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Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Tuesday, March 28, 2000

that include reducing bureaucracy and eradicating corruption.

Berezovsky Predicts Further Rise Of Oligarchs

· Russian tycoon Boris BEREZOVSKY has boasted that the power and influence of Russia's oligarchs and their companies will grow further with Vladimir PUTIN as president. BEREZOVSKY said, "I think that the role of the oligarchs will increase. PUTIN can not fight with big capital." He noted, however, that the power of capitalists in Russia is lower than in the US and must increase, the Financial Times reported. BEREZOVSKY was one of the businessmen who bankrolled Boris YELTSIN's second presidential campaign in 1996 and thereby gained incredible access and influence on him. This election, PUTIN pledged to distance himself from the oligarchs and work to establish an equal playing field in the economy. PUTIN even said that the oligarchs will cease to exist "as a class" after the election. BEREZOVSKY predicted, "It can never happen because big capital can never be as distant from power as small capital." He also said, "I do not see any action from PUTIN's side which will be a threat to big capital in Russia." Despite PUTIN's pledges to reduce BEREZOVSKY's power, the businessman supported PUTIN, saying that he is the best candidate to continue YELTSIN's market reforms. Roland NASH, chief economist at Renaissance Capital investment bank in Moscow said, "In the short term, he's [PUTIN] going to be concentrating on politics, and economics will take a back seat." He predicts that

Russian Federation


Cabinet To Remain Until Inauguration

· Russian President-Elect Vladimir PUTIN met this morning in the Kremlin with several government ministers, as he prepares to form a new government. His inauguration is tentatively set for May 5th. According to the Russian Constitution, the current government must be dissolved and a new prime minister appointed. PUTIN met separately with Deputy Prime Minister and Finance Minister Mikhail KASYANOV, Defense Minister Igor SERGEYEV and Interior Minister Vladimir RUSHAILO. KASYANOV, who negotiated a partial debt write-off of Russia's $32 billion debt with commercial bank creditors last month, is a leading candidate for prime minister post. Other possibilities include German GREF, deputy property minister and the head of PUTIN's Center for Strategic Studies, and Alexander ZHUKOV, the head of the parliamentary budget committee. Further ministerial candidates include controversial Anatoly CHUBAIS, chief executive of Unified Energy Systems and former deputy prime minister and architect of Russia's asset sales, Leonid RAYMAN, telecommunications minister, and Alexei KUDRIN, first deputy finance minister. PUTIN said he would start talking to candidates this week and consulting with Russian State Duma leaders. KASYANOV said the government should continue with its work as normal.

In a recent interview with ABC, PUTIN said he intended to introduce a team of trusted ex-KGB officers into the Kremlin to rebuff attempts by outside forces to "capture the state." It is also believed that PUTIN will not follow his predecessor's government design of having rival poles of power within his administration. PUTIN said he wants to create a government of loyalists who won't be divided along party lines to help him implement election promises

Today's News Highlights


Soros On Putin's Government

Russia On World Oil Prices

Alfa Bank Buys Kievinvestbank

European Republics

Chernobyl Reactor Malfunctions

Ukrainian Energy Chief Resigns

South Caucasus & Central Asia

Kocharyan-Shevardnadze Meet

US Senate Passes GUAM Funds

BP Caught In Arms-for-Oil Deal




March 28, 2000

Intercon's Daily

PUTIN may slowly reduce the oligarchs' clout by weeding their supporters out of the Kremlin and state television.

Soros On Russia's New Government

· US billionaire investor George SOROS in the current issue of the New York Review of Books predicts that a new government headed by President-Elect Vladimir PUTIN will be "authoritarian and nationalistic." He said that, "PUTIN will try to reestablish a strong state and he may well succeed." SOROS wrote in an article "Who Lost Russia" that, "PUTIN's state is unlikely to be built on the principles of an open society; it is more likely to be based on the demoralization, humiliation, and frustration of the Russian people." Foreign investors have pinned their hopes of reform in Russia on PUTIN's ability to reduce the oligarchs' influence. SOROS said that the prospect of a authoritarian Russia could have been avoided if the, "West had been more firmly committed to the principles of open society themselves." He said if the West had been more willing to provide money for Russia's transition, "Russia could have been firmly established on the road toward a market economy and an open society." SOROS is chairman of Soros Fund Management and head of the Open Society Institute, a group that has funded programs to promote democratic principles and market reform the former Soviet Union.

Yeltsin's Immunity To Be Debated

· Senior Russian deputies agreed today to schedule a debate Wednesday on the legality of Acting President Vladimir PUTIN's decree extending immunity from prosecution to his predecessor Boris YELTSIN and his family. The debate is to deal specifically with an appeal to the Constitutional Court by the Communist Party. PUTIN issued the decree within hours after he was appointed acting president on New Year's Eve by YELTSIN, who resigned unexpectedly. It applies to future ex-presidents including YELTSIN, rather than YELTSIN personally, and provided for recipients to receive health care and a pension equal to 75 percent of their last salaries. Communist member Sergei RESHULSKY told RTR state television that his party believed the decree was unconstitutional as it applied to officials no longer in office. Head of the chamber's Legislation Committee, Pavel KRASHENINNIKOV of the Union of Right-Wing

Forces which tends to be friendly to PUTIN, predicted that members would reject suggestions that the decree was unconstitutional. He said. "I think the decree was legal...If a question is not regulated by federal law, it can be regulated by decree, so I believe this was issued legally."

Missile Test Launch Dedicated To Putin

· Just hours after election polling stations closed, the Russian navy successfully launched a ballistic missile from a 667 BDRM nuclear-powered submarine in the Sea of Okhotsk on Monday. The missile flew over 7,000 kilometers to hit a target in Kanin Nos testing ground. Earlier in the day, a RSM-54 ballistic missile, or Skiff in NATO's classification, was launched from a submarine in the Barents Sea, which also hit its target in Kamchatka. The early warning system detected the missile immediately after the launch and timely relayed information about it to posts of the Russian army's supreme commander and the General Staff as a training warning signal of a missile attack, Itar-Tass reported. A Defense Ministry spokesman said, "The missiles were launched as previously scheduled with the purpose of extending the shelf life of this type of rocket." RSN-54 missiles were commissioned in 1986. They can carry four or 10 separate warheads but modifications with 10 warheads have never been deployed. The Navy's crew dedicated the missile launch to the President-Elect Vladimir PUTIN, who has called for restoring the military's dignity and strengthening its capabilities. PUTIN has emphasized the importance of Russia's vast nuclear arsenal as the cornerstone of its defense system and a powerful deterrent against any large-scale attack.

Troops Clash With Chechen Rebels

· Hopes that President-Elect Vladimir PUTIN would quickly end the war in Chechnya were significantly diminished on Monday, as PUTIN congratulated interior ministry troops for their professionalism in fighting the rebels. He said, "Your bravery and dignity is a safe guarantee that this region will be freed of the bandits and peaceful life restored there." Troops continued to clash with rebels, in a conflict many consider to have been created to boost PUTIN's popularity. Few details were available about the fighting in Tsentoroi in southeastern Chechnya, but the rebel group there was believed to be one of the last large concentrations of militants remaining in

When you need to know it as it happens




March 28, 2000

Intercon's Daily

Chechnya. The Associated Press reported that 1,500 rebels were based in the area around Tsentoroi, including hundreds in the village itself. Colonel General Alexander BARANOV, chief of staff of the federal forces, said Tuesday, "There are no gangs under single command left in western Chechnya, but we are concerned about the east." The federal command said more troops and equipment were moving to the area around Tsentoroi. The raids also targeted several other settlements in the southern mountains, including Galaity village, located on a road near Chechnya's eastern border with the Russian republic of Daghestan. Russian commanders said rebels remaining in southern Chechnya were trying to flee to Daghestan as federal forces tightened their grip. The attack on Galaity looked like it was directed at cutting off escape routes.

New Foreign Policy Plans

· Russia's advisory Security Council on Friday approved a new foreign policy concept, calling for stronger protection of Russian citizens abroad and for a more commercially-oriented diplomacy. Foreign Minister Igor IVANOV said the doctrine reflected Russia's resources and needs better than a version drawn up in 1993. IVANOV gave no details, but acting President Vladimir PUTIN made clear the concept included looking after the interests of Russians living abroad, especially in the former Soviet republics of the Commonwealth of Independent States (CIS) and the three Baltic states. "We have to defend in a more attentive, balanced but also more active way the interests of our citizens...who have chosen to live permanently in other countries," PUTIN said. Russian Diaspora in the Baltic states, Ukraine, the Caucasus region and Central Asia complain of discrimination and mistreatment. Secretary of the Security Council Sergei IVANOV said, "We must create through our policies such conditions...that people, our compatriots, would want to stay put, to work normally and to live comfortably." PUTIN also stressed that, "The role of the foreign ministry must be raised. We need actively to use the foreign ministry's opportunities to promote the economic interests of our state overseas." Comment: The appeal to protect and defend citizens living in a foreign land has always provided a convenient pretext for empires to invade or pressure neighboring lands into submission. This will clearly be interpreted by neighboring states as an ominous move

and one which will put countries on notice that Russian foreign policy under PUTIN will become more active and aggressive in the future.


Russia To Collect 122B Rubles In 2nd Quarter

· Russia's Tax Ministry plans to collect 122 billion rubles ($4.3 billion) in the second quarter of this year, exceeding the 90 billion rubles targeted. Tax Minister Alexander POCHINOK today said the ministry planned to collect 42 billion rubles in April. Tax collection in March is expected to be more than 40 billion rubles, higher than the 30 billion rubles target for this month. Tax collection in February amounted to 41.5 billion rubles, while in January it was 37.5 billion rubles.

Ruble = 28.31/$1.00 (NY rate)

Ruble = 28.27/$1.00 (CB rate)

Ruble = 27.20/1 euro (CB rate)

CB Plans To Cut Refinancing Rate

· Central Bank Chairman Viktor GERASHCHENKO today said that the bank is considering cutting Russia's refinancing rate from 33 percent to 20 percent to 22 percent by year's end. He predicted that consumer price inflation may reach 16 percent by end-year, instead of 18 percent foreseen in the 2000 budget. Last week, GERASHCHENKO said the Central Bank might reduce the refinancing rate to 18 percent by end 2000, if annual inflation was the budgeted 18 percent. GERASHCHENKO also said export revenues in the second quarter of this year could be as high as in the first quarter, and the government should be able to repay foreign debts without dipping into Central Bank reserves. If the government is forced to draw upon Central Bank coffers, he said the borrowing would be painless. He said Russia's foreign debt repayments falling due in the second quarter amounted to $2 billion, including $1 billion to the International Monetary Fund.

Russia On World Oil Prices

· Addressing the 109th session of the OPEC Conference, Russian Fuel and Energy Minister Viktor KALYUZHNY said that Russia favors stabilization of world oil prices within $26 to $28 per barrel. He noted that oil production in Russia would rise to 310 million to 312 million tons this year, "thanks to some measures to invigorate the Russian oil and gas

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Tuesday Intercon's Daily March 28, 2000

complex." He stressed that oil production in Russia will not negatively influence the world oil market and formation of the medium world oil price. He said, "We share apprehensions of some international experts who claimed that adoption of a cartel decision on lifting any restrictions on oil production, starting from April 1st, can lead to a sharp drop in oil prices in the conditions of a seasonal decrease in demand and will destabilize the world market...Russia will treat with respect a collective decision by OPEC countries. However, our country deems it expedient to favor preservation of operating limitations on oil production, at least when average world prices reach an acceptable stable level, helping to ensure economic growth and stabilization of the world market." According to experts and analysts, OPEC countries discuss periods and quantitative parameters of a possible increase in oil export, which fluctuate between 1.2 and 1.6 million barrels per day. No consensus has been reached during preliminary consultations. Further discussions will continue today.

Economy Not Dependent On Oil Prices

· First Deputy Prime Minister Mikhail KASYANOV today said the Russian economy will not suffer, if world oil prices fell after a possible OPEC decision to raise output limits. He said, "Despite today's signals of a possible fall in oil prices...we are not afraid." OPEC ministers, who started a meeting in Vienna on Monday under pressure from the West to curb high oil prices, are expected to agree on how much new oil they will supply after their existing output agreement expires at the end of March. KASYANOV said Russia's current economic situation was "not bad at all," and with tax collection meeting its targets the April budget was well balanced. The economy can move forward, "step by step," he said.


Alfa Banks Buys Stake In Kievinvestbank

· Russia's Alfa-Bank, one of the country's biggest private banks linked to Russian oligarch Mikhail FRIEDMAN, announced on Monday it has purchased a 76 percent stake in Ukrainian commercial bank Kievinvestbank as part of its expansion plans. Alfa-Bank Deputy Chairman Evgeny BERNSHTAM told a news conference that Kievinvestbank shareholders had approved the deal. "We shall develop

our business here as a bank offering all kinds of services to clients and we plan to open some 15 to 20 regional branches across Ukraine in the next three to four years," he said. He noted that the remaining 24 percent of shares belong to Ukrainian shareholders, but declined to give further details. The shareholders meeting also voted to boost the Ukrainian bank's charter capital to 73 million gryvnias ($13.5 million) from 14.5 million gryvnias, BERNSHTAM said.

Transneft Finishes Pipeline Bypass

· Russia's pipeline monopoly Transneft has finished laying a 312 km (195 mile) section of pipeline bypassing rebel Chechnya. Transneft vice president Sergei GRIGORYEV on Monday said, "We will start filling the line with oil in March, which will take 10 days. And we will start using it in April." The new line will keep oil flowing from Baku to Novorossiisk. Later it will no longer transport Azeri oil, but instead pump oil from Daghestan, as well as from Kazakhstan and Turkmenistan. Azerbaijan is unlikely to be able to fulfill an agreement under which it is due to supply 2.3 million tons of crude in 2000. As a result Transneft will build another 17-km stretch of line to the Daghestan port of Makhachkala by the end of April. Ten kilometers of this has already been laid. GRIGORYEV said the pipeline would be able to carry up to 2 million tons per year (40,000 barrels per day) of Kazakh and Turkmen crude. Russia started building the bypass last October to re-establish a link with the Azeri capital after violence in Chechnya forced Russia to stop using the existing pipeline and instead to transport the oil by rail.

Itera To Export Gas To The West

· Itera Holdings President Valery OTCHERTSOV has said that Itera is stepping up gas production so that it can export gas to the West within two years. He said in order to achieve this the Russian government must allow third parties use of state-controlled monopoly Gazprom's network of high-pressure pipelines without the present prohibitive tariffs. Itera, whose principal task has been to distribute state-controlled Gazprom's gas within the former Soviet Union, is the only independent Russian gas producer which has access to Gazprom's pipeline network. He pointed to a new pipeline leading through Belarus and Poland, and also to the Blue Stream project, a joint venture with Italy's ENI that is next year scheduled to start Russian gas deliver



Tuesday Intercon's Daily March 28, 2000

ies to Turkey via the Black Sea. "Apparently, Gazprom doesn't have enough funds to improve production," OTCHERTSOV noted. "I believe this is why they are delaying the development of the very large field of Zapolyarnoye [in the Yamal region] and instead developing small fields which aren't economic," Dow Jones Newswire reported. Dmitry AVDEYEV, analyst at Moscow investment bank United Financial Group, said Gazprom's output has fallen because the monopoly has been handing over its licenses to Itera, which is thought to be close to Gazprom management. "The transactions have been non-transparent, and we suspect that they were done on a non-commercial basis," AVDEYEV said.

At a press conference BAKAI said, "Today I tendered my resignation to the prime minister, asking him to relieve me of my duties at my own request...The reason for my resignation is a political one." He stressed that he was determined to leave his post even if his resignation was turned down by the president or prime minister. BAKAI alleges that unspecified Western countries had forced him to quit. BAKAI declined to say which Western countries wanted him out and why, but said the countries were trying to destroy Ukraine as an economic competitor. "If we form a group of journalists, lawyers and security service officials to find out where the blackmail is coming from, many western countries will come out the worse of it." During his time at the post, Naftogaz Ukrayiny managed to trim some debt and discovered six new domestic gas deposits. He also presided over numerous energy shutdowns and failures. He said he wants to work with legislators in parliament to create a plan to develop the country's energy sector independent of foreign investment.

Naftogaz Ukrayiny distributes natural gas to industries and Ukraine's 50 million citizens. It plays a key role in the former Soviet state's struggles to reform its economy and emerge from the shadow of neighboring Russia. Ukraine's debts to Russia's gas monopoly Gazprom for natural gas supplies had risen by $500 million since the start of this year. Ukraine relies heavily on Russian gas imports.

Ukrainian Prime Minister Viktor YUSHCHENKO said late last month Kiev recognized at that time a total debt of $1.41 billion to Russia for natural gas. Naftogaz Ukrayiny spokesman Valeriy SERHIYCHUK pointed out, "The debt increased because we were taking Russian gas from underground storage facilities...We had no choice because there were not enough gas supplies." Ukraine, which depends on Russia for 78 percent of its gas needs, has been unable to secure agreements with other suppliers. One of the main problems has been because domestic users inability to fallen pay their own gas bills. In order to increase gas supplies to Ukraine, Naftogaz Ukrayiny is setting up a joint venture with Itera, which produces and trades gas in the former Soviet Union, SERHIYCHUK said, declining to comment on payment collections payments for the supplies. [See Itera page 4.]

European Republics

Chernobyl Malfunction Stops Operations

· The only working reactor at Ukraine's troubled Chernobyl nuclear power plant cut its capacity in half, after a malfunction in the plant triggered the safety system early Monday morning. No increase in radiation levels was recorded. A spokeswoman said that repairs would be completed by March 30th. Ukraine has promised to shut down Chernobyl station, site of the world's worst nuclear disaster, in 2000 in return for Western funds to complete construction of two replacement reactors at its western Rivne and Khmelnytska plants. Ukraine is dependent on its nuclear power facilities.

Lith. Receives 11 Advisor Bids

· The Lithuanian government said it has received 11 bids from international banks and consultants to advise on the sale of Lietuvos Energija, a Lithuanian electricity utility. The winner of the tender will be announced in about a week, said Deputy Minister of Economy Vytenis JUNEVICIUS. Leaders of the bidding groups include Germany's Deutsche Bank, Austria's Raiffeisen Investment, PriceWaterhouseCoopers, Canada's CIBC Wood Gundy Securities Corp. and Credit Suisse First Boston Ltd. The state owns 86.5 percent of Lietuvos Energija, while 9.78 percent of shares belong to Sweden's Vattenfall. The rest of belong to small investors.

Ukraine's Energy Chief Resigns

· Igor BAKAI, head of Ukraine's state oil and gas company Naftogaz Ukrayiny, resigned on Friday.




March 28, 2000

Intercon's Daily

South Caucasus & Central Asia

Georgian-Armenian Presidents Meet In Tbilisi

· Armenia President of Robert KOCHARYAN started an official, two-day visit to Georgia today. He is meeting with Georgian President Eduard SHEVARDNADZE, State Minister Vazha LORDKIPANIDZE, Chairman of Parliament Zurab ZHVANIA, representatives of government, of foreign diplomatic missions accredited in Georgia and of Armenian Diaspora, which number almost 450,000 in Georgia. KOCHARYAN's and SHEVARDNADZE are expected to discuss regional issues and priorities in the measures for stability and security. At a press conference on Tuesday, KOCHARYAN said he did not exclude that Armenia may join GUUAM (Georgia, Ukraine, Uzbekistan, Azerbaijan, Moldova) in the future. KOCHARYAN said that he is a supporter of widening regional cooperation in the South Caucasus, and GUUAM may be considered as one of the forms of such cooperation. A package of documents between the governments of Armenia and Georgia will be signed during the visit. KOCHARYAN will also be decorated with Order of Honor, a state award of Georgia.

US Senate Passes GUUAM Legislation

· The US Senate on Thursday passed legislation providing funding to an abbreviated GUUAM (Georgia, Ukraine, Uzbekistan, Azerbaijan, Moldova) and Armenia as part of the US appropriation Security Assistance Act. Through negotiations on Section 765 Border Security and Territorial Independence, Armenia was added to the package and Uzbekistan was removed. Reportedly, Republicans put forward funding for GUUAM, but Democrats rejected funding Uzbekistan and added in Armenia. The act provides $37 million to assist, "GUAM and Armenia to strengthen national controls of their borders and to promote the independence and territorial sovereignty of such countries." The funds are available for fiscal year 2001. For is the first time, GUUAM has been recognized in US legislation as an organization of sufficient status and importance to merit funding.

The bill now goes to a conference of the House of Representative and Senate committees, which is meeting today.

Turkish Intelligence Reveals Arms-For-Oil Coup

· Turkish intelligence documents reveal that BP Amoco was involved in an arms-for-oil deal connected with the overthrow of the Azeri government in 1993, The Sunday Times reported. According to the report, "As a result of our intelligence efforts, it has been understood that two petrol giants BP and Amoco, British and American respectively, which together forms the AIOC [Azerbaijan International Oil Consortium], are behind the coup d'etat carried out against [Abulfaz] ELCHBEY in 1993...," in which some 40 people were killed. A former Turkish military intelligence officer said, "Present in the meetings were representatives and what I understood to be senior members of BP, Exxon, Amoco, Mobil, and the Turkish Petroleum Company. The topic was always oil rights and, on the insistence of the Azeri's supply of arms and mercenaries to Azerbaijan...All oil company representatives, including those of BP offered the president and prime minister of Azerbaijan help in their war against Armenia." Once Azeri President Geidar ALIYEV came to power, BP was appointed the lead role in the consortium of oil companies which dominates the region. BP this weekend admitted it had been asked to pay Marat MANAFOV, ALIYEV's right-hand man, a bribe of $360 million to lead oil talks. Six months ago MANAFOV disappeared after making allegations about, "the secret dealings of the ALIYEV family with oil companies." ALIYEV's son, Ilkham is president of Socar, Azerbaijan State Oil Company. BP insists it refused to pay the bribe, but denies allegations of being involved in overthrowing elected governments or links to arms deals.

Due to computer upgrading,

The Daily report on Russia and FSU

will not be published on March 29th.

Today's edition will be an extended issue.

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

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