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, February 26, 1998


Russian Federation

Politics

Yeltsin Leaves 1997 Gov't Review Session

· President Boris YELTSIN left an extended government session reviewing the 1997 year without announcing the dismissal of several cabinet members, as he had threatened to do. YELTSIN opened the meeting by saying that three minister may not have their jobs at the end of the meeting if the discussions confirmed an analysis previously prepared on the government's activities. The Russian leader said, "an analysis of the situation will show who is guilty." Sources say that YELTSIN left the meeting to think over the situation, while others said he was need at the Kremlin to record his regular weekly radio address. Following news YELTSIN had walked out on the session, government bond and share prices fell. Prime Minister Viktor CHERNOMYRDIN spoke for an hour criticizing the government's performance in 1997, especially efforts to boost foreign trade, cooperation with other CIS states, and tax collection. His remarks fueled speculation that Foreign Trade Minister Mikhail FRADKOV, Deputy Prime Minister Valeri SEROV, who is in charge of CIS issues, and State Tax Service chief Aleksandr POCHINOK would be fired by day's end. After the extended meeting YELTSIN met CHERNOMYRDIN to discuss a possible Cabinet reshuffle. A Kremlin spokesman said, "It is possible that there will be no personnel decisions today," but that YELTSIN may announce the dismissals on Friday's radio address to the nation.

Chernomyrdin's Assessment of Russia

· At a government session Russian Prime Minister Viktor CHERNOMYRDIN called for action with regard to the budget, tax collection, Tax Code, welfare and pension benefits, concentrating on the main goal of economic growth. He said it was necessary

to adopt a budget amendments because the government, "wants no more lies." He believes that some 50 billion rubles ($8.2 billion) in spending cuts are needed to make the draft 1998 budget realistic. After Yeltsin described the budget as unrealistic during an address to the parliament, an amendment was proposed withholding expenditures totaling 27.9 billion rubles in the event of revenue shortfalls. However, the Duma voted down that amendment. CHERNOMYRDIN also criticized the poor tax collection. According to him, "we collect taxes where they are easier to collect," cornering the fuel and energy complex and the industrial sector. Other taxes are not collected either through our inability to cope with that sector, or through our inability to work, the Prime Minister said. CHERNOMYRDIN said that, "it is time to put an end to tax surrealism." He stressed that it is crucial that a new tax code be passed this year. He said the code recently submitted by the government to the Duma would greatly simplify the tax system since it envisages a total of only 30 taxes, including a reduced profit tax, as well as a simpler tax procedure for small businesses. CHERNOMYRDIN said the goal is to enter 1999 with zero government debt. He said the factor for accomplishing government efficiency would be its ability to reduce inflation to an annual five-seven percent range.

The Prime Minister said the state should increase its role within the social sphere. Nearly 100 million people or two-thirds of the country's population claim some type of benefits. The state spend

Today's News Highlights

Russia

IMF Urges Rail Privatization

Defense Min. Launches Website

European Republics

Belarus Pres. Distrusts NATO

Lith.-Rus Businessmen Meet

Ukraine Creates State Oil Co.

South Caucasus & Central Asia

Georgia-Abkhazian Economic

CanArgo Signs PSC

Iranians Arrested for Spying

Politics-Economics-Business

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Thursday

February 26, 1998

Intercon's Daily

350 billion rubles, but this is not enough. CHERNOMYRDIN proposed that in the near future to an individual insurance account would be established for contributions to the pension fund. He also said it was necessary to retrain professionals who may lose their jobs. CHERNOMYRDIN noted that the main goal remains to improve economic growth to 5 or 6 percent by 2000. CHERNOMYRDIN concluded that 1997 represents a, "turning point in crisis moments" in the Russian economy.

IMF Urges Privatization of Rail System

· In last week's meeting between the International Monetary Fund (IMF) President Michel CAMDESSUS and President Boris YELTSIN, the IMF demanded that the Russian government privatize the state owned rail system. The demand is a condition that the IMF has placed on the extension of its $10 billion loan agreement and on the release of this month's installment of $670 million, The Journal of Commerce reported. YELTSIN pledged in September to preserve the state control over passenger and freight operations, and to keep the main territorial operating divisions under the Ministry of Railways, headed by Nikolai AKSENENKO. First Deputy Prime Minister Boris NEMTSOV and AKSENENKO agree that the national railroad should be preserved for at least two years, while several subsidiary operations are privatized. Many fear privatizations of the rail system will result in the closure of vast sections of track and loss of employment and welfare benefits to Russia's Arctic and Siberian regions. The rail system brings in huge revenue contributions, which have been growing steadily for many years, to the federal budget. In 1996, the rail system contributed $9.9 billion and $11 billion in 1997. Contributions in 1998 are expected to reach more than $15 billion. It is not clear whether privatization of some subsidiary operations will be enough to satisfy the IMF to release badly needed funds.

Economy

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

Ruble = 6,070/$1.00 (CB rate)

Ruble = 6,044|6,096/$1.00 (buy|sell rates)

February Tax Collection Reaches Target

· State Tax Service chief Alexander POCHINOK said today Russia's tax collection in February has

met the target of 12.3 billion rubles. He said tax revenue will exceed the target if the Russian gas giant Gazprom pays its debt. Tax receipts in cash made 135 trillion old rubles, or a monthly 10-11 trillion redenominated rubles in 1997. POCHINOK said 15-18 billion new rubles must be collected in taxes monthly to implement the socio-economic programs of the president and the government.

Finance Minister Mikhail ZADORNOV added that taxes collected in cash went up by 30 to 35 percent in first months of this year. According to ZADORNOV, the state practically does not borrow securities on the domestic market and even sells them off. Borrowings on the foreign market amounted to one billion dollars in the form of loans of the International Monetary Fund and the World Bank. Therefore, he continued, the state lives only on the cash money, provided by the tax service and the Customs Committee. The Finance Ministry plans to resolve the consequences of raising the interest rates, ZADORNOV said. He believes that if the recent trend towards the bringing down of rates goes on, Russia will resume operations on the world financial markets late in March or early in April, and this will be evidence of the stability of the Russian financial market.

Business

Rybinsk Engines Sales Grew 60 Percent in 1997

· An increase in sales volumes has made the Rybinsk Engines joint stock company, manufacturing aircraft engines and other high-quality products, one of the most profitable enterprises in Russia. General director of the Rybinsk Yury LASTOCHKIN said that in 1997 the volume of sales of products of the company grew 60 percent as compared to 1996 sales. According to him, the Rybinsk has paid all taxes to the federal and local budgets and has no arrears of wages, which averages 870 rubles a month at the enterprise. "For the time being, these are not too high wages but we pay them without delay," LASTOCHKIN stressed. For 1998, the business plans to increase the total volume of sales of products and services from 1,282 million rubles to 2,225 million rubles.

The Rybinsk engines machine-building enterprise, in addition to aircraft engines and ground power installations, also manufactures motors for tractors, tools, snow vehicles, means of small-scale mecha

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February 26, 1998

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nization and consumer goods. At present different divisions of the enterprise employ about 20,000 workers, engineers and employees.

Shareholders Win Russian Bond Fight

· Sidanco, a Russian oil company, and minority shareholders are close to resolving a dispute surrounding a convertible bond issue which would have diluted minority stakes. Vladimir POTANIN, head of Unexmbank the group which owns a controlling stake in Sidanco, said he has offered minority shareholders "equal access" to a planned convertible bond issue which has previously been limited to company insiders. POTANIN said the convertible bond, "to a certain extent it was a mistake. The issue is that the rules of the game are changing so quickly," The Financial Times reported. Bill BROWDER, founder of Hermitage Capital Management, which has led the minority shareholder's complaint confirmed that Sidanco had made a verbal offer. "Basically, they are suggesting letting all the minority shareholders participate pro rata in the convertible bond." BROWDER also praised the Federal Securities Commission for its role in intervening on the side of minority shareholders. "It is a sign that there is some strength from the securities commission." Many see the possibility of settlement a strong indicator that Russian corporate governance is beginning to improve. Weak corporate governance has emerged as a serious obstacle to foreign investment and one of the International Monetary Fund's chief targets for criticism.

Russian Defense Min. Launches Website

· Russian Defense Ministry launched its official website (http://rian.ru/mo/mo.htm) Wednesday on the Internet. A Defense spokesman said, "We operate a policy of openness at the Defense Ministry. We prefer to issue our information directly to the public rather than have it distorted." Those seeking military secrets on the site will be disappointed. The ministry will only post non-classified information. The site for now is only in Russian, but there are plans to create new pages in other languages. "We are trying to force the pace. But our problem is we have too few people who can work with the Internet. We are training military personnel to use it." After a five year internal dispute, the need to be wired won over old crony officers. "Yes, of course that's the case. But, the point is that the Internet is the future. The more

people get to know about each other the better."

European Republics

Belarus President Distrusts NATO

· Belarus President Alexander LUKASHENKO said he does not believe NATO pledges that it will not deploy nuclear weapons in Eastern Europe when it expands, Interfax News Agency reported. LUKASHENKO, addressing the Novosibirsk branch of the Russian Academy of Sciences, added that he, "categorically opposes" the withdrawal of, "Russian strategic nuclear missiles from Europe, including Belarus." The President said that Western states are setting up "intelligence centers" in Poland, Hungary, and the Czech Republic in order to spy on Belarus and Russia.

Russian and Lithuanian Businessmen Meet

· Business professionals of Lithuania and Russia will meet in the Kaliningrad region for a three-day seminar, which will feature a trade show of Lithuanian-made products. During the gathering, representatives of the two business communities plan to discuss the current practice of economic cooperation between Lithuania and Russia's enclave on the Baltic Sea. Head of the Kaliningrad region's representative office in Lithuania, Sergei OVERKO said the direct ties between the two regions are now re- emerging. Last year, 57 joint Russian-Lithuanian ventures were set up in the Kaliningrad region, bringing the total number to 252 companies, or 20 percent of the total number of joint ventures in the region. The Russian enclave's trade turnover with the neighboring republic increased up to $223 million. The most important trend in the economic cooperation between the two sides is a switch from trade to the use of the industrial potential, as well as to the restoration of development of cooperatives. However, an effective mechanism of cooperation between the Kaliningrad and Lithuanian regional ministries and agencies is not yet in place.

Ukraine Creates New State Oil And Gas Co.

· Ukrainian President Leonid KUCHMA signed a decree creating a new state-owned oil and gas company to replace the existing state oil and gas committee. "The new company will be set up within two months to help restructure Ukraine's oil, gas and oil refinery sectors. It will be called Naftohaz Ukrainy

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(Oil and Gas of Ukraine), said presidential spokesman Petro OSTAPENKO. He added that only firms which are 100 percent owned by the state will be included in the new company. There are only 50 purely state owned companies which are involved in extraction, refining, storage, transportation, and distribution. By April, the government will make a list of companies to be included, appoint a chief executive, and approve the Naftohaz Ukrainy charter. In 1997, Ukraine produced 4.2 million tons of oil and 18 billion cubic meters of gas.

South Caucasus & Central Asia

Georgia-Abkhazia Reach Economic Agreements

· Meeting in Sukhumi on Tuesday, Georgian Minister of State Niko LEKISHVILI and Abkhazian Prime Minister Sergei BAGAPSH reached agreement on restoring the high-voltage power line between Georgia's Inguri Hydroelectric power station and Russia and on building a gas pipeline to transport Russian gas to Georgia, Caucasus Press reported. The World Bank is to provide $50 million for repairs to the Inguri station; and the power it generates will be shared between Georgia and Abkhazia at a ratio of 40/60. The agreements must still be endorsed by Russia, BAGAPSH said. Talks on restoring rail links were inconclusive and will be resumed only after the repatriation to Abkhazia of Georgian displaced persons. LEKISHVILI also met with Abkhazian President Vladislav ARDZINBA, RFE\RL Newsline reported.

CanArgo Signs Production Sharing Contract

· CanArgo Energy Inc. Wednesday announced the execution of a new Production Sharing Contract (PSC) for additional acreage in Georgia. The contract signed by the Georgian State Oil Company Georgian Oil, following a decree from President Eduard SHEVARDNADZE, gives CanArgo exclusive oil exploration and development rights to the Nazvrei and Block XIII areas of eastern Georgia. CanArgo holds these rights through its wholly owned subsidiary CanArgo Ltd., formed specifically for this purpose. These areas lie close to existing CanArgo

and Georgian Oil infrastructure, within the main Trans-Caucasus transportation corridor. , and close to the route of the oil pipeline currently being constructed by the Azerbaijan International Oil Consortium to transport crude oil from the Caspian Sea to Supsa. According a company press release, the terms of the PSC 50 percent of the oil sales are used for cost recovery. The remaining 50 percent will be shared equally between CanArgo and Georgian Oil until payout. It is then split 70/30 between Georgian Oil and CanArgo respectively. Chairman of CanArgo Dr. David ROBSON attaches great significance to the PSC and said, "This new contract together with our recently agreed business combination with Fountain Oil Inc. gives the company further potential and resources to exploit our well respected position in the area and to further grow and develop the company."

Three Iranian Spies Arrested in Kazakhstan

· Three Iranians and one Kazakh citizen have been detained by Kazakhstan's Security Services on the charges of spying on Wednesday. They were arrested in Almaty after the Kazakh citizen handed the Iranians "secret information." Itar-Tass reported that Iranians were seeking information on political, economic, and social issues as well as, "data on some people in power." Security spokesman Kenzhebulak BEKNAZAROV said, "Three citizens of Iran were arrested and are suspected of carrying out actions to the detriment of Kazakhstan and which are against the laws of Kazakhstan. The Kazakh contact, who held a post at Iran's Information and Security Ministry, and the three Iranians do not to have diplomatic immunity, the committee said. The Iranian Embassy said, "We absolutely deny that there are any Iranian secret agents in Kazakhstan." The Embassy also noted that the three Iranian nationals have no links to the Iranian Secret Services. Kazakhstan's authorities claim one of the Iranians is a special agent from the Iranian Ministry of Information and Security and the other two are bodyguards. The National Security Committee refrained from any further comments. The Iranian embassy is waiting for further official information.


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

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