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

Friday, May 22, 1998

relations with Russia and Commonwealth of Independent States in the Israeli government and co-chairman of the Russian-Israeli intergovernmental commission on trade and economic cooperation. During his visit, SHARANSKY is expected to meet Security Council secretary Andrei KOKOSHIN and Russian Foreign Minister Yevgeny PRIMAKOV.

Economy

S&P Assigns Yamal-Nenetsky District BB-

· Standard & Poor's (S&P) today assigned its double-B-minus foreign currency issuer credit rating to the Yamal-Nenetsky district (YNAO). This is the district in which former Prime Minister Viktor CHERNOMYRDIN is running for a vacant seat in the Russian State Duma. The rating reflects YNAO's wealthy economy based on vast deposits of hydrocarbons, but also its high concentration on the oil and gas industry. The region holds approximately one-third of the world's proven gas reserves, and accounts for more than 90 percent of the total Russian gas production and about 11 percent of the national crude oil extraction. S&P said the rate also reflects the region's relative fiscal strength, its revenue-raising capabilities, as well as strong financial performance, and very low debt levels. According to the S&P statement, gross domestic product (GDP) growth has been impressive, almost doubling over 1995-1997, and although the region accounts for merely 0.3 percent of the national population, it generates more than 2 percent of the country's aggregate GDP,

Russian Federation

Politics

Duma Fails To Ratify Troops Withdrawal

· The Russian State Duma today in a vote of 209 to 51 and three abstentions failed to ratify the agreement concluded between Russia and Belarus on the procedure for the withdrawal of Russian Strategic Forces temporarily deployed in Belarus. Deputy Defense Minister Vladimir TOPOROV, who submitted the document for ratification, noted that the, "agreement, signed in 1993, envisages the withdrawal of Russian troops in keeping with an agreed schedule, except for the facilities of the Strategic Forces, the use of which will be regulated by separate documents." Chairman of the Duma Committee for Commonwealth of Independent States Affairs Georgy TIKHONOV recalled that the Duma had already discussed the agreement in 1995 and did not ratify it. In spite of this, the troops were withdrawn from Belarus. This operation is unlawful, the deputy stressed. He added, "the withdrawal of our troops was made conditional on NATO's nonexpansion towards the East."

Russian-Israeli Discuss Bilateral Cooperation

· Russian Minister of Science and Technologies Vladimir BULGAK and Israeli Minister of Trade and Industry Natan SHARANSKY met on Thursday to discuss the strengthening of bilateral cooperation. The meeting focused on the implementation of the Russian-Israeli agreements reached earlier and the development of mutually advantageous cooperation. BULGAK and SHARANSKY also discussed the creation of a Russian-Israeli investment fund and the opening of Israel's credit line to finance various projects in Russia ($50 million) and other issues. The sides agreed to prepare bilateral agreements on the protection of intellectual property and investments. SHARANSKY is in charge of all the spectrum of

Today's News Highlights

Russia

Oil Revenues Decline

LUKoil Buying Sidanko?

Rus-Germany Gas Deal

European Republics

Lith. To Issue 200M Eurobond

Lith. Replaces Interior Minister

Ukraine-Turkey Sign Agmts.

South Caucasus & Central Asia

Georgia-Abkhaz Summit

Uzbek Adopts Forgn Invest Laws

Politics-Economics-Business

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Friday

May 22, 1998

Intercon's Daily

which translates into nominal GDP per capita of almost five times the national average. Wealth is further evidenced by the high average monthly wages, which exceed the Russian average by more than 4 times. Factors constraining the rating are the evolving intergovernmental system, limited revenue flexibility, and poor liquidity. The outlook is negative, reflecting the overall rating outlook for the Russia.

Oil Revenues Decline

· The Russian Ministry for Foreign Economic Relations on Wednesday said that Russia received $2.9 billion from the exports of crude oil in the first quarter of 1998, a 24.5 percent decline from the same period in 1997. From January to March, 1998 Russia supplied to the world market 32.1 million tons of crude, a 8.9 percent increase from the same period of last year. The share of crude oil in Russia's exports was 16.3 percent over the first three months of 1998. The average export contract price for Russian oil fell by $39.30 per ton to $89.10 per ton. The non-CIS countries purchased 27.5 million tons of oil and paid for it $2.4 billion. This was an increase of 7 percent as compared with the figures for 1997, but the actual revenue was almost 30 percent down.

Meanwhile, Russia's oil production growth in January to April 1998, slowed down to 0.1 percent, against 0.7 percent in the same period last year. April's oil output was 23.9 million tons. Primary oil refining reduced by 7.9 percent, and production of gasoline and diesel fuel declined by 3.5 percent. Natural gas production growth rate in January to April also slowed down to 1.7 percent. Gas output totaled 48.3 billion cubic meters. In the first quarter this year, Russia reduced export of petroleum products by 26 percent against the same period in 1997, the deliveries to world market were 10.1 million tons.

The Ministry for Foreign Economic Relations said the share of these deliveries in the overall export of the country considerably fell to 5.6 percent from 9 percent. Russia supplied about 60.7 billion cubic meters of natural gas in the first quarter of 1998. The supplies brought in 4,331 billion rubles. The exports of natural gas account for 24.6 percent of all supplies from Russia, although the contractual price of a thousand cubic meters of gas has fallen by $13.2, Itar-Tass reported.

Russia May Increase Foreign Borrowings

· On Wednesday, Finance Minister Mikhail ZADORNOV has said Russia may increase foreign borrowings from the current $3.5 billion to $5.5 billion, depending on the market situation ZADORNOV said that the program for borrowings from international financial organizations, "may be expanded further." The minister also promised that the government would honor its foreign and domestic debt obligations even to the detriment to the budget. The Central Bank, he said, seemed to have managed to put under control the latest tide of crisis in the Russian market of capital. ZADORNOV said the government has already drawn up an austerity program that will slash budget spending by 40 billion rubles and a program for increasing collection of alcohol excise duties to 5 percent and import duties on all goods.

Ruble = 6,157 /$1.00 (NY rate)

Ruble = 6,158/$1.00 (CB rate)

Ruble = 6,136|6,180/$1.00 (buy|sell rates)

Dec Jan Feb Mar Apr May

Business

Lukoil Considers Buying Sidanko

· LUKoil President Vagit ALEKPEROV on Thursday said that LUKoil is holding talks on the acquisition or takeover of Sidanko, the nations fourth largest oil company. Both sides are holding top level consultations on the conditions and rules of the deal. An evaluation of Sidanko is expected to be completed within a month. British Petroleum, which owns 10 percent of Sidanko shares, may be asked either to sell its stake or establish a joint venture with LUKoil

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for work on certain projects. In ALEKPEROV's opinion, "this is not a mere merger." Sidanko has also been holding negotiations with other companies.

The Sidanko oil company was established by a Russian president's decree of May 5, 1994. The company incorporates joint-stock companies Varyeganneftegaz, Varyeganneft, Kondpetroleum, Chernogorneft,Saratovneftegaz, Novosibirskneftegaz, Udmurtneft, Angarsk Petrochemical Company, Saratov Oil Refinery, Khabarovsk Oil Refinery, 12 sales companies and three specialized enterprises operating in the oil industry. All these companies and enterprises contributed 38 percent of their shares each into Sidanko's charter capital. Uneximbank controls approximately 85 percent of shares in Sidanko, another 10 percent the bank sold to the British Petroleum for $485 million. In 1997, Sidanko produced 20.3 million tons of oil and refined 15.55 million. If LUKoil absorbs Sidanko, its oil production will account for approximately 25 percent of the overall volume oil produced in Russia. Russia is the world's third largest oil exporter.

Russia-Germany Extend Big Gas Deal

· Russia's gas giant Gazprom and Germany's biggest gas distributor Ruhrgas on Thursday signed a long-term "strategic alliance" contract to supply up to 13 billion cubic meters of Russian natural gas per year beginning 2008, the Financial Times reported. The gas deal, which extends an existing contract to at least 2020, is worth approximately DM25 billion ($13.7 billion). Ruhrgas said the deal will help ensure continuing supplies from Gazprom. Russia provided 32 percent of Germany's gas supplies in 1997—more than any other country. Ruhrgas and Gazprom are stepping up co-operation in the transmission of Russian gas through Germany, which might lead to the construction of new pipelines. Ruhrgas chairman Friedrich SPATH said Gazprom would, "use our well developed pipeline system to reach markets to the west of Germany, such as France and the Netherlands, in a more cost effective way." Gazprom chairman Rem VYAKHIREV said that his company's agreement with Ruhrgas will not affect Gazprom's agreements with other Germany gas distributors. Gazprom over the past 25 years has supplied more than 330 billion cubic meters of Russian natural gas to Ruhrgas' systems, worth more than DM55 billion.

European Republics

Lithuania To Issue 200 Million Eurobond

· Lithuania's Finance Ministry today said it has decided to issue a 200 million euros eurobond instead of the planned 300 million marks. Deputy director of the ministry's international department Ruta SKYRIENE said, "This is a decision to show that we are committed to the euro," and is based on investor interest. SKYRIENE noted that the pricing gap for marks and euros was not big. She said the ministry would decided whether to issue the bond should be five years or seven years closer to the issue date, which she expects to be in the second half of June. The issue is aimed at refinancing previous borrowings. Lithuania has said that it may switch its current dollar peg for the euro after 1999 since the Baltic state is a candidate for European Union membership.

Adamkus Appoints New Interior Minister

· Lithuanian President Valdas ADAMKUS appointed former Judge Stasys SHEDBARAS as the country's new Interior Minister one day after firing his predecessor Vidmantas ZHIEMELIS. Prime Minister Gediminas VAGNORIUS and the opposition has criticized ZHIEMELIS, a member of the ruling Conservative Party, for his lack of progress in solving recent small-scaled bomb attacks in Lithuania. SHEDBARAS said, "My most important task will be to strengthen the police force and to give more autonomy to the different divisions of the ministry."

Ukraine-Turkey Sign Agreements

· Visiting Turkish President Suleyman DEMIREL and Ukrainian President Leonid KUCHMA signed nine agreements on Thursday, covering military cooperation, medicine, trade, education, and investment protection. Ukraine and Turkey are to sign a free trade treaty in the near future, Ukraine Presidential press secretary Alexandr MAIDANNIK said. Trade between the two states reached $1.2 billion in 1997. DEMIREL at a press conference said, "We are interested in working with Ukraine to enhance Turkey's defense potential." Ukraine is anxious to sell NATO alliance member Turkey 1,000 T-84 battle tanks, produced at Malyshev pant. The tank deal is potentially worth over $2 billion. DEMIREL said Turkey will spend $150 billion on military hardware

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over the next 30 years.The two Black Sea leaders exchanged views on Ukraine's involvement in transporting Caspian oil to Europe. The two nations had reached an agreement on Ukraine's participation. DEMIREL said, "We are fully convinced that Ukraine should make a contribution." He stressed that, "it is important to remember the owners of the oil are not Ukraine or Turkey." KUCHMA suggested that Ukraine, "will help build an oil pipeline from Ceyhan to Samsun." Shipments of Caspian oil from Georgia would be delivered to Turkey's Black Sea port of Samsun where the proposed pipeline would ship crude south across Turkey to its Mediterranean port of Ceyhan. Ukraine stated it is interested in breaking its dependence on Russia for it's oil and gas needs and is looking for other sources of energy.

South Caucasus & Central Asia

Georgian-Abkhaz Summit To Yield Resolution?

· A meeting of the Georgian-Abkhaz Conflict Resolution Coordinating Council will take place today, with representatives of the United States, France, Great Britain, Germany, and the Organization for Security and Cooperation in Europe participating. Special representative of the UN secretary-general Livio BOTA will reside over the meeting. The UN has condemned the renewed hostilities. Georgian President Eduard SHEVARDNADZE has asked the Minister of Foreign Affairs Irakli MENEGARISVILI and his personal representative on Abkhazia Vazha LORDKIPANIDZE to demand a comprehensive account for the developments in the region from the Russian peace keepers. These peace keepers are under fire from both sides for their inactivity during clashes with Georgian guerrillas and Abkhaz forces. Georgian forces were placed on full alert after violent clashes, which are described as the worst since a 1994 cease-fire took place. LORDKIPANIDZE said that after a bitter telephone call between SHEVARDNADZE and Russian Defense Minister Igor SERGEYEV, Russian peace keepers are beginning to guard Georgian civilians as required by its man

date. SHEVARDNADZE hailed the proposal by UN Secretary General Kofi ANNAN to send to Abkhazia a unit of 300 officers to protect the UN observer mission in the region of Georgia-Abkhazia conflict. SHEVARDNADZE said Thursday that Georgia will continue the process of repatriation of the refugees to their homes. He said Georgia will apply any necessary means to achieve this goal.

Uzbek Adopts Foreign Investor Friendly Laws

· Deputy Foreign Minister Zainutdin MIKHODZHAYEV said that Uzbekistan has adopted laws to attract foreign investors. Under the law on foreign investment that became effective on Wednesday, foreign investors would be granted privileges including profit tax holidays for seven years, if involved in projects outlined in the investment program. Uzbekistan is planning for the modernization of the vital oil and gas, textile, chemical, and metallurgical industry, as well as transport and telecommunications. Investors are also free from import tariffs, if they import property to be invested in their venture's statutory funds. Uzbekistan falls behind its Central Asian neighbors in terms of market reforms. Its downfall is the multiple exchange rate mechanism. The official exchange rate is 86.95 som per dollar, while the flourishing black market offer 174 soms per dollar. Head of the state-owned National Bank for Foreign Economic Activity Rustam AZIMOV explains that foreign investors', "profits in local currency will be converted into hard currency and transferred to any part of the world you wish." He added that while there remains restrictions on importing consumer goods, "there are no limits," on technology and know-how equipment. Since independence in 1991, Uzbekistan has attracted approximately $7 billion and absorbed $2 billion in loans guaranteed by the government rather than direct investment.

The Daily Report on Russia and FSU

will not be published on Monday May 25th

in observance of Memorial Day.

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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Daily Report on Russia is for the exclusive use of the subscriber only. Reproduction and/or distribution is not permitted without the expressed written consent of Intercon. Daily Report on Russia Ó copyright 1998, Intercon International, USA.

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