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

Monday, November 27, 2000

Russian Federation

Politics

Russia For "Strategic Partnership" With EU

· Russian Foreign Minister Igor IVANOV, ahead of the Organization for Security and Cooperation in Europe's (OSCE) meeting, called for a "strategic partnership" with the European Union (EU) as a sign of strengthening relations, the Financial Times reported. He called for cooperation in defense policy, stating that this could include deploying Russian troops alongside EU forces in tackling international crises. He said, "Above all, we will be looking at the possibilities for Russian participation in European Union deployments in the framework of crisis management." He clearly pointed out that differences in policy, similar to what emerged during the Kosovo crisis, would continue and that the eastern expansion of NATO remained a concern. He said, "The closer NATO comes to the Russian border, the greater our concerns will become." IVANOV stressed that the OSCE is a more appropriate forum to discuss and resolve security issues than NATO. He said, "The OSCE has by no means exhausted all its possibilities, It is the only organization which includes all the states of the continent and discusses all aspects of security." IVANOV also emphasized cooperation with Europe beyond security for energy and transport and telecommunications. He said, "Oil and gas pipelines are blood vessels to the economic body of Europe. But by no means the whole organism." At the forum, however, IVANOV was faced with tough questions on democracy and human rights, raised by Angela MERKEL, Chairman of Germany's opposition Christian Democratic Union, and Lena HJELM-WALLEN, Sweden's Deputy Prime Minister.

After talks with IVANOV on Sunday, German Foreign Minister Joschka FISCHER called the idea of

Russian cooperation interesting. He said, "This is a proposal which is interesting and we will look at it very carefully…I think we don't have a European army. We are just building up some European structures so we will have a combined effort of the members of the EU supported by non-EU and NATO members and some others." The EU announced last week a plan to set up their own rapid reaction force outside NATO. Critics worry that Russia is trying to the NATO alliance. "The European force is what's driving the wedge between Europe and the United States and the Russians are just trying to jump on the train," said Abraham ASHKENASI, a professor at Berlin's Free University. IVANOV said, "We view the Europeans' desire to provide forces for their own security and to quell conflicts as something absolutely natural and are ready for constructive cooperation. I am certain that this opens good perspectives for our common contribution to bolstering stability and security in Europe."

Italian President Begins Russian Visit

· Italian President Carlo Azeglio CIAMPI arrived in Moscow on Sunday for a three-day state visit to Russia. CIAMPI, accompanied by Foreign Minister Lamberto DINI, was to meet President Vladimir PUTIN, Prime Minister Mikhail KASYANOV, and Russian Orthodox Church Patriarch Alexyi II before leaving for St. Petersburg and the western Russian city of Tambov. DINI was to hold separate talks with Russian Foreign Minister Igor IVANOV. PUTIN

Today's News Highlights

Russia

FSC Seeks Greater Control

Arms Merger To Boost Sales

European Republics

Belarus Security Officers Sacked

Slavneft To Work In Iraq?

Mazeikiu Nafta Shuts Down

South Caucasus & Central Asia

Gudauta Inspection Complete

Shakh Deniz Well Without Gas

Earthquake Rocks Baku

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invited CIAMPI to Russia during his visit to Italy in June. He also invited Prime Minister Giuliano AMATO to visit Russia separately, but the date of that visit has yet to be set.

Maskhadov Threatens Pro-Moscow Leaders

· Chechen President Aslan MASKHADOV, in a letter, has ordered Chechnya's pro-Moscow mayors and other civilian leaders to surrender their posts or be forcefully removed - or worse - by his rebel commanders. MASKHADOV on Saturday night ordered his commanders to deliver a letter to the local leaders reading, "National traitors are responsible for our difficulties. Those who work for the occupants, leave your posts within 24 hours. This is the last warning." MASKHADOV ordered his commanders to use "any means" to make them leave their posts. MASKHADOV's command over the fractured, outgunned rebels is weak, and observers say the recent attacks on pro-Moscow Chechens have been scattered instead of part of an organized rebel strategy, the Associated Press reported. Russian forces found a homemade bomb Sunday outside the house of the mayor of the town of Kadi-Yurt, the ITAR-Tass news agency reported. Russian forces responded with artillery attacks on suspected rebel bases in the Itum-Kale, Vedeno, Nozhai-Yurt and Kurchaloi districts in southern Chechnya.

Economy

Ruble = 27.88/$1.00 (NY rate)

Ruble = 27.86/$1.00 (CB rate)

Ruble = 23.64/1 euro (CB rate)

Securities Commission Seeks Greater Control

· Russia's Federal Securities Commission said it wants to be notified every time foreign investors buy shares in the country's publicly traded companies, moving to enforce a four-year-old law, Vedomosti reported. Some foreign investors and Russian market participants criticized the Commission's move to demand such disclosure, a part of the country's law on securities passed in 1996. Brokers said additional disclosure might scare away some investors, as many transactions on the country's stock markets are concluded between offshore units and therefore avoid tax. Russian stocks rose Friday, led by Unified Energy Systems and Mosenergo. Investors said the stocks had

fallen to lows not justified by earnings outlook or concerns about reorganization plans. The benchmark RTS Index is down 4.5 percent this year.

Russia Drafts Debt Plans For SBS-Agro Bank

· Russia proposed a new plan to creditors of SBS-Agro Bank, formerly the biggest private bank, for the bank's outstanding obligations to depositors, the Vedomosti daily reported. Under the new plan, the state agency for bank restructuring would repay depositors 10 percent of the debt in cash, though not more than 20,000 rubles ($719). The remaining debt would be repaid in dollar and ruble bonds. The agency said it would give a loan to SBS-Agro that will be repaid from the sale of the bank's property. The state agency for bank restructuring said separating depositors from other creditors will help it work out a better debt repayment plan for others, the paper said, citing officials from the agency. Foreign creditors of SBS-Agro, which stopped paying on its $3 billion in debt in 1998, met Deputy Prime Minister Alexei KUDRIN earlier this month to ask for a higher repayment rate than the 1 percent Russia offered in July.

Business

Arms Merger To Boost Sales

· Russian Deputy Prime Minister Ilya KLEBANOV today said day the merger between Russia's main arms exporting bodies, Rosvooruzheniye and Promexport, creating a new firm Rosoboronexport, will lead to a boost of weapons sales and investment in the sector. He also told weekly magazine Profil that, "It is vital that part of the money from exports go toward developing new weapons programs… If we do not take steps already in this direction today, then in the future Russia will have problems. Indeed our partners need new equipment." Rosvooruzheniye in 1999 exported some $3.5 billion worth of weapons and that the government expected arm sales of around $4.0 billion this year. Russia accounts for only five percent of world arms sales, compared to the US at about 50 percent, Reuters reported. He added, "My dream is the following: in the aviation industry there should be one holding to unite large aviation enterprises, as is done in the United States and united Europe…In Russia we have dozens of plants spreading miserly budget finances between themselves. That means they need to concentrate their resources,

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stop duplicating production, and create products that will stay on the market for decades." KLEBANOV said reorganization in the sector would also give individual weapons manufacturers more freedom, by allowing them directly to reach contracts for servicing or supplying spare parts without a government intermediary.

it, in order to try to get special permission to work at full scale," he said. "I am counting on a positive answer insofar as we see that the world's attitude toward Iraq is changing." SHTORKH said some of the necessary equipment which would have to be imported was not subject to UN sanctions. "If we prove that the equipment is of purely for civilian use, there will be no opposition either from the sanctions committee or from other counterparts."

Mazeikiu Nafta Refinery Stop For Lack Of Oil

· Lithuania's Mazeikiu Nafta stopped operations Saturday at the only oil refinery in the Baltic States, after LUKoil Holding, Russia's top oil producer, failed to deliver crude as promised. The refinery stopped work after a 70,000-ton delivery scheduled for Friday didn't arrive. The refinery suffers a loss of about 1 million litas ($250,000) every day it stands idle, Mazeikiu Nafta said. LUKoil delivered only 230,000 tons so far this month under a contract committing it to deliver 430,000 tons of crude in November. Jim SCHEEL, Mazeikiu Nafta's director general said, "Unfortunately, this interruption of crude oil deliveries occurred at the same time when we are trying to agree on a long-term supply contract with LUKoil. The essence of this agreement is the ability of LUKoil to supply 6 million tons a year of crude oil." LUKoil, which failed last year in an attempt to buy a third of Mazeikiu from the Lithuanian government, broke off shipments to Mazeikiu last year after failing to agree on crude prices. A unit of Williams Cos., the largest US natural gas shipper, bought 33 percent of the refinery in October, 1999, and took over management. LUKoil will today resume supplies with a shipment of 50,000 tons of crude, said Ivan PALEICHIK, director general of the Russian company's LUKoil Baltija unit. The Lithuanian oil company supplies about 86 percent of Lithuania's retail gasoline market. It exports about two-thirds of its production, mainly to Latvia, Estonia, Ukraine, and Poland. The company processed 3.76 million tons of crude oil in the first nine months of this year, down from 3.882 million tons during the same period last year.

Ukraine Approves UkrTelecom Sale

· The Ukrainian Cabinet approved the planned sale of a 49.9 percent stake in UkrTelecom, the national phone company, and plans to complete the $600 million transaction by the end of 2001. The decision

European Republics

Belarus Top Security Officials Sacked

· Belarus President Alexander Lukashenko sacked his top security officials today, Reuters reported. Foreign Minister Ural Latypov has taken over as head of the Security Council and Leonid Yerin, head of Lukashenko's personal bodyguards has replaced the chief of the security police still known as the KGB, Press Secretary Nikolai Borisevich said. The country's Prosecutor General Oleg Bozhelko was also dismissed. No replacement has been named yet. "Formally, they have been dismissed in connection with transfers to other jobs," Borisevich said. "But I do not rule out that this reaction by the president reflects his dissatisfaction that many important [high-profile criminal] cases have dragged on for too long without justification." Appointment to a new position is a standard reason to dismiss high officials in the former Soviet Union.

Rus-Belarus Slavneft To Sign Iraq Deal

· The Rus-Belarus oil company Slavneft Vice President Andrei SHTORKH said the company plans to sign a contract to develop the Subba oil deposit in Iraq in December. The company said in September that it plans to ask the UN for special permission to work in Iraq next year, if sanctions imposed against the country were not lifted by then. "All positions have already been agreed [with the Iraqis]. We are doing the feasibility study now, working out the scheme of moving necessary equipment there," SHTORKH said. "The problem of UN sanctions remains real, of course," he added. He said the oilfield held a billion barrels of crude. The sanctions prohibit foreign companies from developing oil deposits in the country. But SHTORKH said Slavneft would try to win permission from the UN sanctions committee. "We are ready to appeal to the UN sanctions committee with a detailed explanation of what we are going to do and how we are going to do

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ends a three-year deadlock over selling a stake in the biggest phone company in the country of 50 million. "The approval of the resolution [on launching the sale] is the first step," towards selling the company to an international telecommunications company, said Natalia ZARUDNA, head of the Cabinet's press service. "The next step is to set up a committee for privatization." Under Ukrainian law, the government will keep 50 percent plus one share in UkrTelecom, while employees will be able to buy between 7 percent and 12 percent at a 50 percent discount. To make the sale more attractive to foreign investors, the government said it may let the owner of the minority stake manage the state's stake, or part of it. Ukraine will spend 30 percent of the proceeds from selling UkrTelecom to develop the company's phone networks, 10 percent will go to develop the Defense Ministry's digital phone network, and 60 percent will go to the budget. Analysts said Deutsche Telekom, AT&T Corp. and Dutch phone company Royal KPN NV may consider bidding for the stake. The International Finance Corporation may invest in Ukraine's telecommunications industry, making it more attractive to foreign investors.

South Caucasus & Central Asia

French Group Finishes Monitoring Gudauta

· A special monitoring group from France's Defense Ministry has completed a three-day inspection of the Gudauta Russian military base in Georgia. Ambassador-at-large for Georgia's Foreign Ministry Avtandil NAPETVARIDZE said on Friday that the first phase of monitoring Gudauta had been successful. Prime News Agency noted that representatives of Sukhumi are against the withdrawal of the Gudauta military base, claiming that it must be handed over to the Abkhazian Army. Meanwhile, Georgia hopes that the withdrawal from Gudauta is completed before December 31^st. Defense Ministry representative Giorgi MANGALADZE pointed out, that at the very least, Russia must remove 70

units of armored cars from Gudauta before December 31^st, as agreed to at November 1999's Istanbul Summit of the Organization for Security and Cooperation in Europe (OSCE).

Shakh Deniz 3^rd Well Shows No Gas

· The BP Amoco-led consortium, licensed to explore the Azeri Shakh Deniz field in the Caspian Sea, has failed to find gas. BP Amoco, however, said the results did not overturn previous tests and they would not affect the consortium's plans to deliver Shakh Deniz gas to Turkey. "Drilling of the third well showed the presence of large quantities of water and an absence of gas in the reservoir which could potentially contain hydrocarbons," said an unidentified source in Azeri State Oil Company (Socar). BP Amoco spokeswoman Tamam BAYATLY said, "We still consider that Shakh Deniz is a world class deposit and it can satisfy the gas needs of neighboring countries." She added that the consortium will in coming days discuss new drill test plans at Shakh Deniz. The seven-member consortium has a $1.3 billion plan to upgrade the nearby gas infrastructure and an existing Soviet-era pipeline system to deliver two to three billion cubic meters (bcm) of gas to the Turkish border by the winter of 2002 to 2003. As the field's production grows, exports may later rise to 16 bcm, Reuters reported. Members of the consortium are operator BP Amoco, Norway's Statoil, Socar, Russia's LUKoil , Iran's OIEC, and Turkish Petroleum.

Earthquake Rocks Baku

· An earthquake rocked Baku on Saturday night, measuring between 6.1 and 6.3 on the Richter scale and knocking out power supply and phone lines in several districts. The epicenter was located 60 miles northeast of Baku in the southeastern Caspian Sea. Minor tremors were felt in Georgia, southern Russia, and Northern Iran. The earthquakes killed at least 24 and wounded 133. Georgian President Eduard SHEVARDNADZE expressed condolences and offer to provide any possible assistance to Azerbaijan's people.

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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