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

Wednesday, March 25, 1998

Russian Federation

Politics

Kiriyenko Gains Popularity With Businessmen

· Russian acting premier Sergei KIRIYENKO met with several government leaders on Tuesday and again today in an effort to build support for his possible candidacy as Prime Minister and to discuss plans for the new government. KIRIYENKO said that in choosing members for the cabinet he is considering the professionalism of his colleagues and not personal likes and dislikes. He refused to say how many people from the former cabinet will become members of the new government, but Russian President Boris YELTSIN hinted that Foreign Minister Yevgeny PRIMAKOV and Defense Minister Igor SERGEYEV will remain. KIRIYENKO met with Speaker of the Russian State Duma Gennady SELEZNYOV, Speaker of the Federation Council Yegor STROYEV, parliament, governors and ministers, faction leaders such as Gennady ZYUGANOV and Yabloko leader Grigory YAVLINSKY, Moscow Mayor Yuri LUZHKOV, and chairman of the committee on the economic policy Yuri MASLYUKOV. SELEZNYOV excluded the possibility of the Duma dissolution stating that, "Deputies are responsible people and will not leave the president tete-a-tete with his right to issue decrees." He criticized KIRIYENKO as not having enough economic experience to handle Russia's huge economy. STROYEV called KIRIYENKO, "an intelligent and educated person." He emphasized the need for contact between all branches of power and that stability is needed by all factions of the State Duma and the Federation Council. YAVLINSKY said, "The nominations are not so important. What is important is the way to solve problems because of which the former government was dismissed...If the new government clearly says it will continue doing things just like the former one, what is the sense of that replacement?"

KIRIYENKO also received an endorsement from Russian automobile and media tycoon Boris BEREZOVSKY, who many speculate could have advised YELTSIN on the cabinet dismissal. Although KIRIYENKO is somewhat new to the political arena, he has dealt with Russia's leading businessmen when he was a head of a commercial bank and a president of an oil company. BEREZOVSKY commented that KIRIYENKO's relative obscurity could be an advantage to his candidacy. "This is a Russian tradition. He who is less known is always better. The known man's faults are familiar. But we close out eyes to the unknown man's bad qualities, because they are not yet known," The Financial Times reported. BEREZOVSKY, whose finances helped to re-elect YELTSIN, is already seeking a Presidential candidate to back for the 2000 elections. To that end, he said Russia's tycoon's are already coming together and developing a collective election strategy. He dismissed YELTSIN as being too physically weak to run again, call LUZHKOV, Alexander LEBED, and ZYUGANOV unable to carry out reforms, and Former Prime Minister Viktor CHERNOMYRDIN, former first deputy prime minister Boris NEMTSOV, and YAVLINSKY as un-electable. The question remains whether BEREZOVSKY's support for KIRIYENKO will last through to the 2000 elections. Incidentally, KIRIYENKO today refuted rumors claiming he had been offered to replace heads of some mass media bodies in the past.

Russian government spokesman Igor SHABDURASULOV said KIRIYENKO continues drafting documents on

Today's News Highlights

Russia

Report Calls For Lifting Quotas

Duma Delegation in Washington

Gazprom Can't Bid in Rosneft

South Caucasus & Central Asia

Georgia-US Sign Defense Co-op

New Kyrgyz Prime Minister

Tajik Fighting Kills 21

Daewoo Sells Kazakhtelecom

Politics-Economics-Business

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Wednesday

March 25, 1998

Intercon's Daily

steps aimed to ensure the timely payment of wages and salaries in the state sector and pensions, and to overcome the consequences of the fall of prices of oil and gas in the world markets. KIRIYENKO is expected to chair a regular cabinet meeting for the first time on Thursday regarding state policy to protect consumers' rights, a report from the Russian Health Ministry, draft federal laws and endorsing the draft plan of meetings of the Russian Cabinet of Minister in the second quarter of 1998.

Kinkel Supports Russia's Membership To EU

· German Foreign Minister Klaus KINKEL proposed to discuss, "already in 1998 the possibilities of creating a free trade zone between Russia and the European Union." The European Union is now the most important trade partner of Russia, he stated on the eve of the forthcoming summit of the leaders of Russia, Germany and France in Boris YELTSIN's residence near Moscow. "Russia carries out almost 40 percent of its foreign trade with the states of the European Union. The agreement on partnership and cooperation between the European Union and Russia, which came into force in December 1997, opens

absolutely new prospects for such cooperation," the German minister stressed. According KINKEL, Bonn and Paris jointly support market and economic reforms in Russia. "We are glad to see advances made in the sphere of liberalization of markets, stabilization of finances and modernization of the management system in Russia...The upsurge of the Russian market situation will do good to entire Europe," KINKEL emphasized. He added that Russia is part of Europe and should become a part of the EU equal to its importance, size, and economic potential.

Report Calls for Lifting Quotas

· The Russian Ministry of Economy has recommended that the country ban all types of illegal imports and protect domestic textile and light-industry products. The suggestions are contained in a report to the State Commission for Foreign Trade and Tariff Policies. The report also calls for lifting quotas and restrictions on Russia's textile exports to the European Union (EU), arguing that Russia's textile imports exceed by a large margin its exports of the products. If the EU refuses to change its harsh stance towards Russia, the report says, Russia will need to consider exercising a quota policy on textile imports from the EU. The Ministry also proposes measures for inspection of imported commodities

and their pre-sale management for the sake of protecting the interests of both Russian consumers and producers. Russia for now has worked out some draft plans to issue import permits for various textile products. To cope with various restrictions imposed by the EU and some other countries on the import of Russian industrial products, a bill was passed on March 20th for the sake of protecting Russia's economic interests in foreign trade. The bill requests that a special institution be set up to investigate Russia's foreign trade and work out protective measures accordingly.

Economy

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

Ruble = 6,100/$1.00 (CB rate)

Ruble = 6,081|6,120/$1.00 (buy|sell rates)

Duma Delegation in Washington

· A delegation of the Duma, led by budget and tax committee acting chairman Aelxander ZHUKOV, is visiting Washington at the invitation of an American business fund to discuss Russian tax legislation, which is a serious deterrent to American investment in Russia. ZHUKOV said the Duma is interested in knowing how potential investors see the draft tax code which is debated by the Duma, what in the tax code discourages investment, and how American business sees the array of draft tax codes the Duma is handling. "On the whole, the opinion is unequivocal that we need to conduct a tax reform and that serious changes to tax legislation are overdue," ZHUKOV said. Foreign investors find Russia's tax legislation as complex and obscure. "And the fact that it constantly changes does not allow them a possibility to realistically assess in advance results of their investments," ZHUKOV said.

Business

Yuksi-Schlumberger Alliance

· Russia's largest oil company Yuksi Tuesday in New York signed a ground-breaking strategic alliance with Schlumberger, enabling Yuksi to out source an agreed level of oil field services in its vast Russian oil fields over the next five years. The alliance is an unprecedented departure from the traditional Russian industry practice of performing all oil field services in-house. Schlumberger will be the sole provider of services on a number of selected

When you need to know it as it happens

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fields under development by Yuksi, which spends $2 billion a year on its oil field services and will train Yuski personnel. The alliance makes the latest oil field expertise and technology available to Yuski, and gives Schlumberger valuable access to the market of the leading producer in the rapidly growing Russian oil industry. Yuksi chief executive officer Mikhail KHODORKOVSKY said, "This agreement with Schlumberger will help turn our vast internal oil field services into a more competitive and focused operation. We have the reserves. We have the production. This agreement will help us achieve the levels of efficiency necessary to unlock the huge profit potential of the Yuksi group. We are rapidly emerging as a new and competitive player in the global oil market." Schlumberger chairman and chief executive officer Euan BAIRD commented that, "This alliance demonstrates our continuing commitment to work for oil companies on a service basis, providing leading technology that helps them lower field development cost and increase productivity." Schlumberger will use the Yuski deal as a springboard for other contracts in Russia, BAIRD said. Yuksi ranks third among the world's independent oil producers at 1.3 million barrels per day. The company ranks first in proved reserves at 16.1 billion barrels. Yuksi employs more than 200,000 people. Schlumberger is a worldwide leader in technical services, with 63,500 employees and operations in more than 100 countries.

Gazprom By Unable to Bid in Rosneft Sale

· Deputy chairman of Menatep Bank Konstantin KAGALOVSKY speaking at a meeting with Japanese oil authorities in Tokyo said that Russia's major gas producer Gazprom cannot legally participate in the sale of Rosneft oil company. The law stipulates that only companies and enterprises with a state interest not exceeding 25 percent may take part in privatization tenders, while the state possesses 40 percent of Gazprom's stock, said KAGALOVSKY of Menatep which is part of the Yuksi group. However, Gazprom may circumvent the law by sending a fictional company for the tender. But such a move would be, "a violation of the spirit of the current legislation," which permits only private companies to participate in privatization, he said. Gazprom's foreign partners may face problems if they decide to join it in the tender. Yuksi will insist that the law be strictly observed at that tender. The sale of 75 percent plus

one of Rosneft has a starting price of $2.1 billion. Bids must be received by May 26th and the winner will be announced May 29th.

Russia-Vietnam To Build Oil refinery

· Russia's Zarubezhneft and Vietnam's Petro Vietnam have agreed to create a joint venture to build Vietnam's first oil refinery. The refinery will have a total investment of $1.3 billion and legal capital of $800 million shared equally by the two partners. The refinery, located in Dung Quat of the central Guang Nghai province, will have a capacity of 6.5 million tons. The official contract is expected to be signed by the end of March. Zarubezhneft representative Levykin SERGEY believes that in order to begin operating by 2001, the two partners need to accelerate the process of establishing the joint venture.

South Caucasus & Central Asia

Georgia-US Cooperate in Defense Field

· United States' Defense Minister William COHEN and Georgian counterpart Vardiko NADIBAIDZE Tuesday signed a plan for cooperation in the defense field. This document lays the foundation for the extension of the military partnership of the two countries. The agreement on this was reached during a visit to Washington of Georgia's President Eduard SHEVARDNADZE in July 1997. COHEN said that in accordance with that plan the sides will begin a dialogue on traffic control in the Georgian air space, share the American know-how in the planning and drawing up programs in the field of defense and the formation of a defense budget, as well as discuss procedures of planning operations in the field of national security and approaches to such planning. The two nations agreed to joint American-Georgian military exercises in 1998. COHEN said the US plans send two patrol boats to the Georgian shores to control the Black Sea coast of the republic. The US will also allocate $1.35 million to Georgia for the purchase of systems of radio communications for land forces of the republic. This kind of modern equipment will promote the strengthening of interaction between military units of Georgia and NATO forces. NADIBAIDZE noted that an agreement had been reached with COHEN to visit Georgia, which is scheduled for the end of this year. NADIBADIZE will also visit Fort Bragg, NCO Academy, Georgia Army National Guard Headquarters and Camp Lejeune.

When you need to know it as it happens

Politics-Economics-Business

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Wednesday

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Intercon's Daily

This will give the Defense Minister and his delegation an opportunity to become familiar with training facilities of the US armed forces and the structure of their activities. His visit will be followed by an official visit of the Head of the Georgian Parliament Zurab ZVHANIA to meet with US legistlative, business and academic leaders in San Francisco, Washington, and New York. Intercon sources report that the Defense Minister was overwhelmed by the reception he received in Washington. He said that, "Seeing America once is more important than hearing about it a hundred times."

Kyrgyzstan's Prime Minister Replaced

· Prime Minister Apas DZHUMAGULOV resigned on Tuesday stating that his ages has begun to factor into his work. He called for "new forces" to promote reform. President Askar AKAYEV accepted his resignation and thanked him for his, "incessant work for the benefit of Kyrgyzstan." DZHUMAGULOV who has been Prime Minister since 1993, played a pivotal role in promoting market reforms which led to rapid privatization, low inflation, and steady economic growth. Kyrgyz daily newspaper Vecherny Bishkek reported that DZHUMAGULOV's resignation may be linked to his participation as a founding member to an Austrian company now handling the sale of Kyrgyz gold. The company stands to make an estimated $80 to $100 million in profits over the next three years. There has been no confirmation that DZHUMAGULOV is currently involved financially with the Austrian company.

AKAYEV nominated Kubanychbek DZHUMAILYEV to replace DZHUMAGULOV as Prime Minister. The lower chamber of Parliament approved him in a vote of 64 out of 70 representatives today. AKAYEV chose his former chief of staff for the post because he said he needed a Prime Minister who could turn his new development program into reality. DZHUMAILYEV stated that, "Kyrgyzstan's main priority is certainly developing closer cooperation with Russia." He hopes for 10.4 percent growth in gross domestic product this year and an acceleration of

privatization, selling 50 to 65 percent in large energy and telecommunication firms in 1998.

Tajik Militants Kill 20 Soldiers

· Tajik opposition militants fired on a Tajikistan Defense Ministry battalion in Kofarnikhon District over the past 24 hours, killing 21 soldiers and taking 50 hostages. A Defense Ministry source has said the battalion has taken up positions, where the main provisional bases of opposition forces in Kofarnikhon District are also located. According to Interior department chief in charge of combating organized crime, Murashino NAZAROV, fighting began at 8.00 a.m. Tuesday after a group of four militiamen was sent to detain criminals near Kofarnikhon. The militiamen were shot dead at point-blank range. Afterwards, a regional Interior unit and government defense forces to their positions and the fighting began.

Daewoo Sells Kazakhtelecom Stakes

· After winning a 40 percent stake in Kazakhtelecom last year, South Korea's Daewoo confirmed it sold part of its stakes. It is unclear who has purchased the stakes and at what price, but the Kazakhstan government holds the remaining 60 percent stake. Daewoo had promised to invest $1.37 billion, which included a $1 billion to increase the number of telephone lines in Kazakhstan from 2 million to 3.3 million by 2000, The Financial Times reported. However, Kazakhstan has not seen any of the promised investment. The company maintained that it would stick to its investment regardless of whether it sold the shares. Although Daewoo has not mentioned a reason for the sell-off, many speculate that it is having financial difficulties due to the Asian financial crisis. If this is true, the reality of other Daewoo investments abroad is questioned. Things do not bode well for Ukraine which signed a joint venture agreement between Daewoo and Avtozaz to produce automobiles with an investment of $1.3 billion. As a condition on the agreement, Ukraine implemented strict restriction on imported used cars and granted Daewoo special tax breaks. Uzbekistan's a contract for a car factory to be built by Daewoo is also in jeopardy.

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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