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

Wednesday, August 16, 2000

down a capsule, there has been no signal from the sub. Russian officials claim this could be because of noise in the region with the rescue effort underway or fatigue of sailors. Russian President Vladimir PUTIN, who on Tuesday expressed pessimistic views, today said that the Russian Navy is doing everything they can for the rescue. He added that the situation is critical. The submarine, according to US intelligence and Norway's Foreign Ministry, sank on Saturday after an explosion.

Theories on the cause of the accident range from a collision to an explosion of a torpedo inside its launch tube to a hit of a mine left over from World War II. Russia stresses that the prime concern is the rescue of its sailors and then the investigation as to what caused Russia's most modern submarine to sink. Dmitry BURMISTROV, spokesman for the Russian Navy's headquarters said, "The priority is to evacuate the crew and any means, including foreign equipment, will be used for this task." Twenty-two ships are now involved in the rescue process.

Admiral Vladimir KUROYEDOV said that an alternative is to raise the submarine using giant pontoons. Another proposal called for raising the submarine to a vertical position so part of it protruded from the water. A survey of the sub determined that the sub's periscope was up and intact, but the railing was bent, the missile tubes cover was missing and the navigation room was dented, according to Russian state-owned television RTR.

Russian Federation

Politics

British Ships Race To Save Russian Sailors

· British experts are headed to the Barents Sea with Scorpio machines to assist in rescuing 118 sailors trapped in a Russian nuclear submarine on the ocean's floor. The Russians finally accepted assistance from the British; the US and France also offered their equipment. Russian officers on Tuesday held a videoconference with military and NATO officials in Brussels to discuss what equipment could be made available. Britain sent the British Royal Navy's LR5 submersible rescue capsule, which can rescue up to 16 people on an Antonov-124. It has arrived in Norway and is being loaded on a ship headed for the Barents Sea. Norway has also offered the use of its helicopters. Until the British help arrives, Russian will continue attempts with its own diving bell capsule. The fifth attempt is in operation, using a larger more powerful capsule called the Bester. Earlier attempts failed due to weather conditions, primarily strong currents, and the angle the submarine is lodge in the ocean's floor. Navy spokesman Igor DYGALO said that Russia almost risked losing one of its rescue capsules due to the weather. One vessel has been damaged during the rescue effort. The British equipment is better prepared for the operation. The Russian Navy refused foreign assistance at first. DYGALO, earlier said, "We are fully in control of the situation and are quite capable of carrying out the rescue operation on our own." Some speculated security concerns were the reason for the refusal, however, many believe it was a question of pride.

Time is running out for the sailors. It is believed that the sub has enough oxygen to last until Friday. The submarine had been communicating through Morse code. However, since the first attempt to send

Today's News Highlights

Russia

Rus-US Work On Arms Agmts.

WB Releases Funds To Russia

MTS ADRs Rise

Mosenergo Threatens Default

European Republics

Belarus Promises Free Election

Rus-Ukraine Resume Gas Talks

South Caucasus & Central Asia

UN Consultant Murdered

Kyrgyz Fighting Continues

Politics-Economics-Business

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Wednesday

August 16, 2000

Intercon's Daily

Rus-US Work On Arms Agreements

· US Disarmament specialist John HOLUM and Head or Russia's arms control directorate Yuri KAPRALOV are beginning meetings today in Geneva to conclude modest arms-control agreements that could strengthen cooperation between the two countries. At the June summit in Moscow, US President Bill CLINTON and Russian President Vladimir PUTIN worked to find new ways to cooperate to lower nuclear tensions. One issue to be discussed is the sharing of techniques to provide early warning of missile attacks and the establishment of a joint center in Moscow. The sides will work on ways to contact each other after a test missile or space rocket had been launched. The objective is to allay misunderstanding and concerns and to avert a dangerous response. The US and Russia will consider a joint project, Ramos, to improve sensors in early warning satellites. The CLINTON administration has proposed working in Geneva on parts of a text for a new START III Treaty to reduce US and Russian long-range nuclear warheads. This could provide a legacy in nuclear reduction, which has been eluding CLINTON.

Economy

Ruble = 27.81/$1.00 (NY rate)

Ruble = 27.74/$1.00 (CB rate)

Ruble = 25.37/1 euro (CB rate)

WB Releases Loan To Russia

· The World Bank on Monday announced that it has released the last $250 million payment from a Social Protection Adjustment Loan to Russia. The money will be used to assist Russia in building a social security system that would help the country during its transition from communism to a market-based economy. The Bank praised reforms to the pension system and coal sector. Pension reforms included increasing monthly minimum pensions to 410 rubles ($15) in February from 234 rubles in early 1999, collecting 97 percent of planned contributions and selecting an auditor to delve deeper into the system, Reuters reported. Another untied $50 million installment of the so-called second coal loan could be paid by early autumn with the final $100 million installment of that program paid by the end of the year.

The money will be channeled through Russia's

general budget, prompting critics to question whether it could be used to quell the uprising in Chechnya. Elizabeth ANDERSEN, advocacy director for Human Rights Watch for Eastern Europe said, "If the money still goes to the budget for general spending, those funds can be spent on the conflict…The Russian government has not taken steps to make sure those responsible of war crimes are held accountable." Former Central Intelligence Agency's (CIA) chief Russia analyst Fritz ERMARTH said, "This is not the time for macroeconomic financial support to the Russian economy. The integrity is far too dubious. We don't know enough about the true agendas of the players."

Business

Mobile TeleSystems ADR Rises

· Mobile TeleSystems (MTS) American Depositary Receipts (ADRs) rose to a record high on optimism the fastest economic growth since the end of the Soviet Union will boost demand for mobile phones. MTS ADR's rose $1.9375, or 7.1 percent, to $29.0625, the highest since the ADRs started trading at the end of June, Bloomberg News reported. Common shares of Russia's biggest mobile phone company by subscribers are not traded in Russia. MTS is set to release its second-quarter earnings this week. Vimpelcom's American depositary receipts rose to a three-month high on optimism that Russia's second-largest mobile phone company by subscribers will report second-quarter profits near a record this week as earnings are boosted by increased demand for mobile phones. Vimpelcom ADRs rose $1, or 3.5 percent, to 30, the highest since May 16^th. Each Vimpelcom ADR comprises 0.75 common share, valuing each share at $40.00. When the common shares were last traded, on Wednesday, the shares closed at $37.50. Tatneft ADRs rose 56.25 cents, or 4.8 percent, to $12.25, a three-month high. Each Tatneft ADR is made up of 20 common shares, valuing each common share at 61.25 cents. In Moscow Friday, Tatneft shares rose to 60 cents. Russia's number four oil producer rose after the company said first-half profit increased almost five-fold from the same period a year ago.

Meanwhile, customers traveling abroad were cut off from the MTS network earlier this month. Customers in Austria, France, Germany, Greece, Is

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Wednesday

August 16, 2000

Intercon's Daily

rael, Spain, Turkey, and Ukraine have phoned the MTS hotline to report connection difficulties. On August 3^rd, MTS' Moscow network failed for five-and-a-half hours.

Mosenergo Threatens Default

• Mosenergo, an electric power plant serving Moscow, may have to default on some financial obligations, its chairman said Tuesday. It comes out just as enterprises throughout Russia are starting to return to world's debt markets for the first time since August 1998 crisis. Alexander REMEZOV, chief executive officer, said: "Mosenegro's financial situation is extremely difficult." According to the Financial Times, its $541 million debt includes a $200 million eurobond due in 2002. REMEZOV said the big difficulty was the insolvency of its customers. "The problem may even become one of refusing [to honor] some financial obligations. We see no resources…so far."

This week, Yukos Oil Company took out a $50 million syndicated loan from a group of western banks, the first such syndicated loan issued since the crisis. Last week, Moscow announced plans to sell at least $800 worth of eurobonds early next year to refinance maturing debts, the Financial Times reported.

Belarus Promises Free Elections

· Belarus President Alexander LUKASHENKO on Monday put forth a number of initiatives aimed at ensuring free and democratic elections in his country on October 15^th. In his messages to European Union foreign policy chief Javier SOLANA and Organization for Security and Cooperation in Europe (OSCE) Chairman in Office, Austrian Foreign Minister Benita FERRERO-WALDNER, LUKA-SHENKO said representatives of the political parties which have nominated their candidates will be included in the Central Election Commission as non-voting members. Irrespective of their political views, candidates will get free airtime on state television to present their election platforms, he said. The President also raised the question of expanding the parliament's functions. He stressed that the expansion of its powers is an inalienable part of ongoing political processes in Belarus, Itar-Tass reported.

Rus-Ukraine Gas Debt Talks Continue

· Russian and Ukrainian representatives are consultations in Moscow in a bid to work out a mechanism for paying Kiev's debt for Russian natural gas supplies. The Ukrainian delegation has prepared new proposals, which take into account the interests of both countries. The new agreement is aimed at providing the basis for further Russian gas supplies to Ukraine and gas transit to Europe through its territory. The sides are trying to work out disagreements at the level of experts. After the Ukrainian delegation returns to Kiev, the agreed-upon proposals will be considered by Prime Minister Viktor YUSHCHENKO. The previous round of consultations in Kiev at the end of July and the beginning of August proved to be a failure. The sides discussed the payment of Ukraine's $1.5 billion debt to Russia in terms of bombers and goods.

Meanwhile, Russian State Duma's committee for international affairs is planning on suing the Ukrainian government and its president in an international court for continuous thefts of Russian natural gas in transit via Ukraine. "The committee considers the Ukrainian government and president responsible for the thefts and is going to demand compensation through an international court", chairman of the committee Dmitry ROGOZIN said on Tuesday. He pointed out that Ukrainian President

European Republics

Gryvnia's Strength Raises Concern

· The Ukrainian Central Bank believes the gryvnia may not weaken enough to reach this year's 16 percent devaluation target amid a glut in dollars on the domestic market, Kievskie Vedomosti reported, citing Sergei YAREMENKO, a Central Bank board member. The Central Bank's currency department believes that the bank should allow Ukrainian exporters to sell only 25 percent of their hard currency revenue on the domestic market instead of 50 percent, he said. That plan could help reduce dollar supplies on the domestic market and make the gryvnia weaker. Ukraine's Central Bank said it bought about $1.1 billion on domestic market so far this year, which compares with its initial plan to purchase about $700 million in the entire year. Last year, the gryvnia lost about 40 percent of its value, while it has fallen 4.6 in the year so far.

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Leonid KUCHMA admitted that the thefts of the gas were initiated by the government of Ukraine.

South Caucasus & Central Asia

UN Sukhumi Consultant Murdered Tuesday

· UN Sukhumi office consultant on human rights, former deputy of the Abkhazian Parliament, Zurab ACHBA was murdered by unknown criminals in Sukhumi, the capital of Abkhazia, Tuesday night. The automatic gunshots came from the passing car, as ACHBA was walking home from the beach. He died on the spot. Head of Abkhazian Supreme Council in exile, Tamaz NADAREISHVILI believes ACHBA's murder was done by the supporters of the unrecognized republic leader Vladislav ARDZINBA. ACHBA, earlier supporting the separatists, "after understanding the lack of perspective of the separatist goals" left Abkhazia after the military activities in 1992-1993 and went to Moscow, NADAREISHVILI said in an interview with Prime News Agency. According to him, after returning to Sukhumi in 1998, ACHBA was more for the compromises with the Georgian side, became one of the leaders of Abkhazian opposition and after some time could possibly become Abkhazian leader.

UN Secretary General special representative Diter BODEN was shocked by the news of the murder. He described ACHBA as, "experienced, valuable worker." BODEN and Emergency Issue minister Malkhaz KAKABADZE will leave for Sukhumi on August 20^th, to continue working on agreement on peace, guarantees of not renewing the military activities, protocols on refugee return to Gali region and measures on restoration of Abkhazian economy. BODEN also stressed that progress on this meeting may become one of the most important steps towards personal meeting of Georgian President Eduard SHEVARDNADZE and Abkhazian leader Vladislav ARDZINBA.

Kyrgyz Fighting Continues, Six Germans Freed

· Tuesday evening, the Kyrgyz Army announced

that their troops had pushed militant rebels out of the country. Troops also freed six German mountaineers, who had been held hostage by the rebels. On Tuesday, Kyrgyz artillery shelled about 50 militants along the border and the government said 600 more rebels were moving in to support the small band. The heaviest fighting took place in the Turo Pass, about three miles from Kyrgyzstan's border with Tajikistan. It is estimated that 18 Kyrgyz soldiers had been killed and about 40 militants killed since Friday. The Uzbek Defense Ministry said that eight soldiers had been killed in fighting rebels. Early Wednesday morning, 50 more rebels entered Kyrgyzstan from Tajikistan. Bolot DZHANUZAKOV, secretary of the Kyrgyz Security Council, said the latest group of rebels had penetrated some eight to 10 kilometers (five to six miles) into Kyrgyzstan. He added that the Central Asian nations should pool their efforts to eliminate the rebels. He said there are 700 to 800 rebels on the border between Kyrgyzstan and Tajikistan, adding they have divided into small groups numbering 40 to 50 people. He noted that heads of terrorist gangs met in Mazar-i-Sharif to coordinate their attack. He said, "We have information that a lot of money was allocated to the terrorists for their invasion of Kyrgyzstan."

Due to the volatile conditions, Uzbek President Islam KARIMOV said he will not attend a summit with leaders of the Commonwealth of Independent States in Ukraine this month because of the fighting. According to the spokesman, "KARIMOV can't make a trip to the Crimea due to a worsening situation on the Uzbek-Tajik border." Kyrgyzstan, Tajikistan and Uzbekistan believe the rebels are fighting to carve out an Islamic state. The rise of the Taliban movement in Afghanistan has fueled fears that similar Islamic groups could flourish in the former Soviet republics on its borders.

The Daily Report on Russia and the FSU

will not be published

from August 21^st to August 25^th

for Intercon's summer break.

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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