DAILY REPORT ON RUSSIA

AND THE FORMER SOVIET REPUBLICS

INTERCON INTERNATIONAL USA, INC., 725 15th STREET, N.W., SUITE 908,

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Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Friday, Novmeber 21, 1997

Russian Federation

Politics

Zadornov Accepts Finance Post

· Mikhail ZADORNOV has agreed to head the Russian Finance Ministry, which was offered on Wednesday. The new Finance Minister believes that the main directions of the ministry's work in 1998 will be, "the completion of the transition to the treasury-based system for the fulfillment of the budget and the implementation of the tax reform." ZADORNOV regards his appointment, "not only as the manifestation of confidence, but also as new responsibility."

In the meantime, the Yabloko faction, to which ZADORNOV belongs, passed a decision on Wednesday, saying that ZADORNOV's participation in the government is inexpedient, said Alexei MELNIKOV a member of Yabloko. He said that ZADORNOV's decision to head the ministry most likely signifies his withdrawal from the faction.

Big Four Meets Next Week

· The "big four" which includes President YELTSIN, Premier CHERNOMYRDIN and speakers of both chambers of the Federal Assembly Yegor STROYEV and Gennady SELEZNYOV will meet Friday, November 28. Russian State Duma spokesman Gennady SELEZNYOV attaches great importance to this meeting. According to a press secretary, the "big four" will, probably, discuss issues connected with the adoption of the budget for 1998 and the Russian government's working relationship with the Duma.

Duma Delays Budget Debate

· In a vote of 258 to four, the Russian State Duma postponed the debate on the 1998 budget to December 5. Deputy speaker of the Duma Vladimir RYZHKOV warns of suffering for the citizenry and

loss of funds if the federal budget is not adopted in time. RYZHKOV stated that the draft of the 1998 federal budget, "is unpleasant for the opposition, since it is very tough, very realistic, small in size and cuts many traditional articles, financed from the budget." Deputy chairman of the State Duma Budget Committee Alexander ZHUKOV spoke of his dissatisfaction of legislators who neglect their constitutional duties to approve the federal budget within stipulated periods. "It is self-evident that any delay with approval of the 1998 budget forces the government to operate under extreme conditions," he stated.

Russian Prime Minister Viktor Chernomyrdin stated that if the 1998 budget is not approved in time, "we stand to lose 50,000 billion rubles" over the first months of the next year and will not be able to recoup the loss later. The government "will do its utmost to prevent losses which may incur if the adoption of the budget is delayed," the premier continued.

New Deputy Chief Administrator Appointed

· President YELTSIN appointed Viktoriya MITINA to the post of Kremlin's Deputy Chief Administrator replacing Aleksander KAZAKOV. Although relatively unknown in the political arena, MITINA served as deputy prefect in Moscow's Zelenograd district and was active in YELTSIN's re-election campaigns in 1991 and 1996.

Economy

Rosugol to be Liquidated

· Deputy Prime Minister and Minister of Economy Yakov URINSON announced today that the Russian government will

Today's News Highlights

Russia

Russia Good as Gold?

6 Oil Co. Pay Back Taxes

Gazprom to Boost Exports

European Republics

New Parliament Law

Selling Ships for Debts

South Caucasus & Central Asia

Results on Abkhazia Talks

US plans Trans-Caspian Project

Politics-Economics-Business

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Friday

November 21, 1997

Intercon's Daily

soon change the management structure of the coal-mining industry and liquidate the state-owned company Rosugol. All key decisions, connected with the coal-mining industry, will be reviewed by a special interagency commission under the Russian Government. Two state bodies will be created under the Ministry of Fuel and Energy for putting those decisions into effect. One of them will be in charge of the reorganization and closing down of unprofitable coal mines, and the other one will tackle social problems of coal-mining regions. URINSON stressed that the new management structure will make it possible for the Ministry to become an authority in charge of the state regulation of the coal-mining industry. URINSON said the commercial companies created by Rosugol, specifically, Investugol and Leasingugol, will continue to exist. Russia is applying to the World Bank for restructuring support of the coal sector.

Ruble = 5,916/$1.00 (NY rate)

Ruble = 5,910/$1.00 (CB rate)

Ruble = 5,904|5,917/$1.00 (buy|sell rates)

Jun Jul Aug Sep Oct Nov

Unstable Market Conditions Improve

· The situation on the Russian stock market can be characterized as "unstable balance," but improvement is in store. First deputy chairman of the Russian Central Bank Sergei ALEXASHENKO said, "We cannot say that the situation has fully stabilized, but there are signs of improvement." The Central Bank had spent $2 billion to stabilize the situation. Central Bank reserves exceeded $25 billion before the crisis. ALEXASHENKO believes the position of foreign investors in Russia is "changing for the

better." He recalled that Russian securities had gone up by ten percent

Privatization of Rosneft on Hold

· The Kremlin on Thursday announced it will postpone the privatization of state-owned oil company Rosneft until the beginning of 1998 in order to streamline the necessary legal grounds to avert a scandal which is traditional for all important tenders. "It is clear that the fight for Rosneft will be acute and the losers will be offended and will show that publicly. Therefore, it is necessary to improve all legal aspects now," Fuel and Energy Minister Sergei KIRIYENKO told Itar-Tass. He further explained that the postponement of the auction of the Tyumen Oil Company was caused by a lawsuit filed by one of the potential buyers who claimed that there had been violations in the preparation of the tender.

Russia as Good as Gold?

· With all of Russia's market reforms, is it possible that Russia could be as good as gold? Economist of the World Gold Council Richard SCOTT-RAM believes Russia has every chance to turn into a major gold market. In a quarterly report SCOTT-RAM revealed figures that show demand for gold throughout the world reached a record high in the third quarter of this year, topping 705 tons, which is six percent more than the figure for the corresponding period of last year. "We know that the Russian leadership has set before itself the task of increasing the country's gold reserve," he noted. The Russian Central Bank recently confirmed its intentions to restore the official reserves by announcing that it had already bought 67 tons of gold this year out of the planned 100 tons. However, the economist admitted, the World Gold Council has no exact figures on the Russian population's demand for gold. SCOTT-RAM said that any increasing demand for gold usually depends on the growth of the GDP.

Russian Prices rise

· Consumer prices in Russia went up by 0.4 percent between November 1-17, said a statement by the State Statistics Committee. With the current inflation dynamics, it is believed that inflation may reach 0.8 percent in November, the highest for the past four months. August and September saw a decline in consumer prices, by 0.1 and by 0.3 percent respectively, while October showed a 0.2 percent rise.

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Business

Gazprom to Boost Exports

· Pyotr RODIONOV, Gazprom board member said that the Russian gas monopoly Gazprom is going to deliver natural gas to CIS countries in the previous volume and to increase its exports to West European countries. RODIONOV said that 73 billion cubic meters of oil was supplied by Gazprom to CIS and Baltic countries last year. 70 percent of this volume went to Ukrainian consumers.

Exporting Russian gas will be growing because of the increase of its deliveries to traditional markets in Western and Eastern Europe with an expected volume of 180 billion cubic meters a year by 2005. Gazprom is capable of annually producing 580 billion cubic meters of natural gas. "Such a growth is planned due to development of 11 major fields in western Siberia. The biggest of them is Zapolyarnoe with an estimated annual yield of 100 billion cubic meters," RODIONOV said. Gazprom also plans a considerable increase of its exports because of the construction of pipelines to Europe and Turkey.

Two major pipeline projects are planned. The first is a route through northern Siberia, the Yamal-Europe pipeline. By transporting gas to Europe without transiting through Ukraine, Gazprom hopes to avoid the problem of non payment by the Ukraine. The export sales RODIONOV said, "give Gazprom hard currency earnings and avoid delays in payments." The second project is to Turkey by running pipelines under the Black Sea which will be developed by Royal/Dutch Shell. Former Fuel and Energy Minister Boris NEMSTOV said, "To export our gas to Turkey is also a priority." He also express the government's support for Gazprom, "On the overseas markets we must help Gazprom." NEMSTOV said that domestically the government needed to increase the amount of money Gazprom receives for its deliveries. Gazprom accounts for 30 percent of the world natural gas reserves and produces a quarter of the world output. The company supplies 19 percent of the gas consumed in Western Europe and the figure for Eastern Europe is 61 percent.

Six Oil Companies Pay Back Taxes

· LUKoil, Tyumen Oil Company, YUKOS, Slavneft, Tatneft, and Sidanko paid off back taxes to the government worth 6.6 trillion rubles ($1.1 billion) in

return for extra export access. The oil companies agreed to pay the government their arrears by November 15. New Fuel and Energy Minister Sergei KIRIYENKO said, "We had a plan, and we have over fulfilled that plan." Counting only Russian energy companies which owe the state more than 110 billion rubles, the total owed stood at 44 trillion rubles at the beginning of October, which is only the debt to the federal budget.

European Republics

Ukrainian Parliament Law/ Strange Bedfellows

· Under the new Parliamentary law half the seats in the new parliament will be allocated by party list and to qualify for any seats a party must win at least four percent of the vote, reported the Financial Times. This new law analysts hope will break the political grid-lock. The new election law clearly gives an advantage to large, well organized parties. Since the new law legislators, who once were enemies, are now banning together to form parties. Ivanna KLYMOUSH of the Ukrainian Center for Independent Political Research commented that, "There are some mergers that seemed impossible before but now they are happening." Oleksandr ELYASHKEVICH once accused Pavel LAZARENKO of being corrupt and now they are in the same party. Former president Leonid KRAVCHUK and Yevhen MARCHUK, the former prime minister, formed the Social Democratic Party of Ukraine.

Some say strong parties will strengthen the parliament's position relative to the president. "Development of a strong party system is essential for a well functioning political system in Ukraine," said PIKHOVSHEK. Others believe the parliament is already too strong. In any case, the new law gives hope to legislators making decisions. The Ukrainian 1998 budget still has not been passed.

Ukrainian PM on EU Trade Conditions

· Ukrainian Prime Minister Valery PUSTOVOISTENKO asked the European Union to revise its anti-dumping procedures and the quantitative limits on Ukrainian goods. PUSTOVOISTENKO said that the strict protective tariff policy of the EU negatively impacted Ukrainian exports. PUSTOVOISTENKO stressed his country did not impose corresponding anti-dumping measures or quantitative limits on EU's exports to Ukraine. Next to Russia, the EU is Ukraine's second largest trading partner. The yearly trade volume between the two

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sides accounts for 14.3 percent of Ukraine's total. The volume for the first nine months this year stood at $3.6 billion.

Selling Ships for Debts

· The Metskhay ship, which had been under arrest since September 1995, was sold at an auction for debts of the Black Sea Shipping Company of Ukraine. It is only one of the 25 ships of the company, arrested at foreign ports; the other ships may meet the same fate. The investigation conducted by the public prosecutor's office revealed that between November 1995 and May 1997, the former management of the shipping company had sold 59 ships at a price less that one million dollars each. The foreign debt of the company is $200 million. Alexander DIORDIYEV, head of the Black Sea Shipping Company, believes the company will not survive without the assistance of the state.

Ukrainian Currency Falls Below Set Limits

· The gryvnia fell below its established limits as one gryvnia cost $2 on the interbank market. The National bank of Ukraine fixed the exchange corridor of 1.70 - 1.90 gryvnia per dollar. Many brokers call the current situation a crisis. They are convinced that neither the National bank nor the Finance ministry will succeed in coping with the fall of gryvnia. The exchange rate will certainly be effected by foreign investors who are quickly selling state securities and converting gryvnias into dollars. Brokers fear gryvnia will continue to fall. The developments on the stock market doubt the possibility to keep the exchange rate corridor fixed by National bank at 1.75 - 1.95 gryvnia per dollar in the first half of 1998.

South Caucasus & Central Asia

Results of Geneva Talks on Abkhazia Conflict

· Georgian and Abkhazi delegates agreed after three days of talks in Geneva to create a coordinating council to oversee further talks. The council will be headed by a UN special representative Liviu BOTA

and will have three committees addressing the repatriation of displaced persons, security, and economic issues, reported Reuters. The council, to meet in December, will consist of representatives from Georgia, Abkhazia, Russia, US, Britain, France, Germany, and UN and OSCE officials. The working out of a new negotiating mechanism is a concrete result of the talks, KALADZE believes.

Trans-Caspian Pipeline and Diplomatic Shock

· US officials have plans to build a pipeline that would cross the Caspian Sea, but bypass countries who are still feuding over rights of the oil rich waterway, reported The Journal of Commerce. The proposal would not only freeze out Iran and avoid Russia, but also Turkmenistan unless it settles its disputes with Azerbaijan over ownership of the Kyapaz oil field. The question of who owns the Caspian and rights to develop it, has impeded the US initiative for a trans-Caspian line. The pipeline, connecting Kazakhstan and Azerbaijan who are not in conflict over oil rights, is slightly longer than the Azeri-Turkmenistan route, but would avoid solving legal problems.

The idea of bypassing disputing nations comes as a diplomatic shock to Turkmenistan following US Energy Secretary PENA's visit and preliminary agreements last week. This bypass shock treatment shows that the US wants to get the attention of quarreling former soviet republics to lay the pipeline in favor of US plans (avoiding Iran). Turkmenistan's attention may be the hardest to get as they plan to participate not only in the China-backed Iranian oil line but also a trans-Iran gas pipeline that will allow it to sell gas to Turkey. "For Turkmenistan now, this is a matter of survival," said a Turkmen official. Turkmenistan exports have been virtually cut off by Russia this year. Although Azerbaijan, Kazakhstan and Turkmenistan have already planned various pipelines, the question remains, will Russia allow development of the Caspian to take place without the consent of the five shoreline nations.

Paul M. Joyal, President, Editor in Chief Clifton F. von Kann, Publisher Jennifer M. Rhodes, Principal Editor

Daily Report on Russia is published Monday-Friday (excluding holidays), by Intercon International, USA. Subscription price for Washington, D.C. Metro area: $895.00 per year. A discount is

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