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

Tuesday, January 20, 1998

Russian Federation

Politics

EU Antidumping Duties on Russian Goods

· The European Union (EU) has threatened to impose anti-dumping sanctions on the Russian export of ammonia nitrate, which may cause considerable losses in Russia's agricultural market. Russia controls over 20 percent of the market in ammonia nitrate with the EU and sells six million tons annually. The decision for levying extra duties on imports of Russian ammonia nitrate to EU countries, was expected to be 30 dollars per ton or roughly a third of the cost per a ton of ammonia nitrate. This was adopted by an anti-dumping committee of the European Commission. The decision must be endorsed by members of the European Commission and the Council of Ministers of the EU at the level of trade ministers before it can go into effect. The ammonia nitrate imported from Russia has been widely used in clandestine deals when the price was sold on the market lower than the declared customs documents. A spokesperson for a British company selling Russian fertilizers said that the duties decision is a victory for European fertilizer manufacture lobbyists, which have been losing in competition with Russian chemical plants.

Primakov-Canadian Minister/ BEAC Session

· Russian Foreign Minister Yevgeny PRIMAKOV, who is taking part in the 5th session of the Barents

Euro-Arctic Council (BEAC), today met with his Canadian counterpart Lloyd AXWORTHY in Lulfa. The sides focused on economic cooperation between the two countries, including issues of cooperation in the Arctic and North. In this connection, the ministers discussed the visit of a Canadian trade and economic delegation headed by Prime Minister Jean CHRETIEN scheduled for fall 1998. Each side also exchanged opinions on a number of urgent interna

tional problems, including the situation in Bosnia, Iraq, and the problem of the Middle East settlement.

At the Barents session, member countries confirmed their intention to further cooperation in the Barents region in the interests of promoting trust and good neighborly relations and solving economic, social, environmental and other problems.

Yeltsin Blasts Ministers on Wage Arrears

· Russian President Boris YELTSIN returned to the Kremlin from his holiday vacation to blast the cabinet's inability to pay off state sector wage arrears by the 1997 deadline. YELTSIN said a major contributor to the late salary payment is an incomplete account transfer system. A number of problems, including the wage arrears, are left over from 1997. YELTSIN told Prime Minister Viktor CHERNOMYRDIN and deputy prime ministers Boris NEMTSOV and Anatoly CHUBAIS at a top level cabinet meeting this was unacceptable. While some federal committees were to be blamed for failing to allocate state funds immediately to local authorities, the cabinet should still be held responsible for the wage problem. The meeting reviewed the practice of economic and social policies in 1997, and discussed the cabinet's work schedule as well as each top officials' new responsibilities for 1998.

YELTSIN approved CHERNOMYRDIN's restructuring of duties amongst the ministers. CHUBAIS will co-ordinate efforts to increase budget revenues. NEMTSOV will concentrate on

Today's News Highlights

Russia

Russia GDp Rises

Japan Fosters Russian Business

Yukos-Sibneft Merger

European Republics

Rus- Belarus Union Agenda

South Caucasus & Central Asia

Gerogia on Abkhazian Peace?

Ukraine-Uzbek Sign Agreements

Kazakh to Build Modern Army

Kazakh Oil Reaches China

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January 20, 1998

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housing, transportation and electricity reform. CHERNOMYRDIN's role, as a result of cuts to the young reformers, will encompass overseeing the fuel and energy ministry, the finance ministry, and the government's media relations. Many believe that by adding these powerful ministries to his already powerful role, CHERNOMYRDIN is staking his claim to be the next President of Russia. NEMTSOV has said he would not run in the next presidential elections, but would support Moscow Mayor Yuri LUZHKOV.

Economy

Ruble = 6,000/$1.00 (NY rate)

Ruble = 6,001/$1.00 (CB rate)

Ruble = 5,972|6,0300/$1.00 (buy|sell rates)

Russia's 1997 GDP Growth

· Russia's GDPgrew by 0.4 percent in comparable prices for 1997, while industrial output increased by 1.9 percent for the first time since economic reforms. The Ministry of Economics said that production growth was reported in the fuel industry, ferrous and non-ferrous metallurgy, chemical and petrochemical industry, machine-building, forestry, wood-working and pulp-and-paper industries and other sectors. Production decline slowed down in the light, food, building materials, automobile and printing industries. Alcohol production increased because of the government's measures preventing illegal alcohol production and imports. Agricultural production grew by 0.1 percent in 1997, compare to its 1996 drop of 5.1 percent. Overall grain production was 88.5 million tons, a 27.6 percent increase since 1996.

Russians Buy Less Foreign Currency

· Central Bank First Deputy Chairman Sergei ALEKSASHENKO said that Russian citizens bought 20 to 25 percent less foreign currency in the fall of 1997, than in the same period of 1996. He added more people began to keep their money in commercial banks in December 1997, and January 1998, after the Central Bank raised its refinancing and deposit rates. ALEKSASHENKO said the bank's refinancing rate is "normalizing" and as soon as there is stable demand for the ruble, the bank may consider slashing it.

Japan to Foster Russian Small Businesses

· Foreign Minister Keizo OBUCHI and chairman of

Russia's State Committee for Support of Small Businesses Irina HAKAMADA in Tokyo today endorsed a plan to foster Russia's small and medium businesses as part of a bilateral agreement. According to the agreement, Japan will set up centers that support small and medium companies in Russia and provide needed technology through the dispatch of experts and money. The development of small businesses in Russia, which is struggling to put its market-oriented economy on a stable course, was emphasized as one of the top priorities in the HASHIMOTO-YELTSIN plan in November.

Shuttle Trade Declines

· The Ministry of Foreign Economic Relations on Monday reported that the "shuttle trade" in Russia decreased by 7.1 percent to 20 percent of imports to Russia, about $14.6 billion in the first 11 months of 1997. It continues to decline. "Shuttle trade" refers to small businessmen who travel abroad and return with goods to resell in Russia. "Shuttle traders" brought $13.4 billion worth of goods into Russia and took $1.2 billion worth of commodities out of the country during the same period. The share of CIS countries in "shuttle trade" increased from 29.7 percent in 1996 to 29.9 percent in 1997, while 76.2 percent of Russian "shuttle traders" made their buys in non-CIS countries. The bulk of unorganized imports came from Turkey, Italy, China, Syria, the United Arab Emirates, Thailand, Poland, Lithuania, and Ukraine.

Business

Yukos-Sibneft Merger Creates Oil Giant

· Russia's leading oil companies, Yukos and Sibneft, announced Monday that they are merging to create the world's largest oil company, Yuksi. This merger may spur other consolidations in Russia, ultimately making it more difficult for foreign investors. The president of the Yuksi will be Mikhail KHODORKOVSKY, board chairman of Yukos-Rosprom. KHODORKOVSKY said the merger is aimed at creating a, "world-scale and world-class integrated oil company with strategically located operations throughout Russia." KHODORKOVSKY says Yuksi will pump nearly 200 million barrels of oil in 1998, a third of Russia's total projected output, and long-term investments will reach $9 billion. KHODORKOVSKY says Yukos, which is owned by the Menatep-Rosprom holding, would control 60

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percent of the new company, while Sibneft, which is an interest of Russian tycoon Boris BEREZOVSKY, would control 40 percent. This alliance is both financially and politically powerful.

Prime Minister Viktor CHERNOMYRDIN attended the signing ceremony, calling the merger a "landmark deal." He said that the consolidation will make it possible to increase oil extraction and refining both in Russia abroad as well. The Prime Minister believes that in terms of size, the new company is ideal for the oil industry. In 1992, the government hoped that there would be four or five strong oil companies in Russia, he recalled. "At any rate, the main task facing the new company is to ensure not only quantitative, but also qualitative growth," he said. KHODORKOVSKY noted that CHERNOMYRDIN's presence signified that the government supports the creation of the new powerful oil structure. KHODORKOVSKY has no doubts that the Anti-Monopoly Committee would approve the merger. CHERNOMYRDIN said he plans to meet Russian oil companies leaders to focus on tax issues.

The 1997 oil output of Yukos was 35 million tons and 18.6 million tons for Sibneft. The merger dethrones LUKoil, with an output of 58.5 million tons, as Russia's largest oil company. Major constituents of Yukos are joint-stock companies Yygansneftegaz, Novokuibyshevski NPZ refinery and Samaraneftegaz. The charted oil store of Yukos is above two billion tons and the total capacity of its refineries 33.3 million tons. Founders of Sibneft (Siberian Oil Company) are joint-stock companies Noyabrskeneftegaz, Omsk Refinery, Noyabrskeneftegazgeofizika and Omskenefteprodukt. The joint company's oil refineries will be capable of producing over 2 million barrels per day. Yukos and Sibneft earned gross revenues of $5.2 billion and $3.13 billion respectively in 1997. Yuksi plans to bid in the privatization sale of state-owned Rosneft, Onako, and Slavneft oil companies, if it can attract Western partners with deep pockets. In recent months a consolidation in the Russian energy sector has seen the formation of alliances between Sidanko and British Petroleum, and Russia's Gazprom and Royal Dutch/Shell.

Yuksi also will need to concentrate on fulfilling minority shareholders concerns who feel they have been given a raw deal. Stock brokers and analysts

in Moscow, including Creditanstalt and Brunswick Brokerage have issues warnings that minority shareholders in Yukos and Sibneft controlled subsidiaries are at risk. Yukos and Sibneft both have been repeatedly accused of compensating for mismanagement and poor cash flow problems by stripping subsidiaries of their assets to fuel larger projects. KHODORKOVSKY, however, promises to set new standards in dealing with minority shareholders, thereby protecting their rights.

Comment: It is unclear whether CHERNOMYRDIN's support of Yuksi, is based on his many years of experience in the fuel and energy sector and his close ties to gas monopoly Gazprom or if he is acting on behalf of the government. As Russia is still developing what type of capitalistic system will govern its economic policies: a free market system of competition or a corrupt "crony capitalism" dominated by a few elite financiers and businessmen, the government's approval of the Yukos-Sibneft merger may define the Russia's choice.

New Russian Financial Information Service

· Russia's Association of Private Investors, the Moscow Municipal Telephone Exchange and the Confederation for the protection of shareholders and corporate investors will launch a nationwide information service starting January 21. The service will offer information on the activity of all financial institutions (banks, joint-stock companies, funds, etc.) operating in Russia, as well as on those companies holding individuals' deposits which ran bankrupt.

European Republics

Rus-Belarus Union Agenda: Budget

· Russian Deputy Premier Valery SEROV, who is in charge of cooperation with the CIS countries, said that the budget of the Rus-Belarus Union will be discussed by the High Council of the Rus-Belarus Union on January 22. On the agenda of the High Council are a programs to combat the struggle against organized crime, approaches to settlement of political issues, and implementation of resolutions passed by the executive committee of the Rus-Belarus Union which met in Minsk on December 2,1997. An intergovernmental council of the union of the "four" will be attended by prime ministers of Russia, Belarus, Kazakhstan and Kyrgyzstan which

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intends to discuss a draft agreement on single economic space and a statute on the Council of heads of government and chairman of the Council of heads of government of the "four."

South Caucasus & Central Asia

Georgia For Peaceful Resolutions in Abkhazia

· Georgian President Eduard SHEVARDNADZE said Monday that the leadership of Georgia stands for a peaceful settlement of confrontation with the breakaway region of Abkhazia. SHEVARDNADZE said, "for this reason we have been continuing the negotiation process for the fifth year already, although it so far has yielded no positive results." SHEVARDNADZE noted that Georgia is against resumption of the war on Abkhazia and, "if somebody calls for the war, he must bear responsibility for it." He calls on the conflicting sides not to be carried away by emotion, but to continue the search for peaceful solutions. But, as Intercon reported on January 5, SHEVARDNADZE said that if there are no serious steps taken to resolve the Abkhazian conflict in the near future, the Georgian leadership will raise the question of conducting in Abkhazia a peacekeeping operation following the "Bosnian format." SHEVARDNADZE said Monday he hoped, "the international community will back such a proposal in case this question is raised."

Ukraine-Uzbekistan Sign Five Agreements

· Uzbekistan President Islam ABDUGANIYEVICH and Ukrainian Prime Minister Valery PUSTOVOITENKO signed a treaty of friendship and cooperation Friday in the Uzbek capital of Tashkent. The sides agreed to finance the bilateral scientific and technical cooperation, ensure relationships between Kiev and Tashkent, cooperation in the plant quarantine and cooperation in the governmental communications. The two leaders also reached agreement on joint railway construction in Uzbekistan and renewed an agreement on Ukraine's supply of technical weapons to Uzbekistan. Last year trade turnover between the two countries ran at $350

million, against $20 million in 1992, the Ambassador of Ukraine to Uzbekistan Vladimir SMETANIN said. Uzbekistan is a traditional supplier of cotton and metals to Ukraine. The export of Uzbekistan produced natural gas to Ukraine began this year and is expected to reach 6,000 million cubic meters in 1998.

Kazakhstan to Build a Modern Army

· Kazakhstan President Nursultan NAZARBAYEV said that Kazakhstan should build its army into a highly capable, efficient, professional and well-equipped armed force. He was quoted by the Kazakh Telegraph Agency as saying Kazakhstan is intensifying its efforts to construct a new defensive military theory and a military reform framework will be conceived by the year 2000. He said, with the growth of the national economy, the armed forces will be able to receive sufficient funds for equipment and technological innovation from 2000 to 2003.

The president said his country is currently working on an outline for arms and military technology development before the year 2005, which involves separating the functions of the department of defense and the army staff. He said measures will soon be taken to reinforce the public surveillance over the armed forces, which is an indispensable step in safeguarding the legal system and order inside the army.

Kazakh -China Oil

· The first train carrying oil from Kazakhstan's biggest oil field Tengiz arrived in China on Saturday. 3,500 tons of raw material will be refined in China, and if the quality of oil meets China's expectations, Kazakhstan will begin regular supplies to China. The volume of the supplies may exceed a million tons this year, Kazakhstan officials announced. The Kazakh-US joint company Tengizshevroil has resorted to using railroads to deliver its oil abroad because Russia has imposed strict quotas on Tengiz oil supplies through their pipelines. Last year, 3.7 million tons of oil was sent to Baltic and Black Sea ports. It was half a million tons more than delivered through pipelines.

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