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 18, 1998

a tough and honest force between YELTSIN's establishment and the Communist opposition. Political analyst Yuri AFANASAYEV told NTV's Itogi news program that, "LEBED's victory has significance for the whole of Russia because in Krasnoyarsk are focused all the country's problems. This was a vote against the status quo."

Yeltsin Pleased With G-8 Summit Meeting

· Russian President Boris YELTSIN has praised the results of the G-8 Birmingham summit. It was the first time Russia participated in the discussion of all agenda items. YELTSIN spoke on each item, "to defend our stance, if it did not coincide with the opinion of other summit participants." The summit decisions were very concrete, he added. The G-8 leader approved a communiqué summarizing their three-day talks. Leaders from Britain, Canada, France, Germany, Italy, Japan, Russia and the United States are believed to have discussed the "millennium bug" computer software problem and other remaining issues during the session. They also agreed on support in principle for a new round of comprehensive trade and investment liberalization talks after 2000, while confirming their commitment to a protocol adopted at a UN climate conference last December in Kyoto, which called for industrialized nations to reduce greenhouse gas emissions. Global economic issues, international organized crime and employment problems comprised the planned agenda originally prepared by British Prime Minister Tony BLAIR. But the leaders Friday concen

Russian Federation

Politics

Lebed Wins Krasnoyarsk Position

· Former presidential candidate, paratrooper, and retired General Alexander LEBED has won 57 percent of the votes in the second round of election for the governorship of Krasnoyarsk against his rival incumbent Governor Valery ZUBOV's 38 percent. It is estimated that 65 percent of the region's registered voters participated in the Sunday's poll ending a vigorous campaign in which politicians, celebrities and businessmen backed the two candidates. ZUBOV was endorsed by Moscow Mayor Yuri LUZHKOV and Russian singer Alla PUGACHEVA, while LEBED was backed by business tycoon Boris BEREZOVSKY, former Soviet President Mikhail GORBACHEV, and French actor Alain DELON. And while Communist Party leader Gennady ZYUGANOV supported ZUBOV, local communists urged its members to vote against both candidates. Only four percent checked the box "against all candidates."

With this win, LEBED has acquired a seat in the Russian Federation Council, earned control of a region a quarter of the size of the US, rich in gold and other resources, and re-established himself as a politician with a strong heartland appeal set to win the Presidential election of 2000. LEBED now joins former Prime Minister Viktor CHERNOMYRDIN, LUZHKOV, ZYUGANOV, and liberal leader Grigory YAVLINSKYas prospective presidential candidates. However, LEBED has stated he will run for President in 2000, only if he manages to revive Krasnoyarsk's ailing economy. The regions problems are directly linked to the old Soviet military-industrial complex. "Ahead of me I see lots of difficult and often routine work to be done. We have to mobilize people, free them from their fears." LEBED, tapping into discontent for Russia's shaky economy, portrays himself as

Today's News Highlights

Russia

Rus.Center Of Financial Crisis?

Gazprom Escapes US Sanctions

West Cos. Interested In Rosneft

European Republics

Belarus GDP Rises 12 Percent

Latvia-Belarus Sign Agreements

South Caucasus & Central Asia

OSCE Resumes NK Diplomacy

CPC Receives Approved TEOI

Politics-Economics-Business

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Monday

May 18, 1998

Intercon's Daily

trated on India's nuclear tests and Indonesian turmoil, and issued a special statement condemning the Indian tests and calling on Indonesia to pursue economic reform. YELTSIN told HASHIMOTO in their bilateral meeting Friday that he will ask other summiteers to let Russia host the millennium summit, despite it being Japan's turn as host that year.

YELTSIN and US President Bill CLINTON discussed the need to restrict the dual purpose technology transfers to Iran. The United States has opposed Russian assistance to Iran, including Russia's aid in building an Iranian nuclear power plant. CLINTON said, "We reached some understanding that will bear fruit in the days ahead. So, I'm hopeful on that." The two leaders also discussed the Russian parliament's ratification of the START II weapons treaty. The START II treaty, ratified by the US Senate in 1996, would reduce nuclear warheads by roughly half, to 3,000 to 3,500. START III would cut the numbers by another third, to levels between 2,000 and 2, 500. YELTSIN said after the meeting he would like to hold a summit with CLINTON in July in Moscow, but CLINTON indicated he would wait until the Russian State Duma ratifies START II. CLINTON praised YELTSIN for seeming, "in as good a health and good a spirits as I've seen him in quite a long time." The Russian media, however, reported that YELTSIN had been able to enjoy a few drinks. During an interview following his meeting with CLINTON, at which several Russian officials forcibly shoved US reporters from the room, YELTSIN appeared drunk. Apparently, YELTSIN introduced the Governor of Suratov IYATZKOV, a member of the Russian delegation, to CLINTON as the next President of Russia. This clearly was an embarrassing moment since Presidents are elected not appointed in Russia. This has led many in the Russian media to question YELTSIN's health and mental capacities.

Economy

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

Ruble = 6,146/$1.00 (CB rate)

Ruble = 6,113|6,180/$1.00 (buy|sell rates)

Next World Financial Crisis To Begin In Russia?

· The Russian stock market has fallen for seven consecutive trading sessions, dropping 18 percent

since May 5th and 35 percent since the beginning of this year. On Friday, the Russian Trading System index closed at 258.10 down 2.1 percent. Russian government bond prices have also dropped. Yields on one year securities jumped from 33 1/4 percent to 39 1/2 percent. Many economic analysts fear that the Central Bank will not be able to prevent the ruble from entering a downward spiral. An international economist at Independent Strategy, an investment consulting firm in London, James LISTER-CHEESE predicts that, "If the ruble collapses, it will be a major setback for Russia's long fought battle to gain financial stability and control inflation, and it will turn a regional emerging market crisis into a global one."

The significance of Russia's stock market is more political than economic because it possesses nuclear arms and is one of the world's largest emerging stock market. LISTER-CHEESE says that Russia is caught in a financial Catch-22. Due to the fall of the prices of its major exports, oil and gas, the country's current account is falling into deficit, at the same time its foreign exchange reserves are shrinking. In an attempt to attract foreign investment, the Central Bank has raised the interest rate to sky high levels. However, those rates in turn are hurting stock and bond prices, widening the government's budget deficit and slowing economic growth, The Wall Street Journal reported. LISTER-CHEESE says that even if the ruble holds and one-year interest rates remain in the 30 to 35 percent range, stocks could still fall another 15 to 20 percent. "But if the ruble proves unsustainable because growth implodes and interest rates are pushed to crisis levels of more than 50 percent, the downside will be much greater," he said.

The stock market has been so weak that Moscow announced plans to postponed the privatization of three oil companies: Russian Eastern Oil, Tyumen Oil, and Slavneft. On Friday in an attempt to defend the ruble, the Central Bank raised its 15 to 30 day Lombard rate from 30 to 40 percent, but did not changed the key discount rate. Chairman of the Central Bank Sergei DUBININ hopes that these decisions will ease investor panic and speculative interests. No matter whether the ruble is sustained or collapsed, the Russian market, "is too big to be forgotten about," says Adam ELSTEIN, head of Bankers Trust Company.

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Business

UES To Defend Foreign Shareholders' Rights

· Russia's national electricity provider Unified Energy Systems (UES), seeking to calm its investors fears over a law limiting foreign holdings in the company to 25 percent, said on Friday it will defend its shareholders' rights. The law signed by Russian President Boris YELTSIN last week has prompted fears that foreign investors will be forced to sell some of their stake in UES. Foreign investors hold 28 to 30 percent of UES shares. UES board member Boris BERVNOV said that the law would not lead to the confiscation of any foreign shareholdings. A UES statement said that the Russian parliament [Russian State Duma] was motivated more by politics than economics in adopting the controversial law. UES has appealed to the Fuel and Energy Ministry and the Federal Securities Commission to clarify the law. Prime Minister Sergei KIRIYENKO on Saturday said that, "The cabinet of ministers has a clear plan of action, of how to protect and ensure in a guaranteed way the observance of rights and interests of all investors, including foreign." He added that, "Regretfully, this decision has proved a blow targeting not only RAO EES Rossii [UES] but also the whole market of Russian corporate securities." He urged foreign investors, "not to succumb to agiotage."

Gazprom Escapes US Sanctions

· The United States and the European Union on Monday agreed to waive US sanctions on European, Russian and Malaysian firms involved in a $2 billion gas project in Iran. The companies involved in the project for the developing of Iran's South Pars gas field are Russia's Gazprom, France's Total, and Malaysia's Petronas. Russian President Boris YELTSIN's press secretary Sergei YATSTRZHEMBSKY said that the gas field development deal of Gazprom, Total and Petronas with Iran is "absolutely legitimate," and backed by the Russian government. Washington suspected the $2 billion deal to fall under the law on Iran and Libya. US Assistant Secretary of State Martin INDYK said the law on sanctions against Iran and Libya provides for international cooperation in order to press Teheran to abandon the development of mass destruction weaponry and combat terrorism. Under that law, punitive measures could be introduced against any company investing in the Iranian oil and gas industry $20 million a year. The administration's exception for

the three foreign companies is sure to provoke severe criticism of the US Congress, which enforces the policy on Teheran.

Sakhalin Region To Set Up Oil Company

· The governor of the Russian Far Eastern region of Sakhalin Igor FARKHUTDINOV has said the region is expected to set up an oil company. He said, "All Russian oil-producing regions have their own companies, and Sakhalin should be no exception." While the local government will have, "a considerable package" in the Sakhalin Oil Company (SNK), the main player in the project will be Central Fuel Company (TsTK), controlled by the Moscow government. In addition, Rosneft- Sakhalinmorneftegaz Company will also participate. TsTK chief Yuri SHAFRANIK and local authorities held talks Saturday to discuss the creation of the SNK. FARKHUTDINOV, on a trip to Alaska is hoping, "to attract US investments and technologies to set up joint ventures for the construction and service of the infrastructure of shelf projects."

Western Companies Interest In Rosneft

· Foreign oil companies are showing an interested in the sale of 75 percent plus one stake of Rosneft. Rosneft's first vice president Grigory NAPOLOV said foreign investors are looking at the store of Rosneft's oil fields, its subsidiaries and its potential to join international projects. The leadership of Rosneft has finished in Moscow talks with the President of Royal/Dutch Shell. NAPOLOV said his company had similar contacts with British Petroleum, France's Elfe Aquitaine and Mobil. However, he noted that the Western companies are interested in future joint projects rather than bidding for the stake. He said Rosneft's leaders are keen on keeping the tender on schedule, as it is expected to raise $400 million in investment. "This money will go into the company's development and it has been already laid out in concrete directions," he said. He noted the company over the recent months has been active in improving its attraction for potential investors. Rosneft has trimmed its debt from a total of 6.5 to 3.5 trillion old rubles and is in effort to recover earlier investment in spin-off projects which proved unprofitable.

European Republics

Belarus GDP Rises 12 percent

· The Gross Domestic Product of Belarus increased

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12 percent in the first quarter of this year, compared with the same period last year. Prime Minister Sergei LING told the parliament on Friday that investment increased 27.4 percent at the same time, while employees' salaries were 37.8 percent more than in the first quarter of 1997. The Prime Minister also expressed concern about the country's financial situation. The budget revenue in the first three months of this year was less than estimated and the inflation rate reached 3.5 percent, compared with the government's plans for less than two percent. Earlier, the Belarus government announced a ten percent devaluation of the country's currency, the ruble.

Latvia-Belarus Sign Agreements

· On Saturday, Latvia's Prime Ministers Guntars KRASTS and Belarus counterpart Sergei LING signed several cooperation agreements cover areas such as customs, fighting organized crime, and border cooperation. The two prime ministers discussed bilateral cooperation in various areas with a focus on trade and economic contacts. The Belarus delegation toured the local chemical fiber plant owned by the Singaporean Company Tolaram Group, which Belarus supplies with caprolactam. The delegation also visited an agricultural exhibition where Belarus tractors were put on display along with their Western competitors. Latvian farmers prefer Belarus tractors to Western ones because they are cheaper and stronger. Belarus, which accounts for only 2 percent of Latvia's trade turnover, is interested in exporting mineral fertilizers, machinery, raw materials and finished products to the West through Latvia.

South Caucasus & Central Asia

OSCE Resumes Nagorno-Karabakh Diplomacy

· Azeri President Geidar ALIYEV told the co-chairmen of the OSCE Minsk Group on Nagorno-Karabakh, Yuri YUKALOV of Russia, George VAUGIER of France and Linn PASCOE of the United States, on Saturday that his country will not allow any breach of cease-fire in the disputed enclave of Nagorno-Karabakh. The Group's co-chairmen arrived in Baku after

political consultations in Stepanakert and Yerevan. ALIYEV confirmed Azerbaijan's commitment to peace and political settlement of the conflict. The fact that no blood has been shed for so long is an achievement, ALIYEV said. At the same time, he stressed the need for the mediators to invigorate their efforts in order to reach concrete results. He believes that the proposal of two-stage settlement put forth by the co-sponsors last year provide the basis for further progress. The first stage calls for the liberation of six occupied districts of Azerbaijan located outside Nagorno-Karabakh, the return of refugees and restoration of communications between the two South Caucasus nations. At the second stage, the Minsk Group proposes to withdraw troops from the Lachinsk and Shusha districts located on the Armenian border and inside Nagorno-Karabakh. Then, the sides will determine the status of the enclave. Armenian President Robert KOCHARYAN has called for direct talks between the Karabakh and Azeri leaders and ruled out any direct subordination of Nagorno-Karabakh to Azerbaijan. The Armenian leader wants the issue of Karabakh's status and the hand over of occupied Azeri land to be resolved simultaneously.

CPC To Conduct Feasibility Study

· The Caspian Pipeline Consortium (CPC) has won approval from Russia for an initial feasibility study on its plans to transport Kazakhstan's oil to western markets. This is the first big step to establishing a pipeline linking Kazakhstan to Russia's black Sea Port Novorossiisk as new export route. Craig RICE, vice president of international projects for the CPC's biggest corporate stake holder Chevron Pipeline Co, said the Russian Commission's approval of a TEOI investment feasibility study is, "a very big milestone." The TEOI is the first of three steps that must be accomplished before construction can start. RICE said that will be, "roughly at the beginning of 1999. We are still hopeful that, with an aggressive schedule we could meet the 2000 target." The $2 billion CPC was hailed the biggest foreign investment deal in Russian history when eight companies and three countries signed on to it in May 1997.

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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