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 8, 1998

[Nevada] made it clear that BLISS had been spared punishment by Russian law, although charges of espionage against BLISS had formally not been dropped. BRYAN declared that during diplomatic contacts made at a high level the Russian side withdrew its demand that BLISS must return to Russia by January 10. However, Russian Federal Security Service (FSB) senior spokesman Major-General Alexander ZDANOVICH claimed the return date was set by western mass media. "Since necessary investigatory actions that warranted direct part of Richard BLISS have been carried out and the American side guaranteed us the return of its citizen to Rostov-on-Don on the first demand, there was no need for setting any date to end the Christmas vacation of BLISS," he said. It was stressed that BLISS would be summoned to Russia if, "necessity arises for his presence for conducting investigatory actions." ZDANOVICH cited his earlier statement saying, "there is enough objective proof of the unlawful activity of the American engineer on the territory of Russia, and at present the check and evaluation of some subjective factors in the case are going on." California Republican Representative Randy "Duke" Cunningham commented that, "Apparently, the Russian government is looking for a way to back out of the embarrassing situation it got itself in when they charged Mr. BLISS with espionage," reported Reuters.

US State Department spokesperson reminded reporters that the US State Department had repeatedly declared that charges brought against BLISS were groundless.

Russian Federation

Politics

Nemstov Speaks On Structural Reforms

· Russian First Deputy Prime Minister Boris NEMSTOV on Wednesday said the main task for Russia this year, in order to keep improving the economic situation, is to have, "major structural transformations in the country." In an interview with the Interfax news agency, NEMSTOV said such structural transformations are economic growth, slashed taxes, and timely pay. He believes the country should abandon "the common stock" principle of making social benefits available to all and adopt a social security system, by which benefits are addressed to those who really need them. NEMSTOV stated that it is critical to achieve, "above all an industrial growth of up to 4 percent a year." He believes this can be reached by changing the system of taxation. As for privatization, the First Deputy Prime Minister said that selling state property should take second place to structural reforms. "Creative competitive conditions is more important and healthier to society than privatization."

Boris NEMSTOV plans to donate 6 million old rubles to the First Children's Clinical Hospital in Nizhny Novgorod. The money comes from a bet with Moscow journalist Vyacheslav TEREKHOV in which NEMSTOV argued that inflation rates in December would not exceed 1.5 percent. This act of charity along with his recent title as Russia's man of the year, hopefully will boost his reputation which took a dive following the book-fee scandal last year.

Bliss Not Required to Return to Russia

· Qualcomm officials say they have received word from the US State Department that Russian authorities will not require Richard BLISS to return to Russia to face espionage charges. Senator Richard BRYAN

Today's News Highlights

Russia

UES Reforms Pay Off in Profits

Mitsui Resumes Russian Deals

European Republics

Ukraine Inflation 10 Percent

Estonia Approves Privatization

South Caucasus & Central Asia

Georgia SeeksUN -Russian Help

New Azeri Political Party

Iran Prospects in the Caspian

Politics-Economics-Business

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Thursday

January 8, 1998

Intercon's Daily

The US will continue efforts to have all charges brought against BLISS dropped. Qualcomm CEO Irwin JACOBS said, "As we have maintained since the onset of this matter, Richard...was simply fulfilling Qualcomm's contractual agreements." BLISS was using a hand-held satellite positioning device to set up a cellular telephone system in the Rostov region when he was arrested for spying. Russian state police accused BLISS of smuggling illegal satellite technology into the country, and imprisoned him last November while they investigated the charges against him.

Economy

Ruble = 5,969/$1.00 (NY rate)

Ruble = 5,972/$1.00 (CB rate)

Ruble = 5,945|5,999/$1.00 (buy|sell rates)

Russian Economy Grows in 1997

· Prime Minister Viktor CHERNOMYRDIN said today that Russia's gross domestic product (GDP), industrial output, and retail trade grew by 1.2 percent, 3.2 percent and 3.9 percent respectively in 1997. The country also saw an 11 percent inflation, lower than half of the 1996 level, a 2.5 percent increase in incomes and a 5.7 percent decrease in unemployment. He was quoted by the Interfax News Agency as saying the country entered the New Year without wage arrears, with over 15 trillion rubles having been channeled from the federal budget to provinces to pay off the arrears. However, Russian Television Channel 1 reported today that this official statement is untrue. The broadcast concluded that there are still widespread nonpayments of salaries in a number of regions and military bases. One Colonel of a particular military base complained he had not been paid since October. He challenged the government to come and investigate his claims.

CHERNOMYRDIN indicated that tax collection would be the main task of the cabinet in 1998. The low tax collection led to the poor implementation of the budget and the suspension of loans from the World Bank and the International Monetary Fund. The Central Bank of Russia, together with the government, guaranteed the stability of the ruble in 1997, despite the international financial crisis, the Prime Minister said. In the meantime, Russia's stock market fell sharply today, dropping by 6.8 percent in moderate trading.

Business

Russian Utility Reforms Pay Off in Profits

· Upon the recommendation of then Fuel and Energy Minister Boris NEMSTOV, 29 year old Boris BREVNOV last May became chairman of RAO Unified Energy Systems (UES), the country's third largest company after Gazprom and LUKoil. With 8 percent of its bills collected in cash (other payments in promissory notes and bartered goods), unable to pay its suppliers or upgrade its electric network, and staggering government debt, UES was a mess. BREVNOV implemented aggressive reforms which have greatly improved UES. He ousted Soviet-era bosses, publicized UES's balance sheet, introduced competition to the sale of electricity, boosted cash receipts from 8 to 20 percent, and paid $101 million to on debts to the government. With $11.7 billion and 28 percent shares held by foreign investors, UES is one of Russia's most popular blue-chip stocks. His reform success is not only important for the power sector but also to the country's economic growth.

Now however, BREVNOV finds his progress blocked by politics, bureaucracy, and Soviet-era beliefs. UES is in the center of massive gridlock of $85 billion in debts which paralyze the industrial sector. Russian consumers owe the power sector $16.5 billion and the sector owes Gazprom $7.9 billion for natural gas. UES keeps insolvent companies in business by continuing to provide electricity despite nonpayments. To do this and combat the soviet idea of subsidies, UES must charge industries that do pay four times what the electricity should cost, reported The Wall Street Journal. UES's outlook still has some hurdles to overcome, such as staggering back debts that are shared with the 72 regional power companies called energos.

BREVNOV has already defined more short and long term goals for the company. He plans to boost cash collections from 20 to 30 percent by the end of this month, seek foreign partners to upgrade its power plants, renegotiate export contracts, and build an electric transmission line to northern China. In the long term, BREVNOV aims to develop UES into a fit power-transmission and distribution company, rather than an all-encompassing utility with holdings in power generation.

Mitsui & Co. Resume Projects in Russia

· Japan's Mitsui & Co. will resume a series of six

When you need to know it as it happens

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Thursday

January 8, 1998

Intercon's Daily

major projects in Russia which had been delayed by the inability of Russian partners to provided necessary funds. The projects, with a total estimated cost of 100 billion Yen, plan to be set in motion by the end of 1998. Russian partners made a down payment amounting to 15 percent of a 8.4 billion Yen to a Japanese trading company securing the installation of automobile painting equipment in an Izhevsk plant. Mitsui also expects Russian investors to partially pay for a renovation project of the oil refinery in Yaroslavl.

Energia, Estonian Railroads, and the telecommunications company Eesti Telekom. He added that only Eesti Telekom will be fully privatized this year. In the Estonian Shipping Company, the state will also sell its remaining 30 percent and 10 percent in the gas company Eesti Gaas.

South Caucasus & Central Asia

Georgia Asks UN And Russia Assistance

· Georgian President Eduard SHEVARDNADZE called on Russian peacekeepers and UN military observers for assistance of in bailing out Georgian hostages kidnapped in the Gali district of Abkhazia. On Wednesday, an Abkhazian armed group took about 30 residents of Georgian villages of Tagiloni and Dikhazurga in the Gali district hostage from two scheduled passenger buses. Immediately, 21 women and children hostages were released.

The motives and demands of the hostage-taking abductors remain unclear. No official reports have been released. Several papers in Tblisi today cited credible sources as saying that the Abkhazian group is an underworld gang. It is believed the group allegedly kidnapped the Georgians in response to the disappearance Alik DZHOPUA, an Abkhazian crime leader with a record of 22 years in prison for grave crimes. The Abkhazian group took Georgian hostages in hopes of using them in exchange for the release of DZHOPUA.

Of the remaining hostages, seven proved to be district residents and two were labeled "Georgian nationals." The nine men were freed today. Intercon sources report that UN forces did play a role. SHEVARDNADZE call to Russian peacekeepers and UN military observers apparently had its intended effect.

Georgia Launched Digital TV Satellite

· Georgia has launched a new satellite digital television. Television broadcasts through the new system, initiated by the Ministry of Communications, will be received in 15 countries—Russia, Armenia, Azerbaijan, Turkey, Cyprus, Greece, Romania, Bulgaria, Moldavia, Syria, Lebanon, Jordan, Israel, Iran and Iraq. On Wednesday, Georgian President Eduard SHEVARDNADZE conversed with Georgian embassies in Baku, Ankara, and the Georgian Home in Tel Aviv through a link provided by the new system.

European Republics

Belarus Calls for CIS Summit

· Deputy Foreign Minister Nikolai BUZO said today that Belarus calls for holding a CIS summit as soon as possible. On Tuesday Ukrainian President Leonid KUCHMA sent a letter to Russian President Boris YELTSIN proposing postponement of the summit until March 16. BUZO believes the fate of the CIS depends on the political will of its leaders. "It is time to adopt important political decisions." On the postponement, BUZO said, "it means that the solution of the most acute problems will be canceled...."

Kyrgyzstan President Askar AKAYEV also calls for the CIS to take action. He believes the CIS needs to undergo radical reforms. He said the reforms should build as soon as possible an effective mechanism for economic cooperation within the CIS, to provide a unified and solid foundation for its existence. Last year Kyrgyzstan's trade with other CIS members dropped 50 percent.

Ukraine's Inflation 10.1 percent in 1997

· The Ukrainian State Statistical Board on Thursday released a report that the inflation rate in Ukraine equaled 10.1 percent in 1997. Prices for foodstuffs grew last year at the rate of 14.1 percent, 2.9 percent for manufactured goods, and 7.9 percent for services. According to Ukrainian statistics, the inflation rate last December equaled 1.4 percent, the prices for foodstuffs grew by 2.2 percent, 0.1 percent for manufactured goods, and 0.9 percent for services.

Estonian Cabinet Approves Privatization Plans

· The Estonian cabinet on Tuesday approved in principal the 1998 Privatization Plans. Economic Minister Jaak LEIMANNN said the program included Estonian Oil Shale, the power company Eesti

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Thursday

January 8, 1998

Intercon's Daily

Turkmen Receives Int'l Credit Rating

· Fitch IBCA, the international rating agency, on Wednesday assigned a single B rating to Turkmenistan's long-term loans in hard currency, which may be applied to senior and unsecured debt issues. Fitch IBCA also assigned short-term foreign currency the same rating. The credit rating paves the way for Turkmenistan to enter international financial markets with a view to borrow money needed by the republic for the development of the national industry. The Turkmen economy is now attracting special interest, because of the development of its gas fields and the opening of its pipeline to Iran in December 1997. A number of CIS member states owe this gas rich nation more than $1.5 billion for gas deliveries. The Turkmen economy depends a great deal on the ability of Ukraine, Georgia, and Armenia to pay Turkmenistan for gas imports. The principal constraint on the credit rating is the willingness and capacity of these CIS consumers to pay their gas bills, a Fitch IBCA press release reported. The rating agency estimates that external debt service ratios based on foreign currency cash receipts from exports and repayments on restructured energy debts are more than double those that treat export receipts on an accrual basis, 32 percent compared with 16 percent. Turkmen's ability to complete more pipelines reducing the dependence on the CIS gas market, will further enhance its creditworthiness.

Kazakhstan Tries Prevent Economic Crimes

· The Kazakh National Security Committee has sharply tightened its grip on crime in the area of foreign economic activities. A total of 20 contracts totally worth $300 million found not advantageous to Kazakhstan have been either annulled or prevented being signed. Today, Kazakhstan National Security Service stopped 100 tons of costly copper cathode wire from being smuggled to China. The people, involved in the attempted transport of the wire through Khorgossky Border Guard check point, have been detained by Kazakh security agents. All those involved in making forged documents to illegally export strategically important cargoes abroad have been

arrested. Following an inspection of a plant producing copper cathode wire, the Kazakh National Security Committee discovered that a criminal group, operating at the plant for private gain, illegally exported a strategically important product in great demand on the world market.

New Political Party in Azerbaijan

· Equality, a political party representing the estimated 780,00 Azerbaijanis forced to flees their homes during the war for control of Nagorno-Karabakh, will hold its founding meeting in late January at a camp for displaced persons. The party claims some 4,000 members. The party aims to protect the political and economic rights of displaced persons and to fight corruption and the stratification of Azeri society, reported RFE/RL Newsline.

Iran Begins Geological Prospecting in Caspian

· The five Caspian littoral countries, namely Iran, Russia, Kazakhstan, Turkmenistan and Azerbaijan, still have not reached an agreement over the rights to the Caspian reserves, estimated at 15.5 billion barrels of crude oil and some 8.3 trillion cubic meters of natural gas. Iran has repeatedly announced opposition to any unilateral exploitation of the natural resources in the Caspian Sea, urging the littoral states to speed up their negotiations to determine the legal status of the sea. In fact, last November, Iran lodged a strong protest against Azerbaijan after Baku started its oil exploitation from the Cherag reservoir of the Caspian Sea. But on Wednesday Iran announced that it has started geological prospecting operations in the Caspian Sea in order to confirm its oil and gas reserves. Iran's Deputy Oil Minister for Oil and Gas in the Caspian Sea Ali MAJEDI said that the prospecting operation was an essential step for the country to estimate the oil and gas reserves in the area. MAJEDI referring to the rights dispute, said it comprises the rights of sea navigation, exploitation of natural resources over and under the seabed and environmental protection. He added that the most serious difference among the littoral states was how to explore the natural resources in the sea.

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

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