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Daily intelligence briefing on the former Soviet Union

Thursday, February 1, 2001

Russian Federation


Putin Speaks To Bush On Borodin

• Russian President Vladimir PUTIN and US President George W. BUSH on Wednesday held their first telephone conversations in what is being called a, ” friendly get-acquainted session.” Both Presidents agreed to meet to continue the dialogue. According to a Kremlin press release, the two leaders discussed the case of Pavel BORODIN, the former chief property manager for the Kremlin, who has been jailed on a Swiss money-laundering warrant in New York. BORODIN denies the charge, but has twice been denied bail. PUTIN, breaking his silence on the subject of his former boss, expressed hope that a solution to the BORODIN case could be found, “that would satisfy both legal and humanitarian principles.” The Russian Foreign Ministry has demanded his release, claiming that he vital to the interests of the state as he was serving as State Secretary to the Rus-Belarus Union at the time of his arrest. The Presidents’ conversation followed one on Tuesday between Secretary of State Colin POWELL and Russian Foreign Minister Igor IVANOV, who agreed to meet, “in the near future for the purpose of exchanging views on the entire range of Russian-American cooperation.”

Russian Diplomat Defects To US

• Agence France Presse citing an unnamed US official on Tuesday that Sergei TRETYAKOV a senior first secretary at the Russian UN mission in New York, his wife Elena, and family quietly defected to the US in October, 2000. At that time, TRETYAKOV expressed an interest in remaining in the US and was put in contact with the proper authorities. The official said, “A Russian diplomat left their mission last fall and the United States has told the Russians that he is safe and doing well but that it is up to him whether he decides to stay in the US or not.” No further details were immediately available. Department officials said they weren’t sure of the legal basis for defections. A Russian Foreign Ministry official has demanded a meeting with TRETYAKOV and the criticized the US for denying such a meeting. Deputy head of the ministry’s press and information department Yevgeny VORONIN said Russian officials wanted, “to ascertain whether he or his family have been subjected to any duress and that nothing has happened to them.” US State Department spokesman Richard BOUCHER said Wednesday that there was, “a very long-standing practice not to comment on matters of that kind.” VORONIN said that the Russian side is still hoping a visit with TRETYAKOV would, “be immediately satisfied.” He added, “Rejecting our legal right, the US side at the same time for unknown reasons raised this question with journalists. We are somewhat surprised at this ‘new style’ shown by an anonymous representative of the US State Department. We assume that the US side will return to the usual diplomatic practice and that our request for a consular meeting with S. TRETYAKOV will be met without delay,” Reuters reported. Moscow hopes that the incident was just a result of the “inexperience” of the new administration of President George W. BUSH. Few Russian diplomats have defected over the past decade since the end of the Cold War.


Gaidar On Debt Dispute And WTO Membership

• Speaking at the Carnegie Endowment for International Peace, former Prime Minister and now Russian State Duma Deputy Yegor GAIDAR commented on Russia’s internal dispute over how to pay creditor nations such as the Paris Club for government debts. He said, “When you have a complicated issues, and Russian financial officials are being asked the same questions, even when they were told very strictly not to express different opinions, inevitably you could find some small differences.” On the possibility of Russia completing negotiations to enter the World Trade Organization (WTO) by 2001, he noted, “The problem is not a lack of political will. PUTIN strongly supports the idea of early membership in the WTO and he made it one of the priorities. The problem with the WTO is it is an extremely complicated technical issue. You need a lot of things prepared and then adopted by the Duma itself.”

Ruble = 28.40/$1.00 (NY rate)

Ruble = 28.47/$1.00 (CB rate)

Ruble = 26.81/1 euro (CB rate)

Russia To Improve Investment Climate

• Russia’s government plans to submit draft laws to the parliament aimed at improving the country’s investment climate by simplifying investment regulations and improving supervision of companies, Vedomosti reported. One planned bill would change the laws on capital investment to simplify bureaucratic procedures for investors, who are required to get a 100 officials’ signatures, cutting waiting time for approval of new projects from as long as two years to between three and five months. The government also plans to amend the law on securities to increase the Federal Securities Commission’s powers to oversee companies involved in advising on investments. The draft law also would give the commission a greater role in supervising Russian companies that want to sell shares abroad as depositary receipts. The government approved a 10-year economic reform program last year aimed at keeping the economy growing by at least 5 percent a year through 2010.


Gusinsky To Fight Extradition

• Russia’s Media Most chairman Vladimir GUSINSKY appeared before Spanish Judge Baltasar GARZON on Wednesday to formally ask not to be extradited to Russia. GUSINSKY is under house arrest in Madrid on a Russian warrant. He is charged with counts of fraud and embezzlement. GARZON forwarded the case to the three-judge National Court panel after a procedural meeting in court. The panel has no deadline, and its ruling must be approved by the government. After appearing, GUSINSKY told reporters, “Despite the prosecutor general’s high hopes of virtually falsifying the legal process, it is clear to everyone in Spain and elsewhere not just that the trial has obvious political undertones but that it is...without substance. [The case] is simply falsified, because ordinary financial relationships...are portrayed as criminal.” GUSINSKY’s supporters say the case is part of the Russian government’s campaign to stop Media Most’s open criticism of the Kremlin. Justice officials in Moscow deny the allegations. In Russia, GUSINSKY’s group is also defending itself against a takeover bid by state-controlled gas group Gazprom by trying to sell CNN founder Ted TURNER a 25 percent blocking stake in Media Most’s NTV television station.

Gazprom Ends Cheap Gas Deal For Itera

• Russia’s gas monopoly Gazprom has stopped using gas to pay taxes to the Yamalo-Nenets region, ending an arrangement that let Itera Holding buy gas for a fifth the average domestic price. Itera said that the government ordered Yamalo-Nenets to accept cash only for taxes. Itera bought 33 billion cubic meters of gas at $2 per 1,000 cubic meters from Yamalo-Nenets that the region had received from Gazprom as tax payments. The average price for gas on the Russian domestic market in 2000 was $10 per 1,000 cubic meters. Itera, which last year more than doubled gas output and increased sales by 50 percent from 1999, may be forced to cut sales this year by the Yamalo-Nenets decision. “Our gas volumes for marketing in the Commonwealth of Independent States (CIS) will decline this year,” said Itera spokesman Nikolai SEMENENKO. Itera said it expected $8 billion of revenue in 2000, mostly from selling 90 billion cubic meters of gas within the CIS, a 49 percent increase from gas sales in 1999. In January, under pressure from shareholders and the government, Gazprom was forced to launch an investigation on its links with Itera and transactions between the two companies at below market prices. Gazprom selected its own auditor, PricewaterhouseCoopers (PwC) to conduct the probe. This means that PwC will be reviewing its own work. David HERNE of Brunswick Capital Management said, “We have very serious concerns about the objectivity of an auditor who has signed off on previous years of Gazprom accounts.” PwC’s appointment raises concerns of potential conflicts of interests. One rival auditing firm officer said, “I’m flabbergasted by this appointment. If you come to an issue where you know now that your work two years ago should go into the trash, of course it makes you think twice.” PwC has previously reviewed its own work in Russia in an audit of Swiss company Forus and the alleged embezzlement of $600 million from Aeroflot and its investigation of Central Bank funds channeled through an obscure Jersey–based company controlled by a company it audited.


Today's News Highlights


Investment Climate To Improve

Gusinsky To Fight Extradition

Gazprom Pays Taxes With Cash

European Republics

Iran-Ukraine To Test An-140

PwC Closes One Ukraine Office

Latvian Shipping Attracts Bidders

South Caucasus & Central Asia

Bush Backs Baku-Ceyhan

Kazakh To Continue Privatization

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Intercon's Daily

When you need to know it as it happens

February 1, 2001

When you need to know it as it happens


European Republics

Ukraine’s CB Bought $80M On The Market

• Ukraine’s Central Bank said it bought $80.6 million on the domestic interbank market since the beginning of the year, Investytsiyna Gazeta reported. The Central Bank printed about 430 million gryvnia ($79.2 million) this year to buy dollars, the Ukrainian business weekly reported. The Central Bank said last month that renewed lending from the International Monetary Fund (IMF) will help it keep the gryvnia stable by reducing the need for it to print money in 2001, Bloomberg News reported. Last year, the Central Bank printed gryvnia to help it buy about $1.6 billion of foreign currency on the domestic market it used to pay off the country’s foreign debts after international lenders suspended credit programs in late 1999. Ukraine said it will not need to buy this much in 2001, provided IMF lending continues. An IMF team is visiting Ukraine this week for talks with the government that will help the fund decide if it should grant more credits under its $2.6 billion, three-year Extended Fund Facility loan.

Iran-Ukraine To Test An-140

• Ukraine said on Wednesday that test flights of its Iranian-built Antonov-140 passenger planes would take place in February. Ukraine sold a production license for its 52-seat An-140 aircraft last year to Iran, the only foreign market its cash-strapped aircraft producers have managed to enter. Foreign Minister Anatoly ZLENKO said, “We are working very successfully in implementing the An-140 project and the first test flight of the plane will take place on February 11th.” The Ukrainian-designed turbo-prop plane, with a range of 2,100 km (1,300) miles at a cruising speed of up to 575 km per hour, is one of the world’s cheapest medium-range aircrafts. ZLENKO also said Ukraine was looking at a possible Iranian and Russian project to produce Tupolev-334 jets. ZLENKO and Iranian Foreign Minister Kamal KHARRAZI discussed transporting Iranian oil and gas via Ukraine to Europe. He did not say how they would achieve that and whether Russia would be involved. KHARRAZI said the talks focused largely on transporting Iranian gas by extending pipes to Azerbaijan and Georgia and further to Ukraine. The countries plan to set a joint working group for further studies, the ministers said.

PwC To Close One Ukrainian Office

• PricewaterhouseCoopers (PwC), the world’s largest accounting firm, said it will close one of its offices in Ukraine amid an internal reorganization of the company’s activities. The firm will close the representative office of PricewaterhouseCoopers Eastern Europe and transfer all of the office’s employees to the company’s other Ukrainian offices in Ukraine. Price Waterhouse, which later became a part of PricewaterhouseCoopers, opened the office in 1995. A PwC spokeswoman Alyona VYGOVSKAYA said the reorganization, “won’t have any [wrong] impact on our work here.” According to a company statement, the company is, “not closing its operations, nor leaving” the country and, “continues to be totally committed to the development of Ukraine.” The company said it provides audit, accounting and business advisory services in Ukraine. It also provides corporate finance assistance, tax and legal advise, management consulting services. In 2000, PwC audited the Ukrainian Central Bank’s reserves to check whether it misused any of the earlier loans from the International Monetary Fund.

Latvian Shipping Sell-Offs Attracts Bidders

• Latvia’s privatization agency announced today that several potential bidders were interested in purchasing a 68 percent stake in Latvian Shipping. The deadline to submit such expressions of interest is today. This tender is the fourth attempt to sell the controlling stake in the firm after previous attempts failed due to little interest and political bickering. Head of the privatization agency Janis NAGLIS confirmed the receipt of several applications. Economy Minister Aigars KALVITIS said participation of international advisers and surveillance from local NGOs would secure transparency in the process. The 136 million state-held shares are expected to be sold and paid for by June. “Based on the advice from our consultants, we will not disclose either the names or number of bidders as long as possible,” KALVITIS said. Latvian Shipping, the world’s 19th largest shipping firm in tonnage terms, has budgeted a 2001 net profit of $5.6 million on planned turnover of $164.4 million. The privatization agency first started planning its sale in 1996, Reuters reported.

South Caucasus & Central Asia

Bush Administration Backs Caspian Pipeline

• Special advisor to US President George W. BUSH and Secretary of State Colin POWELL, Elizabeth JONES, announced on Wednesday that the Baku-Tbilisi-Ceyhan pipeline had the backing of the President and his administration. The proposed $3 billion pipeline would transport oil about 1,000 miles from the Azerbaijan capital of Baku through the Georgia republic to the Turkish port of Ceyhan on the Mediterranean Sea. JONES admitted that the administration has not held significant discussions on the pipeline project. She said at a conference at the Nixon Center, “It’s not a controversial issue. If you look at the strategic goals (of the pipeline), there isn’t any one of those that the new administration wouldn’t support completely.” These goals include ensuring the sovereignty and economic independence of the Caspian states from Russia, developing new reliable sources of energy for the West, and supporting US companies involved in building the pipeline. She stressed that the pipeline will only be built if companies believe it is commercially viable. “It’s not going to happen because it makes political sense for the United States. It will happen if it is determined that there is money to be made there by commercial companies.” JONES said international oil companies will decide in May or June whether to spend about $100 million to conduct a more detailed 12-month engineering study on such items as where pumps would be placed on the pipeline and where thicker steel would be required along the pipeline, Reuters reported. In February, officials from Azerbaijan, Georgia and Turkey will meet with Kazakhstan officials to reach a formal agreement for Kazakh oil to be transported through the pipeline. Georgian and Azerbaijan representatives lobbied officials during the month of December.

Kazakhstan To Continue Privatization Program

• Kazakh Prime Minister Kasymzhomart TOKAYEV at the World Economic Forum in Davos, Switzerland will continue privatizing state industries in 2001 but will concentrate on selling stakes to domestic investors. He said, “The Kazakh middle class has risen to its feet, domestic companies have money, they’re demanding of the government that they be able to take part in privatization. I think we should go to meet their demands.” He said the sale of state-owned blocks of shares in some large firms, including oil companies, was possible but declined to name them. He added that he saw the sale of the state’s remaining 33.33 percent state in the National Savings Bank of Kazakhstan as essential. TOKAYEV said Kazakhstan was still looking for a strategic investor in state telecommunications company Kazakhtelekom. The European Bank for Reconstruction and Development (EBRD) has offered $70 million for a 30 percent stake in the company, but the government is looking for other offers from potential investors. Kazakhstan received a little more than $1 billion in foreign direct investment last year, and has received some $10 billion since independence. TOKAYEV said he expected this year’s figure to be at least as high as last year. He noted that most of the investment went into the oil and gas sector and not the other industries that the government tried to promote.

Intercon's Daily

February 1, 2001

Intercon's Daily


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February 1, 2001

Intercon's Special Feature

Putin’s New Strategy To Benefit Chechens?

• Russian President Vladimir PUTIN has signaled a change in Russia’s strategy toward its war in Chechnya. In the past ten days, he has announced plans for significant troop withdrawals, appointed a Chechen administration with a charge to draw up a constitution, plans to hold elections, and pledged $529 million of aid for reconstruction in 2001. This “pacification plan” tacitly acknowledges both the failure of the military operation and the dwindling support within Russia to the continued loss of life and drain upon the economy. Russian soldiers stationed in Chechnya (Army and Interior troops) will be reduced from 80,000 to 20,000 adopting what appears to be more of an enclave strategy in approximately 200 villages and towns. Command has been transferred from the Defense Ministry to the civilians of the Federal Security Service (FSB) and is sure to produce resentment among the traditional rivals. Military checkpoints are to be dismantled and armed Chechen militia will replace the Russian forces. The Chechen militia will increase from 5,000 to 15,000 and provide the perfect mechanism for fighters to infiltrate the expanded force. This should do little to curb the bribery that has allowed Chechen fighters to move freely in the Republic and improve the safety for Russia forces which remain.

Russian Minister for Coordination of Activities of Federal Bodies for the Social and Economic Development of the Chechen Republic Vladimir YELAGIN said that the Russian government has adopted a social and economic program for the republic, which will give Chechens a chance, “to earn money, to restore their homes, to go in for land farming and to restore the fuel and energy complex in the republic.” PUTIN's plan relies upon Mufti Akhmad KADYROV, appointed head of Chechnya, to rebuild the society. However, many Chechens regard KADYROV a traitor for accepting this Kremlin position. KADYROV has limited powers, no influence over military operations, and his responsibilities overlap with other federal officials. Many call KADYROV a puppet, others call him a fool. On Tuesday, KADYROV survived the third assassination attempt in two months. He was slightly injured as an explosion hit his motorcade on the road in between Gudermes and Grozny. Daily hit-and-run attacks on pro-Kremlin leaders and troops continue throughout Chechnya, despite claims last year that Russia controlled the region. Russian warplanes meanwhile launched heavy bombardments on four districts where the rebels appear strongest. Air and artillery attacks have so far been unable to wipe out rebels in the southern mountains that make up a third of Chechnya. They have however alienated the civilian population.

Ruslan KHASBULKATOV, the former Supreme Soviet speaker said, “Chechens are caught between the anvil of terrorists and the hammer of federal forces. I don’t want to irritate the authorities, but what is happening is practically genocide.” Human rights organizations have documented numerous cases of arrests, torture, and deaths of young Chechens. Crimes against humanity are on the rise. Memorial, a local human rights organization, has said that widespread kidnapping and ransom of civilians have worsened, including a, “well functioning system of hostage-taking” by Russian forces.” Grigory YAVLINSKY, in a speech to the Emergency Congress in Defense of Human Rights, said, “Today, our country has ceased to count its dead. We no longer pay attention to the number of people who are killed every day in zones of military conflict -- [this occurs] for many reasons that cannot be explained from the point of view of logic, the law or the Constitution. A country that does not count its dead is moving on a very dangerous road --it becomes indifferent. And this is just what those who would take political advantage of the country need.”

COMMENT: It is widely believe the military offensive in Chechnya was orchestrated to build-up PUTIN’s reputation as Prime Minister and propel him into the presidency with his tough guy image. After a year as President, it is clear that the Chechen conflict is no longer the useful tool it once was. Today, it is a political and economic liability. Public support for the war is at an all time low, falling to below 40 percent this month from a high of 70 percent in February of last year. PUTIN’s decision to shift force deployment, management, and strategy of the war effort appears to be an attempt to minimize the conflict and reduce casualties of Russian forces. This plan will no doubt fall short. As the Financial Times reported, in financial terms alone the proposed Chechen aid will hardly compensate for the devastation caused by the current war or the previous one between 1994 and 1996. In the end, the most likely result will be continued low intensity conflict and the opportunity for Chechen forces to regroup, gain strength, penetrate the new Chechen administration, and rise again to inflict a more decisive military victory in a year or two. PUTIN is unfortunately learning that it is much easier to start a war than end one. Corruption that has enriched certain Russian military officials in Chechnya with the looting of the republic will now be spread among the new administrators, who see no future but the opportunities of the present. Regionally, the conflict will continue to provide Russia with the convenient excuse to blame neighboring countries, especially Georgia, with responsibility for Russia’s failure to bring this to a successful conclusion. It will also be used to psychologically intimidate Russia’s South Caucasian neighbors and justify the Russian bases in the region. That is why some analysts conclude, including Ruslan KHASBULKATOV, that Russia has never really attempted to finish this conflict for it serves much too important domestic and foreign purposes.

February1, 2001