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

Thursday, December 9, 1999

for-tat spy war. This time Russia is blaming the US for the same reason. Boris LABUSOV, spokesman for the SVR Foreign Intelligence Service, said, "We think this detention and the further expulsions of the Russian diplomat from the United States can be regarded as a reaction of the American side to the latest events in Moscow connected with the detention and expulsion of an American. If it is a reaction...we can only be sorry about it...As far as the Russian side is concerned, we gave up the principle of an eye for an eye long ago." The US State Department has stressed that this is not a tit-for-tat arrest, but is based on facts of a comprehensive investigation. LABUSOV added, "I hope all these incidents will not hamper progress in bilateral relations." More accurately put, the publicity associated with this case is a result of Russia's decision to publicly expose the expulsion of an American diplomat and its unusual decision to show the video taped arrest and interrogation of the American diplomat Saturday on Russian television. Two Russian diplomats had been quietly asked to leave the US earlier this year for spying; one from the UN and the other from Washington, DC.

Western Criticism Of Chechen Offensive Grows

· European leaders stepped up their criticism of Russia's military offensive against Chechen rebels. German Foreign Minister Joschka FISCHER today said, "The ultimatum against an entire population of a country...a threat to eliminate them, that is unacceptable and barbaric" The Russian Army dropped leaflets over Grozny on Monday telling residents to leave

Russian Federation

Politics

US Expels Russian Diplomat For Bugging

· The US Federal Bureau of Investigation's (FBI) counter intelligence unit on Wednesday night apprehended and detained Stanislav GUSEV, the Russian Embassy's second secretary, about one or two blocks from the US State Department when he was found to be monitoring a listening device in a high level State Department conference room. The officers said that they caught the spy "red handed." The Russian Embassy was immediately notified and GUSEV was released later that night. The State Department spokesman Jim FOLEY said GUSEV has been declared "persona non grata" and given 10 days to leave the US. FBI investigators do not know who actually planted the device in such a sensitive area or when. US Agencies are working to determine what and how much information may have been compromised. FBI officers are suggesting GUSEV did not act alone. The FBI said the Russian diplomat's arrest came after a long investigation. Officer Neil GALLEGHER said the Bureau had documented GUSEV's activities around the State Department and concluded it could be a technical activity.

The arrest of the diplomat is similar to a case last week in Russia. Russia gave US diplomat Cheri LEBERKNIGHT 10 days to leave after Russian counter intelligence caught her "red handed" with invisible ink and a pocket-size electronic spy device to prevent eavesdropping. Federal Security Service officers allege that she was on her way, "to obtain documents of military strategic nature that constituted a state secret," from a Russian citizen. Her arrest can just one day after the US apprehended US naval officer Daniel KING for passing on classified information to Moscow in 1994. The US then accused Russia of arresting LEBERKNIGHT in a tit-

Today's News Highlights

Russia

Rus-China Hail Relations

Bond Issue Closes

Tyumen Waits For Ex-Im Loan

European Republics

Lith. Bank Gets $15M Loan

Gas Retailers Cheat Estonians

South Caucasus & Central Asia

Totsky-Chkheidze Meet

Azeri-Kazakh Ferry Suspended

Kazakh Economy Posts Growth

Politics-Economics-Business

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Thursday

December 9, 1999

Intercon's Daily

the city by Saturday or die. Russian Commanders have denied that they have issued an ultimatum, instead calling the threat a warning. FISCHER said, "We should impose all our possibilities on Russia so that the ultimatum is drawn back. In my opinion, Russia is making a frightening error in Chechnya. At the European Union (EU) summit on Friday leaders will discuss the Chechen war and its affects on the region. FISCHER added, "We'll have the Helsinki summit and after that the NATO summit as two good opportunities to discuss all possibilities to continue together with Russia to convince them that they must stop the war immediately." He warned that the war could lead Russia, "into the quagmire of a colonial war." Germany is Russia's biggest foreign creditor and therefore has a vested interest on how the war affects international lending to Russia and its 2000 budget. FISCHER said, "We have two interests here. We also have an interest in the development of Russian democracy. Russia is Europe's neighbor and there can't be European security without Russia." Finnish Prime Minister Paavo LIPPONEN said the EU may decide to use financial as well as political pressure to seek an end to Russia's military campaign. He was not willing to speculate what kind of measures the summit would consider, but like other western leaders he ruled out any form of military involvement.

US President Bill CLINTON said Russia's military offensive in Chechnya risked alienating the global community and investors from Russia. Russian President Boris YELTSIN reacted strongly to CLINTON's comments on Chechnya. While in China, YELTSIN said, "It seems Mr. CLINTON has forgotten Russia is a great power that possesses a full nuclear arsenal. We aren't afraid at all of CLINTON's anti-Russian position. President CLINTON alone cannot dictate how the world should live, work, and play. It is us who should dictate," referring to Russia and China, the United Press International reported. While these remarks might be taken with a grain of salt in the US, they remain an ominous warning to the states of the former Soviet Union that Russia is willing to use force to protect its perceived interests whether they are appropriate or not.

Russia-China Hail Relations

· Russian President Boris YELTSIN, ignoring doctor's recommendations that he remain in the

hospital, arrived in China for what has been called a "historic" visit. Chairman of the People's Republic of China JIANG Zemin greeted the ailing Russian leader with a bear hug, saying "How are you my old friend?" Chinese Foreign Minister spokesman ZHANG Qiyue said China backs Russia's military campaign in Chechnya, which she described the operation in the North Caucasus as an effort to maintain national unity and territorial integrity. She added, "China understands and supports Russia's efforts in protecting its national unity and territorial integrity. We have noted that in the process of taking action in Chechnya, Russia has avoided inflicting casualties as much as possible." JIANG and YELTSIN exchanged views on ways to strengthen their bilateral friendly relations and some international and regional problems of mutual concern. They highly assessed the successful development of their relations and made plans for continuing their strategic partnership into the 21st century. On the agenda of his talks with JIANG later in the visit will be anti-ballistic missile defenses, the Comprehensive Nuclear Test Ban Treaty, and international terrorism, stressing the growing number of common security concerns. China is concerned that an anti-missile defense system based in Taiwan could lead the island to formally declare independence. YELTSIN will also meet Premier ZHU Rongji, and Chairman of the standing Committee of the National People's Congress LI Peng. Today, Foreign Minister Igor IVANOV and Chinese counterpart TANG Jiaxuan signed three inter-governmental documents on the eastern and western borders between Russia and China as well as islets and surrounding water in border rivers for economic purposes.

The Russian President's decision to go to China coincided with the postponement of a meeting in Paris with French President Jacques CHIRAC and German Chancellor Gerhard SCHROEDER planned for December 21st. A Kremlin sources said, "The mood in the Kremlin is that, amid difficult relations with the West over Chechnya, Russia must strengthen its position in the East. We should remember that we are in pre-election mode, and people want to see some good news on the foreign policy front." Moscow and Beijing say their partnership is not an anti-US alliance. Russia's Ambassador to China Igor ROGACHEV described their relations as, "trusting, equal, strategic partnership."

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YELTSIN's departure from Beijing for Moscow is scheduled for December 10th. According to Ekho Moskvy, during the lengthy flights to and from China, YELTSIN will be administered medication that induces a "therapeutic sleep."

Economy

Ruble = 26.87/$1.00 (NY rate)

Ruble = 26.83/$1.00 (CB rate)

Ruble = 27.44/1 euro (CB rate)

Bond Issue Concludes; Another Planned

· The Russian Central Bank is concluding its auction of 6 billion rubles worth of zero-coupon bills on December 14th. The three-month, four-month, and five-month bills, or OBRs, will mature on March 1, 2000, March 29, 2000, and April 26, 2000. The bills were designed to help absorb excess rubles in the monetary system. It is the first issue by the Central Bank since the parliament gave it the right to issue bonds in July. It is also the first new sovereign ruble fixed-income issue since the government started the policy of giving new bonds to holders of GKOs (Treasury Bills) it defaulted on in 1998.

The Finance Ministry is planning its own bond issue worth 10 billion rubles ($373 million) to cover the deficit. The bonds will be short term domestic bonds with maturity of less than a year. Revenues are also needed ahead of the presidential elections in 2000 and to make a $350 million interest payment on international bonds. Foreign investors will be allowed to repatriate their funds frozen after the Treasury Bill restructuring. According to Alexei ZABOTKIN of United Financial Group, the so-called "S" account holds between $600 million and $700 million in foreign investors funds. He predicts that the bond issue will have a maturity of about 6 months and a yield of 20 percent. He said, "This would allow investors to get about 92 percent of their money back at redemption."

Duma Passes Platnium Bill In Third Reading

· The Russian State Duma has passed the third and final reading of a platinum export bill by a vote of 306 to zero with no abstentions. The bill amends a law from December, 1998, which effectively stopped exports since its poor wording failed to identify an authorized agent to carry out exports. The bill must

still be approved by the Federation Council and Russian President Boris YELTSIN. The President will also have to set quotas before exports can begin and instruct the Trade Ministry to issue licenses. All exports are expected to be carried out by Almazjuvelirexport. Russia accounted for 20 percent of the world platinum supply in 1998. The absence of Russian metal from the market sent platnium prices to $457 per troy ounce in November, the highest since August 1997.

Business

Tyumen Told To Wait Longer For Loan

· Tyumen Oil Company, one of Russia's biggest oil producers, has been told that the US Export-Import will make its decision on loan guarantees by year's end. Tyumen is seeking loan guarantees of about $160 million for the revitalization of the huge Samotlor oil field and $500 million for modernizing the company's Ryazan refinery in central Russia. The oil company has been waiting for the loan approvals for approximately a year. The Export-Import Bank has put off the decision due to Tyumen's expansion plans which have harmed the interests of BP Amoco and may have violated shareholders' rights. Russia's military campaign against Chechen rebels have also called into question US lending to Russian companies.

European Republics

Zemes Ukio Bankas Sings $15M Loan

· Lithuania's state-owned Zemes Ukio Bankas has signed a $15 million loan agreement with a group of banks, as the government prepares the bank for sale. The government currently owns 87.6 percent of Zemes Ukio Bankas. The European Bank for Reconstruction and Development (EBRD) and Reifaisen Zentralbank Osterreich AG organized the loan. The EBRD is providing a 5-year $5 million loan, while the other banks re providing a 2-year $10 million loan, with the possibility of extending the agreement by one year. EBRD director of financial institutions Roger LE BARON said, "Access to the global capital markets is a very important step for the bank. The next step is the bank's privatization, expected in the next six months," Bloomberg News reported.

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Gas Retailers Cheating Estonians

· The Estonian Consumer Protection Department on Tuesday charged four major gasoline retailers¾Royal/ Dutch Shell, Neste, Statoil, and Russia's LUKoil¾with deceptive labeling, Postimees and Eesti Paevaleht reported. According to Helle ARUNIIT, the head of the department, the companies were selling standard high-quality "95" gasoline as "95E," which contains a significantly lower sulfur (as well as lead and benzene) content. Epp KIVIAED, head of Statoil in Estonia, said that Statoil follows European Union standards on fuel, adding that the European Union standard "95E" allows for 10 times more sulfur than in Estonia and that European Union fuel regulations in this respect will reach Estonian standards only in 2005. The retailers could be fined up to 10,000 kroons ($660) each for the mislabeling, RFE\RL Newsline reported.

BSEC Session Opens In Kiev

· A plenary session of the Black Sea Economic Cooperation Parliamentary Assembly opened in Kiev on Tuesday. Discussion of economic cooperation between BSEC and the European Council, development of trade and attraction of investments to the Black Sea region are on the agenda of the session. Approval budget of the Assembly for 2000 and appointment of budgetary-auditing commission for the next year are also planned.

South Caucasus & Central Asia

Chkheidze-Totsky Meet Over Border Guards

· Commander of the Georgian State Border Guard Department Valery CHKHEIDZE and Russian counterpart Konstantin TOTSKY met on Wednesday to discuss the Chechen portion of Georgian-Russian border. According to TOTSKY, Russian border guards are, "ready to patrol the Chechen portion of the state border." He stressed that the 81.4 kilometer Chechen portion of the state border is only patrolled by Georgian border guards currently. According to him, the presence of Russian border guards at the

given portion of the state border depends, "on the success of the anti-terrorist operation underway in Chechnya." Georgia repeatedly over the past month has turned down Russia's offers for a joint patrol of the Chechen section of the border.

Azeri-Kazakh Ferry Operations Suspended

· The ferry operations on the route between Baku-Aktau has been suspended, according to Prime News Agency and the Caspian Shipping Company. The Embassy of Kazakhstan in Azerbaijan also confirmed the information. The embassy explained that, "it is necessary to bring the technical condition of Aktau port in coincidence with demands of customs and border guard services." Russia's Defense ministry and Federal Security Service has speculated that the ferry route is being used for the transportation of Chechen gunmen through Azerbaijan and Kazakhstan. The Azeri Border Guard Service explicitly denied this as a possibility. The media has speculated that the ferry's operations were shut down to avoid further suspicion by Russia.

Kazakhstan Plans To Join WTO

· Kazakhstan Economics Minister Zhaksybek KULEKEYEV on Tuesday said that Kazakhstan plans to join the World Trade Organization (WTO) within the next two years. He noted that Kazakhstan announced its application for the WTO membership in February 1996. He said an accession date, "will depend not only on Kazakhstan, but also on WTO member states with which Kazakhstan will have to hold bilateral talks and sign appropriate agreements." KULEKEYEV pointed out that Kazakhstan has already submitted its proposals on shaping customs tariffs to the WTO, which demands low tariffs on goods and services from its members. Kazakhstan today exports mostly raw and other materials. After joining the WTO, it will have access to world markets of textiles, fabrics, food stuffs, and other items. KULEKEYEV stressed that the trading ties with the Commonwealth of Independent States Customs Union countries, which includes Kazakhstan, Russia, Belarus, Kyrgyzstan, and Tajikistan.

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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