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

Thursday, December 18, 1997

document for our people. It helps us to save from hardships the most vulnerable section of population —pensioners."

Deputy Prime Minister and Minister of Labor and Social Services Oleg SYSUYEV noted that the provision will collect pension maintenance on three-level: state pension insurance, state pension maintenance and additional pension insurance through voluntary contributions by employers and employees. SYSUYEV stressed that the reform of the pension system will help to balance stability of the Pension Fund for 50 years ahead, push workers to earn their pensions, place the beginning of retirement on pension to an older age, which will substantially increase its monthly sum.

Yeltsin Approves Commission for NATO

· Russian President Boris YELTSIN on Wednesday signed a decree to set up a commission to cooperate with NATO and oversee the fulfillment of the Fundamental Act signed by Russia and NATO. The commission is charged with coordinating the activities of executive federal bodies to develop cooperation with the North Atlantic Alliance with a view to ensure Russia's national interests. It will develop Russia's policy toward NATO and analyze NATO's effectiveness. Russian Foreign Minister Yevgeny PRIMAKOV will head the commission which will include, the Chief of the General Staff of the Russian Armed Forces, Defense Council secretary and high-ranking officers of Russian ministries.

Russian Federation

Politics

Seleznyov Against US Pressure For START II

· Speaker of the Russian State Duma Gennady SELEZNYOV today said he recommends that US leaders not to place pressure on Russian lawmakers to ratify the START II, warning that otherwise it will never be ratified. "The date to consider the START-II treaty has not yet been fixed and if the [US] president [Bill] CLINTON puts pressure on the Duma it will never be fixed," SELEZNYOV told reporters. CLINTON said in a statement that he could go to Russia after the ratification of this treaty. SELEZNYOV described CLINTON's statement as, "a challenge," noting that the US, "is the power which aspires to rule the whole world."

Russia Adopts Energy Saving Program

· The Russian Cabinet today approved without discussion a draft of the "Energy-saving in Russia" program. The program, which will take place from 1998 to 2005, provides a plan to save 365-435 million tons of fuel within the above-mentioned period, a cut on this bases of the power intensity of Gross Domestic Product by 13.4 percent, a reduction in budget subsidies to regions for energy supply with a 8-13 percent decline in the prices of fuel and tariffs on electric power. The Program will prepare users with meters and systems for the accounting and regulation of the consumption of energy resources. The program plans to prevent the discharge of 3.2 million tons of pollution into the atmosphere per year.

Government Reforms Pension System

· The federal government today approved a draft program for pension reform in the Russia, which will be submitted to President YELTSIN in January. Prime Minister Viktor CHERNOMYRDIN explained after a cabinet meeting that, "It is a very important

Today's News Highlights

Russia

Rus-Bulgaria Gas Deadlock

Rus-Iran Sign Security Coop.

European Republics

Ukraine-Gazprom Deal for 1998

Ukraine PM to Visit China

Estonia Gets $22 Million Loan

Latvia Reeives Moody's Rating

South Caucasus & Central Asia

Georg-Rus Border Guards

Turkmen-Iran Pipeline Complete

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December 18, 1997

Intercon's Daily

PRIMAKOV said that the major disagreement between Russia and the alliance stems from NATO's expansion to the East. PRIMAKOV said Russia does not want to confine itself to several peacekeeping operations and is ready to participate, on a continuous basis, in a multinational task force which is being created by NATO and build a single air-defense system with the alliance. One of the achievements of the past six months was the arrival and intensive work of the Russian permanent representative to NATO in Brussels.

Russia-Iran Sign Security Cooperation

· Russian Interior Minister Anatoly KULIKOV and his Iranian counterpart Abdollah NOURI on Wednesday signed a memorandum of understanding to promote security cooperation between the two nations. NOURI said that the memorandum would open the way for Iran and Russia to expand their cooperation in the areas of security for their citizens, safety of road transportation, fight against smugglers of the cultural commodities and ancient objects, and exchange of know-how and technical assistance concerning crime investigation.

The US will be closely noting what kind of know-how and technical assistance is given to Iran. The US Foreign Aid Bill requires certification by the Secretary of State that the Russian government it is not transferring missile technology to Iran or making substantial progress to that end before foreign aide can be disbursed to Russia.

Economy

Ruble = 5,943/$1.00 (NY rate)

Ruble = 5,943/$1.00 (CB rate)

Ruble = 5,923|5,963/$1.00 (buy|sell rates)

Moscow to Regulate Defense Ministry Finances

· The Russian government Special Commission on Taxation and Budget decided Wednesday to rectify the methods for regulating the defense budget, the soldiers' pay, and provisions expenses. Prime Minister Viktor CHERNOMYRDIN described the financial regulation of the army as, "very bad." He said strict measures should be taken to prevent behavior leading to the misappropriation of funds, including personnel management measures. Minister of Defense Igor SERGEYEV said that the commission's decision includes improving the financial system of the more powerful departments, man

aging the financial affairs of these departments through state financial institutions, and enhancing mutual supervision among these departments.

SERGEYEV stressed that squandering money, embezzlement and misappropriation of public funds are all destructive to the combat effectiveness of the army. Reports say losses occurring as the result of illegal and criminal cases in the army in 1996, amounted to 100 billion rubles (approximately $18 million). In 1997, the amount of money squandered and embezzled in the army rose 26.8 percent, while the amount misappropriated was up 48.7 percent.

Russia- China Labeled Market Econ. by EU

· The European Commission on Wednesday announced that it has proposed to remove the label of "non-market economy" for Russia and China in EU anti-dumping policy. The commission said that with the substantial advances toward a market economy in both Russia and China, the present EU anti-dumping rules which stemmed from the 1950s need to be modified. The new rules recognize both countries' efforts to transform their economies by allowing domestic price information to be used in cases where existence of market economy conditions can be verified. In each case, Chinese and Russian exporters will need to prove that they operate in market economy conditions. European Commission Vice President Sir Leon BRITTAN said, "Changes have already been introduced for the countries of central and eastern Europe. This proposal does nothing to weaken our anti-dumping instrument. Rather it recognizes that with the substantial advances toward a market economy, the situation on the ground [in Russia and China] has changed and our policy should reflect that." Russia and China are both important trading partners for the EU, with trade volume increasing rapidly over the last decade.

Business

Rus-Bulgarian Gas Deal in a Deadlock

· Russian-Bulgarian negotiations over Russia's supply of natural gas to Bulgaria have been stuck in a standstill as a result of the indefinite suspension of a joint stock company operated by the two countries announced during a meeting of the shareholders of the Topenergy Joint Stock Company in Moscow on Tuesday. The shareholders offered the possible reincorporation of the company as a solution. The

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two Bulgarian private giants Multigrup and Overgaz failed to sell their 8.25 percent shares to Bulgaria's Natural Gas Company (NGC), the official shareholder of Topenergy as required in a contact signed by the two sides. The NGC, in return, announced on the same day, its retreat from Topenergy. The Russian-Bulgarian negotiations over the contracts on Russia's supply of natural gas to Bulgaria have to be postponed until next year. Fearing the business deadlock's might harm Russian-Bulgarian relations, Bulgarian Deputy Prime Minister Yevgeny BAKARDZHIEV criticized the two private companies for breaking their promises and said the two governments would step in, holding direct talks on the behalf of the companies. Bulgarian energy officials said that if Russia dose not cooperate on the gas deal, Bulgaria will, "look for support from the West."

Omsk-Angarsk Refineries Get Debt Extension

· Following a three hour meeting of the VChK Tax Commission, Minister of Economics Yakov URINSON said that the Omsk Oil Refinery and the Angara Petrochemical Company have been granted an extension of one week, till December 25, to pay their debts to the federal budget and carry out current payments. He said that, "if they fail to comply with this decision, all measures provided for in the federal laws, up to the confiscation of their property by the Federal Tax Service, will be effected on December 26. Besides, the parent company will have to bear vicarious liability." The Omsk Oil Refinery's parent company is Sibneft and the Angara Petrochemical Company's is Sidanko. The Omsk debt is estimated at 470 billion rubles; the Angara at 700 billion rubles. URINSON said that the commission asked the Prosecutor General's Office to determine the responsibility of those responsible for non-payments. Comment: This deadline will clearly influence the bid battle between opposing joint ventures of Sibneft and Sidanko for the Russian oil company Rosneft to be privatized early next year.

AssiDomän Withdraws Financing for Paper Mill

· The Swedish forestry company AssiDomän on Wednesday announced that it is withdrawing financial support from its jointly owned pulp and paper mill in Russia following a dispute over working capital, reported the Financial Times. The company asked first deputy prime minister Boris NEMSTOV to persuade the mill's Russian shareholders to finance

some of its working capital requirements. Since AssiDomän acquired a 57 percent stake in the Segezhabumprom mill for $45 million, the mill has been hit by negative cash flow problems forcing it to take out loans, bureaucratic difficulties, and tax disputes. The provincial prosecutor has even declared AssiDomän's ownership illegal. Some analysts suggest that AssiDomän's pull out signals the growing concern of financial risk in Russian manufacturing. Russia exports an aggregate of $2 billion worth of forest products annually, including timber, cellulose, pulp and paper. 1997 exports will be slow because of privatization conflicts over the state timber company.

Rus-Finnish Mining Joint Venture

· Russian mining company RAO Norilsk Nikel and Finnish miner Outokumpu plan to form a joint venture to asses and develop ore bodies in the Kola Peninsula. Norilsk spokesman Igor PLOTNIKOV said, "The first phase of cooperation will be the creation of a venture to assess the technical and economic basis of the project. If in 18 months it is clear there is the investment and technology needed, we will start the second phase, which will be a production company." The cost of each phase has not yet been released, but Norilsk expects it to be hundreds of millions of dollars. PLOTNIKOV said that Norilsk needed to open its doors to outside investment, because its own financial resources were not sufficient to carry out major restructuring.

European Republics

Ukraine to Receive Russian Gas in 1998

· The Ukrainian government and Russian Gazprom have signed an agreement for Russia to supply 52 billion cubic meters of gas to Ukraine at a price of $50 per 1,000 cubic meters in 1998. Gas will be supplied as a payment of transit. This will reduce the price of gas supplies for the population and utilities enterprises which currently have to pay $66 per 1,000 cubic meters. Gazprom will also provide for the transit of 15 billion cubic meters of Turkmen gas for Ukrainian consumers.

Ukrainian Prime Minister to Visit China

· Ukrainian Prime Minister Valery PUSTOVOITENKO will pay an official visit to China at the invitation of its Prime Minister LI Peng on December 21-25, 1997, to

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continue a dialogue between the two countries aimed at expanding bilateral trade, economic, scientific, technical and military-technical cooperation. The volume of trade for the first nine months of this year is $955 million, an increase of $109 million from the same period in 1996. PUSTOVOITENKO said, "Bilateral trade is growing, but there is still a lot of room for improvement," citing the hope that it could increase to $5-6 billion before 2000. This will be the first visit to China by a Ukrainian prime minister since the independence of Ukraine.

Estonian Receives $22M IMF Standby Loan

· The International Monetary Fund (IMF) Wednesday approved a standby loan of $22 million to support the Estonian government's 1998 economic reform program. Estonian authorities say they have no intentions to draw on the credit, as was the case for a similar loan which expired in August, 1997. The IMF said, "The authorities must guard against aggregate demand pressures that could cause the banking system to overextend itself in an environment of rising capital inflows and against demand-driven real wage increases that outstrip productivity gains." Estonia's growth prospects would depend on increasing public savings through fiscal adjustment, monetary measures to restrain credit growth and financial risks, and accelerated structural reforms to improve productivity, Reuters reported.

Moody's Rates Latvian Banks Baa2

· Moody's Investor Service on Wednesday rated banks and brokers of Latvia a Baa2 for foreign currency bonds. The rating was welcomed, but seen as nothing that would cause a great market reaction. Girts OZOLS, an equity trader for Hansabank-Latvija, said, "For me the rating, although an important indicator of the general economy, does not bring anything new to the [share] market since the market is locally based." Moody's said that overall Latvia had one of the healthiest banking systems in the former Soviet republics and had made advances in its economic and political development.

South Caucasus & Central Asia

Georg-Russian Border Guards to Fulfil Protocol

· Major-General Valeri CHKHEIDZE, head of the Georgian border guards said today that Georgian border guards were instructed to begin fulfilling provisions of a Russian-Georgian protocol on border issues which were agreed upon at the meeting between Georgian President Eduard SHEVARDNADZE and Russian Vice Prime Minister Valery SEROV earlier this month. He said that in compliance with the protocol, Georgian border guards were ordered to establish a communications link between the Georgian border post Kazbegi and the Russian border post Verkhni Lars to ensure exchange of pressing information between border guards of the two countries and to monitor the highway at this stretch of the Georgian-Russian border. On December 17, Russian border guards returned the border post Verkhny Lars to its initial position of July, 1997.

Turkmen-Iranian Pipeline Completed Early

· The Turkmenistan-Iranian pipeline, which will supply northern Iran with Turkmen gas, has been completed ahead of its opening on December 29. The 200 kilometer pipeline connecting Korpedzhe gas field to Kord-ku in Iran cost the state run National Iranian Oil Industry and Engineering Company $190 million. 2 billion cubic meters of gas will run through the pipeline to Iran per year and is expected to increase before 2006. Iran has committed to buying Turkmen gas for 25 years. The gas route will by pass Russia, thus breaking Moscow's monopoly as an export route. It further boosts Iran's hope of becoming a viable route for the export of Caspian oil.

Correction: Lithunania's incumbent President Algirdas BRAZAUSKAS is not running in the presidential elections on December 21. He is endorsing Arturas PAULAUSKAS for President, indicating PAULAUSKAS's youth and political independence as reasons for his decision. PAULAUSKAS is expected to lead the first round of elections.

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

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