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

Thursday, February 17, 2000

Russian Federation

Politics

Putin Calls For Monitoring Military

· Russia's acting president Vladimir PUTIN, a one time KGB-spy and former Federal Security Service (FSB) chief, has ordered the FSB to monitor the political allegiance of military personnel, in order to counterbalance the army's growing influence. As the presidential election draws closer, concerns are rising that PUTIN will return the power and veracity of the Russian secret services. PUTIN has earned his front runner position in the presidential election from a harsh and indiscriminate military campaign against Chechen rebels. During the military action, he has promised new reforms to the armed forces, an increase in troops' pay, and funding for modern equipment. PUTIN has tightened his grip around the media to such a strangle hold that many believe the free press, hailed in the early 1990s, has reverted back to its pre-independence level. The exchange of Radio Free Liberty journalist Andrei BABITSKY to Chechen rebels for five Russian officers has sparked international concern among journalists and governments alike. The Union of Journalists have protested the exchange in a letter to PUTIN published in a special edition of Obshchaya Gazeta, stating that it is illegal to hand-over a Russian citizen to rebels. They even point out that leading journalist are being monitored, not only in what they write, but when and where they go around town. It adds the, "threat to freedom of speech in Russia has for the first time in the last several years transformed into its open and regular suppression." The latest decree goes beyond simply monitoring the military barracks. The decree is vaguely worded that it provides extensive powers to intelligence personnel. It also reintroduces FSB supervision of some 200,000 troops under the Interior Ministry and the estimated 100,000 border guards, which since the collapse of the Soviet

Union had established their own internal security services. The Walls Street Journal quoted Sergei YUSHENKOV, deputy head of parliament's security committee and a former army colonel as saying, "The FSB is taking on the role of a political police force within the army...It's another sign that since Putin took over, the secret services are trying to control all structures of power in Russia."

Russia Prepares Defense And Offense

· Russian presidential spokesman on the Chechen military campaign Sergei YASTRZHEMBSKY warned Russians that Chechen rebels are planning to infiltrate areas outside its territory. He said, "According to intercepted radio massages available, it is quite possible that part of the militants might break through to the territory of Dagestan, Ingushetia and Georgia." YASTRZHEMBSKY stressed that Russian forces were taking active measures to prevent such breakthroughs.

Fighting continued around the settlements of Shatoi and Itum-Kale in the Argun gorge. Troops are meeting "serious resistance" from the Chechen rebels in the Vedeno gorge. Most of the 63 combat missions by federal warplanes and helicopters carried out in the past 24 hours targeted those gorges, which cut through the mountains to the Georgian border. Paratroopers have also seized the heights near the Tangi canyon. Russian troops have not moved directly into the mountains to confront an estimated 8,000 rebels. Instead the military is launching con

Today's News Highlights

Russia

Chechen Rep. Visits US

Sistema Reports $180M Profits

European Republics

Ukraine Scraps Tax Breaks

Belarus Raises Rates

Estonia Wants Suncor Deal

South Caucasus & Central Asia

Conoco To Buy Caspian Stake

Azeri To Use Turkmen Crude

Tajik Assassination: Sabotage?

Politics-Economics-Business

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Thursday

February 17, 2000

Intercon's Daily

stant shelling and air attacks ahead of what Kremlin officials have described as a decisive offensive. Several Russian officers claim that the upcoming offensive will finish off the rebels. Military officials are planning to seal off Chechnya's capital Gronzy. It will not permit residents to return, for fear that rebels will sneak into the city disguised as civilians.

Chechen Leader Visits US State Department

· US State Department spokesman James RUBIN confirmed that the Deputy Chairman of the Chechen Parliament, Seilam BESHAYEV, met on Monday with working level officials responsible for Russian human rights and refugee affairs. RUBIN said that the US side stressed that, "all parties in the conflict should cease fighting and intensify the political dialogue to bring about a lasting peace." Russian officials expressed anger several weeks ago when a top official of the breakaway Chechen government met with State Department officials away from department headquarters at a nearby hotel. Moscow believes that such encounters give international standing to a group it regards as essentially terrorist. Today, Russia issued an official protest over the recent meeting. It said that Washington should refrain from receiving "representatives of Chechen terrorists." The Russian Foreign Ministry statement said, "We consider contacts between American officials and the Chechen terrorists and separatists absolutely unacceptable...We cannot but consider the meeting with S. BESHAYEV an unfriendly step."

While Russia issued its protest, the international community is pressing Russia to answer for alleged violations of human rights in Chechnya. The UN high commissioner for human rights, Mary ROBINSON, said on Wednesday that Moscow should safeguard basic human rights, citing allegations that the military had committed indiscriminate bombing, executions and rape against civilians. Moscow has denied abuses during its military operation in Chechnya against terrorists. Conditions in refugee and "filtration" camps and the deporting of refugees back to zones within Chechnya against their will are also considered to have violated international laws. New York-based Human Rights Watch has said it has collected testimonies confirming the deaths of 41 Chechen civilians at the hands of Russian soldiers. Russian authorities said Human Rights Watch had been misled by rebel propaganda.

Economy

Ruble = 28.71/$1.00 (NY rate)

Ruble = 28.80/$1.00 (CB rate)

Ruble = 28.45/1 euro (CB rate)

CB Extends Unexim's Temporary License

· The Russian Central Bank has extended the temporary license of Unexim Bank until July 1 to give the bank time to restructure more than $1 billion of debts. Unexim Bank has missed a Eurobond payment and fallen behind on other debts. The bank has been in talks with creditors for more than a year and needs a license in order to put any agreement into effect. The Central Bank revoked Unexim's license in July 1999 after the bank, once the nation's fourth-biggest bank by assets, failed to pay on a number of its foreign and domestic debts. Unexim said in November it reached a preliminary agreement with the majority of creditors, including foreign and domestic creditors, and holders of its Eurobond and floating rate notes, on a restructuring plan. At that point the Central Bank reinstated Unexim's license. Unexim owes between $700 million and $800 million to foreign creditors. Unexim, once the main bank of Vladimir POTANIN's Interros Group, purchased risking high yielding Treasury bills and were left with worthless ruble assets when the government defaulted on the Treasury debt in August, 1998. Unexim is offering creditors a plan involving Rosbank, a Russian bank formed last year that took over Unexim's business. It includes a cash payment, new dollar bonds structured as Eurobonds and dollar-denominated notes issued on the basis of most of the bank's assets deposited in a separate investment trust that will be owned by creditors, based on their claims. After the restructuring agreement is reached, Unexim will merge with Rosbank.

Business

Menatep St. Petersburg Triples Profit In 1999

· The Moscow Times today reported that Menatep St. Petersburg bank's profits in 1999 more than tripled its results in 1998. The bank's profits totaled 90 million rubles ($3.3 million). Originally set up as a sister bank to Menatep bank, Menatep St. Petersburg denies any direct linked to its failed namesake, from which it acquired a regional branch network and several major accounts after the Russian domestic debt default in 1998. Russian gas monopoly Gaz

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prom owns about 30 percent of Menatep St. Petersburg. The Central Bank withdrew Menatep's license in May, after rejecting the bank's proposed reorganizing plan.

Sistema Reports $180M Profit In 1999

· Sistema, a holding with interests in Russian telephone, banking, media, oil and insurance companies, reported a $180 million net profit for 1999 and assets of $2.8 billion, according to Sistema Vice President Anatoly ADAMISHIN. The holding is seeking partners in telecommunications, electronics, machine-building and consumer goods production, Sistema spokesman Gennady TALALAYEV said. The company is also seeking to expand its foothold in retail gasoline sales in Moscow, where it has about 7 percent market share. Sistema owns a stake in Moscow City Telephone Network, the phone company for the Russian capital known as MGTS.

cause we want to discriminate against investors, but because we want to introduce normal competitive working conditions between joint ventures and those which do not have foreign investment."

Belarus CB Raises Refinancing Rate

· The Belarus Central Bank on Wednesday announced that it will raise its refinancing rate from 150 percent to 175 percent. The raise will become effective on February 21st. The Central Bank had earlier pledged to pursue tight credit and monetary policies this year.

Lith. Gas Sale Guidelines Approved

· Today, the Lithuanian government approved the main guidelines for the sale of the state-owned utility Lithuania Gas. At least a 34 percent stake will be sold to a strategic investor. The state will maintain a 34 to 51 percent holding. The sale plan provides an opportunity for the investor to become responsible for the firm's operations. Reuters reports that the Cabinet kept to its plan to include the gas mainline in the deal, but tightened requirements for the strategic investor "who should meet European and transatlantic integration criteria." The government did not specify whether that requirement would rule out Russian firms from taking a strategic stake in Lithuania Gas. Any investor would be required to integrate Lithuania's gas network to those in Europe and establish alternative supply lines for the country which is currently fully dependent on Russia for all its natural gas. Under the guidelines, Lithuania Gas must shed its liquid gas and equipment subsidiaries.

Estonia Optimistic On Suncor Deal

· Speaking at a news conference on Wednesday, Estonian Economics Minister Mihkel PARNOJA expressed hope that Canada's Suncor Energy will set up an oil shale processing operation in Estonia in the next two to three years. He said that the state has not set aside any funding for the project, which is estimated to cost $200 million. Exploratory talks for the project opened in July, 1999. PARNOJA explained that during a recent visit of Suncor executives the sides discussed ways to ensure the supply of oil shale and questions of taxation, as well as location and environmental concerns. It is estimated that Suncor could process approximately 5 million tons of oil shale in the first three to four years of operation. This figure could rise to 20 million tons. Estonia's main oil-shale producer is state-owned

European Republics

Ukraine Parliament Scraps Special Tax Breaks

· Ukraine's parliament today, in a vote supported by 248 deputies, abolished a controversial law granting tax breaks to certain joint ventures. The vote further strengthened the position of the pro-government majority, which gained control of the parliament last week after a split in January. The government has expressed concern that the special tax breaks were being abused to cheat it of hundreds of millions of dollars of potential revenues. The government accused 10 unnamed large joint ventures this month of abusing a law dating back to the early days of Ukrainian independence. The law effectively meant those companies could subsequently import duty-free goods for which other companies had to pay customs tariffs. Four firms together accounted for 77 percent of the Ukraine's total petrol imports and 52 percent of diesel imports last year. The government said the tax privileges, originally intended to encourage bona fide investors to import modern machinery to update Ukraine's aging factories, had cost the budget three billion gryvnias ($750 million) in potential revenues in 1999, Reuters reported. One member of the legislature's Banking and Finance Committee, Serhiy TEREKHIN, said the parliament's action would help level the playing field for all companies importing fuel and other goods. "We are depriving joint ventures of those privileges not be

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Eesti Polevkivi, 51 percent of which has been included in the privatization deal of the Narva power plants, which is slated to be completed with US based NRG Energy Inc. by April. The Narva plants are powered solely on oil shale. Calagary-based Suncor is Canada's fourth largest integrated oil company and operates that nation's second biggest oil sands development.

South Caucasus & Central Asia

Conoco To Buy Exploration Stake

· Conoco Inc., the fourth-biggest US oil company, said it will buy a 20 percent stake in the Zafar Mashal exploration block in the Caspian Sea for an undisclosed price. Exxon Mobil Corp., the world's largest publicly owned oil company, owns 30 percent of the block and is the operator. Socar, Azerbaijan's state-owned oil company, holds 50 percent. The block is 80 miles off Baku. Houston-based Conoco said the purchase requires approval from the Azerbaijan Parliament. Conoco executive vice president Rob MCKEE, "Conoco has been evaluating opportunities in the Caspian for some time...The Zafar Mashal block offers us very promising acreage, located in the high-potential Volga Delta play in the South Caspian basin¾an area that includes previously proved mega-discoveries. We're hopeful that we'll gain formal approval from the Parliament soon."

Azerbaijan To Use Turkmen Crude For Power

· Azeri Prime Minister Artur RASIZADE announced that the Caspian nation will receive 60,000 tons of Turkmen crude per month to alleviate Azerbaijan's growing energy crisis. He said, "Sometime in February or March we will receive 60,000 tons of Turkmen oil and in April to June we will return it and deliver the same amount of oil to a Black Sea port for export." Azerbaijan has been forced to issue a schedule of nation-wide power cuts, leaving some regions with only 13 hours of electricity a day. RASIZADE was confident that the fuel swap will tide over the nation's fuel needs until Spring. At the beginning of February Azerbaijan, which once produced half the world's oil,

asked other Caspian producers to provide crude or fuel oil on barter or swap terms to generate electricity during the winter. Crude exports were halted at the beginning of January and all the country's oil resources were diverted to refineries to produce fuel oil for power stations. Due to a lack of storage facilities, Azerbaijan exports most of its fuel oil output in the summer and imports up to 230,000 tons in the winter when energy consumption more than doubles. Azeri President Geidar ALIYEV has blamed this Winter's energy crisis on corruption and has sacked two top energy officials. The prosecutor's office is investigating the State Oil Company of Azerbaijan (Socar), which is run by the President's son Ilham ALIYEV.

Tajik Assassination An Act Of Sabotage?

· Tajikistan's former deputy Security Minister and parliamentary candidate Shamsullo DZHABIROV died of wounds sustained when the car he was riding in exploded in the capital Dushanbe on Wednesday. Mayor Makhmadsaid UBAIDULAYEV and his driver escaped from the car unharmed. An investigation is on-going to determine the cause. According to the Interior Ministry, a remote-controlled bomb was installed under the car, while UBAIDULAYEV was in a meeting with election officials. Other reports indicate that the Mayor's car was hit by a grenade. The police believe that UBAIDULAYEV, one of the most influential politicians in Tajikistan and also a parliamentary candidate, was the intended target of the attack. President Emomali RAKHMONOV had demanded at an emergency meeting late on Wednesday that extra measures be taken to guard against terrorism ahead of the February 27th election. Presidential spokesman Zafar SAIDOV said, "The leadership of Tajikistan considers the explosion...as a terrorist act with a clear political motive aimed at sabotaging the parliament election." The creation of a new bicameral legislature is officially the final phase of the 1997 peace accord which ended the Tajik civil war.

The Daily Report on Russia and FSU

will not be published on February 21st

in observance of Presidents' Day

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

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