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, February 4, 2000

Russian Federation

Politics

Babitsky Handed Over To Chechens

· Sergei YASTRZHEMBSKY, the Kremlin's spokesman on Chechnya, said that Russian military commanders had handed over RFE\RL journalist Andrei BABITSKY to a Chechen field commander in exchange for three Russian soldiers held by the Chechens at a crossroads between Shali and Argun, outside of Grozny. He said that BABITSKY had signed a letter of consent to the exchange. YASTRZHEMBSKY said the move had been proposed by Chechen field commander Turpal-Ali ATGERIEV. Russian military commanders on Wednesday, however, reported that ATGERIEV had been killed the previous day. Chechen Foreign Minister Ilyas AKHMADOV said the Chechen leadership has no knowledge of any prisoner exchange involving BABITSKY. Russian television stations today aired footage, filmed by Russia's Federal Security Service (FSB), showing an unshaven BABITSKY being escorted along a road and then given to an unarmed man wearing a camouflage jacket and a mask. The validity of the FSB film, especially when it was filmed and to whom BABITSKY was actually released to has led many to speculate that BABITSKY is already dead.

The exchange shocked Russian media normally supportive of the government in the war. The daily Nezavisimaya Gazeta called it, "a blow to Russia's international prestige," while Sevodnya called BABITSKY, "the Kremlin's Caucasus prisoner," saying that the Russian authorities had sentenced the reporter without a trial and had silenced the press. Sevodnya added, "The authorities say that after the exchange they cannot answer for the journalist's fate. That sounds like a sentence." US State Department spokesman James FOLEY called the exchange

of BABITSKY for soldiers "simply an unacceptable action" which "would raise very serious questions about Russia's adherence to its international commitments regarding the treatment of non-combatants." Under international law, civilians such as journalists should not be treated as prisoners of war.

The RFE\RL president expressed disbelief at the hand over, exclaiming that BABITSKY had been held without a lawyer and was unable to make telephone calls. BABITSKY has not made direct contact either with RFE/RL or with his family in Moscow, and his present whereabouts are unknown. The journalist was arrested and accused of collaborating with the Chechen fighters. This case recalls the tragic death of well known international humanitarian relief worker Fred CUNY, who disappeared under mysterious circumstances in Chechnya. The supposed involvement of FSB in spreading rumors concerning CUNY and his associations was reportedly responsible for his death. The exact details of his murder continue to be a subject of controversy.

Primakov Withdraws From Presidential Race

· Russia's former prime minister Yevgeny PRIMAKOV has withdrawn from the early presidential elections scheduled for March 26th. PRIMAKOV, leader of Fatherland-All Russia coalition, said earlier he would make up his mind on whether to run for the presidency based on how well the party did in December parliamentary elections. "At the time of the election and when the State Duma started work, I felt how far our society had

Today's News Highlights

Russia

Skuratov Against Corruption

Capital Flight: $1B Per Month

Court Reverses GM Ruling

European Republics

Parliament Falls To Fisticuffs

Belarus To Meet IMF Demands

South Caucasus & Central Asia

Rus.Violates Georgian Airspace

US Pleased With Pipelines

Japan Funds Kazakh Refinery

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Friday

February 4, 2000

Intercon's Daily

moved from a civil image and from true democracy," PRIMAKOV told RTR television, referring to the Kremlin-controlled media smear campaign against him. "I do not think the situation can radically change in a few months," he added. PRIMAKOV said the decision to withdraw had been difficult. Analysts predicted he would drop out since at one point he was running for the speakership of the Duma. His party boycotted the Duma, after Unity and the Communist Party made a backroom deal to re-elect Gennady SELEZNYOV as speaker and share the committee's chairmanships.

PRIMAKOV had been seen as a potential key challenger to Acting President Vladimir PUTIN, whose rating is well ahead of other confirmed candidates, including second-placed Communist leader Gennady ZYUGANOV. A recent poll conducted by VTsIOM, showed PUTIN leading with 48 percent, ZYUGANOV with 13 percent, PRIMAKOV with six percent, Grigory YAVLINSKY of Yabloko with four percent. PRIMAKOV's popularity was raised during his eight months as prime minister from September 1998 to May 1999, when he was judged to have helped stabilize the country. But his ratings slipped in the wake of PUTIN's progress. PRIMAKOV's running mate in Fatherland-All Russia, ambitious Moscow Mayor Yuri LUZHKOV, has also said he will not stand for president despite once being viewed as a prime candidate. The removal of both men has prevented the formation of a well-defined bloc to run against PUTIN. The main opposition to PUTIN must now come from ZYUGANOV and YAVLINSKY. Others have speculated that PUTIN is in posession of enough "compromat" on both PRIMAKOV and LUZHKOV that has effectively neutralized the ever-cautious PRIMAKOV.

Skuratov Campaigns Against Corruption

· Russia's suspended Prosecutor General Yuri SKURATOV has accused acting President Vladimir PUTIN of not combating corruption as he had promised. SKURATOV said that PUTIN has not said he will continue to support the investigation of the Mabetex bribery scandal or other cases which involve high ranking Kremlin officials. SKURATOV said there is ample evidence against chief of staff Alexander VOLOSHIN as well as business tycoon Roman ABRAMOVICH and Alexander MAMUT, who have close ties to the Kremlin. He added, "The entire

Kremlin inner circle has problems with the law. I don't say they are criminals, but all this evidence must be thoroughly investigated." He also criticized PUTIN for granting former president Boris YELTSIN and his family immunity from prosecution after leaving office, which he calls a violation of the Constitution. PUTIN has been silent on the Swiss warrant for the arrest of his former boss Pavel BORODIN, issued last week. The arrest warrant, for charges of money laundering and taking bribes from Mabetex, is seen to be the first test of PUTIN's stance on corruption. BORODIN has not received the Swiss summons. He said he will cooperate with the Swiss authorities, but still claims he is innocent. SKURATOV said, "As in the past, there is still no political will at the top to fight corruption."

SKURATOV himself was suspended from his duties and this week formally charged with abuse of power. Prosecutors opened an investigation against SKURATOV into charges that he illegally accepted 14 business suits as a gift. He purports to have only ordered six, which he paid for, and returned the rest. Investigators claimed that the suits were purchased for SKURATOV by Mabetex, the Swiss construction firm he was investigating. SKURATOV claims that he has been framed by BORODIN.

The new case launched against SKURATOV is not likely to slow down his campaign for president. Chairman of the Central Election Commission Alexander VESHNYAKOV said from legal point of view the investigation will not affect his candidacy. He explained that under the Constitution only people who are in prison, convicted by a court of law, are unable to run for president. SKURATOV expressed confidence that the required number of signatures to run will be collected without much difficulty. SKURATOV, as a long shot candidate, plans to use his campaign to call for the continuation of the Mabetex investigation and other high ranking Kremlin officials.

Economy

CB To Sell Foreign Units

· Russian Central Bank Chairman Viktor GERASHCHENKO on Thursday said the Central Bank will sell its foreign units, in line with an International Monetary Fund request. This will require changes to the Russian law. The relevant amend

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ments to the law on the Central Bank of Russia will be reviewed by the Russian State Duma, on Monday. The Central Bank doesn't have the right to sell its stakes in foreign subsidiaries, according to current law. The Central Bank owns 89 percent of Moscow Narodny Bank in London, 78 percent of BCEN Eurobank in Paris, 82 percent of Ost-West Handelsbank in Frankfurt, Donau Bank in Vienna, and 49 percent of East-West United Bank in Luxembourg.

Ruble = 28.07/$1.00 (NY rate)

Ruble = 28.76/$1.00 (CB rate)

Ruble = 28.26/1 euro (CB rate)

Aug Sep Oct Nov Dec Jan Feb

Capital Flight Averages $1 Billion Per Month

· Russian deputy Central Bank Chairman Victor MELNIKOV in London today said that capital flight from Russia was currently running at $1 billion a month. "Capital flight is about $1 billion per month but compared to 1998, we have achieved some results," he said. Capital leaving Russia has fallen, MELNIKOV said, from $25 billion for 1998 to an annual $15 billion in 1999. MELNIKOV expects a proposal for a law forcing companies to exchange all foreign currency earnings into rubles to be reconsidered. The proposal was turned down in January by Acting President Vladimir PUTIN. "There was information that this measure would be postponed. But I believe that it does not mean it will not be discussed any more."

1999 Gold Output Reaches 125.87 Tons

· Chairman of the Gold Industrialists' Union Valery BRAIKO announced January 28th that Russia's gold output in 1999 rose from 114.03 tons to 125.87 tons.

"These are the estimates of the union's experts and I have every reason to believe that they are correct," he said. Accurate gold production data has been unobtainable since 1998, after the official State Statistics Agency stopped publishing its figures. BRAIKO said that gold miners produced 113.9 tons of gold in 1999, up from 105.2 tons in 1998. Output of gold as a byproduct of other metals production and obtained from scrap rose from 8.8 tons in 1998 to around 12 tons in 1999. The union has not predicted a rise in gold output for 2000. "It is yet very early to make accurate forecasts, but the union does not see any positive economic and financial factors, which would contribute to growth," he said. "We can expect output to be in a range between 120 tons and 125 tons, but I think the 120 tons figure is more feasible."

Business

Tatneft Buys Neftekhimprom For 40M Rubles

· Russia's fourth-largest oil producer, Tatneft, has purchased Neftekhimprom, a petrochemical company based in central Russia for 40 million rubles ($1.4 million). Neftekhimprom was set up on the basis of Tatneftekhimprom, a state-owned petrochemical company. The proceeds from the auction will be used partly to pay off Tatneftekhimprom's 15.2 million ruble short-term debts. Tatneft has close ties with Kazanorgsintez and Nizhnekamskneftekhim, petrochemical companies which are also based in the vicinity of Neftekhimprom.

Court Reverses GM Damages Ruling

· General Motors (GM), the world's largest automaker, said its affiliate in Tatarstan has won an initial appeal against a court ruling ordering the company to pay $38,000 in damages to a car owner whose Chevrolet Blazer's engine exploded, the Moscow Times reported. The car owner had sued GM affiliate YelAZ GM of Yelabuga, Tatarstan, claiming that a construction defect in the cylinder block caused the engine of his domestically assembled 1997 Blazer to blow up as he crossed a railroad track in July 1998. YelAZ GM claimed in its appeal the court had ignored testimony that poor quality gasoline containing dangerous additives had caused the temperature in the engine to rise putting pressure on components in the cylinder block. GM is negotiating with Avtovaz, Russia's largest automaker, on a joint venture to build a $200 million Opel Astra assembly plant near Togliatti.

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Creditors Approve Bank Restructuring

· Russian bank restructuring agency, ARKO, on January 27th said that creditors of Rossiisky Kredit bank have approved a bank restructuring plan. "A majority of those present at a meeting expressed the opinion that an amicable agreement will offer all creditors better terms than the bank's liquidation," ARKO said in a statement. More than 1,500 creditors, holding more than 47 percent of the bank's debts to individuals and companies, including representatives of over 60 foreign banks, participated in the meeting. Foreign creditors hold about 55 percent of the bank's liabilities. Creditors will make their final decision on the amicable agreement on April 19th. The agreement underpins the bank's restructuring plan which provides for 25.4 billion rubles ($891 million) debt repayment within 10 years. Under the plan, companies and banks would get five percent of their liabilities within seven days after the decision to restructure, 15 percent of ruble liabilities in three years, and hard currency liabilities within five years. The remaining 80 percent would be repaid within 10 years.

Philip Morris, RJ R Boost Production in Russia

· Tobacco companies Philip Morris Cos., the world's largest tobacco company, and RJ Reynolds Tobacco Holdings Inc. (RJR), the second-largest tobacco company in the US, plan to start producing their international brands in Russian plants next month to take advantage of low manufacturing costs, according to the Moscow Times. Philip Morris plans to begin producing Marlboro cigarettes in Russia for the first time since 1986, when its new $330 million factory open in the Leningrad region in mid- February. RJR will begin production of Winston and Camel cigarettes at its RJR-Petro Factory in St. Petersburg next month. Foreign tobacco manufacturers have invested approximately $1 billion in the country since 1992, with nearly 80 percent of that going to the Leningrad region and St. Petersburg.

Serebro Dukat To Build Mill

· Serebro Dukat, a Russian-Canadian joint venture largely owned by Pan American Silver Corp. of Canada, is ready to work on the world's third-largest silver deposit in Russia's far east. But first it plans to build a processing mill at the field. Serebro Dukat lost at an auction for a mill based at the Dukat

silver deposit, to Kaskol Group, a Russian holding company formed in September. The deposit harbors 13,000 tons of silver and 27 tons of gold of proven reserves. Pan American Silver, a Canadian mining company 10 percent-owned by Microsoft Corp. Chairman Bill GATES, holds a 70 percent share in the Serebro Dukat venture.

European Republics

Ukraine's Parliament Falls To Fisticuffs

· The parliamentary row in Ukraine came to fisticuffs on Thursday when the newly elected speaker of the rightist majority Ivan PLYUSHCH along with colleagues and bodyguards forced their way through a human blockade of leftist lawmakers to the speaker's office. Small scuffles occurred between security officers and leftists trying to follow PLYUSHCH into his rival's office. Photographers and cameramen admitted to the parliament building said PLYUSHCH met Prime Minister Viktor YUSHCHENKO in the office to discuss a draft 2000 budget. The Prime Minister ordered that a 2000 draft budget be submitted to the parliament today. The majority speaker later left the office, leading many deputies holed up in the parliament to fear that they will be forced from their position. "I think that finally the authorities will throw us out of this building by force to let the so-called right majority occupy it," Natalya VITRENKO, head of the Progressive Socialist party, said on Thursday. "But the parliament of PLYUSHCH will collapse anyway due to internal tensions." The rival split in the parliament has happened at an awkward time for the new Cabinet of YUSHCHENKO, a former Central Bank chief who is under pressure to pass a budget and laws to secure funding from international lending organizations. VITRENKO, who calls the authorities "plotters," accused YUSHCHENKO and the parliamentary majority of trying to destroy Ukraine by cooperating with the International Monetary Fund. The leftist minority parliament resumed a protest session today, blaring their debate through loudspeakers. The right-wing majority group has the support of President Leonid KUCHMA, who says speaker Alexander TKACHENKO and other leftists have blocked urgently needed reforms.

Belarus CB Pledges To Meet IMF Demands

· Belarus Central Bank Chairman Pyotr

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PROKOPOVICH said that the Bank will try to meet conditions set by the International Monetary Fund (IMF) to get two important loans. He said, "strategic task of signing loan agreements on two credits has been set and should be implemented by the end of the year. PROKOPOVICH added, "We realize that cooperation with the IMF is needed to attract foreign investors." He said Belarus hopes to get a Contingency and Compensatory Fund Facility (CCFF) and a stand-by loan. Earlier he had said Minsk might get a total of $150-250 million. CCFF loans are usually granted to countries which suffer from external circumstances, but the IMF, which suspended loans to Belarus in 1996 and recalled its representative in 1998, believes Belarus suffers from a lack of reforms, Reuters reported. An IMF monitoring mission is due to arrive in Minsk later this month or early March. Belarus has promised to boost reforms. The Central Bank has pledged to scrap its system of multiple exchange rates and slow its ruble printing presses.

South Caucasus & Central Asia

Russia Violates Georgian Airspace

· On Thursday, two Russian Air Force helicopters violated Georgian airspace near village of Shatili on the Georgian-Russian border. Tbilisi has issued a protest to Russia over this recent violation. Deputy chairman of the State border guard department of Georgia Gela KHUTSISHVILI told PNA, the chief of Georgian border guard department contacted Russian border guards, although they denied the fact of violation of Georgian airspace by Russian helicopters. KHUTSISHVILI supposes that Russian helicopters may have been inspecting the Georgian Datijvari pass for possible presence of Chechen gunmen. This is the fourth time Russian aircraft have crossed into sovereign Georgian territory since the beginning of the military offensive against Chechen rebels. Two other violations resulted in the bombing of Shatili. Russia sent an investigation team to review the bombing damage both times, after denying their aircraft had been in the area. After examining the evidence, Russia apologized for the first bomb

ing, but still has not apologized or recognized its involvement in the second.

Meanwhile, Russia will soon return Georgia's military exhibits, which were detained in Moscow airport Sheremetyevo on its way from Bucharest to Tbilisi last November, Prime News Agency reported. The exhibits were detained by the Customs committee of Russia, due to the suspicion that they could have been destined for Chechen gunmen. The exhibits of the Georgian military-industrial committee include three mortars, 1 grenade launcher, bullet-proof vests.

Richardson Pleased With Pipelines

· US Energy Secretary Bill RICHARDSON on Thursday said he was pleased with the progress being made on developing multiple pipelines routes for Caspian oil. RICHARDSON said, "We maintain a very strong interest in the Caspian region." He also added, "We are pleased with recent actions by the Azeris, the Turkmenistan, the Armenians, and the Georgians who are trying to resolve some of their differences, even though some of the Georgian negotiations are moving slowly." The US strongly supports the Baku-Ceyhan oil pipeline. RICHARDSON was in Vilinus to open a conference on investments in the Baltic Energy sector.

Japanese Bank To Rebuild Kazakh Refinery

· The Japanese Bank of International Cooperation has approved funding for a $450 million project, in which Japan's Marubeni Company will rebuild the Atyrau Oil Refinery. The reconstruction will increase the refinery's annual capacity and boost product yield from crude oil, which is currently 42 percent to 29 percent. Japan's involvement in the project has been criticized by Atyrau Governor Imangali TASMAGAMBETOV, who told Interfax new agency last month that the refinery could meet the costs of reconstruction itself over a five-year period, if it functioned at full capacity. In 1999, TASMAGAMBETOV said, the refinery operated at only 38 percent of its capacity. Similarly, the Pavlodar Refinery stood idle for much of last year because of limited supplies of crude oil.

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

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