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

Wednesday, March 11, 1998

Super Computer Investigation Still Stalled

· The Russian-US Commission on Tuesday discussed the refusal by Moscow to allow a US investigation into whether American made supercomputers were illegally diverted to nuclear weapons projects in Russia. The US Embassy in Moscow sent Secretary of State Madeleine ALBRIGHT a cable stating that the procurator general's office had turned down a formal Justice Department request for information on the illegal diversion of the supercomputers. Russia has twice turned down US Government requests. State Department spokesman James FOLEY said, "There was an attempt made to seek Russian cooperation that did not succeed." According to the cable, Russian authorities claimed US assertions about "illegal export or re-export of items intended for end users in the nuclear sector," were not listed under the provision of the US-Russia Intergovernmental Mutual Legal Assistance Treaty, The Washington Times reported. A Senate Republican aide said the Russians failure to aid the investigation is, "another example of Russian compliance with treaties when convenient." The State Department last October announced that the Department of Commerce and Customs Service had begun an investigation of the Supercomputer use under the Justice Department's supervision. Under US policy, the high performance computers manufactured by IBM and Silicon Graphics Inc. require validated licenses for export to military and nuclear installation. The computers are being used at the Chelyabinsk and Arzamas nuclear development facilities in Russia. Senator Thad

Russian Federation

Politics

Gore-Chernomyrdin Commission

· Russian Prime Minister Viktor CHERNOMYRDIN and US Vice President Al GORE opened the 10th meeting of the Russian-US Commission on Economic and Technological Cooperation on Tuesday. US President Bill CLINTON and Russian President Boris YELTSIN sent messages to the commission of good will and encouragement to increase cooperation. The two sides discussed many issues ranging from the international space station to curbing nuclear missile technology transfer to Iran. The leaders discussed health care issues with Russian Health Minister Tatyana DMITRIEVA. The possibility of Caspian pipeline routes was also discussed. The US encouraged Russia to get involved with the Eurasian corridor. The US prefers a southern route from Baku to Ceyhan, while Russia presses a northern route through Novorossiisk. The joint meeting may break the stalled US-Russian energy progress, including two joint ventures with Russia's LUKoil. An announcement from the LUKoil-Conoco, to develop northern oil deposits, is expected today.

House Speaker Newt GINGRICH of Georgia and Senator Majority Leader Trent LOTT of Mississippi refused to meet with CHERNOMYRDIN today. This snubbing may be linked to a press release from LOTT's office on March 5th, which expressed his dissatisfaction with Russia's lack of cooperation in ending its support for Iran's missile program. "Too often in the past, rhetorical commitment and promises have not been matched with performance. In the continued absence of tangible and verifiable progress in ceasing the cooperation of Russian entities with Iran's determined drive to acquire ballistic missile technology, the Senate will consider the Iran Missile Proliferation Sanctions Act before the Easter recess," the statement said.

Today's News Highlights

Russia

Chubais Proposed for UES Post

Internet Forum In Moscow

European Republics

Tripartite Border Guard Meeting

Urkaine-Moldovia Border Dispute

Lith Pres. Reduces Cabinet

South Caucasus & Central Asia

Georgia's Plan For CIS

Oil and Gas '98 Expo in Turkmen

6 Int'l Oil Cos. Meet In Iran

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COCHRAN, a Republican from Mississippi, is preparing legislation that would bar computer sales if Russian Nuclear labs do not cooperate.

Results of Rus. PM's Meeting With WB Presid.

· Russian Prime Minister Viktor CHERNOMYRDIN on Tuesday held a working meeting with World Bank's (WB) President James WOLFENSON to discuss further cooperation. The sides agreed to begin six new projects that were approved by the Bank's board in 1997 but were not implemented. These projects support the restructuring Russian industries, introducing innovative approaches to education, including new textbooks development, the establishment of an Economic Analysis Bureau at the government, reconstruction of the historic center in St. Petersburg, and health care reforms in Tver and Kaluga, Central Russia. CHERNOMYRDIN and WOLFENSON reached a major understanding that the Bank should place a specific emphasis on projects in social welfare and health care in particular. Russian Health Minister Tatyana DMITRIYEVA called on the World Bank to start a project aimed at preventing socially dangerous diseases in Russia. WOLFENSON may visit Russia in May 1998, however, no dates have been fixed.

Russia To Take Military Reform Seriously

· The Russian government's request for foreign assistance in military reform has been answered by several nations. The US is holding preliminary secret talks to help build housing for discharged officers. Japan has loaned Russia $1.5 billion to pay for housing. Germany since 1990 has spent millions to provide houses for military personnel transferred from East Germany. For years the issue of housing has been an excuse for slow reforms, as it is by law that housing must be provided for discharged officers, Russian President Boris YELTSIN has side-stepped the problem by issuing housing certificates to discharged officers instead of providing an apartment. Defense Minister Igor SERGEYEV plans to discharge as many as 300,000 officers. What makes this reform different from other attempts in the past is that the government is lining up ways to pay for the paring down its military. The government has also created and funded a plan to retrain 59,000 of the discharged officers this year in "market oriented professions," through budget allocations of $28.5 million and $3 million from US financier George SOROS. Besides reforms to care for discharged

officers, YELTSIN has merged the Defense and Security Council, cutting down overlapping duties. The President appointed the first civilian to head the Security Council, Andrei KOKOSHIN.

Economy

Ruble = 6,083/$1.00 (NY rate)

Ruble = 6,084/$1.00 (CB rate)

Ruble = 6,060|6,108/$1.00 (buy|sell rates)

Fitch IBCA Not to Downgrade Russia's Ratings

· The international credit rating agency Fitch IBCA announced Tuesday that it will not downgrade Russia's sovereign debt rating. The agency reviewed the financial situation in Russia, finding the frail economy beginning to mend. IBCA decided to confirm its BB+ rating for Russia because of vigorous efforts by the government to cut spending and improve tax collection. Associate director of IBCA David Riley said, "They [Russian government] have tightened fiscal and monetary policy over the past few months and I think they are going to meet their budget targets." Market analysts had predicted a downgrade, because IBCA's rating was higher than Moody's and Standard & Poor's ratings. A lower Russian sovereign debt rating would mean higher costs of foreign borrowing for both the government and commercial banks since those banks' credit ratings would automatically be lowered, RFE/RL Newsline reported. Comment: Russia may have been able to convince IBCA at this time. It is most important for Russia to prove itself by acting on its promises of tax reform, budget guidelines and increased tax collections. The SOROS's secret loan in June, to help the Kremlin meets its deadline for paying overdue pensions, underlines the tenuous position of the Russian government. This may be another factor of why improvement in the rating factor has not occurred.

Business

Chubais Proposed for UES Position

· In a bitter battle between Soviet era and reformer management of United Energy System (UES), the national electric company, for the chairman of the board position, the government has recommended First Deputy Prime Minister Anatoly CHUBAIS for the post, The Financial Times reported. If CHUBAIS, is appointed chairman at UES's shareholder meeting,

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scheduled for April 4th, he might be required to give up his Cabinet post in exchange. The recommendation has renewed speculation that CHUBAIS will soon leave the government and that young reformer Boris BREVNOV will resign as CEO of the power company. Many speculate that conservative forces in the government will only tolerate one reformer in top company positions. The government, holding 52.7 shares, will determine who will hold the chairman position. Changes in the board members is the result of a failed attempt to oust CEO Boris BREVNOV. The leader of the rebellion Anatoly DYAKOV has been removed from office and is not a candidate for the Board position. BREVNOV was appointed by First Deputy Prime Minister Boris NEMTSOV.

50 Illegal Oil Refineries Closed

· Approximately 50 mini-plants producing gasoline from crude oil have been closed down by the Daghestan Interior Ministry's department on economic crimes since January 1st, sources at the ministry press service said Tuesday. The crude oil was stolen from the Baku-Novorossiisk oil pipeline on territory of the Neftekumsk district of the Russian Stavropol territory and brought to North Daghestan. The illegal production plants were hidden in sand dunes. The police have been using a helicopter to locate the mini-plants. A total of eleven criminal proceedings have been instituted on oil stealing, but most of the plant owners are not identified. The scale of the oil stealing has not been determined.

Yuksi Oil Firm Registered

· Russian oil companies Yukos and Sibneft have registered the company Yuksi, completing the first integration phase and meeting the deadline set by both companies's leaders, Yukos's press service said on Tuesday. Yukos and Sibneft signed a protocol for their merger on January 19, 1998, creating the third biggest world oil company and the biggest oil company in Russia. Yuksi officials said that the main shareholders of Yukos and Sibneft will swap shares for those of Yuksi and then new shares will be issued and swapped, voluntarily, for Yukos and Sibneft minority shareholders. The newly-founded company will be used as a basis for a future vertically integrated structure of Russia's biggest oil upstream and downstream holding, uniting oil producing, processing and selling enterprises, the press service said. Yuksi has invited leading Western experts in

corporate development and financial management, to help avoid problems frequently encountered in establishing holdings in Russia.

Internet Forum in Moscow

· Over 300 participants from 140 Russian and foreign firms gathered for the second Internet Forum to be held in Moscow this week. The forum will discuss ways of widening access to Internet in Russia, Russian-language resources, Russian supporting software, corporate Internet-networks, commercial implications, fees and advertising. The forum is organized by the regional public center of Internet technologies ROTSIT, the joint-stock company Vi-6 and the publishing house Open Systems with the support of the State Committee for Communications and Computerization.

European Republics

Rus-Belarus- Ukraine Discuss Border Guards

· Heads of border guard departments of Russia, Ukraine, and Belarus met in the Belarus city of Gomel on Tuesday to attend a tripartite meeting. The meeting is being attended by Director of the Russian Federal Border Guard Service Colonel-General Nikolai BORDYUZHA, Chairman of the State Committee for Border Guard Defense of Ukraine Colonel-General Viktor BANNYKH and Chairman of Border Guard Committee of Belarus Major-General Alexander PAVLOVSKY. On the agenda of the meeting is a broad range of issues connected with practical work carried out by border guards of the three fraternal states in light of the Memorandum on border guard cooperation signed by the Presidents of the three countries in April, 1994. It is the first time that such a meeting was organized on a tripartite basis.

Ukraine-Moldova Dispute Port Border

· Moldavian Prime Minister Ion CHUBUK on Tuesday protested Ukraine's fencing a site in the Danube estuary to move 100 meters inside the traditionally Moldavian territory, Itar-Tass reported. "These actions are running counter to international law," CHUBUK said a tour of the site where Moldavia is constructing an oil terminal. Ukraine's cutting into this, already narrow strip of land will deprive Moldavia of the only access to Danube in this area and the EBRD-sponsored construction will be unfeasible. Ukraine started building the fences in February. The disputable strip is only 400 meters wide. Ukraine,

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"may not erect border facilities before border talks between Kiev and Kishinev are completed," Prime Minister CHUBUK said.

Lith. President Announced Cabinet Reductions

· Lithuanian President Valdas ADAMKUS has formally recommended to the government today the reduction of ministries and departments in order to cut budgetary expenditures and maximize the activities of state institutions. In a letter addressed to the Cabinet of ministers ADAMKUS suggested abolishing two ministries: the Communications and Information Science Ministry and the Construction and Urbanization Ministry, turning over their functions to the Economics Ministry, Environment Ministry and Transport and Railways Ministry. The government was also suggested to discuss a possibility of a merger of the Social Welfare and Labor Ministry with the Health Ministry and the Education and Science Ministry with the Culture Ministry. The Lithuanian President believes it is necessary to specify tasks and names of ministries in charge of European affairs and environmental protection. In order to improve tax collection and avoid interdepartmental barriers the President recommended reorganization of the Customs Service and the State Tax Inspectorate which currently operates within the system of the Lithuanian Finance Ministry. The parliament on Tuesday approved Gediminas VAGNORIUS as Lithuania's Prime Minister in a vote of 92 to 19 with nine abstentions. Prime Minister VAGNORIUS was instructed by ADAMKUS to form a new Cabinet within the next 15 days.

South Caucasus & Central Asia

Georgia To Present New Plan for CIS

· Georgia will present a draft plan to the Commonwealth of Independent States (CIS) summit in Moscow on March 19 and 20th calling for the establishment of a special commission to monitor CIS decisions and a special administrative region in Abkhazia's Gali district to facilitate the return of refugees. A spokesman for Georgian President Eduard SHE

VARDNADZE Vakhtang ABASHIDZE said that the plan also calls for CIS member states to turn to the UN and other international organizations if the CIS does not make progress on the Abkhaz conflict. ABASHIDZE added that the Georgian President has sent a letter to Russian President Boris YELTSIN arguing that it is well and good, "if the CIS promotes the independence of CIS member countries," if it does not, then "disintegration process may develop," within the commonwealth. ABASHIDZE said the letter made clear that CIS membership must not block expanded ties between member states and European and international institutions, RFE/RL Newsline reported.

Oil And Gas 1998 Opens in Turkmenistan

· The international exhibition Oil and Gas 1998 opened in Ashkhabad today. Products of over 80 foreign companies from 34 nations will be on display. A conference of Turkmenistan's oil and gas corporate partners will follow up on Thursday to draw over 200 foreign participants. Turkmen President Saparmurat NIYAZOV is expected to address the meeting in the press before the end of the exhibition.

Six International Oil Co. To Meet In Iran

· Representatives of six international oil companies nominated by the governments of Turkey and Turkmenistan to conduct a feasibility study on the construction of a pipeline through Iran will hold their third meeting in Tehran within the next ten days. Iranian deputy oil minister for Caspian oil Ali MAJEDI said, "We expect this kind of feasibility study within the next four or five months," to be complete, The Dow Jones Newsline reported. Royal Dutch Shell signed a memorandum of understanding in February with Turkmenistan to conduct the feasibility study. The agreement also give Shell the exclusive right to promote the project to sell Turkmen gas to Turkey. In December, Shell was granted the right to form an international consortium for the construction of the gas pipeline. France's Total, Sofregaz, and a German company have expressed interest in participating in the consortium.

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

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