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

Wednesday, February 18, 1998

Russian Federation

Politics

1998 Budget Vote Postponed

· The fourth and final reading of the 1998 draft budget has been postponed until February 20. Following a meeting of the "Big Four," Russian Prime Minister Viktor CHERNOMYRDIN said the government had made some amendments to the 1998 draft budget in keeping with the Russian President's address to the Federal Assembly. The Presidential address said that the budget should be realistic and take into account the changed economic situation, in the world financial markets. CHERNOMYRDIN believes, "The amendments will constructively correspond to the tasks the president outlined in his message to the Federal Assembly." He called for the approval of 12 proposed budget amendments by the Russian State Duma. The most controversial amendment concerns the 27.9 billion rubles ($4.6 billion) in expenditures added to the budget during negotiations between the government and parliament last fall. The amendment would stipulate that those funds are not to be spent unless the government receives sufficient revenues to cover them. This task seems unrealistic given the government's poor record on tax collection. Yabloko leader Grigorii YAVLINSKII noted that even if the government refrains from spending those 27.9 billion rubles, the 1998 budget remains unrealistic. The State Duma's budget committee approved nine of the government's amendments in full or in part. These mainly adapted the budget to current economic circumstances since its initial drafting in May. The committee also issued a nonbinding recommendation to reject a last-minute government amendment that all but reversed extra spending the Duma voted for at the third reading. It appears that more tactical maneuvering to be made before Friday's vote.

Russia Will Not Sacrifice Its Interests For CIS

· In his Sate-of-the-Nation Address on Tuesday Russian President Boris YELTSIN stated that Russia will not sacrifice its national interests for the sake of CIS integration, urging the members of the Commonwealth to cooperate on an equal terms. "We shall not do anything to the detriment of our own national interests and we are not urging the others to do it. The only sensible foundation for the relations among the members of the CIS is equality and mutual benefit." The President is sure that the economic integration of the former Soviet republics is a, "natural process, which is objectively advantageous for all its participants. We are ready to use all our potential to step up this process...The burden of unresolved problems in the bilateral and multilateral relations is growing. Mutual trade turnover is shrinking," the President noted, admitting that a part of the responsibility for this rests with Russia.

China-Russia Sign Bilateral Agreements

· Chinese Premier LI Peng met with Russian President Boris YELTSIN to reaffirm their strategic partnership. They shared the view that frequent meetings between leaders of the two countries have greatly accelerated the development of bilateral ties and that major progress has also been made in economic and trade cooperation between the two countries. The two sides reached a consensus that the Sino-Russian ties are a new type of state relations, which are based on mutual respect, equality and mutual trust, nonalignment and non-confron

Today's News Highlights

Russia

Foreign Investment Needed

IMF Negotiations Continue

Min. Shareholder Rights Won

European Republics

Baltic Banks Defraud Russia

Lith. Cabinet Faces Reduction

South Caucasus & Central Asia

RFE\RL Dine on S. Caucasus

IMF Pleased With Azeri Reforms

Politics-Economics-Business

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Wednesday

February 18, 1998

Intercon's Daily

tation and not directing against a third party, and that such relations embrace broad prospects for development as they conform to the fundamental interests of the people of the two countries and accord with the main tide of world peace and development. They noted that the common stand adopted by China and Russia to promoting the multipolarization of the world has been accepted by more countries in the world and their proposal for the establishment of a new political and economic international order based on peace, stability, justness and rationality has received broad support from the international community. At the meeting, the two leaders also discussed in detail the Iraq crisis and both expressed their concern. As permanent members of the UN Security Council, both nations favor a peaceful solution of the crisis through diplomatic means and oppose the use of force in Iraq.

LI and Prime Minister CHERNOMYRDIN Tuesday signed five bilateral agreements for cooperation in ship-building, the settlement of Russian debts to China, trade and economic cooperation in 1998, streamlining the procedure for Russian access into some Chinese cities, and setting up a new railroad

border crossing. LI told journalists that "direct links" between the most industrialized Chinese provinces and Russian regions must be established in order to significantly increase bilateral trade turnover from the current level of $6 billion annually.

Economy

Ruble = 6,056/$1.00 (NY rate)

Ruble = 6,057/$1.00 (CB rate)

Ruble = 6,031|6,083/$1.00 (buy|sell rates)

Foreign Invest. Needed For Growth in Russia

· Chairman of the Duma committee on industry, construction, transport and energy Vladimir GUSEV said foreign investment in Russia excluding the banking sector investment of 1991-97 is estimated at $13.5 billion, with 34.7 of the total figure representing portfolio and direct investments, Itar-Tass reported. He said that most of investment had been in non-production sectors, with only ten percent in production. GUSEV said this should prompt the Russian government a focus on interests of production, as growth is unthinkable without the influx of investment. The adoption of the new tax code should be a central stimulus to foreign investment, he said.

IMF Negotiations Continue Through the Night

· Prime Minister Viktor CHERNOMYRDIN, Chairman of the Central Bank Sergei DUBININ, First Deputy Premier Anatoly CHUBAIS, Finance Minister Mikhail ZADORNOV and a mission of the International Monetary Fund (IMF) led by Managing Director Michel CAMDESSUS will continue today's meetings through the night until a compromise is reached on the program of the IMF cooperation with the Russian government and the Central Bank of Russia for 1998. The Prime Minister said that the mission's arrival in Moscow is, "of a fundamental importance for Russia's economy." He added, "We are very much concerned and we follow the developments. As Russia is already part of the world financial system, it is important that it should not be affected by what happens in the world financial markets." The IMF mission is to decide by the weekend recommendations to the IMF Board of Directors on granting Russia another tranche of credit. However, complications have ensued over the oil import tariff increase and oil transportation excise duty. IMF experts propose to cut the import tariffs from 30 to 20 percent and introduce an oil transportation excise duty; while the Russian government strongly opposes the proposal. Another snag is a recent Presidential decree on measures to support domestic car makers. IMF experts believe that benefits to foreign investors in the decree should be abolished; while the Russian government feels, "these benefits are an important step to attract foreign investments in the Russian automobile industry."

CHUBAIS said he was hopeful that economic indicators in the IMF report would persuade the fund to release another installment. He said interest rates went down more than ten percent in Russia's treasury bill market over the last ten days. He cited an improvement in the currency market, saying that the Central Bank has not sold a single dollar of its hard currency reserve since the start of January. Capitalization of the corporate securities market has grown 10 to 12 percent, CHUBAIS said. In addition, the government is carrying out austere spending measures and plans to motion closures of several budget-dependent organizations, he said. In addition, the chief of the State Tax Service Alexander POCHINOK said that tax revenues in February 1998 will reach 12.5 billion redenominated rubles as against 9.85 billion planned to be collected in cash.

When you need to know it as it happens

Politics-Economics-Business

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Wednesday

February 18, 1998

Intercon's Daily

Russia Admits to Discreet Borrowing

· The Russian foreign ministry admitted that in late November and early December the government discreetly borrowed $950 million from western banks when there was pressure on the ruble and wage arrears strained the country's public finance, The Financial Times reported. Deputy Minister of Finance Mikhail KASYANOV said, "We have some short-term financing, but it is much lower than $950 million. The exact sun is confidential." The newspaper stated that an unidentified government worker said that Russia had borrowed $700 million in short term loans from western commercial banks. They said that over the same period Moscow had borrowed an additional $250 million in a "split option" facility, a loan that can be repaid at any time. The private borrowing disclosure comes at an inopportune time as the Kremlin is struggling to reassure foreign investors of its commitment to fiscal austerity. KASYANOV, however, added that the International Monetary Fund was aware of all Russian debts.

Business

Gas Exports Increase by 1.2 Percent in 1997

· Russia's gas exports increased by more than two billion cubic meters in 1997 and reached 200.9 billion cubic meters, according to the Economy and Information Department of the Russian Ministry for External Economic Relations. Gas accounted for 19.1 percent of Russia's export trade, as compared to 18 percent in 1996. The main buyers of Russia's gas received 120.9 billion cubic meters of gas, 5.6 percent less than in 1996. Due to the higher average, contractual prices for gas in those countries rose from $84.2 in 1996 to $88.6 per thousand cubic meters in 1997. The value cost of the exported gas remained at $10.7 billion. The amount of gas exported to the Commonwealth of Independent States (CIS) increased by 13.5 percent as compared to 1996, reaching almost 80 billion cubic meters worth $5.7 billion. This is explained by the partial settlement of the disputes with those countries over the cost and amount of the already delivered gas, the Ministry officials stressed. The average contractual price for Russian gas delivered to the CIS equaled to $71.4 per thousand cubic meters.

Minority Shareholders Rights Protected

· The Federal Securities Commission, in a move

which protects minority shareholder's rights, annulled a controversial convertible bond issued by Sidanco. The decision is in response to shareholders complaints that their holdings would be significantly diluted by the convertible issue. The Commissions decision suggests that the Russian government is developing the will to control the powerful magnates who wield political and economic influence. Founder of Hermitage Capital Management, the largest minority shareholder, Bill BROWDER said, "This means that there are laws in place in Russia to protect minority shareholders. We view this as a triumph for minority shareholders and for all equity shareholders in Russia." Sidanco is confident that a settlement will be negotiated between the company and its shareholders, who hold a 4 percent stake. Senior associate Anders ASLUND of the Carnegie Endowment said, "I think the effects on the stock market from corporate governance controversies will be severe. This is a huge issue and the government is insufficiently aware of it," The Financial Times reported.

European Republics

Baltic Banks Defraud Russia of $400M

· Banking institutions from the Baltic states operating in St. Petersburg, Russia have defrauded Russia of $400 million, Prime-Tass reported on Tuesday. Vladimir KOZHIN head of the North-Western regional center of the Federal Service for Currency and Export Control said that activity checks of Baltic banks carried out by the St. Petersburg tax police in August 1997 revealed major violations of the Russian legislation. A suit has been filed with the Court of Arbitration and hearings are to begin within the next few weeks. In the first six months of 1997, 14 Baltic republics' banks operating in St. Petersburg concealed almost 200 billion non-redenominated rubles from being paid to the Russian budget in value-added tax. In response, over 42 billion were taken from their correspondence accounts in Russian banks. Four criminal cases were opened on charges of illegal banking activity. After examinations in the Arbitration Court, when the tax police lost all the cases, the Baltic banks managed to get back over 20 of the 42 billion. According to head of the St. Petersburg tax police Georgy POLTAVCHENKO, the tax police lost this "Baltic case" because of drawbacks in the Russian legislation.

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Politics-Economics-Business

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Wednesday

February 18, 1998

Intercon's Daily

Adamkus To Reduce Cabinet Size

· Lithuanian President-elect Valdas ADAMKUS and Prime Minister Gediminas VAGNORIUS have agreed to reduce the cabinet size from 17 to 12 positions in an effort to cut costs and boost its efficiency. The reduction will be made in two stage, with three positions cut initially and two later. ADAMKUS declined to name the jobs to be cut, but key ministries such as finance and foreign affairs are not expected to suffer.

South Caucasus & Central Asia

RFE/RL's Dine On South Caucasus

· President of RFE/RL Newsline Thomas DINE shared his insights concerning his recent trip through the South Caucasus. He was received by all three Presidents of Azerbaijan, Georgia and Armenia while inspecting Radio Liberty (RFL) efforts in each country. DINE described the recent assassination attempts against ALIYEV and SHEVARDNADZE, as well as the peaceful resignation of TER-PETROSYAN as "not defining the region". He described the region as a major geopolitical/economic "cockpit of the world" with both East-West and North-South axis's. Each country is transitioning from communism differently. He described Azerbaijan as accomplishing nationhood and authoritarian stability (both economic and political). His impressions were that development of the middle class was not evident in Baku and indicated that some RFL broadcasts had been interrupted.

Georgia was described as undergoing a profound revolution. The political situation was maturing through Presidential leadership and the most reform minded parliament in the former Soviet Union (FSU). Economically real growth has occurred for the last three years and citizens in the capital appear active. He noted the new construction underway in center city. Corruption was a problem many people talked about as a high priority. Georgia has the highest percentage of listeners in the FSU of RFL.

DINE complimented Armenia for its peaceful resignation and replacement of its President. He described acting President KOCHARYAN as clear minded and determined to advance economic reform and bring Nagorno Karabakh into the negotiation process with Azerbaijan and Armenia. He also is committed to a free and fair election. DINE observed no evidence of economic vibrancy and a middle class in Yerevan. DINE concluded that he had great faith in the South Caucasus and that by the year 2005 these states will be much different. He also expressed his opposition to section 907 of the freedom support act preventing American foreign aid to Azerbaijan as counter productive.

IMF Pleased With Azeri Reforms

· The International Monetary Fund (IMF) confirmed on Monday that reforms in Azerbaijan have been successful. Director of the IMF Second European Department John AULDING-SMEE said he briefed President Geidar ALIYEV about the report on the economic situation in CIS countries. Azerbaijan ranks first among former Soviet republics in terms of the effectiveness of economic reforms, followed by Georgia and the Baltic states. Azerbaijan showed a 5 to 6 percent economic growth and the lowest inflation in 1997. The country faces at five major tasks this year including, the privatization of leading enterprises, financial, social welfare, education, health care and agro-industrial sector reforms. AULDING-SMEE warned the Azerbaijan leadership against repeating the mistakes made by other oil-rich countries which focused on the development of the oil industry, leaving other sectors of the economy to decay. Once Azerbaijan begins to receive an annual state income of $5 billion from oil by 2005, the worry is that the wealth may foster instability in the region and within the nation as the gap between the rich and poor deepens. ALIYEV said he was satisfied with the way relations between his national and the IMF were developing. He stressed that the Azerbaijan government respected and trusted the IMF and tried to follow its instructions as it carried out its reforms.

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

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