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

Thursday, March 12, 1998

Russian Federation

Politics

Results of US-Russian Commission

· US Vice President Al GORE and Russian Prime Minister Viktor CHERNOMYRDIN Wednesday signed accords on a series of joint technological and economic projects. Under the new agreements, the two countries will develop targets for reducing environmental and health risks from lead contamination in Russia; set priorities for commercial uses of technology; set a framework for supporting US exports to small businesses in Russia; abide by principles of cooperation between the Overseas Private Investment Corp. and its Russian counterpart, the State Conversion Foundation of the Russian Federation; and establish a system for credit to be offered to rural businesses in Russia. GORE said, "The partnership we have created is succeeding." However, a number of complicated issues remain unsolved. The two nations did not reach an agreement on ballistic missile technology being sold to Iran, development of a nuclear power plant in Iran, and information from the supercomputer diversion. CHERNOMYRDIN noted that the Russian State Duma would need to approve the START-II Treaty before the next US-Russian summit. He described Russian-US relations as, "the necessary and sometimes key factor of the world stability."

GORE and CHERNOMYRDIN plan to visit California's Silicon Valley today to meet with engineers and scientists, and to further discuss the technology-sharing potential between the two countries. A tour of the Commercial Satellite Center at Lockheed Martin Missiles & Space will be the first stop on a visit that also includes San Jose State University and Cisco Systems. They will hear details of Lockheed Martin-Russian initiatives ranging from commercial telecommunications satellites to launch

vehicles. Other US companies to be featured at the Lockheed Martin site with exhibits and information are Boeing, Pratt & Whitney, and Iridium LLC. The US is considering allowing American satellites to be launched into space aboard Russian missiles. However, Moscow will first have to cut civilian nuclear aid to Iran. The next Russian-US summit will probably be held in May of 1998, CHERNOMYRDIN said.

OPIC Announces $50M To US-Rus. Ventures

· The Overseas Private Investment Corporation (OPIC) Wednesday announced more than $50 million for new US-Russian ventures and reconfirmed the agencies commitment to supporting defense conversion projects in Russia, an OPIC press release said. OPIC President and CEO George MUNOZ made the announcement at the US-Russian joint Commission on Economic and Technological Cooperation meeting. Since the beginning of the commission in 1993, OPIC has played a key role, announcing more than $3 billion of support for 125 American investments that span Russia's many regions. MUNOZ and Russian State Conversion Foundations (SCF) Chairman Nikolay MAKSIMOV signed an agreement that recommits each agency's resources to identifying, encouraging and supporting US-Russian joint ventures that convert Russian military assets into commercial enterprises. OPIC will educate SCF on its programs and guidelines and SCF agreed to maintain a database of commercially viable defense conversion projects that may be appropriate for American investment.

Today's News Highlights

Russia

Fed. Council Approves Budget

Hard Currency Stabilizes

Three Major US-RUS Contracts

European Republics

Estonia Elects Speaker

Ukraine Foreign Debt Increases

Ukraine Not Interested In NATO

South Caucasus & Central Asia

Caucasian Mkt Opens in London

Tajik Court Sentences Attackers

Politics-Economics-Business

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MUNOZ announced a new project in which the OPIC backed $100 million Agribusiness Partners International Fund will invest up to $7 million in a project that is manufacturing soft drinks in a warehouse formerly used to house military aircraft. The facility is being filled with modern bottling equipment, about $2 million of which is from the US including American-made computers.

Federation Council Approves 1998 Budget

· The Federation Council in a vote 115 to 22 with four abstentions approved the 1998 budget. President Boris YELTSIN is expected to sign the document before the end of the month. The budget calls for 500 billion rubles ($82 billion) in spending and 368 billion rubles in revenues, resulting in a deficit of 132 billion rubles or 4.7 percent of the projected gross domestic product. In a government amendment added just before the Russian State Duma's vote, the government will not be required to seek parliamentary approval to spending cuts in the event of revenue shortfalls, RFE/RL Newsline reported.

Economy

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

Ruble = 6,086/$1.00 (CB rate)

Ruble = 6,064|6,108/$1.00 (buy|sell rates)

Russian Hard Currency Stabilizes

· Russia's Central Bank chairman Sergei DUBININ today stated that the situation on the domestic hard currency market remains stable. He emphasized that the Central Bank's intervention on the market, if it occurs, only concerns the buying of foreign currency, not selling it. Russia added $600 million to its gold reserve in March. DUBININ also said, "there are preconditions" for lowering interest rates. The chairman spoke at the Federation Council meeting to review the 1998 budget. Describing the 1998 budget as optimal, DUBININ stressed that the country's fundamental financial law enables the Central Bank to pursue its policy of supporting the Russian ruble and its convertibility. Russia's current gold and currency reserve is worth $16 billion, and its gold reserve makes 490 tons. DUBININ said the gold and currency reserve had decreased from $23 billion in 1997 to $16 billion in the wake of the Asian financial crisis which had its impact on Russia's banks and financial institutions.

Moody's Downgrades Russia's Bonds

· Following Fitch IBCA's move to maintain its BB+ rating of Russia, the American rating agency Moody's Investor Service downgraded Russia's foreign currency bond ceiling from Ba2 to Ba3, and the ceiling of bank deposits in foreign currency to B1 on Wednesday. Consequently, all Ba2-rated bonds of Russia and of other issuers in Russia have been downgraded to Ba3. A Moody's press release said, "both external and internal phenomena contribute to this new situation...Rapidly growing domestic debt in the treasury bill market has complicated the debt servicing position of the federal government and has placed increasing pressure on an already difficult fiscal position. A sharp drop in foreign exchange reserves juxtaposed with increasing short-term debt has worsened the country's creditworthiness. High domestic interest rates are prompting attempts to increase international debt issuance by all levels of government and by private sector entities. Russia's performance in terms of external debt ratios will deteriorate." Moody's said the long-term deposit, debt, and financial strength ratings of all nine Russian banks it rates remain on Rating Watch negative. As part of this review, the agency said it will analyze these banks' 1997 financial statements when they are made public and review each rated bank individually. First Deputy Prime Minister Anatoly CHUBAIS said at his meeting with President Boris YELTSIN on Thursday that Russia's market will feel little effect from Moody's downgrade. "We knew about their [Moody's] predetermined wish," to revise Russia's rating downward, and for this reason, "there is no big response on markets, and it is not expected," CHUBAIS said. He added that Moody's, "overlooked the Asian crisis and now are trying to compensate this as it were. We shall still prove which of these two agencies [Moody's or Fitch IBCA] is right and which is wrong," he said.

Tax Reforms Critical For Economic Growth

· Russian Deputy Finance Minister Mikhail MOTORIN said on Tuesday that reform of Russia's tax system is critical for economic growth. The country's tax system is now characterized with, "internal contradictions, instability and excessive tax burden," MOTORIN told lawmakers during the tax reform hearings in the Russian State Duma. To streamline the tax legislation, the government offers a specified version of the document discussed by the

When you need to know it as it happens

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Thursday

March 12, 1998

Intercon's Daily

Duma last year. MOTORIN pointed out that the government version, "considerably simplifies the tax system by cutting the number of taxes." In doing so, the taxes to be abolished are those that yield low revenues to the federal budget. Another advantage of the proposed tax code is the alleviation of tax burden, "by not less than 60 billion rubles during the first year," the deputy minister noted. Other changes will affect tax administration, the system of sanctions and the tax-paying procedure, MOTORIN said.

Business

US-Russian Businesses Sign Major Contracts

· Three major US-Russian business contracts were signed on Wednesday to coincide with talks between Russian Prime Minister Viktor CHERNOMYRDIN and US Vice President Al GORE. Russia's LUKoil president Vagit ALEKPEROV and the American oil company Conoco's executive vice president Robert MCKEE signed a memorandum on joint development of major oil fields in Russia's northern Yamalo-Nenets region. The northern oil fields of 1.2 million acres are part of the Timano-Pechora project. The territories are believed to hold recoverable reserves of more than 1 billion barrels of crude oil and 2 trillion cubic feet of natural gas. LUKoil will hold a 60 percent interest in the territories and Conoco the remaining 40 percent. The project is expected to have a $25 million impact on the Russian economy. LUKoil and Conoco plan to submit to the Russian Fuel and Energy Ministry, by mid-December, their collaborative development project and a draft production-sharing agreement. Russian Fuel and Energy Minister Sergei KIRIENKO, US Secretary of Commerce William DALEY and Secretary of Energy Federico PENA signed the memorandum on behalf of Russia and the US. The 1997 oil output of LUKoil and its subsidiaries totaled 62.3 million tons. Conoco, a subsidiary of Du Pont, is seventh on the list of US oil companies. Boeing Commercial Airplane Group confirmed that it will buy $175 million to $200 million worth of milled titanium products from Russia's Verkhnaya Slada Metallurgical Production Association. The deal was signed at a ceremony attended by Russian Foreign Economic Relations and Trade Minister Mikhail FRADKOV and US Secretary of Commerce DALEY. Boeing Executive Vice President Tom SCHICK said, "Working together with Russian industry is mutually beneficial to Boeing,

our suppliers, and Russia." AGCO Corporation and the administration of Chelyabinsk Oblast signed a $62.5 million deal for AGCO to deliver and assemble agricultural equipment. Eight American companies and three Russian governmental agencies signed a protocol for Russia to import from the US the road equipment worth a total $91 million. The US Export-Import Bank and the Russian Vneshekonombank drew up an accord on a broader cooperation. FRADKOV said, "A good tradition is being laid down now, to mark each meeting of the inter-governmental commission by signing big and important contracts in all fields of our cooperation."

Internet Reaches Russia

· Delovaya Set has announced plans to link Russian users to the Internet via cable based radio links to the Western European Internet backbone. The new service, which will use 34 megahertz (MHz) radio links, will link Moscow and St. Petersburg into a major Internet switch in Stockholm, Sweden. In Stockholm, the fixed radio link will interface with UUnet's Internet network. Delovaya Set is a joint venture between several Russian companies, including Rostelecom, Atlas, Relcom, Rospak, Kourchatovsky Institute and PNIEI. The plan is to allow access through the Russian Moscow and St. Petersburg nodes for Internet service providers (ISPs) and large businesses, at relatively low prices

Russian Arms Leave for South Korea

· A shipment of Russian armaments is expected to arrive in South Korea within the next three days to repay Moscow's debt to Seoul. The debt has amounted to $1.47 billion. A cargo ship with the armaments on board carries 10 BMP-3 infantry fighting vehicles, and tank ammunition valued at over $30 million, a senior official in the Defense Ministry of South Korea said today. It was confirmed by an official of the Russian Rosvooruzheniye State-run arms exporting company. Under an intergovernmental agreement, Seoul consented to Russia's repaying part of its debt by the deliveries of armored vehicles, portable anti-tank missile systems Igla, ammunition and spare parts totaling $210 million. Another $210 million of debt is to be repaid through the export of mineral raw materials. In all, the South Korean armed forces will be supplied with 33 T-80U tanks and 33 BMP-3 infantry fighting vehicles, out of which a mechanized battalion is being formed in the Land Forces since October 1996.

When you need to know it as it happens

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Thursday

March 12, 1998

Intercon's Daily

European Republics

Estonian Parliament Elects Speaker

· Reform party member Toomas SAVI today was elected as Estonian parliament speaker. Sixty three out of 93 parliament deputies present voted in his favor in the 101-seat parliament. Under Estonian law, the speaker and two deputies are elected for a one year term. SAVI, the only candidate for nominated for the post, has been elected to other positions in parliament before.

Ukraine's Foreign Debt Increases

· Ukraine's foreign debt has increased sharply so far this year to $9.559 billion and is predicted to continue rising. Foreign debt totaled $8 billion in 1996, but the figure climbed to $8.65 billion in 1997. The Ukrainian Finance Ministry put Ukraine's debts to Russia at $2 billion dollars, to Turkmenistan at $563 million and the Commonwealth of Independent States (CIS) at $2.564 billion. Ukraine also owes the World Bank $1.216 billion in arrears, the International Monetary Fund (IMF) $2.386 billion and the European Union $352 million. Ukrainian debt to the United States, Germany and Japan respectively stood at $476 million, $473 million and $188 million.

Ukraine Not Interested in NATO Membership

· Ukrainian Foreign Minister Gennady UDOVENKO on Wednesday in Tokyo announced that Ukraine has no intentions of joining the North Atlantic Treaty Organization (NATO). "Ukraine is an unaligned country and does not want to join the North Atlantic Alliance." UDOVENKO is currently paying an official visit to Tokyo in the capacity of Chairman of the 52nd Session of the UN General Assembly in order to discuss with Japanese leaders problems of reforming the United Nations. UDOVENKO sees no basic differences in Russia's and Ukraine's approaches to cooperation with the NATO. Ukrainian President Leonid KUCHMA stated during his official visit to Moscow early this March that Ukraine did not want to join NATO, but, "will cooperate very closely with the alliance."

South Caucasus & Central Asia

Caucasian Market Opens London Office

· Chechen Deputy Prime Minister Khozh-Akhmed NUKHAYEV announced that the Caucasian Common Market, an organization grouping Chechnya, Azerbaijan, Georgia and Osetia, will open its office in London on Friday. NUKHAYEV, who is also the Caucasian Common Market President, is accompanying Chechen President Aslan MASKHADOV on his private trip to Great Britain. NUKHAYEV described the main goal of the market, founded in 1997, is to attract foreign investments in the fuel and energy complex of the Caucasian states. "At the moment, the structure and mechanisms of the regional `common market' is under formation," NUKHAYEV said. "The success of the new enterprise will fully depend on the amount of money raised by the already existing international financial fund." The Chechen deputy prime minister did not rule out the possibility of Turkey's and Iran's joining the Caucasian Common Market. The London office is likely to be headed by Mansur YAKIMCHIK, who is a key figure in the search of Western investments for Chechnya.

Tajik Supreme Court Sentences Attackers

· Tajikistan's Supreme Court today sentenced to death six and 15 others to prison terms who were indicted for the bomb attack on President Emomali RAKHMONOV, during a visit to Leninabad region. On April 30, 1997, a bomb was hurled on RAKHMONOV and his guards, leaving two dead and 42 with injuries. The six sentenced to death were charged with terrorism, banditry, and high treason. They include Abdukhafiz ABDULLAYEV, the brother of a former Prime Minister and leader of the opposition group For National Revival of Tajikistan, Abdumalik ABDULLADZHANOV. The sentences are final, but the condemned may appeal to the President for amnesty. RAKHMONOV on Tuesday joined the Tajik People's Democratic Party. Before, RAKHMONOV did not belong to a party, but in order to be nominated in the next presidential election, he needs the support of a registered party.

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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