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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, September 27, 2000

Russian Federation

Politics

Russia Concerned Over EU Military Force

· Russian Prime Minister Mikhail KASYANOV in a meeting with Swedish counterpart Goran PERSSON on Tuesday expressed the Kremlin's concern over the expansion of the European Union (EU) and its military component. Sweden takes up the rotating EU presidency next year. KASYANOV said, "We view Sweden's position about a fast expansion of the EU without particular worry. However, some aspects worry us. We would like to have more information on this issue, about the processes going on inside the EU, more contacts with EU leaders on this question." EU defense ministers decided last week to prepare up to 230,000 troops for an EU rapid reaction force, to be used when the bloc wants to intervene militarily, but Washington does not want its troops involved. This force is believed to be a European alternative to NATO. The Czech Republic, Poland, and Hungary have already been accepted into NATO and are on the fast track to EU entry. Latvia, Estonia, and Lithuania are anxiously waiting for entry in both NATO and EU. Estonia could finish EU membership negotiations by the end of 2001. The head of Estonia's European Integration Office, Henrik HOLOLEI said, "We have got to a stage when we need a breakthrough. The ball is now on the EU side...New quality has to come from the EU. Many candidates are ready to move faster than the current pace, Estonia among them," Reuters reported. KASYANOV took a thinly veiled swipe at Latvia and Estonia, telling PERSSON the EU should also make sure the new entrants respect the rights of their ethnic minorities.

Russia Tests Topol-M Missile

· A Topol-M Intercontinental ballistic missile on

Tuesday successfully was launched from the Plesetsk site in northern Russia to its target on the distant Kamchatka peninsula during a new test. Colonel Islhat BAICHURIN said the test was the 11^th to be undertaken and provided confirmation that the missile was "the basis of Russia's nuclear missile shield in the 21^st century." The Topol-M, known to NATO as the SS-27, was given final approval earlier this year as part of Russia's arsenal. Russia says the missile, with a range of 6,200 miles, can break through any missile system such as the shield Washington is proposing to build. The test was conducted ahead of a strategic Security Council meeting to establish priorities in the country's military. The council will discuss Defense Minister Igor SERGEYEV's proposal to cut the 1.2 million armed forces by 350,000 to 400,000 before 2003. President Vladimir PUTIN has said Russia must overhaul its out-sized armed forces, inherited from the Soviet Union, which spent large portions of its budget preparing for war against NATO.

Court Attempts To Rein In FSB Eavesdropping

· The Supreme Court on Monday abolished a regulation that had permitted the Federal Security Service (FSB) to eavesdrop on telephone conversations without notifying communications companies. The Communications Ministry issued an order in July obligating telephone, mobile phone and paging companies, along with Internet providers, to set up eavesdropping equipment that could be used by investigators from the FSB.

Today's News Highlights

Russia

Small Bus. To Get EBRD Loans

Shareholders Approve Merger

Uralelectromed Builds New Plant

European Republics

Ukraine on IMF/WB Lending

South Caucasus & Central Asia

GUUAM Aid Concerns Russia

Robetson Meets Shevardnadze

Armenia Rejects Resignation

OKIOC Lowers Predictions

Politics-Economics-Business

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Wednesday

September 27, 2000

Intercon's Daily

The Associated Press reported that under the resolution, the FSB still needed to obtain a court order to intercept phone conversations, but it did not have to notify communications companies about which calls were being intercepted. Russian media have criticized the Communications Ministry resolution, saying it effectively gave the FSB free rein to intercept any calls or electronic communications it chose.

Economy

Ruble = 27.09/$1.00 (NY rate)

Ruble = 27.76/$1.00 (CB rate)

Ruble = 24.47/1 euro (CB rate)

Small Business To Receive EBRD Credit Line

· The European Bank for Reconstruction and Development (EBRD) Tuesday announced that it will provide a $30 million credit line for Russian small businesses. The new credit line will be issued to KMB-Bank, the small business credit bank, which was established by the EBRD. The bank will also issue $10 million in new shares in October, taking charter capital to $12.5 million, as Germany's DEG and the Netherlands' Triodos Bank join the current shareholders, the EBRD and the Soros Fund. The EBRD program director Elizabeth WALLACE pointed out that SBS-Agro, one of Russia's major banks felled by the 1998 financial crisis, still owed the small business credit program more than $30 million. "We take that very seriously, since if it does not return our money, the program cannot expand to some Russia regions," she said. It is estimated that 80 percent of the EBRD's problem loans and 50 percent of its non-performing equity investments are in Russia. First Deputy Chairman Charles FRANK said, "We did not chose the wrong companies. We chose the wrong country." Few fault the support for small business, but are beginning to question moves to lend more to Russia's large and sensitive companies, the Financial Times reported.

The EBRD's Deputy Vice President David HEXTER has said that the Bank will not release loans of $150 million and $250 million to LUKoil and Gazprom respectively until its requirements are met. He said, "This is not an easy-risk business. And we are very conditional about lending. We demand transparency." The EBRD has imposed loan covenants as

a condition for the LUKoil loan, as well as, publishing US account information and revealing the identity of the Reforma Investment's owners. Conditions surrounding the Gazprom loan are still under discussion. Gazprom has resisted calls for its break-up, squeezed out its competitors, and failed to clarify its relationship with Itera.

Business

Shareholders Approve Aluminum Merger

· Shareholders of four Russian aluminum smelters last week approved a merger into a holding company that aims to be Russia's second largest aluminum producer. According to a shareholders' statement, shareholders of the Bogoslovsky plant in the Urals and Kandalaksha plant in northwest Russia approved the merger with Siberian Urals Aluminum Company (SUAL) into SUAL Holding. A similar decision was taken by SUAL, which includes Siberian Irkutsk and Urals smelters. Shareholders of the smelters will meet in November to discuss swapping their shares for shares in the new holding, Reuters reported. The holding, registered earlier this month, aims to produce around 20 percent of national aluminum output. Last week, shareholders in another two plants, Kamensk-Uralsky Metals Plant and Polevskoy Cryolite Plant, approved granting SUAL Holding management rights. The group will also control Sredni Timan bauxite mine in northwestern Komi Republic, Russia's largest source of raw material for aluminum smelting, Southern and Northern Urals bauxite mines and some aluminum products plants.

Uralelectromed To Build New Plant

· Russia's second largest copper producer, Uralelectromed, has started building a new copper electrolysis plant with a capacity of 350,000 tons per year. In a statement, Uralelectromed said the first phase of the new plant, with a capacity of 150,000 tons of cathode copper per year, would be completed in two and a half years. Construction costs of the new facility are estimated at $100 million to $120 million. Finland's Outokumpu will supply technology and equipment. Uralelectromed, based in the Sverdlovsk region in the Ural Mountains, is part of the Urals Mining and Metallurgy Company, which includes plants producing copper ore, concentrate, blister and refined copper, as well as some finished products. Uralelectromed's de

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	Wednesday		September 27, 2000
	Intercon's Daily
	sign capacity is 300,000 tons of refined copper per year. It produced 142,668 tons of cathode in the first half of this year, Reuters reported.	the West), and $3 million for counter-terrorism training. Nearly $37 million, of the total, will be distributed in 2002. The US Senate must still approve the bill. The US is keenly aware of the need to bolster these nations' border guard, customs, and security forces. Examples of the threat faced include seizures of nuclear material in Kazakhstan, Uzbekistan, and Georgia. Representative 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," in neighboring countries, the Associated Press reported. Russia has interpreted this bill's effort to establish military cooperation as "anti-Russian" in nature, according to Kommersant Daily. This is a distortion because the funding is directed not at military units, but border guard forces, just as Russians are engaged in Tajikistan. The difference is no western military will be stationed in these countries, as is the case with Russian troops. The goal is clearly directed not at Russia, but to counter specific threats in the region including nuclear proliferation, counter-terrorism, smuggling, and other assorted criminal enterprises. However, it should be noted the bill provides military aid to Armenia, Russia's military ally in the Caucasus region. There is widespread concern among the former Soviet states regarding Russia's activities of arming rebel groups, such as the Abkhaz in Georgia, of its military activities in Chechnya, which could engulf the entire Caucasus, and the continued protection of Igor GIORGADZE, who is wanted by Interpol for his 1995 assassination attempt on Georgian President Eduard SHEVARDNADZE. Today, Russia is attempting to maintain its military preeminence among the states of the former Soviet Union. The withdrawal of most nations from the Commonwealth of Independent States (CIS) Security Agreement as well as the Georgian call for the withdrawal of Russian military bases from their sovereign territory, increases the concern in Moscow that they are losing their influence. Georgia and Russia are carrying out additional negotiations for the removal of the Russian base at Gudauta, which
	European Republics IMF/WB May Resume Lending To Ukraine · Ukrainian Finance Minister Igor MITIUKOV announced that the International Monetary Fund (IMF) could soon approve the resumption of lending under its $2.6 billion, three-year Extended Fund Facility (EFF) loan. The Finance Minister said this was confirmed during a meeting with IMF Managing Director Horst KOEHLER in Prague earlier this week. He added that the two sides haven't agreed on an exact timing for the resumption. KOEHLER urged Ukraine to persuade investors to take part in Ukraine's state asset sales. The IMF postponed lending to Ukraine last September, citing a slow pace in reforms. The EFF lending program, which was approved to Ukraine in mid-1998, expires in mid-2001. The World Bank followed the IMF's lead and in October suspended its lending to Ukraine. However, Kievskie Vedomosti, a Ukrainian daily newspaper, reported that the World Bank could lend Ukraine as much as $1.8 billion, under a newly approved three-year lending program. This could allow the country to obtain at least $181 million in loans from the Bank next year. The Bank plans to release at least $175 million in loans to Ukraine in 2002. The World Bank said that size of lending will depend on the pace of reforms. South Caucasus & Central Asia GUUAM Aid Ruffles Russia's Feathers · On September 21^st, the US House of Representatives approved a new program to shore up border and customs security forces in former Soviet states. The bill authorizes $45.5 million for Georgia, Ukraine, Uzbekistan, Azerbaijan, Moldova (GUUAM), and Armenia. The measure is part of a two-year $7.7 billion US foreign aid bill that also authorizes special funds for foreign military financing, training, anti-terrorism and counter proliferation programs. Of the funds, $25 million will be allocated for foreign military sales purchases, $12 million for export control (customs) programs, $5.5 million for international military education and training (for border guard/ customs personnel to attend instruction in

When you need to know it as it happens
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Wednesday

September27, 2000

Intercon's Daily

now they are attempting to abrogate. Russia agreed to withdrawal from two (Gudauta and Vaziani) of its four bases in Georgia at the OSCE Summit in Istanbul last year. Today, Kremlin envoy Sergei YASTRZHEMBSKY is meeting in Islamabad with Pakistani General Pervez MUSHARRAF to discuss the threat of Islamic extremism, terrorism, bilateral relations, and nuclear non-proliferation. The BBC points out that, "there is a growing conviction in the Central Asian republics themselves that Russia is deliberately stirring up the atmosphere over Islamic extremists' possible invasion of Uzbekistan and Kyrgyzstan in a bid to convince public opinion that Russian troops need to be stationed there or that Russian bases should be set up in the region." Russia is more and more focusing its efforts on Central Asia, since Vladimir PUTIN became President. Russia seeks to strengthen its influence over the old Soviet empire and is extending its reach and contacts with other strategic Asian nations. This year the theme is countering Islamic terrorism. The US program seeks to counter a number of threats including that of terrorism. This is not an anti-Russian program. It is one that addresses current threats and realities among the GUUAM nations.

Robertson Meets Shevardnadze

· NATO Secretary-General George Robertson met Tuesday with Georgian President Eduard Shevardnadze to discuss security in the South Caucasus and Georgia's work with the Alliance in the Partnership for Peace program. According to Shevardnadze, the talks were "very interesting and businesslike." "We discussed regional problems, the situation in Georgia, and also issues of our cooperation with the European security structures," he said. Commenting on the talks, Robertson stated that Georgia has been a reliable partner of the Alliance and NATO is prepared to lend assistance to the country to help improve its military. Associated Press reported Shevardnadze is confident that Georgia will be able to join NATO by the middle of the decade. Meanwhile, NATO officials said that Georgia's ac

cession to the Alliance would be a long and drawn-out process.

Robertson also took part in a conference "Caucasus Today: Regional Cooperation and Prospects for Partnership with NATO." Georgian Foreign Minister Irakli Menagarishvili was quoted by Itar-Tass as saying that it is time to upgrade cooperation between NATO and South Caucasian countries. He also proposed to form a consultative group of Georgia, Armenia, Azerbaijan and NATO to consider cooperation prospects.

Armenian Parliament Rejects Resignation

· The Armenian Parliament on Tuesday, in a vote of 63 to 31 with 2 abstentions, rejected a resignation offer made by its speaker, Armen KHACHATRYAN. As Chairman of the National Assembly, KHACHATRYAN tendered his resignation earlier Tuesday during a morning session, attributing his decision to changed balance of political forces in the Parliament. Under the Armenian Constitution, the speaker's resignation must receive 66 votes to pass. The deputies who had demanded KHACHATRYAN's resignation are expected to appeal to the Constitutional Court of Armenia.

OKIOC Lowers Oil Predictions

· The Offshore Kazakhstan International Oil Company (OKIOC) has lowered the quality prediction of oil found in the Caspian Sea, according to the president of Royal/Dutch Shell group's Kazakh office. The oil was discovered in July at 4,000 meters below the seabed in a well yielding 600 cubic meters of oil and 200,000 cubic meters of gas a day. Jan NORMAN, director of OKIOC's drilling department said that OKIOC's Sunkar rig will start drilling a second well at the East Kashagan offshore deposit next week. ExxonMobil Corp, Shell, BG Group, Total Fina Elf, and Eni's Agip unit each have a 14.29 percent stake in OKIOC. BP Amoco owns a further 9.5 percent, Statoil of Norway owns 4.8 percent, while INPEX of Japan and Phillips Petroleum Co. each own 7.14 percent.

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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