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

Thursday, June 1, 2000

Russian Federation

Politics

Duma Backs Putin On Boosting Central Rule

· The Russian State Duma on Wednesday, in a vote of 362 to 34 with eight abstentions, gave its initial support to the first reading of President Vladimir PUTIN's three bills on reforming the Federation Council, centralizing regional power, and giving the President the power to remove regional governors and disband regional legislatures. PUTIN believes that the series of bills are intended to "strengthen and cement the Russian statehood." In May, PUTIN reorganized the country from 89 regional districts to seven and appointed new envoys to each region to be the eyes and ears of the Kremlin. The regional envoys are to report directly to PUTIN and are charged with, "guaranteeing the realization of the constitutional powers of the head of state within the limit of the...federal district." Some liberal critics warned that giving the Kremlin the power to dismiss elected governors could lead to authoritarian rule.

Several deputies, however, have initiated proceedings to amend the bill, which could threaten to effectively cancel the bill. Leading this charge is business tycoon and deputy Boris BEREZOVSKY, who strongly criticized PUTIN's plans and the method in which he is pushing through the centralizing reforms. In an open letter to the President, BEREZOVSKY said regional reforms could stifle local initiatives and do more harm than good. He said, "It is impossible to take such a decision in a democratic society without broad and open public discussion and a subsequent referendum." Addressing the Duma, BEREZOVSKY said, "There is no doubt about the need to strengthen the government, but the President's efforts would lead to a global catastrophe." At a news conference he said, "What PUTIN is trying to do will lead to dictator

ship… It's a revival of the Soviet-style system of government." BEREZOVSKY, who claimed to have used his influence to bring PUTIN to power, has also accused PUTIN of unscrupulous dealings while serving under former president Boris YELTSIN.

Russian Troops Surround 600 Chechen Rebels

· Russian military commander claims that federal troops have surrounded nearly 600 rebels in the southern village of Nozhai Yurt. The troops moved in after a battle involving powerful artillery and air strikes near. The rebel website, however, denies that rebels are trapped by Russian troops. It said, "Information about the alleged entrapment of 400 mujahadeen is an absolute lie…There is sporadic gunfire from all sides and from all types of weapons...The aggressors' armored vehicles weave from side to side, chaotically firing at mountain slopes and into forests." Russian ground troops were holding back from close-quarters fighting with the militants, instead trying to pinpoint rebel positions for air and artillery strikes. Russian Su-25 attack jets flew 13 combat missions over the past 24 hours. Chechen rebels continue to demonstrate their ability to ambush troops in columns and attack border checkpoints. On Wednesday, a remote control bomb killed Russia's second highest civilian official in Chechnya, Sergei ZVEREV, and the Moscow-appointed deputy mayor of the capital Grozny, Nusreda KHABUSEYEVA.

Security Council List Alternatives To Afghan Strikes

· Russian Security Council

Today's News Highlights

Russia

Putin Rehires Kalyuzhny

Cabinet Works On 2001 Budget

Sibirsky Owes UES $7 Million

Texaco-Tyumen Sign Agreement

European Republics

OSCE Invited IntoBelarus

Ukraine To Sell Steel Mill Stake

South Caucasus & Central Asia

Car Bomb Explodes In Tbilisi

Georgia Approves MEP Package

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Secretary Sergei IVANOV on Monday listed alternatives to military strikes on Taleban camps in Afghanistan, which are allegedly training rebel fighters for the Chechen conflict. Among such options he listed diplomatic and political pressure, economic sanctions, support for "Afghanistan's legitimate government," headed by Burhanuddin RABBANI, military assistance to the Northern Alliance of Ahmed Shah MASSOUD, and assistance to Tajikistan, Uzbekistan, and other "Russian allies." He declined to exclude the possibility of air strikes in order to quell the, "flood of drugs and terrorists." On Monday, Taleban-controlled newspaper in Kabul claimed that 16 Russian generals have visited opposition-controlled territory in northern Afghanistan to meet with MASSOUD and RABBANI, whom they promised to supply with weapons and advice on strategic planning. Kazakh President Nursultan NAZARBAYEV has expressed concerns over Russia's threats. He believes that the present situation does not require air strikes. However, he agreed with Russia that instability in those areas of Central Asia bordering on Afghanistan poses a threat to Russian security.

Kalyuzhny Rehired As Deputy Foreign Min.

· President Vladimir PUTIN has appointed former fuel and energy minister Viktor KALYUZHNY to the post of the deputy foreign minister. PUTIN also appointed KALYUZHNY as the state special representative for resolving the status of the Caspian Sea. The presidential press service did not specify whether KALYUZHNY will be in charge of Caspian affairs as deputy foreign minister. KALYUZHNY, prior to working in the fuel and energy ministry, served as deputy minister in the government of former Prime Minister Yevgeny PRIMAKOV in 1998.

Economy

Ruble = 28.25/$1.00 (NY rate)

Ruble = 28.3/$1.00 (CB rate)

Ruble = 26.3/1 euro (CB rate)

Russia Plans For 2001 Budget

· The Russian government today is reviewing proposals for a balanced 2001 budget, with revenues to be boosted by planned tax reforms. Prime Minister Mikhail KASYANOV said, "For the first time we are examining basic parameters of a draft budget which has no deficit." He stressed that it is

crucial for Russia to adopt tax reform legislation, to boost revenues by 100 billion rubles ($3.1 billion at a projected average exchange rate of 32 rubles per dollar). Government figures estimate 2001 budget revenues will be about 1.05 trillion rubles without the tax reforms and 1.15 trillion with the reforms. The State Duma has postponed its summer recess until July 7^th to consider the new tax laws, the budget and other measures. Finance Ministry officials have said inflation next year is expected to be 11 percent, down from 18 percent in the 2000 budget. KASYANOV as saying salaries could be indexed to account for inflation in 2001 since social spending is a government priority. Finance Minister Alexei KUDRIN noted that Russia will pay 11.6 billion on foreign debt, according to 2001 budget plans.

Business

LUKoil-Yukos To Bid On Onaco

· LUKoil Holding, Russia's top oil producer, may team up with Yukos Oil Co., the nation's number two producer, to bid for state-owned Onaco, the Vedomosti daily reported, citing LUKoil Vice President Leonid FEDUN. The government plans to sell 85 percent of the company by the end of the year. Yukos already holds a 16 percent stake in Orenburgneft, Onaco's largest producing subsidiary. LUKoil also plans to bid for government-owned stakes in Rosneft and Slavneft, scheduled to be auctioned this year.

Sibirsky Owes UES Subsidiary $7M

· Sayano-Shushenskaya GES, Russia's biggest hydropower plant, a unit of national utility Unified Energy Systems, said it is owed 200 million rubles ($7.1 million) in unpaid electricity bills by Sibirsky Alyuminiyum, Russia's third-biggest aluminum producer. The statement follows the breakdown of talks between UES Chief Executive Anatoly CHUBAIS and Sibirsky Alyuminiyum's Chief Executive Oleg DERIPASKA on creating Energometallurgicheskoye Obyedineniye on the basis of the utility and aluminum company assets. The shareholders of the power utility and Sayansky Alyuminiyevy Zavod, major aluminum smelter of Sibirsky Alyuminiyum, had a joint meeting to approve the merger of some assets late last year. Sibirsky Alyuminiyum assets will be merged with aluminum producing assets owned by shareholders of Sibneft, Russia's sixth-largest oil producer,

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to create a holding later this year which will control about 75 percent share of the Russia's aluminum production.

Texaco-Tyumen Sign Advisor Agreement

· Texaco and Tyumen Oil Company (TNK) Tuesday in New York signed an agreement for Texaco to provide commodity risk management advice and related support to the Russian oil company. Texaco Vice President and President of Texaco International Trader Inc. Robert OELKERS, in a company press release said, "Texaco is pleased to provide Tyumen Oil with commodity risk management services. This agreement establishes our commodity trading relationship with Tyumen Oil, as well as increases the scope of commodity risk management services Texaco offers to other companies." Tyumen President Simon KUKES said, "This collaboration is an important outgrowth of our relationship with Texaco in marketing, trading and retailing. Through such relationships, we are able to add value to our shareholders." Since January of this year, Tyumen Oil and Texaco have operated a joint venture to market Texaco-branded imported lubricants as well as TNK and Texaco-branded lubricants produced and blended at Tyumen Oil's refinery in Ryazan. Later this year, Italian-made equipment for manufacturing and filling packaged lubricants will begin operation at Ryazan. This new facility will be capable of increasing production of high-quality packaged products. Many of the new lubricants will be sold through Tyumen Oil's network of service stations in Russia and neighboring countries. Tyumen has six billion barrels of proven oil reserves and produces 460,000 barrels per day. The Russian oil company, part owned by Alfa Group and Access/Renova, also operates 620 retail gasoline stations.

Russki Alumin. To Invest In Alumina Producer

· Russki Alyuminiyum, the nation's biggest aluminum maker following its merger to be completed this summer, plans to invest 193 million rubles ($6.8 million) in Achinsky Glinozyomny Kombinat. The firm hopes to boost the alumina output at Achinsky Glinozyomny by 8.2 percent to 830,000 tons in 2000. Achinsky Glinozyomny accounts for a quarter of Russia's domestic alumina output, with about 60 percent of alumina imported for the nation's smelters. Alumina is used to make aluminum.

According to a company statement, Achinsky Glinozyomny has already received 25 million rubles from Russki Alyuminiyum to maintain production. Russia produces only 2.5 million of alumina. Russki Alyuminiyum, which was registered as a company earlier this year, will be the largest producer in the nation after 75 percent of Russia's aluminum production is consolidated with the planned merger of Sibirsky Alyuminiyum, Russia's number three producer, and smelters owned by shareholders of Sibneft, Russia's sixth-largest oil producer.

European Republics

OSCE Observers Invited To Belarus

· Belarus President Alexander LUKASHENKO has invited observers from the Organization for Security and Cooperation in Europe (OSCE) to assess Belarus' democracy and fairness of the parliament elections scheduled for fall 2000. The President has announced his readiness to accept the proposal of the OSCE consultative observer group for Belarus on setting a confidence period in the country during preparations and holding of the parliament election. The Belarus administration assumes the obligation not to do anything that may deteriorate conditions for public organizations and political parties, but the radical opposition, "must abstain from actions that violate the laws and do deliberate damage to foreign political and economic interests of the nation," LUKASHENKO said on Tuesday. The President plans to submit proposals on changes in the election code to meet the request of a dialog with participants.

Ukraine To Sell Steel Mill Stake

· The Ukrainian State Property Fund today announced plans to sell a 16.032 percent stake in steel mill Donetsky Metalurhychny Zavod on the Ukrainian Inter-Bank Currency Exchange (UICE) on July 5^th. The plant's charter capital, defined as the number of shares multiplied by the face value of one share, is 90.56 million gryvnias ($16.725 million). A subsidiary of Russian company MetalsRussia owns 40 percent of the company. Reuters reported that ownership of the remaining shares is unclear. Donetsky says MetalsRussia has invested some $59 million to modernize the plant over the last three years. The plant made a pre-tax loss of 70.17 million gryvnias in 1999. It

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should be noted that these figures are calculated according to Ukrainian accounting standards, which differ from Western standards.

South Caucasus & Central Asia

Defense Min.'s Brother Dies In Car Bombing

· The brother of Defense Minister David TEVZADZE, Guram TEVZADZE, was killed instantly, when a remote control bomb exploded in his car in the Digomi district of Tbilisi at noon. Head of the anti-terrorist center under the State Security Ministry Levan KENCHADZE is leading an investigation of the incident, which is being described by officials as a terrorist act. Interior minister Kakha TARGAMADZE, Defense Minister TEVZADZE, and Tbilisi Police Chief Soso ALAVIDZE are also assisting at the explosion scene.

It has been determined that approximately 200-250 grams of TNT was installed under the front seat of the car, which was completely destroyed by the blast. Eyewitnesses claim that a remote control device detonated the bomb. Once witness pointed out that a car was seen trailing TEVZADZE's vehicle on the outskirts of Tbilisi, which sped past the car and then the explosion occurred. Police are actively pursuing leads on the other vehicle identified at the scene. Guram's wife and another relative were severely wounded in the blast and are being treated at the local hospital. It is extremely unusual that relatives of the target are involved in such an attack. This is not a typical method of assassination in this culture.

Guram TEVZADZE had been a president of the Foundation for Support to the Georgian Army, working in cooperation with the Defense Ministry's procurement division. The Military Prosecutor's office launched an investigation into the activities of the Support organization. Guram TEVZADZE had been the target of press stories in the past linking him with corrupt practices in the Defense Department. Upon news of stories linking him with questionable prac

tices, Defense Minister TEVZADZE removed him from the capacity of serving as an unofficial representative. Speculation in the capital, links Guram TEVZADZE to a gasoline deal gone bad, while others claim its terrorist attack. Intercon sources report that following the announcement of Guram TEVZADZE's death, an unidentified caller contacted the parliamentary Committee on Defense and Security threatening that Defense Minister David TEVZADZE would suffer the same fate unless he resigns. Questions remain whether this call is truly linked to the attack. Some analysts speculate that the call is more likely linked to those interested in removing TEVZADZE.

Georgian Parliament Ratifies Baku-Ceyhan

· The Georgian parliament unanimously ratified the package of agreements on the Baku-Tbilisi-Ceyhan Main Export Pipeline (MEP) on Wednesday. The package of agreements was signed by Georgian President Eduard SHEVARDNADZE, Azeri President Geidar ALIYEV and then Turkish President Suleyman DEMIREL in Istanbul on November 18, 1999, and the agreement between prospected investors and the countries-owners of territories initialed in Washington on April 28^th. The building of the 1830 kilometer pipeline is to start in 2001 and complete on 2004. The pipeline will be monitored and controlled by a telecommunication control system SCADA. Georgian International Oil Corporation's (GIOC) Gia CHANTURIA testified in the parliament ahead of the vote. Deputy chairman of the parliamentary financial-budgetary committee Koba DAVITASHVILI told Prime New Agency's reporters that the realization of the MEP project will give Georgia a chance to repay the $2 billion external debt. The Azerbaijani parliament ratified the package on May 26^th. The Turkish parliament is expected to debate the package of agreements in the next couple of days. The US has supported this project as part of its multiple pipeline strategy. Investors, however, remain skeptical that substantial volumes of oil will be supplied to the pipeline to make it commercially viable.

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

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