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

Tuesday, June 13, 2000

Russian Federation

Breaking News

Gusinsky Arrested On Embezzlement Charges

· Russian police arrested media giant Vladimir GUSINSKY today and held him for questioning at Butyrsky prison in Moscow. The prosecutor's office said that GUSINSKY had been detained on accusations of embezzling state property worth an estimated $10 million. He was arrested under Article 159 of Russia's criminal code, which covers misappropriation by a group of persons through deceit, abuse of trust and power, and fraud. GUSINSKY is the head of the Most Group, which controls the nation's only independent television station NTV, Media Most, Sevodnya, Ekho Moskvy, and Itogi. Media Most's offices were raided by heavily armed, masked tax police shortly after Russian President Vladimir PUTIN was inaugurated. Many took that action as an indicator of the new administration's low tolerance for the free press. The Most Group's media outlets are frequently critical of the Kremlin. GUSINSKY's arrest occurred just after PUTIN departed for a trip to Spain, allowing senior officials to distance themselves from the arrest. PUTIN said he was surprised by the arrest and noted that the authorities better have good grounds to arrest GUSINSKY. Alexei VENEDIKTOV, head of GUSINSKY'S Ekho Moskvy radio station called the detention a, "loutish, brazen, openly illegal act on the part of the authorities."

Politics

Special Operation Rounds Up Chechen Rebels

· The Commander of Russia's troops in Chechen Colonel General Gennady TROSHEV said that federal forces killed 15 militants and captured 57 suspected rebels in a military operation on Monday in the Vedeno district of Chechnya. He said that of

the 57 suspects detained, "the guilt of nine has been proven and charges have been brought against them." The other detainees will be investigated for ties to the rebels. The military estimates that some 2,500 rebels remain in Chechnya, most of them in the rugged southern mountains.

Rebel spokesman Movladi UDUGOV confirmed TROSHEV's account that a third kamikaze attack occurred at a checkpoint in Russia on Monday. He said that five Russians were killed, but TROSHEV reported only two OMON police had died. UDUGOV added that the attack was carried out by a former Russian soldier who joined the rebels. Federal forces have lost four on June 7^th the first suicide bombing, and two on June 11^th, the second car explosion. The Kremlin stated that it believes that the rebels can only afford to pay off local residents to conduct missions. Kremlin spokesman Sergei YASTRZHEMBSKY said, "People are being selected for the role of kamikaze and are being asked, in return for a financial reward, to drive through checkpoints…After the incident, the UDUGOV propaganda machine whirrs into action, declaring that the terrorist act has been carried out by former soldiers who have gone over to the rebel side." UDUGOV also said rebels had struck a police convoy near the town of Argun just east of Grozny in an ambush that was followed by a battle near the village of Dzhalka further east. He said two rebels died and about 30 Russians were killed. Russia news agencies also reported four

Today's News Highlights

Russia

Ruble Falls In Early Trading

LUKoil Petrochemcial Plant

European Republics

Ukraine To Pay $1.5B In 2001

Ukraine Modernizes Air Defense

South Caucasus & Central Asia

Shevardnadze Denies Illness

Turkey Lobbies For Pipeline

Trans-Asian Railway Project

Uzbek Exporters Get Tax Breaks

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troops died in a helicopter crash near one of the main Russian military bases, Khankala.

Yabloko-Union Of Right Forces Coalition

· Russia's Yabloko party and the Union of Right Forces last weekend agreed to form a coalition. Boris NEMTSOV, a leader of Union of Right Forces, said the coalition's goal is to have a single party list for the next parliamentary election in 2003 and a joint candidate for future presidential and gubernatorial elections. Yabloko Leader Grigory YAVLINSKY said a coalition is "absolutely necessary," though its shape has yet to be determined and its completion could take as long as three years. The parties began discussing a coalition after the March 26^th presidential election raised concern that none of the parties promoting market reforms would overcome the required 5 percent barrier in the next parliamentary election if they were to run separately. Russian voters unexpectedly backed Unity party, created last year with the backing of Vladimir PUTIN, in the parliamentary election, giving it the second-biggest share of votes after the Communist party.

Economy

Ruble = 28.04/$1.00 (NY rate)

Ruble = 28.36/$1.00 (CB rate)

Ruble = 27.25/1 euro (CB rate)

CB Fails To Stop Ruble Decline

· The ruble's average after settlement from unified trading session of eight Russian exchanges, tightly controlled by the Central Bank, fell from 28.2450 per dollar on Friday to 28.4296 per dollar. Russian markets were closed on Monday for Independence Day. The fall had been sparked by government comments that it should avoid any "unjustified strengthening" of the ruble. On Friday, Prime Minister Mikhail KASYANOV said the government would avoid fortifying the ruble because it could hurt the economy. Dealers said strong export revenue sales retrained what could have been an even further drop, as the Central Bank was inactive in morning trading. Dmitry LIPIN, a dealer at Mezhprombank, predicted, "The ruble would rise by the end of the week without central bank support. Given such high oil prices, the Central Bank can relax." The ruble has been rising this month, supported by export revenues from high world energy and commodity prices, Reuters reported.

US-Russia To Form Coal Committee

· The Russian Energy Ministry and the US Energy Department have agreed to form a coal committee. The committee will promote "pure coal technologies" in the production of electricity and do other work. The Rus-American coal group, which met in Washington, focused on ways to draw investments to the mining industry of Russia. The group regards the development of the Engelsovskoye coal deposit in Yakutia as a model. The sides have agreed to harmonize standards of mining and rescue equipment and to exchange scientific information.

Business

LUKoil Petrochemical Plant In Caspian Region

· LUKoil Holding has drafted plans to build a petrochemical plant in the region of the northern Caspian Sea, with the capacity to make about 500,000 tons of ethylene. Head of LUKoil's Department of Petrochemicals Nicholai SHASHKIN said that top oil company will invest about $500 million until 2005 to expand and upgrade its existing chemical plants. The projects include building a power generator at LUKoil's Stavrolen unit, a polyacrylamide factory with a capacity of 10,000 tons a year at its Saratovorgsintez plant and expanding ethylene capacity at its Bulgarian LUKoil-Neftekhim-Burgas site. He added that the plant will be equal to similar plants being built in Saudi Arabia. SHASHKIN said it is too early to disclose the project costs, possible partners and how the new plant will be financed. He said the Russian oil company is still weighing the type of technology it will use to produce ethylene from gas. LUKoil plans to use gas from its own reserves in the region to secure a reliable source of raw materials.

Chubais Briefs Putin On Power Industry

· Before leaving on an official visit to Spain, Russian President Vladimir PUTIN met with chief executive of Unified Energy Systems (UES) Anatoly CHUBAIS today to discussed energy supplies and the development of the power industry. UES is planning to split into two companies: one that handles distribution and one that handles production of electricity. CHUBAIS said, "We had a detailed conversation on the situation in power engineering as a whole and long-terms tasks of development in this field." He added that they discussed plans to attract investment so that Russia will not

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suffer an energy failure in five or six years. Asked about a rise in energy tariffs, CHUBAIS said, "Price liberalization on the energy market leads to price drops in the long run."

Tuesday Tid-Bit

Kremlin Seeking More Construction Funds

· Russia's presidential property department is seeking to raise $2 billion from private investors for construction of hotels, sports facilities and other projects, The Moscow Times reported, citing the Federal Valuation Foundation, which is assisting the Kremlin to attract investors. The projects include apartment buildings, kindergartens, water parks, medical clinics, a brewery and farms. The funding is needed because the Kremlin can no longer finance projects from the federal budget, as was done by Pavel BORODIN, the former presidential property manager. An arrest warrant for BORODIN has been issued in Switzerland, where he is wanted on money laundering charges. He is accused of taking bribes from Swiss construction firm Mabetex, which won lucrative contracts to rehabilitate buildings in the Kremlin. Geneva Judge Daniel DEVAUD believes that Mabetex paid $4 million in bribes to Russian officials, while Mekata Trading, another Swiss construction firm, paid out $60 million to win contracts. In 1999, the Kremlin portfolio was valued at $650 billion. Russia said last year it spent $335 million to restore the main Kremlin palace, at a time when the government said it couldn't meet all of its foreign obligations.

Ukraine Imposes Tax On Diesel Fuel And Gas

· Ukraine's parliament today imposed an import tax on diesel fuel and gasoline, setting it at EUR1.5 per metric ton. The parliament, however, decided that an excise tax on fuel products will be lifted until October 1^st. In March, parliament abolished import and value-added taxes on oil and diesel fuel imports, trying to ease soaring fuel prices ahead of the spring planting season. It abolished all taxes on crude oil imports until January 1, 2001 and on diesel fuel imports until June 1, 2001. Ukraine has found itself in a difficult situation after agricultural regions in the south ended up with only 30 percent to 40 percent of the fuel needed for the sowing season, and had to import oil products from Azerbaijan and other countries.

Ukraine Modernizes Defense Systems

· Air Defense Commander Alexander STETSENKO said Ukraine has modernized 70 percent of its surface-to-air systems. He declined, in an interview with Ukrainian UNIAN news agency, to say how many systems have been modernized. However, he noted that their range had not been increased. He said that more radical modernization will require the acquisition of new systems and cooperation with Russia. STETSENKO said Ukraine is designing a medium-range surface-to-air system, which "exists in blueprints," but "some of its elements, including antennae have already been worked out." He said, "if there is sufficient funding, a pilot system may appear in two years."

Meri Departs For US

· Estonian President Lennart MERI left on Monday for a working visit to the US. The Estonian President will attend a solemn reception in the US Congress and give a speech in the US Center for Strategic and International Research. MERI's visit is devoted to the 60th anniversary of the US non-recognition of the Soviet annexation of Latvia, Lithuania and Estonia in 1940.

South Caucasus & Central Asia

Shevardnadze Denies Illness

· Georgian President Eduard SHEVARDNADZE on Monday addressed rumors that he contracted a grave disease. He clarified that he is in good health and that these "intentional" rumors were "psycho

European Republics

Ukraine To Pay $1.5 Billion In 2001

· Ukrainian daily newspaper Ukraina Moloda reported that Ukraine's domestic debt requirements due in 2001 will reach nearly 8.3 billion gryvnia ($1.5 billion). The government has to redeem 4.8 billion gryvnia worth of Treasury bills and plans to pay back about 2.6 billion gryvnia worth of debt owed to the Central Bank. The government plans to set up a fund for managing its domestic debt and allocate up to 440 million gryvnia to the fund next year. Talks are continuing between the government and Central Bank over rescheduling the domestic debt. The Central Bank owns 90 percent of Ukraine's $2.775 billion domestic debt.

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logical sabotage." The President ordered law enforcement agencies to take tough measures against those who generate and spread such vicious rumors. SHEVARDNADZE stressed that those who predict destabilization in Georgia are often backed up by criminal clans, "which do not like it when corruption is fought more vigorously." He has pledged to combat corruption during his second term in office. He said that reforms will be stepped up, actions will be taken to attract investment and improve the nation's economic outlook. He noted that in the first five months of this year, gross domestic product (GDP) increased by 5 percent, the lari remained stable, and inflation low.

Turkey Lobbies For Baku-Ceyhan

· Turkish Foreign Minister Ismail CEM on Monday met with Kazakh Prime Minister Kasymzhomart TOKAYEV in Astana to discuss the implementation of the Baku-Ceyhan oil pipeline project. CEM said that the pipeline could bring in a profit of $250 million to $300 million annually. TOKAYEV said the implementation of this project was impossible without Kazakhstan's participation. "We want to have as many oil pipelines as possible so that Kazakhstan could export oil as much as possible," he noted. Kazakhstan has already started a feasibility study for a project to transport oil through Iran. The Iranian route is estimated to be half the cost of the Baku-Ceyhan, which is estimated at $2.4 billion. He added, "The more pipelines, the better." While CEM noted that it is natural for Kazakhstan to consider various routes, he stressed that the, "Baku-Ceyhan project is important from the strategic point of view and in terms of security." TOKAYEV said Kazakh tankers have already started oil deliveries from the port of Aktau to Azerbaijan across the Caspian Sea.

CEM's visit is aimed at offsetting in roads by Russia to penetrate the region's oil exports. Turkey eyes Russia as a rival vying for control of the region. Russian President Vladimir PUTIN visited Turkmenistan and Uzbekistan last month to strengthen ties with the two former Soviet repub

lics. During the visit, Russia signed a deal to increase natural gas purchase from Turkmenistan. This agreement threatens the viability of the Trans-Caspian pipeline, backed by Turkey, the US, and Europe. Competition to export Kazakhstan's oil reached a new level after initial drilling indicated huge oil reserves off the Kazakh Caspian.

Trans-Asian Railway: An Important Link

· CIS and Baltic Railway Council chairman Anatoly SIDENKO said at an international conference, which opened in Almaty today that the Trans-Asian railway is a very important link. The new railway corridor will run through a Kazakhstan-China border gate. He said, "The transit corridor running on the territory of China, Kazakhstan, Russia, Belarus, and Poland can compete the sea transport which annually ships about 90 million tons of cargoes to Europe." SIDENKO also predicted that goods on the Trans-Asian railway will reach Europe 1.5 times faster than the Asia-Europe seaway. Prospects for the railway depend on whether the conference participants agree on transit rates, tariffs, and procedures of train passage across state borders.

Uzbek To Offer Tax Breaks On Exports

· In accordance with a presidential decree published last week, beginning July 1^st Uzbek exporters will receive a tax break in a move to increase exports, Reuters reported. The decree said some companies will be freed from paying tax on hard currency earnings received from exports. Companies exporting over 50 percent of their output will be exempt from property tax, while those exporting 25 percent to 50 percent will be allowed to pay half their current property tax rates. But the decree said the measure will not extend to exporters of cotton fiber, yarn, oil and oil and gas products, electricity, or metals - all of which constitute Uzbekistan's main export-oriented sectors. The document did not specify the sectors, which will get the tax breaks, but the government says value-added goods constitute 40 percent of the country's exports. Automobiles and fertilizers are also among its key exports.

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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