DAILY REPORT ON RUSSIA

AND THE FORMER SOVIET REPUBLICS

INTERCON INTERNATIONAL USA, INC., 725 15th STREET, N.W., SUITE 903,

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Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Tuesday, November 30, 1999

may face capital punishment or a prison sentence of ten years. Comment: This tit-for-tat spy war reflects the norm of relations during the Cold War. Since relations between the US and Russia are already tense over NATO's actions during the Kosovo Conflict, disagreement concerning the Chechen Offensive, and delays of loan installments, Russia appears to be striking back in a Soviet-fashion. In July, Russia reacted in much the same way after US Ambassador James COLLINS asked then Security Council advisor Vladimir PUTIN to cut back Moscow's spying on the US. Russia's Foreign Intelligence Agency (SVR) responded by claiming that the US does more spying than Russia.

OSCE Visit To Refugees Stalled

· Russian authorities on Monday stalled a planned visit by the Organization for Security and Cooperation in Europe (OSCE) to the North Caucasus, while Russian troops stepped up its military campaign in Chechnya by launching Phase III. Russian Foreign Minister Igor IVANOV met today with Norwegian Prime Minister Knut VOLLEBAEK, who is current chairman of the OSCE. VOLLEBAEK said, "IVANOV said a trip to the conflict zone is to be agreed on with the government. I hope the Russian government will live up to the promises it gave [at the OSCE summit] in Istanbul and fixes a date for my visit to the region soon." He added, "I would not be honest if I said that I'm satisfied with my achievements," at the end a meeting with IVANOV. The Russian Foreign Minister noted that the government is still considering the re

Russian Federation

Politics

Tit-For-Tat Spy Arrests In Russia And The US

· The Russian Federal Security Service (FSB) on Monday night arrested Cheri LEBERKNIGHT, a US diplomat who works as a second secretary in the political session of the US Embassy in Moscow, on charges of espionage. FSB Spokesman Alexander ZDANOVICH said LEBERKNIGHT was caught red-handed while allegedly trying, "to obtain documents of military strategic nature that constituted a state secret," from a Russian citizen. LEBERKNIGHT was detained, questioned in front of Russian Foreign Ministry officials and US diplomats, and released shortly afterward. The FSB claims that the diplomat also works for the Central Intelligence Agency (CIA). "The Russian side expressed its resolute protest to the consul of the diplomat's actions, which were incompatible with her status," ZDANOVICH said. Foreign Minister Igor IVANOV said, "We hope and expect that this should not interfere with relations between the United States and Russia, but certainly, such episodes do not help improve the climate and atmosphere," in relations.

LEBERKNIGHT's arrest comes just one day after US naval officer Daniel KING was arrested for passing classified data to Moscow in 1994. KING pleaded guilty to sending the Russian Embassy a computer disk filled with secrets from the National Security Agency, after failing a lie detector test. Presumably, the information concerns secret information obtained from US submarines. Commander of US Naval Forces Greg SMITH said the information leaked is of "a local character," rather than inflicting serious damage to the interests of US national security. It is believed that KING never repeated the operation and did not accept any payments. If he is proved guilty of espionage by a military tribunal, he

Today's News Highlights

Russia

UES Applies For Bond Issue

FSU Economic Round Up

Economic Freedom On The Rise

European Republics

Kuchma To Meet With IMF

South Caucasus & Central Asia

Baku-Supsa Operations On Hold

Shell Seeks Stake In Azeri Oil

Japan Grants Uzbek Loan

Politics-Economics-Business

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Tuesday

November 30, 1999

Intercon's Daily

quest for an OSCE trip, emphasizing that each trip is determined by a senior official taking into account areas where provocations by terrorists can be avoided. He reiterated that an OSCE delegation could only deal with humanitarian issues, connected with the massive exodus of Chechen refugees, who have fled the conflict zone. According to VOLLEBAEK, such a visit would give an opportunity to assess the situation in the region and offer measures for rendering assistance. IVANOV said that his country does not need mediator services in the North Caucasus. "The Russian leadership is interested in the resolution of the Chechen issue more than anyone else. We don't have to be convinced of that, taught or pressured." While IVANOV stressed that Chechnya is an internal affair, VOLLEBAEK said the millitary action has broader implications for the region.

Tatum Relatives Sue Luzhkov

· The family of American businessman Paul TATUM, brutally killed in Moscow, have filed a lawsuit against Moscow Mayor Yuri LUZHKOV in Phoenix, Arizona on Friday. They accuse the Mayor of protecting the killers and blocking the investigation of TATUM's murder and are seeking $36 million in damages. According to a press release by the family's lawyer Michael KIMERER, the Moscow Mayor is responsible for the murder of TATUM and the illegal confiscation of his property in Moscow. TATUM was killed on a Moscow street on November 3, 1996, after openly criticizing the confiscation of the Radisson-Slavyanskaya Hotel by Yuri LUZHKOV. It adds that Russian authorities most likely know the assassins well, have been able to protect them, and prevent an international investigation thanks to LUZHKOV's political influence and power. The Mayor's office called the accusations, "an invention by LUZHKOV's political adversaries." The action is also brought against the Moscow Committee for Property. KIMERER said, "The family of Paul TATUM, frustrated by the failure of Moscow authorities to properly investigate the murder and the disinterest in the United States government to get involved, felt that their only recourse was to initiate this suit."

Six Killed In Apartment Blast

· At least six people were killed in an apartment block gas blast in the Russian city of Omsk Saturday morning. The explosion rocked a multi-apartment building No. 11 on Second Barnaulskaya, according

to the Emergencies Ministry. The blast left five people dead on the spot and five others, including a child, injured. Rescuers saved 10 people and at least three people remained under the debris. They brought up five corpses and another injured woman died in hospital later. The blast, believed to have been caused by a gas leak, destroyed 14 apartments. Approximately 79 apartment residents are being temporarily housed in hotels.

Economy

Ruble = 26.04/$1.00 (NY rate)

Ruble = 26.67/$1.00 (CB rate)

Ruble = 26.88/1 euro (CB rate)

New Round Of London Club Talks Begins

· A new round of talks between the London Club and Russia on the restructuring of the Soviet debt began today. The parties will work to bring their position closer. Russia wants to write off at least 40 percent of the $32 billion debt which it inherited from the Soviet Union. The London Club insists that the Soviet debt be transformed into the liability of the Russian state, not Vnesheconombank. The talks with Russian Finance Minister Mikhail KASYANOV and Vnesheconombank head Andrei KOSTIN are held in the Deutche Bank headquarters. KASYANOV said, "The structure of an agreement has already been almost totally agreed, but differences in positions on the financial parameters remain." Markets of the debt, known as PRINs and IANs, have risen on news that the deal could be completed before a December 2nd deadline for a $550 million coupon payment. The Russian Finance Minister stressed that there is a good chance for an agreement, "however we must make a certain effort to turn these chances into reality." Detlef RAMSDORF, a representative of the Deutche Bank, which chairs the club of creditors, said it was unclear whether the round will last for one day or will continue on Wednesday. RAMSDORF refused to give any comments saying "such delicate problems are discussed in conditions of strict confidentiality." However, he did not rule out that the round may be the last one this year. Last week, Russia and the credit organization "narrowed their differences." This round of talks may be complicated by statements made by International Monetary Fund managing director Michel CAMDESSUS that the negative reaction to Russia's campaign

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against Chechen militants may force another delay in the Fund's lending.

Business

UES Applies For Corporate Bond Issue

· Unified Electric Systems of Russia (UES), on Thursday filed for a 3 billion ruble dollar-hedged corporate bond issue for the end of this year. Three other Russian utilities have launched similar issues over the past three months. According to registration documents at the Federal Securities Commission, the bonds would pay 5 percent annual interest, maturing in three years and to be issued in three monthly installments starting in December. Revenues from the issue will be used to restructure UES' debt and cut interest costs. The Financial Times reported that UES has debts totaling $110 million, of which the majority is denominated in dollars. It has $84 million which matures in 2000 and is paying average interest of 19 percent. Issues earlier this year by Russian gas monopoly Gazprom, and oil groups LUKoil and Tyumen Oil Company, meant to tap into the surplus liquidity in Russia, were met with limited success. All issues were undersubscribed. It is believed that a significant portion was bought by institutions connected to the companies concerned. UES is also seeking other options to restructure its debts, including a guarantee against bonds from the European Bank for Reconstruction and Development (EBRD).

FSU Economic Round-Up

Economic Freedom On The Rise

· This year's Index of Economic Freedom, published by the Heritage Foundation and The Wall Street Journal, finds that economic freedom is on the rise. Of the 161 countries rated, 57 expanded economic freedom during the year and 34 curtailed it. The index ranks the world economies according to 50 economic variables in 10 categories: banking, capital flows, and foreign investment, monetary policy, fiscal burden of government, trade policy, wages and prices, government intervention in the economy, property rights, regulation, and black markets. The Index reports that countries with the most economic freedom also have higher rates of long-term economic growth; therefore their people are better off, at all income levels. Overall the economies of 73

countries are rated as "free" or "mostly free," while 88 earned ratings of "mostly unfree" or "repressed." Estonia, Latvia, and Lithuania were categorized as having economies which were "mostly free." Armenia, Moldova, Ukraine, Georgia, Kazakhstan and Russia were determined to be "mostly unfree," while Tajikistan, Belarus, Azerbaijan, Turkmenistan, and Uzbekistan were ranked as "repressed."

European Republics

Kuchma To Meet With IMF

· Officials from the International Monetary Fund (IMF) are preparing to conduct negotiations with Ukrainian President Leonid KUCHMA during his upcoming visit to Washington on December 8th to 9th. It is believed that he will meet with IMF managing director Michel CAMDESSUS on the first day. An IMF mission will monitor reforms in Ukraine in early December. Washington observers believe the Ukrainian authorities are in for quite difficult negotiations with Ukraine's chief international creditor. Kiev has foreign debts coming due in 2000 of over $3 billion. With gold and currency reserves just over $1 billion, Ukraine will have difficulty meeting these terms. KUCHMA was criticized through out his presidential campaign for failing to make important reforms.

The IMF has halted the allocation to Ukraine of credits of a $2.6 billion program. The IMF is concerned that these funds may be used to service Kiev's debts to private creditors, instead of implementing essential economic reforms. KUCHMA has pledged to work tirelessly for economic reform and claims that 70 percent of Ukraine's industrial output is already in private hands. The President predicts economic growth to reach 6 to 7 percent by 2002.

Meanwhile, a World Bank mission, led by the IBRD's acting director for Ukraine and Belarus Lily CHU, has already started reviewing the implementation of the IBRD-financed projects over the past sixth months as well as developing a cooperation strategy for the short term. The mission will work in Kiev until December 5th. Since 1992, the IBRD has issued credits and grants to Ukraine worth a total of $3 billion, of which more than $2 billion has been received. However, the implementation of a number of projects has been suspended owing to Ukraine's failure to meet its pledges and financial obligations.

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South Caucasus & Central Asia

Baku-Supsa Oil Pipeline Temporarily Closed

· The Baku-Supsa pipeline operations have been temporarily suspended due to flooding. According to Prime News Agency water has eroded ground under a 50 to 60-meter portion of Baku-Supsa pipeline in Western Georgia. Due to these technical problems the Azerbaijan International Operation Company (AIOC) has decreased extraction of oil at Caspian field Chirag to 75.000 barrels daily. Press-secretary of AIOC Tamam BAYATLI said, "operation of the pipeline was suspended and all the AIOC oil is being transported through Russia, since November 20th." Georgian International Oil Corporation (GIOC) has said that restoration of the Baku-Supsa pipeline are underway. Prior to the closure, the 30th tanker was filled at Supsa oil terminal. This year over 90 thousand tons of oil was sent to Italy.

Base Withdrawal Talks To Start Immediately

· Georgian President Eduard SHEVARDNADZE in his weekly national radio address declared that talks for the closure of two of the four Russian military bases in Georgia should begin without delay. "Negotiations over bases should begin as soon as possible. If the issue is not postponed this process could proceed painlessly. No good comes of a military presence on another country's territory." Russia has agreed to reduce the number of its troops stationed in Georgia, cutting its bases from four to two by July 1, 2001. SHEVARDNADZE added that the armaments and equipment at those facilities should be regarded as Georgian property and left behind when the Russian troops withdraw. However, he ruled out joint patrols of Georgia's border with Chechnya. Georgia will also not agree to have Russian border troops monitoring the Russian side of that border by transiting through Georgian territory or airspace. SHEVARDNADZE said this type of activity would inevitably draw Georgia into the Russian-Chechen conflict. The President said he would welcome the deployment of Russian border guards on the Chechen side of the Georgian-Russian frontier. Georgia's

Border Guard Chief Valery CHKHEIDZE said, "Georgia has enough of its own forces to control its borders." The Russian government representative to Chechnya, Nikolai KOSHMAN, said two days earlier that Russian border guards will seal the Chechen-Georgian border on the Russian side in December.

Shell Seeks 25 Percent In Azeri Oilfield

· Royal/Dutch Shell is negotiating to buy a 25 percent stake in the Azeri oilfield Inam, which has an estimated reserves of 1 billion to 2.5 billion barrels. Shell is in talks with a subsidiary of Russia's Central Fuel Company to buy its 12.5 stake and British Lasmo for its 12.5 stake in Inam. If the deals go through, it would be Shell's first contract in Azerbaijan. Shell's regional deputy president for Central Asia Gavin GRAHAM admitted, "Shell was a relative latecomer to the modern round of exploration and development in the region because we were focusing on Russia and by the time we focused on the Caspian, major assets in Kazakhstan and Azerbaijan had already been awarded." Shell already has two projects in Kazakhstan on the Temir contract and as part of an offshore consortium. In Turkmenistan, Shell has a 50 percent stake in the trans-Caspian gas pipeline consortium, PSG.

Uzbek To Receive Japanese Loans

· Japan and Uzbekistan have agreed to strengthen bilateral ties. Prime Minister Keizo OBUCHI on Friday pledged to extend up to 15.56 billion yen in loans to Uzbekistan for telecommunications and airport projects. OBUCHI made the announcement in a meeting with Uzbek Foreign Minister Abdulaziz KAMILOV. Foreign Minister Yohei KONO and KAMILOV issued a joint statement reaffirming their efforts to promote political dialogue between the two countries. Up to 12,692 million yen of the credit is earmarked for expanding telecom networks while 2,871 million yen will go for a project to modernize regional airports. OBUCHI said he hopes the projects "will be completed at an early date and contribute to the economic development of Uzbekistan."

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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