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

Thursday, March 9, 2000

agency working like it did during the STALIN-era. It argued against the resurrection of a state police based on the KGB. FSB spokesman Alexander ZDANOVICH responded to this speculation, suggesting that BAZHAYEV, a Chechen, could have been the real target and that the terrorist act was enacted by Chechen rebels.

Blair To Size-Up Acting President Putin

· British Prime Minister Tony BLAIR is scheduled to arrive in St. Petersburg on Friday. He will be the first Western head of government to go to Russia to meet Acting President Vladimir PUTIN since the former director of the Federal Security Service (FSB) and spy was appointed acting President by former president Boris YELTSIN on December 31,1999. According to a BLAIR spokesman, "The Prime Minister's key objective is to build a personal relationship with Putin and assess for himself where Putin is coming from and what he wants to achieve." British officials stressed that they are determined to deepen relations with Russia, despite differences over the indiscriminate military operation in Chechnya. "Russia is too important a country to ignore or isolate over Chechnya...We need to engage. This opportunity should not be turned down," the spokesman added. BLAIR's visit follows last month's visit by Foreign Secretary Robin COOK and US Secretary of State Madeleine ALBRIGHT. COOK described PUTIN as a "refreshingly open" man who would push economic reforms and build better relations with the West. PUTIN has not travelled abroad since taking of

Russian Federation

Politics

Plane Crashes: Accident or Terrorist Act?

· A private passenger plane crashed during takeoff today from Moscow's Sheremetyevo airport, killing all nine people aboard. The Emergencies Ministry said there were five crew members and four passengers aboard the Yak-40 jetliner. The victims include Artyom BOROVIK, a well-known Moscow journalist and owner of Top Secret which covers compromising materials of government officials and businessmen, and Ziya BAZHAYEV, president of the Oil Alliance Group. The Yak-40 aircraft, a medium range Soviet-era passenger jet that typically carries 20 to 30 passengers, was on a charter flight from Moscow to Kiev. The airport was immediately closed for two hours after the crash, during which incoming planes were diverted to other airports. Eyewitnesses say the plane rose briefly into the air and then plunged down. The Emergencies Ministry said the cause of the crash was still unclear. There were no explosions. An investigation was launched into whether or not the plane had violated safety requirements. The plane had been in operation for 20 years, but had a resource-life of 32 years. The crew was very experienced and the technical state of the aircraft had been assessed to be in excellent condition. Investigators have recovered the black box from the cockpit. The contents may be available later.

Although NTV Television did not say anything specific in its coverage of the accident, speculation is rife in Moscow that the tragic event was not an accident, but a terrorist act against BOROVIK. The magazine Top Secret has published articles criticizing Acting President Vladimir PUTIN's government, particularly business tycoon Boris BEREZOVSKY. In its latest editorial piece, the magazine criticized the Federal Security Service (FSB), claiming that the

Today's News Highlights

Russia

EU To Cut Russian Steel Imports

BMW Assembls 1,000 Cars

European Republics

Kuchma Signs 2000 Budget

Industrial Production Rising

South Caucasus & Central Asia

Georgia: Keytsone To Stability

Uzbek Seizes Counterfeit Bills

Kazakh Banking Sector Grows

Politics-Economics-Business

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Thursday

March 9, 2000

Intercon's Daily

fice. He is expected to drop the "acting" part of his title after easily winning the presidential election on March 26th. PUTIN's political standing has been built on the "successful" developments of the Chechen military offensive. British officials insist that BLAIR will press Russia on its actions in Chechnya and stress that the crisis should be resolved through negotiations and not bombardments, or through political talks not military force. Other issues on the agenda include the Balkans, organized crime and the forthcoming Group of Eight summit of the leading industrialized nations and Russia. The sides will also discuss economic ties and greater coordination of criminal investigation bodies.

Death Toll Rises In Chechen Fighting

· Russian federal troops continued their attacks Wednesday on the remaining rebels in Chechnya, killing 37 militants near the village of Selmentauzen. Two special officers of the Justice Ministry were killed and seven interior troops wounded in fighting near the village of Komsomolskoye, said Gennady ALYOKHIN, head of the army's press center. Russia reported killing at least 10 mercenaries, six of which were described as Ukrainians and four as Arabs. Fierce battles are continuing in the Komsomolskoye, where Russian commanders hope to capture Ruslan GELAYEV, a senior rebel field commander leading 25 to 30 rebels. Another band of rebels has been surrounded on the outskirts of the village, ALYOKHIN said. Commanders say they are now employing what they called large-scale reconnaissance operations to find the remaining rebels hiding in the mountains. Aircraft and special equipment will be utilized in the reconnaissance, said Colonel General Gennady TROSHEV, acting commander of the Russian army group in the North Caucasus. He said rebel commanders Shamil BASAYEV and KHATTAB might be somewhere west of the Argun gorge where fighting is underway. Federal air force destroyed a runway on Goluboye Lake in Vedeno district on Tuesday, which was believed to have been made for the evacuation of the rebel ringleaders.

Putin Honors Women's Day With Perfume

· In some sort of bizarre campaign move to gain women's votes in the presidential election, acting President Vladimir PUTIN saluted the women serving in Russia's military by giving them perfume and cosmetics. This gift gesture coincided with International Women's Day on Wednesday, which is cel

ebrated by praising the role of women and mothers in society. Russian television showed footage of the presents with yellow ribbons and a greeting card being loaded for the women serving in Chechnya. PUTIN also presented 20 women with awards in the Kremlin. PUTIN's main competitor Communist Party leader Gennady ZYUGANOV also paid tribute to Russia's women. On Ekho Moskvy radio, he said, "Woman is nature's most beautiful, most amazing creation. But men have not justified the trust placed in them to tackle the country's problems. How can a woman feel feminine when her husband brings home a miserable wage."

Economy

Ruble = 28.55/$1.00 (NY rate)

EBRD Sees Loans To Russia Rising In 2000

· The European Bank for Reconstruction and Development (EBRD) expects to make 500 to 700 million euros in loans and investment this year in Russia, up from 220 million euros in 1999. David HEXTER, the EBRD's vice president in charge of banking said that loans to Russia in 1999 fell to 10 percent of total commitments of 2.162 billion euros from 23 percent of 2.373 billion in 1998. HEXTER noted that Russia still accounts for the lion's share of bad loans. Russia accounted for 80 percent of bad loan provisions in 1999 and 50 percent of bad equity investment provisions, Reuters reported. Provisions against bad and doubtful loans fell to 160.9 million euros from a Russia-inspired 553.1 million euros. HEXTER, however, said that the medium term objective of investing 25 percent to 30 percent of the bank's commitments in Russia remained unchanged.

EU To Cut Russian Steel Imports

· The European Union (EU) plans to cut steel imports from Russia by 12 percent this year in response to Russia's introduction of export taxes on scrap metal in April, 1998. The EU stated that the decision was not political and was in no way related to events in Chechnya. Some EU delegates warned that the move could set a bad precedent and elicit Moscow's counter-measures. EU countries had agreed that Russia should be "punished" for adopting the export duties by cutting the quota for steel imports, but there had been no consensus until recently on how much. The European Commission proposed a cut of 20 percent, which France said

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would be an insufficient response to Moscow's export duties. Britain, Sweden and Germany believed that exports should not be slashed by more than 10 percent. A compromise of 12 percent was proposed by Portugal. European experts estimated economic losses which European importers faced from Russia's export duties in order to find an adequate response. Europe's losses were estimated at 270 million euros.

Business

BMW Assembles 1,000 Cars At Russian Plant

· Bavarian Motor Works (BMW), Germany's third-largest car-maker, assembled the first 1,000 cars at a plant in Russia. BMW set up a Russian assembly line last year with Avtotor, a carmaker, in the Kaliningrad region that borders Poland. BMW said it would invest 125 million deutsche marks ($61.5 million) in the next three years to establish the operation and a sales network, as it seeks to expand its presence in the market. The models planned for assembly include the 5-series sedans and Land Rovers. International car-makers have been seeking ways to cut costs and offer more competitive prices after the market for imported vehicles shrunk following the ruble devaluation in 1998, making imports more expensive. BMW said it started selling cars assembled in Kaliningrad in late 1999. Russians already drive an estimated 120,000 BMWs. BMW sold 1,000 imported cars in Russia in 1998.

compared with last year's budget. The budget targets a zero deficit with total revenues and expenditures of 33.43 billion gryvnias ($5.78 billion).

Ukraine's Industrial Production Rising

· Ukraine's State Statistics Committee reported that industrial production rose 10.2 percent in the first two months of this year compared with the same period a year ago. In February alone, industrial production rose 6.9 percent from the previous month and 14.7 percent from the same month in 1999. Last year, industrial output fell 2.4 percent in two-month period from the same period in 1998. Industrial output in the wood-processing industry rose the most in between January and February from the same period a year ago, by 35.3 percent, while output rose 32.2 percent in the food-processing industry, 31.3 percent in the textiles industry and 25.5 percent in the non-ferrous metals industry. Fuel production declined, dropping 16.2 percent in the first two months from the same period a year ago due to insufficient supplies of crude oil from Russia to Ukraine's oil refineries. The government recently raised its industrial output forecast from initially expected 3.2 percent growth to between 4.5 percent to 5 percent increase this year from 1999. Industrial production increased 4.3 percent in 1999 from 1998.

South Caucasus & Central Asia

Georgia: Keystone To Stable Caucasus Region

· Georgian President Eduard SHEVARDNADZE has been adamant that Georgia will stay out of Russia's conflict with the Chechen rebels. Georgia has accepted thousands of Chechen refugees, mostly women, children and the elderly. It has tightened border procedures, closed its borders with Chechnya, and implemented a mission of Organization of Security and Cooperation in Europe observers to monitor the 80 kilometer border with Chechnya. Despite these measures, Georgia is still at risk of being pulled into the conflict. Russian troops battling Chechen rebels have pushed further into the southern mountains. Moscow has accused Georgia and Azerbaijan of treating rebel fighters in their hospitals, providing transit for rebel reinforcements and their equipment, and allowing rebels to operate information centers on their territory. Azeri President Geidar ALIYEV has admitted to treating Chechens in its hospitals, but did not specify whether they were

European Republics

Kuchma Signs 2000 Budget

· Ukrainian President Leonid KUCHMA signed into law the austere 2000 budget passed by parliament on February 17th. In a letter to the parliamentary speaker and the Prime Minister, KUCHMA said he signed the document because it was the result of a compromise between the parliament and the government. He noted that the budget, "does not fully take into account the financial strategy" presented in his annual address to the parliament. The President called the budget "abnormal," pointing out that the budget provides subsidies to all regions, except Kiev and Crimea. The budget, "does not provide the necessary preconditions to considerably reduce the tax burden" on the production sphere. KUCHMA also expressed his concern over increased expenditures,

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civilians or rebels. He said that not to admit them would be, "anti-humanitarian." One Azeri official pointed out that Georgia is more vulnerable than Azerbaijan to war-overflow from the Chechen conflict. He said, "As soon as they [certain Russian circles] are done with Chechnya, we are very concerned that Russia will focus on Georgia and then on Azerbaijan." Georgia, the main country connecting the North and South and the East and West trade routes, is the keystone as to whether the region remains stable. The Financial Times reports that unresolved ethnic conflicts in Abkhazia and South Ossetia, continued economic hardships, and the shared border with Chechnya are all potentially destabilizing factors. Negotiations with Russia for the closure of two Russian military bases on Georgia's territory and the race to build pipelines to export oil and Turkmen gas to western markets are also possible trouble spots. Tbilisi has accused some Russians circles of meddling in Georgia's ethnic conflicts by funding the opposition and of training rebels involved in organizing and participating in assassination attempts on SHEVARDNADZE. Russia's covert action efforts to destabilize Georgia and assassinate SHEVARDNADZE continues to focus on Igor GIORGADZE. GIORGADZE, wanted by Interpol for the 1995 car bomb attack on SHEVARDNADZE and recently indicted as the leader in a coup attempt remains at large. Repeated attempts to extradite GIORGADZE from Russia have failed. GIORGADZE, who reportedly travels between Russia, Belarus, and Syria under the protection of the Russian military intelligence (GRU) is currently in Syria. Funding for these efforts supposedly remains at an all time high. These continued attacks have led observers to speculate that Moscow will attempt to expand its regional dominance over Georgia. Hope to prevent this has come in the form of a Caucasus Stability Pact proposed by Turkish President Suleyman DEMIREL and the GUUAM nations. He said, "We are trying to tell Russia you should be a part of this as long as you don't pursue hegemonistic tendencies. This is no longer your backyard."

Uzbek Police Seize Counterfeit Dollars

· Uzbekistan police have seized about $400,000 in counterfeit bills. The Uzbek Interior Ministry's investigation was launched after Russian Interior Minister Vladimir RUSHAILO stated that $3,000,000 counterfeit greenbacks had been made in Chechnya. The Russian Federal Security Services suggested that part of the dollars could be smuggled to Uzbekistan. Following the Russian tip, Uzbek police discovered and arrested a group who dealt with the counterfeit money. Hundreds of thousands were seized from two "sellers," SULTANOV and DADABAYEV. The latter said he had received the money in Kazakhstan from a Chechen person residing there. Among the arrested persons was a resident of Khasayurt, named ULUDUYEV.

Kazakh Banking Sector Gaining Strength

· Kazakh Central Bank Chairman Grigory MARCHENKO on Monday predicted that retail deposits in Kazakhstan's commercial banks will probably grow to $700-800 million by the end of 2000 compared with $408 million last month and $398 million at end-January, Reuters reported. "Confidence in the domestic banking system is growing and we expect this trend to continue," MARCHENKO told a news conference. "We believe that up to $700-800 million will be in personal savings [accounts] by the end of the year." The sum is only a fraction of what Kazakhstan's 15 million people are believed to have saved under their mattresses at home. The Central Bank last month created a fund for insuring retail deposits and MARCHENKO said a banking secrecy law would also soon be passed. The law, which will benefit individuals initially and later enterprises, could help bring back some of the money that has been spirited abroad since independence and help strengthen the banking system. The Chairman added, "Banks prefer to invest in the treasury bill market where yields are a maximum 10 percent, but shy away from lending to enterprises at 20 percent." He stressed, "Our task is to keep the (tenge) exchange rate at the present level."

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

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