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

Monday, January 26, 1998

First Deputy Prime Minister Anatoly CHUBAIS said that the new tax code is one of the Russian government's priorities in 1998. He said the adoption of the code is in the program of the government's 12 priorities. He added that there is the need, "to find out the scale of compromise" with the Duma and define the tax code's provisions on which the government cannot agree to compromise.

A Return To Soviet Security?

· The Kremlin is busy drafting new legislation that will merge the Federal Security Service (FSB) and the Federal Border Service (FPS). This follows presidential instructions issued Wednesday, January 21, to draft a decree creating, "a single federal service." This would transfer of borderguards into subordination of the FSB. The service will be commanded by the FSB director, according to Kremlin officials. A draft decree on such subordination will be submitted to President Boris YELTSIN within the next month. It will also be necessary to make changes in legislation, including the law on security and the law on the Federal Border Service. The merger of the two services will help reduce the central staff, of the FSB and FPS, as well as outlays for its upkeep. Funds released will be used for "real protection of the border." It is not clear, however, how long the Federal Agency of government communications and information (FAPSI), which was earlier part of the FSB system, will remain independent. YELTSIN has appointed General Nikolai BORDYUZHA as director of the Federal Border Service (FPS), a presidential

Russian Federation

Politics

Government Leaders State Priorities

· The implementation of the government's 1998 program for "the twelve main tasks in social and economic policy" begins today, President Boris YELTSIN told reporters in Moscow at the beginning of his meeting with Prime Minister Viktor CHERNOMYRDIN. He said that the persons responsible for each task were clearly named in the program, and warned that, "tough demands will be held against them...This is a new form of work. Of course, it creates conditions for better discipline, more exactitude and responsibility," YELTSIN stated. A government source revealed that the "twelve tasks" include: transition to a clearly addressed social protection of the population, control over the tariffs of the natural monopolies, prevention of the accumulation of new debts for pensions and wages, backing of Russian commodity producers, reduction of the tax burden, solution of the default payments problem, training of personnel for state structures and for the national economy, settlement of state debts to the military production complex, provision of housing for servicemen and discharged officers, Russia's accession to the World Trade Organization and more active work with the European Union, more effective legal protection of Russian citizens and enterprises, and land reform problems.

First Deputy Prime Minister Boris NEMTSOV said the Russian government should aim to abolish West European barriers on Russian goods. Russia has not conducted a single anti-dumping investigation on foreign-made goods and, "there are dozens of examples in Europe when exports of Russian-made goods are hampered." He did not call to restore the "Iron Curtain" for foreign-made goods but suggested to take governmental measures to help Russian producers more actively enter foreign markets.

Today's News Highlights

Russia

Rus-EU Coop. Council To Meet

LUKoil in Romania?

Russian Timbre To Privatize

European Republics

Rus-Belarus Union Develops

South Caucasus & Central Asia

Abkhazaian Talks Break Down

Azeri-Georgian Oil Partnership

Azeri-Russian Relations

Chevron Halts Investment

Politics-Economics-Business

Page

Monday

January 26, 1998

Intercon's Daily

spokesman announced today. Comment: Before 1991, border troops were part of the Russian Security Ministry (former KGB) which was transformed into the Federal Counterintelligence Service at that time, the present FSB. This clearly represents a return to Soviet practices of a huge, strong, all encompassing, centralized, security organization like the KGB. Most problematic, however, is the fact that the FPS troops are stationed in foreign countries like Georgia. Such a reorganization would constitute the declared positioning of forces related to the security and defense of Russia outside of itself. This will surely produce negative reactions in the former Soviet republics.

Duma Passes Resolution on US-Baltic Charter

· The Russian State Duma passed a resolution on Friday in connection with the signing of the Partnership Charter by the United States, Latvia, Lithuania and Estonia in Washington on January 16. "The NATO enlargement runs counter to the OSCE concept of a comprehensive security model for Europe, it will result in a geo-political re-division of Europe and inflict an irreparable damage on the European cooperation and confidence," the resolution says. As long as NATO remains a military bloc, its further eastward expansion, especially the involvement of the former Soviet republics, is incompatible with the Founding Act on the Russian- NATO relations, cooperation and security and may have an extremely negative effect on prospects for good-neighborly relations and mutually beneficial cooperation of Russia and European neighbor-countries, the document says. Duma deputies hope that the sides will consider the interests of all European countries and improve the observation of human rights in the Baltic republics when implementing the Charter.

Economy

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

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

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

Business

Lukoil Deal in Romania

· LUKoil has been accepted as the sole bidder in the privatization tender of Petrotel, the Romanian Oil Refinery, according to reports in the Romanian Media. If LUKoil wins the bid, it will be the first LUKoil

acquisition outside the former Soviet Union and the first significant Russian investment in Romania. Petrotel has an annual capacity of 1 million tons. LUKoil hopes to secure the deal by guaranteeing a flow of oil.

Russian Timber To Privatize

· Rosexportles (R.E.L.-Russian Export Timber Co.), Russia's leading export timber company, will be taken over by Imperial Bank of Moscow, and a new company Rosexportles Corp.. Because it belongs to the state agency Roslesprom (R.L.P. -Russian Timber Industry), R.E.L is still standing as a shell. Privatization of Rosexportles has been under consideration for almost a year, creating financial uncertainty for the financing of Russian timber abroad. The Ministry of Finance is still auditing Roslesprom, which may owe 100 billion rubles to the federal budget. R.E.L's exports have been declining since 1995 when it traded $467 million in timber abroad; $450 million in 1996; and $400 million in 1997. Russia exports $2 billion worth of forest products annually, including timber, cellulose, pulp, and paper, reported The Journal of Commerce.

Skoda To Increase Sales to Russia

· The Czech automobile manufacturer Skoda plans to double the sale of its Oktavia in Russia in 1998. Skoda spokesman Milan SMUTNY said on Wednesday that, "While in 1997, we sold 505 Oktavias in Russia, we plan to sell at least 1,000 cars in 1998." The Oktavia and Felicia are the two most popular Skoda's models in Russia. The plant intends to increase their sales in Russia in 1998 by 30 percent, bringing them to 11,000 cars. Half of 10,000 Felicias to be produced will be new models with a new design of the body and interior upholstery.

European Republics

Rus-Belarus Union Develops

· Russian President Boris YELTSIN and Belarus President Alexander LUKASHENKO have agreed to lay the emphasis this year on the integration of the two countries, primarily in the economic sphere. They pointed to the fact that goods turnover between the two countries had increased by 40 percent in 1997, and agreed to work for a similar increase in 1998. The agreement was reached Thursday' at a session of the Supreme Council of the Russia-Belarus Union, held in the Kremlin under the chair

When you need to know it as it happens

Politics-Economics-Business

Page

Monday

January 26, 1998

Intercon's Daily

manship of LUKASHENKO. He said, "We are beginning 1998 in a businesslike manner," Lukashenko said, adding that "for the first time in the past two years" the two sides can be really satisfied with how the Union is developing. Taking part in the meeting from the Russian side are Prime Minister Viktor CHERNOMYRDIN, Duma Speaker Gennady SELEZNYOV, Deputy Prime Ministers Valery SEROV and Anatoly KULIKOV, Foreign Minister Yevgeny PRIMAKOV, Defense Minister Igor SERGEYEV, and Finance Minister Mikhail ZADORNOV.

South Caucasus & Central Asia

Georgia-Abkhazia Negotiations Break Down

· In a statement released by the Mission of Abkhazia, Dr. Yanal KAZAN, the Plenipotentiary for the Republic of Abkhazia in the US, said in response to Georgian President Eduard SHEVARDNADZE belief that a "Bosnian-style format" could be an option to resolve the Abkhazian conflict that, "It is quite obvious that any further negotiations direct or indirect are futile." KAZAN also stated that, "Georgian officials cannot be trusted." He also warned that, "Georgia's obsession in acquiring new territory to further its dominance of other people in the region will be opposed an dealt with severely the moment Tblisi thinks of using `force to establish peace.'" This represents a definite break down in negotiations.

SHEVARDNADZE, however, was quoted on his 70th birthday saying that the Abkhazia conflict will be resolved before the end of his mandate. The day for Georgia to unify its territory is not very far, SHEVARDNADZE added ,and the most important problem is how to ensure the safety of the refugees who will be organized to return to Abkhazia in two to three years. Under the mediation of Russia and the United Nations, a cease-fire was reached in May 1994. SHEVARDNADZE and Abkhazian President ARDZINBA agreed to resolve the conflicts by political means after their first meeting last August. The final status of Abkhazia has yet to be decided.

A Russian Foreign Ministry spokesman has called for Georgia's territorial integrity to be preserved in the solution of the Abkhazian problem. "Russia's fundamental position is that the Abkhazian problem should be solved within the framework of Georgia's territorial integrity," Valery NESTERUSHKIN told a

briefing on Thursday. NESTERUSHKIN was commenting on Abkhazia's accusations alleging that Georgian security forces had escalated sabotage activities in Abkhazia. Abkhazia has demanded that an emergency session of the Coordination Council of Geneva Talks be convened. "The agenda of the Council's session has been complemented by the issue of the strengthening of confidence-building measures because of recent acts of terror and Sabotage there [Abkhazia]," he said. Russian representatives, headed by ambassador at large Lev MIRONOV, are attending the session as a mediator in the Georgian-Abkhazian conflict.

Azeri-Georgian Oil Partnership

· Azerbaijan President Geidar ALIYEV said on Saturday in Tbilisi announced that Azerbaijan has chosen Georgia as one of the major transit routes for Caspian oil. "Georgian territory will become one of the main directions of transportation of Caspian oil," ALIYEV said. Speaking at a meeting with Georgian President Eduard SHEVARDNADZE and members of the Georgian government, ALIYEV noted that Caspian oil will be transported by the Baku-Supsa oil pipeline to begin operation this year.

The North Apsheron Operational Company (NAOC) said today the Ashrafi deposit, located east of Baku, has an estimated holdings of 105 million metric tons of oil, 4.7 million metric tons of condensed gas and 49 billion cubic meters of natural gas. NAOC was set up in early 1997 to coordinate the development of the Dan Ulduzu and Ashrafi deposits. The Azeri State Oil Company (ASOC) and an international consortium in December, 1996 signed a contract on the exploration and development of these deposits. The consortium includes US companies Amoco with 30 percent and Unocal with 25.5 percent, Japan's Itochu with 20 percent, and Saudi Delta Oil with 4.5 percent. The rest of 20 percent belongs to ASOC.

Azeri-Russian Relations

· In a meeting with Russian Federation Council speaker Yegor STROYEV, Azerbaijan's President Geidar ALIYEV said Friday that Azerbaijan advocates a peaceful settlement of the Nagorno-Karabakh conflict. He hoped the Federation Council would do its best to promote a peaceful resolution. STROYEV said that during his visit in Yerevan, Armenian President Levon TER-PETROSYAN reit

When you need to know it as it happens

Politics-Economics-Business

Page

Monday

January 26, 1998

Intercon's Daily

erated his intention of solving the Nagorno-Karabakh conflict on the basis of the Minsk Group plan, which had been mediating the conflict under the auspices of the Organization for Security and Cooperation in Europe. STROYEV indicated that Azerbaijan took a similar stand with Armenia on the Nagorno-Karabakh conflict. Under the 1997 two-stage settlement plan of the Minsk Group, Armenian troops will first partially withdraw from the Nagorno-Karabakh region. Then, after the complete withdrawal is finished, consideration will be given to a highly autonomous status of the region within Azerbaijan territory.

ALIYEV also called on the outer Caucasian countries, Azerbaijan and Armenia to restore their peaceful relationships. He said that Russia could play a more active role in mediating the conflict between Armenia and Azerbaijan. Azeri Foreign Minister Gasan GASANOV said, "for a number of reasons, Russia can and must play a special role in settling the Armenian-Azerbaijan conflict." He said Russia, as chairman of CIS and co-chairman of the Minsk-based group of the Organization for Security and Cooperation in Europe (OSCE), assigned to settle the conflict, should help resolve the issue.

ALIYEV pointed out, Baku was opposed to Russia providing Armenia with weapons, as well as to Russia setting up military bases in other countries of the CIS. ALIYEV said he could not understand why there were still so many Russian troops in Armenia and Georgia. "It is not clear why they have to be in Georgia and Armenia when all of us are members of the CIS," he said. STROYEV assessed the frankness of ALIYEV as a proof to, "his belief in mutual understanding with Russia and the readiness to solve complicated problems together." STROYEV further side-stepped the issue by stating that Russia will do its best to find answers to the questions raised at a meeting of CIS leaders in Kishinev. When asked about the Russian military presence in Georgia and Armenia, STROYEV noted that Russian bases in these countries will never be used against Azer

baijan or any third country. However, he made it clear that Russia has its own interests and it has every right to deploy its troops where it sees fit. STROYEV stressed that Moscow remains committed to a peaceful settlement and Azerbaijan's territorial integrity.

Chevron Halts Kazakh Pipeline Investment

· Chevron Corp. has frozen its $2 billion investment in the Tengiz oil pipeline project in Kazakhstan amid concerns that construction will be delayed for up to a year, completion scheduled for fall 1999. A company spokesman confirmed that investment in new contracts have been halted as of January 1. He stated the decision followed reports that Kazakh President Nursultan NAZARABAYEV sought to oust Russian director of the project group in a meeting with President Boris YELTSIN last week, according to The Journal of Commerce. The two presidents said that they hoped the oil pipelines would be built as soon as possible to facilitate, "oil transportation from deposits in western Kazakhstan to world markets." However, other news reports show NAZARBAYEV seeking alternative routes, because as he said "Russia seen not to be interested in our crude transit." Chevron has been a giant investment and research force in Tengizchevroil project for over a decade. It holds 45 percent of the project and 15 percent of the pipeline consortium.

Russian Foreign Minister Yevgeny PRIMAKOV and the president of Chevron met on Friday to discuss issues connected with the oil pipeline from the field Tengiz in northern Kazakhstan to new terminals near the Black Sea port of Novorossiisk. PRIMAKOV said that Russia viewed the construction through the Russian territory as an important state task, the solution of which would both give certain economic benefit and serve for consolidation of relations with CIS countries, first of all with Kazakhstan. The Chevron president, in his turn, believes that the Tengiz-Novorossiisk pipeline as compared to any other routes that are under consideration is the shortest, most economic and safe for oil deliveries from the Caspian region to world markets.

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