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

Friday, September 22, 2000


Russian Federation

Politics

Gunmen Surrender And Release Hostages

· Gunmen holding hostages in a partially built hotel in Lazernaya, near the Russian Black Sea resort of Sochi, surrendered to police and released all their captives early this morning. Two of the gunmen are believed to be brothers of the hotel owner. The number of hostages and gunmen has been disputed and remains unclear. The kidnappers initially demanded $30 million each and the release of all jailed Chechens. Later, they changed their demands to talks with Russian President Vladimir PUTIN and an escape helicopter. The Federal Security Service (FSB) and interior ministry officials said the gunmen were not connected to Chechen rebels. A representative of Chechen President Aslan MASKHADOV had denied involvement in the kidnapping. The FSB, local interior officials, and police held negotiations with the gunmen, after automatic gunfire and grenades were thrown from the hotel. Deputy head of Russia's FSB German UGRYUMOV earlier said his officers were prepared to storm the building if negotiations failed. RTR said the arrested would face charges of hostage-taking and penalties from 6 to 15 years in prison.

First Deputy Interior Minister Vladimir KOSLOV has speculated that the kidnapping was a staged event. He said, "There are serious suspicions that there were never any hostages and that this was a staged situation with phony hostages." He pointed out that several officials believe that some of the hostages were in fact accomplices of the hostage takers. UGRYUMOV, who praised all security forces involved for near perfect cooperation, was evasive about whether the incident was a real life-or-death hostage drama. "The operation is over. There are no dead or injured. Those who had to be arrested

have been arrested. All hostages have been freed."

Organized Crime Goes Global

· Jane's Information Group, in partnership with The Matthew B. Ridgway Center for International Security Studies of Pittsburgh, PA, held a conference this week in Washington on Transnational Organized Crime. The conference focused on organized crime groups throughout the world, their strategies, tactics, specializations, methodologies, and governments' response or lack of strategic organization. Deputy Chief of the Organized Crime section, Criminal Investigative Division of the Federal Bureau of Investigations (FBI) Kevin LEWIS, defined organized crime (OC) as, "Any continuation and self-perpetuating criminal conspiracy fed by fear and corruption and motivated by greed." Most interesting was the significant difference in the FBI's description of Eurasian organized crime verses that of Mexico, Columbia, etc. The other organized crime group descriptions were limited as to their activities. The FBI describes Eurasian Organized Crime more in terms of their structure and methodology. This described Eurasian or Russian organized criminal organizations as having global collaborators working in an international apparatus active in 53 countries. The FBI estimates that there are 30 Russian OC groups operating in the US. These groups use sophisticated criminal schemes, such as money laundering and securities fraud. The FBI estimates that Russian OC membership globally comprises of 8,059 groups, with over 35,000

Today's News Highlights

Russia

Kasyanov Seeks Loans

Lesin's Involvement Questioned

European Republics

Baltics To Join EU Together?

South Caucasus & Central Asia

Georgia Demands UN Action

US House Approes Military Aid

Hurrican To Invest In Kazakhstan

Politics-Economics-Business

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Friday

September 22, 2000

Intercon's Daily

members. Of the FBI's 1,800 active OC investigations cases, 366 are focused on Eurasian criminal groups. The structure and description of Russian OC activities resemble more an intelligence organization than a criminal organization, but the FBI was unwilling to comment on the differences within their descriptions. In one extraordinary example, a monthly meeting of Russian OC members was detected in South Africa. Analysis concluded that the Russian crime members traveled to South Africa to prepare for upcoming privatization tenders. This acknowledges a troubling reality that these criminal organizations seek international targets in developing countries where law enforcement authorities are not sophisticated or able to counter economic penetration or manipulation.

Roy GODSON, President of the National Strategy Information Center, pointed out that there is no real strategy defined for managing the new reality of transnational organized crime by the US or any other country. He defined organized crime as, "individuals and groups who have ongoing working relationship, and who make their living primarily through profit-making activities that one or more states deem illegal and criminal. Although some criminals may also undertake legitimate activities such as business, law, politics, and law enforcement, their primary occupation and identification is with criminal activity."

Dr. Mark GALEOTTI of the Russian & Eurasian Crime Research Unit at Keele University described the Russian mafia as entrepreneurial and fast moving gangs, which provide services through their "portfolios of business." He pointed out that today's mafia gangs have their roots in the Soviet Union, at a time when deals were brokered between Communist Party officials mixing politics and business. Today's mafia gangs have developed into niche service providers, including contract killer, computer hackers, money laundering, drugs and prostitution. He said that the Russian mafia threatens to subvert the ongoing political change in the nation, its free-market progress, and the country's destabilization, which is detrimental to the world as a whole. GALEOTTI pointed out that the Russian and former Soviet mafia gangs easily created international networks of criminal partners, because they were used to crossing borders within the

Soviet Union, used the latest technology to its advantages, and played on the insecurities of a changing world. GALEOTTI noted that Russian President Vladimir PUTIN understands that crime is a threat to his access to foreign loans. The PUTIN realizes that crime corrodes the power ministries, prohibits foreign investment, and encourages capital flight. GALEOTTI concluded that because Russia remains a criminal state, crime will remain.

Economy

Ruble = 27.82/$1.00 (NY rate)

Ruble = 27.83/$1.00 (CB rate)

Ruble = 24.46/1 euro (CB rate)

OctNov Dec Jan Feb MarApr May JunJul Aug Sep

Kasyanov Seeks Loans, Pledges Transparency

· Russian Prime Minister Mikhail Kasyanov pledged to push oil and gas producers to be more open, and expects the European Bank for Reconstruction and Development (EBRD) to respond by lending them more than $400 million, Bloomberg News reported Thursday. The EBRD postponed a decision on whether to lend $250 million to Gazprom, and $150 million LUKoil Holding, in an effort to allow Kasyanov to discuss the loans with the Bank's directors. Some investors consider EBRD lending as a seal of approval. The Russian government and the EBRD, "are united in the view that these companies need greater transparency," Kasyanov stated. "As a Gazprom shareholder, [the government] is working on that. As for LUKoil, it plans to tap


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international capital markets, so increasing transparency is in its interest." The EBRD has yet to decide on a new date to consider the loans.

While Russia's investment climate has been improving in the aftermath of the 1998 crisis, there's still much to be done to regain investors' confidence and to ensure sustainable growth, EBRD President Jean Lemierre said. According to Kasyanov, the EBRD plans to adopt a new strategy on Russia, which would provide for its greater involvement with the country. "Member countries expect from Russia further actions on reforming its economy," he said. "The government strives to make its actions more transparent and predictable." Lemierre said Russia should speed up reform in banking, energy, and judicial sectors, and break up monopolies.

Business

Lesin To Be Interrogated On Media Most Deal

· Prime Minister Mikhail KASYANOV on Saturday, at the request of President Vladimir PUTIN, will interrogate Press Minister Mikhail LESIN on his role in the shares for freedom deal signed by Media Most's Vladimir GUSINSKY and Gazprom's Alfred KOKH in July. PUTIN said LESIN's actions raise serious questions about his commitment to freedom of the press and about the behavior of state officials. Under the deal, GUSINSKY would hand over his company to Gazprom for $300 million and more than $400 million in cancelled debt and in return would be protected from prosecution and released from jail. GUSINSKY said he was forced to sign the deal "under pressure, at gun-point" and said it therefore lacked legal validity. LESIN admitted Wednesday that he endorsed the agreement at the request of GUSINSKY and KOKH. He stated that he was acting as an individual, not as a state official. Media Most says LESIN's signature showed the state was forcing GUSINSKY to sign in return for dropping fraud charges. GUSINSKY was jailed for three days in June on the charges, which were dropped after he signed the agreement.

Russia's General Prosecutor's office took measures, under a court order, on Thursday to freeze Media Most's shares. This comes after Gazprom requested an investigation into unpaid debts and asset stripping by Media Most. The freeze forbids any sale or transfer of shares in the holding com

pany, Media Most, or in more than two-dozen subsidiaries and affiliated companies. Critics believe that the state is trying to use its 38 percent stake in Gazprom, to crush Media Most, the only independent media group. The gas company owns 14 percent of Media Most and 30 percent of NTV, and holds a large chunk of Media Most shares as collateral for a 1998 loan. In addition to filing a lawsuit demanding that GUSINSKY make good on his pledge to sell control of his company to Gazprom, the gas company on Thursday filed a second lawsuit that demands payment of the $211 million loan.

European Republics

Fischer Thinks Baltic States Could Join EU

· German Foreign Minister Joschka FISCHER said Wednesday there was a chance that all three Baltic States could join the European Union (EU) together, after talks with his counterparts from Estonia, Latvia, and Lithuania. While Estonia is due to join the first wave of the EU's expansion toward the east, the other two are slated for its second phase of enlargement toward the end of the decade. FISCHER gave no time frame during which he expected them to enter the EU, but said the 15-nation bloc should be ready to receive new members from 2003, Reuters reported. The timing of the accession of new members would depend on the findings of a report on candidates' convergence efforts to be published by the European Commission in November, he said. Estonian Foreign Minister Toomas HENDRIK urged the EU to come up soon with "concrete decisions."

South Caucasus & Central Asia

Georgia Demands UN Action On Abkhazia

· Visiting Georgian Foreign Minister Irakli MENAGARISHVILI in New York called on the UN to be more active regarding the situation in the breakaway region of Abkhazia. On Thursday, he accused the UN of dragging its feet. It is estimated that 300,000 Georgians fled Abkhazia in 1993, when separatists armed by Russia drove out government troops and implemented an ethnic cleansing campaign. Approximately 10,000 people were killed in the civil war that followed. While MENAGARISHVILI said his nation was grateful to

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the UN assistance in the peace process, he found fault with what he called UN reluctance to acknowledge OSCE findings, which had established human rights violations in the region. "While struggling with a variety of approaches, the ethnic cleansing of the Georgian population in Abkhazia continues." He called on the UN to work more closely with regional organizations like the OSCE and other European organizations. The UN has sponsors the UN Observer Mission in Georgia (UNOMIG) works with Russian peacekeepers through the Commonwealth of Independent States (CIS) to monitor the situation in Abkhazia and maintain the cease-fire.

In November, 1999, at the OSCE summit in Istanbul, Russia agreed to withdraw from two military bases on Georgian territory, Vaziani and Gudauta, by July 2001. On August 1st, the Russians began removing its equipment from Vaziani. The withdrawal from Gudauta, located in Abkhazia, however is more problematic. The Russians are complaining that they cannot withdraw from Abkhazia because of objections from the Abkhaz government. Abkhazian "foreign minister" Sergei SHAMBA has stated that Abkhazia plans to seize all the current weapons currently at Gudauta. The Russians are therefore proposing that the base be turned into a peacekeeper base, namely for Russians. This idea they believe would prevent the base from being taken over by the Northern Caucasus people. "In June, Russian negotiators proposed that instead of turning Gudauta over to Georgia, control of the base be transferred from the Russian paratroopers currently deployed there to Russian peacekeeping forces in Abkhazia, "according to the September edition of Jane's Intelligence Review. This is considered a tactic to avoid compliance. This approach is unacceptable according to the Istanbul agreement and one, which could provide an opening for Ukrainian and Turkish forces to replace Russian peacekeepers under an OSCE umbrella.

US House Approves Military Aid For FSU

· The US House of Representatives on Thursday

approved a new program to shore up military forces in former Soviet states. The measure is part of a two-year $7.7 billion US foreign aid bill that also authorizes foreign military financing and training and anti-terrorism and non-proliferation programs. The bill authorizes $45.5 million for Georgia, Azerbaijan, Armenia, Uzbekistan, Moldova, and Ukraine. In addition some nations will receive other assistance, including military training and anti-terrorism training. Rep. Benjamin GILMAN (Rep.-NY) chairman of the International Relations Committee said, "The measure establishes a special military assistance program ... to strengthen the territorial independence of these countries in the face of Russian efforts to undermine and sabotage their fledgling democracies," the Associated Press reported. Overall, the measure authorizes $3.8 billion for foreign security assistance in fiscal year 2001 and $3.9 billion for 2002. The Senate must still approve the bill.

Hurricane To Invest In Kazakhstan

· Canada's Hurricane Hydrocarbons, which has invested $190 million in oil projects in Kazakhstan since 1996, plans to invest more in the coming years. Hurricane produces oil at the Kumkol Munai field in southern Kazakhstan. Bernard ISAUTIER, Hurricane's board chairman said, "In all Hurricane has invested $190 million which includes the purchase price of the field. We are ahead of plans because the stipulated investment amount was $90 million." Hurricane plans to produce 3.3 million tons of crude this year in Kazakhstan, through its subsidiary Hurricane Kumkol. "We are already close to peak capacity but we have plans to tap new fields. We have identified projects which would require about $250 million in investments," ISAUTIER said. These projects could include the development of the Kyzylkia, Aryskul, and Maibulak oil deposits. Hurricane in June acquired Shymkentnefteorgsyntez refinery. The company last year merged with the Chimkent oil refinery to create a vertically integrated company, with Hurricane holding 88 percent of the refinery's shares.

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

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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