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

Friday, December 17, 1999

Russian Federation

Politics

Chechen Offensive Force Undermines Aim

· Russian forces attacked the Chechen capital Grozny from three sides, in what rebel commanders said was an apparent attempt to test the strength of rebel defenses. Russian warplanes and artillery continued to bombard the city as armored units fired on the city from the east, south and northwest. The Russians have been sending armored vehicles toward Grozny, with the apparent intent of drawing fire from the well-entrenched rebels in order to find out where they are located and how much firepower they have. There were no immediate reports on casualties and the fighting, which began in the morning, carried on into the afternoon.

The Russian government is still denying reports that there was an all-out assault on Grozny Wednesday night. The Associated Press and Reuters reported that a column of 15 tanks and armored personnel carriers entered the capital and were surrounded and destroyed by 2,000 rebel fighters. The battle appeared to be the worst defeat the Russian military has suffered since its forces entered Chechnya in September to restore Moscow's control over the province. Prime Minister Vladimir PUTIN has described the reports as "total rubbish," and "complete disinformation." The Russian media has failed to cover either the devastation and harm inflicted on the residents of Grozny or the high casualties of the Russian forces, which is estimated to be over 100 in Wednesday's offensive alone. Defense Minister Igor SERGEYEV is sticking to his comment that there will be no assault on Grozny, while civilians remain in the city. TIME correspondent Andrew MEIER speculated that, "The plan may have been for PUTIN to fly down and raise the Russian flag over Grozny on the eve of Sunday's parliamentary elections. But if re

ports of the ambush prove true, that could throw a spanner in the works. In fact, if the Chechens have such a [video] tape, they may hold onto it for a couple of days to achieve maximum political effect."

Foreign Minister Igor IVANOV is facing strong criticism from the international community as he meets in Berlin with the his counterparts in the Group of Eight. German Foreign Minister Joschka FISCHER said, "Many of us demand an immediate cease-fire, intended to be permanent, throughout the territory of Chechnya." Just in from a visit to Chechnya, Knut VOLLEBAEK, Chairman of the Organization for Security and Cooperation in Europe (OSCE) and Norway's Foreign Minister fears that the situation in Chechnya could lead to a blood bath. He says humanitarian aid is urgently needed and that the shear numbers of refugees have overwhelmed the provisions in neighboring Ingushetia. He also reported attacks on refugee buses and sniper hits have proven that the daytime corridors are unsafe. "The corridor doesn't work," he said while reiterating calls for a round-the-clock cease-fire. IVANOV will meet separately tonight with VOLLEBAEK and US Secretary of State Madeleine ALBRIGHT. White House spokesman Joe LOCKHART said, "The indiscriminate use of force...has done more to enhance this cycle of violence, embolden the Chechen terrorists, and undermined the ultimate policy goal that they've articulated," adding that Russia must seek a political solution.

EU Gets Tough On Russia

· The European Union's (EU) external re

Today's News Highlights

Russia

Primakov To Run For President

Ex-Im Postpones Loan Decision

Yukos Protest Duties Rise

European Republics

CB Chief Nominated For PM

Kuchma Cuts Bureaucratic Fat

South Caucasus & Central Asia

Russia Bombs Georgia Again

Ramco Earns Oil Profits Early

Politics-Economics-Business

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December 17, 1999

Intercon's Daily

lations Commissioner Chris PATTEN said the organizations could not conduct "business as usual" with Russia because of its military campaign in Chechnya. He stressed he would make this point clear to Russian Foreign Minister Igor IVANOV at the meeting of Group of Eight countries in Berlin today. PATTEN said, "The disproportionate use of force in Chechnya, the pushing aside of any attempt to reach a political solution...all these things mean we cannot continue with our relations as if nothing has happened."

The EU has also held discussions on forming an EU Army. This force, to be called the European Security and Defense Initiative (ESDI) would be a rapid reaction force of 60,000. There has been no clear indication that the EU would use this force in the North Caucasus. Instead, the force is still in the planning phase. Questions remain as to how it will be funded, trained, and transported. Financing prospects for the force in the EU do not meet the rhetoric of its leaders. The meeting will be the first Group of Eight gathering attended by former NATO chief Javier SOLANA in his new role as EU foreign policy coordinator. The Helsinki summit last weekend agreed the EU should step up pressure on Moscow and PATTEN said he would be putting formal proposals to EU foreign ministers next month. He said that one of the ideas would be to suspend Russia's most favored nation status within the EU's partnership and cooperation agreement.

Russians Head For Parliamentary Elections

· Over 107 million Russians will go to the polls on Sunday December 19th, to elect a new Russian State Duma. The results of the elections will lay the ground work and set the tone for the upcoming presidential elections in 2000. Yevgeny VOLK of the Heritage Foundation's Moscow office said, "It will show the balance of forces in Russian society. It will encourage some people to run for president if their parties are successful. If Unity has good results, it will be a good starting point for [Prime Minister Vladimir] PUTIN's presidential campaign." Twenty-six parties will be competing for 450-seats in the Duma. No party is expected to win a majority. In fact, analysts predict the Duma will look much like the outgoing one: "divided and unable to do much besides block legislation and pass a budget, which the government then largely ignores."

The top three parties have been involved in a mud-slinging political battle ahead of elections. The Communist Party is leading the pre-election polls with 17 to 24 percent. Its top three candidates are Gennady ZYUGANOV, party leader, Gennady SELEZNYOV, Duma speaker, Vasily STARODUBTSEV, Tula region governor. The Communist Party advocates cutting taxes, investigating Russia's state asset sales for possible reversals, providing free education, housing and health care. The party also supports changing the constitution to reduce the powers of the president and uniting Russia, Belarus and Ukraine into one country. Regarding the war in Chechnya, the party issued a statement that, "The main reason for the war in Chechnya is Caspian oil..Aides of YELTSIN started the first war. We must renew normal life there quickly." The Unity Party follows next in the opinion poll with 16 to 21 percent. It recently received a boost when Prime Minister Vladimir PUTIN endorsed the party. The party was formed this Fall from a group of 39 regional governors, in order to create a pro-Kremlin party to run against rival Fatherland-All Russia bloc. Unity's top three politicians are Emergencies Minister Sergei SHOIGU, Alexander KARELIN, Olympic gold medal winner for wrestling, and Alexander GUROV, crime cop. The party has used the military operation in Chechnya to also increase its standings and reach nationalists. The Fatherland-All Russia bloc has dropped in its standings, earning only 9 to 12 percent of the public's support. The fall of the party is in part due to a smear campaign launched by government run ORT and RTR. The coalition was formed in August, 1999. The party's top three representatives are Yevgeny PRIMAKOV, former prime minister, Yuri LUZHKOV, mayor of Moscow, and Vladimir YAKOVLEV, St. Petersburg governor. Fatherland-All Russia advocates raising wages to stimulate economic growth, supporting domestic industry through cutting taxes and giving some loans, and re-examining results of Russia's state asset sale program, though only, in the framework of the law. "The transition to a market economy cannot be an aim in itself...It should be about the real economy, the way a real person lives in our country," LUZHKOV said. In addition to voting for Duma deputies, Yuri LUZHKOV will face off against former prime minister Sergei KIRIYENKO for the mayoral election. LUZHKOV has been slammed in the media, but is expected to be re-elected.

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Primakov Enters The Presidential Race

· Yevgeny PRIMAKOV, a former prime minister and leader of the centrist Fatherland-All Russia bloc contesting Sunday's parliamentary election, announced today that he will run for the presidency in 2000. "After much thought and after receiving thousands of letters and telegrams, I have decided without further delay to announce today that I shall take part in the presidential race," PRIMAKOV told students at Moscow State University. He added, "I cannot stand aside when such lawlessness reigns in the country...when active steps must be taken to drag the country from its very difficult situation...That is why I have taken this decision, which was not an easy one for me." The former spymaster and foreign minister is widely respected for restoring political stability in Russia after taking office as prime minister following the financial crash of August, 1998. Some Russians criticize his age. PRIMAKOV said, "I don't hide [my age]...The main thing is the ability to work, understanding and desire [for the job]."

Other candidates include Vladimir PUTIN, Russia's most popular politician and President Boris YELTSIN's own preferred successor, Communist leader Gennady ZYUGANOV, and liberal Grigory YAVLINSKY. PRIMAKOV said on national television that PUTIN would be his best choice to run with in the presidential election. He did not specify whether the partnership would be defined in terms of president and prime minister.

Economy

EBRD Expands Investment In Russia

· The European Bank for Reconstruction and Development (EBRD) will increase its investments in Russia' economy over the next several years to accelerate the recovery of it economy. EBRD President Horst KEHLER told Economics Minister Andrei SHAPOVALYANTS that the volume of investment in 1999 will amount to $180 million to $190 million. In 2000, the sum may rise to $400 million to $600 million and up to $1 billion in 2003. KEHLER said the amount of funds will depend on the improvement of the investment climate in Russia, which is currently unfavorable to foreign companies. He stressed that the EBRD will support Russia in its efforts to turn this situation around.

Gov't Sells 18B Rubles Of Bonds To Sberbank

· Russia has sold off-market government bonds to commercial banks this year. State-controlled Sberbank, Russia's largest retail bank, has raised more than 18 billion rubles ($670 million), The Moscow Times reports. First Deputy Finance Minister Oleg VYUGIN pointed out that the biggest sale was in September. At that time, the government sold 10 billion rubles in bonds to Sberbank, as it was preparing its military offensive in Chechnya. The loans from Sberbank brought government domestic borrowing above the 17.9 billion rubles limit set in the budget. The Central Bank reported that Russia's money supply grew by 900 million rubles ($33.5 million) in the week ending December 6th.

SBS Agro Settlement Plan Prepared For 2000

· The Russian government's bank restructuring agency will offer creditors of SBS-Agro, formerly the biggest private bank by assets, an out-of-court settlement to clear the bank's debts in the first quarter of 2000, according to Vremya. The settlement will also determine the exact amount of the bank's assets. The agency was supposed to give the proposal to creditors on Thursday, but didn't make the deadline because it only took over the bank on November 16th, after the Central Bank withdrew its license.

Ruble = 26.77/$1.00 (NY rate)

Ruble = 26.77/$1.00 (CB rate)

Ruble = 27/1 euro (CB rate)

Jul Aug Sep Oct Nov Dec

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December 17, 1999

Business

Ex-Im Bank Delays Loan Decision

· The US Export-Import bank has delayed a decision, expected today, on a $500 million loan to Russia's Tyumen Oil Company, until Tuesday. An unnamed bank spokesman said the postponement was due to technical reasons involving board members' schedules. The package to be considered consists of a $292 million loan for US oil service Halliburton Co. to develop the Tyumen Oil field and a separate $198 million for Lummus Global, part of ABB Ltd., to upgrade the refinery's equipment. If approved the loan money will be issued directly to the companies and then Tyumen would pay the bank back with revenues from oil sales on the world market. Pressure has been placed on the bank not to approve the loan due to Russia's military campaign against Chechen rebels and underhanded tactics used to force the sale of Chernogorneft, a subsidiary of Sidanko, to Tyumen, against shareholders' wishes. The Ex-Im Bank has stressed that it will make loan decisions based on sound economic and investment outlooks and not politics. The Export-Import Bank is an independent agency, but the CLINTON administration can block a credit if it thinks the money might be used in a way which would endanger human rights or risk the environment. The White House has so far resisted calls for punishing Russia by cutting off economic aid, fearing it could hinder efforts to promote democracy. Democratic presidential hopeful Bill BRADLEY has said any Export-Import Bank credits to Moscow should be cut off as long as Russian soldiers continue to attack the breakaway republic.

Far East Pipeline Construction Stepped Up

· Construction of a trunk gas pipeline between Komsomolsk-on-Amur and Amursk has been accelerated. Builders have already laid down and welded 34 kilometers of piping. The length of the pipeline totals 74.5 kilometers. Builders are also working on a 41 kilometer pipeline to the village of Elban and a section of the pipeline to the village of Khurba. The pipeline between Komsomolsk-on-Amur and Solnechny was put into operation in 1998. Solnechny no longer experiences problems with central heating of houses as well as social and utility services.

European Republics

Central Banker Nominated For Premier

· Ukrainian President Leonid KUCHMA today nominated Central Bank Chairman Viktor YUSHCHENKO for the post of prime minister and urged the parliament to approve his choice at a meeting on Tuesday. YUSHCHENKO needs 226 votes in the 450-seat legislature to win approval. Political analysts believe he has a good chance of succeeding. The President proposed YUSHCHENKO after consultations with pro-market parliamentary factions, saying the energetic 45-year-old would help Ukraine steady its shaky economy and pay off more than $3 billion in foreign debts due next year. Deputies from the Communist Party, the Socialist Party, the Progressive Socialist Party, the Peasant Party, and the Gromada party did not attend the meeting. The leftist parliament rejected former prime minister Valery PUSTOVOITENKO keeping his post. The PUSTOVOITENKO government resigned in November in line with the Constitution, following the re-election of KUCHMA. This political crisis has aggravated Ukraine's precarious economy and called into question prospects of adopting a realistic 2000 budget by year's-end.

Kuchma Cuts The Fat Off State Bureaucracy

· Aiming to create a new image for his second term and follow through with pledges for more reforms, Ukrainian President Leonid KUCHMA on Wednesday reduced the number of ministries from 89 to 35. The presidential chief of staff Volodymyr LYTVYN said that another presidential decree decreased the number of Cabinet members to 20 people, consisting of the prime minister, his first deputy, three deputies and 15 ministers. The decrees also bans ministers from having more than four deputies; some currently have 15 deputies. LYTVYN said, "There is no doubt these decrees will meet political resistance, but this [reduction] is unavoidable. This is the road which Ukraine must follow." The International Monetary Fund (IMF) and World Bank have been pressing for administrative reforms to reduce the government's interference in the economy. This has been a key requirement for the resumption of IMF loans. Small and medium-size businesses are often thwarted by unnecessary

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checks and bans enforced by state bureaucracy. The President told a news conference he was determined to push forward with market and administrative reforms.

South Caucasus & Central Asia

Russia Bombs Georgia For A Third Time

· Two Mi-24 helicopters violated Georgian airspace today, firing rockets, machine guns and dropping bombs in the vicinity of Shatili. The British Ambassador to Georgia was an eye witness to the attack. He has obtained a shell fragment of the rocket and taken it back to Tbilisi to be presented to the Georgian Foreign Ministry as evidence of the attack. Intercon sources in Georgia indicate that a formal protest will be lodged to the Russian government on Saturday concerning the repeated violations of Georgian airspace and the newest bombing. Luckily there were no casualties, but acting head of Georgian State Border Guard Department Staff Kornely SALIA told Prime News Agency that the rocket strike caused a fire in the forest. He also noted that two other Russian helicopters later violated Georgian air space at 2 pm. The Russian government still has not apologized for the first bombing of Shatili in late November. In addition, Russian forces have taken complete control over the road in Southern Chechnya leading to Shatili. According to the Russian information center, helicopters dropped landing forces, which destroyed the "groups of terrorists."

In a letter to the UN Security Council, Georgian Foreign Minister Irakly MENAGHARISHVILI expressed the Georgian government's concern over continuing claims in the Russian media that Georgia is abetting the Chechen resistance. Russian Customs have illegally seized several military cargoes destined for Georgia, claiming that the equipment and material were supplies for rebels. The media has also reported that an OSCE mission observed Chechen rebels in the Georgian village of Shatili and that the government has held talks with Chechen representatives in Tbilisi. These allegations are

absolutely false. He said the disinformation campaign is directed at drawing and provoking Georgia into the conflict. MENAGHARISHVILI again affirmed that as a sovereign country, Georgia will not allow anyone to use its territory to launch aggression against a neighboring state. Comment: The repetitive bombing is a clear violation of Georgia's territorial sovereignty. The Russians military campaign has once again crossed the internationally recognized border. This should be a clear signal to Europe and the US that Russia has large military and strategic intentions. This includes pushing its Chechen offensive past its borders into neighboring Georgia and Azerbaijan. The consorted disinformation campaign matched with the repeated incursion into Georgian airspace as well as the bombings, illustrate the danger of the Chechen conflict and how it can easily engulf the region. Only strong and sustained international pressure can succeed, as Georgian protests continue to fall upon deaf ears within the Russian government.

Ramco Earns Oil Profits Ahead Of Schedule

· British-based Ramco Energy said its operations off the Azeri shore are making a profit earlier than expected because of this year's surge in oil prices. The company, which is a founding partner of the Azerbaijan International Operating Company (AIOC), said it expects to earn a profit of more than $3 million in 2000 from its 2.08 percent interest in the venture, if oil prices and output remain at current levels. "Ramco is reaching a turning point in its development," said Chief Executive Stephen REMP. According to a company statement, Ramco shares rose as much as 7.7 pence, or 2.3 percent, to 340p in London. The shares have increased more than 40 percent this year, while crude oil prices more than doubled from a 12-year low last December as the world's top producers restrained supply to eliminate a global surplus. Ramco said in September a platform on the Azeri Chirag Gunashli field was producing 110,000 barrels of oil per day. BP Amoco is the largest investor in the AIOC, with Statoil A/S and others also holding a stake.

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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