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

Tuesday, February 17, 1998

Russian Federation

Politics

Yeltsin's Address to Federal Assembly

· President Boris YELTSIN today gave his fifth annual address to a joint session of the Russian State Duma and the Federation Council concentrating on the state of the Russian economy. He said a "realistic" 1998 draft budget is essential for the country's economy, even if it requires amendments to the document. The Duma is expected to debate and vote on the fourth and final reading on Wednesday. First Deputy Prime Minister Anatoli CHUBAIS has called for amending the budget in light of recent trends on Russian financial markets. YELTSIN called on legislators to approve spending cuts because of low state revenues from taxes. YELTSIN also warned the government to prevent the creation of new state debts and called for timely payment of wages to state employees. He said Prime Minister Viktor CHERNOMYRDIN is personally responsible for timely payment of wages and stressed, "We must start 1999 without a single ruble of wage debt." Russia is endangered by non-payments, YELTSIN said addressing the parliament. "The Russian market is overloaded by barter. We are choked by reciprocal non-payments. Enterprises are living on credit, even without thinking to pay off debts. Causes are numerous, the key one is the unrealistic budget," YELTSIN said. "An economy of debt laxity has emerged in the country - this is a vicious practice, it is inadmissible, useless and dangerous to continue it." Russia needs qualitative economic growth supported by a large influx of investment. "We need stable and qualitative economic growth, the growth supported by a large influx of investment, renewal of production basis, introduction of new technologies, lowering of outlays." A clear investment policy should be worked out in 1998 and stable development of the domestic market should be ensured. The state is obliged to

create conditions for investment stipulating clear cut and predictable legal and economic norms of economic management for the next five to ten years, YELTSIN said. The President said a new tax code must be passed this year, echoing an appeal for tax reform in his 1997 speech to the parliament. The president also called for the 1999 budget to be balanced, excluding debt servicing costs, Reuters reported.

YELTSIN received applause in response to his statement that cabinet changes may follow if the government fails to cope with its economic tasks. The President said he would take tough measures against discordance in the executive power. "There is nothing to justify discordance in such an integral system as the executive power." YELTSIN noted that he favored delimiting the functions of administration properly. YELTSIN called for a restructuring of the administration set for the middle of the year to make it more compact, efficient and controlled by society. However, he added that the country's rise requires coordinated activity of all bodies of power at all levels.

Primakov Discusses Gas Project In Greece

· Russian Foreign Minister Yevgeny PRIMAKOV met with his Greek counterpart Theodoros PANGALOS to discuss bilateral economic relations, the situation in the Balkans and international developments. PRIMAKOV said that the two countries expressed their concern about the stability in the region

Today's News Highlights

Russia

Rus. Econ. After Asian Crisis

CB Lowers Refinancing Rate

Gazprom To Buy Rus. Bank

European Republics

Ukraine To Privatize Again

Shell Buys Estonian EK

South Caucasus & Central Asia

Terrorist Arrested in Georgia

Azeri Foreign Min. Fired

Politics-Economics-Business

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Tuesday

February 17, 1998

Intercon's Daily

and were prepared to do everything possible to boost cooperation among Balkan countries in the political economic and social sectors. PANGALOS said that both sides agreed that efforts should continue to overcome obstacles from any side, and one of the ways to overcome such obstacles would be to create a more specific program of action. PRIMAKOV also met with officials of a Greek-Russian energy joint venture to discuss energy issues in southeastern Europe with the company's managing director Dimitris KOPELOUZOS. These talks included joint venture plans to construct a natural gas system and electric power plants, the semi-official Athens News Agency (ANA) reported. PRIMAKOV affirmed that Moscow would fully support the gas company's activities, particularly its participation in a consortium for the construction of the Burgas-Alexandroupolis oil pipeline in northern Greece. Prometheus Gas Company was established in 1991 by VEP Gazexport, the Russian energy giant Gazprom's exporting company, and Greece's Kopelouzos Group on an equal share basis. PRIMAKOV noted the project, "transcend the borders of Greece and this is quite natural, because Greece does not border directly on Russia. This will contribute without doubt to regional stability." As for the purchase of Russian-made S-300 surface-to-air missiles by Cyprus, PRIMAKOV said that Russia will deliver the missiles to Cyprus on schedule which is seen as a direct threat to Turkey. With regard to Greece's disputes with Turkey in the Aegean Sea, he said that he favors a peaceful solution to all the problems involving the two neighboring countries in the Aegean. PRIMAKOV will also meet with Greek President Costis STEPHANOPOULOS, Prime Minister Costas SIMITIS, and Greek parliament speaker Apostolos KAKLAMANIS.

Russia Negotiates WTO Membership

· Minister of Foreign Economic Relations and Trade Mikhail FRADKOV Monday said that Russia is ready to join the World Trade Organization (WTO), but only under conditions that serve Russia's interests. Russia will not pay an untold price for the admission. FRADKOV said that 1998 is a decisive year for Russia in which to negotiate with the WTO over entrance into the organization. A first-phase of talks regarding Russia's entry was completed last year. Preparations for the second round of talks over conditions for foreign goods entering Russia's mar

kets are well underway, the minister said. Some Western countries have demanded that Russia quickly open its markets and substantially lower its import tariffs. Russia will only open up its market in phases, because it believes it would be very difficult to reduce import tariffs rapidly. President YELTSIN said in his State-of-the-Nation Address, "Not a single fact of discrimination of Russian goods in the world market should go unattended and without retaliatory actions. We have a corresponding law, which defines what should be done in such cases. We must actively use it." Focusing on the domestic market, the president said in the message that, "we must also master and learn how to use civilized anti-dumping procedures to prevent the ousting of Russian goods with foreign, sold at deliberately undercut prices." It is intolerable when in making state purchases priority is given to imported goods while there exist similar domestic products, the President believes. The state itself is a buyer of industrial and food products and should set an example as such, Yeltsin said. The 125-member WTO is an international body which is responsible for world order of economy and trade.

Economy

Ruble = 6,050/$1.00 (NY rate)

Ruble = 6.054/$1.00 (CB rate)

Ruble = 6,028|6,800/$1.00 (buy|sell rates)

Russian Econ. After The Asian Financial Crisis

· Central Bank Chairman Sergei DUBININ said on Monday a total of $2.5 billion worth of non-residents' funds fled the Russian government securities market between November 1997 and January 1998. "We confess that we made a mistake when we thought that the crisis would end much earlier," DUBININ said. "No one expected that there will be several tides and countries will be `falling' one by one, and that the general feeling in Russia is that a total collapse is imminent." DUBININ said that the worst happens to a national currency when the country's population loses confidence in it and starts selling it off. Regarding the downgrading of Russia's ratings by some rating agencies, DUBININ said that in reality the situation in the country is no worse than at the time when the ratings were assigned, in the autumn of 1996. Lower ratings are fraught with more foreign borrowing by government and private commercial structures, he added. Commenting on the present

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situation on the financial and hard currency market in the country which underwent a turmoil in connection with a sharp rise of interest rates, DUBININ said that "we had been successfully coping with this situation." He said that the gold and currency reserve at the Central Bank are estimated at $16 billion dollars. Their volume has not changed since the end on January, when DUBININ came up with the same figure. As of the beginning of December, 1997, the CB's gold and currency reserves were $18 billion, compared to $25 billion in late October before the Asian financial crisis broke out.

CB Lowers Refinancing Rate

· The Central Bank of Russia says it has lowered its key refinancing rate to 39 percent from 42 percent, effective today. The central bank also reduced to 39 percent the rate on lombard credits for periods of three to 30 days. The downward revisions related to positive changes on financial markets and stabilization of the currency market, the central bank said. Director of the Central Bank's press service Irina YASINA, told RFE/RL Newsline that the bank was reacting to the recent "stabilization" on the Russian financial markets. However, some market analysts say the interest rate cut was motivated by political considerations. Chief executive of Pioneer-Bank Mikhail RUBINCHIK calls the change a "gift" to YELTSIN on the eve of his annual address to the parliament, intended to show that the government and Central Bank are working in tandem and closely monitoring the situation on the financial markets.

Business

Gazprom to Buy Russian Bank Stake

· Gazprom board chairman Rem VYAKHIREV said Thursday that Gazprom plans to buy a stake in a big Russian bank with a good regional network. Gazprom already possesses blocking interests in Promstoibank. The National Reserve Bank and Imperial allows it to have a well-adjusted regional network almost in all Russian regions. Only three or four regions will not be reached by Gazprom's system after it purchases another bank, VYAKHIREV said. He added that the relationship between Gazprom and Russian banks is mutually advantageous. Russian banks help Gazprom attracts credit resources, while the money the banks receive form Gazprom remain in Russia rather than flowing abroad.

European Republics

Ukraine to Privatize Again

· Ukrainian lawmakers have approved a privatization program ending a legislative ban on the sale of state assets, AFP reported on Friday. The program, submitted by President Leonid KUCHMA, allows for the privatization of the energy and telecommunications sectors but would not permit the sale of farm land. Prime Minister Valery PUSTOVOYTENKO said he expects privatization to add about 1 billion gryvna ($521 million) to state coffers this year.

Shell Buys Estonian Petrol Retailer

· Royal Dutch/Shell said on Friday that it has agreed to buy all of the shares in Estonia's second largest petrol station chain EK, Reuters reported. Shell said in a statement that conditions of the deal will not be released. The purchase was made through Shell Estonia, a subsidiary of Royal Dutch/Shell Group. "We are continuing our investment in Estonia and the other Baltic countries, by expanding our petrol station network and developing the oil product business," Shell said. EK, a former state-owned petrol retailer privatized by US Costal Baltica Holding 18 months ago, has 31 petrol stations around Estonia. The acquisition will bring Shell's petrol stations to 38 in Estonia.

South Caucasus & Central Asia

Georgia Arrests Suspected Terrorists

· Georgian security officials announced Sunday the arrest of five suspected terrorist involved in the assassination attempt on Georgian President Eduard SHEVARDNADZE. The names of the terrorists have not been released. A television program showed photographs of two more suspects and requested residents to help the police in their search. Intercon sources report that an additional two attackers have been arrested. One arrested terrorist explained that they lived in groups of three or four in 11 rented apartments which were raided by Georgian Security and carried identity papers to move about Georgia freely. Investigators believe most of terrorists did not know each other and probably had met only at an unspecified training base in the North Caucasus. The attackers reportedly told investigators that addresses of Tblisi's safe houses were known only to a few masterminds who directed the act and that their target, SHEVARDNADZE, was revealed to them just

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a few days before the attack. Intercon sources report that one attacker admitted being promised $200 thousand for his participation in the attack. A viedo was also seized by Georgia's Security Ministry which shows the actual attack.

The Georgian Interior Ministry found an ammunition dump 20 kilometers outside of Tblisi following a tip from an anonymous caller. Operatives found a considerable amount of weapons, explosives, and ammunition, including a SKS self-loading carbine with an inscription in Russian which showed that it used to be owned by Georgian former defense minister Tengiz KITOVANI. He was sentenced to a term in prison in 1996 on charges of setting up illegal military formations. It is unclear whether the ammunition dump was related to the recent attack on SHEVARDNADZE.

The President on national television said those arrested were supporters of ousted late President Zviad GAMSAKHURDIA and were recruited and financed by unnamed circles outside Georgia. SHEVARDNADZE again suggested a connection between last week's attack and the failed bid to kill him in August 1995. He demanded that former Georgian Security Minister Igor GIORGADZE, who is suspected of participating in the 1995 attack, be extradited from Moscow. Georgian Prosecutor- General Dzhamlet BABILASHVILI said, "Law and order bodies of Georgia have no serious differences with the leadership of the Russian military airfield Vaziani over the conduction of investigation to ascertain identities of passengers on the air flight which left this airfield in the morning after the attempt on the life of Eduard SHEVARDNADZE." BABILASHVILI said the Russian military are cooperative and ready to provide passenger lists to show that usual passengers were flown before and after the attack on SHEVARDNADZE on February 9. Comment: Information concerning the planning and training of the operation, continues to lead investigators north. Reports from Moscow indicate that Igor GIORGADZE and others have left Moscow to avoid detection and extradition.

Azeri Foreign Minister Fired For Corruption

· The Foreign Affairs Minister Gasan Aziz GASANOV was fired Monday by a decree signed by Azerbaijan President Geidar ALIYEV. He was charged with abusing his power in the construction and management of the Europe Hotel in Baku. GASANOV said the charges against him were practically "true" and he would like to ask the president for a pardon for his misbehavior. According to the decree, the Europe Hotel was built, "on initiative and with participation" of GASANOV who without any grounds changed the purpose of a Turkish credit issued to Azerbaijan to open its diplomatic missions abroad.

Azerbaijan Prime Minister Artur RASIZADE and heads of the country's financial and law-enforcement bodies submitted a report to the President which accused the foreign minister Gasan GASANOV of serious violations. It appeared that the ill-starred hotel was built with the money from a Turkish credit issued to Azerbaijan to open its diplomatic missions abroad. The $10 million credit was spent on the construction of a hotel in Baku. Gasan GASANOV misled the president claiming the credit was not to be paid back in accordance with the agreement. However, the credit is interest-free but has to be paid by 2001. The debt of the Foreign Ministry to Azerbaijan has amounted to $2.3 billion and the economics has been harmed by exports of all foreign currency proceeds of the hotel abroad. One of the most serious accusations is that GASANOV helped the Turkish Imperial company to gain control over the Europe Hotel. The Turkish company has a shady reputation and connections to drug trafficking. GASANOV and his ministry have damaged Azerbaijani international image, the report added. GASANOV, known as a key figure in the cabinet, had been in charge of the Foreign Ministry since 1993, and was a close associate of ALIYEV's. President ALIYEV said in a press conference, "Illegal acts were uncovered. Azerbaijan Foreign Minister Gasan GASANOV was punished and removed from his post." He added, "Whoever is guilty, whoever is at fault, we do not cover it up and we never will."

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

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