. The Russian parliament on Tuesday voted to freeze ORT's bank accounts. ORT's prime-time programs have strongly criticized Moscow mayor Yuri LUZHKOV, who has come out against the Kremlin and Russian President Boris YELTSIN. This is yet another episode in the battle for media control in the run up to December's elections.

US Congress Passes Business Education

· The US Congress has approved an initiative sponsored by Senator Richard LUGAR (Rep. Indiana) to help teach Russians skills in business administration, accounting, and marketing. LUGAR's legislation authorizes a public-private fund to establish a training program in Russia and Ukraine to teach business administration, accounting, and marketing

in order to achieve international standards of quality, transparency, and competitiveness. According to a press release, LUGAR said, "After the break-up of the former Soviet Union, we assumed that Russia had enough trained people who understood our business philosophy and procedures to insure a rapid and successful transition to economic growth and a higher standard of living for a vast majority of the population. We were wrong. We misread the situation, and Russian society is likely to suffer even more until we help to change it." He added, "It is important that Russians learn business skills, such as those acquired by Masters of Business Administration and Certified Public Accountants, to transform Russian business management and economic policy. They will produce a quantum leap in American-Russian trade and investment and undergird the potential for normal development of political and military relationships between our countries."

European Republics

Baltic Borderguards Meet In St. Petersburg

· The first meeting of experts from the Borderguard Services of eleven countries of the Baltic region will opened in St. Petersburg today. The Russian delegation will be led by Chief of the International Cooperation Department of the Federal Borderguard Service Major-General Vladimir MOCHALOV. The Northwestern Regional Department of the Federal Borderguard Service said that the experts would devote primary attention to the promotion of cooperation among their services. The participants of this two-day meeting will discuss all the main problems facing the borderguards of the Baltic region. The two main ones are to prevent illegal migration and smuggling. The borderguards of the Baltic region are constantly working to improve their joint actions to save people in distress at sea.

Ilyichevsk-Poti Increases Ferry Route Capacity

· The Ukrainian government intends to increase the carrying capacity of the ferry route between Ukrainian port Ilyichevsk and Georgian port of Poti to 5,000 thousand tons annually. The decision was made in Kiev at the session of the state commission for transport corridors chaired by Ukrainian First Deputy Prime Minister Anatoly KINAKH. The State commission charged the Transport Ministry, State Customs Department, State Border Committee to

Politics-Economics-Business

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hold certain measures for maintenance of the existing and attraction of additional volumes of cargoes for transportation in the direction Europe-Asia, through the rail-ferry route Poti-Ilyichevsk. Prime News Agency reported that the Poti-Ilyichevsk ferry route is being used only at 30 percent of its capacity. During the period of January to September, 221,000 tons of cargoes were transported by the ferry route.

South Caucasus & Central Asia

Georgian Receives Large US Foreign Aid

· The US House of Representatives this week passed the foreign aid bill for the former Soviet Union. It granted Georgia $108 million; its highest level ever. Armenia received $104 million. "In addition, at least $25 million of the funds made available for Georgia should be obligated for border security and law enforcement training." "The managers continue to support funding of the judicial reform initiatives in Georgia."

Russia Impounds Another Georgian Cargo

· Russian Customs officials at Domodedovo airport have impounded a second Georgian military cargo, claiming that its final destination was for rebels in Chechnya. The detained cargo includes 300 kilograms of Georgian ammunition that was being returned to Georgia from a defense industry exhibition in Bucharest, the RFE\RL Newsline reported. Head of the Georgian Defense Ministry's technical department, Gogi TAVADZE, expressed concern lest Russian military specialists steal unique Georgian technology. Russian customs officials impounded 15,000 military uniforms donated to Georgia by the US earlier this month on the pretext that they were allegedly being sent to Chechnya. Once again, this is an attempt by Russia to intimidate Georgia and add fuel to its disinformation campaign.

Turkmenistan Predicts Gas Rise In 2000

· The Turkmen Oil and Gas Industry Ministry today said that Turkmenistan aims to export 33.4 billion cubic meters (bcm) of natural gas in 2000. A ministry official said 20.0 bcm of the total will go to Ukraine via

Russia's pipelines and 5.0 bcm to neighboring Iran. The remaining 8.4 bcm will go to foreign contractors in exchange for construction work on oil and gas pipelines. Turkmenistan had hoped that the totals for 1999 will reach 30.0 bcm. In the period of January to September, official statistics show that exports were just 9.9 bcm, worth $364 million. Of this total, 8.8 bcm went to Ukraine. Supplies to Ukraine this year, however, were ordered by President Saparmurat NIYAZOV to be cut off due to debts.

Tengiz Oil Stake No Longer For Sale

· Kazakhstan's Finance Minister Mazhyt YESENBAYEV announced that the government Tengizchevroil (TCO) stake is no longer for sale. He said, "Today, there is no question of selling a share in TCO." Kazakhstan had invited a number of foreign oil companies to participate in the domestically controversial sale of a 5 to 10 percent stake in the joint venture. Members of the venture include Chevron (45 percent) and Mobil (25 percent), Kazakhstan (25 percent) and LUKArco (5 percent). The sale triggered heated political debate in a country where opposition to selling stakes in the most promising oil, gas, and metal ventures to foreign firms has grown. Nurlan KAPPAROV, former head of the state oil company Kazakhoil, which manages government oil stakes, was removed from his position in August because he objected to the sale.

Halyk Bank Opens Branch In Beijing

· Halyk Bank of Kazakhstan, the largest savings bank in the country, today opened its first representative office in Beijing, during the visit of Kazakh President Nursultan NAZARBAYEV to China. The office is also Halyk Bank's first representative foreign office. "The establishment of the Beijing representative office is evidence of closer economic and trade ties between Kazakhstan and China," chairman of Halyk Bank Karim MASSIMOV said.

The Daily Report on Russia and the FSU

will not be published on November 25th-26th,

in celebration of the Thanksgiving holiday.

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

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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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