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

Monday, March 2, 1998

Russian Federation

Politics

Yeltsin Fires Three Top Ministers

· Russian President Boris YELTSIN as promised has fired three top government ministers, Deputy Prime Minister Valery SEROV in charge of relations with CIS issues, Transport Minister Nikolai TSAKH, and Education Minister Vladimir KINELEV, saying they would move to other jobs. SEROV was replaced by Secretary of the Security Council Ivan RYBKIN. YELTSIN commented that he chose RYBKIN because, He proved himself very well over Chechnya. You can trust him." RYBKIN said that during a "transition period" he will continue to supervise relations between Russia and Chechnya. TSAKH was replaced by transportation deputy Yuri MIKHAILOV. KINELEV was replaced by Aleksandr TIKHONOV as education minister. YELTSIN's press service gave no explanation for the dismissals and did not clarify which "new jobs" the fired ministers were said to be taking. Speculation about SEROV's dismissal had circulated widely in the Russian media since a CIS summit last October, at which other CIS leaders criticized YELTSIN. SEROV was also under investigation for allegedly writing off part of Uzbekistan's debt to Russia. State Duma chairman Gennady SELEZNYOV was surprised that Economics Minister Yakov URINSON was not fired because in his words, "Because most problems are related to this ministry which is supposed to carry out the government's economic policy, but has failed to do that. The President's press secretary did not rule out further changes in the government soon.

Russian Atomic Energy Minister Viktor MIKHAILOV resigned today. YELTSIN has not appointed a replaced, but many suggest that Vitaly KONOVALOV who used to be first deputy minister of atomic energy

a few years ago, will be chosen. MIKHAILOV was criticized last month when he announced the ministry would close three out of eight plants involved in nuclear weapons production due to severe funding shortages. He has backed Russia's nuclear cooperative measures with foreign nations especially the construction of a nuclear plant in Iran that the US opposes.

Duma-US Congress Members Meet

· A delegation of Russian State Duma members led by chairman of the Duma committee on international affairs Vladimir LUKIN met with several US Congressional representatives on Friday to discuss a broad range of the Russian-American relations, including the NATO enlargement and the situation with Iraq. The sides also discussed prospects for the Duma ratification of the START-II. Specifically on the START-II, LUKIN said, "We are slow with the ratification because we still have our strategic fears, primarily NATO." He urged the need for, "detailed and specific discussions" with participation of parliament members from both countries. On the same day, the Russian parliament members met US First Undersecretary of State Stroub TALBOTT, high-ranking staffers of the US National Security Council and the American-Russian Business Council.

Economy

Ruble = 6,070/$1.00 (NY rate)

Ruble = 6,073/$1.00 (CB rate)

Ruble = 6,045|6,101/$1.00 (buy|sell rates)

Today's News Highlights

Russia

Engineering Plants Merge

Tycoon Beats Visa Charges

European Republics

Ukraine's Anti-Corruption Laws

Ukraine- EU Agreement

South Caucasus & Central Asia

Georgian Pres. Denies Resign

Caspian Summit in Istanbul

Azeri-Uzbek Sign Agreements

Azeri-Japan Sign Agreements

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March 2, 1998

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Russia to Float Eurobond Issues

· The Russian Finance Ministry said in an official report on Friday that Russia will begin flotation of Eurobond issues in Deutsche Marks and Italian Liras. Eurobond issues floated in German Marks will be the first to appear on the market this year. The Russian Finance Ministry has authorized the Deutsche Bank and the Warburg Dillon Reed Bank to be joint coordinators responsible for the portfolio of the second Eurobond issues in German Marks. The Credito Italiano Bank and a department of the Morgan Bank are to be joint coordinators responsible for the portfolio of the first Russian Eurobond issues in Italian Liras. Senior officials of the Russian Finance Ministry will represent Russia at presentation ceremonies scheduled to be conducted at key finance centers. Presentation ceremonies of Eurobond issues in Deutsche Marks are expected to begin in the second half of March, and in Italian Liras in April, 1998. The time of commencing the transactions and the terms when the Russian Eurobond issues are to be redeemed will be announced shortly before the flotation of Eurobond issues begins.

Business

Russian Tycoon Beats US Visa-Fraud Charges

· A federal judge in Fort Lauderdale has dismissed visa-fraud charges against a Russian tycoon Alexander TARANTSEV after ruling that prosecutors failed to prove their case. TARANTSEV had been arrested for failing to report that he had been convicted in 1979 and 1982 for dealing in the black market in the former Soviet Union. Prosecutors hinted that as president of Russian Gold, a holding company for vast business enterprises, TARANTSEV has ties with organized crime in Russia, but they were never able to pursue the link. Attorneys for TARANTSEV insisted the convictions were expunged with the collapse of the Soviet Union, and had been prepared to present a witness who has 25 years of experience with the Russian equivalent of the US Supreme Court to explain the ruling. TARANTSEV still must attend a deportation hearing with the US Immigration and Naturalization Service before he can go home. He earns $5 million a year as head of Russian Gold, which deals in real estate, jewelry, fashion, music production and television stations.

Engineering Plants Announce Merger

· The Uralmash and Izhory engineering joint-stock

companies on today announced, "a merger through an exchange of shares." The Uralmash and Izhory engineering companies are Russia's major producers of engineering, metallurgical, rolling-mill and power engineering equipment. An Uralmash press release said the companies had signed a merger protocol on February 22. Experts estimate that following the merger, the two companies will control of 15 to 100 percent of the production of individual engineering equipment in Russia. The Uralmash and Izhory are planning to announce details of the merger during a joint press conference on March 4 in New York, where Chairman of the Uralmash Board of Directors Kakha BENDUKIDZE and General Director of the Izhory Engineering Plants Vladimir VASILYEV are attending an international conference called Investments in Russia.

European Republics

Ukraine Drafts New Anti-Corruption Laws

· Ukraine's Justice Ministry has drafted a new law on combating corruption which will operate with terms reflecting modern realities, including organized. Deputy chairman of Ukraine's Security Service (SBU) Anatoly BELYAYEV said the present law on corruption, effective in Ukraine since 1995 is defective since those involved in its drafting did not have experience. The terms "corruption" and "organized crime" have not been legalized in the judicial system, BELYAYEV said, adding that the existing law only defines the notion "acts of corruption" which are punished by fines or demotion. When asked whether the SBU control officials' activities, BELYAYEV said it does not have the right to do so. The SBU staff comprises 750 officers working to resolve the problems with crime. Their objective is to detect and rectify flaws in legislation in other official documents, he said.

Ukraine-EU Agreement Effective As of March 1

· The agreement on partnership and cooperation between Ukraine and the European Union came into force on March 1. The document imposes mutual obligations on both sides ad seeks to improve economic relations. Ukraine's Ambassador to the organization Boris GUDYMA said Ukraine will first need to bring its legislation in line with the European Union's regulations. The document has already been ratified by all the 15 European Union member

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states. Until now, relations between Ukraine and the union have been regulated by a temporary agreement. Ukraine will appoint its delegations to the union's councils and committees for cooperation, as well as the interparliamentary committee soon. 10 working groups have been set up for cooperation in the coal-mining and steel industries, trade, pan-European transportation, the agro-industrial complex and other fields,GUDYMA said. The agreement commits both sides to creating favorable conditions for trade and investment. The EU is second behind the US in trade with Ukraine. The agreement comes on the heels of unilateral restrictions by Kiev on car imports in a move designed to benefit Korean automaker Daewoo, which has made substantial investments in Ukraine. The EU said the restrictions violate the agreement, and that sanctions could be imposed as a result.

South Caucasus & Central Asia

Georgia President Denies Resignation

· In an today's national radio broadcast, Georgian President Eduard SHEVARDNADZE said, "I wish to tell friends and foes alike that I am very well and am going to continue as President to consolidate Georgia's independence and prosperity." He was referring to an article in Moscow's daily Nezamisimaya Gazaeta which said the leader was discredited and would use the pretext of illness as an excuse for quitting the presidency. SHEVARDNADZE suggested the authors should, "think about the health of their own President and only after that worry about me." Georgia's allegations that last month's assassination attempt on the President was organized by forces in Russia which seek to destabilize Georgia, reverse its pro-western orientation, and force Georgia back into Russia's sphere of influence, has proved to worsen already strained ties between the two nations. Russian Foreign Ministry spokesman Gennady TARASOV said, "In our opinion, with the present situation in Georgia, all should show restraint and refrain from politically motivated statements that hardly serve interests of strengthening the cooperation and understanding between Russia and Georgia." In today's issue of Moskovski Komsomolets an article suggests that the attack on Georgian President SHEVARDNADZE was timed strategically to overlap with the Olympics and the crisis in Iraq, so that world-wide attention would not

be drawn to the assassination attempt and hostage taking which destracted attention from those which stood behind these apparently coordinated activities. This cover allowed SHEVARDNADZE's allegations that "Russian hands" were involved in the attack to fall on deaf ears. The article implicates that forces outside of Georgia were involved in planning the attack to instigate chaos in the region in hopes that western nations would not support the planned pipeline project through Georgia.

Meanwhile, Russia's Defense Minister Marshal Igor SERGEYEV postponed last weeks official visit to Tblisi. SERGEYEV said the purpose of his visit is to decide whether or not Russian military bases in Georgia are necessary. "The deadline [for the visit] will be agreed upon with the Georgian side and the Georgian Defense Minister proceeding from the situation shaping in Georgia," SERGEYEV said. The minister intimated that Russia is ready for any decision, not ruling out the possibility of Russian troop withdrawal from the Georgian territory. "We are prepared for any versions."

Caspian Summit Back Baku-Ceyhan Route

· Caspian Foreign Ministers from Kazakhstan, Turkmenistan, Azerbaijan and Georgia met in Istanbul with Turkish counterpart Ismail CEM to discuss oil pipeline routes to transport Caspian oil to western markets. Turkey insists that an oil pipeline should be laid down to connect Azerbaijan's Baku and the port of Ceyhan in the Turkish Mediterranean to export Azeri and Kazakh oil. The Foreign Ministers are expected to consider the funding issued related to the Baku-Ceyhan pipeline. The construction of the 1,730-km Baku-Ceyhan pipeline will take $2.5 billion, according to Turkish estimates and transport 1 to 1.5 million barrels of oil per day. Georgia's Irakly MENAGARISHVILI said, "The Baku-Ceyhan route is the shortest and most economical" and it is suitable for both oil and gas shipments. CEM said the conference aimed to establish, "a consensus and political basis for the decisions on [pipeline routing] to be taken this year." CEM said Turkey hopes to lay down a pipeline network in the Caspian-Mediterranean area to secure that regional oil and gas demand is supplied. Representatives agreed that they do not, "want to depend on Russia in the matters of regional exports of energy supplies." The pipelines are strategic assets that give considerable power to the

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countries who control them. Washington supports the Baku-Ceyhan route as an alternative to a shorter and cheaper route through Iran. While in Japan, Azerbaijan President Geidar ALIYEV also stated support for the Baku-Ceyhan project and said construction must begin before year's end. It is important to realize Turkey must convince both ALIYEV and the consortium of international oil companies developing Azerbaijan's reserves, the Azerbaijan International operating Company (AIOC). When asked if the AIOC supports the Baku-Ceyhan oil pipeline plan, ALIYEV said, "In general, yes...They are having difficulties, some differences of opinion for the financial issues. We have to work on it." A joint statement at the meeting's conclusion showed support from all five countries to an "east-west corridor," which includes multiple pipelines to pump out the production from the AIOC. A final decision on the pipeline is due in October. Georgia will host the next meeting of the five nations, although no date has been set. Comment: US government policy could influence this decision positively if loan agreements based on the pipeline tariff discounts could be guaranteed. This is in the US strategic interest.

Azerbaijan-Uzbekistan Sign Agreements

· Three bilateral agreements were signed on Thursday at a first joint session of the intergovernmental commission for cooperation between Azerbaijan and Uzbekistan. These documents are expected to streamline mutual relations between the two countries in the field of currency and exports control and boost efforts in the fight against financial and economic crime. Co-chairmen of the intergovernmental commission, First Vice- Premiers of Azerbaijan Abbas ABBASOV and Uzbekistan Ismail DZHURABEKOV regarded the session as an important step towards broadening a legal basis for cooperation between the two states. DZHURABEKOV stated that the sides had agreed to double Uzbek goods traffic in 1998 to Europe through Azerbaijan and Georgia, with which his country and Turkmenistan are bound by a transportation agreement within the frame work of the European Union program Traseka. In his view,

this route is the shortest and commercially profitable for Uzbekistan, which saved in 1997 about $40 per ton of cargo and estimated 200,000 tons of shipments were shipped along this route from Uzbekistan in 1997. Volumes of cargo doubled because railway tariffs on other routes are two times higher than Georgia and Azerbaijan's railways. He noted that the bilateral trade turnover reached $23.5 million in 1997.

Azerbaijan-Japan Sign Agreements

· Azerbaijan President Geidar ALIYEV and Japanese Prime Minister Ryutaro HASHIMOTO agreed Thursday to enhance bilateral relations by signing joint statements on Friendship and Partnership and trade cooperation. HASHIMOTO stressed the geographic importance of Azerbaijan for promotion of development of the whole Eurasia region. HASHIMOTO stated that Tokyo will support Azerbaijan's bid for membership in the World Trade Organization and the Asian Development Bank (ADB). Azerbaijan's Economy Minister Namik NASRULLAEV and Japanese Foreign Minister Keizo OBUCHI exchanged notes for Japan's first yen loan to Azerbaijan. The loan, totaling about 20.7 billion yen (about $161.7 million), will be used to help Azerbaijan transform a thermal power plant in Severnaya into a gas combined-cycle power plant. Japan's state-owned Export-Import Bank announced a 5.5 billion yen to Baku to finance the upgrading of a chemical plant. Japan also declared that it will provide about 400 billion yen ($3.13 million) to modernize and develop the food industry as part of Japan's program of official assistance to the development needs. Japan will provide three countries in the Caucasus with some $3.22 million in emergency aid to help refugees. The humanitarian assistance to Azerbaijan, Georgia and Armenia will be given through the UN High Commissioner for Refugees (UNHCR), the World Food Program and the International Organization for Migration. The Mitsui corporation signed a contract to develop the promising deposit Kyurdashi located in the southern part of Azerbaijan's sector of the Caspian Sea.

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

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