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Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Tuesday, September 12, 2000

Russian Federation


Live Ammunition Hit The Kursk?

· A German newspaper, Berliner Zeitung, reported that Russia's Federal Security Service (FSB) in a secret report concluded that the cruiser Peter the Great had fired a "Granite" cruise missile which sank the Kursk submarine during training exercises, killing all 118 sailors aboard. Russia has denied these claims. First Deputy Prime Minister Ilya KLEBANOV, the head of a government commission investigating the August 12th disaster, said that no shooting was underway at the time the Kursk sank and that no live ammunition was used during the entire training session. However, Admiral Vladimir YEGOROV, head of the Baltic Fleet, said that one of the scenarios under investigation involved cruise missiles. The German newspaper cited a report conducted by a special investigating team under FSB director Nikolai PATRUSHEV. It noted that shortly after the missile was fired two underwater explosions were registered, both visible from the bridge of the Peter the Great ship. An FSB spokesman refused to comment on the report Monday, referring callers to a secret service statement last week that denied the Kursk was sunk by a Russian torpedo. Navy spokesman Igor DYGALO said the Kursk and Peter the Great were not even in the same area when the explosions took place. The newspaper also noted that the training mission had been to simulate a nuclear attack on Russia and involved the experimental testing of the "Granite" cruise missile. The Pentagon has handed over acoustical data collected on the two loud blasts the day of the explosion. US officials have said the Kursk's sinking was most likely caused by the misfiring of one of its torpedoes.

Sergeyev Proposes Army Cuts

· Russian Defense Minister Igor SERGEYEV said on Friday that military personnel would be cut by 350,000 by 2003, representing a drop of nearly one-third in the official size of the 1.2 million-strong former Red Army. "Decisions to do so have been made and proposals to the president on their implementation are being worked out," he said. The number of divisions in the long-range nuclear Strategic Rocket Force would be cut from 22 to 12, and lose its separate command structure by 2006. SERGEYEV cited cuts not only among land-based troops, the navy, and air force, but also civilian personnel, border guards, ministry of interior troops, and railway forces.

President Vladimir Putin said Russia needs to radically overhaul its outsized armed forces, inherited from the Soviet Union, which spent a large chunk of its budget preparing for an all-out war against NATO. Plans for military reform have been on the table for much of the post-Soviet era but have not been implemented, forcing the military to live on a shoestring and see its hardware deteriorate beyond safety limits. The sinking last month of the nuclear submarine Kursk, killing all 118 crew, highlighted the dismal state of equipment and infrastructure. Putin said, "We need to live according to our means. We need to have a smaller army, but one that's better equipped and technically perfect." Meanwhile, Russia's military weakness is revealed every day in Chechnya,

Today's News Highlights


General Wounded In Ambush

Is The Rus. Economy Vulnerable

European Republics

$1B To Be Spent Servicing Debt

Lith. To Issues Int'l Bonds

South Caucasus & Central Asia

Shelton To Visit Georgia

Baku-Novorosiisk Deliveries

EBRD-Kazkommertz Agmt.

Kyrgyz Kill Seven Rebels




September 12, 2000

Intercon's Daily

where its forces continue to suffer heavy casualties almost a year after they occupied the republic and months after they claimed to have broken rebel resistance. Analysts agree that reducing the army's strength is no panacea when what is really needed is root-and-branch reform. For many, the problems lie with Russia's military doctrine. "The big question is whether Russia still regards the US and NATO as its primary enemy. The majority of the military still does," said Dmitri Trenin, deputy head of the Carnegie Moscow Center. According to the Financial Times, there has been no information on whether Russia plans to fulfill the pledge of former President Boris YELTSIN to abolish conscription and shift toward a fully professional army.

Russian General Wounded In Ambush

· Kremlin spokesman Sergei YASTR-ZHEMBSKY today admitted that Major General Anatoly MIKH had been seriously wounded and six other soldiers killed, after Chechen rebels conducted a series ambush attacks in areas supposedly under Russian control near Gudermes. Five bullets hit MIKH; his driver and another officer were also wounded. The Associated Press reports that the attack is another major embarrassment for the Russian military, which has claimed repeatedly that the rebels in Chechnya are defeated and pose no major threat. At least three others were killed when militants shot up an armored personnel carrier approaching the southwestern city of Urus-Martan, he said on condition of anonymity. Overnight, rebels sprayed gunfire at a Russian checkpoint in Gudermes and set off a bomb at a railway crossing in the town. Federal troops discovered the device and defused it, the official said. Lieutenant General Ivan BABICHEV, the chief military commandant of Chechnya, said the attack on MIKH was motivated by efforts to stop thefts of oil from pipelines crossing Chechnya. "Federal troops and law enforcement bodies have taken a strong grip on the shadow oil tycoons in Chechnya and now they want to take revenge," he said. Russian Sukhoi-25 attack planes have flown 16 combat missions against targets in the mountains over the past 24 hours.

Contradictory Claims In The Chechen Conflict

· Chechen rebels claim they ambushed in the mountainous Nozhai-Yurt district and killed 27 paratroopers on Monday. An aide to the Kremlin said the

military had fired rockets at a rebel base in the area but no direct confrontation had taken place. Rebels also describe two ambushes in Grozny, in which 10 to 11 Russian soldiers were killed. Russian denies these figures, citing that only three policemen have been killed in two separate ambushes in the past three days. In addition, a spokesman for Chechen President Aslan MASKHADOV said that rebels had taken three Russian officers, a general and two colonels, captive on Saturday in the Chernorechiye district south of Grozny. Kremlin spokesman Sergei YASTERZHEMBSKY has denied this. "None of this is true. There was no such incident...It is disinformation." Russia claims their forces have destroyed several rebel hideouts and killed two rebel fighters in an incident near Grozny. Russian crews defused a mine in the eastern village of Tsentoroi, near the home of Chechnya's Moscow-installed civilian administration head, Akhmad KADYROV. Russia reported that Bukar AKHMATOV, pro-Moscow boss of the village administration in Oktyabrskoye near Kurchaloi in eastern Chechnya, was shot repeatedly, while returning home in his car, and died instantly on Sunday. Over the past few months, rebels fighting for independence have killed several Chechens who work for the pro-Moscow government in Chechnya.


Ruble = 27.84/$1.00 (NY rate)

Ruble = 27.82/$1.00 (CB rate)

Ruble = 24.09/1 euro (CB rate)

Is The Russian Economy Vulnerable?

· Russia's consumer price inflation slowed in August. Consumer price growth slowed to an impressive 1.0 percent last month compared with 1.8 percent in July. Analysts, however, warn that price could rise. A UFG brokerage analyst said, "Although these figures are ultimately strong by themselves...we should note their seasonal nature." The State Statistics Committee said the biggest difference was in food prices¾which rose only 0.3 percent from 1.8 percent in July. Non-food and services rose 1.4 percent versus 0.8 percent and 3.0 percent versus 3.8 percent, respectively. Alexei MOISSEYEV, an economist at BNP Paribas, said the government, alarmed by prices creeping higher, had taken steps to curb the growth in money supply in August. Russia's monetary base, which

When you need to know it as it happens




September 12, 2000

Intercon's Daily

has risen by more than 40 percent since the start of this year, dropped to 430.8 billion rubles on August 28th from 435.1 billion rubles on August 21st. The Central Bank has been printing rubles to bolster its hard currency reserves through purchases of dollars. But between July 28th and August 25th, reserves only rose by $900 million, compared with a $2.0 billion rise between June 30th and July 21st, Reuters reported. MOISSEYEV said the long-term danger of inflation remained. He believes that the ultimate solution to higher prices would be reforming the economy, which in its current state is unable to absorb a growing money supply. "When the economic function of reallocating financial resources between different sectors of the economy works normally, the problem will solve itself. Until then the key problem will persist. If oil prices are low, there will be problems with debt payments, if they are high, there will be problems with printing money."


Lenenergo To Sell ADRs

· Lenenergo, the monopoly power supplier for St. Petersburg, plans to sell 10 percent its shares abroad as American Depositary Receipts (ADRs), The Moscow Times reported. The power company will offer Level 1 ADRs with a face value of 8.9 million rubles ($325,000), according to Viktor NESTEROV, secretary to the Lenenergo board of directors. Conversion terms will be set after approval by the US Securities and Exchange Commission in October. Level 1 ADRs don't involve raising new capital as they are issued on existing shares held with a depository bank. Foreigners already own 31 percent of Lenenergo and the company hopes to improve its reputation among investors. Local companies flocked to ADR programs in the mid-1990s to increase trading in their shares and their international profile.

much the cash-short government planned to borrow on foreign and domestic markets next year. The government plans a balanced budget for next year. "We propose a zero-deficit budget to curb state debt growth," MITYUKOV told a government meeting earlier. By July, Ukraine had slashed its foreign debt from $12.437 billion to $10.572 billion at the start of the year, despite frozen financing from the International Monetary Fund (IMF). Ukraine's domestic debt jumped to 42.6 billion gryvnias ($7.83 billion) from 15.0 billion gryvnias, largely due to rising obligations to the Central Bank, which had once been a major buyer of treasury bills.

Lithuania To Issue International Bonds

· Lithuania's Finance Ministry today said it was planning to debut a five-year, international bond issue in October worth about 100 million litas ($25 million) at par and denominated in the local currency. Ana ABRAMCIK, the head of the ministry's market operations division, told Reuters, "We are considering a first issue of some 100 million litas but the exact size of the issue will be set after consultations with foreign banks. The move is part of the government's plan to restructure its debt with longer maturing paper." The ministry is also working on registering litas with the EuroClearing System, expected by October 1st, so that settlement could take place on international markets. Currently the longest maturity for Lithuanian litas denominated securities is three years. At the latest Treasury bond auction the average yield stood at 9.986 percent on three-year paper.

South Caucasus & Central Asia

Shelton To Advise Georgia On Army Reform

· Head of the Joint Staff of the US Armed Forces General Henry SHELTON is scheduled to visit Georgia on September 14th to discuss reforming Georgia's army. While in Tbilisi, General SHELTON will meet with Georgian President Eduard SHEVARDNADZE, Chairman of Parliament Zurab ZHVANIA, Defense Minister David TEVZADZE, and head of the armed forces headquarters Johnny PIRTSKHALAISHVILI. The sides will also talk about the US help to 11th motto-firing brigade, the training of Georgian officers in the US, and the development program of English language studies.

European Republics

Ukraine To Spend $1B Servicing Debt

· Ukraine's Finance Minister Igor MITYUKOV has projected that it will cost Ukraine seven billion gryvnias ($1.06 billion at a gryvnia rate of 6.6 per dollar) in 2001 to service its debt. MITYUKOV on Monday said foreign debt servicing would amount to four billion gryvnias. He declined to say how

When you need to know it as it happens




September 12, 2000

Intercon's Daily

Socar Predicts Investment Cost For Block

· Initial investments in rehabilitation and development of the Mishovdag-Kalamaddin onshore block in Azerbaijan will reach between $60 million and $80 million, the head of SOCAR's overseas investment department Valekh ALESKEROV said. He noted that the total investment value of the project would be established after the work scope had been considered in detail including drilling operations, and the reserves of the contract area had been estimated. A Production Sharing Agreement for Mishovdag-Kalamaddin is due to be signed during an Azeri delegation's visit to the US, which includes President Geidar ALIYEV.

Rus-Azerbaijan Gas-Oil Deliveries

· Russian natural gas deliveries to Azerbaijan will allow to resume major transit of Caspian oil via the Baku-Novorossiisk pipeline across the Russian territory, President of the Azerbaijan State Oil Company (Socar) Natik ALIYEV said today. He explained that Russian gas would replace Azeri fuel oil at electric power stations and thus allow "to release up to two million tons of oil a year for the transfer to Russia." This year the Baku-Novorossijsk pipeline carried only 350,000 tons of Azeri oil. The government ordered Socar to suspend oil exports. "The problem can be solved if Russian gas deliveries begin from October 1st," ALIYEV said. The Baku-Novorossiisk pipeline brings Azeri oil to the Black sea for further export. The pipeline follows a route via rebel Chechnya.

Kazkommertz Bank-EBRD Sign Loan Agrmt

· Kazakhstan's leading commercial bank, Kazkommertz, and the European Bank for Reconstruction and Development (EBRD) on Monday signed a loan deal for three credits worth a total of $45 million. The deal could eventually give the EBRD a 10 percent stake in the bank. Kazkommertz managing director Oleg KONONENKO explained that the new credits include $15 million and $10 million intended for trade finance, while part of the third $20 million loan for "general purposes" can

later be exchanged by the EBRD for shares in Kazkommertz. "They will have the option of buying up to 10 percent of our shares. Judging by our talks, they will likely choose this option. I think we shall not be against this," he said. He said the agreement allowed Kazkommertz access to EBRD funds at better terms than an earlier credit, which was taken out after the Russian crisis in 1998. Earlier this year the bank repaid the first tranche of that $40 million loan ahead of schedule. The improving economic situation allowed it to return the second installment unused, Reuters reported.

About 32 percent of Kazkommertz shares are traded on European and US markets in the form of American and Global Depositary Receipts. Some of the bank's shareholders own stakes in telecommunication monopoly Kazakhtelekom, but the bank said it has sold its stake in an oil refinery.

Kyrgyz Troops Kills Seven Rebels

· Kyrgyz Secretary of the Security Council Bolot DZHANUZAKOV said that Kyrgyz troops killed seven rebels late on Monday in fighting on the border with Uzbekistan. He said, "Yesterday evening OMON special-forces encountered a seven-strong bandit unit, encircled them and, in fierce fighting, wiped them out completely." Fighting broke out early August between rebels and government troops in the remote, mountainous region where the borders of Uzbekistan, Kyrgyzstan and Tajikistan meet. DZHANUZAKOV said Monday's operation was the result of close cooperation between Kyrgyz and Uzbek troops pursuing a group of 15 rebels who entered Uzbekistan and got as far as the administrative region surrounding the capital, Tashkent, last month. Uzbek forces had already killed the remaining eight members of the group in Uzbekistan. Both Uzbekistan and Kyrgyzstan say the rebels are based in camps in Tajikistan, although the Tajik government denies this. There was similar heavy fighting last summer, but it ended with the return of winter snows that make the region effectively impassable.

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

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