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 23, 1998

Russian Federation

Politics

Yeltsin Sacks Entire Government

· Russian President Boris YELTSIN dropped a bombshell today in a live television broadcast when he dismissed Prime Minister Viktor CHERNOMYRDIN and the entire cabinet. After being away from his office for a weak due to poor health, YELTSIN's government reshuffle is clearly seen as an attempt to reassert his power. YELTSIN has criticized the government for the slow pace of economic reforms and said political infighting has caused the Cabinet to waste time. He added that the government had failed to convince ordinary citizens that capitalism and market reforms would improve their lives. He also expressed concern over delays in wage and pensions and the continued growth of such debts. In February wage debt to state payroll workers increased by 20.9 percent totaling 7,636 million rubles as of March 1st. Overall wage debt grew by 4 percent in February totaling 50, 132 million rubles. The current drop in oil prices is obviously effecting Russia's ability to collect income to off set expenses. YELTSIN called for a new, younger team to ensure progress in economic reforms. "The dismissal of the government does not mean a change of course in our policy. It is an effort to make economic reforms more energetic and effective, to give them a political push, a new impulse," YELTSIN said. CHERNOMYRDIN, who has survived several reshuffles, was given the job of organizing next year's parliamentary election and the presidential election in 2000. He has not announced he will run for the President, although he is high on the public's list of candidates. YELTSIN says the appointment of CHERNOMYRDIN to head the preparations would help ensure victory for a democratic candidate. Some believe, that YELTSIN's action to relieve the Prime Minister of his duties may be an attempt to remove CHERNOMYRDIN from the

political spotlight and reassert his own power in a possible bid for the 2000 election. YELTSIN himself has not ruled out running for a third term, but his age, state of health and a clause in the Constitution prohibiting three terms make that unlikely. The Constitutional Court is reviewing the laws looking for a loop hole to allow YELTSIN to run for a third term. Curiously, the court stated it will announce the results of their review only at the end of 1998, leaving a short time before the elections.

In a separate decree, YELTSIN sacked First Deputy Prime Minister Anatoly CHUBAIS and Interior Minister Anatoly KULIKOV, "in view of transfers to other jobs." YELTSIN has appointed young Fuel and Energy Minister Sergei KIRIYENKO as acting Prime Minister as well as carrying out CHUBAIS's responsibilities. By placing the Fuel and Energy Minister in the number two position in the government, YELTSIN has strategically put oil and energy reforms as a priority along with rejuvenating the government with young ministers. KIRIYENKO also masterminded the plan effective by which energy companies which paid their tax debts were granted access to export markets. He also has restored tax privileges to some joint ventures. With these accomplishments, however many see KIRIYENKO as unexperienced and that he will not be YELTSIN's candidate for Prime Minister. Three names have surfaced as possible candidates for Prime Minister: First Deputy Premier Boris NEMTSOV, deputy prime minister in charge of CIS relations Ivan RYBKIN, and

Today's News Highlights

Russia

Duma Passes Protectionist Bill

Investment Conference in Kwuait

Aide Favors Planes Over Cars

European Republics

Ukraine Creates Oil Company

Belarus NB Under Gov't Rule

South Caucasus & Central Asia

Georgia Searches for Criminals

Turkmen First Oil Reaches Baku

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leader of the Yabloko faction Gregory YAVLINSKY. NEMTSOV is a controversial figure, with an aggressive attitude towards reforms. RYBKIN is considered a moderate social democrat. YAVLINSKY is a liberal reformer, who would validate Russia's reforms in the eyes of the international community. A NEMTSOV or YAVLINSKY appointment may well mean YELTSIN is prepared to dismiss the Duma, which is controlled by Communists and Nationalist forces and continued to impede reforms and arms controls.

YELTSIN appointed Pavel MASLOV acting Interior Minister to replace KULIKOV. MASLOV was named chief of staff of the Interior Ministry forces of Russian in 1997 and was a deputy commander during the armed conflict with Chechnya in 1996. YELTSIN has asked ministers other than CHERNOMYRDIN, CHUBAIS and KULIKOV to continue their duties until a new government is formed. Defense Minister Igor SERGEYEV, overseeing vital military reform and Foreign Minister Yevgeny PRIMAKOV are likely to remain in their present positions. NEMTSOV said the decision to fire the government was taken by YELTSIN alone. "It was a decision of the president and I have nothing else to add," NEMTSOV said. The President expects a new cabinet to be in place by April 10th. This timeline is extremely optimistic as a new Prime Minister must be approved by the Communist and Nationalist led Russian State Duma, which may result in a coalition government or a larger confrontation. Under the Constitution, if the Duma turns down the proposed candidate three times, the President shall disband it and call a parliamentary election. Comment: With the economy just rebuilding since the Asian financial crisis this 20 percent drop in the market will force upon the government new challenges making the appointment critical. With the health of the president in question, workers loosing patience over wage arrears, and the looming impeachment vote by communists next month, President YELTSIN's dismissal is an attempt to reassert his power and cover his tracks by placing the blame for lack of reforms on the cabinet and maybe the Duma. He now has the opportunity to rebuild the government to suit his political needs. If his choice for Prime Minister causes the disbanning of the parliament, YELTSIN will have a clean slate to change the face of Russian government. Whether he uses the opportunity for more than political expedience remains to be seen.

Accords in Moldova-TransDniester Conflict

· Leaders from Ukraine, Russia and Moldova held talks Friday in Odessa to discuss the settlement of Moldova's conflict with the self-declared Trans-Dniester Republic. Moldovan President Petru LUCINSCHI, Ukrainian President Leonid KUCHMA, Russian Prime Minister Viktor CHERNOMYRDIN and the leader of Trans-Dniester Igor SMIRNOV, signed an accord that promises to increase mutual-trust and contact between Moldova and Trans-Dniester. CHERNOMYRDIN said, "It is the first time we came to signing a document on confidence-building measures." Under the accord, Moldova and Trans-Dniester would both reduce their peacekeeping forces stationed in the region by 500 servicemen. Russia and Ukraine act as guarantors of peace in the region. Ukraine agreed to send observers to the region for the first time. The leaders also signed a protocol defining some priorities in speeding up the settlement of the Trans-Dniester conflict. KUCHMA and CHERNOMYRDIN also signed a joint statement on the Trans-Dniester conflict after a bilateral meeting. The statement called on leaders of Moldova and Trans-Dniester to give priority in their negotiations to resuming an integrated economic, social and legal system. Trans-Dniester, which is an important industrial region of Moldova, began to seek independence in 1990 and later declared itself an independent state. A memorandum granting Trans-Dniester broad autonomy within the Moldova border was signed last year in Moscow, but leaders of Trans-Dniester insist they need full independence.

Duma Passes Protectionist Bill

· The Russian State Duma Friday passed on the third reading a bill on foreign trade aimed at protecting Russia's economic interests in international competition. Under the proposed legislation, the Russian government will create a special commission to work out anti-dumping measures to protect Russia's enterprises from unfair competition. Under the legislation to be adopted by a fourth reading, the Russian government can levy special tariffs on foreign goods and temporarily limit the import of certain commodities with quota, among other anti-dumping measures. Russia's export volume decreased by 1.8 percent in 1997 from that in 1996.

Russia Accepts 1956 Declaration With Japan

· The Russian Foreign Ministry said Sunday it has

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acknowledged the validity of a 1956 joint declaration with Japan calling for the return of two of four disputed islands to Japan. The 1956 declaration stipulates that Moscow would return the Habomai group of islets and Shikotan Island to Japan on the condition that the transfer take place following the signing of a bilateral peace treaty. The four islands, were captured by Soviet troops at the end of World War II. The territorial row will be high on the agenda of talks between Prime Minister Ryutaro HASHIMOTO and President YELTSIN in Kawana, southwest of Tokyo, next month.

Economy

Ruble = 6,096/$1.00 (NY rate)

Ruble = 6,097/$1.00 (CB rate)

Ruble = 6,076|6,118/$1.00 (buy|sell rates)

Stock Market Plunges on Government Dismissal

· The Moscow Stock Market plunged 10 percentage point following President YELTSIN's dismissal of the entire government. Itar-Tass reported that stocks fell as a result of foreigners attempting to dump securities on the market, "amid a complete lack of demand." Outgoing Prime Minister Viktor CHERNOMYRDIN said at a news conference that the government reshuffle, "is not a catastrophe. There is no government crisis in the country...I particularly appeal to the entrepreneurial sector, to our Russian bankers. There's no need for panic." He stressed that Russia's economic reforms cannot be reversed.

Investment Conference Opens in Kuwait

· The Investment climate in Russia conference, sponsored by the Russian Economic Ministry and the Kuwaiti Trade and Industrial Chamber, opened in Kuwait on Sunday aiming to expand Russian-Kuwaiti trade, economic and investment cooperation. The Russian delegation includes representatives from ministries and departments as well as businessmen from several regions. Russian ambassador to Kuwait Pyotr STEGNY stressing the interest of the two countries in economic cooperation said, "Russia offers broad vistas for profitable investments, while Kuwait can successfully use Russian industrial experience and new technological development studies." Chairman of the Kuwait Chamber of Commerce and Industry Abderrazzak AL-HALED emphasized mutual opportunities in oil, gas, and

power industries. He said, "Russia has overcome the most difficult period in its development. All indicators show that its economy is moving towards stabilization."

Business

Presidential Aide Favors Planes Over cars

· Russian presidential aide Evgeny SHAPOSHNIKOV has said Russia should give priority to developing its airplane manufacturing industry instead of automobiles. SHAPOSHNIKOV said that the Russian policy of blindly developing the automobile industry is a, "stupid strategic mistake." In his words, while Russia has no chance to catch up in the automobile sector with its foreign counterparts in the near future, Russia's comparatively advanced airplane manufacturing industry can serve as a locomotive to propel an overall industrial development. Due to the lack of large-scale state investment, the research and development of Russian aviation products has been stagnant. As a result, he said, Russian airplanes lag behind international standards. He stressed that foreign airplane manufacturers are intensifying their efforts to penetrate the Russian market.

European Republics

Ukraine Creates National Gas Company

· President Leonid KUCHMA in late February a decree which mandated the setting up of a national oil and gas joint-stock company, Neftegaz Ukrainy (Oil and Gas of Ukraine). The government and the State Property Fund are compiling a list of open joint stock companies in which the government has stakes with a view of adding the stakes to the companies' authorized capital. The reorganization of the oil and gas sector is expected to be completed by April 1. KUCHMA said Ukraine should learn from Russia's experience with Gazprom. He explained that it won't do that, "the pipe is with one [company], extraction with another and fuel sales with a third."

Belarus National Bank Under Gov't Control

· Following the collapse of the Belarus ruble, Belarus President Alexander LUKASHENKO on Saturday signed a decree in which the activities of the National Bank (NB) in the pursuance of a com

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mon economic, financial, credit lending and monetary policy will from now on be the responsibility of the Cabinet. He assigned the Council of Ministers within two weeks to present a draft decree which would regulate relationships between the government and the NB. Chief of the Presidential staff Mikhail MYASNIKOVICH, pointing out that this decision does not signify that the NB loses its independence said, "According to the Constitution, it remains an independent financial institution accountable to the President and the law but its practical activities now must be oriented to a greater extent towards full implementation of Cabinet decisions." On Friday LUKASHENKO removed Chairman of the NB Gennady ALEYNIKOV and three members of the NB Board members for the failure to control the economic crisis. LUKASHENKO replaced ALEYNIKOV with First Deputy Prime Minister Pytor PROKOPOVICH. The President has also threatened to fire Prime Minister Sergey LING. First, accusing the Russians for the ruble plunge, LUKASHENKO now believes the Belarus ruble collapse was a "planned act by the West." Belarusians, seeking to convert rubles into hard currencies, ran into long lines at exchange offices in Minsk.

South Caucasus & Central Asia

Georgia Still Searches For Criminals

· Georgian Interior Minister Lieutenant-General Kakhi TARGAMADZE said that Russia in 1997 has detained and extradited to Georgia 110 persons charged for various grave crimes. TARGAMADZE lauded Russian Interior Minister Anatoly KULIKOV, who he said gives a maximum assistance to cooperation between Georgian and Russian interior ministries. He said 11 people are on the wanted list in Georgia as participants in the attack on the motorcade of Georgian President Eduard SHEVARDNADZE on February 9. TARGAMADZE added the search had not been called off for six persons who are suspected to have participated in a previous assassination attempt against SHEVARDNADZE on August 29, 1995. On the top of Georgia's most

wanted list is former Security Service chief, Lieutenant-General Igor GIORGADZE, charged with masterminding the 1995 assassination attempt. Georgian authorities are checking reports claiming that GIORGADZE is hiding in Austria. First Deputy Prosecutor General Revaz KIPIANI and head of the International Operations Section of the Prosecutor General's Office Erik SVANIDZE in a press conference, expressed dissatisfied with the effectiveness and pace of the search for GIORGADZE.

Mobil Exports Turkmen First Oil

· Mobil Corp. announced today that Mobil Exploration and Producing Turkmenistan Inc., and its partners have exported their first cargo of crude oil from Turkmenistan. A 4,700 metric tons (35,000 barrels) cargo of crude was shipped across the Caspian Sea from the port of Aladja in Turkmenistan to the port of Baku in Azerbaijan. Mobil Oil Corp. International Exploration and Producing president M.W. SCOGGINS said, "Mobil's strong and integrated position in the Caspian region is further enhanced with this first export of crude from Turkmenistan. It is a landmark on the way to our goal of establishing a major hydrocarbon base in Western Turkmenistan." In 1997, Mobil and Monument entered into a Memorandum of Understanding with the Turkmenistan government for the exclusive right to negotiate a Profit Sharing Agreement for a second producing region. Mobil Exploration and Producing Turkmenistan Inc. holds a 40 percent interest in the Nebit Dag concession; Monument Oil and Gas PLC, the operator, holds a 35 percent interest, and Burren/VSTT holds a 25 percent interest. Mobil is also involved in joint ventures in Kazakhstan, Russia, and Azerbaijan. Mobil hold a 7.5 precent interest in the Caspian Pipeline Consortium which is planning to construct a 900 mile pipeline from the Tengiz oil field to a port on the Black Sea. "Mobil will continue to build upon its integrated position in the Caspian Region as this area will be a significant contributor to our world-wide strategy of achieving profitable long-term growth," SCOGGINS said in a company press release.

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

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