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

Friday, December 5, 1997

cerned over the considerable imbalance in Russian-Turkish contractual operations. Russia's trade representative in Turkey Viktor KOPTEVSKY said that Russia hopes measures will be taken during the forthcoming visit of for increasing the amount of building contracts, fulfilled by Russian companies in Turkey. Turkish firms are fulfilling building contracts in Russia to the sum of $6 billion, while Russian companies are implementing agreements to the sum of only $100 million. Russian firms are fulfilling contracts in the transportation and industrial infrastructure sector.

Economy

Tax System Slower Than a Snail

· International Monetary Fund managing director Michael Camdessus said on Thursday that Russia's biggest problem is its slow-moving tax collection system. "The serious problem for Russia is the slowness in improving the system of tax collection which is paralyzing the progress in the public and private economy in Russia." CAMDESSUS said if Russia runs into an emergency in the wake of the crisis or some other exigency, the IMF will be there to help. "I can guarantee you that I am personally very attentive to [Russia] and I hope that very soon the government will be able to demonstrate by new measures its commitment to putting tax collection in order to allow us to continue to contribute to financing the Russian economy," CAMDESSUS said. With the money collected from taxes, the

Russian Federation

Politics

Duma Approves 1998 Budget Bill

· The Russian State Duma today approved the 1998 budget in its first reading by a 231 to 136 vote with six absentions. President Boris YELTSIN made his first appearance to the parliament to urge them to pass the budget. He said that the if the budget did not pass, there would be serious ramifications on the ruble. He told members to pass the budget for the sake of ruble stability and the economy. Prime Minister Viktor CHERNOMYRDIN also encouraged the Duma to pass the budget calling it the most realistic budget worked out by the government and parliament in five years of reform.

Government Reveals Defense Expense for 1998

· Russian Prime Minister Viktor CHERNOMYRDIN announced today that 1998 government expenditures for national defense will be 3.5 percent of the gross domestic product. Replying to legislators at a plenary meeting of the State Duma discussing the 1998 federal budget bill in the first reading, the prime minister stressed that by instructions of President YELTSIN fund in this proportion will be fulfilled. Appropriate figures were recorded in the outlays section of the 1998 budget bill.

The State Duma lower house of Russian parliament Defense Minister Igor SERGEYEV appeared in the house today to explain the state and combat readiness of the Russian nuclear deterrence forces in a close- door session.

Russian-Turkish Imbalance

· Prime Minister Viktor CHERNOMYRDIN plans to visit Ankara, Turkey on December 15-16 to sign an intergovernmental agreement on mutual protection and encouragement of investments. Russia is con

Today's News Highlights

Russia

Gazprom Goes Global

Ericsson JV

Trade Volgas for Volvos

European Republics

Belarus Restricts Public Assem.

Baltic Banks Sued by Russia

South Caucasus & Central Asia

Georgian Pres. in Turkmenistan

Where's Georgian-Rus. border?

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December 5, 1997

Intercon's Daily

Russian government will pay back salary arrears owed to workers.

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

Ruble = 5,933/$1.00 (CB rate)

Ruble = 5,912|5,954/$1.00 (buy|sell rates)

Jul Aug Sep Oct Nov

Business

Gazprom Goes Global

· Russian gas monopoly Gazprom announced on Thursday plans to invest $40 billion over the next eight years to pay for a global expansion program. Gazprom is seeking to raise $9 to $12 billion by the end of 2000 through American Depository Shares, convertible bonds, secured and unsecured loans and Eurobonds. $19.5 billion will be spent on gas transportation projects. $11.3 billion will be spent on development of gas production in the Yamal peninsula. Gazprom has two big gas pipeline projects planned: the Yamal-Europe pipeline and Russian-Turkey link.

EBRD Loans Incombank $53 Million

· European Bank for Reconstruction and Development (EBRD) on Thursday signed an agreement with the Russian Incombank for a five year loan of $53 million, which signals a growing trust of the world banking community in the Russian financial market and economy in general. Incombank President Vladimir VINOGRADOV said, "The agreement with the EBRD is not only the acknowledgment of the successful work of Incombank, but a demonstration

of the trust of the world business to the Russian economy." Inkombank was established in 1988 as a limited partnership by eight founding companies and is the fourth largest bank in Russia in terms of assets.

The loan is a part of a bigger deal which envisages the sale by Incombank of 10 percent of stock to a major western bank. The EBRD also acquires 2.28 percent of Incombank shares. By selling 10 percent of its shares to a western bank Incombank may be accepted into the elite club of major international financial institutions where important decisions for the world economy are adopted. The agreement with EBRD will not only enhance the international positions of Incombank, but also increase its credit rating.

EBRD President Jacques DE LAROSIERE said that part of the loan would be invested into the development of the medium and small-sized Russian businesses. He added that, "By supporting the growth of one of Russia's leading private banks, the EBRD financing package will contribute to the development of the local banking sector and will promote the investment activities of small and medium-sized business in the Russian private sector."

Ericsson Signs JV with Russia

· Ericsson on Thursday signed a joint venture agreement with Sviazinform Nizhni Novgorod, a public telecom operator and Nitel, a Russian telecom vendor to produce Ericsson's radio access system DRA 1900 that is based on the global DECT-standard (Digital Enhanced Cordless Telecommunications). The agreement will meet the demand of wireless access communications for the Russian telecom market. Ericsson has a 51 percent majority share of the joint venture called Ericsson Sistema Telecom and the Russian partners own 49 percent. President of Ericsson Corporatia REDLING said, "This strategic step is another milestone in Ericsson's 115 years history in Russia. With this joint venture we will be the first local manufacturer of radio access products in Russia." The system can be used as an alternative or as a complement to wired access and is designed for use in urban, suburban and rural networks, bringing telephone and data services to residential and small business subscribers. The new factory to employ 100 Russians will be established in Nizhni Novgorod, Russia's fastest expanding financial area, 400 kilometers east of Moscow. The capacity of the production plant will gradually in

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crease to approximately 500,000 lines a year. Ericsson is the world-leading supplier in telecommunications.

Ericsson today singed a five-year frame agreement with Lattelekom to supply switching equipment to the Latvian fixed telecom operator. The first AXE contract under the agreement is worth about 93 million kronor. General manager of Ericsson's international office Ilkka JAENTTI said, "This is the first time Ericsson has signed an AXE contract with a Latvian operator." The agreement also includes support and telecom management systems.

Trade your Volga for a Volvo in Russia

· Russian Transport Minister Nikolai TSAKH and the Swedish Volvo representative Leif JOHANSSON signed on Thursday a memorandum of understanding on the production of buses and trucks in Russia. The sides have arranged to set up in the near future a joint group with participation of representatives from the Russian Transport Ministry and Volvo for settling issues of mutual interest. Direct investment in Russia is a real opportunity for Volvo to reach its aim of increasing its presence fivefold. There was no indication of the amount of investment that would be involved but it was estimated that 1,000 to 2,000 buses will be produced. First Deputy Minister Boris NEMSTOV, who attended the signing welcomed Volvo's decision to invest in Russia's car industry instead of just selling its cars.

Half-jokingly, NEMSTOV said he expected that Russian bureaucrats will be trading in their Volgas for Volvos since the cars will be considered home made. NEMSTOV was referring to his be-Russian-drive-Russian initiative, as a result of which some functionaries had to change expensive foreign cars for Russia's much criticized Volga. He added that the Russian car industry has "considerably improved," with production growth making 13 percent. Volvo intends to create an institution of subcontractors, which on the one side will be used for activities in Russia, and on the other deliver spare parts for the existing Volvo affiliates in Russia.

Lynch. Merrill Lynch was to structure financing in the local currency denominated T-Bills, which was worth about $450 million, reported the Financial Times. The IMF may have objected to the yield of the T-Bill indexed to the exchange rate of the dollar to the local currency, the gyryvnia. This would have guaranteed the lender against devaluation but created open ended liability for the Ukrainian government. Chairman of the national bank Victor YUSHCHENKO said the government believed it had to offer attractive yields to compete with other emerging markets. "We understand that alongside Ukraine there are other markets which will try to do their best to attract capital." The IMF last week released two installments of a stand by loan worth $100 million. Ukraine will borrow heavily this month to meet its budget obligations without printing money.

Belarus Restricts Public Assembly

· The Belarus Parliament passed a new law on Thursday restricting public meetings and demonstrations. Organizers of such events will have to obtain an official permit. Those who ignore the law will face criminal penalties. The new law codifies a 1996 decree issued by President LUKASHENKO, reported RFE/RL Newsline.

Latvia looks to Finland for EU Support

· Latvian Foreign Minister Valdis BIRKAVS met with his Finnish counterpart Tarja HALONEN in Helsinki on Thursday attempting to gain the Finnish backing for his country's bid to join the European Union (EU). The trip was part of the Latvian campaign to win favors among the EU member states for its eligibility in the first round of EU expansion talks.

He called for HALONEN'S support for a latest proposal by Sweden and Denmark to allow countries who already meet EU's criteria for legislative procedures to join the membership talks. The plan, as of now sets only the six countries recommended by the European Commission will be sitting around the initial negotiation table.

Strict New Law on Lith. Public Servants

· The Lithuanian government has submitted to the parliament amendments to the Criminal Code for tougher punishment of public servants who violate the law. Under the proposed amendments, employees of the state sector will serve up to five years in prison if found guilty of power abuse, procrastination, or bureaucratism in matters critical to the state. Falsification of documents by public servants will be

European Republics

IMF Blocks Ukraine-Merrill Lynch Bond Deal

· The International Monetary Fund (IMF) forced the Ukrainian government to call of a deal with Merrill

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punished by three year imprisonment.

Baltic Banks to Be Sues by Russia

· The Era Bank from Estonia, Aizkrauklesbank from Latvia, Estonian Forex-bank, and Parex-bank from Latvia are suspected of unlawful capital withdrawal from Russia and of servicing Russian enterprises without the Central bank's permission. Prosecutors in St. Petersburg launched criminal proceedings against these banks. A thorough investigation is being conducted to determine the circumstances of the crimes.

In June-August all 14 Baltic banks operating in St. Petersburg were checked by the local security service which exposed, " ... rude violations of acting tax, currency and banking legislation of the Russian Federation," stated an official release. Tax police estimate that the 14 banks have not paid a total of 200 billion rubles to the budget in half a year.

South Caucasus & Central Asia

Georgian President in Turkmenistan

· Georgian President Eduard SHEVARDNADZE arrived in Turkmenistan today to meet with President Saparmurad NIYAZOV and discuss the debts of Georgia for the Turkmen natural gas and the construction of a pipeline to the Georgian port of Poti on the Black sea. The Georgian debt for 1993-1994, which was rescheduled into a state credit, exceeds $93 million, while current debts amounts to $19.5 million. The two leaders are sure to discuss the agreement signed by Uzbekistan, Turkmenistan, Azerbaijan and Georgia on the trans-Caspian transportation route which will connect Central Asian republics with the Black sea, bypassing Russia. The two presidents are also to sign an agreement on avoiding double taxation, a consular convention, agreements on industrial cooperation, environmental protection.

SHEVARDNADZE will also meet with vice-president of the Turkmenistan parliament Abad REZAYEV, as well as deputy prime minister.

Where is the Border? Protests Continue

· According to Russian-Georgian agreements, the border between the two former Soviet republics corresponds to that fixed in 1957. However, Georgia believes that Russia should recognize the 1905 border which existed before the Soviet Union was created. The head of the Georgian border protection department Valery CHKHEIDZE, stating that the move is "unilateral and unlawful," urged Russia, "... to restore the status-quo on the border and withdraw the Russian post to the initial position."

An official statement from the Georgian Foreign Ministry says that, "the accusation that the Georgian state commission on the delimitation of the Georgian-Russian border stopped its work in February 1997 does not correspond to the real situation. So far as Georgia's statement is concerned on the refusal to work in the commission for the delimitation of the border, that decision was taken in response to unilateral and illegal actions of Russian frontier guards." The statement stresses that, "Georgia recognizes only a method of negotiations, accepted by international legal norms, and the fixing of the border with the help of international treaties as the only correct way to settle conflict situations."

Protest continue over the Georgian-Russian border guard move. Over a hundred young Georgians plan to set up a tent camp near the Russian border post, "... to attract the attention of the world public to the problem," because they claim Russian authorities have not provided any explanations for such actions.

Kazakhstan-China Relations

· Chinese Deputy Foreign Minister ZHANG Deguang met with Kazakh Foreign Minister Kasymzhomart TOKAYEV on Thursday to discuss developing relations between the two nations. TOKAYEV said Kazakhstan and China continue to increase high-level exchanges every year. ZHANG said China has persistently supported efforts Kazakhstan made. China and Kazakhstan signed a series of agreements, including one for broadening cooperation in gas and oil fields.

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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