DAILY REPORT ON RUSSIA

AND THE FORMER SOVIET REPUBLICS

INTERCON INTERNATIONAL USA, INC., 725 15th STREET, N.W., SUITE 903,

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Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Friday, May 1, 1998

tions of the Ministry of Foreign Economic Relations and part of responsibilities of the Economics Ministry. KIRIYENKO said the presidential decree also mandates the Ministry of Land Policies, Construction and Utilities. The Ministry of Cooperation with CIS Countries is abolished and its functions assigned to the Foreign Ministry. The average age of members of the government is 42.5 years, with six first time ministers. KIRIYENKO has said he wants a dynamic government which will work as a team and will not be torn apart by conflicting political interests and personal ambitions. YELTSIN and KIRIYENKO will complete cabinet appointments after a meeting on Tuesday May 5th.

Chechen National Bank Issues Bonds

· The National Bank of Chechnya has issued the first bonds of the domestic state loan with a nominal value of $5,000. President Aslan MASKHADOV and parliamentary speaker Ruslan ALIKHANDZHIYEV urged residents of Chechnya to support the state program to restore the ravaged national economy and buy securities in the National Bank. A spokesman for the Chechen National Bank on Chechen television displayed samples of bonds and explained the process and its benefits. Bond holders can exchange the bonds for banknotes at any time and the interest will be paid out. Holders of state securities will have special privileges in drawing credits form the bank. He has said the securities were printed abroad and have several degrees of protection against forgery and that information about the buyer will be reg

Russian Federation

Politics

New Cabinet Ministers Announced

· Russian President Boris YELTSIN on Thursday met with Prime Minister Sergei KIRIYENKO to review and appoint new members of the cabinet. YELTSIN appointed Oleg SYSUYEV as the third and final Deputy Prime Minister. Among the new appointments, State Property Minister Farid GAZIZULLIN, Science and Technology Minister Vladimir BULGAK and Economic Minister Yakov URINSON were former deputy prime ministers with portfolios. Culture Minister Natalia DEMENTYEVA and Transport Minister Sergei FRANK retained their posts. The new cabinet faces include Fuel and Energy Minister Sergei GENERALOV, a former vice-president of the Menatep Bank, and Labor and Social Policy Minister Oksana DMITRIYEVA, a former Duma representative and member of Yabloko. The former government office director in charge of ownership and natural monopolies, Viktor NEKRUTENKO, was promoted to head the Ministry of Natural Resources. Justice Minister Pavel KRASHENINNIKOV used to serve as the first deputy minister and acting minister of the same ministry. The newly appointed Agriculture Minister Viktor SEMYONOV has been serving as the first deputy chairman of the agro-industrial union. After announcing his second batch of appointments, KIRIYENKO said Deputy Prime Minister Oleg SYSUYEV would be in charge of social affairs, Viktor KHRISTENKO, economic and financial affairs, and Boris NEMTSOV, reform and natural monopoly.

KIRIYENKO's pledge to reduce the size of the government has been evident in the mergers and abolishment of various overlapping ministries. One decree sets up the Ministry of Industry and Commerce and abolishes the Ministry of Foreign Economic Relations. The new ministry takes over func

Today's News Highlights

Russia

Pres. Envoy Kidnapped

Ruble Chart

More Bank Closings In Russia

Chubias Appoint UES Chairman

European Republics

Latvian Gov't Wins Confidence

Ukraine Privatization Sales

South Caucasus & Central Asia

Policy On Caucasus Confusing

Politics-Economics-Business

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Friday

May 1, 1998

Intercon's Daily

istered when bonds are bought from the bank. If bonds are resold to another person, the transaction is registered with the National Bank. The Russian Finance Ministry said that the Chechen loan is not permitted under Russian legislation.

Presidential Envoy Kidnapped Near Chechnya

· Russian President Boris YELTSIN's representative in the Chechen Republic Valentin VLASOV was kidnapped today. According to the Russian Interior Ministry VLASOV's car was forced to stop at 10 o'clock in the morning by gunmen in camouflaged uniforms on the Rostov-Baku highway. Several hours after the kidnapping, VLASOV's diver and bodyguard were arrested by Chechen police on the suspicion that they were involved in the kidnapping. YELTSIN sent Ivan RYBKIN and First Deputy Interior Minister Colonel-General Vladimir VASILYEV to Chechnya to negotiate VLASOV's release. However, no one has claimed responsibility for the incident. Law enforcement agencies from Chechnya and Russia have launched an investigation to find the criminals.

Economy

Ruble = 6,134/$1.00 (NY rate)

Ruble = 6,133/$1.00 (CB rate)

Ruble = 6,109|6,157/$1.00 (buy|sell rates)

Nov Dec Jan Feb Mar Apr

More Bank Closings In 1998 First Quarter

· The Russian Central Bank on Wednesday said that 59 commercial banks closed down in the first quarter of 1998, bringing their overall number to

1,616. Russia also has 25 non-banking lending institutions, bringing the total number of lending organizations to 1,641. The aggregate registered charter capital of Russia's lending institutions increased by about 1.2 times in the first three months of the year from 33.158 billion rubles to 39,853 billion rubles. Part of the charter capital of 146 lending institutions belongs to foreign investors. Approximately, 16 organizations are fully owned by foreign capital and 11 by more than 50 percent.

Business

Yeltsin Appoints Chubais Head of UES

· Sacked Russian First Deputy Prime Minister Anatoly CHUBAIS has been appointed chief executive of the state-controlled Unified Energy Systems (UES) on Thursday. He was approved by the board of directors, not a shareholders' meeting, according to the company's charter. CHUBAIS said that President Boris YELTSIN made the final decision. YELTSIN cautioned CHUBAIS that his decision would not be welcomed by those who tried to make the position a subject of political bargaining. Despite criticism from rivals which say CHUBAIS will use the company for a political platform CHUBAIS said, "For me, it is not a subject of political action, but the need to get down to the serious job of bringing order to a crucially important field." He added that the restructuring of UES will benefit the whole economy. He now faces the task of restoring and developing the national power grid, and easing the company's enormous financial problems. UES, one of the monopolies in the transport, of natural gas and energy sector, is owed some $2 billion by Russian factories and industries, and other CIS countries, who cannot afford to pay their debts. Prime Minister Sergei KIRIYENKO said that CHUBAIS will have a limited trial period in which he must prove his ability as chairman. KIRIYENKO said, "If Anatoly CHUBAIS copes with his responsibilities in UES, he will work on, if not, he will be dismissed as early as autumn."

UES operates 27 out of 34 of Russia's largest power plants. UES is 53 percent owned by the Russian government and 30 percent by foreign investors. Foreign investors, in general, are pleased with the appointment of CHUBAIS, who has a good reputation abroad. Russian utility analyst at Deutsche Bank Derek WEAVING said, "There are plenty of people at UES who know how to produce electricity but

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almost nobody who understands economics. We now have a chief who knows all about business and investors," the Financial Times reported.

A 25 percent stake in the energy transmission company Kyivoblenergo will be sold on June 11th to the highest bidder. The deadline for bids on the 1,301,094 shares with a face value of 10 gryvnias and starting price of 25.5 million gryvnias is June 4th. The winner is required to pay off a company debt of 8.8 million gryvnias within 60 days of winning the tender, invest 17.5 million in three years to upgrade power lines and maintain the workforce. The buyer will also have the right to sign an agreement to gain management control over the government's 51 percent stake.

South Caucasus & Central Asia

Hearing On US-Caucasus Relations Confusing

· The US House of Representatives' Committee on International Relations on Thursday held a hearing on the US role in the Caucasus and Central Asia which appear to hold conflicting arguments regarding the US policy. Secretary of Energy Frederico PENA, Ambassador Stephen SESTANOVICH, Ambassador Richard MORNINGSTAR, and acting administrator for Europe and the New Independent States for USAID Don PRESSLEY presented statements before the committee. The CLINTON administration believes that neither Russia nor the US should maintain a sphere of influence in Central Asia, but it has no objections to Russian troops based in the region. It has also stated that the region is of vital interest to the US.

In his statement, SESTANOVICH rejected the idea of the "Great Game" strategy which was followed in the 19th century, but admits that the region is surrounded by large and troublesome neighbors who have at times meddled in their internal affairs and specifically, "there are forces in Russia nostalgic for the imperial past." He acknowledged that Russia should have good relations with its neighbors, so long as it respects their independence and sovereignty. He rejected the concept of spheres of influence. He said that, "early Russian attempt to exploit conflict for its own purposes did not enhance Russia's security along its southern border." SESTANOVICH added that this type of policy did not benefit its other bilateral relations in the region. He said that the CLINTON administration aims to assist the Caucasus and Central Asian countries to, "develop the political and economic institutions that will enable them to become democratic, prosperous, and stable

European Republics

Latvian Cabinet Survives Confidence Vote

· Latvian Prime Minister Guntars KRASTS on Thursday won a parliamentary vote of confidence in his new government by 58 votes, with no votes against and no abstentions. KRASTS was forced to form a new government after the largest party, SAIMINIEKS in the former government walked out, accusing the Prime Minister of damaging relations with Russia. The new government will have to face key questions relation to the very existence of its own society. The most critical task is the integration of the Russia minority. Faster integration means many Latvians would have to overcome deep resentment and change the laws that govern the way Russian speakers are naturalized, which would improve Latvia's image with the European Union.

Ukraine To Sell Oil, Power, Energy Distributors

· Ukraine's State Property Fund (FDM) on Wednesday announced the privatization sales of three major companies in the oil, energy and power sectors. The FDM will sell a 45 percent stake, comprised of 2.187 million shares with a face value of 0.05 gryvnias each, in crude oil producer Lisichansknaftoprodukt on May 27th. All bids must be received by May 20th. FDM set the starting price on the 45 percent stake at 1.97 million gryvnias. The winner must invest 4 million gryvnias into the operation and inject 500,000 gryvnias into the company's cash flow. A previous tender for the stake, when it was priced at 2.47 million gryvnias, failed due to the lack of buyers.

The FDM announced the sale of a 35 percent stake in power distribution utility Chernihivoblenergo to the highest bidder on May 27th. Bids will be accepted until May 20th for the 10,440,327 shares with a face value of one grryvnia and starting price of 14 million gryvnias. The winner of the tender is required to pay off a debt of 5 million gryvnias and invest another 5 million gryvnias in the company's cash flow. The buyer must also invest 17.76 million gryvnias to upgrade the nation's power lines. The buyer will also have the opportunity to control the government's 26 percent stake in the company.

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and to be constructive and productive members of the international community." He outlined four main elements of this strategy: strengthening modern political and economic institutions and advancing a free market, conflict resolution, energy development and support for the east-west energy transport corridor, and security cooperation.

He said that the US supports the, "creation of the Central Asian Peace-keeping Battalion made up of troops from Kazakhstan, Uzbekistan, and Kyrgyzstan." Regarding the Silk Road Strategy Act being reviewed by the House and Senate, SESTANOVICH said that it may create confusion with the Freedom Support Act, which contains Section 907. Both Secretary of State Madeleine ALBRIGHT and Deputy Secretary Strobe TALBOTT have testified that Section 907 is a "serious obstacle to our diplomacy in Azerbaijan." He said that the bottom line is that, "Section 907 hinders US interests," because the US cannot give aid to Azerbaijan and therefore is backing the Armenians against Azerbaijan. The US does not want to back either, if it followings a policy to reject spheres of influence.

Secretary of Energy Frederico Pena concentrated his statements on the US policy toward the vast energy deposits in the Caspian region and its support of an east-west transport corridor. He said that, "two of the CNES (Comprehensive National Energy Strategy) goals: ensuring against energy supply disruptions and seeking international cooperation on global energy issues," embody the energy policy in the Caspian. Specifically he said the US seeks to enhance energy security, advance geostrategic aims, and foster commercial opportunities. He stressed that, "Rapid development of the region's energy resources and trade linkages are critical to the independence, prosperity, democracy, and stability of all the countries of Central Asia and the Caucasus." He added that the development of multiple pipeline routes will, "serve to diversify rather than concentrate world energy supplies by avoiding over reliance on the Persian Gulf," and Russian transport

routes. He said that these links will require regional cooperation which will overflow into other sectors on many levels. He reasserted US backing of the Baku-Ceyhan route.

Comment: The statements presented before the House committee illustrates the unclear and contradictory nature of our policy. While SESTANOVICH said that the US does not support the basing of Russian troops in Georgia and Armenia, but doesn't reject it, he contradicts the position that the region should, "not be a part of anybody's sphere of influence." If this is the case, then why should any troops be present? It is also troubling to say the US rejects the "Great Game" and that this region is "vital" to US interests, but acknowledges and ignores that the "Great Game" is indeed being played as Republican Congressman from Nebraska Douglas BEREUTER noted. SESTANOVICH and PENA both continued to say that the US has a "vital" interest in the regions' development of independent and democratic institutions. If the US has decided to follow a policy not to influence the region, the question remains will others follow its lead. What is to keep other "imperialistic" forces, which do not respect the sovereignty of these fragile new states from orchestrating a take-over? The CLINTON administration policy is unclear as to how it will keep a strategic foothold in the region without countering increased outside interference.

BEREUTER rebuked the CLINTON administration's failure to confront the issue of Russian troops. BEREUTER said he would introduce a resolution that would clarify Congress' position that it "unanimously objects" to having Russian troops in the volatile region. He said, "I've done a lot of thinking about this issue and have wondered whether I should say this, but I am convinced that elements of the Russian government are trying to kill President SHEVARDNADZE and the United States government should make it clear that this is unacceptable and that there would be severe consequences if this would occur." It appears that only the State Department is refusing to play the "Great Game."

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

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