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Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Thursday, September 21, 2000

Russian Federation


Hostage Crisis In Sochi Linked To Chechens?

· Several people have been taken hostage in the Lazarevskaya district of the Black Sea resort of Sochi. Masked kidnappers earlier today demanded a ransom of $30 million and the freedom for Chechen prisoners held in Russian jails; now they are demanding a helicopter. Sochi is located approximately 300 miles west of Chechnya. The head of the Krasnodar regional police press office Vladimir VOLOGIN said the masked gunmen were holding the hostages on an upper floor of a hotel building under construction. Two hours after the hostages were kidnapped and a shootout, elite police units secured the ground floor of the building. Russian President Vladimir PUTIN put the Federal Security Service in charge of the negotiations with gunmen. He has also sent to the scene Viktor KAZANTSEV, who said, "the situation is completely under control, and steps to neutralize the bandits and free the hostages will soon be taken." The number of captives is unclear. Russian news agencies initially said there were seven hostages, while Kremlin spokesman for Chechnya Sergei YASTRZHEMBSKY told Interfax there were five at the most and KAZANTSEV said there were five men and a woman. VOLOGIN, however, estimated as many as 30 hostages. Interfax reported that a woman hostage was shot and wounded as she fled. YASTRZHEMBSKY said the hostage-takers were armed with a pistol and hand grenades, contradicting Krasnodar police who told Itar-Tass they had only a pistol. This kidnapping comes just days before the anniversary of the start of the latest Russian campaign in Chechnya. Russian jets bombed the outskirts of Grozny on September 23, 1999, and troops rolled into the breakaway republic seven days later. Russian officials are playing down

the Chechen link and a representative of Chechnya's President Aslan MASKHADOV has denied any involvement.

Seleznyov Registers His Own Party

· Russia's State Duma speaker, Gennady SELEZNYOV, registered his own political movement called Russia today, but denied a split with the Communist Party, of which he is a senior member. SELEZNYOV was shown on Russian television attending the registration ceremony of his movement at the Justice Ministry. SELEZNYOV's move to branch out has sparked rumors of a split within the left-wing, which is dominated by the Communist Party and its leader, Gennady ZYUGANOV. SELEZNYOV said, "This is maybe a new impetus for the Communist Party. Our Russia movement is an ally movement to the Communist Party." Russian media have suggested that SELEZNYOV might like to contest the presidency as a left-wing candidate in a future election. ZYUGANOV has made two failed attempts to become president in 1996 against Boris YELTSIN and 2000 against Vladimir PUTIN.

Duma Deputies Reject Immunity Bill

· The Russian State Duma today, in a vote of 133 to 119, rejected a bill that would have partially lifted their immunity from prosecution. Communists and nationalists said the bill could open them to arbitrary attacks by the authorities. The proposal to remove the immunity of elected officials was a major issue in the December 1999 general election, winning wide

Today's News Highlights


Contract Soldiers Demand Pay

Russia's Unemployment Falls

Lesin Linked To Pressured Agmt

UES Tax Probe Launched

European Republics

WB Urges Lithuanian Sell Offs

WB May Lend Ukraine $1.8B

Alumina Stake On Exchange

South Caucasus & Central Asia

Regional Oil & Gas Projects




September 21, 2000

Intercon's Daily

spread public approval. Russia's parliament must vote to remove the immunity of members before criminal cases can proceed. The proposed bill would have allowed prosecutors to bypass parliament to pursue criminal cases against members as long as the investigations did not involve arrests or searches, Reuters reported The lifting of deputies' immunity would also apply to the Federation Council and regional assemblies.

Contract Soldiers Demand Back Pay

· Russian contract soldiers, or kontraktniki, attempted to blockade the entrance to a big army headquarters in southern Russia demanding back pay for the military offensive in Chechnya. Top officers claim that the contracted volunteers had failed to honor their contracts and some had exhibited undisciplined behavior. NTV broadcasted footage showing soldiers linking arms and jostling officers trying to pass through the main entrance of the headquarters of the Northern Caucasus military district. In an exchange at the blockade, one official said, "On what grounds are you asking me to go in the other door? Let me through!" A soldier responded, "Comrade Colonel, on what grounds have been obliged to live on the street? We're waiting for our money. Our quarrel is with the headquarters, not with you," Reuters reported. Another soldier said he had received $125 out of what he believed was promised pay of $2,500. The Russian military has relied on the hastily recruited kontraktniki in its year-old campaign against Chechen separatists, to beef up a force of mostly youthful conscripts.


Ruble = 27.82/$1.00 (NY rate)

Ruble = 27.79/$1.00 (CB rate)

Ruble = 23.88/1 euro (CB rate)

Russian Unemployment Falls

· The number of unemployed people in Russia fell 18.1 percent to 7.13 million, during the 12 months ending August 31st, Russia's state statistics agency announced today. The State Statistics Committee said the number of jobless as measured by International Labor Organization standards had dropped steadily all year, from 8.9 million at the end of 1999 to 7.29 million in June 2000, the Associated Press reported. Russia's economy has been bouncing back from an August, 1998 financial crash. Higher

prices for Russia's oil exports have pumped cash into the economy, and a fall in the ruble's value against foreign currencies has made Russian products cheaper than imports. Russian unemployment statistics are widely viewed as significantly understating the true number of unemployed, since many people are shown as working for enterprises that have slashed or ceased production and often don't pay them.


Lesin Tied To Media Most Contract

· Russian Press Minister Mikhail LESIN admitted on Wednesday that he approved the forced contract between Vladimir GUSINSKY, chairman of Media Most, and Alfred KOKH, the head of Gazprom's media branch. He said that this was "a serious mistake." The contract for GUSINSKY to sell his shares in Media Most in return for the dropping of criminal charge, which was forced on GUSINSKY while he was imprisoned, indicates that the government interfered with the fate of Media Most, the only independent media group. This leads to speculation as to whether President Vladimir PUTIN or Prime Minister Mikhail KASYANOV had been aware of the contract. The Financial Times reported that LESIN said he had taken the initiative on his own and only informed KASYANOV after the fact. LESIN said that the freedom-for-assets contract was raised by GUSINSKY. However, NTV Television, part of the Media Most group, reported that LESIN had proposed the contract. It further accused the Press Minister of making threats and seeking personal gain from the sale of Media Most to Gazprom. For its part, Gazprom has said the contract is purely based on commercial interests. Gazprom says Media Most has defaulted on considerable debts to Gazprom.

UES Investigated For Tax Evasion

· The Moscow City Department of the Federal Tax Police Service (FTPS) has instituted criminal proceedings against Unified Energy Systems of Russia (UES) for failing to make a tax payment of taxes to the tune of 3.2 billion rubles ($115 million), Kuzma SHALENKOV, chief of the FTPS operations department said. Reports of the new probe sent UES' shares tumbling, pulling the rest of the market down with it. However, it has been reported that the criminal case was opened on August 28th.

When you need to know it as it happens




September 21, 2000

Intercon's Daily

SHALENKOV said that the probe could be dropped if UES paid its debts, which were discovered during a check at the end of July and the beginning of August. Tax police were investigating why UES had not been able to pay taxes on time and planned to check UES subsidiaries in Samara, Rostov, and Stavropol regions. Renaissance Capital power sector analyst Hartmut JACOB noted that the action taken against UES is aimed at keeping its chief executive officer Anatoly CHUBAIS in line with the government on restructuring plans. He said, "I do not expect anything to happen with it. The investigation will yield no results and will not be handed to a court...It will be decided quietly as similar cases in the past have been."

In July, Russia's Audit Chamber launched an investigation into the partial privatization of UES nearly 10 years ago, alleging that a stake in the company, which had been earmarked for Russian investors, had been illegally sold to foreigners. The charges were interpreted as part of a crackdown against powerful businessmen.

sector. On September 13th, the government approved a restructuring of state-owned Lithuanian Energy into five companies ahead of the firm's eventual privatization.

WB May Lend Ukraine $1.8 Billion

· The World Bank announced it would lend $1.8 billion to Ukraine under a new three-year loan program, if the country implements a comprehensive economic reforms program. The World Bank warned that financing could be reduced to $456 million, if reforms were slow. World Bank Director for Ukraine and Belarus Luca BARBONE was quoted in the Bank's statement saying the real level of financing would depend on implementing economic reforms and achieving results that created a basis for sustained economic growth. According to the statement, the new program is aimed at helping the government implement institutional reforms and improve the system of management. It would also focus on social issues. But the statement said the major part of the loans will be given if Ukraine proves its success in achieving agreed economic targets. Cooperation on the new program will be further discussed during World Bank President James WOLFENSOHN's visit to Ukraine on October 4th.

Ukraine To Sell Alumina Stake on Exchange

· Ukraine plans to sell a five percent stake in the country's only alumina producer, Mykolayivsky Hlynozemny Zavod, on the Kiev International Stock Exchange on October 26th, the State Property Fund announced today. The Fund, which has already sold 75 percent of the plant, plans to split the remaining 25 percent state stake and sell it in two 10 percent stakes and one five percent stake. Olexander BONDAR, head of the Fund, had said that would allow it to attract more portfolio investors to the sale. A Ukrainian firm linked to Russia's Sibirsky Aluminium purchased 30 percent of the plant, located in southern Ukraine, for $101 million in March. Sibirsky Aluminium had said it already owned 36 percent of the alumina plant.

South Caucasus & Central Asia

Regional Caspian Oil And Gas Projects

· Azeri President Geidar ALIYEV, at a ceremony for the IV annual conference "Azerbaijan: Gates to Eurasia" in Washington DC last week, indicated his

European Republics

WB Urges Lithuanian Sell Offs

· The World Bank today urged Lithuania to step-up its privatization efforts, if it wants to receive a second $50 million installment of a structural adjustment loan next spring. In July, the World Bank approved an 11-year, $100 million structural adjustment facility as well as the first of two $50 million tranches. World Bank director for the Baltic States and Poland, Basil KAVALSKY said, "The second tranche is expected in something like nine months, [depending] on whatever government is in office taking the...measures which have been agreed." The World Bank is particularly eager to see progress in privatizing the country's last remaining state-owned banks: second-largest Lithuanian Savings Bank and third-largest Agricultural Bank. Earlier this year the government entered talks with Polish Pekao, who in consortium with Italian UniCredito Italiano is looking to take a controlling stake in Agricultural Bank. In August Lithuania launched a tender to sell a 91 percent state-owned stake in Lithuanian Savings Bank with bids to be submitted in October. Prime Minister Andrius KUBILIUS has pressed ahead with plans to privatize the energy

When you need to know it as it happens




September 21, 2000

Intercon's Daily

displeasure with ExxonMobil for its failure to give full support of the Baku-Tbilisi-Ceyhan MEP project, at an estimated cost of $2 billion to $3 billion. He also accused ExxonMobil and other Azerbaijan International Operating Co. (AIOC) shareholders of trying to delay the realization of the Baku-Tbilisi-Ceyhan. K. Terry KOONCE, President of ExxonMobil, said that ExxonMobil is prepared to give its full support. However, he noted that ExxonMobil has the responsibility to its shareholders to ensure that Baku-Ceyhan is feasible and an economically viable investment. ExxonMobil requires, "a pipeline outlet be economically viable and that it have the right kind of [oil] reserves to back it up. And we're not entirely convinced that Baku-Ceyhan has reached that point yet," KOONCE said. One ExxonMobil representative said the Baku-Tbilisi-Ceyhan project is "ambitious." This lead Wref DIGINGS, Vice President of BP Amoco's Main Export Pipelines, to note that BP Amoco plans to invest $6 billion on a one track in the Caspian, which will require deep oil wells. He said that BP Amoco must be sure that before it invests this large sum in drawing the oil out of the ground that there is a way to transport it to markets. He questioned whether Baku-Tbilisi-Ceyhan would be operation for this reason. BP Amoco said that it is conducting a 6 month general engineering review followed by a 12 month detailed engineering review for the Baku-Tbilisi-Ceyhan oil pipeline. This project is still 20 months out. In an interview with The Wall Street Journal, KOONCE said that the project is not beneficial for the company and it can not take the responsibilities of its realization. He said this decision was due to the fact that the amount of oil dedicated for transport through the Baku-Tbilisi-Ceyhan route has not been secured.

Meanwhile, the Caspian Pipeline Consortium's (CPC) project from Kazakhstan to Novorossiisk is predicted to be operational in June, 2001. The Kazakh portion has not been tested. Large terminal and storage units are under production; pumping stations are being built; and pipes are already laid in the ground. The Russian pipeline section around

Chechnya has been completed. As of April, 2000, it has already pumped 5.3 million tons of oil. Special adviser to the president and secretary of state of the USA for Caspian energy resources John WOLF said that the US government plans give the Baku-Ceyhan oil pipeline export-credit financing and political risk insurance. He also urged Turkey and Georgia to diversify the sources of gas supplies and welcomed the intention of Azerbaijan to exports its natural gas to Georgia, Turkey and Europe. According to WOLF, the US Administration also hopes that Turkmenistan will join the given project in future.

AIOC has completed tests showing that the Baku-Supsa pipeline is capable of transporting 126,000 barrels of oil per day. The current quantity of oil transported per day is 115,000 barrels. Increase of the transported amount is connected with upcoming increase of worked out amounts on Chirag wells, Prime News Agency reported. The Supsa terminal was opened in April, 1999, and already 60 tankers have been loaded with the Caspian crude.

ALIYEV also promoted a plan for pipeline export of natural gas from Azerbaijan's Shakh Deniz field to consumers in Turkey. London-based BP Amoco is developing Shakh Deniz and hopes to begin exporting its gas to Turkey in late 2002. BP Amoco, also the lead member of an international consortium developing the ACG (AIOC) oil reserves, estimates costs savings of 5 percent to 20 percent, if the oil- and gas-export pipelines can be coordinated, DIGINGS said. BP Amoco's Vice President David FITZSIMMONS told an energy conference in the Turkish capital Ankara that the Azeri-Turkey gas pipeline is on schedule to make its first delivery by the end of 2002. He said the project to pump gas from recently-discovered large reserves in Azerbaijan's Shakh Deniz fields needed a further $2 billion in investment. "Over 100 people from BP Amoco are working on the project. We remain on target but we cannot do it alone. We need cooperation from Turkey and Azerbaijan," Reuters reported.

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

Oleg D. Kalugin, Content Advisor Jennifer M. Rhodes, Principal Editor

Tatyana Kortova, Contributing Editor

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When you need to know it as it happens