DAILY REPORT ON RUSSIA

AND THE FORMER SOVIET REPUBLICS

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

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, May 14, 1998

Russian Federation

Politics

Book Scandal Charges Dropped

· Moscow's prosecutor Sergei GERASIMOV has dropped the charges in the privatization book scandal that prompted the dismissal of its co-authors: then head of the government's privatization program Deputy Prime Minister Maxim BOIKO, head of the Federal Bankruptcy Agency Pytor MOSTOVOI, Russian President Boris YELTSIN's chief of staff Alexander KAZAKOV, and the demoting of former First Deputy Prime Minister Anatoly CHUBAIS. GERASIMOV said that no charges were warranted against the four former officials since the $90,000 book advances they received originated from a private firm. "There is no evidence of abuse of office or embezzlement." Many criticized that the payments were bribes because they came from the Segodnya-Press publishing house which is linked to Uneximbank, a major Russian bank that won the bidding of two key privatization auctions in 1997.

GERASIMOV said that prosecutors were still investigating charges against Alfred KOKH, a former deputy prime minister and head of Russia's State Property Committee, for a book deal and illegally obtaining a state-owned apartment in 1993. KOKH received $100,000 from a Swiss firm to write a book on privatization which has not been published. GERASIMOV is working with Swiss authorities to learn more about the firm and the origins of the payments. KOKH today said his book will soon be released. First copies are expected to be sent to a book fair in Chicago late in May and be on bookstore shelves starting in mid-June.

Blast Targeted At Magomadov, Kills Three

· A powerful blast rocked the Chechen capital Grozny Wednesday killing three, wounding several

people, and causing severe damage to nearby cars and buildings. Local enforcement agencies have determined that Chechnya's Deputy Prosecutor General Magomed MAGOMADOV, who is deputy chief in charge of Chechnya's department for combating kidnaps, was the target of the mine. He leads a team of investigators created in order to locate and release Russian presidential envoy Valentin VLASOV, who was abducted in Chechnya on May 1st. Witnesses said the mine, which was buried under a tree, exploded after MAGOMADOV's car left the parking lot of the Prosecutor General's Office. MAGOMADOV's car managed to escape the radio-controlled mine's range before any serious damage could occur. The explosion destroyed another car which followed MAGOMADOV, killing the driver and two passengers. Grozny regards the attempt on MAGOMADOV as blatant challenge by crime families to Chechen authorities. Chechen President Aslan MASKHADOV instructed a joint investigative group, consisting of officers of the Ministry of Shariah State Security, the Prosecutor General's Office and the Chechen National Security Service, to investigate this terrorist act. No suspects or accomplices to the crime have been found. Chechen law enforcement bodies do not preclude a direct link between the kidnapping of VLASOV and the assassination attempt on the head of the investigative group.

Economy

Ruble = 6,143/$1.00 (NY rate)

Ruble = 6,144/$1.00 (CB rate)

Ruble = 6,112|6,176/$1.00 (buy|sell rates)

Today's News Highlights

Russia

Ingushi-Pacific Petro. Oil Deal

Gazprom Reviews Lith. Gas

Chubais Strict On UES Reforms

European Republics

Lith. Security Chief Resigns

Citibank Opens In Ukraine

South Caucasus & Central Asia

Georgian-Russian Relations

Azeri Bank To Be Privatized

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Cabinet Reviews Budget Spending

· Prime Minister Sergei KIRIYENKO's press secretary Konstantin VOITSEKHOVICH announced that KIRIYENKO signed a resolution stating that the cabinet will not review suggestions from federal ministries and institutions, and executive authorities which may increase spending from the federal budget, if the proposal does not include a clear indication of the funding source. A federal law is now being drafted, which will introduce this scheme in the relations between the government and the parliament. It is supposed that the law will block the appearance of draft laws involving additional expenditures, which are not envisaged by the budget. Russian President Boris YELTSIN is expected to sign a decree to eliminate a possibility of submitting for the consideration of the head of state the draft decrees, which are not supported by budget financing. The press secretary explained that the purpose of the decree is to, "curtain dramatically the possibility of lobbying groups" to railroad the projects, for which sources of financing were not found. In the future, the work for establishing the exact amount of spending for individual items and spheres will be carried out only within the framework of drafting a federal budget for the next year.

Business

Oil Deal With Pacific Petroleum

· The Russian republic of Ingushetia on Tuesday reached an agreement on joint oil production and refining with United States' Pacific Petroleum. Under the agreement, a joint Russian-US venture South-Pacific Petroleum will be established. The agreement also provides for investments into Ingushetia's oil complex. Oil production will be carried out using state-of-the-art US technologies allowing for deep hole boring, said Ingushetia's President Ruslan AUSHEV, who signed the document. Ingushetia will hold 15 percent of shares in the joint venture. AUSHEV said the setting up of the joint venture is not merely to invest in the republic's economy, but also to solve socio-economic and political problems, and to increase oil production and refining in Ingushetia. Before the signing of the agreement, the parties discussed transportation-related issues. Pacific Petroleum said they expect the oil to be sold on Western European markets.

Gazprom Reviews Lithuanian Gas

· Two representatives from Russian gas giant Gazprom arrived in Lithuania Tuesday to review the operations of Lithuanian Gas, a 90 percent state owned company with share capital of 372 million litas. Gazprom is considering an investment of a 66 million litas ($16.5 million) share issue of the Lithuanian gas transporter, which would constitute a 15 percent stake in the utility. Lithuanian Gas commercial director Vidmantas CHEPUKONIS said the Gazprom representatives came to, "our company to look over our situation and to analyze our economic and financial documents." Lithuanian Gas has already held talks with a consortium of Germany's Ruhrgas and Preussen Elektra, Gaz de France and Lithuanian-Russian Stella Vitae. CHEPUKONIS said that a decision is expected by later May or early June.

Yuksi Merger Still Delayed

· Yuksi President Mikhail KHODORKOVSKY said the merger of Russian oil companies Yukos and Sibneft into Russia's largest oil company Yuksi will be completed by the end of this year despite difficulties in the transition. He said, "The merger is proceeding according to the plan. Various personalities, management techniques, and many other problems," are making the merger process difficult. The Yukos and Sibneft merger was initially expected to be completed this summer. His comments follow concerns over the financial well being of Yukos which has been hurt by falling oil prices. Last month, Yukos defaulted on a $500 million loan arranged by Goldman Sachs. Yukos had promised to export 600,000 tons of crude oil per quarter, but has exported less. "To produce high quality oils for a narrow segment of the foreign market is not the most profitable," KHODORKOVSKY explained. Domestic sales have been somewhat sheltered. Stephen O'SULLIVAN of United Financial Group, a Moscow-based brokerage firm, said, "Some oil companies are suffering more than others. Russian domestic crude prices really haven't changed in the past two months. It is the exporters who will lose out," the Financial Times reported. Yukos is looking into the production of high-quality oils such as engine oil, but it is likely to face obstacles breaking into this specialty market.

KamAZ Company To Increase Charter Capital

· At a meeting of the board of the KamAZ Truck Factory on Tuesday, shareholders agreed to in

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crease the company's charter capital from 125 million rubles ($20 million) to 6.25 billion rubles. The nominal price of individual shares is to be increased and additional 300 million shares issued. The measures are intended to reduce the plant's debts, currently estimated at 8.5 billion rubles. Russia and Tatarstan will increase their holdings in KamAZ, while the stake of the US company KKR, which failed in its bid last year to find new investors for the company, will be reduced from 32 to no more than 11 percent. The meeting also elected a new board, which is headed by First Deputy Prime Minister Ravil MURATOV and includes seven representatives of the Russian federal government and four from Russian commercial creditor banks, RFE\RL Newsline reported. KamAZ General Director Ivan KOSTIN said it plans to increase the KamAZ output of 2 billion rubles in 1997 (78 percent of the 1996 amount) to 2.8 billion rubles in 1998. The company will make 15,000 KamAZ trucks and 24,000 Oka cars.

Ericsson Receives Order From VimpelCom

· Ericsson has received a D-AMPS IS-136 order valued at $22 million from the Russian wireless network operator, VimpelCom. This will allow VimpelCom to enhance network coverage and capacity in response to rapidly growing subscriber demand in the Moscow area and several adjacent regions. The decision by VimpelCom to expand digital D-AMPS services in Russia confirms the steady growth of D-AMPS IS-136 in Eastern Europe. There are currently 200,000 D-AMPS/AMPS mobile phone users throughout the region and growth has been 100 percent over the past year. VimpelCom, selling its services under the Bee-Line trademark, is the largest wireless operator in Russia and CIS, with more than 110,000 subscribers in its Moscow network. It was the first Russian company to be listed on the New York Stock Exchange. Ericsson equipment is in operation or on order in more than 50 regions of Russia. D-AMPS was the first technology to be commercially available as a dual-band (800/1900 MHz) and dual-mode (analog/digital) technology. Ericsson, active in more than 130 countries, possesses expertise in fixed and mobile networks, mobile phones and infocom systems.

Chubais Strict On UES Reforms

· Following a meeting of the board of directors of the national electricity utility Unified Energy Systems

of Russia (UES), chairman of the board of governors Anatoly CHUBAIS said that recovery of the Russian energy sector and making its performance effective is the key task of UES leaders. CHUBAIS said that in order to provide heat and electricity to every house in Russia stiff measures will be used against enterprises with arrears on electricity payments. He spelled the measures on tariff policies that are to introduce limits on electricity use by budget-financed enterprises and organizations. The limits will allow the UES to build up the proportion of cash in payments for electricity deliveries, CHUBAIS said, adding that at present the proportion makes up 15 to 18 percent. The tough tariff policies are dictated by the need to improve the UES' finance for paying off its debts to the coal and gas sectors. CHUBAIS said UES' difficulties are caused by, "persisting non-payments, wage delays in energy companies."

European Republics

Lithuanian Security Chief Resigns

· Lithuanian President Valdas ADAMKUS accepted the resignation of State Security Department Director General Jurgis JURGELIS during their Wednesday meeting. The meeting was initiated by the President who sought to discuss and evaluate the agency's performance. The agency has been blamed for its failure to expose those to blame for over 30 blasts that rocked Lithuania's public buildings, state companies, private shops, warehouses and cars over the last six months. Both ADAMKUS, the leadership of the ruling Conservative Party, and Christian Democrats accuse the service of, "passive and inefficient performance" in the crimes' investigation.

Citibank Opens Branch In Ukraine

· Citibank on Monday opened its first Bank in Ukraine, the 100th country in the Citibank's network.

Ukraine Citibank AKB will serve both global corporations and local Ukrainian companies, focusing initially on cash management, trade and foreign exchange services and short-term financing. It opened with $25 million in capital and 25 employees. Citibank Vice Chairman William R. RHODES said, "Our opening in Ukraine is an important step in the Bank's expansion strategy within Central and Eastern Europe." He added, "When we open in a country, our hallmark is helping that country develop its financial and capital markets and in the process

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becoming an integral part of its banking system." Citibank's presence in Central & Eastern Europe is the most extensive of any foreign institution with 18 offices in eight countries. To mark the opening of its 100th country, Citibank's Head in Ukraine, Witold ZIELINSKI presented a check for $100,000 to the yiv-Mohyla Academy to fund a program that will support academic exchanges both at the teaching and student levels. Citibank is a subsidiary of Citicorp, the US based bank holding company. In April, Citicorp announced its intention to merge with Travelers Group, which would form the largest financial services company in the world.

South Caucasus & Central Asia

Relations With Rus. A High Priority For Georgia

· Speaking at the National Press Club in Washington Georgian Foreign Minister Irakly MENAGARISHVILI said that improving relations between Georgia and Russia is an, "indubitable priority" for Georgia. "We have been making intensive efforts in this direction and certain steps have been already taken. This concerns mostly the economic sphere and the attraction of Russian companies," he said noting that, "there are some unsettled problems in Russian-Georgian relations, especially in the military field." He called the presence of Russian military bases on Georgian territory, "an irritating factor in bilateral relations." MENAGARISHVILI stressed that the success of developing relations depends on Russia's stance. He said, "I have great expectations for the new Russian government as regards the development of cooperation between Russia and Georgia," and expressed hope that following the visit of Russian Defense Minister Igor SERGEYEV the sides would reach, "certain progress" in the settlement of the base issue. It is clear that the Foreign Minister is interested in improving ties with Russia. However, several impediments are in the way, specifically complications centered around the status of Russian military bases operating in Georgia. The base treaty has still not been ratified by the Georgian parliament. The outlook for passage is

slim, since its ratification is tied to the resolution of the Abkhazian conflict. At this time prospects for resolution remain bleak.

Regarding the Commonwealth of Independent States (CIS) the Foreign Minister said, "The Commonwealth must prove its necessity as to the economic development of member-states. Only in this event the existence of the CIS will be justified." He said that the priority of the organization is, "to settle conflicts on the Commonwealth territory." Commenting on the appointment of Boris BEREZOVSKY to the post of the executive secretary of the CIS, MENAGARISHVILI said that BEREZOVSKY was endorsed by the Presidents of the independent states in hopes that he would, "actively contribute to a search for new approaches and the implementation of programs for mutual aid and economic cooperation among the CIS states and try to introduce a fresh note into this cooperation and new approaches." BEREZOVSKY met with Georgian President Eduard SHEVARDNADZE today during his CIS tour. In addition to settling regional conflicts, SHEVARDNADZE called for the further development of economic cooperation among CIS countries. He stressed that the process should not hamper already established relations between CIS members and other countries from both East and West, international and European economic and financial organizations.

Azeri's Largest Bank To Privatize?

· The International Bank of Azerbaijan may be privatized by the end of this year if the government approves its plan, a bank official announced on Tuesday. The bank's Moscow representative Elchin GULIYEV said the government's 50.2 percent stake would probably be split in two, with the larger piece being put up for sale. The bank's chief executive, Fuad AKHUDANOV said that the European Bank for Reconstruction and Development could buy a stake. He said, "the government has clearly indicated that the government will be privatizing the bank...They have not identified clearly when, the timetable, what the methods are going to be."

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