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 23, 1998

Yeltsin Promises Again To Pay Wage Arrears

· Russian President Boris YELTSIN has promised to repay all wage arrears within the next few days, the Interfax news agency reported today. In his first 1998 radio address, YELTSIN noted that despite the efforts made by himself and the government last year, "the problem has not been settled." YELTSIN had urged the federal and regional authorities to fully clear wage arrears by January 1, 1998. The wage debts have still not been settled in six regions, although the money was allocated on time. According to First Deputy Prime Minister Boris NEMTSOV, the government had fulfilled its obligations by transferring 11.3 trillion rubles to the local authorities. "Large sums got lost in the republics, territories and regions," YELTSIN continued, criticizing the local leaders for mishandling the funds. He urged the government, "to find out how this could have happened and punish those guilty." YELTSIN specifically cited allegations that money earmarked for wages was used for other purposes in Tyumen and Volgograd Oblasts.

Economy

Consumer Prices Rise in January

· The State Statistics Committee released figures on Thursday showing Russia's consumer prices grew 1 percent in the first 19 days of January, including a 0.4 percent increase from January 13 to 19. January inflation is expected to reach 1.6 percent versus 1 percent in December 1997, if the present trend in

Russian Federation

Politics

Russia Tightens Weapons Exports

· Russian Prime Minister Viktor CHERNOMYRDIN has ordered a tightening of export controls on weapons and materials used for their production, reported United Press International. The decree issued by President Boris YELTSIN covers all dual purpose materials which could be used by other countries to build nuclear, biological or chemical weapons. Moscow officials insist the directive will be applied to exports to all countries, effective immediately.

The move follows reports by US officials that Iran is receiving military technology from Russia. Russia has previously denied this, claiming it provides aid for civilian projects in Iran. US Vice President Al GORE spoke with CHERNOMYRDIN stressing concern over Russian technical assistance to Iran. US State Department spokesman James RUBIN said Russia's step was inspiring and indicative of its anti-proliferation measures. He said the decree will help Russia reach its own security goals and avert threats of mass destruction weapons in the hands of culprits. The problem has not been resolved, but Russia has made a step forward, he said.

Head of the Russian Space Agency Yuri KOPTEV today admitted that some Russian organizations had contacts regarding deliveries of dual-purpose technologies to Iran. He stressed at the same time, that those attempts were immediately stopped by the state. He refused to name the organizations. KOPTEV stressed that, "on the state level Russia is not participating in any way whatsoever" in the deliveries of rocket technologies either to Iran, or to any other country, and that it fully observes the program of non-proliferation of those technologies.

Today's News Highlights

Russia

Bids For Rosneft Dwindling?

Gazprom on World 500 List

Korea Telecom-Samsung Buy

European Republics

Ukraine Reduces Budget Deficit

Ukraine Delegation to US

South Caucasus & Central Asia

The Four Agree on Accords

Georgain-China Military Coop.

Armenian-Russian Relations

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January 23, 1998

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price increases remains unchanged, the Committee said. Average daily price increase in January inched up to 0.054 percent against 0.031 percent last December.

Russia to Pay Foreign Debt By 2005

· Russian Economics Minister Yevgeny YASIN said on Wednesday that Russia will pay the foreign debts it took in 1994 and 1995 by the year 2005. The payment of Russia's external debt is closely linked to a deficit-free budget. 24.1 percent of the federal budget accounts for the servicing of the external debt. "We do not intend to clear off all the debts momentarily as it may bring about social perturbations, and we will be doing so during several years."

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

Ruble = 6,020/$1.00 (CB rate)

Ruble = 5,990|6,050/$1.00 (buy|sell rates)

Aug Sep Oct Nov Dec Jan

Business

LUKoil-Gazprom-Shell To Bid For Rosneft?

· The troika of Russian gas giant Gazprom, LUKoil, and Royal/Dutch Shell may retract plans to participate in the privatization tender of Rosneft, the last major state owned Russian oil company. The latest terms of the tender involve 50 percent plus one stake to be sold, 46 percent to be sold at cash auctions later in the year, and the remaining shares given to company employees, rather than previous plan of a 75 percent block pus one. LUKoil and Shell have said the stake is too small for management control. Shell spokeswoman Irina ARKHIPOVA said, "We're strategic and not portfolio investors." LUKoil spokes

man Dmitri DOLGOV said, "The consortium partners think that the new plan for Rosneft's privatization doesn't allow for an effective running of the [subsidiary] enterprises which belong to the company." LUKoil noted the pervious plan would have provided, "tender winners with a possibility to get enough control over the company, make necessary investments, carry out reorganization and increase production efficiency." However, some experts believe the consortium's refusal to participate in Rosneft's privatization is due to former security council deputy secretary Boris BEREZOVSKY's possible appointment to one of the top positions in Gazprom.

Prime-Tass reported that taking into account the recent Sibneft, linked to BEREZOVSKY, and Yukos merger into the Yuksi, Gazprom may form a new alliance with Yuksi to participate in Rosneft's privatization. Terms of a possible merger between LUKoil and Sidanko have not been determined, but may include short alternatives. The two companies may agree to cooperate on the domestic market as well as a joint bid for Rosneft, according to The Wall Street Journal. Comment: While leading oil companies jockey in and out for the right position in the Rosneft tender, the Russian government remains hopeful that the tender will take place. If Gazprom, LUKoil, and Royal/Dutch Shell withdraws from the bidding and another bidder does not enter, the auction could be canceled, dashing another opportunity for the government to raise $2 billion for its budget. On Tuesday, the government was forced to cancel the tender of a 34 percent stake in Eastern Oil Co. because it lacked bidders. Revenue remains the top priority for the government.

Gazprom on World 500 List

· The Financial Times on Thursday placed Russia's gas giant Gazprom in the 91st position on the world's 500 largest companies list from the 421st in 1997, based on capitalization. The top five companies are US General Electric and Royal/Dutch Shell on top with giants Microsoft, Exxon and Coca Cola. The list of the world-largest includes Russia's LUKoil and Unified Energy Systems. Gazprom has appreciably consolidated its global positions over the past 12 months. World markets were impressed by Gazprom's long-term contract for gas exports to Turkey and strategic partnership deal with Shell. The status of Russia as a re-emerging economic giant is con

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firmed by comparing Russian companies' capitalization with other Eastern European corporations. Of the list of 50 largest Eastern European companies, 34 are Russian. The top ten on the list are Russian companies. The inventory of Europe's largest 500 companies includes 15 Russian companies. The Financial Times reported that Russia's improved international foothold is an extension of its fundamental macro-economic improvement.

Korea Telecom-Samsung Buy 73 Percent

· Korea Telecom and Samsung Electronics Co. will buy 73 percent stake in New Telephone Co. of Russia for $18 million. Korea Telecom will hold managing rights of New Telephone Co. with 53 percent stake. Samsung Electronics Co. will provide communications equipment for New Telephone Co. with 20 percent stake. The reaming 27 percent will be controlled by existing stock holders. Korea Telecom plans to expand local telephone lines by 8,00 circuits in Vladivostok, increase the company's mobile telephone business, and raise profits.

Almazy Rossii-Sakha To Increase Production

· The company Almazy Rossii-Sakha plans to increase diamond extraction to $1.5 billion in 1998, a 7.6 percent increase compared to 1997. The company's output will grow by 28 percent compared to 1993 when it started operation. The amount of mining work will increase by 37 percent, while production costs will remain at the 1997 level as a result of growing transportation costs. For the first time, the company has worked out its investment budget estimated at 1.2 billion rubles. The company will provide more than 150 million rubles from its profits to finance prospecting work. The management also plans to cut the company's manpower by 2,000, most of them building workers. However, if it launches investment projects to be financed through credits and loans, the number of workers will be restored.

country finances will follow a regime of rigid limitation on the spending of budget resources. Chairman of the National Bank of Ukraine Viktor YUSHCHENKO said the bank supported the measure. In his view, Ukraine cannot borrow large sums to cover a deficit. YUSHCHENKO said that the deficit, "has been brought into line with possible credits."

Ukraine Delegation Arrives in US

· A Ukrainian delegation, headed by Deputy Prime Minister Sergei TIGIPKO, arrived in the United States to negotiate with the top officials of the World Bank and the International Monetary Fund (IMF) on the prospects for cooperation between Ukraine and these major financial organizations. The delegation is to discuss the final stages of the three projects implemented by Ukraine jointly with the World Bank in January 26. Ukraine has been authorized to spend $350 million within the next three months to develop private enterprise. The Ukrainian negotiators expect to discuss IMF's granting further three trenches to Ukraine as part of the $150 million credit. Chairman of the National Bank of Ukraine Viktor YUSHCHENKO believes that Ukraine may receive this credit before April 1, 1998.

South Caucasus & Central Asia

"The Four" Approve Customs Agreement

· Russian President Boris YELTSIN, Belarus President Alexander LUKASHENKO, Kazakh President Nursultan NAZARBAYEV, and Kyrgyzstan President Askar AKAYEV on Thursday approved several agreements which envisages abolishment of customs fees, quantitative restrictions on imports and exports, introduction of a single customs tariff, removal of obstacles preventing free movement of work force, services and capital in member-states of the Customs Union, rapprochement of their legislation and coordination of economic policies. These leaders have instructed their governments to submit their proposals by February 10. At the next summit scheduled for April, the agreement is expected to be signed, NAZARBAYEV said. "These documents consolidate the legal foundation of our integration," YELTSIN stressed. He said these results represented, "a notable turning point" in the work of the Russia-Belarus Union and "the four" since October 1997. Prime Minister of Belarus Sergei LING said that economic and financial institutions of the four

European Republics

Ukraine Reduces Budget Deficit

· Prime Minister of Ukraine Valery PUSTOVOITENKO announced that Ukrainian President Leonid KUCHMA has issued a decree reducing the budget deficit for 1998 to 2.5 percent of the gross domestic product (GDP) instead of 3.3 percent approved by the parliament. Under this decree the

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countries must thoroughly work on the adopted decisions on common economic space. NAZARBAYEV said, "The time has come when everyone begins to realize the advantages of integration, and economic integration, in particular." He proposed to introduce a single passport for the four members of the Customs Union. Apart from the passport and visa-free trips, he also put forward an offer to ensure the admittance of students from the four countries to higher educational establishments on equal conditions. The summit also discussed the possibility of Tajikistan joining the Customs Union.

Georgia-China Military Cooperation

· Georgian and Chinese military experts are negotiating a series of agreements on military and military-technical cooperation between the two countries, the press service of the Georgian Defense Ministry said. The announcement follows a meeting between Georgian Defense Minister Vardiko NADIBAIDZE and Chinese Ambassador to Georgia ZHANG Yongquan. NADIBAIDZE confirmed his ministry's interest in developing cooperation with the Chinese armed forces and reiterated his willingness to visit Beijing to discuss issues of mutual concern. He has also suggested to German Ambassador to Georgia Norbert BASS that Georgia host the maneuvers scheduled for later this year under NATO's Partnership for Peace program.

Armenian-Russian Inter-Parliament Relations

· Armenian President Levon TER-PETROSYAN stated on Friday after a meeting with Russian Federation Council speaker Yegor STROYEV, "Between Russia and Armenia, there no problems at all that should be resolved." Participants in the meeting expressed hope that the Armenian economy would recover after the Russian industry improved. Both Russia and Armenia are interested in implementing big joint projects of national and transnational companies, including Russia's gas giant Gazprom, and setting up Russian financial institutions in Armenia., STROYEV confirmed that, "there is mutual concern over the fact that the sides do not yet manage to

implement economic cooperation accords in full." On Thursday, STROYEV and Armenian Prime Minister Robert KOCHARYAN called for the issue of double taxation avoidance to be accomplished. "Trade and economic relations will be developing much better when all pressing territorial problems with neighboring states are removed," STROYEV said. After meeting with Armenian National Assembly Chairman Babken ARARKTSYAN, STROYEV noted that Armenia is one CIS nation that does its best to expand inter-parliamentary cooperation. "We hope that our visit will strengthen our ties." ARARKTSYAN said, "Russia will be doing everything to strengthen and develop relations between our countries."

STROYEV and the parliament delegation will conclude their Trans-Caucasian tour arriving in Baku tonight to meet with Azeri President Geidar ALIEV and speaker of the republican parliament Murtuz ALESKEROV. The sides will discuss expansion and strengthening of inter-parliamentary relations, economic cooperation between the two nations, further development of integration within the CIS, and racial conflicts in the Trans-Caucasian region.

Socar To Expand and Explore Oil Production

· Azerbaijan state oil company Socar and Switzerland's Glencore have signed a contract for Glencore to purchase 120,00 metric tons of Azeri oil. The oil will be delivered to Russia's Black Sea port Novorossiisk. This is the second deal involving Azeri Caspian oil. The first contract was signed by Russia's LUKoil at a price of $130 per metric ton, reported The Journal of Commerce. Additionally, Socar and US Conoco have signed a memorandum of understanding for a six month joint exploration of Azeri natural gas resources. Head of Socar's foreign investment division Valekh ALESKEROV said, "We need the independent view of an expert on the development of the country's gas sector." The memorandum calls for an analysis of the possibility of raising output from the Garadagskovo gas refinery and the production of compressed gas in Azerbaijan. Conoco, a unit of DuPont Co., will finance the project.

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

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