DAILY REPORT ON RUSSIA

AND THE FORMER SOVIET REPUBLICS

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

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

Monday, December 22, 1997

Russian Federation

Politics

Yeltsin Appoints Gazizullin to Privatization Post

· On Saturday Russian President Boris YELTSIN appointed Farit GAZIZULLIN the new privatization minister replacing Maxim BOIKO, who was ousted during the CHUBAIS book scandal. Prior to this appointment GAZIZULLIN was first deputy chairman of the privatization committee and before that deputy vice premier of the semi-autonomous republic of Tatarstan. GAZIZULLIN is considered to be a moderate supporter of CHUBAIS's reforms. He said that privatization has provided the conditions for competition and allowed the creation of an equities market that has been a source of cheap financial resources for new enterprises. GAZIZULLIN also said that further sell-offs of state controlled industries will have to be worked out with and approved by the Duma. Investors hope that GAZIZULLIN will continue with the second waves of reforms, which has been stalled since YELTSIN's election. The privatization process has been criticized for the sell-off of stated owned businesses at bargain prices to wealthy bankers with ties to the Kremlin.

Gov't Cover-up FSB Death in Hostage Crisis

· Russian Federal Security Service forces (FSB) on Saturday shot a terrorist to death when they stormed a car in the Swedish Embassy compound in Moscow, ending a five-hour hostage crisis. The terrorist had taken a Swedish diplomat hostage demanding a $3 million ransom but later exchanged him for a Russian secret service official. The terrorist, Sergei KOBYAKOV, was killed when he tried to put up resistance to the security men who arrested him. Prime Minister Viktor Chernomyrdin said, "There will be a through investigation of the circumstances of the Swedish diplomat's seizure in Moscow and of the operation to render the terrorist harmless." The

Swedish government is considering financial assistance to FSB officer Anatoly Savelyev who made himself a hostage to the terrorist in exchange for his releasing Swedish diplomat Jan-Olof Nystroom. Savelyev died of gunshot wounds in fighting the hostage-taker. FSB Director KOVALOV said on Russian news that SAVELYEV died of a heart attack at the hospital. However, on Moscow Television later, a doctor, hidden by a hood, said that the government's statement was untrue and that SAVELYEV died of four bullet wounds.

Chernomyrdin Visits Uzbekistan

· Russian Prime Minister Viktor CHERNOMYRDIN arrived in Tashkent today for a visit with Uzbek President Islam KARIMOV, Prime Minister Utkur SULTANOV, and signed six major documents. Two of the signed documents are intergovernmental agreements on encouraging mutual protection of investments and on science, technology and peaceful uses of atomic energy. Other agreements concentrated on counteracting illegal financial operations linked with money laundering. The two sides also signed a protocol on economic cooperation between Uzbekistan and Russia. The aim of the visit is to, "find ways to resolve the existing problems and to improve the legal foundation of economic and political cooperation between Russia and Uzbekistan". The sides plan to discuss the creation of an intergovernmental Ilyushin Aircraft-Building Company, which will include the Russian Ilyushin Research and Technological Complex, the Voronezh Air

Today's News Highlights

Russia

Int'l Conference on Chechnya

S&P Outlook Changed Negative

Rosenft Sell-Off As Planned

India Seeks Russian Investment

European Republics

Lithuanian Presidential Elections

South Caucasus & Central Asia

EU Reschedule's Georgia's Debt

Armenian-Rus Gas Company

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Monday

December 22, 1997

Intercon's Daily

craft-Building Plant, and the Tashkent Aircraft-Building Enterprise. The new company will design and build the medium-range Il-114 aircraft, as well as military and civilian modifications of the heavy Il-76-MT and Il-76-TF transport planes. Russia is interested in discussing the joint mining of uranium in Uzbekistan. The sides will most probably agree to the guaranteed delivery to Russia in 1998 of 250,000 tons of cotton yarn in exchange for Russian grain. Uzbekistan, which holds the world's fourth places for the output of cotton, stopped supplying cotton to the Russian textile factories in exchange for grain in 1996. The sides will also discuss problems linked with cooperation in the military-technological domain and in customs matters.

Russia accounts for more than 50 percent of Uzbekistan trade turnover with the members of the CIS. Trade turnover with Russia reached over $1.5 billion last year. From January to November 1997, it totaled $1.4 billion, a 10 percent increase from the same period in 1996.

CHERNOMYRDIN's visit to Turkmenistan, scheduled for December 23, was postponed until January in order to finalize documents. Turkmen President Saparmurat NIYAZOV and CHERNOMYRDIN agreed that questions, envisaged for discussion during the visit, were, "not quite prepared" and fixed time for adjusting positions of the Turkmen and Russian governments on some aspects of bilateral and multilateral cooperation. An agreement on transporting gas across the Russian territory highlights dozens of documents which are being prepared for CHERNOMYRDIN's visit to Turkmenistan.

International Conference on Chechnya

· An international conference of the Hague Initiative program on Chechnya ended in Kazan on Sunday, which was attended by Secretary of the Russian Security Council Ivan RYBKIN, Tatarstan President Mintimer SHAIMIYEV, Chechen President Aslan MASKHADOV, Ingush President Ruslan AUSHEV and international experts. The aim is to find a way out of the conflict without discussing the status of Chechnya or urging the sides for concessions.

Head of the international expert delegation and ex-premier of the Netherlands Ruud LUBBERS said that it is time to give up the notion of concessions and find a mutually beneficial way out of the situation.

SHAIMIYEV believes that Tatarstan could take part in the restoration of Chechnya and use the money Tatarstan transfers to the Russian federal budget to finance the works, SHAIMIYEV said at the final news conference. In his opinion, the restoration of the Chechen economy is both an economic and a political question. Russian Security Council Secretary Ivan RYBKIN stressed that the principles laid down by the Russian president remain the same—peace, patience and the restoration of the Chechen economy. "We want only one thing—a guarantee of the republic's security. The Russian Constitution does not give us this guarantee, and if we become a subject of the international law we will get it," MASKHADOV said. He welcomes visit of Russian President Boris YELTSIN, but if he comes, "to outline the Chechen status, such a visit is not desirable."

Kulikov Ends Iran Visit

· Russian Interior Minister Anatoly Kulikov ended his three-day visit to Iran on Friday. During the visit, the two sides discussed the expansion of cooperation between Russian and Iranian law enforcement agencies and signed a memorandum on the strengthening of bilateral relations. The focus of the meeting was to discuss prospects for promoting a dialogue between the interior ministries of the two countries. Russia and Iran agreed to join efforts to fight illegal trade of weapons. They also agreed to exchange information and to hold working meetings and consultations.

Meanwhile, The Security Council deputy secretary Yuri DERYABIN and Iranian Deputy Foreign Minister Gholamali HOSHRU met today to discuss the strengthening of security and the development of cooperation in the Caucasus and Caspian regions and the establishment of contacts between Russian and Iranian security councils.

Economy

Ruble = 5,945/$1.00 (NY rate)

Ruble = 5,947/$1.00 (CB rate)

Ruble = 5,924|5,970/$1.00 (buy|sell rates)

Russia's GDP Target Realistic

· First Deputy Prime Minister Anatoly CHUBAIS on Saturday said the two percent growth of the Russian gross domestic product (GDP) is a realistic target for the economy. Because of losses during the

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international financial crisis CHUBAIS admitted, "the safety margin has certainly decreased a bit" in Russia's prospect of achieving the growth increment. He added that he sees two percent as the low end of projected figures. CHUBAIS also said that industrial companies planning to invest in Russia had not changed their behavior, citing the interest of British Petroleum and Royal/Dutch Shell in the privatization of Russia's oil company Rosneft.

Russia Ranked on Top World Export-Import List

· The annual report of the World Trade Organization, which was published in Geneva on Friday, ranked Russia in 20th place in the world for exports ($68.7 billion) and 26th place for imports ($42.7 billion). No other former soviet republic was put on the list of 50 major trading powers in the world. The list is based on data for 1996.

According to the report, it will take much time for Russia, if it wants, "to catch up with and outstrip America." The US is unchallenged leader of world trade: it sold $624.5 billion worth of goods in 1996 or nine times more than Russia and purchased $817.8 billion worth of goods—19 times more than Russians. Russia's share in world export and import is now very modest—1.3 and 0.8 percent, respectively, which is much less than for the US (11.8 and 15.1 percent). Russia also lags far behind the world's leaders in trading services (25th place for export and 16th for import, according to 1995 data).

S&P Outlook Revised from Stable to Negative

· On Friday Standard & Poor's (S&P) revised its outlook for Russia's foreign currency debt rating for 1998 from stable to negative. The rating itself remains unchanged at BB-minus. S&P cited deep structural weakness in public finance, poor payment discipline, weak legal system, and developing cultural and political institutions, as reasons for the change. These coupled with a high deficit of 6.5 to 7 percent of GDP compared with the expected 5 percent, high interest rates, and poor tax collection, caused S&P to reconsider its rating. S&P also downgraded the outlook for several blue chip companies such as LUKoil, Mosenergo, and Rostelekom. The announcement caused the stock market to fall sharply 6.7 percent. LUKoil and Mosenergo, both suffered losses of 7 to 8 percent. Philip POOLE, head of emerging markets research at ING Barings

said, "Russia needs to address the fundamental issues which underlies all of its other problems—an inability to collect taxes," reported the Financial Times.

Business

Rosneft Sell-Off Still On As Planned

· Deputy Prime Minister Anatoly CHUBAIS said at a press conference on Saturday that, "The question of Rosneft's privatization has been in principle decided." CHUBAIS said he did not rule out that it could be privatized by selling, "a very big package as one lot" to a potential strategic partner. He said the government planned bidding for a stake in Rosneft for, "the first quarter of the next year and this time has not changed." No specific date, however, was released.

India Hopes Russia will Invest in Industry

· Following First Vice Premier Anatoly CHUBAIS return from India, he told reporters that India would like Russia to own some of its major industrial infrastructure facilities. CHUBAIS said that the foregoing offer was made to him, "during his Friday meeting in New Delhi with Prime Minister Inder Kumar GUJRAL." The Indian premier, offered ownership in large objectives as nuclear power plants, hydraulic power stations, and ports. The aging infrastructure is unable to meet the growing demand of the Indian economy. CHUBAIS asked the Indian premier to submit to the Russian side a list of the large Indian infrastructure units, to which India wants to attract Russia's attention, and then a financial plan would be developed. This involves, he stressed, dozens of billions of US dollars. CHUBAIS noted that the implementation of all this was difficult only at first glance. "This is feasible in the present-day conditions," because the potential of the Russian financial structures is growing.

European Republics

Lithuanian Presid. Election —Run Off Planned

· Lithuanian presidential elections ended with no final results because none of the seven candidates received more than 50 percent of the votes. Former Prosecutor-General Arturas PAULAUSKAS with 45.5 percent of votes is followed by Valdas ADAMKUS, an American ecologist of Lithuanian descent, who received 28.2 percent of the votes.

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The two will face a run off presidential election on January 4, 1998. A winner in the run-off is to be decided by a mere majority. Electoral Commission Chair Zenonas VAIGAUSKAS said, "It is absolutely clear that a second round runoff will be necessary and that PAULAUSKAS and ADAMKUS will go through." Electoral Commission officials said that voter turnout was more than 70 percent. PAULAUSKAS, who adheres to Center-Left views, is supported by the incumbent Head of State Algirdas BRAZAUSKAS, who declined to run for the presidency. ADAMKUS is supported by Central Union, the second largest political force in Lithuania.

South Caucasus & Central Asia

EU Reschedules Georgia's Debt

· The European Union Commission has rescheduled Georgia's debt of $127.9 million. Georgian authorities said the decision became possible largely due to the position of the Netherlands which agreed to provide 50 million ECU to pay part of the debt. Temur BASILIA, economic adviser to the Georgian president, said that the EU's decision to provide additional assistance to Tbilisi reflects growing trust in relations between the EU and Georgia. Specifically, 30 million ECU will be made available under the TACIS program to provide technical assistance to Georgia, five million ECU to modernize the Inguri hydropower plant, which generates 40-45 percent of all energy in the country, and 14 million ECU in 1998 and 12 million ECU in 1999 to support the country's budget.

Armenian-Russian Joint Gas Company

· The formation of a new company Armrosgazprom shows that the Armenian-Russian treaty of friendship, cooperation and mutual assistance, signed in Moscow last August, is already in operation, although it was not ratified. Armrosgazprom held its founding meeting to set up the Armenian-Russian Armrosgazprom joint-stock company which will settle several tasks on designing, financing, building and operating new gas pipelines and gas storages as

well as on expanding and reconstructing operating gas systems. The power industry is among the most important sectors for Armenia, and the establishment of such a company will enable the republic to resolve several strategic tasks. The Armenian President Levon TER-PETROSYAN noted that the company has a bright future and expressed the hope that its operations will overstep the borders of Armenia and will cover the entire region.

Starting next year, the company will be engaged in deliveries and sales of Russian gas as well as repair, construction and other types of work in Armenia. According to the Armenian Energy Minister Gagik MARTIROSYAN, out of $271 million of the company's authorized capital, the first $5 million were already deposited at the Armstroibank. Board chairman of the Russian giant Gazprom company Rem VYAKHIREV emphasized that a very tough competition is underway in the region between Iranian, Turkmen and Russian gas and oil companies.

New Kazakhstan Deputy PM

· Kazakhstan President Nursultan NAZARBAYEV on Saturday named Zanybek KARIBZANOV a Deputy Prime Minister. He was formerly the director of the region of Akmola. It would be KARIBZANOV's third term to serve as the country's deputy prime minister. KARIBZANOV, an agricultural expert. He also held high positions such as Agriculture Minister and Chairman of the Committee for State-owned Property.

The Kazakh President announced that Vladimir GARTMAN would replace Zanybek KARIBZANOV as the new head of the Akmola regional administration. It has become known from informed sources, the former North Kazakh governor will be replaced by Danial AKHMETOV, former head of the Pavlodar regional administration.

The Daily Report on Russia and the Former Soviet Republics will not be published December 25-January 2, 1998 for Intercon's annual winter break.

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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Daily Report on Russia is for the exclusive use of the subscriber only. Reproduction and/or distribution is not permitted without the expressed written consent of Intercon. Daily Report on Russia Ó copyright 1997, Intercon International, USA.

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