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 3, 1999

Russian Federation

Politics

Clinton Warns Putin Over Chechen Campaign

· The tone of the 50 minute meeting between Russian Prime Minister Vladimir PUTIN and US President Bill CLINTON in Oslo on Tuesday was described as "serious" and "frank." CLINTON made a personal appeal to Russia to back-off its assault on Chechnya and seek a political solution, possibly through a mediator. He warned PUTIN that the military offensive in Chechnya threatens to increase civilian casualties, undermine world opinion of Russia, and turn the opinion of ordinary Chechens against it. One CLINTON aide pointed out that no ultimatum was issued. PUTIN said Russia's campaign in Chechnya is designed only to stamp out terrorist who were mingling with civilians. NATO Secretary General Lord George ROBERTSON also expressed concern over the situation in Chechnya. He said, "Clearly every state has a right¾and a duty¾to combat terrorism. But we should never stop asking: does the end really justify the means being applied." Today in Fergana, Uzbekistan, Russian Defense Minister Igor SERGEYEV said that Russian troops will take total control of the Chechen territory. He said Russian troops, "are planning to free from terrorists not only Grozny but the whole Chechnya. This is the task set up for us by the President." SERGEYEV also predicted that "today or tomorrow" troops will seize Chechnya's second largest city Gudermes. PUTIN also gave CLINTON a letter from Russian President Boris YELTSIN, which warned the US against plans to amend the 1972 Anti-Ballistic Missile Treaty. The US has opened negotiations with Russia to allow under the treaty the US to develop a system for shooting down nuclear weapons. President YELTSIN said that a missile defense system would be "extremely dangerous" for arms control process.

Rus-US Open Nuclear Training Center

· Russia and the US on Monday opened a US-funded nuclear security center to train Russian officers on how to guard atomic weapons storage sites and use high-tech detection equipment. Colonel-General Igor VALYNKIN said, "When we started [cooperating] seven years ago, we didn't think it would be possible to work in such areas as nuclear security, transporting nuclear warheads, and guarding important military sites. Today, it is a reality." The training compound is located in the northeast woods of Moscow. Staff at the center will assess new security equipment and design packages of systems to deploy at Russian bases. Officers are already being trained on some of the equipment, including infra-red detection devices. The center will also house a drug-testing laboratory. Retired US Air Force General Thomas KUENNING, who heads the Defense Department's Cooperative Threat Reduction program, said the US and Russia had common cause in keeping Russia's stored weapons safe, but Moscow was short of cash. One Russian General echoed this saying, "We really haven't got the funds to carry out such large-scale work on the problem of nuclear weapons security."

Economy

Russia Expects Second IMF Installment In December

· Finance Minister Mikhail KASYANOV told an investment conference that the government expects to received the second $640 million in

Today's News Highlights

Russia

Creditors Reach Debt Deal

UES To Pay Debts With Shares

European Republics

Moroz Endorses Symonenko

IMF Mission In Vilnius

South Caucasus & Central Asia

Georgia To Guard Its Borders

CPC Passes $1.3 Billion Budget

Armenia Forms New Gov't

Kazakstan Reverses Oil Sale

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November 3, 1999

Intercon's Daily

stallment of the $4.5 billion loan from the International Monetary Fund (IMF) in the beginning of December. He said, "There is every reason to believe that we shall get IMF money at the start of December, World Bank money immediately after that and the Japanese government money maybe even slightly ahead of schedule." IMF's Russian affairs chief John ODLING-SMEE met with First Deputy Prime Minister Viktor KHRISTENKO on Tuesday and is meeting today with Prime Minister Vladimir PUTIN and Russia's representative at the IMF Alexei MOZHIN. ODLING-SMEE reviewed the implementation of the economic policy underpinning the Russian loan. He determined that another IMF mission will visit Russia next week ahead of discussion on the next installment release. It will analyze the implementation of the coordinated economic program in the third quarter. The IMF chief pointed out that the Fund, "is concerned increases in military financing do not lead to...changes in revenues, spending and the primary surplus." Presidential envoy to the G-Eight, Alexander LIVSHITS said that the Cabinet has not exceeded the budget limits in its military campaign against terrorists in Chechnya. He stressed that the Western fears of Russia using IMF money for the war in Chechnya were absolutely groundless. KHRISTENKO said the government had sent the IMF reports on Russia's economic performance and proposals to comply with the new requirements. KASYANOV noted that the government was "scrupulously" fulfilling the economic program agreed with the IMF in July, despite the delay of the second installment and managed to meet requirements on the primary surplus and tough monetary policy.

Ruble = 26.37/$1.00 (NY rate)

Ruble = 26.26/$1.00 (CB rate)

Ruble = 27.62/1 euro (CB rate)

Business

Debt Deal Reached With Foreign Creditors

· The decision last week by Moscow's Arbitration Court, which ruled that the revoking of Mezhkombank's license by the Central Bank as invalid, has paved the way for the first debt-for-equity restructuring deal between an insolvent Russian financial institution and its foreign creditors. American Express Company's American Express Bank in New York has agreed to a 12.5 percent in

Mezhkombank and Standard Bank London, a unit of Standard Bank Investment Corp. will take a 25 percent. These two are among 16 banks holding a total of $70 million in debt in Mezhkombank and the deal puts 80 percent of the bank's shares in creditors hands, The Wall Street Journal reported. The debt-for-equity deal was originally reached in June, but a week later the Central Bank revoked Mezhkombank's license. As a result of the August financial crisis, Mezhkombank had foreign loans of $200 million and debts to private investors of $50 million. Since then, the bank has reduced these debts to $70 million and $300,000 respectively. Alexander GRIGORIEV, a former Mezhkombank president and now a member of the board of directors, said creditors would reach a final decision on the new structure of the bank later in November.

UES-Gazprom Consider Shares For Debt Swap

· Russia's national power grid Unified Energy System (UES) is holding talks with gas monopoly Gazprom to negotiate a trade of UES shares to pay off its 46 billion rubles ($1.75 billion) debt to Gazprom for fuel. UES Chairman Anatoly CHUBAIS noted that these negotiations would last several years. He said his company had increased the portion of cash payments to Gazprom to 50 percent in the third quarter from 20 percent in the first quarter. He said that UES fuel oil stocks amounted to 97 percent of plan and coal 93 percent. CHUBAIS added that Sakhalin, Arkhangelsk, and the Far Eastern Primorsky Krai regions have critical levels of fuel.

European Republics

Symonenko Wins Moroz Endorsement

· Ukraine's Communist Party candidate Petro SYMONENKO received a boost in his chances to win in the run-off presidential election, when head of the Socialist Party Alexander MOROZ gave his support to his candidacy. MOROZ came in third in the election on October 31st with 11.3 percent. He said on Tuesday, "Together, we will send KUCHMA and his cronies into retirement," Financial Times reported. SYMONENKO is also hoping to win the backing of leftist hard-liner Natalia VITRENKO, who received 11.1 percent of the vote. Yevhen MARCHUK is another candidate, whose support could affect the outcome of the run-off vote on November 14th. SYMONENKO, who favors including Ukraine in the

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recreation of the Soviet Union and rebuilding a nuclear arsenal, is seeking to soften his image and appeal to Ukraine's center. His biggest liability is the word "Communist." Incumbent President Leonid KUCHMA hope to capitalize on this and seeks to motivate the youth to the polls.

International observers of the presidential elections have reported minor irregularities, but they said it would not affect the voting results of the first round in which KUCHMA won with 37 percent and SYMONENKO 22 percent of votes. Observers of the Ukrainian Congress Committee of America said the most typical irregularities were delayed opening of polling stations and voting without passports. The elections were monitored by 500 delegates of international and public organizations. The chief of the Organization for Security and Cooperation in Europe's (OSCE) observer mission in Ukraine, Simon OSBORN, said the first round of the presidential elections cannot be recognized as fully consistent with OSCE criteria.

IMF Mission Arrives In Vilnius

· An International Monetary Fund (IMF) mission, led by Odd PURE, deputy head of the Baltic subdivision of the IMF's Second European department, arrived in Lithuania Tuesday to continue talks on the signing of an agreement on further cooperation with the Lithuanian government. IMF experts are expected to analyze Lithuania's financial and economic development. They are scheduled to meet Lithuanian leadership to discuss the complex fiscal situation that has developed in the country, basic principles for next year's budget, the state of affairs in the banking system, the balance of external payments, the privatization process, and terms for the sale of the Lithuanian Mazeikiu Nafta petroleum complex to the US Williams International Company. The tasks of the mission are getting complicated in view of a government crisis in Lithuania. However, Lithuania is counting on receiving a regular credit from the IMF to improve the fiscal situation.

South Caucasus & Central Asia

Georgia To Guard Its Own Chechen Border

· Russia and Georgia failed to reach an agreement Tuesday on the joint protection of the Chechen section of their common border. After meeting with

Russian Federal Border Service chief Konstantin TOTSKY, Georgia's Border Chief Valery CHKHEIDZE said that the border will continue to be patrolled solely by Georgian guards. Russia, which currently has no control over the Chechen section of its border with Georgia, feared that "various elements" would infiltrate Chechnya from neighboring Georgia as the federal troops continue their assaults on the Islamic militants in the breakaway republic. CHKHEIDZE insisted that Georgia "has sufficient means and forces to guard its borders." The two only agreed to exchange observers on the Chechen and Abkhaz sections of their common border. TOTSKY said a group of Russian border guards will soon travel to the Chechen section to check the arrangements there, which will be virtually closed in two or three weeks due to bad weather conditions. Georgia reiterated its denial Tuesday that militants and arms are illegally entering Chechnya through the Georgian territory. Chief of the anti-terrorist service of the Georgian National Security Ministry Levan KENCHADZE said such claims by the Russian Federal Security and Border Services were groundless. He said that Russia has presented no evidence to verify their supposition. Georgian President Eduard SHEVARDNADZE said that if necessary, the army units would assist the border guard forces. Former prime-minister of Russia Sergei STEPASHIN ties the refusal by Georgia for the joint guarding of Chechen portion of state border, with the "policy of Georgian president Eduard SHEVARDNADZE in relation to Russia," Prime News Agency reported.

CPC Expect Approves 2000 Spending

· Caspian Pipeline Consortium (CPC) shareholders on Tuesday unanimously approved a budget of $1.33 billion for next year. The CPC is building a 1,5000 kilometer pipeline from Kazakhstan's Tengiz oil field to a yet-to-be-built Black Sea port near the Russian town of Yuzhnaya Ozereyevka, outside of Novorossiisk. The CPC will start installing the delivered pipes and constructing three floating oil terminals by November 15th, according to CPC Deputy General Director Anatoly SHATALOV. This later will be increased to 10 tanks. The estimated cost of the pipeline's first stage is $2.4 billion, and is expected to be completed in 2001. The total cost of the pipeline is estimated at $4.2 billion, when it is finally finished in 2015. In the first stage the CPC plans to deliver 28 million tons of oil a year, while the pipeline's final

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capacity is estimated at 63 million tons. Chevron, which holds a 15 percent equity interest in the CPC, predicts that the projects in Tengiz and the pipeline will add more than $150 billion to the combined gross domestic product in Russia and Kazakhstan. "We are very pleased that the project implementation has moved into high gear. Site work at the marine terminal is well underway, and CPC will begin laying the pipeline later this month," said Nick ZANA, Chevron's Eurasia managing director.

The equity interest in the CPC is allocated as follows: Russia (24 percent), Kazakhstan (19 percent), Sultanate of Oman (7 percent), Chevron Caspian Pipeline Consortium Co. (15 percent), LUKARCO B.V. (12.5 percent), Rosneft-Shell Caspian Ventures Limited (7.5 percent), Mobil Caspian Pipeline Co. (7.5 percent), Agip International (2 percent), BG Overseas Holdings Limited (2 percent), Kazakhstan Pipeline Ventures LLC (1.75 percent), and Oryx Caspian Pipeline LLC (1.75 percent).

Armenia Begins To Form New Government

· Armenia's parliament at an extraordinary session on Tuesday elected a new speaker and two deputy speakers to fill the seats left by the late Karen DEMIRCHYAN, Yuri BAKHSHYAN and Ruben MIROYAN, who were killed in the attack on October 27th. The parliament in a vote of 103 to 10 elected Armen KHACHATRYAN, who was heavily wounded by the terrorists, as the new speaker. Prior to the appointment, KHACHATRYAN led a committee on foreign relations. Tigran TOROSYAN and Gagik ASLANYAN have been appointed to the posts of deputy speakers of the National Assembly of Armenia. All the three new heads of Armenian parliament represent the political bloc Unity, created by DEMIRCHYAN and the late Prime Minister Vazgen SARKISYAN, who was also assassinated by the terrorists. The next sitting of the Armenian parliament is scheduled for November 8th. Armenian President Robert KOCHARYAN said at the closing of the session, "A major step towards overcoming the crisis has been made: the National Assembly is now able

to continue the normal functioning." He said the prime minister will be appointed and a new cabinet formed in several days.

Unity Party has proposed the brother of the slain prime minister as his replacement. Aram SARKSYAN is the director of a cement factory and has not played a major role in politics. The party, who describe him as a decisive person, said that no parliamentary vote would be needed to approve Aram SARKSYAN.

Rus-Kazakh Coal Delivery Company Proposed

· Russian First Deputy Prime Minister Nikolai AKSYONENKO on Saturday proposed the creation of a Russian-Kazakh company for the delivery of coal from Kazakhstan's Ekibastuz basin to Russia. He said such a company should involve the United Energy System of Russia (UES), representatives of the Russian coal industry and Kazakh railways. UES Chairman Anatoly CHUBAIS welcomed the proposal and described it as, "constructive and very interesting." Kazakh Transport Minister Serik BURKITBAYEV pointed out debts of regional enterprises of UES to Kazakhstan's railways for the coal delivered from Ekibastuz have already reached about $40 million.

Kazakhstan Reverses Plans For Oil Sale

· Kazakhstan has decided against selling off part of its 25 percent stake in the Tengiz oil field, with the new Prime Minister saying that only 5 percent might eventually be on offer. Kasymzhomart TOKAYEV said Kazakhstan was determined to retain a 20 percent blocking stake that gives it veto powers over the possible disposal of stakes by its other partners, which include Chevron, Mobil and LUKoil, the Financial Times reports. The issue of whether the government should sell parts of its holding in Tengiz, arguably its single most important financial asset, has become deeply politicized since the previous government first flagged the idea last summer. One argument in favor of selling a 5 percent stake is that the government should be able to secure a price that reflects current high crude oil prices.

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

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