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, January 16, 1998

Russian Federation

Politics

Prime Minister Defines New Duties for Cabinet

· Russian Prime Minister Viktor CHERNOMYRDIN said he signed a document on a re-distribution of Deputy Premiers' duties. First Deputy Prime Minister Anatoly CHUBAIS, "will be in charge of the entire economy, coordinating the actions of all agencies in realization of the medium-term development program of the Russian Federation," CHERNOMYRDIN said. However, CHERNOMYRDIN will now be responsible for the Ministry of Finance. Deputy Prime Minister Vladimir BULGAK will be in charge of matters concerning the government's interaction with media. Deputy Prime Minister Anatoly KULIKOV has retained charge of the Interior Ministry; he remains responsible for replenishment of the budget revenue. First Deputy Prime Minister Boris NEMTSOV will tackle reforms-related matters, devoting special attention to the housing-and-utilities reform, and the work of the Transport Commission. He has been relieved of handling, "matters that are purely within the province of the fuel-and-power sector proper." Deputy Prime Minister Ramazan ABDULATIPOV remains in charge of the state policy in the sphere of inter-ethnic and federal relations, as well as the development of local government. ABDULATIPOV will also control problems of regional policy and the socio-economic development of subjects of the Russian Federation, including matters dealing with the Chechen Republic, the development and support for the Northern territories and for small nations of the North, as well as the resettlement of people from the Northern regions. ABDULATIPOV will maintain cooperation with the Northern Caucasus Association. CHERNOMYRDIN noted that these changes are nothing sensational, as that as head of the government he has the right to change ministers responsibilities from time to time as needed.

New Chechen Government Approved

· Chechen President Aslan MASKHADOV approved Shamil BASAYEV's proposed new cabinet. Complying with the republic's constitution, MASKHADOV hold the posts of President and Prime Minister of Chechnya as well as commander-in-chief of the army. MASKHADOV signed a decree appointing First Vice-Prime Minister Shamil BASAYEV acting chairman of the government for the term of six months. Another First vice premier is Turpal ATGERIYEV. Vice Prime Minister Movladi UDUGOV will hold position of Foreign Minister. Vice Prime Minister Kazbek MAKHASHEV will oversee the Power Ministries. Vice prime ministers without portfolio will be Musa SHAKHABOV and Khamzat SHIKHDAYEV.

Meanwhile, Moscow Mayor Yuri LUZHKOV on Thursday called for Russia to guarantee full independence to Chechnya.

Russia-France Discuss Military Cooperation

· Russian Defense Minister Igor SERGEYEV and his French counterpart Alain RICHARD on Thursday met to discuss aviation and space research in connection with military cooperation between Russia and France. The two nations are considering several join projects. Among the joint projects is the production of trainer aircraft MiG-AT and transport planes AN-70 as aircraft of the future, meeting the toughest requirement by Russia, France and Europe.

SERGEYEV said that although military budgets are diminishing, security issues re

Today's News Highlights

Russia

Black Market 50% GDP?

Ford Invest $150M in Auto Plant

European Republics

Ukraine Farmer Benefits Reform

Belarus GDP Rises

South Caucasus & Central Asia

AIOC Project Complications

Georgian 1998 Econ. Forcast

Russia to Buy Turkmen Gas?

Kazakh Develops Telecom

Politics-Economics-Business

Page

Friday

January 16, 1998

Intercon's Daily

main important. "We seek mutual benefit and are setting up a permanent mechanism of consultations on basic problems of European security and strategic stability," the Russian minister said. RICHARD stated that the parties shared views on many international issues, in particular on security and the establishment of new balance in Europe. He called for friendly and trusting relations between the Russian and French Defence Ministers. The French minister praised the Russian-NATO act. He supported the idea that Russia take an appropriate place in Europe in the atmosphere of peace and cooperation.

Economy

Russian Black Market 50 or 25 percent of GDP?

· A US Treasury survey reports that Russia's shadow economy could account for 50 percent of its gross domestic output. The survey suggest that average living standards are far higher than officially stated, with millions of Russians moonlighting in second jobs, as reported by The Financial Times. If this is true, such activities testify to the entrepreneurial drive of millions of Russians to earn more money. The survey's authors, Larissa PYASHEVA and Igor BIRMAN feel that the Russian government must develop a plan to collect taxes on profits being earned on the black market, in order to improve the quality of governance. Many economists disagree with the survey's figures, stating that it understates the poverty problem. Goskomstat, the Russian State Statistics Committee, estimates that the shadow economy accounts for 25 percent of gross domestic output. This Committee, set up to monitor detailed manufacturing output, is ill-equipped to gather accurate data on the service sector and the shadow economy.

Nonetheless, other indicators also prove that the standard of living in Russia is far better than under communism. More Russians own television sets. Car ownership increased from 18 percent in 1990 to 31 percent in 1996. Over a third of Russians own an apartment, dacha, car, and hold a high level of disposable income. Presidential spokesman Sergei YASTRZHEMBSKY today announced that, "The President instructed the government and the secretary of the security council to submit within a month a joint plan for lessening the scale of the shadow

economy....which is a priority problem." YELTSIN's concerns developed as a result of a report from Security Council Ivan RYBKIN. RYBKIN is to report to YELTSIN monthly on measures taken against the shadow economy.

Ruble = 5,990/$1.00 (NY rate)

Ruble = 5,998/$1.00 (CB rate)

Ruble = 5,970|6,025/$1.00 (buy|sell rates)

Aug Sep Oct Nov Dec Jan

EBRD $117.7M Loan Electro-Metallurgical Plant

· The European Bank for Reconstruction and Development (EBRD) approved the release of a $117.7 million loan to the Oskol Electro-metallurgical works in the south-eastern Russian Belgorod region, according to an EBRD press release on Thursday. The money is to be used for modernization and expansion of the plant. $100 million will be released with an 8.5 years for repayment, another $10 million will be allocated for 5.5 years. The remaining 7.7 millions will be given as direct investments. It is planned that 18,000 people will be employed at the plant. Once the modernization is complete, the plant will become one of the largest Russian metallurgical enterprises, with an annual production of rolled stock making 2.27 million tons.

Business

Ford to Invest $150 M in Auto JV

· Ford Motor Company plans to invest about $150 million in a Russian car plant. Ford hopes to announce the joint production venture in the first half of 1998. Associate director for new markets Len MEANY said, "Our plan is to refurbish a part of the Russky

When you need to know it as it happens

Politics-Economics-Business

Page

Friday

January 16, 1998

Intercon's Daily

Dizel pant at Vsevolozhsk outside St. Petersburg. It is likely to be a joint venture, but the actual composition of the joint venture is under discussion with our prospective partners." Ford has been in negotiations for more than a year. Ford plans a fully equipped plant, with initial capacity of 25,000 cars.

Novovsibirskenergo To issue GDRs

· Russian power utility AO Novosibirskenergo on Thursday announced that it is more likely to issue Global Depository Receipts (GDRs) than American Depository Receipts (ADRs). Novosibirskenergo Chairman Leonif MALAMED said, "From the point of view of simplicity and clarity of ownership re-registration rights, it is better to issue GDRs, not ADRs. This very decision will be proposed to the board. I think GDRs are most likely to be issued." Other advantages to GDRs include less paperwork, requirements, and cheaper to issue. MALAMED believes that less information about the issuer may cause the price to fall, but said an increase in turnover and liquidity would compensate the fall. GDRs would cover all Novosibirskenergo shares in circulation. There are 113,524,401 common shares, and 2,550,218 preferred shares in circulation.

UES Electricity Complete 1997 Reforms

· Russian electric company UES's chief Boris BREVNOV announced that the electric sector reforms for 1997 have been completed and that further reforms would continue in 1998. "The [reform] model is alive, the model is developing, and the scheme has really created the conditions for our industry to get access to energy resources at low prices, which allows them to make their production competitive," BREVNOV said. In 1997, Russia launched a new wholesale market pledging to reverse a trend in which the industrial electric consumers pay up to three times more than market prices for electricity. It also promised to raise cash receipts and make producers more competitive. From July to December, 1997, cash receipts increased three times. Deputy of UES, Oleg BRITVIN said, "We have raised [cash receipts], and that is perhaps the most important task for 1998, to increase and increase and increase them."

Leonid PODOLYANUK announced that the government would not issue a decree for the mandatory purchase of grain. "For 1998, there has been no such decree, and according to my information there will not be one." The state will no longer require farmers to sell part of their grain at artificially low prices. The Ministry of Agriculture hopes this move will increase the incentive for farmers to produce, as now their full crop can be sold at market prices through commodity exchanges. The mandatory government purchases have been a source of conflict with farmers. In the past, the government would require the farmers to fulfill all state orders before exporting any of their grain, putting $400 million in grain export contracts at risk. The state also still owes farmers for several years of purchases. Ukrainian farmers will still receive 25 percent less than their world counterparts for their grain because of restrictions in place by Khilb Ukrainy, the grain storage and processing monopoly. Ukrainian farmers have hope that this will all soon change. As Intercon reported , Ukraine has decided to privatize Khilb Ukrainy, with 343 out of 550 enterprises to be sold by December, 1998.

Belarus GDP Grew in 1997

· Belarus first deputy premier Pytor PROKOPOVICH said today that Belarus's gross domestic product increased in 1997 by over 10 percent, dwarfing the 2.6 percent increase in 1996. Industrial production bolstered economic growth, increase over 17 percent compared with 3.2 percent in 1996. Agricultural output increase by over 4 percent. Exports accounted for 45 percent of the country's economy. "The economy has come along way. People are living better than before," PROKOPOVICH commented.

South Caucasus & Central Asia

AIOC Project Meets Complications

· Vice President of the Georgian Pipeline Consortium, a division of the Azerbaijan International Operating Company (AIOC) Denis STUART said that the Baku-Suspa pipeline has met some complications, but it will be completed on time. "The pipeline work we're finding far more difficult and complex than originally expected. There are far more holes than we counted two years ago." $150 million has been spent on the project so far, with an excess of $300

European Republics

Ukraine Grain To Be Sold at Market Prices

· In another move to reform Ukraine's grain sector,

When you need to know it as it happens

Politics-Economics-Business

Page

Friday

January 16, 1998

Intercon's Daily

million expected to be needed. The Baku-Suspa route is one of two AIOC plans to use to export its "early oil" output to the world markets. The other option runs from Baku to Novorossiisk. STUART noted that the Baku-Suspa route is the cheapest and shortest of the options. The Azerbaijan government has the final say over the politically sensitive decision to choose the route.

Georgian Econ. Forecast: Development in 1998

· Economics Minister Lado PAPAVA on Wednesday announced that, "1997 was the year of economic stabilization. 1998 will be the year of development." He forecasts the 1998 gross domestic product to rise by 11 to 13 percent and industrial output to between 14 and 23 percent. Inflation, he hopes will slow to 8 to 9 percent from 10 percent in 1997. PAPAVA and others believe strict monetary and fiscal policies will bring these dramatic improvements to the Georgian economy. The industrial sector needs to be expanded, he said. Only 30 percent of GDP was generated by industry, transport, communications, and construction sectors. Agriculture accounted for 29.4 percent and trade 25.2 percent of the economy, Reuters reports. The Economics Minister blames the poor industrial sector on Georgia's energy trouble. A debt of over $400 million has led Turkmenistan and Russia to strictly limit gas supplies to Georgian power stations to a cash-only basis.

Russia to Buy Turkmen Gas

· Russia's gas giant Gazprom, which is ready to purchase about 30 billion cubic meters of gas in Turkmenistan, believes the proposed price of $42 for 1,000 cubic meters on the central Asian republic's border is too high, Gazprom spokesman Gennady YEZHOV said on Thursday. "It is a clearly an excessive price" which cannot be accepted by anyone. "First and foremost, we should discuss such a global problem as price indicators. These are purely market calculations. But before we agree a price, we should find who will buy Turkmen gas, define his paying capacity and specify transit routes....As long as these aspects are not clarified, any talk about the

price is premature," he said. Both sides agreed to set up working groups to consider the issue. The groups might meet in Moscow on January 26.

Kazakh Develops Telecom Market

· President of the Kazakhtelecom Company Serik BURKITBAYEV met at the US Department of Commerce with some representatives from leading American telecom companies doing business or want to bid on the tender of ten or eleven telecommunication projects panned for 1998 in order to attract foreign capital, experience, and technologies. BURKITBAYEV explained that the telecommunications sector is among the priority ones in his republic. He noted that, "communications are probably the only system which we were able to save from disintegration after the collapse of the USSR."

Such projects include the building of the Kazakh sector of the Eurasian information line, which is to stretch "from Shanghai to Frankfurt." The new system is expected to assume a large part of functions linked with transit telecommunication services within the CIS. This transit is already yielding a profit of many millions in hard currency to Kazakhstan. Further development of television and satellite telecasting is a priority. BURKITBAYEV invited American businessmen to invest in this market, which gives access to a total of 350-400 million people not only in Central Asia, but also in the southern part of Russia, the Caucasus, Western China, Northern India, Iran and Afghanistan. Finally, the systematized integration of computer circuits and databanks is a necessity. BURKITBAYEV believes it is logical to set up a centralized computer bank, from which customers could draw universally accessible information at moderate prices, thereby saving their own resources for more vital businesses and corporate needs.

The Daily Report on Russia and the Former Soviet Union will not be published January 19, 1998 for Martin Luther King, Jr. Day

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

available for non-profit institutions.

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 1998, Intercon International, USA.

When you need to know it as it happens

Politics-Economics-Business

Page