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

Wednesday, March 8, 2000

Chechen Losses; Chance For Peace; War Costs

· Russia's military today admitted new losses in Chechnya, as Chechen rebels continue to attack Russian troops. Colonel Gennady ALYOKHIN, head of the military's press center in the region, spoke of unspecified new military setbacks in remarks to RTR state television. "Unfortunately we have suffered losses, but they are insignificant compared to those of the [Chechen] fighters," he told RTR. "The [Chechen] fighters have about 10, 15 times as many." Despite these losses, continued fighting, and small battles to re-take villages once under Russia's command, the government is turning its attentions the aftermath of the conflict and ways to define Chechnya's status. Tatarstan President Mintimer SHAIMIYEV has urged Moscow to seek a political solution. He believes that the Kremlin should offer Chechnya a special political status within the Russian Federation, devolving power to the region. He said, "The fact that large-scale military action has been completed should not be the occasion to dictate one-sided terms to the civilian population of Chechnya...We are not talking about a victory in Chechnya, but about the destruction of bandit formations and international terrorists." Sevodnya reported that the Russian government's official estimate of the cost of the Chechen war underestimated the actual costs by 50 percent. The government's estimate is 5 billion rules ($175 million). The newspaper noted that the real cost of the war will probably never be known because, "the state has ways of hiding" them elsewhere in the budget.

Russian Federation

Politics

KGB Resurgence Surrounds Presid. Election

· The resurgence of the Federal Security Service (FSB), the successor of the KGB, has been evident in Russian society for the last year to year and a half. The top brass in the FSB has been filling governmental positions from Security Council chair to Interior Minister to Prime Minister. This year's early presidential campaign is no exception, with former head of the FSB and KGB spy, acting President Vladimir PUTIN, pinned to win the election. Speculation is growing as to whether or not PUTIN will develop a special force to be directly responsible to him. Such a suggestion was raised after PUTIN called for a force to combat corruption and distance the oligarchs from the Kremlin.

Russian State Duma deputy and former head of President Boris YELTSIN's security service Alexander KORZHAKOV in an Argumenty i Fakty article published on Monday said that it is time to re-establish the KGB. He wrote, "By supporting Vladimir PUTIN for the country's president our people are sending an utterly clear message to those in power: it is high time at last for special services to make a fist and strike those who are preventing them from building a normal life. Russia needs its KGB! It is high time to say this without blushing." KORZHAKOV believes the "first step" in this direction should be the formation of a coordinating council of the security services directly subordinated to the Russian president, RFE\RL Newsline reported. Kommersant-Vlast published a nationwide poll conducted in February among 1,600 respondents, in which more than 50 percent of respondents said they have no objection to a former KGB officer becoming president.

Today's News Highlights

Russia

PACE To Tour Chechnya

OECD Releases Report on Rus.

European Republics

Audit Shows No Funds Misuse

Few KGB Agents Come Forward

New Privatization Head Rejected

Luik Speaks In Washington

South Caucasus & Central Asia

Armenian 2000 Budget Passes

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PACE Delegation To Tour Chechnya

· Representatives of the Parliamentary Assembly of the Council of Europe (PACE) are scheduled to visit the North Caucasus on March 11th to 12th to monitor Russia's excessive military actions and attacks against civilians in Chechnya. The PACE delegation will meet with officials from Russia's Foreign, Defense, Interior and Nationalities ministries in Moscow before traveling to Chechnya. Council of Europe representatives will submit a report to the assembly in Strasbourg, which will meet April 3rd to 7th. At that meeting, representatives could decide to suspend Russia's membership in the Council of Europe based on allegations of human-rights abuses in Chechnya.

Meanwhile, the Council of Europe has invited Radio Liberty correspondent Andrei BABITSKY, who was held in captivity for over a month, to address the council. BABITSKY, however has had to decline the invitation because investigators have suspended his travel rights. They fear that BABITSKY would emigrate to the West to escape charges of using a false passport and other accusations related to his work covering the Chechen conflict. BABITSKY said he would instead meet with the PACE delegation which is expected to arrive in Moscow today.

Former Chechen Defense Head Arrested

· Head of the criminal police of the Interior Ministry operative brigade in the North Caucasus Vladimir BARLIBIN today reported that its officers have detained Zaindi AKHMATKANOV, who was formerly in charge of Chechnya defense industry. The Chechen was also the director of an illegal mortar plant in Argun, which was established on the basis of a food industry enterprise under Chechen President Aslan MASKHADOV's personal order. The plant started serial production of 82 millimeter mortars on the eve of the Chechen rebel invasion in Daghestan in the summer of 1999, according to BARLIBIN. The mortar, intended especially for mountain warfare, was designed by a graduate of a technical university of a Commonwealth of Independent State-member country. It is easy to handle and transport and it can fire standard Russian mines. MASKHADOV personally supervised the plant and defined its production volume. AKHMATKANOV pointed out that the existence of the mortar plant was kept secret, with only two workers involved in the arms production. The

prosecutor general will launch legal action against the director and the constructor, also detained.

Economy

Ruble = 28.55/$1.00 (NY rate)

Ruble = 28.56/$1.00 (CB rate)

Ruble = 27.46/1 euro (CB rate)

OECD Report Cites Economic Problems

· The Organization for Economic Cooperation and Development (OECD) released an economic survey on Russia today, citing that economic growth had been inhibited by fiscal problems in regional governments. "Retrenching much of the fiscal decentralization of earlier years on the basis of increasingly rigid regulations and mandates has apparently backfired." The OECD said, "the high degree of centralization, lack of transparency and [often] unfeasibility of formal inter-budgetary arrangements seriously weakens financial responsibility at lower levels of government and encourages corruption." It urged the federal government to shoulder more social costs, continue new policies to allocate some funds to regions on the basis of need, and then impose temporary fiscal managers in regions which failed to meet obligations. It added that growth since the in Russian financial collapse in 1998 has been marred by widespread poverty. The OECD called on Russia to implement needed reforms. It suggested that the state reform tax laws, force through bankruptcy of deadbeat companies and even regions, and dismantle incentives for the non-cash barter which accounts for nearly 40 percent of industrial trade.

Russia Not To Borrow From CB In March

· First Deputy Prime Minister and Finance Minister Mikhail KASYANOV confirmed on Tuesday that the Russian government does not plan to borrow funds from the Central Bank in March. He said, "We hope March will be as successful as February," in terms of the budget. "A decision has been taken to refrain from taking central bank credits in March. As for April, we shall see." The Finance Ministry reported that Russia's federal budget surplus in February totaled 14.1 billion rubles ($494 million), 3.6 percent of gross domestic product (GDP). The primary budget surplus for February, which excludes debt servicing, has been estimated at 5.7 percent of GDP and at more than six percent in the first two months of the year, double the annual target. Former

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Finance Minister Mikhail ZADORNOV believes the government will face a cash shortage and will have to borrow hard currency to pay foreign debt this month. "Budget revenues are higher than expected, but there is a cash shortfall nonetheless, and therefore there will be borrowing from the Central Bank."

Russia Foreign Policy Enters New Phase

· Russian newspapers on Tuesday published a government proposal outlining plans for a east-west transportation network called Transcam. The network that would link China, Japan, and the Russian Far East with the Near East and Caucasus region is an alternative to the European Union's TRANCECA. The network would take 10 years to be built and would cost an estimated $4 billion, RFE\RL Newsline reported. The proposal calls for the creation of an extra-terrestrial international free economic zone to include Russia's North Ossetia and the unrecognized South Ossetia in Georgia. Comment: Russia's plan to restore its prestige and influence in the Caucasus region is now entering a new and more clever phase of utilizing its economic power for Russia's foreign policy purposes. Acting President Vladimir PUTIN's approach appears to be a more modern version of former prime minister Yevgeny PRIMAKOV's "great power" approach. Russia still enjoys considerable disparity of power with its neighbors in the near abroad. Its ability to influence events through military means alone remains a 19th century approach, which is out of sync with today's realities.

For example, Russia has been pressing Ukraine to pay its gas debt, largely symbolic during president Boris YELTSIN's era, by providing Russia with equity stakes in key industries. Moscow estimates that Kiev owes it over $2.3 billion for natural gas, but Ukraine says its debt is much less. Acting Prime Minister Mikhail KASYANOV last week handed Ukrainian officials a list of Ukrainian enterprises saying Ukraine could settle its debt by handing over state-owned shares. Ukraine's first deputy prime minister Yuri YEKHANOUROV said, "There will be no payments of debts with shares. No." This debt for equity swap was also proposed to Georgian officials earlier this year during electricity negotiations. However, the inclusion of South Ossetia as part of the free economic zone of the Russian Transcam project is clearly the most revealing indication that Russia will use economic carrot and sticks to divide and conquer the former states of the Soviet Union.

Business

SUN Interbrew Buys Stake In Russian Brewery

· SUN Interbrew Ltd.'s has purchased the controlling stake in Russia's fourth-largest brewer, Klin Brewery. SUN Interbrew, created last year from Russia's Sun Brewing Ltd. and Belgium's Interbrew NV, bought 74.25 percent of Klin Brewery, based in the Moscow region. Klin's market share rose last year to 3.8 percent from 3.2 percent in 1998. Its brands are available in Moscow and nearby regions. "It is significant for them, because one of the key issues the company was facing was its presence in Moscow," said Kim ISKYAN, an analyst at Renaissance Capital in Moscow. "You cannot be a Russian brewer and not have presence in the largest markets," such as Moscow and St. Petersburg. Domestic brewers have been expanding market share after the ruble's devaluation in 1998 made imported beers more expensive.

European Republics

Ukrainian Audit Shows No Misuse Of IMF Funds

· An audit of Ukraine's Central Bank, conducted by PriceWaterhouseCoopers (PwC), has determined that Ukraine did not misuse International Monetary Fund (IMF) credits in 1997. Allegations brought in late January by the fugitive former prime minister Pavlo LAZARENKO prompted the IMF to announce that it won't consider releasing new loans for Ukraine until a probe was completed. LAZARENKO claimed that $613 million in IMF credits were diverted into speculative government bonds in December, 1997. About $200 million were deposited in Belgian and Swiss accounts held by President Leonid KUCHMA's associates. KUCHMA, the Central Bank, and its former chairman Viktor YUSHCHENKO, now Ukraine's prime minister, denied LAZARENKO's allegations. According to a Central Bank statement PwC, "did not reveal any operations that, by their character or nature, could correspond to," LAZARENKO's allegations. YUSHCHENKO will bring up the subject of resumption of IMF lending programs during a visit to the US on March 14th to 16th. The World Bank has also requested that Ukraine's Finance Ministry expand the second audit to include the $1.81 billion in structural adjustment loans that the bank has granted Ukraine since 1994. This money was mostly used to cover foreign debt pay

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ments and that there was no immediate evidence of wrongdoing. Results of the second audit will be released later this month.

Few Lithuanian Ex-KGB Agents Come Forward

· Only 100 former KGB agents and informers have come forward under a new Lithuanian law requiring them to report on their past activities. The law, which took effect in Lithuania earlier this year, requires former agents and informers to file detailed confessions about their KGB collaboration with a special commission, which then keeps the names in a confidential database. It is believed that the law could apply to as many as 10,000 people. Rimas MARTINAITIS, an official at Lithuania's State Security Department, which oversees the registrations, said he expected numbers to increase as an August deadline for filing confessions approaches. The law supplements earlier legislation banning ex-agents from most public and even some private jobs. If suspected collaborators don't come forward voluntarily and evidence later points to their KGB links, their names would be made public and they could lose their jobs.

Latvia Rejects Privatization Candidate

· The Latvian government on Tuesday rejected the nomination of Edmunds JANSONS as head of the Latvian Privatization Agency (LPA), LETA reported. JANSONS, who was nominated by Economics Minister Vladimir MAKAROVS, said he would stand again if re-nominated. Justice Minister Valdis BIRKAVS added that current LPA head Janis NAGLIS can be removed from his post only by a government decision, as his contract is open-ended. MAKAROVS argues that the LPA head should not be a political appointment. NAGLIS is a board member of Latvia's Way, a member of the ruling coalition.

Estonian Defense Minister In Washington

· Juri LUIK, the Estonian Defense Minister, spoke this morning at a forum hosted by Radio Free Europe/Radio Liberty in Washington, DC. He outlined Estonia's democratic path and achievements since gaining independence. He said, "We have

successfully resolved a number of problems of a post-colonial nature, including ending the occupation and rebuilding a modern, civil society." His talk focused on Estonia's drive to join NATO. LUIK said Estonia is taking steps to increase defense expenditures to 2 percent of the nation's gross domestic product (GDP), a requirement for NATO membership. He also pointed out that Estonia is working to bring its forces and equipment in line with NATO standards. Finally, he noted that Prime Minister Mart LAAR has established a government commission devoted to preparing Estonia for NATO membership. During the question session, LUIK stressed that Estonia is interested in joining NATO to be a part of the West and not out of fear of Russia. The Estonian Defense Minister said that by joining NATO, Estonia will have a chance to forge new cooperative relationships with Western nations. LUIK brings youth and vigor to the Defense Ministry. He was Defense Minister in 1993 to 1994, Foreign Affairs Minister in 1994 to 1995, and Estonian Ambassador to NATO and the Benelux States.

South Caucasus & Central Asia

Armenian Parliament Passes 2000 Budget

· In a vote of 70 to 12 with 21 abstentions, the Armenian parliament Tuesday approved the 2000 budget. The budget projects a deficit of 4.7 percent of gross domestic product (GDP), to be covered chiefly by sales of domestic treasury bills and loans from international financial organizations. Spending is predicted at 252.8 billion drams ($462 million) on revenues of 202.1 billion drams, inflation is projected at five percent and the dram currency rate is expected to average 547 per dollar. Prime Minister Aram SARKISYAN said the budget will be tough to achieve. He said the government intended to eliminate all obstacles for development of domestic business, to strengthen financial discipline and to simplify the tax system. SARKISYAN did not rule out the possibility of amending the budget. The approved budget has been endorsed by various international financial institutions.

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 available for non-profit institutions.

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