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

Friday, February 6, 1998

legislation on open and classified information, which is currently in effect." Communication ministers of European countries, who met in Greece last year, admitted that prohibitory measures could only lead to censorship. They suggested self-regulation to Internet providers, so that the creation of the global computer network will not lead to human rights violations. KRUPNOV is skeptical about the prospect of self-regulation.

Russia is well behind Western countries in the development of Internet, and KRUPNOV believes that the problem should be resolved as quickly as possible. According to Deputy Prime Minister Vladimir BULGAK, there are between 600,000 and one million Russian Internet subscribers today compared with an estimated 41.5 million US Internet users. BULGAK believes Russia should create its own server for the Russian part of the Internet network. The development of the global computer network in Russia may be hampered by the introduction of payment by the minutes for the use of local telephone lines which many consumers oppose.

US Defense Secretary To Visit Moscow

· US Defense Secretary William COHEN will visit Moscow on February 11-12. COHEN will meet Defense Minister Igor SERGEYEV to discuss NATO expansion, bilateral military contacts, cooperation in peacekeeping in Bosnia and Hercegovina, and the crisis with Iraq. Military analyst predict COHEN will inquire about the Russia-Germany-France

Russian Federation

Politics

Duma Approves Draft Budget in Third Reading

· Russia's State Duma on Thursday approved the 1998 draft budget on its third reading by a vote of 232 votes for and 141 against, with one abstention. The budget bill set for the fourth and final reading on February 18, according to Reuters. Russia has been operating without an approved budget this year by allocating funds according to last year's budget. President Boris YELTSIN and his reforms view the budget as an important instrument in economic growth for 1998. The draft budget outlines revenues of 367.5 billion redenominated rubles ($61.3 billion) and expenditures of 499.9 billion rubles ($83.3 billion). The GDP is planned at 2,840 billion rubles ($473.3 billion) and annual inflation at 5.7 percent. The allowed maximum of budget deficit has been set at 132.4 billion rubles ($22 billion dollars) or 5.7 percent of the GDP. Duma speaker Gennady SELEZNYOV said after voting, "It will be extremely difficult for the government to fulfill this budget...For this government it is practically unrealistic."

Chubais Supports Internet for Russia

· Deputy Prime Minister Anatoly CHUBAIS supports the development of Internet in Russia and believes the government should not restrict information in the global computer network. Chairman of the State Committee for Communication and Information Alexander KRUPNOV said, "Internet cannot be regulated. This medium does not depend on the government, it lives its own life."

CHUBAIS suggested the creation of a commission, which would promote the development of the Internet network in Russia. He stressed that the imposing of. "additional restrictions on information is not reasonable. All should be done within the framework of the

Today's News Highlights

Russia

Chechen Reforms Interior Min.

Ruble on Chicago Exchange

European Republics

Kiev-Minsk Trade Relations

Ericsson $18M Estonian Deal

South Caucasus & Central Asia

Armenian Presidential Candidate

Armenian Privatization Continue

Turkmen-Azeri Discuss Caspian

Politics-Economics-Business

Page

Friday

February 6, 1998

Intercon's Daily

rapport on the European security and the prospective visit of French President Jacques CHIRAC and German Chancellor Helmut KOHL to Moscow in March. The defense ministers will address prospects of ratification of the Strategic Arms Reduction Treaty II and the outlook for starting work on START-III which is to scale down nuclear potentials of Russia and the US. First Deputy Defense Minister Nikolai MIKHAILOV argued on Wednesday that military reform will be, "brought to a standstill" if Russia fails to ratify the START-II treaty. MIKHAILOV said Russia cannot afford to maintain its stockpile of nuclear weapons.

Chechnya Reforms Interior Ministry

· Chechen Deputy Prime Minister Kazbek MAKHASHEV announced that Chechnya's Interior Ministry will undergo restructuring in line with Sharia law. "The Interior Ministry is being restructured not because it does not cope with its task, but because a new stage begins," he said. MAKHASHEV, in charge of law-enforcement bodies, added that new ways to combat crime are being developed.

Economy

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

Ruble = 6,038/$1.00 (CB rate)

Ruble = 6,012|6,064/$1.00 (buy|sell rates)

Sept Oct Nov Dec Jan Feb

Market Boosts From Political and Budget News

· Following the news that President YELTSIN will keep Deputy Prime Ministers Boris NEMTSOV and Anatoly CHUBAIS and the Duma's approval of the draft budget's third reading, the market experienced a boost. Russian stocks rallied nearly 6 percent

Thursday. Yields on government bonds were down to 42 percent from last week's high of 46 percent. A senior trader for CentreInvest Securities Dan RAPPAPORT said, "Today was a positive day...But, in Moscow there's still an overall impression that reforms in Russia have stalled because of political infighting," The Wall Street Journal reported.

Rubles to be Trade on Chicago's Exchange

· Chairman of the Chicago Mercantile Exchange Scott GORDON announced that the exchange has filed for regulatory approval to trade Russian ruble futures and options contracts on an exchange outside of Russia. "As investment interest in Russia has grown, our customers have urged us to provide them with these important risk management vehicles." The exchange hopes the ruble will gain popularity as the Mexican peso has since its launch in 1995. The Eastern Europe contract, the exchange's first, will be cash settled, and worth 500,000 rubles ($83,000).

Property Ministry to Decide Sell-offs

· Russian State Property Minister Farit GAZIZULIN said today that the Property Ministry within a week and a half will complete registering eight or nine enterprises ready for privatization. He said that sell-offs are expected to raise most of revenue for the 1998 budget. The privatization program has been submitted for review by public consultative council. GAZIZULIN said that the privatization list includes majors companies in the fuel and energy sector and other industries of public interest. The public consultative council will review the Rosneft Oil Company privatization on March 12 and over management of privatization receipts on April 17. GAZIZULIN said the sell-off of Rosneft would be scrutinized before bids for its controlling stake are announced, on March 20-25.

Business

Court Decides Norilsk Nickel Sale Legal

· The Moscow District Federal Arbitration Court has upheld a ruling of the Moscow Arbitration Court,

which determined that last year's sale of a 38 percent stake in Norilsk Nickel was legal, Interfax reported. A company linked to Uneximbank won the auction for the stake in August, but the circumstances surrounding the sale provoked controversy and criticism from market analysts. The little-known company Taiga, which contested the legality of the Norilsk sale in

When you need to know it as it happens

Politics-Economics-Business

Page

Friday

February 6, 1998

Intercon's Daily

court, charged that laws on hard-currency transactions were broken during the sale and that potential bidders were not properly informed in advance regarding auction terms. The company cited a report by the Audit Chamber, which has reached similar conclusions and recommended that the Norilsk sale be annulled, reported RFE\RL Newsline.

Japan Builds Floating Power Plant in Sakhalin

· A Japanese corporation Marubeni plans to build the world's largest floating electric power plant in Russia's Far-East Sakhalin. Marubeni has experience building floating power stations in South-East Asian and Latin American states. Japan's Ex-Im Bank is likely to finance the construction which will cost $170 million with terms for Russian to pay back the loan in three or four years. The deal should be closed before May 1998 and the station operating in August 2000.

Lithuania to Sell Stake in State Agriculture Bank

· Lithuania's Finance Ministry announced Tuesday that it is seeking a strategic investor to buy a 86 percent stake in the state run Agricultural Bank. The Agricultural Bank is the third largest bank with an estimated 20 percent of the local banking market and assets worth 1.46 billion litas at the end of 1997. Deputy finance minister Rimantas SURVILA said, "We are expecting to complete the sell off of the bank in the second half of 1998. The government has chosen Deloitte & Touche, Nomura, and Lithuanian brokerage firm Vilfima to advise on the sale. Chairman of Vilfima Arvydas ZHABOLIS said, "It is not only that one of the country's largest banks is put on sale, but also a significant share of the banking market... The government's wish is that during the privatization the buyer is a solid foreign bank."

Ericsson Signs $18M WLL Deal

· Ericsson has signed a Wireless Local Loop (WLL) contract with Estonia Telephone Company Ltd., valued at $18 million. The contract includes turnkey deliveries of Ericsson's RAS 1000 system, as well as operation and maintenance systems. Managing Director of Logistics and Materials for Estonia Telephone Company Ltd. Teet SOONURM said, "The RAS 1000 contract is the largest Estonia Telephone Company ever has signed. The wireless solutions will serve subscribers in the entire country, with installations starting in June."

South Caucasus & Central Asia

Armenian Presidential Candidate: Manukyan

· Vazgen MANUKYAN, leader of the opposition National Democratic Union, announced on Thursday that he would run for President of Armenia on a platform of democratic and industrial development, reported The Associated Press. Armenian needs less, "rigorous presidential rule, which ultimately leads to dictatorship," and more participation by parliament, MANUKYAN said in his candidacy announcement. MANUKYAN lost to TER-PETROSYAN in 1996, by 2 percent of the vote. His supporters believe that the 1996 election was riddled with corruption and fraud. MANUKYAN said, "I am confident the coming election will be free and fair." According to Prime Minster Robert KOCHARYAN elections will be held on March 16. Regarding the Nagorno-Karabakh conflict MANUKYAN said that forces in Armenian and Karabakh, "understand per

European Republics

Kiev-Minsk Trade Relations Discussed

· Ukrainian Prime Minister Valery PUSTOVOITENKO arrived in Minsk on Thursday for talks with Belarus President Alexander LUKASHENKO. Belarus is prepared to, "strengthen relations with Ukraine," by holding direct talks in compliance with agreements signed by Ukrainian President Leonid KUCHMA in Kiev and Gomel, LUKASHENKO said. LUKASHENKO believes that PUSTOVOITENKO's official visit will result in a considerable growing of the bilateral trade turnover. He regretted that the increase of the trade turnover with Ukraine is lower than with Russia. PUSTOVOITENKO proposed working on a bilateral long term agreement with Belarus to be signed in the first half of the year.

Five Firms Interested in Lith.Telecom Sale

· France Telecom, Greek OTE, TeleDenmark, Swedish Telia, and Telecom Finland, are considering strategic investment in 60 percent of Lithuanian Telecom. Lithuanian European Affairs Minister Laima ANDRIKIENE said that, "The government's stake in Telecom will go down to 34 percent...60 percent of Telecom will be offered for sale." The remaining six percent will be reserved for staff. ANDRIKIENE said that to tempt investors, Lithuanian Telecom will keep its monopoly until 2003 on local, domestic and international calls.

When you need to know it as it happens

Politics-Economics-Business

Page

Friday

February 6, 1998

Intercon's Daily

fectly well that only through peaceful negotiations can the problem be solved." In a commentary by RFL, Paul GOBLE pointed out the dangers associated when an elected head of state is pressured by outside forces (OSCE) to move contrary to public opinion on Nagorno-Karakbakh. Time will tell whether the political will for peace is stronger than that of complacency and resistence.

Armenian Privatization Plans To Continue

· Finance Minister Armen DARBINIAN, amidst the political chaos in his country, believes that economic progress and privatization will continue. He said the government will launch a second privatization program. The last privatization sale of 90 percent of Armenian Telephone Co. bought by Greece's Hellenic Telecommunications Organization OTE earned $143 million in revenue. Eleven state companies, including hotels, electronics manufactures, and the country's cognac factory, are to be sold under the advice of Merrill Lynch & Co., The Wall Street Journalreported. Next will be Yerevan Airport, Armenian Airlines, the airport ground services company and non-golding mining interests. DARBINIAN said that Armenia's electricity production, transmission and distribution networks were set up as separate companies to prepare for sale. Comment: While these privatization sales may look good to reformers, the economic progress will only be apparent if the revenue is used for budgetary purposes and not corrupt practices.

Turkmen-Azeri Discuss Caspian Sea Rights

· Russia, Iran, Kazakhstan, Azerbaijan, and Turkmenistan have been arguing over the rights to the Caspian Sea since the break up of the Soviet Union. Although the dispute has not impeded the oil deals, all the nations are interested in a settlement. Russia and Iran, who have minimal oil and gas reserves off shore, have argued that the sea is the joint property of all the littoral states and that rights to resources should be limited to 45 nautical miles from their shores. Kazakhstan and Azerbaijan, who have considerable reserves, seek to have the Caspian di

vided into national sectors. Turkmenistan, who wavers in the middle, has reached a significant understanding with Azerbaijan. On Thursday, Turkmenistan and Azerbaijan reached a political agreement on the division of the Caspian Sea into national sectors. Foreign Minister of Azerbaijan Gasan GASANOV said, "The problems in the Caspian are linked to Turkmenistan and Azerbaijan and if we manage to divide the sea by sectors, then the other [littoral] countries will come around to it." The formation of national sectors will rule out the possibility of any monopoly in the Caspian, GASANOV stressed. The two sides decided to set up joint task forces including geodesists and geologists, who will prepare the next round of the talks scheduled for spring in Baku.

As Russian bureaucrats drag their feet and companies in the fuel and energy sector become profit hungry, the Caspian Sea may be the only post-soviet region where Russian influence is diminishing. An unnamed high Russian government official told Itar-Tass that, "our own Russian companies that in fact work under protectorate of the government and Viktor CHERNOMYRDIN by deed pursue an anti-state, anti-governmental policy." Competing with western companies and forming overlapping joint ventures, Russian companies have entered a phase where capitalistic gains take priority over the interests of the state. Russia also is losing its monopoly over pipelines to export oil west. By boat, train, and alternative pipelines Caspian and Caucasus states are cooperating to avoid dependency on Russian pipelines. Already Turkmenistan is opting to use a southern pipeline to export oil to Iran and is negotiating a second deal through Afghanistan to Pakistan. The western route from Baku to Suspa plans to be completed by the end of 1998. A second western route to bypass Russia and Bosphorous environmental hazzards involves a pipeline from Baku to Ceyhan. Turkey's Energy Minister Cumhur ERSUMER says, "The Baku-Ceyhan pipeline is unrivaled in terms or its route, capacity, and environmental friendliness." Kazakhstan is even considering an eastern route to China

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

Daily Report on Russia is published Monday-Friday (excluding holidays), by Intercon International, USA. Subscription price for Washington, D.C. Metro area: $895.00 per year. A discount is

available for non-profit institutions.

Daily Report on Russia is for the exclusive use of the subscriber only. Reproduction and/or distribution is not permitted without the expressed written consent of Intercon. Daily Report on Russia Ó copyright 1998, Intercon International, USA.

When you need to know it as it happens

Politics-Economics-Business

Page