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

Monday, January 5, 1998

Russian Federation

Politics

Russian Arrested in Miami on Drug Charges

· Russian citizen Oleg KIRILLOV was arrested in Miami, Florida, for the involvement in a drug smuggling conspiracy and forgery of information to obtain a US visa. KIRILLOV planned to buy cocaine in the US with his American accomplice Vadim GUBIN over the telephone. He told the American accomplice to pass over 7,000 dollars to the drug supplier, who appeared to be the FBI informer, to buy a trial batch of cocaine. His telephone conversations were recorded after an anonymous tip. According to FBI agents, KIRILLOV is a hardened criminal twice sentenced in Russia for fraud and robbery, which he did not note on his visa application. He may face 15 years of imprisonment for the forgery charge alone. President of the Russkoye Zoloto closed joint stock company Alexander TARANTSEV was also arrested in Miami in late November for the same violation.

Yeltsin Signs Law on Income Taxes

· President Boris YELTSIN signed a new income tax law which was adopted by the Russian State Duma on December 19, 1997, and approved by the Federation Council on December 24. Under the new law, 25 percent of Russians in a low-income bracket, whose annual income does not exceed 5,000 denominated rubles, will be exempted from the income tax. They will pay only a symbolic sum, equal to two minimal monthly wages. For making calculations more simple, the sums of the income tax will be calculated in full rubles. The law is one of the ten budget-forming tax draft laws, submitted by the Russian government in 1997.

Chechnya Forms New Government

· Chechen President Aslan MASKHADOV dismissed his cabinet on Thursday and asked First

Deputy Prime Minister Shamil BASAYEV to submit a new cabinet by January 10. It is expected that BASAYEV, a former field commander, will reduce the number of cabinet positions from 45 to 22. It has been reported that a body resembling a defense ministry may be set up in Chechnya. Ruslan GELAYEV, a notorious field commander and deputy premier in the outgoing government, might be offered the top position in it. Movladi UDUGOV, another former deputy premier, will remain and be offered the position of foreign minister. Besides, former deputy premier and culture minister Akhmed ZAKAYEV and former deputy premier Khozh-Akhmed YARIKHANOV will remain in the new government as well. Apti BATALOV resigned from his position as Security Service Chief on December 30,1997. Turpal ATGERIYEV, who was MASKHADOV's campaign chief during presidential elections in Chechnya, may replace BATALOV. Former police chief Kazbek MAKHASHEV may become a deputy premier in charge of police and security, while the position of police chief may be proposed to former security chief Abu MOVSAYEV.

Economy

Ruble = 5,973/$1.00 (NY rate)

Ruble = 5,963/$1.00 (CB rate)

Ruble = 5,927|5,999/$1.00 (buy|sell rates)

Russia Receives $250M From WB

· Deputy Prime Minister Oleg SYSUYEV announced that Russia received a $250 million installment of the World Bank's (WB) loan for

Today's News Highlights

Russia

Inflation Down to 12 percent

Russia Sells Gas to Israel

Russia Builds Nuke Plants China

European Republics

Ukraine Against Shadow Econ.

Adamkus Wins Lithuanian Pres.

South Caucasus & Central Asia

Shevarnadze on Abkhazia

CIS Free Economic Zones

Turkmen-Iran Pipeline Opens

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structural adjustment of social programs. He said the installment of this loan, which totals $800 million, had been suspended pending on the Russian government's meeting a series of the WB's conditions. SYSUYEV said the conditions are not at variance with the government's determination to pursue social reforms. However, there have been delays with implementation of some of social measures, in particular pension reform, which was the WB's reason for withholding the regular tranche. He said the WB would disburse the rest of the loan in the first half of 1998.

The government is in negotiations with the bank about a $750 million loan for Russia's education sector reform. Moscow is going to ask in 1999, for a loan of a similar size to reform the health care system. SYSUYEV said the WB would soon issue Russia additional "small" loans for pilot reform projects in the education and health sectors. Moscow expects to get loans of $25-40 million for these projects in the

first half of this year.

Russia Sells Gas to Israel

· Russian Ambassador in Turkey Vadim KUZNETSOV said that Russia plans to sell natural gas to Israel through Turkey. He added that Canadian and Israeli companies would be involved in the construction of the pipeline but failed to mention when the project will be completed. The Russian ambassador admitted that the main user of the Russian gas will be Turkey because it is an energy-starving country. Turkey purchases about 6 billion cubic meters of gas from Russia per year. The figure is estimated to increase to 30 billion cubic meters following the construction of the Black Sea pipeline, reported Xinhua.

Russian Inflation Decreases to 12 Percent

· President of the Central Bank of Russian Federation Sergei DUBININ announced that Russian inflation in 1997, dropped to 12 percent from 22 percent in 1996. He said that the decline of inflation had shown that Russian financial policies were fruitful. Looking towards 1998, he stressed that it would be a difficult task for Russia to reduce the inflation to 5 or 6 percent because each percentage point of decline would require great efforts.

Russia's Foreign Trade Increase in 1997

· Russian Minister of Economic Relations and

Trade Mikhail FRADKOV announced that Russia's total foreign trade volume increased by 2 percent in 1997 to $136 billion. He said Russia's export decreased while import increased in 1997. The country maintained a favorable trade balance of $3.6 billion. The Ministry will devoted special attention to the development of the export of engineering products, focusing on military-technical cooperation, defense-industry conversion, the stimulation of investments in export-oriented production processes. It will also try to attract more investment in developing enterprise specializing in making goods for export. FRADKOV added Russia will reconstruct some of its overseas business offices in 1998.

Business

Russia To Build Nuke Plants in China

· Russia's First Deputy Prime Minister Boris NEMSTOV and China's Premier LI Peng on December 29, 1997, signed an agreement to build a $3 billion nuclear plant in Eastern China. A spokesman from the Russian embassy said, "It's considered one of our major breakthroughs. We hope it will increase annual trade and the scope of cooperation." The deal gives Russia a foothold in China, which American and Japanese companies feel is the fastest growing market for nuclear power. Under the agreement Russia will supply two 1,000 megawatt nuclear reactors to the facility along with various equipment and training. Russia will also provide China with an $1.8 billion loan. China plans to build 150 reactors over the next 40 years to meet the rising power needs of their nation, reported The Associated Press.

Bechtel Awarded $7.2M Contract For Security

· San Francisco based Bechtel National, Inc. (BNI) has been awarded a $7.2 million contract to provide enhanced safety and security for a stockpile of nuclear weapons the Russian government has stored at 30 sites across the former Soviet Union. The two year assignment will be carried out by BNI for the Defense Special Weapons Agency and Russia's Defense Ministry by November 15 ,1999. Ninety percent of the work will be conducted north of Moscow, with the remaining 10 percent performed in BNI's McLean, Virginia office. A company press release said, BNI will oversee the design, preparation, operation, and maintenance of a technical test bed facility in Sergiev Posad. The structure will be used to demonstrate and test various security and safety technologies, systems, and equipment that

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will help make the Russian weapons storage sites more secure. This will again show BNI's unique role of being one of the few companies to assist the governments of the US and the former Soviet Union in their efforts to dismantle a broad inventory of nuclear and chemical weapons.

nia, in 1926. His family emigrated to Germany in 1944. He lived in the US from 1949 until June 1997. Holding dual citizenship from Lithuania and the US, he has been a regional administrator at the US Environmental Protection Agency for 16 years.

South Caucasus & Central Asia

Russian Defense Minister Visits Georgia Plans

· Chief of the Russian Defense Ministry's Foreign Relations Department Colonel-General Leonid IVASHOV and a group of Defense Ministers arrived in Georgia today. During the trip, the group intends to visit the areas of Russian troop deployment in Batumi and Akhalkalaki, inspect their combat readiness and their real active service conditions, and hold military cooperation talks with Georgian leadership. General IVASHOV told Itar-Tass that he intended, "to analyze in detail the course of implementation of the earlier concluded agreements on bilateral military and military-technical cooperation." He intends to discuss the problems of the stay of Russian military bases on the territory of Georgia. The possibility of their relocation by mutual agreement is not ruled out, also a solution to matters concerning the joint use of the military infrastructure will be discussed. One of IVASHOV's most complicated problems to fix is Georgia's demands for Russian compensation for the cost of military equipment removed from the republic following the break-up of the Soviet Union. Georgian Defense Minister Vardiko NADIBAIDZE asserts that, "the cost of the real military property, which was on the territory of Georgia and subject to transfer, is estimated at $262 million." Russia owes another $5.5 million to Georgia for the lease of land areas taken up by the Russian military since 1992. Georgia also lays claim to a certain number of ships of Russia's Black Sea Fleet.

Shevardnadze on Abkhazian Conflict

· Georgian President Eduard SHEVARDNADZE on Friday stated that his country would not refuse to use "compulsion elements" to settle the Abkhazian conflict. Speaking at a New Year reception for Georgia, SHEVARDNADZE said that, "I remain adherent to peaceful settlement of the Abkhazian conflict and solution of all problems through negotiations and a dialogue. However if there are no real and serious steps to return refugees home and restore the Georgian territorial integrity in the near future, the country's leadership plans to raise the question of

European Republics

Ukraine's Intensifies Against Shadow Economy

· Ukrainian Economics Minister Viktor SUSLOV said that Kiev plans to intensify efforts against the shadow economy which is untaxed and unregulated. He said the shadow sector of the economy accounts for about 43 percent of the gross domestic product. Among processes affecting the economic situation in the republic are an increased proportion of barter operations, growing volumes of smuggled goods, unbacked tax and other privileges and massive tax evasion. In order to replenish budgetary revenues, participants in a government session suggested tougher control be exerted in tax collection, including employment of criminal proceedings against deliberate tax evaders. They also called to step up measures against smuggling, to use indirect tax excises and to build up trust to the country's banking system. Ukraine's Prime Minister PUSTOVOITENKO believes the government's main task is to overcome the current negative tendencies in the economy.

Lithuanians Presidential Elections

· A Lithuanian-American Valdas ADAMKUS has claimed a narrow victory in a runoff presidential election in Lithuania beating his rival—left centrist lawyer Arturas PAULAUSKAS 50.48 to 49.26 percent of 1.91 million votes. The official results will be announced by January 9. The new president will take oath and start his term February 25. The Lithuanian President, elected for a five year term, represents the country abroad and can send legislation back to Parliament for amendment. Valdas ADAMKUS said at a news conference today that, "Lithuania was going to continue a correct good neighborly policy in relations with Russia as Russia is a great country and Lithuania's main economic and trading partner." ADAMKUS said Lithuania's foreign policy would remain unchanged. Its top priorities would remain the same—integration into the European Union and NATO, and good relations with neighbors particularly with Baltic countries. 71-year-old Valdas ADAMKUS was born in Kaunas, Lithua

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other variants to settle the conflict, for instance a peace-making operation of the so called `Bosnian format' in Abkhazia." He said the number of politicians, who call for using compulsion elements to settle the Abkhazian and other conflicts, is mounting in Georgia and some other countries. The President stressed that the use of the `Bosnian format' and compulsion elements to settle conflicts does not run counter to the UN Charter. SHEVARDNADZE hopes that the Abkhazian conflict will be settled by 2000.

CIS Free Economic Zones

· Russia is advocating a free economic zone in the Commonwealth of Independent States (CIS). Minister of Cooperation with CIS Countries Anatoly ADAMISHIN said Monday that this would help further promote the integration of CIS member nations. He said Russia's volume of trade with other CIS members has continued to be on the downward slope in 1997. The decline is related not only to economic problems existing in the CIS community, but also that some CIS nations levy a surtax on imports from Russia. Trade among CIS nations could grow only if they achieve economic stability and resolve their disputes over indirect taxation, he said.

Meanwhile, the CIS statistics commission report on December 29, 1997, said the industrial output of most members of the CIS in the first 11 months of 1997, showed a growth over the same period in 1996. Of the 12 members, Kyrgyzstan earned the highest growth of 49.1 percent, followed by Belarus and Georgia with 16.8 percent and 9.8 percent respectively, the Interfax news agency reported. Those also reporting increase are Uzbekistan, Kazakhstan, Russia and Azerbaijan. Ukraine, Moldova and Tajikistan, however, had declines of 1.8 percent, 2.2 percent and 5.1 percent respectively. Kyrgyzstan had the highest gross national product (GNP) with a growth of 11 percent, followed by Belarus, Azerbaijan and Russia with 10 percent, 5.3 percent and 0.3 percent.

Turkmenistan-Iran Pipeline Opens

· Turkmen President Saparmurad NIYAZOV and

Iranian President Sayed Mohammad KHATAMI on December 29, opened the natural gas pipeline from Turkmenistan to Iran. The 200-kilometer pipeline beginning in 1998, will deliver 4 billion cubic meters of Turkmen gas to Iran, increasing to about 8 billion cubic meters by 2006. This pipeline is seen as a segment of a wider network of pipelines from Turkmenistan to Europe via Iran and Turkey. The pipeline cost $195 million, 80 percent of which has been paid by Iran. Until now, Turkmenistan had only one export pipeline through Russia. Moscow will now compete againstTurkmenistan in the world gas market.

The new pipeline undermines US efforts to isolate Iran and punish the country for supporting terrorist groups and building of nuclear weapons. State Department spokesman James FOLEY said the Iran-Libya Sanctions Act (ILSA), signed by President Bill CLINTON in 1996 to impose sanctions on any companies investing more than $20 million in either Iran's or Libya's energy sections, could not be applied to the pipeline between Turkmenistan and Iran because the construction of the pipeline predated the act. FOLEY said, "We will examine carefully any new proposals for the construction of trans-Iranian pipelines in light of the provisions of ILSA. If any such project is found to involve sanctionable activity, we will take appropriate action under the law." The US favors multiple gas and oil pipelines in the region, in hopes that it would provide competition preventing any one nation from become too powerful in the energy industry.

But US restrictions have not kept Iran from reaching abroad. A consortium led by Total of France has signed a $2 billion deal to develop the enormous South Pars gas field in Iran. Also, KHATAMI and Turkish Prime Minister Mesut YILMAZ endorsed plans by Royal/Dutch Shell to study a possible 940-mile, $1.6 billion natural-gas pipeline running through Iran from Turkmenistan to Turkey. Other countries of the Caspian Basin, notably Azerbaijan and Kazakhstan, have been sought for oil and gas development by Western companies.

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

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