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 5, 1998

law was passed in the wording of the conciliatory commission of both parliamentary houses. The law prohibits federal funds from being used to maintain UN sanctions against Iraq unless such expenses are listed as a separate item in the federal budget, Interfax reported. Also, it will allow Russian companies to conduct trade with Iraq, "that is not banned by the Russian president and government." Russian TV cited unidentified Western sources as saying the strike against Iraq will begin on February 17.

Economy

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

Ruble = 6,036/$1.00 (CB rate)

Ruble = 6,010|6,062/$1.00 (buy|sell rates)

Russia Permitted to Borrow Up to $3B from WB

· World Bank Executive Director for Russia Andrei BUGROV announced that Russia may borrow up to $3 billion from the World Bank in 1998. BUGROV said that borrowing from the World Bank is part of Russia's external borrowing program which has been incorporated into the Russian draft budget for 1998. He noted that a distinguishing feature of this program is that it is geared to investment projects which account for about two thirds of all borrowing. The program is also socially oriented and calls for providing loans to finance water and heat projects in Russian cities and to repair and maintain roads in Siberia and the Far East to a total amount of $300 million. The World Banks second coal loan consists of three installa

Russian Federation

Politics

Chubais, Nemtsov to Remain in Government

· With personnel problems threatening to rock the boat of reform, President Boris YELTSIN declared that first deputy prime ministers Boris NEMTSOV and Anatoly CHUBAIS will remain in the government until 2000, despite the removal of their individual portfolios in November. "I say: they will both stay to work until 2000. Of course, if they will. If they hold out themselves, I will push away the rest who are pressing them. I won' allow, won't permit to touch them." He admitted that others in the government had been pushing for their removal. He said, "There are bids of others to push them out one by one or both. But when they [the bids] bump into me, they bounce from me with the same force with which they hit." He recommended that NEMTSOV and CHUBAIS stay firm in their resistant to "petty attacks."

Economics Minister Yakov URINSON, responding to Duma speaker Gennady SELEZNYOV's prediction that YELTSIN would request URINSON's resignation, said that, "the president can and must handle personnel problems, he forms the government and it is up to him to make replacements in the government." If the President asks him to step down URINSON said, "I will not think long, I will tend in my resignation at once and express gratitude to the president for giving me this opportunity to do since December 1991 what I wanted and what I had dreamt about." He added that, in the government or not, he would, "all the same work to promote reform."

Duma Passes Iraq Cooperation Law

· The Russian State Duma on Wednesday in a vote 290 to 7 passed the law "On measures to develop cooperation with the Republic of Iraq" that had earlier been turned down by the Federation Council. The

Today's News Highlights

Russia

$250M Investors Free Zone

New Budget Reform Measures

New Rail Tariffs Yield Revenue

LUKoil License To Be Reviewed

European Republics

German President in Kiev

IMF Urges Lith. Budget Reforms

South Caucasus & Central Asia

Armenian Elections in 40 days

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tions. The first installation was transferred to Russia in December 1997. The other two installations are due to be issued this year.

$250 M Investors Receive "Free Warehouses"

· President Boris YELTSIN has signed a decree on "free warehouses" for investors whose investment in the Russian economy is above $250 million. First Deputy Prime Minister Boris NEMTSOV commented that this is a, "unique decree which is aimed at the attraction of huge investments into the Russian economy." The decree mandates that special "free warehouses" be provided as free economic zones for investors, with the provision that investors annually build up a share of Russian produced components in their products. The share must reach 50 percent within five years. NEMTSOV said by this measure, "we involve foreign investors in the Russian economy and say that we are ready to help you if you will create new jobs in Russia and bring here new technologies." He said he hoped that the presidential decree would be seen as an, "important signal for investors and in a few months first large-scale projects will start functioning."

Downgrade Not To Effect Direct Investment

· Moody's Investor Service on Wednesday announced its intention to send a delegation to Russia to consider the possibility of downgrading Russia's rating as a sovereign borrower. The Finance Ministry countered these pessimistic remarks with its fiscal accomplishments. Tax collection in January 1998 is 30 percent higher than in January, 1997. In December 1997, the Finance Ministry stopped borrowings on the domestic financial market for the purpose of financing budget spending. Measures were taken to reduce federal budget spending and the liabilities of budget-financed organizations. The ministry is prepared to provide Moody's with all the necessary information for assessing the current economic situation. It added that Russia can prove that, "the fiscal situation, including tax collection and budget deficit, has improved considerably."

Russian Economics Minister Yakov URINSON said the review of Russia's credit rating will not effect direct investments into Russia. In the opinion of the Russian minister, an investor is not concentrating on the state of the market, but is interested in long-term prospects. Russian Finance Minister Mikhail ZADORNOV admitted that the crisis on the Russian

market of government securities had been intentionally provoked by, "a number of persons." He refused to identify any of them but said they could be easily figured out by looking through all reports issued by new agencies and publications in the press.

New Budget Measures

· First Deputy Prime Minister Anatoly CHUBAIS announced today at a government meeting that the State Tax Service in January collected 26 percent more taxes than January, 1997 and the State Customs Committee's returns in taxes grew by 30 percent. This news was welcomed by the IMF mission reviewing Russia's economic reforms. However, CHUBAIS said Russia's entry into European financial markets is not possible before March. YELTSIN ordered the cabinet to implement a tougher line on corporate tax arrears. The government is to hold a meeting of the emergency tax and budget commission for decision-making on the largest ten enterprises with heavy tax debts. The State Tax Service was ordered to prioritize them as of February 1. The government is also to make a list of state-owned organizations that are to be closed or amalgamated because of strict budget measures. The government is also to make decisions banning the privatization of enterprises with tax debts to the budget. YELTSIN also told CHUBAIS that the government would, "live within its means," and not allow foreign or domestic borrowing.

Business

New Rail Tariffs To Be Implemented

· The newly established Federal Service for Regulating Natural Monopolies (FSEMT) announced that the Russia's state run Rail system's freight charges and passenger tariffs reduction by 5 percent has generated revenue gains for the Ministry of Railways worth 3.2 trillion ruble ($550 million). FSEMT chairman Mikhail KISLYUK is proposing to reduce cargo tariffs on the rail system by another 12 percent by the end of March in hopes to attract more shippers and generate a projected 8 trillion rubles ($1.3 billion) in additional revenue, The Journal of Commerce reported. FSEMT predicts that cuts on the tariff for use of rail infrastructure implemented on January 1, will lower transportation costs by 10 percent.

Environmental Concerns Over Caspian Oil?

· Russia's chief prosecutor Yuri SKURATOV is

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investigating LUKoil license to explore and develop oil deposits in the Russian sector of the Caspian Sea. He believes that oil extraction in the area violates a 1975 Soviet environmental protection law and could endanger breeding grounds for sturgeon. A review of the license was called into question by Yukos, who competed against LUKoil for the licenses. Yukos and Sibneft last month merged to form Russia's largest oil producer. Yukos claims that the government is guilty of "scandalous procedural infringements," in awarding the licenses to LUKoil, reported The Financial Times. In a move that could deny both companies the rights to extraction, SKURATOV is attempting to convince the government to uphold the environmental law which protects the northern Caspian as a wildlife preserve and forbids extraction of mineral resources in the area. LUKoil spokesman Dmitry DOLGOV argues that the government should have considered the law before awarding the licenses. He added, "If they ban oil extraction then Russia will neither save the sturgeon nor get the oil."

All the littoral Caspian five nations have claimed rights over the oil fields and fishing grounds of the inland sea. Moscow and Kazakhstan's new capital Akmola believe that a, "fair division of the Caspian bottom" should leave in shared use the sea surface for free navigation, with agreed quotas of fishing and environmental programs. Russia and Kazakhstan agreed to finalize a draft convention on the Caspian Sea's status by March 15, 1998.

HERZOG added that, "As long as Ukraine leaves market economic reforms unchanged, Germany will continue to assist it in developing its economy." HERZOG will also meet with Prime Minister Valery PUSTOVOITENKO and parliamentary speaker Aleksander MOROZ. Germany is Ukraine's third largest trade partner, after Russia and the US, with trade turnover of $1.7 billion in 1997.

IMF Urges Lithuanian To Reduce Budget Deficit

· International Monetary Fund (IMF) officials told Lithuanian President-elect Valdas ADAMKUS on Tuesday that one of the fund's major goals is to eliminate Lithuania's budget deficit by 1999, BNS reported. Julian BERENGAUT, director of the IMF's Baltic Division of the Second European Department and Adalbert KNOBL, IMF representative to Lithuania, expressed concern over the situation of Lithuania's state-owned banks. They noted that progress has been made toward strengthening the economy and stressed that the arrival of foreign banks in Lithuania would be a positive development.

South Caucasus & Central Asia

Are Fair Elections Possible in Armenia?

· The political crisis in Armenia, which stemmed from differences among its leadership over ways to settle the Nargorno-Karabakh problem and led to the resignations of top government officials including the President, continues to mount. Regional analysts have likened the forced resignation of President TER-PETROSYAN to a coup. Prime Minister Robert KOCHARYAN, however, says the change of power in Armenia was within the constitution, adding that the government would pursue the policy of economic reforms and support to business, investment and freedom of press.

Regarding the Karabakh issue, KOCHARYAN, the former president of the self-proclaimed Karabakh republic, said Armenia remains an advocate of a peaceful settlement and will continue its participation in the negotiation process mediated by the Minsk group. KOCHARYAN called for a comprehensive settlement package on Karabakh, "so that later there is no temptation of any of the sides to change something." France, together with Russia and the United States, as co-chairs of the OSCE Minsk group on Nagorno-Karabakh, attached great con

European Republics

German President in Kiev

· In Kiev, German President Roman HERZOG pledged Wednesday to support Ukrainian economic reforms and to assist Ukraine's closer integration with Europe. He praised Kiev's charter with NATO, its bilateral treaties with Romania and Russia, and its participation in peacekeeping in the former Yugoslavia. However, HERZOG expressed disappointment in the slow pace of economic reforms. The German President said that Ukraine will have to tackle structural reforms needed to attract direct foreign investment, and to ease the need for foreign aid and internal borrowing. Ukrainian President Leonid KUCHMA expressed hope that Germany would increase investment in Ukraine, especially in the weapons, metallurgical and chemical industry.

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cern over the political developments in Yerevan and expressed importance to the continuation of the peace process. The French Ministry of Foreign Affairs noted that the resignation of TER-PETROSYAN was, "not good news." Georgian President Eduard SHEVARDNADZE is positive that, "the fraternal Armenia will find a way out of the current difficult situation and will make a substantial contribution to the Caucasian movement in defense of peace and accord among nations, in whose success the whole world is interested." Azerbaijan President Geidar ALIYEV said on Wednesday, "Azerbaijan and Armenian efforts, paid over the past years, have helped preserve the truce, and we shall be faithful for the cease-fire regime and do everything to ensure that it remains so." Armenia's Defense Minister Vazgen SARKISIAN was quoted by The Financial Times as saying, "We will take a much tougher line on any future negotiations on Nagorno-Karabakh...The best way to keep the peace is to be ready for war."

Central election commission chairman Khachatur BEZIDZHYAN said that no official date has been set for Armenia's early presidential elections, but a likely date is March 16. Under the constitution, presidential elections must be held before the 40th day following the president's resignation. KOCHARYAN said, "I can guarantee that they [elections] will be free and fair." He has started consultations with all political parties. And in a move to boost opposition to the Minsk Group's plans KOCHARYAN re-legalized the Dashnak Party, an extreme nationalist group that TER-PETROSYAN banned in December 1994 for alleged involvement in terrorism, RFE\RL Newsline reported. The Dashnak Party seeks to recreate the "greater Armenia," which includes portions of Turkey, Azerbaijan, Georgia etc. When asked if he would be a potential candidate, KOCHARYAN said it was, "unlikely but everything will depend on the outcome of the consultations," with other political parties. According to the constitution, presidential candidates must be citizens of Armenia. KOCHARYAN is technically a citizen of Azerbaijan. The power and

control which KOCHARYAN and the Erkrapa Party have gained since the resignation of TER-PETROSYAN is at such an influential level that it is hard to comprehend how truly meaningful "free and fair" elections can be held in 40 days. Clearly, other groups will be unable to organize and gain support to act as real contenders against the Erkrapa Party.

The world is carefully watching how Armenia will survive this turmoil, as it will effect the Caucasus region. One high level government official in the region said, "I hope that those who are making policy in the US and elsewhere understand how well calculated, staged, and timed what happened in Armenia has been. True there were objective problems between the two camps, but see how they were manipulated during a time others are more focused on Iraq when Russian support is essential. The world should be very concerned and careful because this situation includes not only Armenia, but the entire region which has become a pivotal geo-political arena commercially, economically, and politically."

SOCAR Signs With Exxon And Conoco

· Azerbaijan state oil company SOCAR and Exxon Corp. agreed to conduct a joint study of Azeri natural gas reserves. The study will take a year to complete. President of Exxon Ventures (CIS) Inc. said, "this study reflects Exxon's goal to be a long-term, significant participant with SOCAR and Azerbaijan in the exploration and development of hydrocarbon resources in the Azerbaijan sector of the Caspian Sea."

SOCAR has also signed an agreement with Conoco, a unit of DuPont Co., to study the commercial viability of gathering, processing and transporting Azerbaijan reserves of natural gas and gas liquid for both domestic and foreign use. A Conoco statement said the joint study's findings, "will form the basis for decisions on investment in an development of the Azerbaijan gas industry." The Azeri government predicts that natural gas output will increase from 6.4 billion cubic meters in 1997 to 16.5 billion cubic meters by 2010.

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

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