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, May 18, 2000

will allow the Kremlin to punish regional leaders who make decisions outside or in conflict with federal law. The Washington Post notes that it had become increasingly common for regions to write their own laws and engage in trade practices that are at odds with policies set in Moscow. The third proposal would give the President the power to dismiss elected governors and dissolve local assemblies. It would also grant governors the power to dismiss regional mayors and other administrators. This package of powers to strengthen the Kremlin comes just days after PUTIN divided the country into seven super districts from 89 regions. These districts will be monitored by a Kremlin envoy, which will enforce federal policies. These Presidential envoys will be selected from the military or other security services.

The proposals received a mixed reaction. Duma Speaker Gennady SELEZNYOV said, "These laws must be adopted to remind everyone that Russia is a federation, not a confederation where the territories have nearly unlimited rights." Both the Russian State Duma and the Federation Council must approved PUTIN's proposals. The power package will probably face strong resistance from some regional leaders. Boris NEMTSOV, a member of the Duma and a former deputy prime minister, said, "Nationwide elections must be preserved ... This is nothing but the first step toward dictatorship and this is a coarse violation of the constitution." If the plan is adopted, NEMTSOV said the removal of a

Russian Federation

Politics

Top Ministers Retain Their Posts

· On Wednesday, Russian President Vladimir PUTIN signed decrees re-appointing most of the nation's top ministers. The ministers that retained their positions include: Defense Minister Igor SERGEYEV, Interior Minister Vladimir RUSHAILO, Foreign Minister Igor IVANOV, Emergencies Minister Sergei SHOIGU, and Justice Minister Yuri CHAIKA. These appointments indicate that PUTIN has not big changes planned for Russia's military and diplomatic strategy. Other appointments included Nikolai PATRUSHEV as director of the Federal Security Service (FSB), Vyacheslav SOLTAGANOV as head of the Federal Tax Police Service, Yevgeny MUROV as head of the Federal Bodyguard Service, Konstantin TOTSKY as director of the Federal Border Guard Service. Newly approved Prime Minister Mikhail KASYANOV said that all Cabinet members would be appointed no later than the beginning of next week.

Putin Tinkers With Legislative Branch

· President Vladimir PUTIN addressed the Russian nation on television Wednesday night, reiterating his pledge to impose a "dictatorship of law." He said that newly proposed initiatives are aimed at strengthening the "vertical structure of power." The President's proposals, which he said would not require Constitutional amendments, were sent to the Russian State Duma, outlining a major overhaul to Russia's system of government. The first bill calls for regional legislature to elect two full-time representatives to the Federation Council, instead of the governor and speaker of the legislature serving part-time. This will diminish the governors' ability to lobby the Kremlin, but give the Kremlin more influence in the upper house. The second proposal

Today's News Highlights

Russia

Russia Unable To Stop Ambush

Kasyanov Urges Econ. Reforms

EBRD-LUKoil Sign Loan Agmt.

European Republics

NATO's Robertson Visits Estonia

Ukraine's Indust. Product Falls

South Caucasus & Central Asia

GUUAM Pannel Seminar

Baku-Ceyhan Pkg. Submitted

ADB To Lend Kazakh $400M

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May 18, 2000

Intercon's Daily

governor should be left to the courts to ensure the decision was not politically motivated. Federation Council Yegor STROYEV said the move was long overdue and was aimed at getting parliament to work more effectively.

Russia Unable To Prevent Major Attack

· Interior Minister Vladimir RUSHAILO said today that the Russian military had prior knowledge that a convoy was about to be attacked in Ingushetia by Chechen rebels. The ambush on May 11^th killed 18 Russian soldiers. RUSHAILO said, "Information on an imminent attack had been received beforehand and search measures had been organized. However, they failed to yield positive results." The Minister blamed the attack on mistakes and miscalculations made by commanders of the Interior Ministry force and the Interior Ministry of Ingushetia. Federal officials have warned that the raid signaled the Chechens' intention to expand their fight to other Russian territories after nine months of war. Federal positions have come under fire 14 times since Wednesday. The Associate Press reported that Russia has flown 24 combat missions, bombing suspected rebel bases in the Nozhai-Yurt district near the eastern border with Daghestan and in the forest near the town of Achkoi-Martan in central Chechnya in the past 24 hours.

Economy

Ruble = 28.27/$1.00 (NY rate)

Ruble = 28.33/$1.00 (CB rate)

Ruble = 25.33/1 euro (CB rate)

Kasyanov To Press Ahead With Reforms

· After easily winning the approval of the Russian State Duma, Prime Minister Mikhail KASYANOV pledged to press ahead with "energetic, consistent, and balanced" reforms. He did not spell out any detailed policy initiatives that could be included in the Kremlin's economic program. He said the reforms should benefit all and not harm the living standards of ordinary Russians. The Prime Minister called for reducing taxes, saying private businesses must be allowed to thrive and that the country's bad banks must be weeded out. KASYANOV declined to endorse the strict plan being developed by a government think-tank led by economics advisor German GREF. He said, "Today the government doesn't yet have a program.

We have received draft programs from various political groups." He stressed the importance of following a plan that the public supports. KASYANOV said Russia needs to continue market reforms to sustain the economic recovery that began with last year's unexpectedly strong 3.2 percent growth. Deputies urged KASYANOV to tackle widespread official corruption and sever the government's ties with the so-called business oligarchs.

Russia-Sweden To Restructure Soviet Debt

· Russian Deputy Finance Minister Sergei KOLOTUKHIN announced that Russia and Sweden agreed on terms for restructuring payments on Soviet-era debt to the Paris Club of sovereign creditors due in 1999 and 2000. In August, the Paris Club agreed to restructure payments due in 1999 over a period of 20 years, but Russia must reach bilateral agreements with each Paris Club member in order for the deal to take effect. Agreements have already been reached with 6 of the 18 club members: Spain, Austria, Australia, Switzerland, France and Germany. Russia owes creditor governments about $40 billion in Soviet-era debt and said it will ask for a partial reduction of the principal and rescheduling of interest payments later this year.

Business

EBRD-LUKoil Sign $150 Million Loan

· The European Bank for Reconstruction and Development (EBRD) signed a $150 million loan deal Monday with Russia's largest oil producer, LUKoil, on condition that the company improves transparency. The three-year loan is intended to help LUKoil replenish working capital and is secured with the company's oil exports. LUKoil must make its financial statements and share ownership more transparent to guarantee further EBRD lending. The loan requires LUKoil to issue by the end of this summer financial accounts through fiscal year 1998 according to International Accounting Standards and without qualifications. LUKoil President Vagit ALEKPEROV said at the signing, "The new loan is confirmation of the trust placed in the company and in its openness by foreign investors." This loan is the EBRD's second-largest to date in Russia. The EBRD has said it could lend Russia $550 million to $750 million in 2000, up sharply from $220 million in 1999. One EBRD banker said the company is considered one of Russia's best managed,

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but to count on steady financing from international markets in the future it needs to improve its financial accounting and the transparency of its ownership structure. LUKoil, which like many Russian companies suffered after the August 1998 financial crash, has been rebuilding its standing with the help of higher oil prices over the past year. LUKoil will hold an annual shareholders' meeting on June 8^th, where the company plans to present its 1999 earnings according to international standards. The company plans to increase the number of its shares traded abroad and needs to present its accounting based on international norms to sell more American depositary receipts.

struction materials rose the most in April from March, increasing 10.9 percent, while output in the ferrous metals industry rose 1.7 percent and output in the food processing industry rose 0.5 percent. The government said last month it raised its industrial output forecast to 6.5 percent from between 4.5 percent to 5 percent growth initially expected. Industrial production increased 4.3 percent in 1999 from 1998.

South Caucasus & Central Asia

GUUAM Panel Warns of Regional Conflicts

· Addressing a seminar sponsored by Radio Free Liberty, the Ambassadors of Georgia, Ukraine, Uzbekistan, Azerbaijan, and Moldova, expressed the GUUAM countries' interest in expanding cooperation with each other and the US. Senator Gordon SMITH (Rep- Oregon), a member of the Senate Foreign Relations Committee said that the US should devote more attention to GUUAM and the efforts it takes to prevent nuclear proliferation, block narcotics traffic, and fight religious and ethnic extremism. Molodvan Ambassador Ceslav CIOBANU said that GUUAM had given its members a new self-confidence about the future. He said GUUAM's purpose is to create network of nations, which has an open door policy, which is against no one or nothing. CIOBANU stressed that the organization should work to decrease dependence on any single nation and that the borders of the Soviet Union should not be re-established. Ukrainian Ambassador Kostiansyn GRYSHCHENKO said that the group was first formed as a consultive organization. Now the group needs to create a structure to actively work on practical projects. Uzbek Ambassador Sodyq SAFAYEV pointed out GUUAM's economic and security dimensions. He also said that GUUAM reflects Uzbekistan's commitment to democracy and the Western orientation of the other member states. SAFAYEV added that one main aspect of GUUAM is its aim to strengthen regional stability. Azeri Ambassador Hafiz PASHAYEV stated three priorities of the group: political decisions for interaction with international and European organizations; economic cooperation through the Eurasian corridor and its security; and the cooperation to oppose religious and ethnic intolerance. Georgian Ambassador Tedo JAPARIDZE stressed that GUUAM has a strategic relationship among its members. These

European Republics

NATO's Chief To Visit Estonia

· NATO Secretary-General George ROBERTSON is scheduled to arrive in Estonia today as part of a tour to visit countries seeking membership in the security alliance. In the past, the NATO chief has said that Estonia is a strong candidate to join the alliance. Estonia has set 2002 as its date to meet requirements for NATO membership, four years earlier than a target mentioned in a recent Partnership Goals document from the alliance. Estonia will spend 1.6 percent of gross domestic product on defense this year, up from 1.39 percent in 1999, and the government plans to boost that to 1.8 percent next year and 2 percent in 2002. Estonia, Latvia and Lithuania have made joining NATO a foreign policy priority since regaining independence from the Soviet Union in 1991. ROBERTSON will meet with President Lennart MERI, Prime Minister Mart LAAR, Foreign Minister Toomas ILVES, and Defense Minister Juri LUIK.

Ukraine's Industrial Production Fell In April

· Ukraine's industrial production decreased 4.5 percent in April from March, but was up 11.2 percent from the figures obtained in April, 1999. The State Statistics Committee reported that in the first four months, industrial production rose 10.4 percent from the same period a year ago. Production of electricity declined the most in April from the previous month, dropping 24.4 percent, while output in machine building and metal processing industries decreased 6.8 percent and output in the textiles industry fell 4.9 percent. Production of con

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five countries have come together because of their, "common Western orientation, common problems, and common threat perceptions." A second panel of experts followed the Ambassadors, which included RFE\RL Communications Director Paul GOBLE, Intercon's Paul JOYAL, SAIC's Glen HOWARD, and RFE\RL's William SAMII. Picking up on point made by CIOBANU that 50,000 tons of munitions are stored at Russian bases in the Trans Dneister region, JOYAL noted this poses a real threat to the region. He pointed out that weapons from these bases were used to arm Abkhaz separatists in Georgia during the 1993 to 1994 conflict. The arms have also been linked to the Balkan conflicts. GOBLE said that the formation of GUUAM demonstrated that these nations were focusing more on an east-west corridor and not a north-south corridor with Russia being the dominant nation. He said that GUUAM helps its members to further define themselves after the Soviet Union's collapse. Universally all panelists urged that Uzbekistan be re-included in the Senate GUUAM legislation because of its strong efforts to combat proliferation of weapons of mass destruction and counter-narcotic operations.

Baku-Ceyhan Package Submitted

· Georgian President Eduard SHEVARDNADZE presented to parliament today the complete package of agreements on Baku-Tbilisi-Ceyhan Main export pipeline. SHEVARDNADZE has also made copies of the agreements available in the libraries of Tbilisi, Kutaisi, Poti and Batumi. Georgian International Oil Corporation president Gia CHANTURIA told Prime News Agency that the company will present the package of agreements to scientists on Friday. CHANTURIA noted that the parliaments of Georgia, Turkey and Azerbaijan are obliged to ratify the agreement before June 10^th.

Turkmen-Pakistan Renew Pipeline Talks

· Turkmen President Saparmurat NIYAZOV, after meeting with by Pakistan's military ruler Parvez

MUSHARRAF, said the two nations were working to revive gas pipeline talks on an abandoned project. The plan to transport Turkmen gas through war-torn Afghanistan or Iran to Pakistan and further to India and other countries was abandoned. NIYAZOV said the resurrection of the project will be discussed at the upcoming summit of the Economic Cooperation Organization in Tehran. The group unites all five central Asian states as well as Pakistan, Iran, Afghanistan and Turkey. The project was initially planned by Argentina's Bridas Corp. and was taken up by US Unocal after Bridas was ousted from Turkmenistan. Unocal pulled out of the project because attracting financing was virtually impossible due to the fighting in Afghanistan, Reuters reported. Many analysts doubt the project has any chance of success in the near future given the region's political instability and the lack of funds available to both Turkmenistan and Pakistan.

ADB To Lend Kazakhstan $400 Million

· The Asian Development Bank plans to lend Kazakhstan $400 million over the next four years to finance a number of infrastructure and agricultural projects. Bank representative Hong WANG said today, "Recently the ADB and the government have reached an agreement on a program of assistance for...2000-2003. In the next four years the ADB will provide Kazakhstan with loans totalling $400 million and grants of $16 million." He said the bank would focus on supporting economic reforms in Kazakhstan, together with social development. The ADB plans to allocate $10 million this year to deal with Kazakhstan's locust infestation threat. Another $60 million will finance the reconstruction of the Almaty-Bishkek highway and $35 million will be allotted for supporting farmers' cooperatives. WANG said most loans would be made under government guarantees, but some private sector loans would be given without guarantees. Kazakhstan joined the ADB in 1994. It has so far received loans worth $415 million. The prior funds went towards pension reform, agriculture, water, education and road-building, Reuters reported.

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

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