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

Wednesday, August 9, 2000

Russian Federation

Politics

FSB Arrests Two In Moscow Bombing

· The Russian Federal Security Service (FSB) has detained two suspects in connection with the bombing on Tuesday of a Moscow underground walkway, which killed seven people and injured 93 others. The TNT bomb is believed to have weighed between one pound and three pounds. The FSB domestic security police said one of the suspects was from Chechnya and the other from neighboring North Caucasus republic, Daghestan. Witnesses describe two to three men from the Caucasus region leaving a bag near one of the underground kiosks. The third man is described as fair-haired and round-faced and a Slav. Authorities have questioned the two men, but Moscow's prosecutor Alexander BUKSMAN say the two have not been, "directly linked," to the blast. Chechen President Aslan MASKHADOV has denied his separatist fighters were behind the bomb blast. "The press service of the president of the Chechen republic of Ichkeria is empowered to declare that attempts by the Russian side to blame the terrorist act on Pushkin Square on Chechen resistance fighters has no foundation." Russian President Vladimir PUTIN has warned against being too hasty in placing the blame for the blast on Chechens, although officials have said they were investigating a link between the rebel region and the bomb explosion. However, PUTIN said, "We must take what we are doing in the North Caucasus to the end, finish off the terrorists in their nest, ensure security for people on all Russian territory." Moscow Mayor Yuri LUZHKOV and Interior Minister Vladimir RUSHAILO separately said on Tuesday they had no doubts the blast, in which dozens were injured, was a terrorist attack. LUZHKOV blamed it on the Chechen rebels. No one has claimed responsibility.

The blast comes in between an anniversary marking the Chechen re-taking of Grozny during the 1994 to 1996 war, the anniversary of PUTIN being appointed Prime Minister, and just 11 months after the apartment bombings blamed on Chechen terrorists, which prompted Russia to begin its offensive in Chechnya. Police have stepped up their efforts to avert new attacks. Roadblocks are being set up around the capital to check cars and trucks for explosives. Random police checks of basements and cellars have also been reinstated.

Comment: Tuesday's blast recalls to mind, the unresolved nature of the apartment bombings in 1999. In another incident, a resident found a bomb in the basement of his apartment building. When authorities came to defuse it, the FSB claimed the bomb was planted as part of a training exercise. Speculation still looms as to involvement of the FSB and government in these blasts. Without credible suspects, similar questions are bound to be raised again in this recent case.

In addition, Russian authorities discovered a bomb at the country's largest train station in central Moscow, the Interfax News Agency reported. Railway traffic police found a bag with TNT explosives in the luggage department at Kazansky Vokzal. The bomb was diffused. Police also evacuated the head office of state-controlled bank Sberbank after a bomb threat was received.

Today's News Highlights

Russia

Fin. Min Proposes Draft Budget

Kola Smelter To Be Modernized

Sidanko Appeals Bankruptcy

European Republics

Hansabank Sees $3.8M Loss

New Economics Min. Appointed

South Caucasus & Central Asia

Red Cross Workers Are Alive

Uzbek Forces Battle Rebels

Kyrgyz-Russia Atomic Deal

Politics-Economics-Business

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Wednesday

August 9, 2000

Intercon's Daily

Chechens Deny Surrendering

· Despite Russian claims that rebels were beginning to surrender, Russian forces came under continued attacks Tuesday west of Grozny. A mine explosion injured several servicemen in an armored personnel carrier on a road linking Grozny and the rebel province's chaotic southern hills. RIA News Agency said a group of rebels armed with automatic weapons and grenade launchers had attacked a Russian Interior Ministry command post in Nozhai-Yurt. Moscow says the rebels have been reduced to "diversionary and terrorist acts" because their numbers have been sharply reduced. Rebel commanders counter that their forces are stronger than ever and winning the psychological battle. Rebel commander Shamil BASAYEV said, "The enemy has suffered a psychological breakdown. Practically everywhere in Chechnya we are carrying out relentless mine warfare against the aggressors." Rebel attacks have demonstrated that Russian claims of controlling Chechnya are unfounded. Despite these attacks, Russian military reports on Monday stated that rebels were surrendering because they realized the "futility" of their cause. Chechen commander Ibragim KHULTYGOV voluntarily surrendered, therefore authorities said they would not charge him with "membership of an illegally armed group."

Meanwhile, the Federal Security Service department in charge of Chechnya today discovered a large ammunition depot on the Chechen-Daghestan border. The ammunition depot, which included a thousand cartridges and over 100 hand grenades, was located near the settlement of Zandak in the Nozhai-Yurt region of Chechnya. It was found in a hiding place in a deserted highland area. It appears that rebels were piling up weapons and ammunition in preparation for an attack.

Economy

Ruble = 27.73/$1.00 (NY rate)

Ruble = 27.68/$1.00 (CB rate)

Ruble = 24.90/1 euro (CB rate)

Finance Ministry Discusses Balanced Budget

· Russian Finance Minister Alexei KUDRIN announced today plans for a $40 billion balanced draft budget for 2001. This would include $10.5 billion of foreign debt payments and forecast a budget sur

plus this year. KUDRIN said the ministry's draft budget has a primary surplus, which is calculated before debt payments, of 3.1 percent of gross domestic product (GDP). He said the budget this year swelled by high prices for energy and commodities exports have helped keep the economy booming. The budget will have a surplus of 1.7 GDP and a 4.7 percent primary surplus. The ruble exchange rate is predicted to trade between 27.7 rubles to 30 rubles per dollar. Inflation is expected to slow from 18 percent to 12 percent, while GDP is expected to grow about four percent next year, totaling 7.75 trillion rubles ($258 billion). The budget is expected to be 1.19 trillion rubles. Russia is still negotiating with foreign creditors on restructuring the Soviet-era debt. Without a deal total payments would be $14.5 billion, KUDRIN noted. He added that the government had discussed International Monetary Fund support in the range of $1.8 billion next year and expected $900 million in untied World Bank loans.

The Russia's government will review the 2001 draft budget on August 22^nd. The review will keep the government on schedule for passing along the proposal to parliament on August 26^th. Trade and Economic Development Minister German GREF said the meeting on August 22^nd would review economic forecasts, followed by a full review of the budget by the Cabinet at its regular Thursday meeting on August 24^th. The Finance Ministry expects about 4 percent gross domestic product growth next year and inflation of no more than 12 percent.

Business

Norilsk Nickel To Modernize Kola Smelter

· Norilsk Nickel, the world's largest palladium producer, plans to secure $60 million in grants and loans from Norway to modernize its smelter based in Russia's Kola Peninsula. Norilsk will receive a $30 million grant from the Norwegian government and another $30 million in loans from Nordic Investment Bank, a triple-A rated European development lender. These funds will be used to finance part of a $300 million 10-year program to modernize Pechenganickel, which needs new processing and environment protection equipment and new mines. According to a company statement, "The upgrade of Pechenganickel's mining operations includes both the completion of mine-driving work at the

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Wednesday

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Intercon's Daily

Severny underground mine and the construction of a new underground pit." Norilsk plans to spend between $3 billion to $5 billion overall through 2005, with 42 percent of that in ore exploration, 33 percent in utilities and smelters and 25 percent in infrastructure development. The company will invest $67.8 million alone to fight Pechenganickel's pollution from its smelting operations along the border with Norway through 2015.

Sidanko Appeals To Bankruptcy Court

· Russian oil company Sidanko on Friday appealed to an arbitration court in Khanti-Mansiisk to stop bankruptcy procedures against its subsidiary, Varyoganneftegaz. Last month, Sidanko, in which BP Amoco holds a 10 percent stake, paid off Varyoganneftegaz's debts to creditors, worth 358 million rubles. Sidanko has also settled 400.9 million rubles in debts Varyoganneftegaz owed to budget agencies. According to a statement, "In the opinion of Sidanko, at the moment there is a legal basis for stopping the bankruptcy procedures against Varyoganneftegaz." Trading company Alyans Group is trying to acquire Varyoganneftegaz through the bankruptcy process. Alyans Group claims its subsidiary Alyans Kapital holds 76 percent of Varyoganneftegaz's debts. Sergei VAKUNOV, chief spokesman for Alyans said, "[Sidanko] broke laws on bankruptcy, and the civil code," the Dow Jones Newswire reported. VAKUNOV said Sidanko failed to follow the procedures for paying creditors, by settling debts to commercial organizations before those to budget agencies. He added that neither had Sidanko held a creditors' meeting, or secured licenses from the Central Bank to allow it to settle hard currency debt.

tions governing the organization of work procedures," the bank said. Estonia is striving to conform with European financial regulations to pave the way for possible membership of the European Union. The State Audit Office in July, however, said some of the country's anti-corruption laws are inadequately enforced. Hansabank shares declined 0.25 kroons to 123.25 in Tallinn. Swedbank, which holds a 52.6 percent stake in Hansabank, fell 1 krona to 139 in Stockholm.

Ukraine Appoints A New Economics Minister

· Ukrainian President Leonid KUCHMA has appointed Vasyl ROHOVY as the new economics minister, according to president's press secretary Alexander MARTYNENKO. ROHOVY, 47, has held the post of first deputy head of Kuchma's administration since the beginning of this year. He was also the economics minister in the previous Cabinet from April, 1998, until the end of last year. The post has been vacant since July, when Kuchma accepted the resignation from former Economics Minister Sergei Tyhypko, who was elected to parliament and, by law, could not combine his new job with work in the government. Speaking of ROHOVY, MARTYNENKO said, "According to the President and Prime Minister, he is the best choice for the post." ROHOVY will leave the presidential administration to become the new minister.

South Caucasus & Central Asia

Red Cross Workers Believed Alive

· Georgian law enforcing bodies have received information that the three employees of the International Committee of the Red Cross, kidnapped in Pankisi on Friday, are alive. The Red Cross in Georgia on Tuesday suspended its work with refugees near the Chechen border after the disappearance of its employees. Prosecutor General of Georgia Jamlet BABILASHVILI denied all the allegations that negotiations on bailing out the hostages are underway. He stressed the investigation is taking into account that certain Russian forces are attempting to destabilize the situation in Pankisi, currently sheltering over 7,000 Chechen refugees, Prime News Agency reported. The Interior Ministry, however, reports that it is holding negotiations for hostages' release. The ministry would not say who the captors are or give any other details.

European Republics

Hansabank Sees $3.8 Million Loss

· Estonia's Hansabank, majority-owned by Sweden's Swedbank, said one of its employees made an unguaranteed loan to a client that may cost Estonia's largest bank as much as 66 million kroons ($3.8 million). The bank, which will file a report to police, has fired its head of trade finance, Mait KOLDITS, who withheld information on the loan made in 1998. He also lied to the bank's credit committee, Hansabank said, adding it will take a charge for the loss this month. "To avoid future violations, Hansabank will scrutinize the regula

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Rumors surfaced today that the Red Cross workers have been released in the Pankisi Gorge. One high-ranking law enforcement officials said, "There are no concrete facts to confirm these reports at present, we have been verifying the authenticity of this information." Law enforcement units are continuing their search for the missing workers: Natascia ZUNINO from Italy, Sophia PROKOFIEFF from France and their Georgian driver, Yuri DURCHIYEV. Red Cross spokesman David AKHOBADZE said, "Unfortunately, we have no news about our colleagues. We are still doing our best to find them…We are sure that Georgian authorities are taking all the necessary steps. I hope that everything will be sorted out successfully."

Uzbek Forces Clash With Islamic Rebels

· Uzbek Security Forces continue to clash with Islamic rebels, who invaded the Central Asian nation from Tajikistan on August 6^th. The 70 to 100 Islamic gunmen appear to be loyal to Djuma NAMANGANI and Takhir YULDASH, the leaders of the banned Islamic Movement of Uzbekistan. Uzbekistan has blamed NAMANGANI for a number of explosions in Tashkent in 1999, aimed at assassinating Uzbek President Islam KARIMOV. Secretary of the Uzbek Security Council Mirakbar RAKHMANKULOV in a press conference said, "The operation to wipe them out has been carefully planned...using all possible means at our army's disposal." Foreign Minister Abdulaziz KAMILOV said the fighters were getting support from the United Tajik Opposition (UTO), which fought Moscow-backed government forces in Tajikistan's civil war between 1992 and 1997.

US State Department Richard BAUCHER on Tuesday said, "We recognize the right of the Uzbek government to defend sovereignty and territorial integrity of Uzbekistan." This year the US included the Islamic movement of Uzbekistan on a list of terrorist organizations. The US has called on the Uzbek and Tajik governments to cooperate in pre

venting the threat of security in Central Asia. However, the US urged Uzbek authorities to use, "maximum possible restraint in order to minimize unnecessary casualties." Kyrgyzstan has put its military units in the south on alert. Troops have been ordered to be in a state of combat readiness number 1, following the intrusion of rebels into Uzbekistan from Tajikistan. Kyrgyz Human Rights Ambassador Tursunbai BAKIR UULU told Itar-Tass today that he does not rule out that the group of bandits might break from Uzbekistan into Kyrgyzstan by September. Last fall, BAKIR UULU conducted negotiations with Islamic rebels for the release of hostages in Kyrgyzstan, including four Japanese scientists. Tajik Deputy Border Protection Committee chief Major General Safarali SAIFULLAEV said that Tajikistan has intensified controls along its border with Uzbekistan. He said, "I officially state that no fighters crossed from the territory of Tajikistan into Uzbekistan, especially a group the size of the one Uzbekistan is talking about."

Kyrgyz-Russia Discuss Atomic Projects

· Kyrgyz President Askar AKAYEV and Russian Atomic Energy Minister Yevgeny ADAMOV discussed prospects of atomic cooperation between Russia and Kyrgyzstan at a meeting in Moscow on July 28^th. Specifically, the talks dwelt on possible production of equipment for the protection of state borders at the enterprises overlooked by the Russian Atomic Energy Ministry, ADAMOV told Itar-Tass. He believes that conversion could be another area of Russia's economic cooperation with Kyrgyzstan. "We are short of financial resources but we do have a huge intellectual potential and the workforce," ADAMOV went on to say. He stressed that Russia and Kyrgyzstan intended to consider the ecological consequences of the uranium use and extraction. The activities of the Slavonic University in Kyrgyzstan were a separate item on the agenda. ADAMOV said the Atomic Energy Ministry would render "all possible assistance," to this educational establishment.

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

Tatyana Kotova, Intern

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