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

Wednesday, December 8, 1999

Russian Federation

Politics

Leaflets In Grozny Aimed At Rebels

· Russian Prime Minister Vladimir PUTIN defended the dropping of leaflets on Grozny, which issued what he calls a warning to those remaining in Gronzy to leave by Saturday or risk being destroyed by bombs and heavy artillery. He said, "I have not heard of any ultimatums made to the Chechen population of Grozny. I have heard of a statement of our military concerning the future of civilians remaining there." PUTIN said, "The statement aims to avert civilian casualties and to lessen the federal losses as much as possible." General Viktor KAZANTSEV said the leaflets were aimed at the rebels. "This is a warning to the bandits¾a week's grace has been given to them," he said. The leaflet explained that citizens would be guaranteed protection if they left before Friday through a safe corridor. Interior Minister Vladimir RUSHAILO today visited Pervomaiskaya village, northwest of Grozny where the safe corridor will lead. He said that a corridor was being established and would be open on Saturday. The route will remain open as long as needed, without any deadlines, RUSHAILO said. Many civilians have been to afraid to leave their homes, fearing not only the Russian bombing, but also the militants still in the city. Refugees have pleaded with authorities to postpone the massive air raids since leaflets were blown away in strong winds and most of the remaining residents are hiding in basements and underground bunkers too afraid to come out. Meanwhile, Russian troops moved closer in on Grozny as they entered the key town of Urus-Martan. Rebel spokesman Movladi UDUGOV said, "Chechen forces pulled out of Urus-Martan early this morning in line with an order from the military high command as part of the plan to regroup for further battle with the Russian aggressors."

US Defense Secretary William COHEN condemned the Russian campaign. He said, "This activity is not acceptable" and accused Russia of killing innocent civilian, "on a rather substantial scale." He stressed that, "The situation in Chechnya must be resolved diplomatically and not through military means." COHEN declined to say whether Moscow's actions had violated Geneva conventions regarding protection of civilians during wartime, or whether its three-month military offensive amounted to an attempt at ethnic cleansing. Later, Pentagon spokesman Kenneth BACON said, "We believe that what began as a legitimate and understandable campaign against terrorism has turned into a campaign that involves a lot of civilian casualties, and this is not acceptable." Canadian Foreign Minister Lloyd AXWORTHY said Russia was, "crossing the line into potential crimes against humanity." Comment: With Russian aircraft and artillery still bombing Grozny, it is inconceivable that all those remaining in Grozny would be notified of the ultimatum and choose to abandon their homes. The supposed safe corridor may not be enough to convince them to attempt the treacherous journey. This is particularly true, following reports that columns of refugee cars had been fired on. The chief of the Russian army in western Chechnya Vladimir SHAMANOV even pointed out that the military was firing on cars that try to pass Russian lines at high speeds, assuming they are carrying militants. Furthermore, the plan to spread information to residents who are shielding themselves from constant air raids and bombardments

Today's News Highlights

Russia

Oil Export Tariffs Rise

IMF Outlines Requirements

European Republics

Butinge Terminal Spills Oil

Belarus Ruble Falls Sharply

Ukraine Earns $140M

South Caucasus & Central Asia

Georgia Gets Tough On Crime

Rodhams Return To Adjaria

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giving them a deadline before annihilation is absolutely an immoral and inappropriate military action.

Economy

Ruble = 26.91/$1.00 (CB rate)

Ruble = 27.67/1 euro (CB rate)

Oil Export Tariff Raised

· On Monday, Russian Prime Minister Vladimir PUTIN signed a resolution raising the crude export tariff from 7.5 euros to 15 euros per metric ton of crude oil. First Deputy Prime Minister Viktor KRISTENKO said the resolution will become effective on its publication in the official gazette and the government could revise the tariff in the first quarter of 2000. Analysts predict that the tariff hike will cause no great hardship to oil companies since world prices are high enough to keep exports attractive. Dmitry AVDEYEV of United Financial Group said, "Exports remain extremely profitable, as revenues are incomparably higher than from domestic sales." Valery NESTEROV of UCB Flemings said that the increase in the tariff will result in a fall in net profits next year estimated at around 6 percent for companies like LUKoil and Surgutneftegaz and up to 20 percent for companies like Tatneft. He explains that, "The difference is in their export structure. LUKoil and Surgut export more oil products, while Tatneft exports practically none." AVDEYEV added that the hike was expected. He said, "It's natural, as the government treats any rise in oil prices as a kind of windfall which it must get its hands on somehow or another." As a result, the government is expected to earn an extra 1.8 billion rubles per month beginning next year, according to Vremya. Unidentified sources in the White House told the newspaper that the government needs more resources to spend on defense and elections.

IMF Details Requirements For Russia

· The International Monetary Fund (IMF) outlined detailed requirements Russia must meet to win a new installment of the $4.5 billion loan. IMF Managing Director Michel CAMDESSUS said Russia had exceeded IMF expectations on economic growth, inflation, tax revenues, and Central Bank reserves. But Russia has not fulfilled some structural reform promises made in a July letter to the Fund. CAMDESSUS said, "A number of structural bench

marks set for end-September 1999 remain to be met. When these remaining issues have been satisfactorily resolved, I expect to recommend completion of the review to the Executive Board." The Fund said Russia must increase the cash collection rate for electricity, district heating, and natural gas to 35 percent, and for railway freight to 60 percent. It has to amend the insolvency law to eliminate a bias against the liquidation of enterprises, and to make other changes to the bankruptcy provisions. It should award contracts for financial management reviews that would lead to annual audits to international standards of the government's pension, social insurance fund, medical insurance and road funds. Russia also must eliminate the deposit requirement for prepayment of imports and submit to the Russian State Duma amendments to the bank bankruptcy law, the Financial Times reported.

Fund officials admit it will take a number of weeks for the remaining requirements to be met. Russia also believes that it will take some time. Deputy Finance Minister Alexander KUDRIN said, "It is evident that this year will not manage to receive the next tranche from the IMF. We have worked out a proposal for attracting extra revenues [to fill the budget gap], which was submitted to the government." Russia is expected to announce details on a domestic bond issue, the first since it defaulted on GKOs in August 1999, on Thursday.

The US White House said that Washington was unlikely to cut off aid to Russia. White House spokesman Joe LOCKHART said, "IMF loans are blocked right now, which we support based on other considerations. We are ultimately going to make our decisions based on what our national security interest is. If you look at the aid that we provide to Russia, the vast majority of it is to make our lives safer." Germany, Russia's largest foreign creditor, meanwhile, regards any release of IMF installments to Moscow as unlikely during the Chechen campaign. A German source said the situation in Chechnya is directly linked to aid for Russia. "It is hard to see how any cash can flow to Russia in the current situation," Reuters reported.

Business

Magnitogorsk Steel To Produce Gazprom Pipes

· Chelyabinsk Governor Peter SUMIN said that

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the Magnitogorsk Steel Works is to become the main supplier of large-diameter pipes for Russian gas monopoly Gazprom. He said, "The organization of production of pipes with a diameter of 1,420 millimeters for gas and oil pipelines is extremely important for Russia, because no less that $1 billion is spent every year on the import of such pipes." He pointed out that the cost of producing the 5000 rolling mill and a production shop for the electric welding of pipes, does not exceed this sum. Over the next two years, the Magnitogorsk Steel Works will invest $2 billion in retooling the plant. In response to a question on whether or not the implementation of the project by the Magnitogorsk Steel Works will economically harm the position the Chelyabinsk Pipe-Rolling Works, which is one of the leading enterprises in the industry, SUMIN said, "There is a lot of work to do for the Chelyabinsk Works. Russia needs not only large-diameter pipes, but also other kinds of pipes. Short two-seam pipes, produced by the Chelyabinsk Works, are not in demand any longer. At least, they are not used at trunk pipelines."

Belarus Lifts Lombard Rates By 40 Percent

· Belarus' Central Bank on Tuesday announced it was raising its Lombard rate from 110 percent to 150 percent for 14-day loans and from 120 percent to 160 percent for loans for up to 30-days. The tighter credit policy becomes effective today, as the country tries to strengthen the Belarus ruble. The ruble has fallen sharply from its rate of 100,000 rubles per dollar in January to 314,000 rubles per dollar. The black market exchange rate is 720,000 rubles per dollar.

Kuchma To Meet Clinton, Gore

· Ukrainian President Leonid KUCHMA arrived in Washington on Tuesday as a part of his post inaugural tour. Today, he will meet with US President Bill CLINTON and attend the third meting of the Ukrainian-American intergovernmental cooperation commission he co-chairs with Vice President Albert GORE. During his visit, KUCHMA will meet with Treasury Secretary Lawrence SUMMERS, Energy Secretary Bill RICHARDSON, World Bank president James WOLFENSOHN and International Monetary Fund Managing Director Michel CAMDESSUS. He is also expected to meet with US congressmen and businessmen. In an interview with Le Monde, KUCHMA stressed that Ukraine does not intent to join the Rus-Belarus Union.

Ukraine Earns $140M From Privatization Sales

· The Ukrainian State Property Fund stated that the country has received a total of 675.63 million gryvnias ($139.88 million) from cash sell-offs so far this year. Head of the Property Fund Alexander BONDAR said the state budget revenues totaled 580.7 million gryvnias in the same period and the fund will channel another 74 million gryvnias to the state coffers by the end of December. Ukraine had targeted privatization revenues at 800 million gryvnias this year compared to 360 million gryvnias raised last year. BONDAR said sale of energy companies accounted foremost of 128.71 million gryvnias raised in the fourth quarter. Ukraine's government plans to boost privatization revenues to about 2.5 billion gryvnias next year to help pay foreign debt obligations of more than $3 billion. He said the government expected privatization of national telecoms monopoly Ukrtelekom and sell-offs in the energy sector to help meet the higher target. BONDAR, however, suspended the privatization of energy suppliers, which had been decreed by the president in the summer. The fund said

European Republics

Oil Spills At Butinge Oil Terminal

· The first major environmental accident at the Butinge offshore oil terminal occurred Monday night, when 4 tons of crude oil spilled into the Baltic Sea. The Butinge terminal is located in the open sea, near the Latvian border. Lithuania opened the oil terminal in July, against the protest of Latvian environmentalists. The protesters claimed that the terminal could be hazardous due to erratic weather patters that threaten Latvia's coast more than Lithuania's. Latvia's chief environmental official Felikss KLAGISS said he would ask Lithuania to provide an explanation for the accident. He said the terminal should not have been loading ships in such bad weather. An official from Mazheikiu Oil, which owns Butinge, said that the wind speed at the time was under the maximum threshold for operations, but Lithuania's Civil Defense Department officials said the wind gusts were beyond the allowed limits. High waves in the Baltic Sea are hampering efforts to clean up the spill. In addition, a Maltese-registered tanker carrying 45,753 tons of oil ran aground at the mouth of the Bosporus Strait. The tanker, sailing from Russia to Italy did not immediately request any help.

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privatization has been halted in connection with "difficulties in energy supplies in the winter period [as well as] the need to ensure efficient state control over the operation of energy companies and the process of the branch's restructuring." The privatization of energy companies has raised revenues totaling 90 million gryvnias ($18.5 million). The state has controlling interest in 20 of Ukraine's 27 regional energy suppliers, RFE\RL Newsline reported.

South Caucasus & Central Asia

Shevardnadze Speaks Out Against Corruption

· Georgian President Eduard SHEVARDNADZE in his Monday national radio address said that corruption and graft remains the principal cause of the extremely devastating budgetary crisis. He said, "Neither Georgia as an independent state nor the Georgians as a civilized nation will have any future if we fail to overcome this formidable disease." He added, "The situation is really alarming, but it does not mean at all that we are going to throw down our swards and surrender to the respectably-looking Mafioso and criminal gangs that are trying to impose their way of life on Georgia. Not only shall we not surrender and not only shall we cease to be tolerant, but, I am saying this confidently, we will overrun all the Mafioso, bribe-takers, smugglers, robbers of the budget, tax-evaders, and the like, using the power vested on us by the constitution, and relying on the law and support..." The Georgian President declared that corruption will be his principal election issue in addition to "creation of dignified living conditions for citizens of Georgia, the development of the economy, the establishment of firm social guarantees." He described that the new approach to fighting crime will be to implement radical measures. SHEVARDNADZE noted that a system of anti-corruption measures have already been drafted with his participation and the establishment of an anti-corruption body will shortly be submitted to parliament. This new body will concentrate on the most important cases which influence the country's development and involves "those bigwigs whom the law-enforce

ment bodies find too difficult to deal with." He said, "No regional or town administrators, no official will be able to retain his office if he fails to combat contraband, corruption, the production of forfeited good, and the grey economy as a whole." Along these lines, SHEVARDNADZE said he will soon offer parliament a motion on abolishing parliamentary immunity. "Local councils, as well as parliament cannot remain a safe haven for corrupt people."

Rodhams Return To Failed Business Deal

· The brothers of US first lady Hillary CLINTON, Tony and Hue RODHAM, returned to Georgia on Saturday to spend one week in Adjaria, in hopes of reviving a failed deal to create a joint venture to sell hazelnuts. Their visit is sure to cause more controversy than their previous visit. The RODHAM brothers first visited the autonomous republic of Adjaria last September, causing a ripple in US-Georgian relations. The brothers briefly paid a visit to Georgian President Eduard SHEVARDNADZE, but spent a majority of time with political opponent Adjarian chairman Aslan ABASHIDZE. During that visit, ABASHIDZE and the RODHAMs made several public appearances. The Adjarian chairman hailed their visit as an endorsement of support from their brother-in-law US President Bill CLINTON. Soon-there-after, US National Security Chairman Sandy BERGER urged the brothers to drop their business relationship with ABASHIDZE and cancel the deal because it would complicate the international relations and harm the first lady's chances of being elected senator for New York. During SHEVARDNADZE's visit to the US in September, CLINTON clarified the US strong support behind the legitimate Caucasus leader. ABASHIDZE told reporters in Batumi, "This visit of RODHAMs to Batumi shows that the scandal caused by the hazelnuts business of RODHAMs was baseless." The RODHAM brothers, co-founders of Argo-Holding Company are scheduled to visit hazelnut plantations in the autonomy republic, Prime News Agency. It was reported that Argo-Holding would be reformed into the kind of a company which would not do any harm to the family of the US President.

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

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