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, December 20, 2000

extremely high. Strategic nuclear forces of Russia must be at a minimal sufficient level for securing the country's defense capability. As a weapon of political deterrence, they may be used only in the face of a direct threat to territorial integrity and sovereignty of Russia."

Lugar Visits Site Of Future Nunn-Lugar Facility

· US Senator Richard LUGAR (Rep.-IN) is visiting the future site of the NUNN-LUGAR Chemical Weapons Destruction Facility at Shchuchye, Russia. The center will be capable of destroying 800 metric tons of Russian chemical weapons. The weapons stored at Shchuchye represent 14 percent of the total declared Russian chemical weapons stockpile and approximately 50 percent of Russia's most modern artillery and rocket-launched weapons. These weapons pose a dangerous proliferation threat because they are small and easily transportable. NUNN-LUGAR will also provide security fencing and intrusion detection security systems to enhance the security of the Shchuchye storage facility. In a released statement LUGAR said, "The completion of a chemical weapons destruction facility must be a high priority. These weapons are extremely dangerous and easily transportable. My hosts and I had a very frank discussion surrounding the proliferation threat these weapons pose. It is in the national security interests of the United States to ensure that these weapons are stored safely and ultimately eliminated." Since 1991, NUNN-LUGAR has deactivated more than 5,000 nuclear war

Russian Federation

Politics

Russian Military Reform

· Russian Army General Staff chief Anatoly KVASHNIN Tuesday announced that military reform will leave a three-branch structure, which will include ground troops, air forces and the navy. He said the, "airborne troops will remain as an independent arm of service. The military space forces and units of missile space defense will be an entity." The military districts will also be restructured, from seven to six. The Volga and Urals military districts will be merged, with their staff to be located in Yekaterinburg. KVASHNIN added that the former Volga district would retain control of a general-purpose army. "Part of the ship strength will be reduced too, to be committed to tasks in sea basins and in world oceans," KVASHNIN said. He said, "four fleets and the separate Caspian flotilla will still remain with the navy." He noted that the military will also make cuts in some formations and units" two brigades in the Leningrad military district bordering Northern Europe; one division of full combat readiness in the Moscow military district; no deployments in the Siberian or Far Eastern military district, Itar-Tass reported. He added, however, that, "three divisions will still remain in the North Caucasus military district, where the situation is most alarming." KVASHNIN said, "The plan of building the armed forces for the years 2001-2005 and the state program of the development of armaments and the military hardware for 2001-2010 already have been agreed with the government, and will be submitted to the Russian president for approval in the nearest time." He added, "determining the future structure of the armed forces, the state proceeds from the assumption that a large-scale threat to Russia is little probable, while the probability of local conflicts is, on the contrary,

Today's News Highlights

Russia

Germany On Soviet Debt

Russky Aluminy Sued For $2.7B

European Republics

Lith. To Scrap Captial Gains Tax

South Caucasus & Central Asia

Lockheed Win Georgian Contract

Second Train Leaves Gudauta

Azeri To Persuade Kazakhstan

IMF Urges Kazakh Reforms

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December 20, 2000

Intercon's Daily

heads and Ukraine, Kazakhstan, and Belarus, once the world's third, fourth, and eighth largest nuclear powers, have become nuclear weapon free.

Russian Spies Mark Chekist Day

· Russia's top spies and secret security organizations marked Chekist Day by working to change its image. Secret organizations today practically opened its doors by giving interviews, revealing songs they sing, and recalling the old days. SVR chief Sergei LEBEDEV said that with the end of the Cold War, his men both fought and cooperated with rival foreign agencies and intended to pursue such cooperation. FSB chief Nikolai PATRUSHEV said, "The history of the Lubyanka in the last century is our history, no matter how bitter and tragic it was," referring to the KGB's Moscow headquarters, still synonymous with the torture and repression of the Stalinist era. LEBEDEV said, "Being an intelligence officer means being reliable, it means dedication, dedication to one's homeland, to one's comrades, it means being noble." This is the image that Russian President Vladimir PUTIN, himself a former spy, hopes to project on the modern KGB agency, the Federal Security Service (FSB). This appears to run contrary to calls raised since PUTIN became President to resurrect the statue of Cheka founder Felix DZERZHINSKY, torn down by pro-democracy demonstrators in 1991 as the Soviet Union fell. Fears are also growing over the rising number of former security agents invited to hold posts in the presidential administration, Cabinet and all branches of government. There appears to be a particular concentration managing Russia's relations in the near abroad. The Washington Post noted that last year's ceremony to mark Chekist Day, PUTIN said that the group of FSB agents, "sent to work under cover in the government has been doing well at the initial stage." This joke has unfortunately become a reality. For example Security Council Secretary Sergei IVANOV is a former KGB official as well as five out of the seven appointed presidential envoys to the regional districts, the first deputy justice minister, deputy minister of taxation, director of the new arms export agency, and first deputy minister of communication and information. Intercon's Paul JOYAL at a conference hosted by Johns Hopkins University's School of Advanced International Studies (SAIS) said that what we see in Russia is the re-emergence of the counterintelligence state.

Economy

Ruble = 27.95/$1.00 (NY rate)

Ruble = 27.96/$1.00 (CB rate)

Ruble = 25.31/1 euro (CB rate)

Russia Pushes Forward Open Markets

· Russia's chief World Trade Organization (WTO) negotiator Maxim MEDVEDKOV said that Russia will make new offers on opening up its markets to foreign investors in goods and services in February to speed up accession talks. This move is another signal of the high priority Russian President Vladimir PUTIN places on gaining WTO membership. Russia hopes to complete negotiations with WTO members in 2001 and join in 2002. Russia's application to join the Geneva-based trade body, originally made in 1993, was stalled by the country's economic collapse and sluggish market reforms. Russia approved a plan in September to reduce import tariffs an average 10 percent on everything from furniture to cars, to fight corruption and tax evasion and help sustain record economic growth. The plan, which takes effect at the start of 2001, includes cutting top tax rates to 20 percent from 30 percent, with the exception of sugar and tobacco. The highest import duties will be levied on consumer goods, chemicals and equipment, and antidumping measures and special duties also will be levied on imports to protect domestic producers. The Russian government is also seeking protection measures for its banking and insurance sectors from foreign competition. It will have to make its economic and trade legislation compatible with WTO rules before joining. MEDVEDKOV said that Russia hopes to send draft customs law to the Russian State Duma in early January.

Germany On Soviet Debt Relief

· German debt negotiators on Tuesday agreed to consider a deal for swapping debt that Soviet Union owed to East Germany into equity of Russian companies. Russian took on the Soviet-era debts at the time of the collapse of the Soviet Union. The German side stressed that any agreement would cover only62 billion of so-called transferable rubles of bilateral debt inherited after Germany unification, the Financial Times reported. This conflicts with statements made last week that the debts-for-equity swap could include some debt owed by Russia to the Paris Club of creditors. Russian

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Prime Minister Mikhail KASYANOV and German Chancellor Gerhard SCHROEDER first talked about the idea after meeting in Berlin on December 1^st. On Tuesday, the head of the Paris Club informed Russian Finance Minister Alexander KUDRIN that the country would face "unfortunate damage," to its financial reputation if it failed to renew payments on $48.6 billion of debt next year.

Business

Russky Alyuminy Faces Billion Dollar RICO Case

· Base Metal Trading, Base Metal Trading Ltd., and Alucoal on Tuesday filed a lawsuit against Russky Alyuminy companies for $2.7 billion under the US Racketeer Influenced and Corrupt Organizations Act (RICO). The accusations include murder, fraud, bribery, and money laundering. The group alleges that the Russian companies and their executives, Oleg DERIPASKA and Mikhail CHERNOI, perpetrated criminal acts in the US to help them gain control of the Russky Alyuminy industry and of Novokuznetsk Aluminum Zavod (NKAZ). The lawsuit claims that acts of money laundering and death threats were conducted in the US. The three companies further claim that they lost key contracts with NKAZ when it was forced into bankruptcy by DERIPASKA and CHERNOI. The plant was taken over by Sibirsky Aluminum and then merged with the aluminum interests of Sibneft to form Russky Aluminy, which controls more than 75 percent of aluminum production in Russia and is controlled by some of the nation's top businessmen. Russky Aluminy spokesman Vlad VERSHININ denied the allegations saying, "These allegations against the company and its managers are completely absurd. It is an attempt by Base Metal and Alucoal to fight competition by non-commercial means. Base Metals has already lost several cases involving metal produced by NKAZ in the courts of the US, Netherlands, Estonia, and Russia. It has now falsified the facts to fight Russian Aluminum [Russky Alyuminy] in the US again." New York State Attorney General Robert ABRAMS, of the law firm Stroock & Stroock & Lavan said, "Criminal elements have besieged Russian industry with illegal payoffs, threats, and acts of violence. This case will demonstrate how US financial institutions are used by criminal elements to accomplish their purposes. US courts have the power and

opportunity to prevent Russian oligarchs from using the US banking and commercial systems to facilitate criminal conduct in other countries."

European Republics

Lithuania To Scrap Capital Gains Tax

· Lithuania's parliament on Tuesday, in a vote of 65 to 46 with eight abstentions, approved a law to scrap the country's 15 percent capital gains tax. The government hopes this will lead to more investment in the financial markets. The bill still has to be signed by the country's president and is expected to take effect on January 1^st. The Finance Ministry said the move "encouraged Lithuanian citizens to save and [helped] develop an investment culture" in Lithuania. Arvydas JACIKEVICIUS, a broker for Suprema, told Reuters, "Local private investors will be more active on the market and some cash will return to the equity market that was withdrawn two years ago because of this capital gains tax. For brokerage houses it's a good thing because...they can [divert more time] to client services from accounting." The capital gains tax came into effect in the beginning of 1999 and drew criticism from politicians and local market investors who said the tax was driving away local investors due to complicated and time consuming tax administration. Local capital markets have been largely stagnant since Lithuania plunged into recession following the loss of key eastern markets in the wake of Russia's August 1998 financial crisis.

South Caucasus & Central Asia

Lockheed-Georgia Sign Air System Agmt.

· Lockheed Martin Corp., the world's largest defense contractor, won a 15-year contract valued at $105 million to improve Georgia's air traffic-control system, with upgrade suggestion for the air-traffic network and airports. Lockheed also will recommend ways to make Georgia's airline industry more efficient, such as changing airline routes. Lockheed said its computer systems control 60 percent of the world's air traffic. A 15-year long-term partnership agreement was signed on Tuesday. Georgian Minister of Transport and Communications Professor Merab ADEISHVILI said, "It is the political will of the Georgian government to establish this long-term partnership with Lockheed Mar

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tin for the aviation infrastructure modernization of Georgia." Lockheed Martin Air Traffic Management President Don ANTONUCCI said, "We are delighted to have the opportunity to work with the Georgian government... We are pleased that they have chosen us as their partner for this important initiative, and we look forward to a long and fruitful business relationship in Georgia."

Further Russian Withdrawals From Gudauta

· A second train with Russian military technology has left the military base in Gudauta, Abkhazia. It is transporting 45 pieces of military hardware to a base in the Moscow Military District. Representatives of the Agency of Arms Control of the USA and Georgian specialists will monitor the withdrawal process. Process of the withdrawal of Russian military technology from Gudauta military base is being held in framework of the Istanbul Organization for Security and Cooperation in Europe (OSCE) Summit agreement on the adaptation of the Treaty on Conventional Armed Forces in Europe, that was signed in Istanbul on November 19, 1999, as well as the Russian-Georgian statement, dated November 17, 1994. About ten days ago 44 combat vehicles were transported to Russia. The operation for the transportation of arms and military hardware is expected to end before December 31.

Azeri Works To Persuade Kazakhstan

· A delegation from the State Oil Company of Azerbaijan (Socar) will arrive in Kazakhstan this week to hold negotiations with Kazakh President Nursultan NAZARBAYEV and Kazakh oil company executives on the Aktau-Baku pipeline project. The project would transport Kazakh oil by the Baku-Tbilisi-Ceyhan Main Export Pipeline (MEP). Georgian International Oil Corporation president Gia CHANTURIA and the Strategic adviser to Georgian President Eduard SHEVARDNADZE for international oil and gas Edward CHOW have already started the discussion on the given issue in Kazakhstan Saturday. Prime News Agency reports that the Kazakh government has confirmed the inten

tion to join in the Baku-Tbilisi-Ceyhan pipeline. Kazakhstan plans to transport approximately 20 million tons of its oil by Baku-Tbilisi-Ceyhan pipeline annually. The US plans to organize in February an intergovernmental meeting on the Aktau-Baku-Tbilisi-Ceyhan pipeline project.

IMF Urges Kazakh Reforms

· The International Monetary Fund (IMF) released a statement Monday, following its an annual meeting with officials from Kazakhstan, urging the Central Asian nation to make reforms on trade and privatization. The Fund complemented Kazakhstan for embracing "prudent fiscal policies" in light of the profits from higher prices for oil and metals. The increase in prices has boosted Kazakhstan's gross domestic product, estimated to reach 8 percent in 2000, up from 1.7 percent in 1999 and after a 1.9-percent downturn in 1998. Inflation has also softened. The nation's consumer price index fell to 9 percent in 2000, nearly half the 1999 amount. However, IMF officials urged Kazakhstan to make more reforms in order to strengthen the economy further. It also said the country needs to make further strides in trade policy. IMF officials "urged the authorities to open all sectors of the economy to international competition, noting that recent trade policy measures may be harmful to economic efficiency, regional integration, the investment climate, and sustained long-term growth," the statement said. The IMF said Kazakhstan's should continue efforts to collect taxes, including value-added import taxes. The Fund's officials also called on Kazakhstan to expand transparency in the oil sector and supported the establishment of an oil stabilization fund, which would help insulate the country from volatility in oil revenues.

The Daily Report on Russia and the FSU

will not be published

from December 25^th to January 1^st

for Intercon's Winter Break

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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