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, December 12, 1997

year, the decision gives Russia's macro-economic credibility. Charles BLITZER of Donaldson, Lufkin and Jenrette told the Dow Jones Newsline, "When Russia is on track with an IMF program, they would be in a strong position to get back-up liquidity from the international community to quickly help it keep the ruble strong." The World Bank is still considering to grant a $1 billion credit to Russia. This will help alleviate the cash strapped government to meet President Boris YELTSIN's January 1, 1998, deadline to pay $2 billion in wage arrears to state workers. The Russian market is closed for Constitution Day holiday, but news of the IMF decision help prices rise in offshore markets for Russian debt hard currency.

Business

Menatep-Sibneft Alliance For Rosneft Bid

· The battle lines have been drawn in what appears to be a fiercely competitive tender for Rosneft, Russia's largest oil company, which continues the cat-and-mouse game of some of Russia's most prominent tycoons. Menatep Group, the Russian FiG which purchased Eastern Oil Company this week and which has a net worth of 932 trillion rubles, formed a strategic alliance with Sibneft Oil for the Rosneft bid, reported the Financial Times. Sibneft a subsidiary of Boris BEREZOVSKY's Logovaz empire, who last month was ousted from his position on the security council. Head of Menatep Mikhail KHODARKOVSKY said the alliance was seeking a western partner to participate in the group's bid,

Russian Federation

Politics

Chubais Book Scandal Verdict

· The widely publicized privatization book scandal, which cost not only the removal of Anatoly CHUBAIS from the Finance Ministry position, but also caused a major government reshuffle, has been brought to the Information Arbitration Chambers by CHUBAIS over two journalists' accusations. The Chamber determined that Alexander MINKIN, of Ekho Moskvy radio, and Sergei DORENKO from the TV analytical program Vremya accusations of CHUBAIS taking brides and laundering money were groundless. The Chamber cited MINKIN and DORENKO's lack of evidence this decision. The chamber reprimanded the journalists for abusing their journalists' rights, violating the law on mass media, and using insulting terms. First Deputy Prime Minister Anatoly CHUBAIS said he was satisfied with the decision of Chamber, which he says proves the independency and objectivity of the Chamber. The Moscow court will hear CHUBAIS' slander case against MINKIN in February

Economy

Ruble = 5,932/$1.00 (NY rate)

Russian Markets were closed

due to Constitution Day celebrations

IMF to Resume $10 Billion Loan to Russia

· A mission from the International Monetary Fund (IMF) announced that it will recommend the $10 billion loan program to resume, providing Moscow with badly needed financial support. The IMF has determined, "the forecast of the Russian economy for 1998 is positive" under the condition of "full and constant implementation" of agreed measures of tax, budget and credit policy. Although the $700 million installment isn't expected to be delivered until next

Today's News Highlights

Russia

Russian Uranium Deal Cancelled

4 Privatization Auctions Rigged

European Republics

Merrill Lynch-Ukraine Deal On

Belarus- Rus Joint Def. Force

South Caucasus & Central Asia

WB $20M Loan to Georgia

Chevron Trans-Georgia Pipeline

CIS Economy Improves

OSCE Meets on Karabakh

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May for a price less than the value of the company. The Tyumen Oil Company's 40 percent share was also purchased below the value and its buyer has failed to fulfill its payment obligations.

Russian Uranium to be Sold on World Markets

· The Atomic Energy Ministry announced Thursday that it intends to terminate an agreement between Tekhnosnabexport company and US Enrichment Corporation to sell uranium from Russia's dismantled nuclear weapons. Instead, Russia will sell its uranium on the world market, where it is expected to earn $300-500 million more than if it had continued the contract. The contract signed in August had Russia selling its uranium through a newly privatized US company to Cameco Corp a Canadian mining company, Cogema of France, and Nukem Inc. of the US at discounted prices. The Enrichment Corp.'s price for Russia's low-enriched uranium was 15 percent below world prices. First Deputy Atomic energy Minister Alexander BELOSOKHOV said, "We will work with any firm in any country—in France, Canada, with whomever, but we will not accept discriminatory unprofitable conditions for Russia." Asked if rouge states would be considered as buyers, Director of Tekhnosnabexport Albert SHISHKIN said Moscow will strictly comply with international regulations.

Yukos Petro Exports Increases Five Times

· Russian oil company Yukos said in a press release that the export of petroleum products by the company increased five-fold from January to September 1997, to reach 6.172 million metric tons. Over 6.644 million tons of petroleum products were marketed domestically, a 59.6 percent increase from the same period last year. Experts believe the company growing sales of petroleum products are a result of a better sales and distribution system. Sales of fuels and lubricants at home and abroad was also influenced the termination of the production of leaded gasoline and transition to the production of ecologically clean types of fuel. Yukos oil production in January through September 1997, totaled 26.773 million tons, a 248,000-ton increase from the same period last year. The sales of crude totaled 26.353 million tons against 24.678 million tons in 1996.

which will boost their chances. KHODARKOVSKY explained that Menatep, accounting for 15 percent of Russia's total oil production, aims to become Russia' leading oil company. "Our strategy is to focus on the oil business and in that business we want to be number one, or, okay maybe number two in the world."

Menatep will have to out bid two strong competitors for the Rosneft bid: Gazprom, allied with Royal/Dutch Shell, and Uneximbank, allied with British Petroleum. Uneximbank, headed by Vladimir POTANIN, is closely linked to First Deputy Prime Minister Anatoly CHUBAIS, the arch-nemesis of Boris BEREZOVSKY. Menatep has sought to distance itself from the on-going battle between CHUBAIS and BEREZOVSKY in various areas of politics, justice, and economic deals. "I will be the minority partner, the main partner will be Sibneft," KHODARKOVSKY said. But with the stakes of the battle rising, Menatep may be pulled into the battle against its will.

Audit Chambers Finds 4 Privat. Auctions Rigged

· The Audit Chamber announced on Thursday that four privatization auctions were rigged, but the government is unlikely to ask for an annulment, reported RFE/RL Newsline. The sale of 38 percent of Norilsk Nickel was purchased by an Uneximbank affiliate at below the market value. In the auction of 25 percent stake of telecommunications giant Svyazinvest, currency rules were violated. The chamber also found that 51 percent of Sibneft was sold in

European Republics

Merrill Lynch Deal May Revive Ukraine Economy

· Ukraine and Merrill Lynch revived their bond

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deal yesterday, which will places $250 million worth of Ukrainian treasury bills on the market. Intercon last week reported that the International Monetary Fund (IMF) objected the deal on the grounds that the yields of the T-Bill would be indexed to the exchange rate of the dollar to the gryvna causing open ended liability for the Ukrainian government. The revised deal provides some protection to Ukraine by setting the T-Bills yields of 9 to 12 month maturities at 40 percent. Merrill Lynch, agreeing to find buyers for the T-Bills hopes, "to close the transaction by year-end," said Merrill's Alex SEIPPEL. Deputy prime minister Sergey TYHYPKO said, "If we cannot get money on the external and internal markets, there's only one alternative: sell some state property. We must remember that the state needs money..." to pay back wage arrears and pensions.

No Payment on Ukraine's Wage and Pensions

· The Ukrainian government is unlikely to make payment on huge wage and pensions arrears by the end of 1997. According to statistics from the National Bank of Ukraine, the total wage and pension backlog in Ukraine has reached 6.2 billion gryvnas (about $3.2 billion), one fifth of the 1997 budget revenues. Of that figure only 1.4 billion gryvnas (about $740 million) are due to pensioners.

David SNELBECKER, an economic adviser from the Harvard Institute for International Development (HIID), said Ukraine's "pay-as-you-go" model for supporting retirees, in which each worker theoretically pays taxes to support the current group of pensioners, is plagued with problems. The problem will only worsen as the retired population increases over the next 30 years. SNELBECKER suggests that Ukraine should adopt a fully funded pension system employing individual retirement accounts. Under this model, each worker would make payments into an account that would provide for his or her own retirement.

The huge debt is not only effecting the living standards of ordinary Ukrainians, but also the political clout of President Leonid KUCHMA and the government as a whole. KUCHMA admitted that not paying overdue wage and pension arrears would give the Communist Party a boost in the March 1998 parliamentary elections. Though the problem is urgent enough that it could affect the outcome of the elections, Ukrainian officials consider it is too early to reform the system.

Belarus- Russian Joint Defense Policy

· The executive Committee of the Belarus-Russian Union met on December 2nd to discuss a document on the joint defense policy. The document was discussed at the highest level by Russian Armed Forces General Anatoly KVASHNIN and Belarus counterpart Mikhail KOZLOV. Unfortunately, the exchanges during the meeting are "classified and not subject to publication." The Union's Parliamentary Assembly Security, Defense, and Anti-Crime Committee deputy chairman Nikolai STOLYAROV said, "We have no time to delay military integration, because NATO is standing at our borders." This is the only indication of the direction policy.

Without any special publicity many force structures have been integrating for some time. The Belarus-Russian Security Committee, organized on August 8th, united the Russian Federal Security Service (FSB) and the Belarus KGB. The countries also organized a joint border committee. Belarus is the only former Soviet republic in which Russia has not only kept, but continues to manage strategic facilities providing communication with the Russian Navy as well as other security services for the country. The Baranovichi military base, built in Belarus during the post-Soviet period, controls Russia's early warning missile system. The joint defense force would include not only infantry and tank battalions, but also strategic nuclear forces. It is unclear, however, who will command a joint defense force, if it is enacted. The Russian people are unlikely to learn of such a decision until it has already been passed or LUKASHENKO discloses it to the public, as he did in the past with the joint basing treaty. Comment: With strict restrictions placed on Belarus free media, public assembly, and a parliament controlled by LUKASHENKO who some describe as a virtual dictator, it is critically important to determine who will actually control Russia's nuclear forces.

South Caucasus & Central Asia

WB $20M loan to Georgia for Poverty Reduction

· The World Bank (WB) has approved a $20 million loan for a social investment in Georgia to reduce poverty and foster development of the private sector, according to a WB press release. The project aims to support the poor in Georgia by improving their access to basic social and economic services. It also

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will mobilize public and private resources for small scale investments or "micro-projects", such as developing water supplies, irrigation, roads and schools, in 400 communities. Task team leader for the project Robert MAURER said, "The project, supported by the World Bank, offers an important opportunity to the Government to ensure that the restructuring of the public sector and the development of the private sector proceed in an effective and transparent manner." The project also hopes to strengthen the capacity of small-scale contractors to build and implement projects in their communities, increase employment, and better monitor and analyze trends related to Georgian poverty.

Chevron Builds Trans-Georgian Pipeline

· US company Chevron plans to build in 1998, a pipeline from Baku to the port of Batumi to transport oil from Kazakhstan's Tengiz oil field, according to "Finansoviye Izvestiya." The cost of the project is estimated at $600 million and will transport 5 million tons. The transport tariff for oil transported through Georgia to Batumi is sure to be an issue for the Georgian government and the Autonomous Republic of Adjaria to discuss as it is unclear how the tariff will be shared, reported RFE/RL Newsline.

CIS Economy Improves Overall

· The economy in the Commonwealth of Independent States (CIS) has shown signs of improvement, according to a report released Thursday by CIS's inter-state statistics committee. The average gross domestic product (GDP) grew 0.3 percent in the first ten months of this year. CIS countries gained the 0.3 percent growth rate following a GDP decline of 5.5 percent in the same period of 1996. The industrial production of the CIS countries this year grew 2.3 percent in contrast with the 3.5 percent decrease in the same period of 1996. Trade between the CIS states and other countries this year increase by 1 percent, but among the CIS states, it fell 8.7 percent.

Primakov to Attend OSCE Meeting on Karabakh

· Russian Foreign Minister Yevgeny PRIMAKOV

will attend the meeting of the Council of foreign ministers of the Organization for Security and Cooperation in Europe (OSCE) in Copenhagen on December 18 and 19. Gennady TARASOV said, "In order to strengthen the OSCE as the main forum, whose framework serves to work out coordinated approaches towards cardinal problems of European security and issues on European order, Russia calls for developing one of the most important functions of this organization — norm-setting." TARASOV said he believed that the foreign ministers will discuss the concept of European security in the 21st century.

Also at the meeting, the council will once again attempt to settle the dispute over Nagorno-Karabakh conflict. Since the rejection of the planned step-by-step approach which mutually agreed upon by Armenia and Azerbaijan, it is unclear what the starting point of negotiations will be. President of the breakaway republic Arkady GHUKASYAN said he would not agree to any status subordinating the region to Azerbaijan or the return of its territory. On Wednesday, Alexander ARZOUMANIAN met with his Nagorno-Karabahk counter part Naira MELKUMAIAN to discuss the Karabakh peace process. ARZOUMANIAN said his ministry will continue to defend Armenia's national interests. Comment: At this stage it is clear that the Minsk process to settle the Nagorno-Karakbhk conflict is at a complete standstill and has failed.

Kazakh-Chinese Oil Deal

· Ambassador of the Republic of Kazakhstan Kuanysh SULTANOV said in Beijing that Kazakhstan expects to export 100,000 tons of crude oil to China by the year's end. China's demand for energy has been fueled by rapid economic growth, while Kazakhstan is rich in oil reserves. The combination offers significant opportunities for bilateral cooperation, SULTANOV said. China National Petroleum and Gas Corporation won two Kazakh oil development project bids this year. The pipeline between the western part of Kazakhstan and Karamay in Xinjiang in northwest China costing $9.5 billion to be completed in 2005, will transport 20 million tons of oil.

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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