DAILY REPORT ON RUSSIA

AND THE FORMER SOVIET REPUBLICS

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

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Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Thursday, January 22, 1998

speculations," ADAMISHIN said. Comment: Although no leaders have officially withdrawn from the CIS, many have stated their dissatisfaction in the Commonwealth, stressing that it is simply a means for Russia to continue its influence in the affairs of former Soviet Republics. One FSU Ambassador to Washington this week described the CIS as a train going no where.

Rus-Japanese Peace Talks Resume

· The Russian Foreign Affairs Ministry announced today following the first round of bilateral consultations on the peace treaty between Russia and Japan, that the two nations have established a joint Russian-Japanese commission to work towards the signing of a peace treaty between the two countries. The first meeting of the commission, to be co-chaired by foreign ministers Yevgeny PRIMAKOV and Keizo OBUCHI, will be held in Moscow in February 1998. Japan refused to recognize Russia's sovereignty over the South Kuril islands which it regards as its own "Northern territories." Alexander LOSYUKOV of the Russian Foreign Ministry said, "There can be no instantaneous decisions, and the Foreign Ministry simply is not authorized to make them." Results of the consultations must be presented to governments of Russia and Japan before to go for ratification by parliaments of the two states, LOSYUKOV said.

Space- Defense Min.Cooperation On Security

· Russian State Military Inspector and Secretary of the Defense Council Andrei KOKOSHIN said Tuesday that the Russian Space

Russian Federation

Politics

The CIS Future Needs To Be Defined

· Russian Deputy Prime Minister Valerii SEROV said on Wednesday that President Boris YELTSIN is seriously concerned by the state of the CIS, Itar-tass reported. Regarding meeting with "the four,"YELTSIN said, "I am pleased by the way today's deliberations were held—they were not bazaar-bargaining, but serious negotiations between serious leaders... We must strive to make the CIS as a whole work in this way." Presidential spokesman

Sergei YASTRZHEMBSKY said, "The president believes this year is to become the year of enhancing CIS. With this in view, he expects the government to show more initiative." Russian Minister for CIS Relations Anatolii ADAMISHIN believes the time has come to further define the goal of the CIS, whether it should be a "consultative organ" or a forum for economic integration. He suggested that the center of gravity is increasingly shifting to the economic sphere. "I believe that we shall eventually arrive at a common denominator, a free trade zone." ADAMISHIN conceded that the problems that have accumulated in inter-CIS relations do not mean that "the CIS is in need of rescuing." He expressed the hope that the March summit of CIS heads of state will yield agreement on a document outlining political relations within the CIS. "If a document is adopted, showing what we want from the Commonwealth, what its image should be like, it will be an important step forward, because we shall thereby determine the end goal and long-range purpose of our movement." He stressed that no leaders of the CIS countries have openly raised the question of withdrawing from the Commonwealth. But it is impossible not to see that there is a view in some countries of the Commonwealth that, "it is necessary to withdraw from the CIS if Russia fails to do this or that. These are political

Today's News Highlights

Russia

Economic Outlook By Ministers

LUKoil-Sidanko Merger?

Motorola Signs Network Agmt.

European Republics

Rus-Ukraine Economic Relations

Kiev-Minsk Cut Value-Added Tax

New Baltic Links

South Caucasus & Central Asia

Georgian Pipelines On Time

GIOC Need $500M For Project

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Agency and the Defense Ministry have agreed to cooperate in the space programs related to national security, including those to be subjected to the military reform. KOKOSHIN said the meeting focused on the maximum efficient use of various space means in the interests of defense and national security. Defense Minister Igor SERGEYEV and General Director of the Russian Space Agency Yuri KOPTEV outlined joint proposals on the strategy in that sphere for the next decade. The world tendency is such that space means of reconnaissance, communication, combat control, missile attack warning and navigation, "are a very strong multiplier of combat abilities of armament systems and arms of the armed services," KOKOSHIN said. Many military systems will be used for civilian goals.

Russia-Albania To Sign Friendship Treaty

· Albanian President Rexhep MEJDANI Wednesday accepted Russian President Boris YELTSIN's invitation to visit Moscow and sign a friendship and cooperation treaty. MEJDANI said he agreed with YELTSIN that his trip would be important for cementing a partnership between the two countries. It would also help strengthen stability in the region. YELTSIN also pledged support in the letter for stability and democracy in Albania, saying that Russia would deepen cooperation with the Balkan nation. A specific date for the proposed visit has not been set.

Economy

Ruble = 6,005/$1.00 (NY rate)

Ruble = 6,015/$1.00 (CB rate)

Ruble = 5,980|6,050/$1.00 (buy|sell rates)

Economic Outlook By Nemtsov, Chubais, Yasin

· Three varying predictions for the Russian economy in 1998 were released this week by top advisors First Deputy Prime Ministers Boris NEMTSOV, Anatoly CHUBAIS and Econmics Minister Yevgeny YASIN.

NEMTSOV said that economic growth in Russia for 1998 will increase from 4 to 5 percent. According to NEMTSOV, "economic growth in Russia is as inevitable as a sunrise...The vigor of the growth will largely depend upon the way the government, the State Duma...and Russian President Boris YELTSIN will coordinate their work." NEMTSOV believes that to promote the economic growth it is necessary to scale down taxes, namely to pass the Tax Code with a simplified system of tax exemption. Also, banks'

refinancing rates need to be cut and the rates fixed for the natural monopolies' services. NEMTSOV predicts that by the end of the year the interest rate would decrease. The refinancing rate of the Central Bank of Russia as well as the yields on government papers should drop this year to between 15 and 18 percent from 28 and 32 percent now.

CHUBAIS said the government must legislate reforms to reduce corporate taxes, cut gas and transport tariffs, and solve the crisis of non-payment of bills. He predicts that if these measures are taken, the economy could grow as much as 7 to 8 percent. CHUBAIS praised the economic accomplishments for 1997. Specifically, the rising gross domestic product by 0.4 percent and industrial output by 1.8 percent, the first time in eight years. Pessimistically, CHUBAIS said that a stable middle class in Russia may not emerge until 2015. Even then, with continued rapid economic growth, CHUBAIS says Russia would only rank between the fifth and tenth largest economies in the world, as reported in The Financial Times. In the short run, CHUBAIS said the main threat to the economy is another crisis on Asian financial markets.

Russian Economics Minister Yevgeny YASIN on Wednesday stated that Russia's GDP rise in 1998 will be 2 percent. "The stabilization will be steady, we do not anticipate a further economic slump, but we are still in the stage of a structural crisis," YASIN said. The minister ruled out an "economic miracle" in 1998, as an 8 to 10 percent GDP rise is not expected soon. Regarding positive trends registered in 1997, he said "we achieved a lot: lowering the tariffs of natural monopolies, and progress in housing reform." Budget expenditure will continue to be a key issue in 1998. If this percentage goes up, Russia will be unable to follow a softer tax policy, he said. Regarding foreign rating agencies' doubts that Russia will be able to maintain its financial achievements, he said such assessments were "unjust." The inflation rate is not expected to exceed 5 to 7 percent. YASIN predicts that the January inflation rate will be 1.6 percent compared to 2.2 in January, 1997.

Business

Motorola-Sviaztransneft Sign Agreement

· Motorola Radio Network Solutions Group (RNSG) has signed an agreement with Sviaztransneft to

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supply a multi million pound ARCNET trunked radio system for phase II of its global telecommunications network in the Russian Federation, according to a company press release. Sviaztransneft supplies state of the art communications primarily for oil pipeline and extracting enterprises stretching across the entire Russian continent. This latest Motorola contract is part of its long term development program to re-equip the network by 2010. The finished system will incorporate digital switching as well as trunked radio telephone and satellite communications.

Director General of Sviaztransneft Aftandil MAMEDKHANOV explained that, "The Motorola equipment will help us to set up advanced inter-operable communications at key areas along the pipelines, thereby increasing the reliability and effectiveness of the network. As well as expanding current capacity for its, primary purpose, the new technology will eventually allow us to reduce the number of fixed channels so we can offer group digital streams with billing on minute basis to other industries, private organizations and individuals." The Sviaztransneft network is connected to other services including WC Russia, Gazprom, Ministry of Railways and other organizations. The network has been ranted MoC license, which ensures inter-redundance and allows it to offer communications services to other operations.

Motorola is one of the world's leading providers of wireless communications, semiconductors and advanced electronics systems and services. Sviaztransneft is an open joint stock company comprising 16 affiliated members including 15 industrial-technical communications departments (PTUS) who provide regional telecommunications networks.

Uneximbank Neither Confirms/Denies Merger

· A representative from the powerful Uneximbank , which owns a controlling interest in the Sidanko Oil Company, on Wednesday neither confirmed nor denied a report about the alleged intention of Sidanko's merger with another Russian oil giant LUKoil. Head of Uneximbank's information department Larisa ZELKOVA told reporters LUKoil is the most developed Russian oil company, and an alliance with it would be very advantageous. ZELKOVA said she did not believe this would happen in the near future. A meeting of Uneximbank's president Vladimir POTANIN and LUKoil's head Vagit ALIKPEROV,

however, has been planned for the weekend to possibly discuss the merger of LUKoil and Sidanko.

According to an official from NIKoil, LUKoil's register holder, LUKoil and Sidanko have no economic reasons for a merger. A merger could be only explained by political interests of financial and industrial groups. Clearly, a possible merger between LUKoil and Sidanko is a response to the Sibneft and Yukos merger, which created the Russia's biggest oil holding. The combined capacity of LUKoil and Sidanko would be higher than that of Yuksi.

European Republics

Rus-Ukraine Economic Relations

· Ukrainian President Leonid KUCHMA and Russian President Boris YELTSIN will meet outside Moscow on January 30-31, to discuss a long-term bilateral economic program for 1998-2007. The program and a respective treaty are expected to be signed during KUCHMA's official visit to Moscow scheduled for February. Following a meeting in Moscow with his Ukrainian counterpart Gennady UDOVENKO to prepare for the upcoming visit, Russian Foreign Minister Yevgeny PRIMAKOV said Moscow and Kiev have no problems, "that would divide us or place us on different sides of a barricade." PRIMAKOV predicted that the Russian State Duma will ratify the friendship treaty signed with Ukraine last May. Duma Speaker Gennady SELEZNEV has also said the Duma will approve that treaty when it comes up for debate in early February. State Duma chairman Gennady SELEZNEV said that its ratification in the Russian parliament, "will not be easy," adding however that lawmakers have even more questions about the agreement on the division of the Black Sea fleet.

Ukraine-Belarus To Abolish Value-Added Taxes

· Tuesday Ukrainian President Leonid KUCHMA and President of Belarus Alexander LUKASHENKO

discussed problems and prospects for the development of bilateral relations in the economic sphere.

The two sides agreed on the main components of the mechanism for the abolition of value-added taxes on goods imported to the country-partner. A package of Ukraine-Belarus documents will be prepared in accordance with the scheme of taxation of foreign economic operations between Ukraine and Russia

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which will come into force from February 1. Prime Minister of Ukraine Valery PUSTOVOITENKO

will visit Minsk in early February to accelerate the implementation of the presidents' decisions.

New Baltic Links

· 11 Prime Ministers of The Council of Baltic States member nations, which include Russia, Norway, and Iceland, opened a meeting today to develop plans for long term cooperation. In 1990, 35 percent of Soviet trade passes through Baltic Ports, including St. Petersburg. In 1997, this figure, based on Russian and Finnish studies, increased to 45 percent. The volume of transit traffic through the Baltic States is due in part to Latvia and Lithuania's road and rail links to the Russian port Kaliningrad. Interest in the region is further increasing as a result of Gazprom's investment in a pipeline running through Belarus and Poland to Northern Germany. The council will focus on the development of democratic institutions, protection of the environment, and means to combat organized crime and money laundering.

Russian Prime Minister Viktor CHERNOMYRDIN will join the council, providing him an escape from possible political crossfire. CHERNOMYRDIN, after last weeks reshuffle, is responsible for the interior, finance, defense, foreign, and fuel and energy ministries. This unprecedented amass of power leaves him vulnerable on three fronts. His ability to negotiate deals and devise policies, rather than implement them, will be tested. His political enemies and presidential candidates are now forced to state their claim against him for the presidential position. Finally, it is unclear how President YELTSIN may react to CHERNOMYRDIN's powerful strong hold, which challenges the President's authority.

South Caucasus & Central Asia

GIOC-Socar-AIOC Georgian Pipeline

· Deputy Chairman of Georgian International Oil Corporation (GIOC) Nikolai GVAZAVA said Wednesday that renovation of the pipeline from the Azeri-

Georgia border to the Black Sea Port of Supsa will be completed on time. His statement is in response to Vice President of Azerbaijan state oil company, Socar Akhmed ZEINALOV who said the renovation would require more time. "Georgia will honor its obligations under an agreement with Azerbaijan and the Azerbaijan International Operating Company [AIOC]," GVAZAVA said. He added that Azerbaijan was facing difficulties with its renovation of the pipeline connecting the Caspian Sea to the Azeri-Georgian border. In fact, he said, "As far as I know, Azerbaijan is not going to restore its pipeline, but build a new one because the pipeline is damaged much more than they expected," as reported in The Journal of Commerce Under the agreement Georgia is to provide its existing pipeline for Azeri Caspian early oil transit to Supsa. A consortium led by BP and Amoco established AIOC for exploration purposes.

Georgia Needs $500M for Gas Pipeline

· The Georgian International Oil Corporation reports that it will need $500 million to rehabilitate the country's main gas pipeline. The estimated figure include necessary funds for the extra capacity being added to this 200 km pipeline. Russia is panning to use this pipeline to transport gas to Turkey as part of a major contract signed last year. Georgia will benefit from tariffs levied on gas transportation. Georgia is also seriously considering transporting gas from Turkmenistan and Kazakhstan. The European Union's TACIS program is providing funds for technical and economic evaluation of such proposed projects, reported the Caspian Business Report.

Russians Move Int'l Space Station to Baikonur

· A spokesman for the Khrunichev Space Research and Production Center announced that the first component of the future the Russian-made International Space Station will be shipped by rail from Moscow to Baikonur on January 27. The space outpost to replace Russia's 12-year-old Mir is to be launched in orbit. A Proton-K booster rocket w ill be delivered to Kazakhstan's Baikonur space port together with the cargo module in March.

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

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