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Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Wednesday, February 25, 1998

Russian Federation


New Foreign Coordinating Body Formed

· Russian Minister of Fuel and Energy Sergei KIRIYENKO said at a briefing on Tuesday that a new state institution will be formed to coordinate the foreign economic activity of Russian departments and companies, which is likely to be headed by Prime Minister Viktor CHERNOMYRDIN. The work of the new institution will be similar to the foreign economic functions of the US State Department. Two thirds of all Russian foreign economic activity are fuel and energy industry contracts. The new institution will assist in forming the state position on strategic fuel and energy projects and boost their promotion. The Fuel and Energy Ministry has proposed a new procedure, similar to the Central Bank, to approve the appointment of heads in fuel and energy taking into account candidates' reputation and experience. It is necessary to change the law on joint stock companies in order to introduce the new procedure and make the companies to coordinate the top-ranking nominations with the Fuel and Energy Ministry, KIRIYENKO said.

Customs Union of Four Discuss VAT

· First Deputy Prime Ministers of Russia, Belarus, Kazakhstan and Kyrgyzstan, the four members of the Custom Union, met today to formulate an accord on the value added tax (VAT). Russian First Deputy Prime Minister Anatoly CHUBAIS said the lack of coordination in the levying of the VAT on exports and imports of CIS Customs Union members adversely effects their trade. Integration committee chairman Nigmatzhan ISINGARIN said the VAT is a major determinant factor in trade. In 1997, Kazakhstan revised the principle of levying the VAT on imports from the CIS and taxed the imports at their destination. This resulted in double taxation and a reduction

of Kazakhstan's trade by 20 percent with Russia and 30 percent with Belarus, ISINGARIN said. CHUBAIS hope that the parties would come to a "joint reasonable decision," as a result of the discussions.

Yeltsin Calls For Caspian States to Meet

· Presidential spokesman Sergei YASTRZHEMBSKY on Tuesday announced that Russian President Boris YELTSIN has called for a summit of the five Caspian Sea states to define the sea's legal status. YELTSIN's believes it is possible for all littoral nations, "to work out as soon as possible a legal status that would suit all the states in the Caspian Sea basin," which would be, "signed at a meeting of all their leaders." YELTSIN said, "I see it this way: If the sea is in joint possession, its resources should be mined on the basis of a legal status approved by all the five Caspian states." YELTSIN and Kazakh counterpart Nursultan NAZARBAYEV agreed that it is necessary to preserve the "joint use" of water surface, keeping the sea open to navigation and adopting rules to regulate fishery and environmental protection in the basin.

Maskhadov Urges Prosecutor Gen. to Resign

· During an appearance on Grozny television Tuesday night, Chechen President Aslan MASKHADOV said that prosecutors failed to fulfill his order to interrogate Salman RADUYEV, against whom a criminal case has been instituted on charges of anti-state activities. He called the performance of the prosecutor-general's office unsatisfactory

Today's News Highlights


25 Percent of Banks in The Red

Customs Changes Are Trouble

European Republics

Ukraine To Sell Steel Plant

Latvia-Ukraine Discuss Agments.

South Caucasus & Central Asia

Kidnappers Release All Hostages

China-Georgia Relations

Azeri Host Trans-Caucasian Mtg

Russia Changes Caspian Policy




February 25, 1998

Intercon's Daily

and urged its leadership to resign. MASKHADOV scolded leaders of power-wielding ministries and the Shariah court. He claimed they had taken a wait-and-see position and had not been doing anything to prosecute violators of the Chechen constitution and laws. MASKHADOV called for a more active crime-fighting, saying that every minister must act without waiting for presidential orders and persecute law-breakers.

Report On Embezzlement of State Funds

· Government spokesman SHABDURASULOV announced that the Finance Ministry has handed over to CHERNOMYRDIN its report on how funds earmarked for wage payments were allocated in late 1997, which he will make public at the cabinet session on Thursday. SHABDURASULOV said the report shows how some federal funds went astray in the regions. Government ministers have repeatedly blamed regional officials for the delay in payment of wage arrears to state employees. The Prosecutor General's office announced that Russian courts have passed sentences on 69 officials since 1996 for embezzling 2,959 million non-denominated rubles ($490,000) from federal coffers. As many as 114 criminal suits were referred to courts. Investigators recovered 789 million rubles and another 268 million were returned during trials. Prosecutors sued for 1.9 billion rubles worth of damages. The report was prepared by the department monitoring legality of verdicts as part of measures to implement the presidential decree on tougher control over the use of federal money intended for paying wages.


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

Ruble = 6,068/$1.00 (CB rate)

Ruble = 6,042|6,094/$1.00 (buy|sell rates)

25 Percent of Russian Banks in the Red

· Head of the Central Bank Sergei DUBININ said that about 25 percent of Russian credit organizations are operating in the red and need to undergo normalization procedures. The assets of financially unstable banks account for 24.3 percent of the total assets of the existing credit organizations. He explained that the main responsibility for implementing normalization measures lies with the territorial branches, that is the Central Bank's main directorates. The situation is especially pressing in Russia's Far East,

where 57.7 percent of the banks face serious financial difficulties. In the North Caucasus, the share of unsteady banks is 52.8 percent; 43.7 percent in East Siberia; 43.2 percent in the Central area (excluding Moscow and the Moscow region); 38.3 percent in West Siberia; and 37.5 percent in the Urals. Liquidation commissions are now working at 73 percent of the banks, whose licenses were revoked, compared to less than 30 percent in early 1997, DUBININ said.

New Savings Bank Option?

· A new banking network to pose a rivalry to the ex-Soviet giant Savings Bank may emerge in Russia as a federal securities agency and some presidential staff, have asked Boris Yeltsin for an alternative to deposit individual savings. The Federal Securities Commission (FSC) and the Administration's Main Legal Directorate believe that a network which would send returns by mail could boost individual investment in the Russian economy. The network could be established in half a year if the FSC gets controls over Russia's mailing service. If no urgent measures are taken to raise individual investments, the revenue from the state short-term bond market and privatization in 1998 will be much lower than planned, and the government will fail to increase domestic and foreign investment in the long run.


Custom Reorganization Causes Gridlock

· Moscow's attempt to end corruption in the Customs collection process by reorganizing the infrastructure on January 12th has caused major delays in shipments. Sergei ZHELANOV, an executive with the largest foreign shipper operating in Russia Sea-Land Service Inc. said, "There are huge lines of hundred of people waiting to have the documents inspected," reported The Journal of Commerce. He added, "We are also hearing of cases of people having to pay duties a second time because old Customs account into which they prepaid for their goods has been closed." Shippers were warned several months earlier by the State Customs Committee of changes, no one has been prepared for the change over. The reorganization replaces specialized custom houses with a simpler geography based system, adds four customs posts in Moscow, and a bans direct contact between consignees and customs officers. All consignees must present their documents for clearance in the region where their

When you need to know it as it happens




February 25, 1998

Intercon's Daily

office or warehouse is located. The processing of documents is done anonymously, without consignees being able to see or communicate with customs officers. Art FRANCZEK, an instructor at the American Institute of Business Economics and a member of a special committee on customs at the American Chamber of Commerce in Russia, says there are no reliable figures to show just how much money is illegally passed to Russian Customs officers. He warns that it is difficult to determine what is corruption and what is bureaucratic and legal complexity.

Nemtsov Says Gov't Will Limit Mergers

· First Deputy Prime Minister Boris NEMTSOV announced Tuesday at a meeting of Fuel and Energy Ministry Board that the government will not support mergers that would give new companies more than a 30 percent share of the domestic oil or gas market, RFE\RL Newsline reported. He did not name any specific firms. The State Anti-Monopoly Committee has yet to approve the recent merger of the Yukos and Sibneft oil companies to form the Yuksi firm. Although CHERNOMYRDIN attended the Yuksi signing ceremony and praised the merger, NEMTSOV is responsible for overseeing the work of the State Anti-Monopoly Committee. Last month, a redistribution of duties in the government gave CHERNOMYRDIN the authority to supervise energy policy, but NEMTSOV has vowed to stay involved in forming government policies in that area.

with the Ukrainian leadership the possibility of lowering duties on the import of Ukrainian grain to Latvia. He will propose a steep reduction from 75 to 35 percent. Agreements on cooperation in communications, railway transport and shipping are expected to be signed during the Latvian Premier's visit. On Tuesday the two sides failed to agree on free trade of agricultural products. The sides said at the negotiations that despite the abundance of Ukrainian-Latvian documents, many of them do not function properly. This includes the agreement against double taxation. Ukraine and Latvia did manage to reach mutual understanding on the majority of issues and voiced the need to search for natural gas sources other than Russian.

South Caucasus & Central Asia

Georgian Kidnappers Release All Hostages

· All remaining UN military observers, who have been held hostage since February 19th, have been released today by Zviadist kidnappers in Zugdidi. Their release followings a meeting of Georgian President Eduard SHEVARDNADZE, Nemo BURCHULADZE, and four other pro-GAMSAKHURDIA activists in Tbilisi as demanded by the kidnappers. BURCHULADZE was appointed to represent by the hostage-takers, though no real connection existed between them. Both BURCHULADZE and the pro-GAMSAKHURDIA regard SHEVARDNADZE's rule as illegitimate. The kidnappers had three demands: the release of suspects being held for the attack on SHEVARDNADZE; talks to be held between SHEVARDNADZE and BURCHULADZE; and the closure of Russian military bases in Georgia with the withdrawal of Russian peacekeepers and freedom for "political prisoners." The group's leader Gocha ESEBUA issued a final demand this morning calling for an "international legal assessment" of the armed coup which overthrew GAMSAKHURDIA in early 1992. Approximately 17 kidnappers surrendered to security forces following the hostages' release. ESEBUA and at least two others appear to have been released. Presidential press secretary Vakhtang ABASHIDZE said, "The security organs had the possibility of liquidating the terrorists but doing so would have caused bloodshed and it was decided to give ESEBUA a corridor." He added that a manhunt was underway to track him down now that all the hostages were free.

European Republics

Ukraine to Sell Stake in Steel Plant

· Ukraine's State Property Fund said Monday it will sell a 27.25 percent stake in steel maker AT Nikopilsky Zavod Ferrosplaviv, which employs 8,700 workers, by March 31 to the highest bidder. Authorized capital in the plant is 75.8 million gryvnias ($38 million) and shares have a nominal value of 0.25 gryvnias each. A Fund statement said future privatization plans for the plant call for 15 percent of shares to be traded for privatization certificates and a 12.52 percent stake being sold to the buyer with the best investment plan. The government owns a 25.1 percent stake in the plant.

Latvia-Ukraine Discuss Agreements

· Latvian Premier Guntars KRASTS, who is leading a delegation of 39 business executives, will discuss

When you need to know it as it happens




February 25, 1998

Intercon's Daily

ABASHIDZE said that talks between SHEVARDNADZE and pro-GAMSAKHURDIA activists were positive but gave few details of the meeting.

China-Georgia Increase Transport Cooperation

· Chinese Vice-Premier WU Bangguo and Georgian Minister of Transport Merab ADEISHVILI met today in Beijing. WU pointed out that cooperation between China and Georgia has gained in scope since the establishment of diplomatic relations in 1992. The Vice-Premier called for wider contacts between transport ministries of the two countries. He said it is essential for both the Peoples Republic of China and Georgia, "to use as many goods as possible for transportation and increase the competitive power of their transport." ADEISHVILI noted the need for, "a transition to a new stage in cooperation between the two countries in the transport sphere." The Georgian delegation led by ADEISHVILI was invited to China by Chinese Minister of Railways HAN Zhubin.

Trans- Caucasian Highway / Caspian Summits

· Azerbaijan plans to invite the leaders of European and Asian countries interested in the transportation of goods by the Trans-Caucasian highway to come to Baku to participate in a summit meeting in late May. The announcement was made by President Geidar ALIYEV Monday. ALIYEV said he had sent invitations to the leaders of many countries situated along the route which is designed to link the north of Europe with China and Japan. He said the Trans-Caucasian section of the route has been used by European countries, Georgia, Azerbaijan, Kazakhstan, Uzbekistan and Kyrgyzstan. Meanwhile, ALIYEV supports Turkey's proposal to hold a meeting of the foreign ministers of Turkey, Azerbaijan, Kazakhstan, Turkmenistan and Georgia in Istanbul in March to discuss the transportation of oil from Caspian fields to the world markets by the optimum route. Azerbaijan will be represented by Deputy Foreign Minister Araz AZIMOV. Turkey intends to present its version of Caspian oil transit route which, if approved, may link Baku with Ceyhan in the Mediterranean. About 100 million tons of Azerbaijan, Kazakh and possibly

Turkmen and Uzbek oil will go by this route by 2000. Russia and Georgia have also proposed their oil transit routes to Novorossiisk and Supsa accordingly. The final decision will be made in October by the international consortium which is developing three Caspian fields.

Russia Reverses its Caspian Pipeline Policy

· Russia, in a move that marks a reversal in its Caspian pipeline policy, is bargaining for a stake in the Turkish Baku-Ceyhan pipeline, which avoids Russian territory. Until now, Russia has been strategically lobbying to ensure that Caspian oil only flows to its Port of Novorossiisk. By possibly joining the Ceyhan consortium, Russia hopes to minimize its losses if this pipeline is favored over their plans. LUKoil's president Vagit ALEKOEROV and Turkish Energy Minister Mustafa Cumhur ERSUMER met to discuss the construction of a $3 billion pipeline from Baku. Robert EBEL director of the energy and national program at the Center for International and Strategic Studies explains LUKoil's behavior. "If they are convinced that the line is going to happen, they want a piece of the action," as quoted in The Journal of Commerce. LUKoil wants to play a larger role in Turkey by supplying crude oil to its refineries and opening gas stations there. LUKoil may also be acting on behalf of Russia's national interests. Russian Fuel and Energy Minister Sergei KIRIENKO has also reportedly met with ERSUMER to discuss the Ceyhan option. First Deputy Prime Minister Boris NEMTSOV said at a meeting of the Fuel Ministry Board on Tuesday that Russia should concentrate on finalizing construction for the Chechnya bypass pipeline. Russia can use the pipeline as a reserve way when the oil from the Baku fields increases.

Turkmen Introduces New Income Tax

· Turkmenistan will introduce new differentiated rates of the income tax for individuals on March 1. A decree to the effect followed an instruction of President NIYAZOV to raise the salaries by 1.5-2 times. An income smaller than 200,000 manat is tax exempt. The manat exchange rate to the is 5,100 per dollar.

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

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