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Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Tuesday, May 12, 1998

Russian Federation


Yeltsin Attempts To Counterbalance US Power?

· In a rare speech to the Russian Foreign Ministry Russian President Boris YELTSIN outlined his foreign policy priorities and praised Russian diplomacy. He named the top priorities as preserving Russia's territorial integrity, ensuring national security and democratic institutions, and carrying out unspecified reforms. He said that Russia has become an integral part of the world economy and an equal partner of the main Western countries. He said, "It is time to recognize that in the contemporary world no single state can dictate its views, not even a very powerful state," clearly referring to US economic and military posture since the fall of the Soviet Union. He stressed that Russia supports a multi-polar world in which countries, individually or together, balance each other's influence. YELTSIN praised Russian diplomats for their role in spreading the balance of power. He cited Foreign Minister Yevgeny PRIMAKOV's active role in brokering a compromise between Iraq and the international community as a good example of this multi-polar approach. He welcomed the ministry's success in forging better ties with China, Japan, and India and securing recognition from the European Union of Russia's status of a market economy. He urged diplomats to support Russia's commercial interest abroad. "We shall enter the world economy not just as a land of rich natural resources but as an industrially developed nation, an equal and responsible partner," YELTSIN said. He added "Russia deserves it and must remain a great power" as its potentialities for exercising a positive influence on the world events "have grown strongly" in the post Cold War conditions. Comment: Under the leadership of PRIMAKOV, the foreign ministry has followed a more nationalist policy aligning itself with its Cold War allies and challenging the US. Its

policy in relations with former Soviet Republics contains neo-imperialistic tendencies, interfering in its neighbor's business. Russia has been accused by many of former republics of attempting to destabilizing their governments; most recently Georgia's President Eduard SHEVARDNADZE said, "Russia is fighting very hard against the establishment of democracy here." The Commonwealth of Independent States (CIS), once thought to have been a structure which would unite the region with equal membership, has failed to live up to its expectations. Many member states accuse Russia of trying to dominate the CIS and use it as a tool to revive its influence on the world stage. Even YELTSIN's new government has abolished the ministry responsible for CIS affairs and ordered the Foreign Ministry to take charge. YELTSIN said the CIS ministry was abolished because. "The CIS does not bring the due returns: neither from the point of view of our economic nor our political interests." Without dwelling on the causes, the President said that "also our own indecisiveness, sluggishness, lack of interdepartmental coordination and formalism" were to blame. YELTSIN is promoting in speeches a multi-polar world, but is actively bolstering its own power while diminishing the Commonwealth. Unfortunately, Russia's actions speak louder that the words of its President.

Yeltsin Urges Ratification Of Start-II

· Russian President Boris YELTSIN has called on diplomats to help persuade the Russian State Duma to ratify the Start-II strategic arms

Today's News Highlights


Dubinin Assesses Economy

Michelin, Rus Producers Talk

European Republics

Ukraine Parliament First Session

Ukraine Government Reshuffles

South Caucasus & Central Asia

Georgia Tries Regional Peace

Kazakh Oil Cos. To Be Sold

Kyrgyzstan To Sell-off Cos.




May 12, 1998

Intercon's Daily

reduction treaty. He said that ratification would open a way to the Start-III treaty which he said would bring a "total balance" of Russia's weapons with the US nuclear arsenal, "both in the level and quantity [of strategic arms]." He stressed, "it is important to stick to a checked-out balance between security interests of the country and its real economic possibilities." In his debut Internet interview, YELTSIN explained that the Start-III treaty will enable the cutting of strategic nuclear arms by half or even to one-third. He hopes that the development of Start-III treaty will begin immediately following the passage of Start-II.

Chechnya Passes Peace Treaty With Russia

· The Chechen parliament on Monday ratified the treaty on peace and the principles of bilateral relations signed last year by Russian President YELTSIN and his Chechen counterpart, Aslan MASKHADOV. Speaking at the ratification ceremony, MASKHADOV affirmed that Chechnya will continue to develop its relations with Russia on the basis of that treaty, which the Chechen side argues is equal to an official recognition of Chechnya's independence from the Russian Federation, RFE\RL Newsline reported.


Ruble = 6,139/$1.00 (NY rate)

Ruble = 6,141/$1.00 (CB rate)

Ruble = 6,111|6,172/$1.00 (buy|sell rates)

Dubinin's Russian Economic Assessment

· During the annual session of the European Bank for Reconstruction and Development (EBRD) in Kiev, Russian Central Bank Chairman Sergei DUBININ assessed the Russian economy stressing the need to reduce expenses on servicing the state debt. He said Russia's financial system is not going to face any serious financial turmoil in the coming few months. According to DUBININ, situation with the federal budget has improved as compared to 1997. "Live money," receipts in the federal budget have increased by 25 percent as compared to the first three months of 1997. This is, "a very big achievement," DUBININ emphasized. He said that without taking into consideration expenditures on servicing the state debt, revenues have been exceeding expenditures in the first months of 1998, creating preconditions for restricting the growth of the state debt. Focusing on Russia's foreign trade balance, he said that if the present condition is preserved, there

will be a zero balance by December, unlike in previous years, when exports were considerably exceeding imports. The share of a private sector in servicing the debt is growing in the balance of payments, as many enterprises and banks are recurring to big foreign borrowings. DUBININ hopes the adoption of the euro currency by European Union countries will positively influence Russia's foreign trade. DUBININ said cooperation of European states is very important for Russia's trade, but the "reality is such" that about 70 percent of contracts with European countries use US dollars.

According to estimates by the Russian Central Bank, the banking system is, "considerably stable" at the moment. Despite a financial crisis abroad, Russia's large private banks, although suffering some losses, have managed to withstand, and none of them has gone bankrupt. However, Intercon reported that the Central Bank has placed Tokobank temporarily under its administration for two months. First Deputy Chairman of the Central Bank Andrei KOZLOV said the decision was made because liquidity and management problems threatened Tokobank's clients. The EBRD owns a 9.6 percent stake in Tokobank, one of Russia's main recipient of foreign loans.

Russia's gold and currency reserves have decreased by 5 percent in April, to make $16 billion compared against $16.9 billion in March, DUBININ said. As January of 1998, the currency reserve of the Central Bank of Russia reached $12.9 billion and the gold reserve $4.9 billion.

Ukraine, Rus Banks Sign Payment Agreements

· Russia's Central Bank chairman Sergei DUBININ on Saturday announced that Ukraine's National Bank and The Russian Central Bank have signed two important agreements on organizing correspondent payments. The two main banks of Ukraine and Russia had fruitful talks, DUBININ said. "It was worth coming to Kiev to sign these two documents," he noted. According to the chairman, the agreements permit the transfer of normal payments between the sides in their national currencies. The system of correspondent payments between the sides has existed for a long time, but now some parameters as well as payment terms are more definite.


When you need to know it as it happens




May 12, 1998

Intercon's Daily

Michelin Cautiously Talks With Rus. Producers

· Michelin and Tatarstan tire maker Nizhnekamskshina have started buy-in investment talks. Nizhnekamskshina has awarded a mandate to the French bank Societe Generale to find a strategic investor prepared to acquire about 20 percent of the plant's shares. Michelin has hesitantly refrained from investing millions in domestic Russia production, but said that it could be ready to form a partnership to the growing tap Russian domestic market ahead of its competitors Goodyear and Bridgestone. Michelin, Bridgestone, and Goodyear capture about 55 percent of global sales. All three have offices in Moscow and supply 50 percent of Russian tire consumption per year. All three agree that Russia has a growing tire market as the US, European, and Japanese auto makers expand their production to Russia. Michelin, Bridgestone, and Goodyear are clamoring for regular talks with their Russian counterparts, but are withholding their investments. Many believe that this financial hesitation is based on the experience of Germany's Continental and Slovak manufacturer Matador. Continental and Moscow Tire Works, Russia's second largest tire producer, signed a letter of intention, which was misconstrued as a commitment of 150 million Deutsche marks ($86 million) to acquire 75 percent share in the company. At the time, Bridgestone's Moscow sales manager Taku SASAKI said, "You just can't find big growth anywhere, else except for Russia, China, and India. To capture growth and market share, you have to have domestic factories. But in Russia, everyone is afraid of the risks. Continental is a very brave company," The Journal of Commerce reported. Matador's experience investing $50 million in a joint venture with the Omsk Tire Works has turn out to be a disaster. One Western industry source explained that, "Production was supposed to be 1 million tires, but last year they were getting no more than 150,000 tires." To quash these fears and convince tire makers to put their money where their commitment is, Nizhnekamskshina and the Tatarstan government are offering tax and import privileges, discount energy prices, and special supply arrangements with local rubber producers. It is unclear whether these benefits will prompt Michelin, Bridgestone, or Goodyear to take the plunge into domestic production of tires in Russia. For now, they are content to learn from others mistakes.

European Republics

Ukrainian Parliament Opens First Session

· The new Ukrainian parliament, elected on March 29th, held its inaugural session today. To date, the Central Electoral Commission has registered 430 deputies and ordered elections to be repeated in nine single-mandate constituencies. A second vote, due to invalid election results, will be held on August 16th. After the new deputies took an oath, outgoing speaker Alexander MOROZ reported on the results of the four years of work of the previous parliament and tendered a resignation. The new parliament has to name a new speaker and two deputy speakers. The chairman of the parliament's working group Alexander BANDURKA said the name of Ukrainian parliament's speaker could be announced by the week's end. There are seven possible contenders for the post of speaker, including five members of the provisional presidium, which will head the work of the parliament till the speaker is elected, and two vice-speakers. They are ex-speaker MOROZ, leader of the People's Democratic Party Anatoly MATVIYENKO, ex-minister for environment and nuclear safety Yuri KOSTENKO, Communist leader Petr SIMONENKO, head of the Gromada party Pavel LAZARENKO. The dominating Communist Party faction and other left wing parties won just over 200 seats, which although is short of a majority, spells trouble for reform policies. President Leonid KUCHMA addressed the parliament describing his vision of Ukraine's internal and foreign policy. He called on lawmakers to cooperate with the executive government and reach politically unbiased solutions of economic and social welfare problems. KUCHMA needs parliamentary support to back tough reforms demanded by the International Monetary Fund (IMF) before the IMF releases a $2.5 to $2.7 billion three year loan. He asked the parliament to approve a law on cutting the budget deficit to 2.5 percent of gross domestic product (GDP) in 1998 against the 3.3 percent of GDP approved earlier this year.

Ukrainian Government Reshuffle

· Ukraine's Prime Minister Valery PUSTOVOITENKO an elected deputy from the Popular Democratic party has announced that he has refused his seat in parliament, but will remain in the government. Ukraine's law forbids officials from holding posts simultaneously in the government and parliament. At



When you need to know it as it happens


May 12, 1998

Intercon's Daily

a news conference Monday he said he had no, "moral right" to combine work in government and parliament during Ukraine's difficult times. However, he expressed confidence that the government will be effective in addressing the crisis. "Now, when conditions for efficient executive government have emerged in Ukraine, I am sure that the government team will prove able to improve financial and economic condition in the country," the Premier said. Environment and Nuclear Safety Minister Yuri KOSTENKO, elected on the Popular Rukh ticket, has resigned his post to take up his parliamentary seat. The post of the Minister for Environment Protection and Nuclear Safety remains vacant.

South Caucasus & Central Asia

Georgia Ties to Forge Regional Peace

· In his weekly radio address Georgian President Eduard SHEVARDNADZE on Monday called for intensive development of relations between Georgia, Armenia and Azerbaijan. He said it was time for further contacts because, "the Caucasus has no future without peace." He recently met with Azerbaijan's President Geidar ALIYEV and plans to have talks with Armenian President Robert KOCHARYAN in the near future. After his meeting in Moscow with KOCHARYAN on the eve of the CIS April summit, SHEVARDNADZE said he, "could not name a single issue on which we failed to find a common language and understanding." Armenian parliamentary speaker Khosrov HARUTIUNIAN's talks with Georgian leaders earlier this month, focused on a range of issues crucial to cementing cooperation not only between Yerevan and Tblisi, but among all three South Caucasus states. HARUTIUNIAN advocated direct negotiations between the leaderships of Azerbaijan and the unrecognized Nagorno-Karabakh Republic, and called on Georgia to promote a rapprochement between Armenia and Azerbaijan that would enhance the prospects for peace in the South Caucasus. HARUTIUNIAN argued that a key component of

peace and regional stability is a regional security system that would balance the interests of all the countries of the region. HARUTIUNIAN also assessed with Georgian Minister of State Niko LEKISHVILI the barriers to expanding economic cooperation between the two countries, explaining that high transit tariffs serve as a deterrent to Armenian businessmen eager to take advantage of Georgia's transit potential.

Kazakhstan's Oil Cos. To Be Privatized

· Kazakhstan announced on Sunday that the long awaited sale of two oil companies will begin in the third quarter of 1998. The State Investment Committee hopes that sales of minority stakes of Aktobemunaigaz and Mangistanmunaigaz will jump start the domestic securities market. Head of the State Committee for Investment Anvar SAIDENOV said the Kazakh government has not yet decided whether to list shares of the two privatized companies on foreign exchanges. The committee is seeking an investment bank to advise it on the planned share offers. The program in which the two Kazakh oil concerns participate is known as the Blue Chip Privatization Project. SAIDENOV admitted, "There was a delay on this program, but it was due to procedural issues."

Kyrgyzstan Plans Sell-Offs Of State Enterprises

· Kyrgyzstan Central Bank Chairman Murat SULTANOV on Saturday said the state plans to tender large stakes in strategic state-owned enterprises sometime later this year. He said, "We have had interest from many investors and we think the best way is to hold a tender for these companies." SULTANOV said the companies included energy company Kyrgyzenergo, state telecom monopoly Kyrgyztelekom, the state-owned airline and some metallurgical enterprises. He gave no details on the size of the shares that might be offered. German and Russian companies and Dutch owned ABN AMRO bank might be involved in the sale of Kyrgyzenergo's hydroelectric power station. He noted that 80 percent of share in Kyrgyzenergo are held by the state.

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

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When you need to know it as it happens