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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 15, 2000

Russian Federation

Politics

US Retired Colonel Arrested For Espionage

· Federal Bureau of Investigation (FBI) officers arrested retired Army Reserve Colonel George TROFIMOFF, the highest ranking US military officer, on charges of spying for the Soviet Union and Russia for a period of 25 years. He was arrested in a sting operation, after undercover agents lured him to a Tampa hotel, promising back payments for his spying services. German and American officials had been tracking TROFIMOFF's case for seven years. According to a federal indictment, TROFIMOFF sold "documents, photographs, photographic negatives and information relating to the national defense of the United States" while serving as a civilian employee of the US Army at the Nuremberg Joint Interrogation Center in West Germany from 1969 to 1994. Prosecutors said TROFIMOFF used his unlimited access to classified information at the interrogation center to tell the KGB what the US knew about the Soviet Union and its allies. TROFIMOFF also knew of weaknesses in American intelligence-gathering and passed that information on to the KGB. The indictment also notes eight meetings between TROFIMOFF and KGB officers, naming the KGB agents in three instances. FBI Special Agent Frank GALLAGHER said that TROFIMOFF was paid about $250,000, plus bonuses, and special Soviet awards.

This is not the first time TROFIMOFF has been arrested for espionage. He and his recruiter Igor SUSEMIHL, a Russian orthodox priest were arrested in Germany in 1994 on spying charges. They were released when German officials could not prove their case within the five-year statute of limitations. The US has not statue of limitation on espionage cases. TROFIMOFF told German au

thorities the money he received from SUSEMIHL, who died in 1999, were personal loans.

Oligarchs Protest Gusinsky's Arrest

· If the Kremlin was planning on using the arrest of Media Most chief Vladimir GUSINSKY, on charges of embezzling $10 million, to serve as a warning to the nation's so-called oligarchs, the message was heard. However, instead of sheepishly burying their heads in sand, 17 of Russia's leading businessmen joined forces to express their outrage of GUSINSKY's detention in an open letter to chief prosecutor-general Vladimir USTINOV, demanding his immediate release. The letter [See Page 5] said, "Until yesterday, we thought that we lived in a democratic country. Today, we strongly doubt it. The arrest of Vladimir GUSINSKY caused all the business people in Russia and many of those abroad to have such doubts." It added, "The fragility of Russian democracy was demonstrated yesterday. A precedent was created, which looks like a state's execution of a political opponent. And this precedent may be duplicated and applied to opponents in the regions [of Russia] and other administrative bodies. Anyone in the business community can be considered an oppositionist." They said that whatever GUSINSKY was charged with, there was no reason to jail him pending an investigation, as he presented no danger to society. They offered their personal guarantees that GUSINSKY would appear for questioning. The signatories of the letter included, Gazprom chief Rem VYAKHIREV,

Today's News Highlights

Russia

Putin-Schroeder Econmic Ties

Gallaher To Buy Tobacco Plant

European Republics

IMF Mission Heads To Belarus

Estonia To Cut Budget Further

South Caucasus & Central Asia

Rus-Georgia On Base Propertyu

Rus-Azeri Sign Accord

US Embassy Bomb Threat

CAEC Opens In Dushanbe

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Thursday

June 15, 2000

Intercon's Daily

Unified Energy System (UES) chief, former privatization head Anatoly CHUBAIS, businessman Pyotr AVEN, and Vladimir POTANIN. "[Vladimir] PUTIN, as president, bears responsibility for such a decision," CHUBAIS said, adding that it was still not clear whether he knew about it in advance. PUTIN, who is on a European tour to Spain and Germany, claimed he was surprised by the GUSINSKY's arrest and that he had tried to reach USTINOV for additional information, but was unable to reach him. USTINOV is also out of Moscow on a personal trip. His office in Moscow issued a statement criticizing some of the media reaction to GUSINSKY's detention. "The press has unleashed a mass campaign, in the course of which some journalists have shamelessly distorted facts and, carried away by their emotions, have ignored both legal and professional ethics." Others businessmen and analysts place responsibility for GUSINSKY's arrest on the wiley Kremlin Chief of Staff Alexander VOLOSHIN, who is linked to tycoon Boris BEREZOVSKY. It should be noted that BEREZOVSKY did not sign the letter to USTINOV. AVEN defended his decision saying that BEREZOVSKY had already expressed his opinion on the matter and that his signature was not necessary, since he is now a politician not a businessman.

GUSINSKY issued a handwritten statement from prison claiming, "This is political intrigue, organized by high-ranking representatives of the government who consider freedom of speech a danger." He added that government officials see the free news media as, "an obstacle to building a new Russia as they see it, which in effect means a return to the totalitarian past, complete with gulags."

Economy

Ruble = 28.33/$1.00 (NY rate)

Ruble = 28.32/$1.00 (CB rate)

Ruble = 27/1 euro (CB rate)

Economic Ties: The focus Of German visit

· Russian President Vladimir PUTIN and his delegation of businessmen will be pushing for more economic and technological ties as well as foreign investment during his two-day visit to Germany, which started today. Headline-grabbing joint venture projects and other economic initiatives could

be announced but the details are sketchy. German oil and gas company Wintershall, a subsidiary of petrochemical firm BASF, said last week it planned to create a joint venture with Russian gas monopoly Gazprom to explore an offshore oil field in the Russian north.

PUTIN said his first meeting with German Chancellor Gerhard SCHROEDER was positive and focused on economic cooperation. SCHROEDER said, "Germany has an interest in a truly strategic partnership with Russia." PUTIN characterized the discussions as intensive and emphasized Germany's importance as a link to Europe both economically and strategically. Further talks with other German officials will also cover debt, anti-missile plans, Russia's policy toward the Baltics, and its military operation in Chechnya. It is also expected that Russia's $43 billion debt to the Paris Club will be discussed. Germany is the holder of approximately half of this debt and has ruled out a partial write-off. Germany plans to reopen export credit lines to Russia, which had been frozen since the devaluation of the ruble in 1998. German direct investment in Russia peaked in 1998 at $347 million, but tumbled in 1999 to only $221 million. German officials traveled to Moscow last week for talks on how to clear a backlog of around 600 million marks ($295 million) in payments on Hermes credits and received assurances from the Russian side that the money would be paid. Germany has made resolving the Hermes problem a precondition for the bilateral implementation of a framework debt rescheduling deal reached last August between Russia and the Paris Club of sovereign lenders, Reuters reported. PUTIN and his economic advisor German GREF are expected to announce major sections of Russia's economic policy. Foreign Minister Igor IVANOV, also accompanying the President, will meet with his German counterpart and other top ranking officials. During his days in the KGB, PUTIN served in Dresden from 1984 to 1990. Although he is fluent in German, PUTIN elected to speak in Russian, when he arrived in Berlin.

Business

Gallaher To Buy Russian Tobacco Plant

· UK tobacco company, Gallaher Group, beating out rivals Imperial Tobacco, Japan Tobacco, and

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	Thursday		June 15, 2000
	Intercon's Daily
	Philip Morris, has won a tender for the purchase of Russia's state-of-the-art cigarette factory in Moscow, owned by Russian Vector Group Ltd. Gallaher will pay $335.6 million in cash and assume $64.4 million in debt for Liggett-Ducat Ltd., one of Russia's leading cigarette makers. The Moscow factory produces 35 billion cigarettes a year and controls about 15 percent of the Russian market. It had an estimated $100 million in sales in 1999. Gallaher hopes the acquisition will boost its overseas division, entering the Russian market, which is the world's fourth-largest. Gallaher has had difficulty importing tobacco products into Russia because of changes in customs regulations. Tax stamps also have been hard to obtain, Chairman Peter WILSON said at the company's annual meeting last month. Gallaher also manages a factory in Kazakhstan. Bennett LEBOW controls the Miami-based Vector Group, which changed its name from Brooke Group Ltd. last month.	Izvestia-Ukraina, Ukraine's deputy minister for transportation Oleksandr KOLESNIKOV said Ukraine will allow Kazakhstan to pay less for shipping Kazakh crude oil through Ukrainian territory. Beginning in July, Kazakhstan will pay $9.50 to transport 1 ton of oil through Ukraine, compared with the current price of $10.50 a ton. Kazakhstan agreed to supply 1 million tons of oil to Ukraine this. Ukraine needs to increase oil shipments to its refineries, after supplies declined more then 50 percent in the first five months from the same period a year ago, worsening the crisis in the Ukrainian fuel-making industry. Clinton Supports Estonia's Bid To Join NATO · US President Bill CLINTON today said, "The United States welcomes and supports Estonia's aspiration to NATO membership." Estonia's Foreign Ministry cited the statements as a reaffirmation of Washington's backing. CLINTON said that 10 years after breaking from the Soviet Union, Estonia was a prosperous and democratic state that could fully take its place in the European and western family of nations. Estonia was among nine NATO aspirants that pledged last month to set aside national rivalries and work together to convince the military alliance to launch a so-called "big bang" round of expansion. Comment: The significance of CLINTON's announcement on Estonia is clearly linked to the disappointment of the summit with Russia President Vladimir PUTIN. One can also attribute this vocal decision to the increasingly troublesome trends in Russia, especially the arrest of Vladimir GUSINSKY. Clearly the states of the former Soviet Union and the Western world itself are troubled by the actions of the Russian government. The Washington Post editorial today declare, "Mr. PUTIN shows his KGB face." "Mr. PUTIN has engaged in police-state tactics so crude that even his severest critics seem stunned." Unfortunately, many fear the worst is yet to come! Estonian Government Plans Budget Cuts · The Estonian government announced today plans to cut the 2000 federal budget in August, after parliament left a revenue shortfall by approving a five percent VAT on heating on Wednesday. Government spokesman Priit POIKLIK told Reuters that the government had planned for an 18 percent VAT to be levied and the shortfall will leave a 254 million kroons hole in the 2000 budget of 28.531 billion kroons, which by law was passed as bal
	European Republics IMF Mission Headed To Belarus · An International Monetary Fund (IMF) mission will arrive in Belarus on June 20^th for a key review of the state's economic performance. "The mission, which will work from June 21^st to July 4^th, will monitor the implementation of a new credit, monetary and budget policy in the first half of 2000," the official at the IMF's Minsk office told Reuters. She said the mission would also familiarize itself with government plans on privatization and liberalization of financial markets and prices, but did not plan to discuss loans. The IMF suspended loans to the nation of 10 million 1996 and recalled its representative in 1998 in protest of slow reforms. The Fund has repeatedly urged Minsk to scrap its policy of multiple exchange rates and to introduce structural reforms. The government, which promises tighter credit and monetary policies this year, has shown no intention of removing rigid state controls on the economy. Officials say the IMF mission will also review Belarus' banking sector. Belarus earlier this month reversed President Alexander LUKASHENKO's decision to subordinate the Central Bank to the government. Kiev Reduces Price For Kazakh Oil Transport · According to Ukrainian-Russian daily newspaper


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	Thursday Intercon's Daily June 15, 2000

	anced. He added, "According to the law...if parliament passes a law which cuts the income to the state budget then the government has to draft a law...that will cut expenditures. Now the government has decided that an additional budget will come in August and has asked all the ministries...for proposals where to cut expenditures." Finance Minister Siim KALLAS in May said rising expenditures threaten to derail this year's budget but the government was sticking to its full-year deficit target of 1.3 percent of gross domestic product. South Caucasus & Central Asia Rus-Georgia Dispute Base Property · A top ranking Russian Defense Ministry official issued strong statements regarding the division of property on Russian bases Vaziani and Gudauta in line with their withdrawal. Head of the Russian Defense Ministry's Main Directorate for International Military Cooperation Colonel-General Leonid IVASHOV told journalists that, "after the question of property was settled in the CIS, it is pointless and senseless to start a chain reaction for re-division." He added that Georgia's attempt to divide the property after the withdrawal of Russian bases "by its own method" will not benefit Tbilisi. "Our estimates show that if Georgia's method is used, the Georgian side will be in debt to us." IVASHOV claims that if military infrastructure, including port installations, airfields and warships, are taken into account, "the balance will be not in favor of Georgia." Chairman of the Parliamentary Committee for Defense and Security Revaz ADAMIA shot back that according to the Vienna Convention the immovable property of Russian military bases dislocated in Georgia is the property of Georgia. He said that IVASHOV has misunderstood Georgia's stance. He also pointed out that Russia did not leave a single plane or vessel in Georgia during the beginning of 1990's. The next round of negotiations on the Vaziani and Gudauta military bases is to be held in Tbilisi next week, Prime News Agency reported. Russia must pull out of those two bases by July 2001. Russia-Azerbaijan Sign Cooperation Accord · The security councils of Russia and Azerbaijan signed a protocol on cooperation in Baku on	Wednesday. The protocol provides for the exchange of information on national, regional and global security, and for the coordination of law enforcement activities to fight terrorism, organized crime and illegal drug trafficking. Russian Security Council Secretary Sergei IVANOV said the protocol is "an important step towards the development of Russian-Azerbaijani security cooperation." He believes that the two countries face the same threats and are determined to eliminate them. Azeri President Geidar ALIYEV said, "We wish to see Russia as a free and powerful state, which adheres to democratic values." He added that the accord may become a "good foundation" for the development of equal bilateral relations. ALIYEV also issued an invitation for an official visit to Russian President Vladimir PUTIN. He also confirmed his intention to participate in the summit of the Commonwealth of Independent States (CIS) scheduled for June 21^st. US Uzbek Embassy Target Of Bomb Threat · The US Embassy in Tashkent was sealed off briefly today, following an anonymous bomb threat. Witnesses said nearby buildings, including a kindergarten, had been evacuated in the morning and dogs were brought in to search for bombs. The cordon around the embassy was lifted later in the afternoon. Uzbek Interior Ministry's press office representative Natalya KOCHUBEI said, "Apparently an anonymous caller said someone may have laid a mine near the embassy. Therefore it has been sealed off and checked, although so far there is no confirmation [of any explosives]." Security in Tashkent has been particularly tight since February 1999, when a series of bombs went off killing at least 16 people. President Islam KARIMOV claimed the explosions were part of an assassination attack. He narrowly escaped the attack. KARIMOV blamed the attack on hard-line Islamic opponents bent on overthrowing his regime. CAEC Conference Opens In Dushanbe · The Heads of State Council of the Central Asian Economic Community (CAEC) opened a summit in Dushanbe today. The summit will discuss a program of priority steps to form a single economic space before 2002 and also the strategy for the integration development of the CAEC countries up to 2005.


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The Oligarch's statement to Russian Prosecutor General V. Ustinov

"Dear Vladimir Vasilyevich,

"Until yesterday, we thought that we lived in a democratic country. Today, we strongly doubt it. The arrest of Vladimir Gusinsky caused all the business people in Russia and many of those abroad to have such doubts. "There are controversial opinions of Gusinsky in business circles. We admit that the legal institutions might have questions regarding his activities. We also admit that the government has the right to take severe preventive measures toward certain individuals. "But Vladimir Gusinsky is not such an individual. "Today his name is synonymous to a critical attitude to the government, and he is a symbol of the independent mass media in opposition. In a democratic society, the state's attitude to such a person should be strictly unbiased. "However, we live in Russia, whose democratic traditions are young. The fragility of Russian democracy was demonstrated yesterday. A precedent was created, which looks like a state's execution of a political opponent. And this precedent may be duplicated and applied to opponents in the regions (of Russia) and other administrative bodies. Anyone in the business community can be considered an oppositionist. "However, we still hope that we will live in a democratic country. There is no other way out. All our efforts and investments will be doomed to failure if democratic institutions cease to exist. We hope that the state power will be strong enough to admit that Vladimir Gusinsky is not dangerous to society, and therefore doesn't need to be isolated in prison during the investigation. We are sure that Gusinsky is ready to cooperate with the investigators and that he will not oppose justice being done. If our opinion is of any value, we hereby guarantee the above."

The statement was signed by the following Russian business executives:

V. Potanin, Interros, President; A. Chubais, UES, Board Chairman;

V. Lisin, Novolipetsk Ferrous Metal, Board Chairman; M. Fridman, Alfa Group , Chairman;

P. Aven, Alfa Bank, President; V. Vekselberg, Sual, General Director;

K. Bendukidze, Uralmashzavody, General Director; M. Khodorkovsky, Yukos, Board Chairman;

A. Karachinsky, IBS Group, President; D. Zimin, Vimpelcom, General Director;

A. Mordashov, Severstal, General Director; V. Yevtushenkov, AFK Sistema, Chairman;

V. Mashchitsky, Rosinvestneft, President; Ye. Shvidler, Sibneft, President;

R. Vyakhirev, Gazprom, Board Chairman; O. Kiselyov, OOO Impexbank, President.

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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