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 19, 1998

Russian Federation

Politics

Plunging Oil Prices Threaten Russian Economy

· Plunging oil prices on world markets have forced the Russian oil industry to cut production and development. Yuksi, formed from Yukos and Sibneft, announced Wednesday that it will cut production by up to 5 percent at less profitable wells and reduce development spending by 30 percent. Yuksi President Mikhail KHODORKOVSKY noted that since other nations such as Venezuela and Saudi Arabia have refused to limit oil extraction, price will continue to fall. World oil prices have dropped by 40 percent as compared with the last year's average price, with price per barrel dropping from $18.34 in 1997 to $13. The lower prices also puts pressure on the government to reduce the tax burden on domestic producers thereby easing the oil sector's financial strains. KHODORKOVSKY has called on federal authorities, the Russian State Duma and the Foreign Ministry to take urgent measures to stabilize the national oil industry. The Russian oil sector, which exports 30 percent of its production, could lose $4.3 billion in revenues for 1998, according to The Financial Times. Export earnings are crucial to Russian oil companies which receives payment in cash, while domestic sales are primarily through barter. KHODORKOVSKY claimed that many countries are interested in negotiations both inside and outside the OPEC framework, since the present level of prices is edging down to a threshold of profitability not only for Russian oil-producing companies. He underlined that Russia should show an active position to international business, since the matter in question is to preserve investment appeal of the Russian oil sector for Western investors. "[Russia's] Passive observation of events may lead to a situation when money, planned for production of Russian oil, can be redistributed in favor of other countries,"

KHODORKOVSKY concluded. Russian analysts say the oil sector may contribute 20 percent less to the budget than previously predicted. Deputy Prime Minister and Minister of Economics Yakov URINSON said Russia's losses from the fall of world oil prices by about one third will amount to $400 to $500 million in gross income. First Prime Minister Anatoly CHUBAIS warned the oil price collapse will have, "serious" consequences for the Russian economy.

Serbian President Signs Kosovo Declaration

· As a result of Russian Foreign Minister Yevgeny PRIMAKOV's Yugoslav visit, Serbia's President Milan MILUTINOVIC Wednesday signed a declaration on the political process in Kosovo and Metohija, in which he appealed to ethnic Albanian leaders to join in talks with his government on self-government in Kosovo as Serbia's component region. He indicated for the first time that the autonomy of the region may be restored. The Yugoslav authorities are ready to resume cooperation with the OSCE and to give this organization an opportunity to open its mission in Kosovo. Russian Deputy Foreign Minister Nikolai AFANASYEVSKY emphasized that this document had been signed, "with the blessing" of Yugoslav President Slobodan MILOSEVIC and can be viewed as a, "serious response by the Yugoslav authorities to the stand taken by the Contact Group." When asked why the document did not address the demand from the Contact Group that Serbian interior troops be withdrawn from Kosovo AFANASYEVSKY said, "We have been assured that special police

Today's News Highlights

Russia

Economic Ties With Moldova

Gazprom Cuts Belarus Supplies

Russian Business in Hong Kong

European Republics

Belarus Ruble Collapse

Estonia Abolishes Death Penalty

South Caucasus & Central Asia

Youth Protest on Abkhaz Border

Skoda To Assemble in Uzbek

Kazakh Releases Iranian Spies

Politics-Economics-Business

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Thursday

March 19, 1998

Intercon's Daily

units and heavy weapons are being pulled out of Kosovo to the places of their permanent deployment." On Wednesday, Russia backed away from the arms embargo agreement which it helped draft on Monday. AFANASYEVSKY said that the Contact Group at its London meeting made it clear that sanctions would not be necessary if the Yugoslav authorities made progress in the Kosovo settlement.

WTO Membership Completes Information Stage

· First Deputy Prime Minister Anatoly CHUBAIS on Wednesday held the fourth meeting of the commission in charge of preparations for Russia's accession to the World Trade Organization (WTO). He stated that the commission has competed the "information stage," providing data and answering WTO member questions. Disputes on import duties have complicated the accession process. Russia has officially submitted its proposals on the minimum permissible duties and the WTO has accepted them, he said. "We have identified more than 10,000 tariff issues and 21 WTO members have shown keen interest in them," CHUBAIS said. Russia today will begin talks with the European Union, the US, and Japan to discuss import duties. Talks with the WTO on services have also been intense, including areas of tourism, medicine, culture, finances and insurance. Ministries and departments have been instructed to work out proposals on these issues by April 30, 1998 in order for Russia to begin talks with the WTO.

Russian delegation led by Deputy Foreign Economics Minister Georgy GABUNIA and a Japanese delegation represented by experts from the Japanese Foreign Ministry are holding meetings to discuss Russia's membership to WTO. Today's meetings focused on creating conditions for the advancement of Russian goods to the world market. The two sides, during the two day consultations, plan to analyze Russia's strategy of defending domestic goods exported to a foreign market. Spokesman for the Russian delegation to the consultations Vladimir KHREBTOV said, "The consultations have a working character and therefore, the signing of any concrete agreements has not been planned." Both Moscow and Tokyo attach a special significance to this meeting, regarding it in the context of realization of the YELTSIN-HASHIMOTO plan for bilateral economic cooperation adopted in November, 1997,

which envisages Japanese assistance to integration of the Russian economy into the world market.

Economy

Ruble =6,093/$1.00 (NY rate)

Ruble = 6,093/$1.00 (CB rate)

Ruble = 6,070|6,116/$1.00 (buy|sell rates)

Russia-Moldova To Increase Economic Ties

· Russian Prime Minister Viktor CHERNOMYRDIN and his visiting Moldovan counterpart Ion CIUBUC Tuesday agreed to launch economic cooperation between the two countries for the period 1999-2008. CHERNOMYRDIN said bilateral relations have progressed to the point where, "we can plan for ten years of cooperation." The two sides signed an agreement to encourage and mutually protect capital investments. CHERNOMYRDIN plans to attend a meeting on Friday with Ukrainian President Leonid KUCHMA and Moldovan President Petru LUCINSCHI in Odessa to discuss specific details concerning the settlement in the Dniester region.

Business

Bulgaria To Hold Talks With Gazprom

· A Bulgarian governmental delegation headed by Vice-Premier of the Bulgarian government Yevgeny BAKYRDZHIYEV will meet with Gazprom Friday to discuss the transit of Russian natural gas through the territory of Bulgaria and an outlook for deliveries of this natural fuel to Bulgaria. Bulgaria has been dependent on Russian gas since 1974. It receives 6 billion cubic meters of gas per year. For 1998 the sides signed contracts for the delivery to Bulgaria of 3.1 billion cubic meters of Russian gas. In addition gas will be transported to the republic as an advance against payments for transit of Russian gas through the Bulgarian territory to Greece, Macedonia, and Turkey. Approximately 8 billion cubic meters of gas passed through Bulgaria to Balkan markets in 1997. Another 1.5 billion cubic meters of gas will be delivered to Bulgarian markets through the Russian-Bulgarian joint-stock company Topenergy. Talks have been stalled by the Bulgarian government's attempt to keep Multigroup out of the Topenergy joint venture and return the government's holding to 50 percent. The Bulgarian government states that the strategic interests of gas transit should be left to the government and not private firms. Gazprom

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holds the remaining 50 percent of Topenergy. It insists that Topenergy be used in future gas deals. According to Reuters, analysts believe Russia is trying to restore its dominance over Bulgaria through gas deals or punish it, by stalling needed gas supplies, for Bulgaria's intention of joining NATO.

Gazprom Threatens Belarus' Gas Supplies

· Russia's gas giant Gazprom warned the Belarus government that Gazprom will cut gas supplies startingTuesday by 30 percent because its failure to pay for previous supplies. Belarus Prime Minister Sergei LING said Wednesday that Belarus cut its debt for gas supplies from $217 to $95 million in 1997, but in the first two months of 1998 the debt soared back to $220 million. LING attributed this to the new payment terms proposed by Gazprom of paying 70 percent of the debt in hard currency and 30 percent in goods. Last year, Belarus paid 30 percent of gas supplies with hard currency and 70 percent with goods. Two thirds of Belarus' exports go to Russia, in which 80 percent of all transactions carried out by Russian businesses with Belarus are barter deals. "Give us rubles and we will pay Gazprom," LING said. The Belarus Prime Minister dismissed Gazprom's claims that it needs money, not goods. Gazprom has named 30 companies which take goods made in Belarus, sell them and then pay the suppliers of fuel. Because of the difference in the exchange rates, the companies sell Belarus goods in Russia with a 25 percent surcharge.

Russian Businessmen in Hong Kong

· A Russian business delegation arrived in Hong Kong to study opportunities to boost trade and economic cooperation between the Russian Khabarovsk Territory and Hong Kong, the financial and economic center of the Far East. Deputy Governor of the Khabarovsk Territory, and leader of the delegation, Alexander LEVINTAL expressed the readiness of Siberia and the Russian Far East to launch broad cooperation with Hong Kong in all economic sectors, not limiting activities only to trade. Director of the Russian trade association in Hong Kong Peter GORDON noted that the growing number of representatives from Russian business quarters come to Hong Kong to study potentialities of cooperation not only in the spheres of trade, investments and tourism, but also in the sphere of setting up joint ventures.

European Republics

Belarus Ruble Crashes, President Blames Rus.

· On Friday, the Belarus ruble or zaichik fell against the dollar being sold for 50,000 and more to the dollar. Since then the ruble has started a recovery reaching 45,000 per dollar on Wednesday. President Alexander LUKASHENKO ordered to peg the ruble to 42,000 to the dollar, a rate of early March. He directed his chief of staff, Security Council secretary, State Control Committee, national bank and KGB to investigate the causes of the ruble's collapse and come up with measures for stabilization of the currency market. Western experts believe the crisis grew out of sluggish privatization plans, Belarus' multiple currency rates, and massive prop-up infusions in industry and agriculture. Meanwhile, LUKASHENKO has blamed Moscow for the ruble devaluation. LUKASHENKO said the Belarus currency tumbled because of its low quotation and ample supply on the Moscow currency exchange. He said Belarus' financial situation is adversely affected by not getting cash for goods it exports to Russia and other CIS states, with barter accounting for 80 percent of settlements. The President disagreed with Russian First Deputy Prime Minister Anatoly CHUBAIS' assessment of the economic situation. CHUBAIS responded that he hoped, "LUKASHENKO will have enough common sense to look for constructive solutions," in the economic field, "rather than for enemies," responsible for the crash of the Belarus ruble. The Russian Central Bank rejected LUKASHENKO's claims that it was to blame for the devaluation of the Belarus ruble. The bank said there is not, "the slightest economic logic," in blaming it for the currency drop. The Moscow Interbank Currency Exchange (MICEX) deputy director-general Aleksei MAMONTOV said the exchange has temporarily suspended trading in the Belarus ruble on recommendation of the Central Bank of Russia. No date for resumption has been announced.

Today, LUKASHENKO ordered all state and private companies to cut their prices in a move to combat the collapsed currency. Trade Minister Pytor KOZLOV said, "Yesterday and the day before all shops conducted readjustments and prices were wound back to March 1st levels...orders from the President and government apply to all forms of property." He added that directors of any state company that refused

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would be sacked and private companies would have their licenses revoked.

Estonia Abolishes Death Penalty

· Although public opinion polls show that between half to one third of Estonians favor the death penalty, the Estonian parliament in a vote of 39 to 30 with 13 abstentions ratified the sixth protocol to the European Convention for the Protection of Human Rights and Fundamental Freedoms, under which the country must abolish the death penalty. Politicians said the measure was necessary for Estonia to gain acceptance in European institutions, including the Council of Europe and the European Union (EU). The head of the parliament's legal committee Daimar LIIV told legislators that, "This is not 1956 and the evil empire, it's 1998 and we are striving to become one of the cultural nations of the world." He said the decision will send a positive message to the EU.

Ukraine To Sell 24 Stake in Steel Mill

· The Ukrainian State Property Fund on Wednesday announced that it will sell a 24 percent stake in the Zaporizhstal steel mill in a tender on April 23rd. Zaporizhstal , Ukraine's third largest steel mill, will be sold at a non-commercial tender for 269.978 million shares worth 76.42 million gryvnias ($38.21 million). The winner of the tender is expected to invest 150 million gryvnias in modernization by 2000 and invest 18.72 million gryvnias further. The plant's profits last year totaled 151.6 million gryvnias compared to 68.71 million gryvnias in 1996. Ukraine's metal sector brings in 40 percent of the nation's hard currency revenues.

South Caucasus & Central Asia

Thousands Protest on Georgian-Abkhaz Border

· Between 10,000 and 15,000 ethnic Georgian displaced persons who fled Abkhazia during the war staged a rally on the border between Abkhazia and Georgia protesting the failure of Russian peacekeepers to ensure the return of ethnic Georgian refugees. The demonstration was organized by the youth wing of Georgia's ruling party, the Union of

Citizens. The demonstrators, who are demanding that their repatriation to Abkhazia be speeded up, are also blocking supply routes between western Georgia and the CIS peacekeeping force deployed in southern Abkhazia. The Abkhaz government deployed additional Interior Ministry troops in the Gali region on Wednesday to deal with, "political and social complications and instability," RFE/RL Newsline reported.

Meanwhile, Abkhaz President Vladislav ARDZINBA and a group of Abkhaz parliamentary deputies met with Russian Foreign Ministry's Special Envoy for Abkhazia Lev MIRONOV in Moscow on Wednesday. The two parties discussed a document titled, "On Additional Measures for Settling the Abkhaz Conflict," which the Georgian leadership had drafted for discussion at the CIS summit in April.

Skoda To Assemble Trucks in Uzbekistan

· A delegation from the Czech car-maker Skoda arrives in Uzbekistan today to sign a package of documents. In addition to meetings at the official government level, the company's director general and his colleagues are scheduled to meet with representatives of the Uzbekistan business community. These meetings are to result, among other things, in signing an agreement to set up a joint Czech-Uzbek venture in the capital Tashkent to assemble Tatra trucks.

Kazakh Expels Three Iranian Spies

· The Kazakh Foreign Ministry announce today that is was expelling three Iranian citizens who were detained in Almaty on spy charges on February 24. Although the guilt of the detained men had been fully established, the ministry made it clear that it was not pressing charges to maintain good relations with Iran. The Foreign Ministry statement said, "demonstrating good will and striving to maintain the hard-earned potential of relations between the two countries, [Kazakhstan] took the decision to free them from custody and deport them." Kazakhstan views Iran as a potential market for its grain and a possible route for its oil and gas to reach foreign markets.

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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