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 4, 1998

Russian Federation

Politics

Duma Passes 1998 Budget In Fourth Reading

· The Russian State Duma today passed the 1998 budget in its fourth and final reading by a vote of 252 to 129 with two abstentions. The budget must still be approved by the Federation Council and signed into law by Russian President Boris YELTSIN before it can become effective for 1998. So far, this year, the government has been operating without a budget, basing spending decisions off the 1997 budget. The government had advocated approving the budget as an important instrument for continued stable economic growth. The Kremlin insisted the budget must reflect changes in the economy since the Asian financial crisis. A previous attempt to pass the budget failed on February 20th when the opposition dominated Duma rejected government amendments to the documents and failed to rally enough votes to pass the budget unchanged. The budget was finally approved with a compromise amendment drawn up to break the deadlock. In place of a government proposal to make expenditures totaling 27.9 billion rubles ($4.6 billion) conditional on receiving enough revenues to cover that sum, the budget contains an amendment allowing the government to cut spending if the Duma is informed within three days and if all budget items are cut proportionally. Russian financial markets welcomed the new with shares rising three percent by mid-afternoon. The budget approval is an important political victory for YELTSIN and the government administration .

Rus-Israel Discuss Bilateral Relations

· Russian Foreign Minister Yevgeny PRIMAKOV on Tuesday met with Natan SHARANSKY, Israeli Minister of Industry and Trade, who was recently appointed an Israeli government member in charge of relations with Russia and other CIS countries. The

sides discussed the present situation in Russia-Israel relations in political, trade, economic and other fields, as well as their prospects. They emphasized positive dynamics of their development over the recent years. A Foreign Ministry press statement said, "Yevgeny PRIMAKOV and Natan SHARANSKY exchanged opinions on the situation in the Middle East in the light of a recent aggravation of an Iraqi crisis, serious difficulties in the Middle East peace process." They also focused on other factors arising concern in Israel and its neighboring states as far as their security is concerned, according to the report. The ministers have agreed to continue a dialogue between the two states on regional matters. SHARANSKY and Russian deputy in charge of CIS affairs Ivan RYBKIN discussed bilateral economic cooperation and international terrorism and stressed the need for, "a joint fight against the common evil," RYBKIN's staff said. Annual trade turnover between Russia and Israel totals $400 million. SHARANSKy noted that he had no reason to believe Moscow was knowingly supplying Iran with missile know-how, but added that Israel is concerned that such technology could still be making its way out of Russia.

New Nuclear Energy Minister Appointed

· Russian President Boris YELTSIN today appointed Yevgeny ADAMOV as Russia's new Minister of Nuclear Energy, replacing Viktor MIKHAILOV who decided to retire on pension and to concentrate on scientific work. ADAMOV was director and chief designer of the Research Institute of Nucleon

Today's News Highlights

Russia

Gov't Pledges Investor Protection

Tatneft To Sell ADRs On NYSE

Volvo Buses To Be Made at PAZ

European Republics

Kiev Keeps Med-Range Missiles

No-Confidence Vote Rejected

South Caucasus & Central Asia

Azeri Oil Flows Through Russia

Daewoo Telecom Sells Network

Three Asian Foreign Mins. Meet

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Wednesday

March 4, 1998

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ics participated in the effort to clear the aftereffects of the Chernobyl disaster. Russian President Boris YELTSIN has instructed ADAMOV to preserve "parity" in nuclear weapons while making it possible to reduce funds spent on Russia's nuclear arsenals. ADAMOV said the President had also instructed him to work on enhancing nuclear safety so that the nuclear energy could have considerable impact on transformations in the Russian economy. The export of uranium mined in Russia and of Russian nuclear technologies was also discussed with President YELTSIN, specifically the recent agreement with Germany, ADAMOV said.

Regional Legislator Shot in Yekaterinburg

· Georgi STEPANENKO, a deputy in the Sverdlovsk Oblast Legislative Assembly, was shot dead Tuesday near his home in Yekaterinburg in an apparent contract killing, RFE/RL Newsline reported. STEPANENKO was campaigning for a seat in Sverdlovsk legislative elections to be held on April 12th. Our Home-Our City movement, which is headed by Yekaterinburg Mayor Arkady CHERNETSKII, was backing his candidacy. Our Home-Our City is the main political rival of the Transformation of the Urals Movement, headed by Sverdlovsk Governor Eduard ROSSEL. Some observers believe STEPANENKO's murder was not connected to his political activities, but to his work as a lawyer. One of his clients has been suing for control over several enterprises in the oblast. Meanwhile, law enforcement agencies are still investigating a January explosion that occurred near a car carrying ROSSEL.

Economy

Ruble = 6,075/$1.00 (NY rate)

Ruble = 6,077/$1.00 (CB rate)

Ruble = 6,051|6,103/$1.00 (buy|sell rates)

Rus. Gov't Pledges to Protect Investors

· The Russian state commission has approved a draft state program for the protection of investors' rights in 1998-1999. The commission for the protection of investors' rights on the Russian financial and stock markets held a meeting on Tuesday chaired by Prime Minister Viktor CHERNOMYRDIN. Chairman of the Federal Commission on Securities Dmitry VASILYEV said that the program will be upgraded with the help of staffers of the Federal Commission on Securities, the Justice Ministry and the Interior

Ministry and released as a government resolution. The program is necessary "to ensure a comprehensive protection of investors and coordinate the work of all state institutions in that process so that investments in Russia are beneficial and the money is not lost," he said. VASILYEV believes the Duma will support the government in drafting the protection laws. The task is challenging and he adds that, "Much is to be done by the law-enforcement bodies," for the protection of investors' rights in Russia.

Tatneft To List ADRs On NYSE

· Tatneft later in March will be the first Russian oil company to list its shares in the form of American Depository Receipts (ADRs) on the New York Stock Exchange. In a company statement, Tatneft said the new ADRs will each represent one-fifth of an ordinary share. The company also will offer an exchange of the new ADRs for current holders of outstanding restricted ADRs. Tatneft General Director Rinat GALEEV said, "A New York listing will commit us to meet the highest standards of information disclosure in the world, and should help further distinguish us from our peers." Based in Tatarstan, Tatneft is Russia's fourth-largest crude producer. Proven reserves as of January 1, 1997, were 855 million metric tons of crude. Sales and other operating revenues in the first half of 1997, calculated according to western standards were $1.279 billion an increase from $1.226 billion in 1996.

Business

Volvo Buses To Be Produced By Russian Plant

· Swedish automaker Volvo AB plans to increase investment in Russia by producing buses at the Pavlov Bus Works (PAZ) in Nizhny Novgorod. PAZ, produced 7,000 and 8,000 vehicles in 1995 and 1996 respectively. Volvo Bus Corporation's sales manger Andrew PUEKKER said he believes the plant will produce 50 buses by the end of 1998, rising to 300 and 500 in later years. First Deputy Prime Minister Boris NEMTSOV lobbied for Volvo to invest in his home region by offering a combination of import duty and tax-free benefits. These enticements were criticized by International Monetary Fund managing director Michel CAMDESSUS. The IMF managing director said, "I do not see a good reason for Russian taxpayers to subsidize big automobile industries of the rest of the world," The Journal of Commerce reported.

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Court Finds Rosgosstrakh Firing Unlawful

· A Moscow Court has reversed a decision by Rosgosstrakh's Valery SUKHOV and Prime Minister Viktor CHERNOMYRDIN to fire Vladislav REZNIK and called for the reinstatement of REZNIK to the position of chief executive and chairman of the board. SUKHOV, who took over the domestic insurer, gave no comment to The Journal of Commerce. The court found the firing unlawful because it had not been voted by a meeting of the company's shareholders. It also found that REZNIK's employment rights had been violated, since his dismissal notice was issued when he was on sick leave. Rosgosstrakh, Russia's largest domestic insurer, is partially privatized, but the government still controls the majority of shares. REZNIK's removal is on the agenda for the next shareholder's meeting. Meanwhile, the Russian State Duma is considering amendments to block further privatization of Rosgosstrakh and hopes to force it out of the compulsory insurance coverage field, which includes medical, accident insurance, and coverage of military personnel.

DeBeers Ready to Further Invest

· South African De Beers Diamond Corporation chairman Nicholas OPPENHEIMER on Tuesday said De Beers is ready to invest in the development of diamond deposits in the Russian Arkhangelsk region if the investment conditions are acceptable. He gave a news conference in Johannesburg, which was broadcasted to the De Beers London headquarters. De Beers executive director Harry RAFE said they are satisfied with the current relations with Russia based on a diamond trade agreement of last year. The corporation continued to buy Russian raw diamonds in January and February 1998. Russian export organizations have not received a government license to export diamonds De Beers is planning to buy. The situation on the world diamond market is rather complicated because of a drop in the demand for diamond jewelry in Japan and countries of South East Asia. The world market of jewelry is estimated at $52 billion, diamond jewelry amounts to about 25 percent of that market.

KUCHMA said Ukraine will not give up its medium-range missiles. The US has attempted to persuade former Soviet Republics to halt production and use of these weapons. Ukraine, once the world's third largest nuclear nations, has scrapped all its nuclear weapons since it gained independence from the Soviet Union. These cuts have won praises from its neighbors and money from Washington and the West. KUCHMA said, "We have already cut so much that there is nothing left to cut...Ukraine will have [the missiles] regardless of the opinion of this or that country." Unofficial sources said ALBRIGHT's visit will focus on Ukraine's investment climate with a view of Washington's financial assistance to Ukraine. ALBRIGHT is also expected to discuss Ukraine's desire to sell turbines to Russia for use at a nuclear power plant Russia is building in Iran. The US opposes supplying nuclear technology with rouge states, especially Iran.

Latvian Parliament Rejects Confidence Vote

· Latvia's parliament on Monday after protracted debates refused to vote confidence in the cabinet of Prime Minister Guntar KRASTS. The extraordinary parliamentary sitting was held upon KRASTS' surprise request, who said he could not run the office without a new confirmation of confidence from parliament. KRASTS called for the vote after some deputies voiced the intention to revise accords concluded seven months ago when the coalition government was formed. He claimed that his authority was damaged when a parliamentary committee investigating the loss of $5 million in a transaction between the Latvenergo Company, Baltia Bank and a Liechtenstein firm said that he, as the then economy minister, could not know nothing of the deal. The Prime Minister also said his steps towards a greater openness of privatization had received wrong interpretation. Deputies criticized the Prime Minister for bringing in personal motives, which did not correspond to the proposed draft resolution.

South Caucasus & Central Asia

Azeri Oil Overcomes Rus. Custom Blockade

· Azeri oil flowing from the Azerbaijan International Operating Company (AIOC) is finally flowing through Russian pipelines, after a three week blockade by Russian Customs demands which threatened the success of the $7.4 billion project. The Russian

European Republics

Ukraine Plans to Keep Medium Range Missiles

· On the eve of a visit by US Secretary of State Madeleine ALBRIGHT, Ukrainian President Leonid

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Customs blocked the oil demanding new documentation and additional duties. In an AIOC press statement the consortium implied that the standoff had ended without the payment of customs charges. It also said that customs talks, "have been completed successfully," and all transport-related issues will be covered by a previous agreement signed between the governments of Azerbaijan, Russia, and the AIOC, as reported in The Journal of Commerce. Oil deliveries are expected to reach its destination, the port of Novorossiysk in the second half of March, if it does not meet complications through the 95 mile pipeline in Chechnya. A transit pact between Russia and Chechnya expired on February 28th. It is not known whether the agreement has been extended for a second time.

Russian First Deputy Prime Minister Boris NEMTSOV said Russia is actively building an oil pipeline, bypassing Chechnya to pump Caspian oil. Russia has pledged to do its utmost for Azerbaijan oil to flow along the northern route in future. NEMTSOV claimed that the Russian route between Baku, Tikhoretsk and Novorossiisk is much cheaper than the one proposed by American companies and no more dangerous than an oil pipeline which will supposedly run to Turkey across Kurdish territories.

Daewoo Telecom Sells Network to Azerbaijan

· South Korea's Daewoo Telecom Co. said today it will provide $13 million worth of digital switching systems and related equipment to Azerbaijan's Ministry of Communications. The large and small scale switching systems will have a total capacity of 34,00 circuits, Dow Jones Newsline reported. The switching systems will be installed by early next year. Daewoo Group also agreed to provide communications equipment worth $350 million by 2000. Daewoo Telecom has been selling its witching systems to the Commonwealth of Independent States including, Ukraine, Uzbekistan, Russian and Georgia.

Customs Union of Four Elect New IPC Chairman

· Kyrgyzstan parliament speaker Aidygany

ERKEBAYEV was elected new chairman of the Inter-Parliamentary Committee (IPC) of Belarus, Kazakhstan, Kyrgyzstan and Russia at its fifth session in St. Petersburg on Saturday. The need to elect the new IPC head before the incumbent chairman's term expires in October 1998 arose after ERKEBAYEV's predecessor, Almambet MATUBRAIMOV, resigned as Kyrgyzstan parliament speaker, thus losing the right to head the IPC. Under the rules of this inter-parliamentary organization, the IPC can be chaired only by the parliament speaker of one of the participating countries. ERKEBAYEV pledged to, "ensure continuity in his activities, work in a constructive way and prevent deviations from the legal acts passed by the committee."

Three Central Asian Foreign Ministers Meet

· Tajikistan Foreign Minister Talbak NAZAROV and his counterparts from Uzbekistan Abdulaziz KAMILOV and Kyrgyzstan Muratbek IMANALIYEV met in Dushanbe to discuss combating Islamic extremism and arms and drugs smuggling in the region. The three countries intend to cooperate in locating sources of these threats and to coordinate efforts for combating it at both international and regional levels. The Uzbek Foreign Minister criticized "certain countries" for backing extremist activists in Central Asia, but did not name these countries. According him, "peace and stability in Tajikistan meet the interests of Uzbekistan and the entire Central Asian region." KAMILOV stressed that the sides, "expressed first of all a unanimous view on the need to strengthen democratic, legal and secular state of Tajikistan...We hope that the official leadership of the republic and leaders of the Tajik opposition will reach a full mutual understanding on these issues." All the Ministers favored Tajikistan's admission to the single economic space of the Central Asian Union, comprising of Kyrgyzstan, Kazakhstan and Uzbekistan. IMANALIYEV noted the union is, "neither a political nor a military alliance, but an exclusively economic union, open for membership of all CIS states, including Russia." Russia currently acts as an observer state of the union, he added.

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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