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 24, 1998

third quarter of this year and consistent reduction of the backlog in defaulted payments from the fourth quarter. CHUBAIS called for the FSDN to generate a program of fighting non-payments to encompass the analysis and monitoring of corporate debts, and coordinated measures for handling them. The root of non-payments lies in irresponsible financial pledges and unimplemented budgets, CHUBAIS added. He also defined two levels of non-payments: the federal level, including the debt of the military-industrial sector and the electricity industry and the "lack of responsibility" level, including embezzlement and corruption of administrators of enterprises. He said the FSDN would focus on such enterprises to choose, "those that must be subjected to the bankruptcy procedure."

Russia-Syria Sign Agreements

· Syria and Russia signed agreements on bilateral cooperation in the energy, tourism, investment sectors and avoidance of double taxation in Damascus on Monday. An agreement on the peaceful use of nuclear energy for development was signed by Russian Minister of Nuclear Power Engineering Viktor MIKHAILOV. These documents were concluded upon completion of a session of the Russian-Syrian commission for trade, economic, scientific and technical cooperation set up five years ago. Justice Minister Sergei STEPASHIN, Russia's co-chairman of the commission, on Sunday met Syrian President Hafez AL-ASSAD to give him a message from Russian President Boris YELTSIN

Russian Federation

Politics

Yeltsin Warns of Cabinet Shake-up

· Russian President Boris YELTSIN has threatened another reshuffle of the cabinet. On Monday, he said that he will take a "demanding" attitude towards the government's report on its 1997 performance, which has been delayed since early December. "I will question specific ministers and then take an immediate decision on their future." In an on going internal struggle for power between the reformers represented by First Deputy Prime Ministers Boris NEMTSOV and Anatoly CHUBAIS and the conservative side represented by Prime Minister CHERNOMYRDIN, it is unclear which side will suffer the consequences or gain the upper hand in the government. CHERNOMYRDIN criticized the Ministry of Fuel and Energy, formerly headed by NEMTSOV, for its failure to change the negative trend in the development of the industry. He said despite the increase in oil output, the industry has major defects. Earlier this month, President YELTSIN pledged that his top three ministers would keep their jobs. Today, government spokesman Igor SHABDURASULOV denied rumors of resignations and sackings saying he had no official information. He added, "I didn't hear any words form the mouth of the President to the affect that resignations would be possible as a result of the session."

Chubais Cracks Down on Non-Payments

· First Deputy Prime Minister Anatoly CHUBAIS said that the Federal Bankruptcy and Financial Rescue Agency's (FSDN) 1998 goal is to fight non-payments in the economy. Russia's non-payments totalled 760 trillion unredenominated rubles in 1997. CHUBAIS is spurred to make progress following Russian President Boris YELTSIN's demands during his state-of-the-nation address, for non-payments to stop in the

Today's News Highlights

Russia

Insurance Sector Shake-up

Gazprom Cuts Spending

European Republics

Ukraine Denies Territory Dispute

Ukraine-Shell Pipeline Deal

South Caucasus & Central Asia

Georgia Negotiates Burchuladze

Aliyev Visits Japan

Pipeline Meeting in Turkmen

Turkmen-Shell Sign MOU

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February 24, 1998

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concerning the development of bilateral relations between the two countries. During the talks, the two sides discussed the situation in the region, including the Iraqi crisis, and the Middle East peace process. Syria's $10 billion debt for arms purchases impedes Moscow-Damascus successful economic cooperation. In 1997, a trade turnover between the two countries reached $200 million. A Russian parliamentary delegation led by State Duma speaker Gennady SELEZNYOV is expected to arrive to Damascus today for further talks.

Economy

Ruble = 6,064/$1.00 (NY rate)

Ruble = 6,066/$1.00 (CB rate)

Ruble = 6,040|6,092/$1.00 (buy|sell rates)

Businessmen Promote Regional Projects

· Union of Industrualists and Businessmen of Russia and San Francisco authorities are hosting a two day conference which opens today, to draw the attention of American investors to major Russian regional projects. Vice-president of the Boguchany Hydropower Station joint-stock company Vassily GREBENSHCHIKOV said that Russian regional projects will be presented by regional administrations' chiefs as well as by directors of industrial enterprises, banks, and integrated mills. Russian companies represented at the conference are the Federal Energy Commission of Russia, Inkombank, LUKoil, the largest hydropower stations, and members of the Russian State Duma. American businesses attending include the Federal Reserve Bank of San Francisco, the Bank of America, Chevron, and Bechtel. Highlighted in the presentation is the establishment of a Russia-China power transmission bridge, which will make it possible to sell surplus electric power transmitted to China from operating and building hydropower stations in Siberia, GREBENSHCHIKOV said.

Business

Insurance Sector Shake-up

· The Russian government, acting on an order by CHERNOMYRDIN, announced that head of the insurance control department of the Finance Ministry Valery SUKHOV will become chairman of the board of Rosgosstrakh, the state owned domestic insurance company, The Journal of Commerce re

ported. This move follows the dismissal of Rosgosstrakh's chief executive Vladislav REZNIK, for his and other insiders actions to capture control of the company through manipulating the privatization process. His attempt was quashed when a Moscow Court forced the Ministry of State Property to abandon the sell-off of 500 million shares for a price estimated at less than $50 million. The decision on what is to be done with the shares of Rosgosstrakh is still unknown. The company has not been approved for privatization this year by the Duma. SUKHOV's post will be filled by Ilya LOMAKIN- RUMYANTSEV, formerly head of Moscow's fund of compulsory medical insurance.

Gazprom Cuts Spending on New Gas Deposits

· Russian gas giant Gazprom has slashed spending on new gas deposits in the northern Yamal Penninsula by a third. Instead, the company will focus on tapping already existing fields. Gazprom spokesman Anatoly KOTOV said, "We will look to use old deposits and increase output from those deposits we already have...In no way will this reduction effect our ability to fulfill obligations to customers. Gas demand and deliveries to those customers with whom we have long term contracts will be guaranteed." Senior gas analyst from Gas Strategies in London Jonathan STERN sees the reductions as a positive move for Gazprom. "It shows that Gazprom is publicly acknowledging where its priorities lie...The priority should lie in creating pipeline capacity to export markets and refurbishing its existing pipeline network." Gazprom is building a new pipeline that could link trillions of cubic meters of gas in Yamal to expanding markets in Europe.

ICN Elects Russian Vice President

· Former head of the Russian Committee for the Press Sergei GRYZUNOV has been appointed Vice President of ICN Pharmaceuticals (ICN) and is responsible for a public relations department maintaining contacts with all European countries. GRYZUNOV's new responsibilities are to promote the corporation's interests through contacts with mass media, governmental departments, medical centers and the public at large across Europe. He was Director of the Provisional Information Center during the Chechnya war. The center was set up, "for bringing to the Russian and world public objective information about events in the region." Many believed in 1995, after GRYZUNOV abandoned his

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position, that he would become an ambassador to one of former Yugoslav republics, since he has 12 years experience there. However, his Yugoslav connection placed him in the corporate world. ICN's President is Milan PANIC, former Prime Minister of Yugoslavia. ICN actively recruits dismissed Russian government officials. In January Russia's former Foreign Minister Andrei KOZYREV was placed on ICN's board of directors. ICN has moved its European office from Amsterdam to Moscow. Earlier this month ICN declared that it intends to invest $300 million into the Russian economy in the next five years. ICN Pharmaceuticals earned $150 million in sales in the Russian market for 1997.

Digitcom Gains Approval for Internet

· The Russian Ministry for Telecoms has approved Digitcom's Internet Phone for use across Russia. According to Digitcom, the phone has been approved for use in Russia by ZNIIS, the Central Science Research Telecoms Institute in Russia. Digitcom said that the approval clears the way for final joint venture contracts to be signed with Elektrosvyaz, Rostov for deployment in that region of Russia. The St. Petersburg telephone network carries approximately seven percent of Russian Federation telephone traffic, which is second only to Moscow GTS.

the actual resolution will look like, but we believe it will involve about $1.5 billion of Shell's money and long lasting partnership with Ukraine," The Financial Times reported. Ukraine's pipelines need to reinforce its position as the preferred route for gas transit to Europe. If the agreement gives Shell a commercial role in the purchase and transit of gas, rather them being a pipeline operator, it will have huge strategic implications for Ukraine and Shell. Shell could gain the power to determine throughput and maintenance schedules for the pipelines. This may give Shell leverage over Russia's gas giant Gazprom and increase Shell's market share in western Europe's gas market.

South Caucasus & Central Asia

Georgian Pres. To Negotiate With Criminal

· Georgian President Eduard SHEVARDNADZE has expressed concern over the continuing UN hostage crisis in Zugdidi. SHEVARDNADZE said, "We are ready to start a dialogue with the supporters of GAMSAKHURDIA. But they should know our patience has its limits and certain parameters." He has ordered the Georgian Ambassador to Russia Vazha LORDKIPANIDZE to begin negotiation talks with Nemo BURCHULADZE. BURCHULADZE was deputy chairman of the Georgian parliament under Zviad GAMSAKHURDIA from 1990-1991 and has lived in Moscow since January, 1992. He was convicted by Georgian authorities for treason and armed robbery under section 65 and 78 of the Georgian Criminal Law code. However, BURCHULADZE, has said he had nothing to do with the hostage-takers and denounced their actions. "I have no demands. It is hostage-takers who have some demands and I am not in contact with them...I denounce acts of terrorism including this one." It is unclear why the kidnappers have chosen BURCHULADZE as their representative and what they hope to gain. The gunmen indicated they would release their hostages after LORDKIPANIDZE started talks with BURCHULADZE in earnest. BURCHULADZE said he was ready to meet with SHEVARDNADZE on the condition that talks be held under the auspices of the UN.

Aliyev To Sign Bilateral Documents in Japan

· President Geidar ALIYEV of Azerbaijan arrived in Tokyo today for a five-day official visit devoted to

European Republics

Ukraine Denies Territorial Dispute With Russia

· The Ukrainian Foreign Ministry said Monday that a territorial dispute between Moscow and Kiev, "never existed and cannot exist." The statement came in response to Moscow Mayor Yuri LUZHKOV's recent claims to Crimea and its port city of Sevastopol. The Foreign Ministry said that, as in Russia, "serious politicians in Ukraine" realize that good relations between Kiev and Moscow are based on, "mutual respect, sovereignty, and territorial integrity." The Ukrainian parliament has approved a bilateral treaty with Russia that guarantees current borders between the two countries, RFE\RL Newsline reported.

Ukraine-Shell Hope For Pipeline Deal

· Ukraine and Royal Dutch Shell signed a protocol, which may give a stake of the pipeline network across Ukraine to Shell. Shell's general manger in Ukraine Todd STAHELI said, "We don't know what

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Japanese companies' participation in the development of Caspian oil. ALIYEV will be received by Emperor AKIHITO, meet with Prime Minister Ryutaro HASHIMOTO, Speakers of both Houses of Parliament, directors of the Japan National Petroleum Corporation, and address the leading businessmen of the country. Documents giving the right to several Japanese companies to develop Caspian oil resources, are also expected to be signed. Some of the companies already participate in multinationals, which had concluded a total of about $30,000 million worth of contracts with Baku for the production of oil and natural gas. ALIYEV said he welcomed cooperation between Azerbaijan and Japanese companies and promised to create all the necessary conditions in his country to boost it.

A framework agreement on friendship and partnership and a protocol on consultations between the foreign ministries of the two countries are expected to be signed during the visit. Both documents are designed to lay the legal foundation for burgeoning cooperation. Prime Minister Artur RASIZADE said the two nations are also expected to sign a intergovernmental document on trade and economic relations and two credit agreements. Under a program for assistance through the World Bank, Japan has allocated $165 million to Azerbaijan this year to modernize the Severnaya power plant on the outskirts of Baku, becoming one of the main financial donors of Baku. The other credit agreement is with the Japanese corporation Nitimen to provide $94 million to build a steam-generating facility at Sumgait's plant which makes semi-finished ethylene and propylene products and which is part of the company Azerkhimiya. Japan is also expected to give Azerbaijan two grants of $3 million to $4 million each to support health care, education, charity activities and food production.

Pipeline Route Meeting in Turkmenistan

· An international meeting on oil and gas pipeline routes in Central Asia sponsored by the Economic Cooperation Organization (ECO) opened on Mon

day in Turkmenistan's capital. Representatives from Turkmenistan, Turkey, Kazakhstan, Kyrgyzstan, Uzbekistan, Pakistan, Afghanistan, Tajikistan, and Iran participated. Azerbaijan did not send representatives to the meeting.

The focus of the meeting is to share opinions on the technical viability of oil and gas pipeline construction projects submitted to the conference for consideration. The projects include gas pipelines Turkmenistan-Turkey-Europe and Turkmenistan-Pakistan, and an oil pipeline to stretch from Kazakhstan to the Gulf area crossing Turkmenistan. The oil pipeline to connect Kazakhstan and Iran was in the focus of discussions on Monday as relevant accords between Kazakhstan and Turkmenistan and Turkmenistan and Iran have been signed on bilateral level. ECO stressed that the project should be opened to other Central Asian states, especially Azerbaijan. The conference is to work out a summarizing document to be submitted to the ECO headquarters and presented at an ECO summit scheduled for this year in Kazakhstan. The Economic Cooperation Organization views energy supply pipelines a regional cooperation priority.

Turkmen-Shell Sign Gas Project Memorandum

· Turkmenistan President Saparmurat NIYAZOV and Royal Dutch Shell President of International Ventures Alan PARSLEY today in Brussels signed a memorandum of understanding on a $4 billion gas pipeline project. The pipeline will carry gas from Turkmen's Shatlyk field through Turkey to Bulgaria and other parts of Europe. Half of the gas will be delivered to Turkey, will the rest going to the European market. The Fuel and Energy Ministry spokesman said French companies Total and Gaz de France, and Germany's Ruhrgas had expressed interest in participating in the project. Also while in Brussels, NIYAZOV is expected to sign an agreement on partnership and cooperation with European Union (EU) and a joint project with the EU on cotton production, under which 50 percent of cotton output would be sold to Europe.

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

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