DAILY REPORT ON RUSSIA

AND THE FORMER SOVIET REPUBLICS

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Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Monday, January 12, 1998

Russia's material and financial expenses, it said. It will also unify legal norms and acts suitable to the border sphere into the Russian Border Code, and make its structure consistent with Russia's financial and economic situation. This process seems to reflect steps being undertaken within CIS countries for greater control of their own borders.

Russian-Chechen Talks "Get Off The Ground"

· The Russian delegation led by Deputy Prime Minister Ramazan ABDULATIPOV, who heads the delegation as chairman of the state commission on stabilization of the situation in Chechnya which includes First Deputy Fuel and Energy Minister Viktor OTT and the Chechen delegation led by Shamil BASAYEV held talks on Chechnya's economic restoration, the status of Grozny's airport Severny, and relations between the two in Grozny on Saturday. ABDULATIPOV said, "there are much politics and too few acts" concerning relations between Moscow and Grozny. Russian and Chechen government officials confirmed their willingness to cooperate in order to make economic relations between Moscow and Grozny, "get off the ground." The Russian government's representative in Chechnya, Georgy KURIN, said that the sides planned, "to work out joint rules of the game" and set the schedule for the program of Chechnya's restoration. He said Chechen leaders had offered their draft of the program which was approved by MASKHADOV. Russia earlier had sent to Chechnya a federal program which earmarks 16 trillion old rubles ($2.6 trillion) plus $1 bil

Russian Federation

Politics

Russia's WTO Membership Could Take Years

· The European Commission has concluded that Russia will be unable to join the World Trade Organization (WTO) this year. In fact this process could take years. The European Union's (EU) executive body noted that Russia had not submitted offers to the WTO since 1993, when it sent its application to WTO's predecessor, the General Agreement on Tariffs and Trade. This has been a great disappointment for WTO members, who intensified work over the past years to accelerate the Russia's membership. One of the problems with Russia's application was that Moscow was not prepared to make any "standstill" commitment on tariffs, the European Commission said. Russian Prime Minister Victor CHERNOMYRDIN assured President of the European Commission Jacques SANTER that there would not be an increase in overall tariffs. This gesture was aimed at improving Russia's negotiating position. However, Moscow later decided that the tariff-cut plan for 1998, would not be implemented. Other issues effecting Russia's application include intransparent customs legislation, a range of non-tariff barriers, poor intellectual property protection, and reluctance to join WTO's Government Procurement Agreement.

Russia Increases Border Security

· The Russian Federal Border Guard Service said that its main tasks this year are to set up and strengthen a security zone along the country's border, in response to NATO's eastward expansion, the Interfax news agency reported Saturday. The Russian Federal Border Guard Service will improve border cooperation with the neighboring countries, especially with the member states of the Commonwealth of Independent States (CIS), in hopes to save

Today's News Highlights

Russia

Rus-Chechen Talks

Chechn Cabinet Submitted

Foreign Currency Tax Rejected

Russia Increases Alcohol Tax

Harvard Host Investment Conf.

Aeroflot Leases 2 Boeing Planes

European Republics

German Presid. to Visit Ukraine

South Caucasus & Central Asia

Rusian PM Discusses Pipelines

Politics-Economics-Business

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January 12, 1998

Intercon's Daily

lion for revitalizing the Chechen economy. KURIN said these funds are to come not only from the federal budget but also as investment and proceeds from joint economic projects, such as oil transportation. The flow of finance is to be rigidly controlled by both sides. KURIN said stabilization in Chechnya requires free economic zone like Ingushetia's and customs concessions to Chechnya.

As for the Severny airport, KURIN cited, "agreed concrete acts and decisions," in sight. Chechens believe the airport must be international. He said Severny's technical conditions so far allow flights only in Russia and CIS states. Meanwhile, deputy director of the Federal Border Guard Service Alexander YEREMIN and first deputy head of the Chechen border guard and customs service Zhambulat SAMKHADOV met to discuss Severny airport customs and security on the Georgian border. SAMKHADOV said that the Russian delegates did not object to Chechnya's initiative to guard the border it shares with Georgia, but Russia still believes that federal border guard and customs officials should be posted at Severny airport. However, Chechnya insists that its border guard and customs services can cope with the flow of goods and vehicles entering the republic themselves. "This issue should be settled at the highest level in Moscow and Grozny," SAMKHADOV said. KURIN added that the border service remains an unsolved problem. Shamil BASAYEV noted that his republic is willing to cooperate with Russia. "Chechnya expects Russia to fulfill its obligations, especially in the economic sphere.... Then cooperation in other areas will develop successfully," he said.

There are signs of a, "serious breakthrough" in relations between Russia and Chechnya, Vice-Prime Minister Ramazan ABDULATIPOV said. He regretted that many orders and instructions concerning assistance to Chechnya issued by the Russian president and government are not fulfilled. ABDULATIPOV stressed that Russian-Chechen relations, "should develop in an open and honest way." He will meet President Boris YELTSIN at the end of January to report the results of his trip, the situation in Chechnya, and the first steps taken by his commission for the stabilization of the economic situation in Chechnya. He believes that BASAYEV is committed to normalizing relations between Moscow and Grozny.

Chechnya's Cabinet Submitted For Approval

· Former Chechen commander Shamil BASAYEV has sent a proposed draft list of cabinet members to President Aslan MASKHADOV for approval. MASKHADOV is expected to make up his mind within days. Sources close to BASAYEV told Itar-Tass that posts in a new government will be as follows: Kazbek MAKHASHEV as deputy prime minister in charge of power ministries, Akhmed ZAKAYEV as deputy prime minister and culture minister, Khozh-Akhmed YARIKHANOV as overseeing the oil industry, Islam KHALIMOV as deputy prime minister in charge of social programs, and Movladi UDUGOV as deputy prime minister, foreign minister. ZAKAYEV confirmed that Chechnya is planning to develop a defense ministry to be led by Vice-Prime Minister Ruslan GELAYEV. MASKHADOV, who is president and prime minister under the constitution, has shown no intention of giving up premiership. This leaves a possibility that BASAYEV may become acting prime minister in a new government.

Economy

Ruble = 5,974/$1.00 (NY rate)

Ruble = 5,976/$1.00 (CB rate)

Ruble = 5,951|6,001/$1.00 (buy|sell rates)

Double Tax on Foreign Currency Rejected

· Russian President Boris YELTSIN rejected a bill that doubles the tax on purchases of foreign currency. The bill was passed by the State Duma on December 18, 1997, and approved by the Federation Council on December 24. It provided an increase of the tax from 0.5 percent on the purchased foreign currency sum to one percent. In the opinion of the president, the bill does not fully correspond to the Russian legislation. The 60 percent of tax proceeds were to be distributed to the federal budget and 40 percent of the proceeds to regional budgets. The tax was first introduced July 29, 1997, and expected to bring about one trillion old rubles worth of revenues.

Russian bankers differed in their opinion about the tax consequences. Some claimed people would stop buying dollars and deposit their money in rubles, other said that individuals, especially shuttle traders, would continue buying foreign currency. The bankers unanimously agreed that the tax would result in a slight increase of the dollar exchange rate because the banks would include the tax sum in the foreign

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currency cost price. A total of $51.57 billion were sold by banks to individuals in 1996, and over 132 trillion rubles were spent by individuals to buy foreign currency from banks in the first five months of 1997, according to the State Statistics Committee.

Russia Increases Alcohol Tax

· Russian President Boris YELTSIN signed into law a substantial tax increases on the import, production and sale of alcohol. According to the law, the price for alcohol import license will be raised 15 times, to 83,500 new rubles, nearly $14,000. A license to distill, bottle, stock and sell alcohol is now 41,750 rubles ($6,958). The law is not valid for alcohol-containing medicines, perfumes and make-up.

Harvard Hosts US-Russia Investment Conf.

· Deputy Prime Minister, Economics Minister Yakov URINSON, presidential administration deputy chief Viktoria MITINA, Moscow Mayor Yuri LUZHKOV, business tycoon Boris BEREZOVSKY, and foreign investor billionaire George SOROS attended the Russian-American investment symposium at the Harvard University Kennedy School of State Government. With the fiscal deficit growing at a fast rate, tax collections down, and a slight growth in GDP, those in attendance were interested on how Russia plans to maintain economic stability. MITINA cited opinion polls that she said found more than a half of Russians to see 1997, a better year compared to Russia's previously troubled years. She said a still larger percentage expect the life to further improve. The implication is that social stability is adding to political and economic, MITINA said. The Russian speakers cited economic and social indicators to suggest that Russia's situation has restored to stability implying a better investment climate.

BEREZOVSKY believes that struggles between the "new with old" [thinking] is over in Russia. The changes are now irreversible. Russia has entered a phase where the "new" [entrepreneurs] are competing against the "new" [political forces]. He said major results of 1997, indicated that this competition can be creative instead of destructive. This competition depends on foreign investment and privatization. Comment: One way to interpret BEREZOVSKY's analysis is to say that he sees himself as an evolutionist and CHUBAIS as a revolutionist. He concluded his remarks by asserting that it was unjust to describe CHUBAIS's actions as an

attempt to organize the theft of state property as George SOROS implied. SOROS, whose funds have invested more than $2.5 billion in Russian industries, urgently called on Russia to open up more to foreign investment and reform its tax system. Tax arrears are now the major cause of low tax collections. "This is an intolerable situation, and it has to be dealt with early in this year. His statement comes only days after Russia's deputy finance minister Mikhail MOTORIN in charge of tax reform, said the code would not be implemented in full until 1999 as it needs further amendments. The dysfunctional tax system in Russia fell short of its target collections by 35 percent in 1997, which is worse than collections in 1996. Nearly 16 percent of all tax collections are remitted in a barter form rather than cash. "It is critical to end the practice of permitting non monetary tax payments," said deputy managing director of the International Monetary Fund (IMF) Stanley FISCHER. The IMF last week released $670 million loan to Russia, which had been stalled due to poor tax collections.

Regarding foreign investments, Economics Minister Yakov URINSON said he was unsatisfied with the volume of foreign investment in Russia and called them "kopeck-worth." He said they account for less than 2 percent of the world investment market valued at $300-320 billion. "Of course I'm also to blame for this, since the economics minister is responsible for investments." He added that it is difficult to speak about investments when all free money is used to pay debts to public sector workers. URINSON said 1997, "has been for Russia an important step on the road to macroeconomics stabilization and resumption of economic growth." Russia's production recession was halted in 1997, for the first time in the last decade, inflation was reduced and a positive trade balance held, URINSON said. "Over the past six years, Russia has overcome many difficulties on the road from the totalitarian state to a democratic society with a market economy. In that same time our political and economic relations with the West have changed in a radical way." URINSON feel the time is ripe for a new-quality cooperation between Russia and the West.

Business

Aeroflot Leases Boeing Aircraft

· Russia's Aeroflot airlines has signed an agree

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January 12, 1998

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ment to lease two Boeing 777-200 jets from International Lease Finance Corp. The new jets, to be delivered in April and October, will be used on the most heavily-traveled routes: Moscow-New York and Moscow-Tokyo. Aeroflot said it would continue with a plan to re-equip the Russian flag carrier with Western aircraft. Aeroflot currently operates a mixed fleet including two Boeing 767s, an old McDonnell Douglas DC-10, eight Airbus-310 jets leased from the European manufacturer, and dozens of aging Russian-made TTupolev and Ilyushin jets. Last year Aeroflot decided to order 10 Boeing 737 short-haul jets for European routes. The planes will be delivered this spring.

been put off several times, Russian Prime Minister Viktor CHERNOMYRDIN is expected to negotiate the opening of former Soviet pipelines to carry Turkmenistan gas supplies which has been closed since last March. Russia reduced the flow of Turkmen gas to Western Europe in late 1994, in order to use the capacity for itself. Volumes were partially restored after Moscow sent Turkmen gas to poor nations that could not repay Turkmenistan. The effect on the Turkmenistan economy has been devastating. The IMF estimates that gas exports in 1997, earned only $294 million, a 71 percent drop from 1996, reported The Journal of Commerce. Gas accounted for 60 percent of Turkmenistan's total exports in 1996. So what motivates Russia to re-open these pipelines? Turkmenistan's recent opening of a $190 million gas link with Iran will compete with Russia to provide gas to Turkish markets. Russia has signed a $20 billion deal to increase gas exports to Turkey five fold by the year 2010. Turkmenistan has also agreed to provide gas to Turkey through a pipeline with Iran which has yet to be built.

By opening the pipelines through Russia, Moscow hopes to rebuff unnamed "third forces," from interfering with cooperation between Russia and Central Asian republics. Recognizing Turkmenistan's right to decide independently where and which way to export its gas, CHERNOMYRDIN is sure that Russian transit is the cheapest. "All this was calculated back in Soviet times. The southern corridor will be 100-200 percent more expensive, and it should be calculated what damages the state will suffer," he said. Russia and Turkmenistan have not agreed on the price of Turkmenistan gas, brought to the Russian border, or the cost of its transit. Turkmenistan claims that a Russian price can make gas too expensive. Ukraine is one of the main consumers of Turkmenistan gas. Government officials stated that Ukraine does not intend to pay more than $66 for 1,000 cubic meters of gas in 1998. Other topics for the bilateral talks will include participation of Russian firms in the construction of gas pipelines to Pakistan and Turkey.

European Republics

German President To Visit Ukraine

· German Foreign Ministry state secretary Peter HARTMANN and Ukrainian First Deputy Foreign Minister Anton BUTEIKO held consultations in Bonn to discuss German President Roman HERZOG's visit to Ukraine in February 3-6. HARTMANN and BUTEIKO focused on a spectrum of political relations between the two countries. They discussed the European Union-Ukraine agreement on partnership to be in force soon, Ukraine's gradual involvement to European security structures, prospects for economic cooperation and Ukraine's role in the future united Europe, a spokesman added. The visit to be followed by the first bilateral consultations at the highest level between Ukrainian President Leonid KUCHMA and German Chancellor Helmut KOHL should not only demonstrate the high level of understanding between the two countries, but also assist in the deepening of economic cooperation and encourage more German investors to participate in economic projects in Ukraine.

South Caucasus & Central Asia

Russia Reevaluates Turkmen Gas

· In a visit to Turkmenistan this week, which has

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

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