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

Tuesday, February 8, 2000

Russian Federation

Politics

Why Are People Still Confused On PUTIN?

· Why does acting President Vladimir PUTIN remain a mystery to some? PUTIN's actions have clearly defined him as an authoritarian leader who is seeking to return Russia to the status of a strong state. PUTIN's popularity has grown since he was picked by former president Boris YELTSIN to be prime minister. From that post, PUTIN's popularity increased as Russian troops marched into Chechnya to fight terrorists. The decision for the military offensive reportedly was taken as a result of the invasions first into Daghestan by Chechen commanders Shamil BASAYEV and KHATTAB and then for three apartment bombings which killed 300 people. Former prime minister Sergei STEPASHIN, however, has publicly stated that plans for the military offensive were drawn up in March, when PUTIN was head of the Federal Security Service (FSB). This has led some to question whether PUTIN's backers were responsible for these bombings, which provided a pretext for PUTIN's rise and the Russian State Duma successes. PUTIN's village by village successes along with a heavily state-influenced media campaign created an image of a successful military campaign in Chechnya. Following the bombings, PUTIN ordered the FSB to round up suspects in the case, targeting Chechens and other dark-skinned residents. He also ordered operation Whirlwind, in which the FSB, Interior Ministry, and the local police monitored and search buildings and homes for anything suspicious in nature. With his experience as and knowledge of Kremlin corruption from his brief term in the presidential administration under Pavel BORODIN, it is believed that those who stand behind PUTIN used this and other information to silently remove YELTSIN. In a speech on December 31st, YELTSIN resigned and asked for the Russian people's

forgiveness, after obtaining from PUTIN a generous retirement and immunity for himself and his family. The Chechen war continued with indiscriminate bombing, reports of civilian massacres, increasing military casualties, and military incompetence, but support remained high. This week PUTIN claimed that the military offensive in Chechnya is complete. However, federal troops continued to fight Chechens who remain around Grozny and in the southern mountains.

While PUTIN claims that he will increase salaries for teachers and scientists, and has promised to strengthen the role of the government, while developing a market economy, history teaches that human rights will suffer under the strong hand of the center. Stability and predictability in Russia will only emerge when political parties were formed under Western principles and a civil society is created. Critics say PUTIN has failed to produce details of his plans to right Russia's limping economy. PUTIN responded that he is in no hurry to publish his program of action because it will immediately become, "an object of attack." On ORT Television he said, "As soon as it is given out, it will be gnawed at and torn to pieces," a convenient excuse to avoid committal.

In a dramatic turn from the common assessment of PUTIN, liberal reformers rebelled, when the virtual party which supported PUTIN, Unity, made a backroom deal with the Communist Party for control of the Russian State Duma speakership. The loss of their sup

Today's News Highlights

Russia

Zyuganov Registers In Race

Gazprom To Sell $3.3B Stake

European Republics

Belarus CB Changes Rates

Ukraine Release Debt Terms

South Caucasus & Central Asia

Georgia's Parliament Opens

IDS Wins CPC Contract

Turkmen Postpones PSA Agmt.

Three Blasts Rock Tajikistan

Politics-Economics-Business

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Tuesday

February 8, 2000

Intercon's Daily

port has lead many in the West to become uneasy about PUTIN's regime, while still remaining hopeful. Anatoly CHUBAIS, chairman of Unified Energy Systems of Russia (UES) and member of Union of Right Forces, has continued to stick by PUTIN. CHUBAIS, who in the past has said that he would choose robbery capitalism over communism and admitted to lying to the International Monetary Fund, believes liberals should support PUTIN's attempts to consolidate the state and modernize the economy. He said, "I do believe that the liberals will be able to press the president to follow their basic principles," the Financial Times reported. CHUBAIS' appears to be following PUTIN's lead in bring Russia back to its once great status, particularly his expansionist ideas. During a recent trip to Georgia, CHUBAIS expressed UES' interest in taking over Georgia's electrical system and grid, showing the dominating and monopolistic behavior of the old Soviet Empire. Union of Rights Forces' parliamentary leader Sergei KIRIYENKO has already resigned to the fact that PUTIN's regime will be in place until the next parliamentary elections in 2003 to 2004 and presidential election in 2007 to 2008. He said, "This is not going to be our government. These are not going to be our policies. Our time will come in 2003-2004 or even 2007-2008." However, Andrei PIONTKOVSKY the director of the Center for Strategic Studies in Moscow believes that PUTIN's ruthless actions in Chechnya show that he could never entertain liberal ideas. He said, "People say PUTIN is the lesser evil, but in what units can you measure evil? Everything that I know about PUTIN makes me think he is very dangerous for my country and for the world."

However, even for the most generous of the Russian affairs experts, the sound of their rose-colored glasses cracking is deafening in the case of RFE\RL journalist Andrei BABITSKY. When Russian officials in mid-January searched his Moscow home and arrested BABITSKY in Chechnya for not holding proper accreditation papers and for suspicion of collaborating with the rebels, PUTIN's veil began to drop. Last week, Russian media showed an FSB film showing the hand-over of BABITSKY to supposedly a Chechen gang leader in exchange for two Russian soldiers. Presidential spokesman on Chechen information Sergei YASTRZHEMBSKY confirmed the exchange took place near the crossroads of Argun and Shatili. He said he does not know who gave the

orders for BABITSKY's release, adding that it could not have taken place without the consent of the Prosecutor-General's Office. The Defense Ministry said that the army was not involved in either the detention of BABITSKY or his alleged hand-over. Chechen President Aslan MASKHADOV again said the Chechen side has no knowledge of the BABITSKY exchange. FSB head Nikolai PATRUSHEV on Monday said, "BABITSKY is alive, but I don't know where he is now. You shouldn't ask us [but the Chechens] such questions. In a strange turn of events, Russia's top prosecutors have said they want to question BABITSKY about his involvement with "illegal armed bands." They have given him a deadline to appear in Moscow voluntarily, or be sentenced to five years in prison. RFE\RL's Moscow director Serik SHUSTER said this is "absurd," calling it a KGB-style smear campaign. The Russian media is now beginning to question various holes and contradictions in the official explanation. These include the recent increased number of Russian soldiers exchanged for BABITSKY and the fact that the Chechen commander who was supposedly responsible for the exchanged was killed in combat one day before the exchange. With the cover-up story and disinformation campaign emanating directly from the acting president's spokesman concerning BABITSKY, many fear what will happen once PUTIN is voted into office. Unfortunately the prospects maybe even darker than present events allow most to contemplate.

Zyuganov Registers As Presidential candidate

· Communist Party leader Gennady ZYUGANOV today registered as a candidate in Russia's early presidential elections scheduled for March 26th. He is confident that he will overhaul the heavily favored Acting President Vladimir PUTIN. As he was registering with Central Election Commission members applauding his candidacy, ZYUGANOV said, "Our chances are good in this election." The Communist leader did point out, "Things are unbalanced, that's obvious to everyone. One candidate makes statements all day long and the others can't even get their declarations published. I find this position totally unobjective." ZYUGANOV declared in his financial disclosure documents that he has total savings of 18,597 rubles ($647.30), held mostly in state-controlled Sberbank. He reported an income last year of 495,443 rubles.

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The deadline for registration is Sunday. Candidates must gather the signatures of a half million supporters and provide declarations of their own income and that of their families. An opinion poll cited by state television at the weekend credited PUTIN with 48 percent support, well ahead of ZYUGANOV's 12 percent but short of the 50 percent needed to win outright in the first round. Former prime minister Yevgeny PRIMAKOV and Viktor CHERNOMYRDIN have withdrawn from the race. Alexei PODBERYOZKIN, the leader of the nationalist Spiritual Heritage movement, has also registered. Others expected to enter include liberal economist Grigory YAVLINSKY and ultra-nationalist Vladimir ZHIRINOVSKY.

Apartment Explosion Kills 11 In Khabarovsk

· The Emergency Situations Ministry today said that an explosion in an apartment building in the far East city of Khabarovsk killed at least 11 people and injured seven others on Monday night. The ministry's spokeswoman Natalya SHAKHGEDANOVA said that a rescue teams were looking for two people believed buried in the concrete debris. Six out of 75 apartments were completely destroyed. Approximately 50 residents have been granted temporary shelter in Khabarovsk schools. The possibility of finding the two alive is almost nil because overnight temperatures fell to minus 25 degrees Celsius. The Federal Security Service (FSB) is investigating the cause of the blast. One officer said, "We are working on all the possibilities, including a possible terrorist act."

Acting President Vladimir PUTIN had warned Russia's citizens to be on guard for possible retaliatory attacks by Chechen rebels. However, explosions caused by faulty gas lines in Russia's aging apartment buildings are also frequent. Last September, bombings in Moscow and Volgodonsk killed 300 people. These explosions have been blamed on Chechen fighters, however, there has never been any evidence to support this claim.

Ruble = 28.79/$1.00 (NY rate)

Ruble = 28.72/$1.00 (CB rate)

Ruble = 28.35/1 euro (CB rate)

Business

Gazprom To Sell $3.3B Stake To Foreigners

· Russia's gas monopoly Gazprom is seeking the government's approval for a sale of a $3.3 billion

stake on foreign markets over the next three years. Gazprom said it wants to offer American depository receipts (ADRs) representing a 14.5 percent stake starting in the second quarter. The government, which holds 38.4 percent of the company, is considering the plan dated December 17th. Approval is needed because of limits on foreign ownership. Gazprom or its major shareholders could buy back domestic stock, which trades at a discount to the ADRs, boosting the Russian shares and making the sellers a profit of about $1 billion. Analysts warn that the government may demand part of the proceeds. In addition to shares currently held by Gazprom and the government, the company proposed the selling some domestic stock held by investors directly to international banks as ADRs. Foreign investors are prohibited from buying Gazprom shares in Russia, where they trade at less than one-third the price of the ADRs. Gazprom ADRs, which represent 10 Gazprom shares, rose 0.5 percent Friday to $9.60, equivalent to 96 cents per share, on the London Stock Exchange. The domestic shares fell 2 percent to 7.35 rubles (26 US cents) on the Moscow Stock Exchange. "The sale would increase the domestic share price and improve the liquidity of the shares," said Stephen O'SULLIVAN, director of research at the United Financial Group brokerage in Moscow.

LUKoil 1999 Profits Reach $1.3 Billion

· Russian oil producer LUKoil has release a report showing that 1999 profit totaled $1.3 billion, or $1.63 per share, compared with $10 million, or 2 cents per share, in 1998. Revenue last year totaled an estimated $10 billion, up from $8.4 billion the year before. The report explains that the rise is due to an increase in world oil prices and the lowering of operating costs after the ruble plunged against the dollar. LUKoil plans to invest as much as $22 billion over the next 10 years. LUKoil also plans to issue more American depository receipts (ADRs) this year or in 2001, representing about $500 million of state-owned shares, pending government approval. LUKoil Vice President Leonid FEDUN said, "We learned how to save during low world oil prices. Therefore our profits grew and approached the level of leading world oil companies." Brent crude for delivery in March is now at $26.39 per barrel, compared with $12.93 in late January last year. LUKoil shares rose 1.8 percent, or 20 cents, to $11.15. The stock is down 14 percent since January.

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Tuesday Intercon's Daily February 8, 2000

Kalyuzhny Calls For An Increase Of Reserves

· Russia's Fuel and Energy Ministry Viktor KALYUZHNY has plans to increase the nation's crude reserves by 250 million tons this year. He said companies that fail to invest in new reserves will have their oil exploration licenses revoked. Last year, oil companies added only 200 million tons of crude reserves, much less than annual output of 305 million tons.

Belarus CB Raises Interest, Lombard Rates

· Belarus' Central Bank raised short-term interest rates on Monday, aiming to strengthen its ruble and slow inflation. Immediately effect, the Central Bank also raised its Lombard rate on credits for commercial banks of up to 14 days from 160 percent to 180 percent. The rate for loans of 15 to 30 days rose from 160 percent to 190 percent, the level set on December 8, 1999. The Central Bank pledges tighter monetary and credit policy this year and said in January it would peg the refinancing rate, now 150 percent, to inflation. Monday's statement said the hikes were aimed at strengthening the ruble and slowing price rises. Inflation was 10.1 percent in the first 21 days of January after 13.6 percent for December and 251 percent for 1999.

Lithuania Pledge To Join EU In 2004

· On Monday, Lithuania said it will meet all European Union (EU) membership requirements by the start of 2004 and wrap up negotiations at least a year before. The Baltic state's European Integration Commission, chaired by Prime Minister Andrius KUBILIUS, approved major elements of a draft of the statement it will give the EU at the start of accession talks. According to a government press office statement, "The document states that January 1, 2004, is considered to be the date by which Lithuania will be ready to take on EU membership requirements and also sets a target to complete the talks in 2002." Lithuania also expects to begin negotiations on seven chapters of EU legislation, the drafts of which the Cabinet should approve soon. The European Commission, in its last progress report, singled out Lithuania's gaping fiscal budget deficit and continuing state dominance of its energy sectors as areas that needed work. Lithuania was invited in December to begin accession negotiations, which start formally on February 15th. The first six candidates¾Poland, the Czech Republic, Hungary, Estonia, Slovenia and Cyprus¾started talks on final synchronizing of local legislation with EU law in 1998, setting the end of 2001 as a target to wrap negotiations.

South Caucasus & Central Asia

Georgian Parliament Opens Spring Session

· The Georgian parliament opened its Spring session today with 104 issues on its agenda. Legisla

European Republics

Ukraine Releases Debt Swap Terms

· Ukraine on Friday unveiled the terms of a debt swap for the restructuring of $2.6 billion of short-term commercial debt. The International Monetary Fund has approved the terms. Holders of Ukrainian international bonds, including DM1.5 billion due in February 2001, 500 million euros due next month, $73.7 million due in October, and $1 billion in so-called Gazprom bonds will be offered new international bonds with maturity in seven years. The new bonds will be denominated in euros and dollars, which will be paid in quarterly interests of 10 percent and 11 percent respectively. All bonds will be exchanged at par, except Gazprom bonds maturing after March 2000. Ukraine Finance Minister Igor MITUKOV said in the release, "In the light of the difficult liquidity situation facing Ukraine, it was vital that we arrived at a solution that incorporated a sustainable and realistic debt servicing facility whilst delivering the best possible asset value to our investors."

Dutch investment bank ING Barings, the lead manager of the debt exchange, said that Ukraine is using e-mail to reach thousands of retail investors. A website, already operating in English, at www.ukraine.exchange.ingbarings.com explains the debt terms and conditions, allows investors to contact ING Barings, and provides acceptance forms which can be downloaded and passed to advisers and custodians. This is the first international bond restructuring which involves thousands of retail investors. ING Barings estimates that there are between 3,000 to 5,000 retail investors holding as much as $800 million worth of bonds. It has already heard from 250 investors via e-mail. Ukraine needs 85 percent of bond holders to accept its terms in order for the offer to go through.

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tors will review documents relating to Georgia's membership in the World Trade Organization (WTO). Georgia currently has observer status. It will become the WTO's 135th member, thirty days after the parliament ratifies a memorandum on Georgia's accession to WTO. The parliament will also debate the 2000 draft budget. Georgian President Eduard SHEVARDNADZE is preparing for his annual state of the nation address to the Georgian parliament. The address, he will make on Wednesday, will highlight the results of 1999.

CPC Awards IDS Contracts

· Industrial Data Systems Corporation (IDS) Monday announced that its IDS Engineering, Inc. subsidiary has been awarded two contracts by the Caspian Pipeline Consortium (CPC). According to a company press release, the contract outlines terms for IDS to assemble and program computer control systems for five pump stations on the Caspian Pipeline project. These services will be provided on a time and materials basis with a combined estimated value of $2.4 million. This work will primarily be performed by a dedicated task force of IDS Engineering employees out of the company's Houston office. Additional work relating to on-site commissioning of the computer control systems will be governed by additional agreements. The newly organized Caspian Pipeline Consortium was established in 1997 to construct a crude oil pipeline connecting the oil fields in western Kazakhstan with a new terminal located on Russia's Black Sea coast. The initial construction phase of the CPC project is expected to be completed in October 2001, which will allow the transport of approximately 175 million barrels of oil per year. William COSKEY, IDS President stated, "We at IDS consider it an honor to be selected by CPC as a participant in their world class pipeline project. This is an exciting development which illustrates our expertise in the area of pipeline automation and control."

Turkmen Postpones PSA With Shell

· RFE\RL Newsline reported that Royal/Dutch

Shell and the Turkmen government have postponed indefinitely the signing of a production-sharing agreement (PSA) on extracting gas from three deposits in eastern Turkmenistan. The signing of that document had originally scheduled been for February 20th. The official added that talks between the two sides on the terms of the agreement will continue. The gas in question is earmarked for export via the proposed Trans-Caspian pipeline.

Three Explosions Rock Tajikistan

· The Tajik Interior Ministry said three explosions in quick succession rocked downtown Dushanbe Monday night. So far no casualties have been reported, but there is structural damage to buildings and near by vehicles. The blasts exploded near government buildings, some of which are used for meetings by officials including the president. The tax collection headquarters, a major department store, and an apartment building were hit. Police are investigating the cause of the blast. One officer speculated that the blasts could have come from a grenade launcher. Another series of bombs ripped through Dushanbe in October, wounding several people. Tajikistan has been wracked with violence, despite a 1997 peace agreement that ended the five-year civil war.

US Diplomats To Return To Tajikistan

· The US State Department has decided to allow diplomats to return to its embassy in Dushanbe, Tajikistan. This may be delayed taking into account Monday's bombing. The Department is permitting diplomats from Almaty, Kazakhstan to visit Dushanbe periodically. Americans working at the embassy were withdrawn in September 1998 because the US feared they were in danger from Islamic fundamentalists seeking revenge for US missile attacks on Afghanistan and Sudan. A State Department statement pointed out that even if US diplomats go to Dushanbe, the embassy will not be fully operational. The Almaty embassy will handle consular affairs. Emergency consular services for US citizens in Tajikistan will still be unavailable. A travel warning for US citizens remains in effect.

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

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