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

Thursday, March 5, 1998


Russian Federation

Politics

Soros Provided Bridge Loan to Kremlin

· American financier and major investor in Russia, George SOROS said on Wednesday that he lent the Russian government, "several hundred million dollars," from June 25th to July 3, 1997 to help the Kremlin meet its deadline for paying overdue pensions. SOROS said, "They were stuck...There was one period of a few days when we did make a kind of bridge loan to enable the government to pay the arrears." SOROS said he gained a "very favorable" interest rate on the loan, but refused to give further details. He added that the Kremlin turned to him because it did not want to reveal its vulnerability and embarrassment to western banks involved in the eurobond deal. SOROS also admitted that last December, the Russian government again appealed to him for a short term loan to pay back wage arrears, the amount of which he could not remember. SOROS however declined because he, "did not want to make a habit of it." The SOROS loan follows a pattern of confidential borrowing from western banks in moments of financial crisis. In November and December 1997, the government borrowed $950 million from western banks to help the state survive the shockwaves from the Asian financial crisis. This pattern of behavior worries the International Monetary Fund (IMF) and foreign investors. The IMF was informed of Russia's December borrowings, but it unclear whether it knew about the June loan from SOROS. Comment: With the Russian economy struggling to grow, a 1998 budget passed Wednesday in the Russian State Duma, and the ongoing internal political power plays within the Kremlin, one wonders if Russia is ready for serious economic reforms and can abide by strict IMF borrowing guidelines. Prime Minister Viktor CHERNOMYRDIN and Russian President Boris YELTSIN in February

attempting to win support for the 1998 budget insisted that government live within the means of its budget and reduce foreign borrowing. While these statements may appear to be sincere, the real proof will be if the Kremlin can terminate its need to seek lenders, such as SOROS, follow IMF guidelines and collect more taxes.

Wage Debts Increase Again

· Chairman of the Russian Federation of Independent Trade Unions (FNPR) Mikhail SHMAKOV said today that wage debts in Russia have already started rising this year and threaten to pass last year's figure. "Regrettably, one-time action to pay debts, undertaken by the government last year, has not created a system, warding off a new growth in debts," said SHMAKOV. He explained that debts started growing again both at public-sector factories and at joint stock societies. "The situation is disastrous," the trade union chairman said. SHMAKOV claimed that the recent ruling by the Constitutional Court also contributed to the growth in debts. As a result of this ruling, "tax bodies now take everything for taxes, leaving no funds for wages." FNPR now braces for an all Russian protest action, scheduled for April 9, slogans of which will be not only payment of wage arrears but also demands for pay rises. He stressed that the, "population cannot make any investments without normal wages. Nobody will buy, say, a new Moskvich car, since people will just have no money to do so....we [unions] do not need any new scuffle, we need a normal development of the country."

Today's News Highlights

Russia

Investing in Russia Magazine

UES Chairman Loses Post

European Republics

Lithuanian-Rus. JV Increase

UK Backs Estonia in EU

South Caucasus & Central Asia

Shimoda Opens Georgia Fund

Georgia To Sell Textile Plant

Alliance Support Koncharyan

Greek OTE Acquires Armentel

Politics-Economics-Business

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Thursday

March 5, 1998

Intercon's Daily

Raduyev Expelled from Caucasian Confed.

· Salman RADUYEV, a former field commander of the Chechen rebel forces, was relieved of his duties as General Secretary of The Caucasian Confederation and expelled from that public-and-political organization, "for actions incompatible with the Rules of the organization and for numerous provocative political statements, "on behalf of the organization." The decision to sack RADUYEV was made at the conference of The Caucasian Confederation in Grozny on Wednesday. The Caucasian Confederation was established by the former Presidents of Chechnya Jokhar DUDAYEV and Georgian Zviad GAMSAKHURDIA, on September 5, 1992. It brings together public and political movements of the North Caucasus republics, Azerbaijan and Georgia. Its current president is Zelimkhan YANDARBIYEV, a former president of Chechnya. Salman RADUYEV could not be reached for comment. RADUYEV, although many believe he was paid to do so, claimed responsibility for the attack on Georgian President Eduard SHEVARDNADZE in February.

Economy

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

Ruble = 6,790/$1.00 (CB rate)

Ruble = 6,053|6,105/$1.00 (buy|sell rates)

Has Russia Reached Financial Stability?

· A conference in Tokyo on Russian economy concluded on Wednesday that for the time being, it is early to speak about full financial stabilization in Russia, although significant progress has been achieved in this field. First Deputy Chairman of the Central Bank of the Russia Alexander KHANDRUYEV noted, the country has entered only into the first stage of financial stabilization, by curbing inflation to 11 percent in 1997. However, the situation remains fragile as the country still experiences the growth of mutual non-payments, the size of which has amounted to about 30 percent the gross domestic product (GDP), and state expenses for servicing the internal and external debts have also increased. Conference participants believe, one should not expect that financial stabilization will bring about an immediate economic revival of Russia, a rise in its gross domestic product and expansion of industrial production. From the viewpoint of medium-term prospects, the first signs of financial stabilization will be inevitably followed by an "adaptation period," which means a

transition to a non-inflation growth of the economy. Therefore, one of the main tasks of the Russian government will be a successful implementation of this transition, participants in the forum pointed out. First Deputy Minister of Economics of Russia Andrei SHAPOVALYANTS and deputy head of the Department for economic planning of Japan Ioichi OKITA stressed the need to concentrate efforts on raising the level of consumption and investments in Russia while retaining a strict policy of curbing inflation.

Gov't Approves Privatization Program

· The Russian government positively described the privatization process in 1997 at its regular meeting and approved the 1998 state privatization program. Prime Minister Viktor CHERNOMYRDIN stressed that one of the main tasks of the government is, "investment support for privatized firms. It is necessary to preserve and increase the number of jobs at them, as well as to introduce new technologies and equipment." First Deputy Minister for State Property Alexander BRAVERMAN stated that 1998 would be a transitional year from the mass privatization model to a model of privatization of priority projects. Special attention will be given to drawing investments into privatized companies as well as to better use of military property. Defense Minister Igor SERGEYEV opposed a broad privatization of naval and air force repair factories. He claimed that 53-55 percent of combat hardware and weapons in the army are inoperable and need repairs. BRAVERMAN reported that the 1998 state privatization program will be submitted for approval to the Russian State Duma over the next few days.

Business

Investing in Russia Magazine Debuts in April

· Investing In Russia, a new financial magazine focusing on investment in Russia, Newly Independent States (NIS), and Russian financial markets, announced Wednesday that it will begin distribution this April. The magazine will be published in English and available in the US, Canada, and Western Europe six time per year. The magazine will target portfolio managers, analysts, investment bankers, corporate personnel, academics and the general investment community. The magazine will discuss investment opportunities in Russia and the NIS as their economies expand and their financial markets become increasingly liquid.

When you need to know it as it happens

Politics-Economics-Business

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Thursday

March 5, 1998

Intercon's Daily

UES Chairman Loses Post

· UES company spokesman Sergei MEDVEDEV said on Wednesday that chairman of Russia's national electricity company UES Anatoly DYAKOV has not been nominated by shareholders to a new board of directors, Reuters reported. The move is welcomed by foreign shareholders of UES, since DYAKOV led a midnight-hour attempt in January to snatch the post of chief executive from the young reformer Boris BREVNOV. MEDVEDEV said the company had officially finished accepting nominations for the new board, which will be elected on April 4th. Shareholders will also vote on the board at the annual meeting which MEDVEDEV said will take place in May or June. "There are about 30 candidacies announced for both the extraordinary shareholders' meeting and the annual meeting," said MEDVEDEV, who is personal press secretary to BREVNOV. "If you look at the lists you can draw one conclusion Anatoly DYAKOV, who currently nominally occupies the post of chairman, is included in none of the [candidate] lists." Investors have been waiting to see whether the government, which holds 52.7 percent of UES and has said DYAKOV's attempted takeover illegal, would support BREVNOV. BREVNOV was backed in the past by First Deputy Prime Minister Boris NEMTSOV. UES, before and during the nomination process, has been plagued by counter accusations between BREVNOV and DYAKOV of misuse company funds.

UK Backs Estonia's Bid to European Union

· During a visit with British Prime Minister Tony BLAIR and Foreign Minister Robin COOK, Estonian President Lennart MERI was assured that Britain will strongly support Estonia's accession to the European Union (EU). Estonia is one of five countries to be considered in the first wave of EU membership talks. MERI said Estonia's lack of experience in international politics and civil service administration represent a handicap to joining the complex EU. He noted that Britain had promised to provide "substantial help" in these areas. MERI also said that Estonia's economy is on "a very strong foundation" and had overcome the turbulence in the global emerging market resulting from the Asian financial crisis. Estonaia economic performance and bid to become an EU member serves as an example for Latvia and Lithuania to emulate. The gap between the Baltic nations can be dramatically seen in foreign direct investment figures. Estonia boasts per capita foreign direct investment in 1989- 1996 of $503, compared with $234 in Latvia and $83 in Lithuania, according to figures in The Journal of Commerce.

South Caucasus & Central Asia

Shimoda Georgia Opportunity Fund Launched

· Shimoda Capital Advisors announced the launch of its Shimoda Georgia Opportunity Fund in anticipation of growing investor interest in Georgia. The tax-exempt Cayman Island based fund plans to raise $20 million by an offering date of March 31, 1998, and make equity and direct investment several into Georgian industry sectors, including mining, transportation, energy, finance, real estate and agriculture. Georgia has made significant steps towards creating a viable market economy and developing democratic institutions since its independence. Georgia has the fastest growing economy in the Newly Independent States (NIS) and The Economist has referred to it as a new economic tiger. It has a stable currency supported by the IMF and decreasing inflation rates over three years. Its strategic location in the Eurasian corridor for the transport of Caspian oil and gas to western market and consumer good to and from Central Asia, offers investors unique investment opportunities in the transportation and oil transport service industries. Senior Investment Officer to the Fund is Michael ALCORN, a veteran of the NIS having spent five years in Central Asia working on

European Republics

Lithuanians Increase Investment in Russia

· Lithuania's production joint stock companies are increasing investments in Russia's Kaliningrad region. According to Sergei OVERKO, the investment "boom" began after an economic zone was granted to the region. 252 Lithuanian-Russian companies have been registered in the region as of January 1, compared to a meager 53 in early 1993. Trade turnover between the Kaliningrad region and Lithuania has increased over the two years from 480 million litae ($120 million) to 892 million litae ($223 million) and continues to grow. The Kaliningrad market has become attractive for Lithuanian capital due to privileges offered to foreign companies engaged in expanding production in the region, as well as an opportunity to reduce Russia's high customs tariffs for products manufactured locally.

When you need to know it as it happens

Politics-Economics-Business

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Thursday

March 5, 1998

Intercon's Daily

fund management and capital market development projects. The Shimoda Georgia Opportunity Fund is also backed by the expertise of Shimoda Director David MAPLEY, who has been investing in Georgia since 1993. Paul M. JOYAL of Intercon Capital Advisors is the fund's investment advisor. Shimoda Capital Advisors manages a number of funds in the former communist states, including the Shimoda Renaissance Funds, the Shimoda Russia/NIS Fund, and Shimoda Resources Limited, all which showed strong performances in 1997.

Georgia Plans To Sell 94 Percent of Textile Plant

· The Georgian government on Tuesday announced it will hold an international tender for a 94 percent stake in Maudi Textile Plant. Deputy State Property Minister David GELASHVILIL explained that the starting price would be a symbolic 1 lari, although there is a $10,000 participation fee. Foreign and domestic bidders have equal bidding rights, and the winner will be chosen according to the price of the offer and proposed investment plans. "The winner should be willing to invest a minimum of 10 million lari ($8.67 million) in the enterprise over 10 years," GELASHVILIL said. Maudi Textile Plant, located in Tblisi, is capable of producing 4 to 5 million meters of wool and semi-wool textiles. The plant is at a standstill because of a lack of funds.

Alliance Formed to Support Kocharyan

· Five mostly center-left parties on Wednesday announced they have formed the Justice and Unity alliance to support Prime Minister and acting President Robert KOCHARYAN's candidacy in the early presidential elections on March 16th, RFE\RL Newsline reported. The alliance is dominated by the nationalist Dashnak party (HHD) and the Yerkrapah union of Karabakh war veterans. The new alliance affirmed its support for KOCHARYAN's efforts to, "consolidate the entire Armenian nation," resolve the Nagorno-Karabakh conflict, and establish democracy and social justice. KOCHARYAN has pledged to strengthen industry, create more jobs and favorable conditions for attracting investment, and con

tinue to combat the black market and tax evasion. He also promised to increase wages, reform the social security and pension systems, and introduce free health care for the most vulnerable social groups. Foreign policy priorities remain to balance developing ties with Russia, the CIS, and neighboring Georgia and Iran with strengthening relations with the US and the EU.

KOCHARYAN and main opposition challenger Vazgen MANUKYAN now must compete with a third force who is gaining popularity, former Armenian Communist Party First Secretary Karen DEMIRCHYAN. Many believe that KOCHARYAN pressured DEMIRCHYAN to run for the presidency in a bid to weaken the chances of the other opposition candidates. But this alledged plan may back fire. Unofficial surveys suggest that DEMIRCHYAN has good chances of winning the election due to a widespread popular nostalgia for the "good old days." DEMIRCHYAN's growing popularity underscores public discontent with the current socio-economic situation in Armenia. DEMIRCHYAN, if elected, plans to, "consolidate all political forces" to establish democracy and a free market economy. He supports a peaceful settlement of the conflict with Azerbaijan. And he added that Nagorno-Karabakh must never regain the status it had before 1988, but he did not say what he would offer as an alternative.

Greek OTE Acquires 90 Percent of Armentel

· Greek telecom company OTE has completed the acquisition of 90 percent of Armentel, Armenia's national telecom firm. A company press released said, "The price for the acquisition of 90 percent of the equity of Armentel was $142.5 million, with assumed borrowings at closing of $46.7 million." The deal marks OTE's first acquisition abroad as a part of its expansion strategy into east European markets. With a population of 3.5 million, Armenia has 585,000 telephone lines in service with a ration of 74 lines per Armentel employee. Armentel forecasts revenues above $60 million this year and a monopoly of fixed-wire telephones for the next 15 years.

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


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