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

Tuesday, March 24, 1998

work on a comprehensive program of the development of the coal industry.

Nemtsov Reviews Oil Restrictions

· Acting Prime Minister Sergei KIRIYENKO has instructed former Deputy prime minister Boris NEMTSOV to lead a meeting within the next two days to discuss alleviating measures for the economic consequences caused by falling oil prices on the world markets. NEMTSOV said after a meeting with KIRIYENKO, "We will think over excise duties tomorrow or the day after tomorrow because oil prices have dropped almost two fold and oil companies cannot pay. There should be an adequate reaction. On the other hand, we are restrained, for if we sharply change excise duties, the budget will not get several billions." The demand to lower excise duties has been lately made by several oil companies which have been sustaining losses from the fall of world oil prices. Sixteen petroleum producers, including both members and non-members of the Organization of the Petroleum Exporting Countries (OPEC) specifically Venezuela, Mexico, and Saudi Arabia, agreed to reduce output in an effort to boost slumping oil prices which had been below $13 per barrel. Acting Fuel and Energy Minister Viktor OTT said a set of measures worked out by the ministry and submitted to the government for consideration call for keeping Russian oil exports at the same level and solving the problem by invigorating the domestic market of oil consumption. Analyst Ruslan NIVKOLOV of Nomura Securities said that if Russia remains

Russian Federation

Politics

Kiriyenko to Fill Cabinet, Continue Reforms

· Russia's First Deputy Prime Minister and acting Prime Minister Sergei KIRIYENKO met today with ex-premier Viktor CHERNOMYRDIN, head of the presidential administration Valentin YUMASHEV and with speakers of the parliamentary houses. KIRIYENKO has been asked by Russian President Boris YELTSIN to form a cabinet, "but the President will have the final say." He has seven days to draft a new government line-up. He also met with President Boris YELTSIN to discuss the immediate tasks of the government. KIRIYENKO noted that YELTSIN did not stipulate any rigid framework for structure or composition of a new cabinet.

KIRIYENKO pledged to continue the policies carried out by the previous government of Viktor CHERNOMYRDIN. YELTSIN also assured world leaders that Russia's foreign and economic policies will not change. KIRIYENKO stressed that personnel changes will not affect reform progress. "The country's economy and people's fate shall not depend on a change of a name-label on one or another chair," KIRIYENKO said. He added that he will seek to fulfill the tasks identified by the president in his annual state-of-the-nation address to the Federal Assembly and in the "Twelve Tasks of the Government" program. KIRIYENKO declined to say whether he expected YELTSIN to appoint him permanently to the Prime Minister post, stating that, "It is up to the president to decide this. My business is to deal with current problems and ensure the government's work." KIRIYENKO said he will focus on four objectives this week, including fighting delays in the payment of wages in the public sector and, "ensuring an adequate government reaction to the fall of world oil and gas prices." The government will also continue

Today's News Highlights

Russia

Rus-IMF Agreement Delayed

Yuksi Elf Aquitaine Alliance

European Republics

Belarus Halts Ruble Trading

Estonian Court Rules On Tariffs

Two Parliament Candidates Shot

Ukraine PM Approves Auto JV

South Caucasus & Central Asia

Primakov Shocks Georgia

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March 24, 1998

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outside the agreement, "I'd expect the price factored into the Russian budget, which is $15.50 for exported Russian oil, is much more likely to come true by the end of the year."

Cuban Foreign Minister in Russia

· Russian Foreign Minister Yevgeny PRIMAKOV met his visiting Cuban counterpart Roberto Robaina GONZALEZ in Moscow Monday to discuss bilateral relations and international issues of common interest. The two ministers signed a consular convention. GONZALEZ hopes the bilateral talks will help promote the economic cooperation between the two countries. Russia's relations with Cuba have improved in recent years as Russia adjusted its western-oriented foreign policy since the disintegration of the former Soviet Union. Russia is opposed to the economic blockade and the containment policy practiced by the US and west European countries against Cuba, which PRIMAKOV described as "counterproductive." Russia made efforts to energize the normalization of Cuban-US relations and it welcomes the measures taken by Cuba toward democratization, said the Russian minister. Speaker of Russia's State Duma Gennady SELEZNYOV and GONZALEZ today discussed problems and prospects of trade and economic cooperation, as well as supplies of Russian spare parts for agricultural machinery and financing of Cuban projects by Russian banks. SELEZNYOV called for strengthening the cooperation between Cuba and Russia across the board, including parliamentary ties.

Russian Spy Sentenced to 12 years

· The military court of the Russian Strategic Nuclear Forces on Monday sentenced former major Igor DUDNIK to 12 years in jail for, "high treason in the form of espionage," a Federal Counter-intelligence Service source said. In 1996, DUDNIK prepared secret data about the activities of a missile army to sell to the US intelligence for $500,000. Fearing counter-intelligence, he tried to contact US intelligence through school friends who were abroad. If these data had reached the US, Russia, "would have lost the ability to effectively use the combat power of a major group in its nuclear forces and would have suffered huge material expenditures to reorganize the command of the nuclear forces of this country," the source said. The secret data contained detailed documents about the army's combat structure, training, warfare methods, command and combat plan

ing, the source said adding that DUDNIK succeeded in collecting the data, "due to improper security system in the headquarters of the army." His sentence follows two weeks of tit-for-tat spying expulsions between Norway and Russia.

Economy

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

Ruble = 6,099/$1.00 (CB rate)

Ruble = 6,078|6,120/$1.00 (buy|sell rates)

Russian-IMF Agreement Delayed

· The agreement reached in mid-February between International Monetary Fund's (IMF) managing director Michel CAMDESSUS and the Russian government on Russia's 1998 economic program will probably be delayed until a new government is formed. The agreement was reached after controversial late-night talks over import tariffs and measures attracting foreign investment to the automobile industry. The IMF stressed the need for the government to adopt a realistic budget and remain within the planned parameters. According to a joint Russian-IMF statement, the agreement must be signed by the Prime Minister, Central Bank chairman, and approved by the IMF management. These steps are also required for the disbursal of the next quarterly installment of Russia's IMF loan. An IMF spokesman said, "We see no reason that policies would not be conducted in line with the agreement which is in the final stages of technical preparation."

Eurobond Issued After Being Postponed

· Due to Russian President Boris YELTSIN's massive government dismissal on Monday, the Finance Ministry postponed the Eruobond offering on Monday. Although it will take weeks before a new Prime Minister is selected and approved by the State Duma, the cabinet formed, and political actions take on a forward momentum, the stock market responded with vitality on Monday reaching 342.85 a 2.1 percent gain. Russia today launched DEM 1.25 billion Eurobond maturing in 2005 though trading volumes remained light. The bonds were priced at 475 basic points over compatible Bunds, and carry a coupon of 9 percent for a yield of 9.44 percent. One stockbroker reported however that, "Even if the best possible scenario comes to past, that should still entail a higher risk premium in the price of Russian securities than at any time since YELTSIN's re-election in

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1996," The Financial Times reported. The Finance Ministry added that despite the government reshuffle it will continue to implement the 1998 budget.

Uneximbank Not to Control Customs Agency

· Former First deputy prime minister Anatoly CHUBAIS on Monday said Uneximbank will not handle the accounts of the Customs Agency. CHUBAIS suggested that former first deputy prime minister Boris NEMTSOV will be responsible for selection of a new bank to maintain the accounts. CHUBAIS explained a decision was made that to place the accounts with Uneximbank was "unwise." He planned to announce this decision to the government's commission for credit and finance on Wednesday but was removed from the Cabinet on Monday. Under a May 1997 presidential decree, the government was ordered to move away from "authorized" commercial banks to handle state funds. Banks would have to compete in tenders and pay fees to win the right to perform transactions with state funds.

Business

Yuksi-Elf Aquitaine Alliance Announced

· France's Elf Aquitaine Oil Company Monday announced it has agreed to form an alliance with Russia's Yuksi, buying a 5 percent stake in the company for $528 million. Yuksi, which was formed in a January merger between Yukos and Sibneft, is Russia's largest oil company holding the world's largest proven reserves of oil of 16.1 billion barrels. Under the agreement, Elf Aquitaine will jointly develop the Sugmut field in western Siberia at an estimated combined cost of $1.5 billion. The field has more than an estimated 700 million barrels of crude. The alliance will also study the development of Prirazlom oil field with estimated 1 billion barrels of crude. Elf Aquitaine's chief executive officer Philippe JAFFRE says that, "through this alliance Elf Aquitaine becomes one of the major international operators in this country [Russia]," and diversifies its production, which is concentrated in Africa and Europe. Yuksi's chief financial officer Eugene SCHVIDLER said the Elf Aquitaine deal will have no impact on Yuksi's bid for 75 percent of Rosneft, the last large state owned oil company to be privatized.

Continental Tire Plans New Russian Plant

· Germany's Continental tire, the fourth largest tire producer in a $70 billion a year industry, plans to

open its first manufacturing plant to serve Russia's growing vehicle market while expanding its global reaches. Chairman Hubertus VON GRUNBERG said the company, "will be majority owned, with a Russian partner. It will initially produce under five million [tires] units a year," The Financial Times reported. Continental's plant in Russia will use the modular manufacturing process, in which tire parts are manufactured in low-cost locations and then shipped to plants in other markets for assembly.

Mitsubishi Interested in Saratov Airport

· Governor Dmitry AYATSKOV announced Monday that Japanese corporation Mitsubishi has expressed readiness to deliver state-of-the-art equipment to modernize the Saratov airport. The Saratov governor is attending the Rus-Japanese conference on economic cooperation. He said an agreement has been reached that planes of the Japanese ANA Airlines will fly to Europe via Russia with a stopover in Saratov. The conference has also recommended that the Russian government revise its laws to promote foreign investment.

Hitachi To Create Transistor JV

· Hitachi Ltd. will shortly create a new joint venture company Hitachi-Svetlana Power Electronics, with St. Petersburg's AOOT Svetlana to produce power transistors at a new factory in Russia. The devices, insulated gate bipolar transistors (IGBTs), are power semiconductors and will be targeted at use in traction appliances, such as inverters for electric train rolling stock. The joint venture to establish the company, which will be based in St. Petersburg, was signed in Moscow on March 20th. Hitachi will provide 51 percent of the one million rubles ($170,000) capital with the remaining to be supplied by Svetlana and other Russian investors. Hitachi produced the world's first 2 kilovolt (kV) IGBT in 1992 and has since developed 3.3 kV versions.

European Republics

Belarus CB Stops Foreign Trading

· Struggling to keep the Belarus ruble from collapsing further, the Belarus Central Bank in a telegram Monday ordered all ruble transactions between residents and non-residents to be halted. In an additional telegram, the bank said non-residents were not allowed to make payments in Belarus rubles. One dealer said, "The interbank market is

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paralyzed, there are no transactions or bids." This halting of currency trading violates agreements between Russia's Central Bank and the Belarus Central Bank, which was placed under the Cabinet's control. President LUKASHENKO has ordered the ruble to remain at 41,000 to 42,000 per dollar.

Estonian Court Rules On Custom Tariffs

· The Estonian Supreme Court on Monday ruled that the law on customs tariffs, which gives the government the right to impose such duties, "partly contradicts" the constitution RFE/RL Newsline reported. The court decided in favor of an appeal by Legal Chancellor Erik-Juhan TRUUVALI. He argues that the law gives, "too wide powers" to the government and that the parliament should have the right to establish customs tariffs. The court's decision cannot be appealed. The draft of the law had been strongly opposed by the opposition, which believes tariffs would harm Estonia's image aboard. As a compromise, the parliament included in the final version of the law a provision whereby the government must seek the parliament's consent to introduce tariffs for a period exceeding six months.

Two Parliament Candidates Injured in Drive-by

· Ukrainian Mayor of Lubny Vasyl KORYAK, a parliamentary candidate, today was injured when unidentified gunmen opened fire on his car near his home. "The victim was rushed to the hospital in serious condition," Interfax reported. KORYAK is a candidate for the United Social Democratic party. Earlier today, Vasyl KALYTYUK, a leader if the Socialist party branch in Crimea also running for a seat in parliament, came under fire in Sevastopol. A Socialist party statement says, "Someone shot straight into the front window of the car. KALYTYUK sustained light injuries and is in shock. " The attacks are just the latest in a series of increasing violence, arrest, newspaper closures ahead of parliamentary elections to be held on March 29th

Ukraine PM Approves Auto Manufacturer JV

· Ukrainian Prime Minister Valery PUSTOVOITENKO

approved the joint venture between Ukrainian and South Korean car manufacturers. As a result the Zaporozhe plant Monday started production. The project, established on March 4th, unites a car-manufacturing plant in Zaporozhe and South Korea's Daewoo Group. The companies signed an agreement on September 17, 1997 to produce five types of cars in Ukraine. With an estimated investment of $1.3 billion, it's one of a few giant joint ventures in Ukraine. The first cars manufactured by the joint venture are expected to be put on sale in Ukraine at the end of March.

South Caucasus & Central Asia

Primakov's Comments Shock Georgia

· During Russian Foreign Minister Yevgeny PRIMAKOV's visit last week to Kosovo which was broadcast on Russian Television, the minister entertained the idea of testing whether a rocket propelled grenade (RPG) would be powerful enough to penetrate an armored Mercedes. His comments, exactly 40 days since the terrorist attack on Georgian President Eduard SHEVARDNADZE, raised serious concern to the Georgian government. In his weekly radio interview SHEVARDNADZE, responded to reports that "it was obvious to everyone which Mercedes he [PRIMAKOV] was referring to." SHEVARDNADZE said, "that the terrorist act, victims of which were two young men, cannot become the subject to cynical jokes. This is an unforgivable action for the politician, and especially for a diplomat." The President encouraged his, "compatriots to take less tragic and worried attitude towards this issue." Comment: It is precisely this kind of behavior by Russia's top diplomat that has produced the skepticism and distrust of Russian in Georgian and throughout the region. After the government reshuffle in Russia, YELTSIN praised PRIMAKOV, implying he will remain at his post. With Igor GIORGADZE still being protected in Moscow and the refusal to extradite him to Georgia for the 1995 assassination attempt on SHEVARDNADZE, Georgians are concluding that the more things change, the more they remain the same.

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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