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

Monday, May 11, 1998

Russian Federation

Politics

Yeltsin Signs Law on UES

· Russian President Boris YELTSIN on Sunday signed a law regulating the management of shares in federally-owned joint-stock companies operating in the power engineering sector, including the Unified Energy System of Russia (UES). The law passed the Russian State Duma on June 20, 1997 and was approved by the Federation Council on July 3, 1997. Under the law, 51 percent of shares in the UES are to be state owned, 33 percent of which are transferred to the country's constituent parts in proportion to the volume of electricity consumption. No more than 25 percent of shares can be owned by foreign states, international organizations, foreign legal entities or individual investors. Selling or mortgaging shares of the UES or other state-owned energy companies can only be done on the basis of the federal law.

New Ministry Creates Bureaucratic Struggle

· When Prime Minister Sergei KIRIYENKO abolished the Ministry of Foreign Economic Relations and replaced it with a new agency, the Ministry of Industry and Trade, he created a bureaucratic nightmare. On Friday, Russian President Boris YELTSIN appointed Georgy GABOUNIYA as acting Trade and Industry Minister. Before his appointment to the cabinet, GABOUNIYA served as first deputy head of the Foreign Trade Ministry. He has been Russia's top negotiator on trade issues, such as the country's bid for membership in the World Trade Organization (WTO) and in talks with the European Commission on limits for Russian exports such as steel and textiles. The consolidation of the Trade and Industry Ministry could delay action on Russia's new legislation defending domestic trade. Economic Minister Yakov URINSON told a group of his subordinates

that he will not allow any of them to shift into the Ministry of Industry and Trade, The Journal of Commerce reported. URINSON also said he will not accept the break-up of parts of the Ministry of Economy, which is involved with industrial policy.

Federation Council Delegation In France

· A delegation of the Russian Federation Council has arrived in France today at the invitation of the French Senate. Speaker of the Federation Council Yegor STROYEV stated, "The main purpose of our visit is to strengthen the relations between the upper houses of the parliaments of Russia and France," along with boosting bilateral cooperation and encouraging mutual understanding. He added that, "an equally important purpose of our visit to France is to promote direct contacts between the regions of Russia and France." Currently over 600 joint Rus-French enterprise conduct business in Russia. The National Council of Businessmen and the Association of French Banks expressed interest in holding talks with the Russian delegation.

Lebed, Zubov Debate On Television

· Russian incumbent governor of Russia's Krasnoyarsk territory Valery ZUBOV and his main contender Alexander LEBED in the run-off gubernatorial elections ,scheduled for May 18th, appeared in TV debates on the evening Itogi TV program Sunday. In this often mud-slinging run-off election both candidate have attacked each other. ZUBOV said, "The shock from an unusual election campaign, from un

Today's News Highlights

Russia

Kidnappers Demand Ransom

Inflation Remains 8 Percent

Russia's IL-114 On Display

European Republics

Latvia's Cos To Issue GDRs

Ukraine To Attract Foreign Invest

South Caucasus & Central Asia

Aliyev Support Baku-Ceyhan

ECO Meeting Held in Almaty

Politics-Economics-Business

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Monday

May 11, 1998

Intercon's Daily

usual Western methods is going away, people are beginning to understand what is going on and the situation has clearly changed. This gives me confidence." He said he was definitely sure he would win. When asked about funds to finance the election campaign, ZUBOV said he was "shocked by the existence of campaigning funds in the Krasnoyarsk territory," while LEBED claimed he had "79 regional structures," so he is able to, "finance any campaign." LEBED's campaign is backed by business tycoon and newly appointed executive secretary of the Commonwealth of Independent States Boris BEREZOVSKY. LEBED has not been shy about his intentions to use the governor position as a springboard to launch his presidential campaign for the year 2000.

Reformers Plan Major Job Cuts

· First Deputy Finance Minister Alexei KUDRIN during a presentation at the annual meeting of the European Bank for Reconstruction and Development in Ukraine said that at least 200,000 federal budget-funded jobs will be cut in an effort to trim $11 billion from the budget this year. In an attempt to explain the frustrating vicious cycle, KUDRIN said, "Non-payments continue, barter continues, low government budget receipts continue, and government debt remains. The government receives services but does not pay for them, or only with a long delay." The job cut policy follows Prime Minister Sergei KIRIYENKO's pledge to streamline the government and follow through with promises made to the International Monetary Fund (IMF) last year. "Two hundred thousand is a minimum," KUDRIN said. These cuts will be met with fear and loathing by the public and may represent hard times for KIRIYENKO, who was challenged by Russian President Boris YELTSIN to improve life for the average Russian. It appears these tough reforms will need time to be implemented and affect the public positively.

Kidnappers Demand Ransom For Vlasov

· The abductors of Russian Presidential envoy Valentin VLASOV have demanded a "very large" sum for his release, despite acting Deputy Premier Ivan RYBKIN's warning that no ransom will be paid, Russian media reported on Saturday. VLASOV was taken from his car at gun point on May 1st and his exact whereabouts remain unknown. Chechen intelligence sources and Russian Interior Minister Sergei

STEPASHIN have both said that VLASOV is alive. RYBKIN met with Chechen President Aslan MASKHADOV on Saturday in Baku to discuss the investigation into the abduction, RFE/RL reported.

Economy

Ruble = 6,136/$1.00 (NY rate)

No Russian Ruble Rate today

1945 Victory Day Observed

$1.5 Billion Budgetary Loss Due To Oil

· First Deputy Finance Minister Alexei KUDRIN Sunday said that low oil prices will leave Russia with more than $1.5 billion in budgetary losses. KUDRIN reported the budget losses during a presentation at the annual meeting of the European Bank for Reconstruction and Development in Ukraine. Russia cut excise taxes to help oil companies hit by falling oil prices on the world market. Russia relies heavily on oil revenues. The overall 1998 federal budget is 500 billion rubles ($82 billion). This represents nearly 2 percent of budget revenue. Some estimate it will however go as high as 5 percent.

Inflation To Remain Within 8 Percent

· Russian Central Bank Chairman Sergei DUBININ said on Sunday the country's inflation rate will be 8 percent by the end of 1998. In terms of Russian economic growth, he said the country registered a 0.4 percent gross domestic product increase and a 1.9 percent rise in industrial output in 1997. He stressed that favorable investment conditions have been created in Russia. The macroeconomics situation provides stimulus for banking development. Concentration of capital is underway in the nation's banking sector, he said, adding that 30 leading banks account for 66 percent of all assets. The number of banks is steadily declining. There are 1,641 credit institutions in Russia now, compared to 2,500 in 1994 to 1995. He added that Russia and experts of the International Monetary Fund (IMF) will be able to reach an understanding when they meet in Moscow later this month.

Business

ING Barings to Finance Norilsk's Credit

· The ING Barings Banking group is preparing to issue a $110 million export credit for Russia's large mining group Norilsk. Norilsk produces most of

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Russia's nickel, copper, platinum, and palladium. Amid bureaucratic and political infighting, Norilsk has again fallen into cash flow problems because its permits for exporting platinum metals have been delayed. ING Barings' one year export credit facility will be secured against copper exports, which are flowing, the Financial Times reported. The banking group will be repaid directly by western buyers. Norilsk will pay 4 percent above the London interbank rate.

Russia's IL-114 Plane On Display

· The chief designer of the Ilyuishin Aviation Complex Nikolai TALIKOV said that starting May 12th, the new Ilyushin Il-114 passenger airliner will conduct demonstration flights in Russia to demonstrate to potential buyers the opportunities for regional aircraft service to replace the outdated An-24 and Yak-40 fleet. The first promotional trip will fly to Saint Petersburg and return to Moscow. The plane will carry aboard leaders of the Russian Federal Aviation service, delegates of the Ilyushin Company, Tashkent aircraft factory and Inkombank which plans to set up a leasing company to promote the plane in the domestic air services market. The second demonstration flight to Nizhny Novgorod on May 18th will return to Moscow on the same day. The Il-114 will commence on May 20 a tour of Tyumen, Omsk, Yekaterinburg, Magadan, Yakutsk, Samara, Mineralniye Vody and Rostov. The Il-114 plane accommodates 64 passengers. TAKILOV stated Il-114 will begin passenger services in June with Uzbekistan's air company Uzbekiston Khavo Yullari. TAKILOV said the Tashkent aircraft factory is capable of manufacturing five to seven Il-114s a month. So, far 11 planes have been assembled.

later this year. Ventspils Nafta is already traded on the bourse in Riga. Latvia hopes to raise at least $30 million from each of the two GDR issues. NAGLIS said his agency will choose an advisor for the GDR issues sometime next year.

Ukraine To Attract $1B In Foreign Investment

· Deputy Prime Minister Serhiy TYHYPKO said on Saturday that Ukraine seeks to attract $1 billion in direct foreign investment by year's end. TYHYPKO told delegates of the European Bank for Reconstruction and Development's annual meeting, "We forecast that we will have foreign investment of $3.2 billion by the end of 1998." Ukraine has already attracted $2.2 billion since its independence in 1991. The deputy prime minister said Ukraine's most attractive sectors for foreign investors are trade, food, engineering, iron, steel, transportation and telecommunications. Foreign investors have complained that bureaucracy, corruption and high taxes are deterrents to investment in Kiev. Ukraine has been trying attract foreign investors by speeding up privatization and conducting sell-offs through direct tenders or selling stakes on stock exchanges. Ukraine plans to raise $500 million from privatization sales this year, compared to $40 million in 1997.

Deutsche Bank To Plan Privatization In Ukraine

· A CEO with the German Deutsche Bank AGE said on Sunday during his meeting with Ukraine's Prime Minister Valery PUSTOVOITENKO, that German bankers will cooperate with their Ukrainian colleagues in foreign economic transactions. Deutsche Bank is prepared to help Ukraine establish a comprehensive privatization program. The Bank, with which 70 Ukrainian banks opened their accounts, seeks to develop long-term ties with Ukraine and not merely earn "quick money." The banker recommended that the Ukrainian Cabinet to concentrate on the issuing of the common European currency denomination, the euro. The Deutsche Bank executive says that it is critical for Ukraine to improve its relations with the World Bank, the International Monetary Fund and the European Bank for Reconstruction and Development. PUSTOVOITENKO encouraged Germans to take part in privatization sales of Ukrainian enterprises. "This year, we hope to earn not less than 1.1 billion gryvnias from privatization while last year we planned to earn only 500 million," he said. He suggested Ukrainian and Ger

European Republics

Latvian Oil and Gas Cos. To Issue GDRs

· Latvian privatization agency chief Janis NAGLIS announced on Saturday that Latvian gas company Latvijas Gaze and oil transits company Ventspils Nafta plan to issue global depository receipts (GDRs) in 1999. "Latvijas Gaze [will issue GDRs] in the second half of 1999, Ventspils Nafta in the first half of 1999." Latvijas Gaze's issue will represent at least 15 percent of the company's shares, while Ventspils Nafta's issue will be only seven percent. Latvijas Gaze will be traded on the Latvian Stock exchange

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man companies set up joint ventures for the production of agricultural machinery on the lease basis. The Ukrainian Prime Minister also proposed to hold this autumn a meeting between the Ukrainian President and representatives from German business and financial circles.

South Caucasus & Central Asia

Aliyev Endorses Baku-Ceyhan Route

· Azerbaijan's President Geider ALIYEV told visiting Turkish President Suleyman DEMIREL on Sunday that he endorses the construction of the Baku-Ceyhan pipeline, which would carry Caspian Sea oil through Georgia and Turkey instead of North through Russia. ALIYEV did not elaborate on his decision, except to say that the Turkish route is the, "only one" for Azerbaijan. He said preparations for the Baku-Ceyhan must be completed this year. The 1,075 mile pipeline is expected to cost $2.5 billion and will be capable of carrying 6.4 million barrels of oil per year. A decision on pipeline routes in the Caspian region is to be made in October. Falling oil prices however are completing the financial case for this route and increasing the need for governmental support of such a plan.

Kazakh To Issue $500 Million Bond

· Kazakhstan is planning to issue a $300 to $500 million seven year eurobond in June, which is Kazakhstan's third eurobond issue since December, 1996. Director of Kazakhstan's budget department Daniyar ABULGAZIN said that the manager of the bond will be decided this week. He said that nine banks were competing through a tender to issue the bond. The bond will be either in euros or US dollars. In January, Kazakhstan was given an upgraded credit rating of BB by Fitch IBCA. In the second half of 1998, ABULGAZIN said the country will launch a three year domestic treasury bond.

EOC Discusses Regional Issues

· The Presidents and Prime Ministers of the ten

Economic Cooperation Organization (ECO) member-nations held a summit meeting in Almaty today. Kazakh President Nursultan NAZARBAYEV on Sunday held short preliminary talks with each of the leaders upon their arrival. NAZARBAYEV, as chair of the organization for the next two years, is committed to consolidating and further developing ties within the alliance. The summit adopted the Almaty Declaration, which is an action program for ECO and several accords. These included a frame agreement on export shipments, a memorandum on cooperation in prevention of contraband and customs fraud, and a charter on cooperation in education to promote research projects. Participants today discussed economic cooperation, regional stability and development of a network of trans-national pipelines in the region. NAZARBAYEV said that, "of the five ECO projects to build regional pipelines, three are in Kazakhstan's geo-strategic interests." Included in these three is a pipeline which will stretch form Kazakh port of Aktauto Azerbaijan's Baku and then run across Georgia to Turkey's port of Ceyhan. This route is backed not only by oil-producing Kazakhstan, Azerbaijan and the transits states, but also by Washington. The second is a pipeline from Kazakhstan to the Persian Gulf via Turkmenistan and Iran. The third delivers Kazakh oil to Pakistan via Uzbekistan, Turkmenistan, and Afghanistan. NAZARBAYEV announced at a press conference that he agreed with Iranian President Mohammed KHATAMI to deliver 2 million tons of crude to Iran; Iran in turn will make the same amount available to Kazakhstan in the Gulf.

The ECO was set up by Turkey, Iran, and Pakistan in 1992 and was later joined by Afghanistan, Azerbaijan, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan. The ECO has immense economic potential covering an area of almost seven million square kilometers with a population of 300 million. ECO countries consider it their priority to co-develop transport, communications, trade, and the energy sector. The next meeting will be held in Kyrgyzstan's capital Bishkek in the first half of 2000.

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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