DAILY REPORT ON RUSSIA

AND THE FORMER SOVIET REPUBLICS

INTERCON INTERNATIONAL USA, INC., 725 15th STREET, N.W., SUITE 908,

WASHINGTON, D.C. 20005 -- 202-347-2624 -- FAX 202-347-4631

Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Wednesday, February 4, 1998

Russian Federation

Politics

Nikolaev to Run for State Duma

· Former director of the Federal Border Service Andrei NIKOLAEV, sacked by Russian President YELTSIN in December, 1997, confirmed he will run for the State Duma seat vacated by Irina KHAKAMADA when she took up a government post last November. According to Kommersant Daily on January 27, NIKOLAEV will compete with 20 candidates, including former Defense Minister Igor RODIONOV and former St. Petersburg Mayor Anatolii SOBCHAK, for the DUMA seat. By elections are scheduled to take place in April. Russian new media reports that NIKOLAEV is a potential candidate for the Russian Presidency.

Government Budget Revenue Commission

· The Russian cabinet, on Tuesday has decided to create a government commission to control federal budget revenues. First Deputy Prime Minister Anatoly CHUBAIS said the commission will comprise the heads of all revenue-generating departments. Its main objective is to make monthly estimates of budget replenishment. CHUBAIS said the State Customs Committee's (GTK) performance last year had been positive on the whole, but it did, "not propose to the cabinet its ideas to boost budget." CHUBAIS criticized the GTK for insufficient measures against the understatement of prices of imported goods such as cigarettes and cars. Items that the GTK did not confiscate legally, went to the shadow economy.

Russian-Chechen Relations

· Chechen President Aslan MASKHADOV is advocating the adoption of a new constitution for the republic that would declare Chechnya an Islamic state and would give the President almost unlimited

powers, RFE/RL Newsline reported on Monday. The current constitution, adopted in March 1992 under President Dzhokhar DUDAEV, declares the republic a secular state. It also gives the parliament significant powers, such as the right to confirm ministerial appointments and dismissals and to approve changes in the structure of the executive branch. MASKHADOV argues that when the 1992 constitution was adopted, DUDAEV was hoping for support from the international community. MASKHADOV charges that not only did Western countries not back Chechnya's bid for independence; they helped Russia finance the war to keep the republic in the Russian Federation.

On Tuesday, a Chechen delegation headed by a vice-premier met with Russian vice-premier Oleg SYSUYEV to discuss social issues. A spokesman for the Russian government Igor SHABDURASULOV confirmed that Russia will continue working with the Chechen republic on all issues.

Economy

Ruble = 6,031/$1.00 (NY rate)

Ruble = 6,033/$1.00 (CB rate)

Ruble = 6,007|6,059/$1.00 (buy|sell rates)

Possible Downgrade for Russian Banks' Rating

· Moodys Investor Service has paced the long term foreign currency deposit ratings, debt ratings and stand-alone financial strength ratings of

Today's News Highlights

Russia

Gazprom Out Turkmen Deal

European Republics

New Ukrainian License Law

Italian-Estonian Relations

South Caucasus & Central Asia

Armenian Politcal Power Crisis

Georgia Combats Corruption

Kazakh-Farnce Sign Trade Agmt

Daewoo Out of Uzbek Telecom

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Intercon's Daily

nine Russian banks under review for a possible downgrade, according to a Moody's press release. The review was prompted by a recent increase in interest rates on the domestic Treasury bill market which, "complicated the debt servicing position of the federal government" and put increased pressure on, "an already difficult fiscal position," leading to a heightened risk of capital flight. Moody's warned that increased pressure on the ruble and foreign exchange reserves may occur, adding to losses in the banking sector. It also said that doubts remain about Russia's federal government's fiscal policy and its relationship with Russian regions, municipalities, banks and corporations. Moody's will asses the government's "capacity and intent" to implement a comprehensive set of policies to address these problems and strengthen foreign and domestic investor confidence.

Gold and Foreign Currency Reserves Dropped

· Deputy Chairman of the Russian Central Bank Alexander POTEMKIN said that as of February 1, 1998, the gold and foreign currency reserve of Russia dropped by 45 percent as compared to late summer 1997. In his words, a drop of the reserve is caused by the financial crisis in the world economy and finances, three waves of which hit Russia. "We gained new experience from that crisis," he said. A main task of the bank is to restore and increase the gold and foreign currency reserve by March-April 1998.

Business

Gazprom Withdraws From Gas Deal

· Russian gas giant Gazprom's spokesman Dmitry DANKIN announced today that Gazprom has withdrawn from a $2 billion, 1,460 km pipeline project from Turkmenistan to Pakistan via northern Afghanistan. Gazprom held 10 percent stake in the project. DANKIN did not know who purchased the Gazprom stake, but Unocal said on Saturday that its share rose from 46.5 to 54.11 percent. Remaining participants in the project are Unocal, Saudi Arabia's Delta Oil Company, Japan's Itochu Corp. and Inpex, South Korea's Hyundai Engineering and Construction Co. Ltd., Pakistan's Crescent Group, and the Turkmen government.

DANKIN down played the significance of the decision to withdraw from the pipeline plan, which could

be crucial to Turkmenistan's economic development, Reuters reported. He said, "As you know, we have fairly complicated relations with Turkmenistan." Talks between Turkmenistan and Gazprom to use their pipeline to transport Turkmen gas to CIS nations and Europe have stalled because of a disagreement on price. Ukraine President Leonid KUCHMA and Turkmenistan President Sapamurat NIYAZOV signed an agreement January 29 to deliver 20 billion cubic meters of Turkmen gas annually to Ukraine until 20005. KUCHMA said that Russian President Boris YELTSIN on Saturday agreed to a solution to the Turkmen gas issue, however, no details have been released. Meanwhile, Gazprom has proposed buying Turkmen gas and reselling it to Ukraine, rather than receive fees for transporting gas.

Gazprom will continue with plans to develop a gas deposit in southern Iran worth $2 billion despite the US threat to impose sanctions. DANKIN said, "We will take part in the South Pars project, because it does not break any laws-Russian, Iranian or French." The US Iran-Libya Sanctions Act (ILSA) foresees sanctions against foreign firms that invest more than $20 million in the oil and gas sectors of those two countries. No decisions have been taken so far by the US to impose such sanctions on the consortium, consisting of the Russian Gazprom company, French Total and Malaysian Petronas. US State's Department's James FOLEY said Tuesday that the possibility of sanctions, "remains quite probable."

Rostelekom Traffic Rise Shows Growth

· Russia's leading telephone operator Rostelekom experienced strong growth in long-distance and international traffic in 1997, which shows evidence of a growing economy. Economists have drawn links between the frequency of telephone calls and broader business activity, especially in Russia where much of the economy goes unrecorded, The Financial Times reported. Rostelekom's President Oleg BELOV said inter-city traffic grew 12.2 percent, reflecting an increase in personal and business calls. Incoming international calls grew by 5.6 percent, while outgoing call rose 19.7 percent. The increase of international calls, highlights foreigners interest in Russia. BELOV said, "For us this is a very optimistic, pleasant fact which shows that all the investments we have made in upgrading our network have been matched by increased demand." Rostelekom invested $1.5

When you need to know it as it happens

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billion since 1992 expanding its network. Rostelekom accounts for 85 percent of all long distance and international calls in Russia. The company is facing increasing competition from independent and foreign operators in the market. 12 million Russians are still waiting for telephone installation.

of both Armenia and Nagorno-Karabakh." Russian President Boris YELTSIN in a statement said that TER-PETROSYAN will be replaced by "tough" people. He said Armenian, "is in the strategic field of Russia's interests. One must not lose Armenia, and we won't do that." Following a parliamentary vote to accept the President's resignation, the speaker of the Parliament Babken ARARKTSYAN submitted his resignation. He said, "I do not regard myself a hired worker to carry out ideas of the new parliamentary majority [The Erkrapa Party]." Deputy speakers Ara SAAKYAN and Karapet RUBINYAN and chairmen of several permanent committees of the National Assembly also tendered resignations. ARARKTSYAN suggested the Prime Minister Robert KOCHARYAN fulfill presidential duties. KOCHARYAN until last Spring was president of the self-proclaimed Republic of Nagorno-Karabakh. He rejects the possibility of returning to Azerbaijan the areas, occupied by Nagorno-Karabakh in the course of the armed conflict. KOCHARYAN is emphatically supported by Minister of the Interior and of National Security Serzh SARKISYAN and Defense Minister Vazgen SARKISYAN, who patronizes the Erkapa Party, which is now the majority party in the Armenian parliament. Deputy Khosrov ARUTUYNYAN in a vote 99 to 56 with 11 absentions was elected new parliamentary chairman. According to the constitution he will be acting President until elections are held in 40 days.

In his resignation speech, President TER-PETROSYAN said, "time will show who did what for Nagorno-Karabakh and who is selling it and who is really betraying Nagorno-Karabakh. Nothing extraordinary happend,. Simply, the party of peace and decent accord has lost...The party of peace has suffered defeats in more developed countries like Israel. But both in Israel and Armenia everything is transient. This is just a temporary defeat." He urged the new president to, "show restraint, to maintain peace in the country and to hold legal, civilized elections of a new president...this will be evidence of the maturity of the state that we took eight years to create, and a guarantee of the preservation of its international prestige."

In a White House statement on Assistance Programs for the New Independent State of the Former Soviet Union, US President Bill CLINTON has determined

European Republics

New Ukrainian Law Cuts Business Licensing

· In attempt to abolish the Soviet practice of taking bribes for business registration, Ukraine approved a law drastically reducing the time and money required for businesses to register and obtain licenses to operate in Ukraine. The new licensing process will take no more than five days for most businesses to obtain seven basic licenses. Previously new businesses had to obtain more than 90 licenses for about 1,000 types of business activities, which took several month and required visits to more than 30 ministries and up to 800 municipal bodies. The complicated maize of licensing requirements have deterred foreign investors and the development of small and medium sized businesses. Since 1991, Ukraine has only attracted $2 billion in direct foreign investment.

Estonian-Italian Bilateral Relations

· Italian Premier Romano PRODI on Tuesday arrived in Estonia for an official visit with Estonian President Lennart MERI, Prime Minister Mart SIIMANN, and Foreign Minister Toomas Hendrik ILVES to discuss bilateral relations, economic cooperation, and issues regarding Estonia's integration into European institutions. The Estonian and Italian Heads of Government are to hold a joint press conference on the results of the visit. This visit is a second trip to Tallinn of Italian leaders.

South Caucasus & Central Asia

Crisis in Armenia: Change of Political Power

· Armenian President Levon TER-PETROSYAN on Tuesday tendered his resignation in a stand-off with Prime Minister Robert KOCHARYAN and the Erkrapa Party over the settlement of the Nagorno-Karabakh conflict. The Erkrapa Party made a public statement in parliament, accusing the president and the ruling party, The Armenian National Movement, of pursuing, "a defeatist policy that poses a threat to security

When you need to know it as it happens

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that the US will appropriate funds to Armenia and Russia without regard to subsection (c) of the Foreign Operations, Export Financing, and Related Programs Appropriations Act, 1998. Subsection (c) restricts assistance to any NIS government that, "directs any action in violation of the territorial integrity or national sovereignty of any other NIS," countries, specifically Russia's involvement in Georgia and Armenian's involvement in Azerbaijan. The President will exercise this authority over Congress because he feels that, "applying this amendment in a fair and equitable manner among all twelve of the NIS would be a complicated and imprecise task." CLINTON supported this statement with examples including Nagorno-Karabakh, stating that Armenia's support to Nagorno-Karabakh separatists militarily and financially is inconsistent with territorial integrity and national sovereignty principals of the Helsinki Final Act. CLINTON further added that, "Success [in NIS reforms] is critical to international peace and prosperity and to the US national security interests."

Azerbaijan Opposes Russian Military Presence

· Azerbaijan President Geidar ALIYEV on Sunday expressed his dissatisfaction with the Russian military presence in Georgia and Armenia, the Interfax news agency reported from Baku. He said, "I oppose the presence of Russian military bases in Armenia and Georgia and I protest against Russia's military union with Armenia...Even if Russia acts as a mediator in the settlement of the Armenian-Azerbaijan conflict, it has no moral right to conclude an agreement on military cooperation with Armenia." The President noted that he has discussed this issue with Russian President YELTSIN in October and again with Russian Federation Council chairman Yegor STROYEV just last month. He noted that Russian bases in Georgia and Armenia will never be used against Azerbaijan or any third country. According to ALIYEV, modern offensive weapons worth $1 billion had been passed to Armenia, "through Russian military bases in Armenia and Georgia." Baku is urging Russia to confiscate these weapons from Armenia and punish those involved.

Georgia Creates Anti-Corruption Task Force

· Speaking before Georgian lawmakers on Tuesday, SHEVARDNADZE said he would sign a decree to set up an independent commission to combat corruption. It will act as a legal state body after necessary amendments have been made to law. He said, "We should fight the reasons for corruption and not only its consequences." He added that the fight should begin at the highest ranks of the government. "The caste of people who have gotten rich off corruption, if they take power illegally, will certainly use it against economic reforms." SHEVARDNADZE said that the shadow economy accounted for 45 to 50 percent off overall activity in 1997. Corruption according to state figures contributed to a five percent shortfall in collecting budget revenues during the same period.

Kazakhstan-France Sign Trade Agreement

· Kazakhstan and France on Tuesday signed an agreement on the mutual protection of investments as well as a tax convention. The agreement makes it possible for both nations to prevent double taxation. The documents signed will promote a further development of trade relations between the two countries. Jacques DONDOUX, French Minister of Foreign Trade, pointed out after the signing ceremony that France takes a positive view of Kazakhstan's entry into the World Trade Organization (WTO) and other international organizations.

Daewoo Pulls Out of Uzbekistan Telecom

· South Korea's Daewoo has pulled out of an investment program in Uzbekistan's telecom sector after market research showed the local telephone company would not yield enough profits to recoup the investment. Daewoo had planned to invest in six Uzbek regions. Daewoo said the investment would have been profitable if Daewoo had been able to operate long distance and international services as well. These are already provided by a joint venture Udinet set up last year between Italy's STET International, Germany's Siemens AG and Telekom of Uzbekistan Makhallii.

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