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 15, 1998

Russian Federation

Politics

New Appointments, Duties Defined

· Russian President Boris YELTSIN Thursday appointed former deputy prime minister Ivan RYBKIN his personal envoy to the Commonwealth of Independent States (CIS). RYBKIN will have a rank equivalent to that of deputy prime minister. He previously oversaw CIS affairs in the old government. Last month during the government reshuffle, the CIS ministry was merged with the foreign ministry. YELTSIN has appointed Vladimir RUSHAILO as head of the Interior Ministry's Main Administration on Organized Crime (GUOP). RUSHAILO was the longtime head of the Moscow Regional Organized Crime Administration (RUOP). He was transferred to the post of first deputy head of the GUOP in October 1996, but then Interior Minister Anatoli KULIKOV fired him for criticizing his superior at the GUOP and his successor at the RUOP. YELTSIN has appointed Deputy Prime Minister NEMTSOV as chairman of the 10-member collegium of state representatives in the gas monopoly Gazprom. NEMTSOV has been an off-again on-again member of the collegium since YELTSIN created it in May, 1997. The state owns a 40 percent stake in Gazprom.

Members of the new Cabinet were assigned their duties by a government decree issued today. Deputy Prime Minister Boris NEMTSOV is in charge of the land, housing and communal reforms and shipments. His responsibilities include the policy of the state in science and technology, energy, construction, transport and communications fields, anti-monopoly policies and promotion of competition, and support for small and medium-size business. He will also coordinate the Atomic Energy Ministry in foreign trade and commerce. Deputy Prime Minister Oleg SYSUYEV is in charge of social programs encom

passing the drafting and implementation of social statutes and reforms of the retirement system, wages, social insurance, benefits, welfare, employment, migration, education, health, youth policies and sport. He will be in charge of the government's contacts with mass media, trade unions, public and religious groups. Deputy Prime Minister Viktor KHRISTENKO's responsibilities cover the economic reform, the drafting and implementation of the national socio-economic program, development of the banking and financial sector. He is in charge of state property management, privatization, securities market, and rescue and bankruptcy of enterprises. His duties include coordination between finance, tax and customs services, monetary and export control bodies in tax collection. KHRISTENKO will be in charge of the industrial policy, trade, economic security, privileged loans for agriculture, internal and foreign debt and foreign loans.

Economy

Russian Inflation Update

· Head of the State Statistics Committee's department for prices and finances Irina GORYACHEVA said Russia's annual inflation is likely to range between 7 or 8 percent in 1998, accounting for seasonal price decrease. May's monthly inflation will be 0.3 percent against 0.4 percent in April. She said also that Russia's consumer prices increased by a factor of 6,000 from 1991 to 1997 (in prices before re-denomination). The consumer

Today's News Highlights

Russia

Rus. Industrial Output Rises

Gazprom-Kiev Reschedule Debt

European Republics

Ukraine-BP On Caspian Oil

Belarus Invests In Sino Autos

South Caucasus & Central Asia

Georgia To Privatize Energy

Kazakh-China Discuss Economy

World Wide Sues Kazakh Gov't

Ex-Im Grants Uzbek $215M

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May 15, 1998

Intercon's Daily

price index, or a multiplier reflecting price growth, was 26.1 in 1992 and 9.4 in 1993.

Industrial Output Rises

· The Russian State Statistics Committee on Thursday released a report stating that the volume of industrial production in Russia rose by 1.2 percent in the period from January to April 1998 as compared to the same time period in 1997, amounting to 532 billion rubles. The highest rates of industrial growth were registered in January at 1.5 percent. Then, there was a decline in the indicator to 1.4 percent for February, 1.2 percent in March, and 0.8 percent in April. According to the Statistics Committee, the highest industrial increment was recorded in the micro-biological industry by 14.2 percent. This indicator totaled 11.4 percent in the medical industry and 10.4 percent in the printing industry. The highest slump was registered in the building materials industry by 5.3 percent and in the flour-cereals-and-mixed-feed industry by 5 percent.

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

Ruble = 6,145/$1.00 (CB rate)

Ruble = 6,112|6,179/$1.00 (buy|sell rates)

Dec Jan Feb Mar Apr May

Russia's Eurobond Remains At $3.5 Billion

· Russia's Finance Minister Mikhail ZADORNOV has said that Russia will not change its plans for borrowings on foreign markets this year. ZADORNOV said Russia's Euro-bonds program is actually 30 percent complete. The volume of the Euro-bonds issue will remain unchanged at $3.5 billion. The Finance Minister emphasized that the Russian government had not received any loans from either

International Monetary Fund or the World Bank since January 1998 which caused budget difficulties. However, these difficulties can be overcome, he said. He pointed out that the Russian state debt was too short and very costly to service. In the first quarter of 1998, 30 percent of Russia's budget spending went to service its foreign debt. As for the state debt, it causes no concern on the part of the Finance Ministry. Russia's overall state debt is estimated at $250 billion, and domestic and internal debt, at about $100 to $120 billion. The state debt currently stands at a level of 50 percent of the gross domestic product (GDP), while the maximum limit for a country that seeks admission in the European community is 60 percent of the GDP.

Business

Gazprom-Ukraine Reschedule Debt

· Russia's gas giant Gazprom chairman Rem VYAKHIREV and Ukrainian First Deputy Prime Minister Anatoly HOLUBCHENKO on Thursday agreed to reach a deal on restructuring gas debts. There however remains confusion over how much Ukraine owes Gazprom. HOLUBCHENKO said that Ukraine owed $411 million, hours after Gazprom issued a statement in Moscow putting the debt at $1.2 billion and saying Ukraine may issue state-backed securities to cover the debt. HOLUBCHENKO said Ukrainian gas traders and other companies owed $400 to $500 million to Gazprom. He said, "As for the billion dollars they're talking about, those are commercial debts. We have nothing to do with them and there will be no talk about any sort of bond issue covering debts for commercial structures." Ukraine plans to pay it debts by October. Ukraine is the biggest buyer of Russian gas, set to receive about 52 billions cubic meters of gas this year, but it regularly states it will seek alternative energy sources when Russia threatens to cut supplies for unpaid bills. Turkmenistan agreed to supply a 20 billion cubic meters of natural gas to Ukraine until 2005, but arguments over transport costs have stalled the agreement.

Ukraine also mentioned its interest in setting up a Ukrainian-Russian-Turkish joint venture Gastransit for the reconstruction of operating gas pipelines and laying out new ones to stretch over the territories of Ukraine, Moldova, Romania and Bulgaria to the Turkish border. The estimated cost of the project is $2 billion. The agreement to set up Gastransit joint

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venture was initialed in Istanbul in January 1997 by representatives of the Ukraine, Ukrgazprom joint-stock company, Russia's Gazprom, the Transbalkan Pipeline Consortium and the Istanbul firm Botas.

Sanjiang-Walite Special Vehicles Co Ltd. is jointly funded by the China Sanjiang Space Industry Group and the Minsk Wheel Tractor Truck Plant in Belarus. The total investment is valued at 52.5 million RMB yuan. China holds 70 percent stake in the joint venture and Belarus holds 30 percent. It is expected to be built within this year and annually produce 300 sets of WS, M3KT cross-country vehicles.

South Caucasus & Central Asia

Georgia Plans Energy Sell-Off

· The State Property Minister Avtandil SILAGADZE said that Georgia plans to announce an international sale tender for a 75 percent stake in its huge state-owned power distribution company Telasi in June. SILAGADZE said, "Georgia's power sector privatization strategy envisages the privatization of the state power companies and their distribution networks." Tender conditions have not been finalized by the government, but it is expected that the winner will be required to invest at least $100 million in Telasi. "We are pinning our hopes on the active participation of foreign investors in the tender as local businessmen cannot afford such an expensive purchase," he said. He added that part of the remaining 25 percent of Telasi's shares would be distributed among the company's employees and the rest would be sold on the market. Georgia's power sector privatization program has been developed by US investment bank Merrill Lynch, Kantor Management Consultants, KPMG and Georgian company Begiashvili & Co. Ltd. The program envisages privatizing the entire Georgian distribution network, merging domestic distribution companies into four large independent companies.

Georgia's State Property Ministry also plans to sell off some state-owned communication companies, natural gas distribution networks, and Georgian Airlines, SILAGADZE said. An estimated 11,000 small and medium-sized enterprises have been privatized since privatization began in 1993.

Leaders Urge Eur-Asian Transport Expansion

· Representatives of Yugoslavia, Belarus, Armenia, Romania, Azerbaijan and Ukraine support changes to the scheme of Europe-Asian transport corridors following the International Eurasian conference on transport, which ended Wednesday in St. Petersburg. Vice President of the Azeri state company

European Republics

Ukraine-British Petroleum Discuss Caspian Oil

· Ukrainian President Leonid KUCHMA held talks in Kiev on Thursday with the British Petroleum (BP) President Ian RUSHBY on the export of Azerbaijan's Caspian oil via the Odessa-Brody pipeline, currently under construction. A major partner in the first international consortium created to develop Azerbaijan's offshore oil fields, BP is lukewarm about the proposed construction of the Baku-Ceyhan oil export pipeline, RFE\RL Newsline reported. RUSHBY confirmed that more than one pipeline would be used for the export of Azeri oil from Baku. The Ukrainian government also issued instructions to the State Committee for the Oil and Gas Industry to create an international consortium to complete construction of the Odessa-Brody pipeline and the Odessa oil terminal, with an annual capacity of 12 million metric tons.

Ukraine To Reduce Prices On Odessa Refinery

· Ukraine's State Property Fund on Wednesday announced that it will re-offer two stakes, of 26 and 25.9 percent, in the Odessa refinery in June at reduced prices. The privatization agency admitted that it failed to find buyers for the AT Odessky Naftopererobny Zavod stakes. The asking price for the 26 percent stake, comprised of 57.25 million shares with a face value of 0.01 gryvnias each, has been dropped to 13.67 million gryvnias ($6.7 million) from the 19.53 million gryvnias asked at the first auction. The buyer, required to have oil industry experience, must pay no less than $1 million in company debts, invest $600,000 in modernizing the refinery, and guarantee production of 700,000 tons of oil annually for the next five years. The price for the 25.9 stake, comprised of 57.03 million shares, has been reduced to 13.58 million gryvnias from 19.40 million gryvnias. The buyer of this stake must pay $1 million in debts, invest $600,000 for modernization, and guarantee minimum production of 500,000 tons of oil for five years.

Belarus Invests in Chinese Auto Industry

· The first investment project of Belarus in China for heavy-duty cross-country vehicles has started construction in Xiaogan, Hubei Province. The China

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Azernagliyat Kaviz ABDULLAYEV proposed that the European community prolong five of the nine pan-European transport corridors as far as Baku and across the Caspian Sea, Turkmenistan, and Iran to the Persian Gulf region. These corridors link regions of Central, Southern and Eastern Europe, Russia and Black Sea countries. The representative of Azerbaijan believes that the extension of these transport corridors through the Caucasus to Asia will make cargo traffic cheaper and efficient. Ukrainian Deputy Minister of Transport DEMIDENKO called on participants to establish a European-Asian corridor via Ukraine and a ferry across the Black Sea.

Kazakh-China To Improve Economic Relations

· Kazakhstan's Prime Minister Nurlan BALGIMBAYEV and a delegation of business leaders met Chinese Premier ZHU Rongji and mayor of Shanghai XU Kuangdi on Monday. BALGIMBAYEV said that his country would like to draw on the construction experience of Shanghai, China's largest economic center. The two leaders also expressed their hope to further bilateral economic and trade cooperation. Shanghai's exports to Kazakhstan reached $314,500 last year. The sides paid considerable attention to joint development of two big deposits of oil in Kazakhstan and its export to the Xinjiang Uygur autonomous area. A feasibility report of the joint project will be prepared already by this autumn. "We also discussed questions concerning cooperation in export of Kazakh electricity and grain to China and found understanding and support on this questions from Chinese leaders," BALGIMBAYEV noted. He also said that the sides signed several important bilateral documents, the most important among which is an agreement on cooperation in peace space explorations. ZHU noted that China supports a proposal for another summit meeting between China, Russia, Kazakhstan, Kyrgyzstan and Tajikistan. Kazakhstan's President NAZARBAYEV has proposed that the heads of the five states hold a third meeting to discuss issues of regional security and economic cooperation.

Transnational Suing Kazakhstan Government

· The Toronto-based transnational corporation World Wide Minerals and its US sales agent on Wednesday filed a suit against the government of Kazakhstan with the Washington Federal District Court for allegedly failing to honor an agreement permitting the export of uranium. World Wide Minerals is suing for $220 million in damages. World Wide Minerals in October of 1996 signed a contract with Kazakhstan for the corporation to manage the Stepnogorsk uranium ore plant with the prospective right to buy a 90 percent stake in it. World Wide Minerals invested $32 million in the dilapidated uranium mine and paid $300,000 to the plant's personnel in compensation of the state's wage and pension debt. After the Kazakhstan government refused to issue uranium export licenses, production stopped, and the government canceled the contract. While the government denied the company an export license, it granted a license to Nukem, a German company, along with the exclusive rights to sell Kazakh uranium in the US. World Wide Minerals and its Kazuran subsidiary are suing for compensation for their investment in the plant and Kazakhstan's deposits and for damages in failed profit. The Kazakh government has acknowledged its obligation to provide compensation, but no specific settlement has been offered.

Ex-Im Approve $215 M Grant To Uzbekistan

· The US Export-Import Bank has approved a $215 million long-term guarantee to finance the export by ABB Lummus Global Inc. of engineering services and equipment for a polyethylene plant in Uzbekistan. Ex-Im Bank's guarantee of a loan by Chase Manhattan Bank, will finance US exports to design, build and commission the Shurtan Gas Chemical Complex plant. The total cost of the project is estimated at $762 million. Official export credit agencies from Uzbekistan, Japan and Germany will provide the rest financing needed for the project. Ex-Im Bank is an independent federal agency that supports American jobs by financing the sales of US goods and services to foreign markets.

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

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