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

Tuesday, May 26, 1998

Russian Federation

Politics

Yeltsin Approves Government Spending Cuts

· Russian President Boris YELTSIN today signed a decree that pledged to cut government spending and reduce the government's budget deficit. Finance Minister Mikhail ZADORNOV said the saving plan, drafted by Russia's cabinet, will mean a budget cut of 40 billion rubles ($6.67 billion). ZADORNOV stressed that the cabinet is prepared to take decisive measures to bring into order budget revenue and expenditures. This means raising licensing fees on the alcohol market, which alone will bring the federal budget 4 billion rubles of revenue ($666.7 million), introducing excises on access to gas pipelines, and augmenting import duties for all commodities by 5 percent, the minister said. Prime Minister Sergei KIRIYENKO explains that the ultimate goal is to draft a realistic budget. He pledged that his government would focus on cutting state expenses to reflect Russia's actual tax revenues. He added that up to 26 percent of this year's budget is not backed by revenue and may have to be scrapped. Tax chief Alexander POCHINOK said that revenue collection was expected to be lower this month at $1.94 billion as compared with April's $2.5 billion.

The International Monetary Fund (IMF) welcomed the move. An IMF team was in Moscow last week reviewing Russia's economic reforms. It did not reveal whether or not it would release the next $700 million installment of its $10 billion loan. Russia hopes that IMF aid would boost foreign investors' confidence in the Russian economy. With miners' strikes blocking the railways, falling stock market, and dropping oil prices, the Russian economy has been somehow lurching along crisis to crisis. But today, the Russian stock market continued last week's downward spiral, with investors dumping stock and bonds on fears that the government has no

effective plan to shore up financial markets.

US Senate Approves Sanctions Against Russia

· On Friday the US Senate in a vote of 90 to four approved a measure to impose sanctions on Russian companies which share missile technology with Iran. It would give the President 30 days to send Congress a list of violators. Then sanctions would automatically be imposed, ranging from denial of arms licenses to denial of US foreign aid for up to two years. The bill, which was approved by a voice vote in the House of Representative last November, is expected to be vetoed by President Bill CLINTON and then over-ruled by Congress. The bill aimed at Russia could apply to any foreign government or business that supplies ballistic-missile technology to Iran. CLINTON opposes the measure because he believes it infringes on his foreign policy powers and it threatens billions of dollars in space cooperation and chemical exports. However, attached to the measure is the implementation of the Chemical Weapons Convention (CWC), which CLINTON supports. If the CLINTON administration backs down from its veto, it could use waivers, citing national interest, to exempt Russia, while still benefiting from CWC implementation.

A Russian Foreign Ministry statement said in response to the Senate vote that, "Russia is categorically against new attempts to prevent free development of legitimate trade and economic ties with Iran." It further added that the bill is an attempt to impose,

Today's News Highlights

Russia

Pres. Administration Reshuffle

Progress In Vlasov Search

Stocks Follow Downward Plunge

Yukos-Sibneft Merger Canceled

Rosneft Sale Closes Today

South Caucasus & Central Asia

Cease-fire Signed With Abkhaz

Iran,Greece, Armen Sign Memo.

Politics-Economics-Business

Page

Tuesday

May 26, 1998

Intercon's Daily

"American laws against foreign countries which maintain normal relations with the country listed in the US black lists...The purpose is to complicate Russian-US relations by accusing Russia of helping Iran create nuclear missiles." The new Russian government has again stated that restriction of dual-purpose technology transfers is a top priority in its national security policy.

Presidential Administration Reshuffle

· Kremlin spokesman Sergei YASTRZHEMBSKY on Monday said a major reshuffle has occurred in the Russian presidential administration. First deputy head of the administration Viktoria MITINA was sacked by Russian President Boris YELTSIN, following a series of events in Russian regions, including in Nizhni Novgorod. The spokesman was apparently referring to a recent row over the election of businessman Andrei KLIMENTYEV with a criminal record as Nizhni Novgorod mayor. Vladimir PUTIN was appointed first deputy head of the presidential administration. Former government spokesman Igor SHABDURASULOV was appointed deputy head of the administration responsible for public relations. He will also be in charge of the team of YELTSIN's speech-writers. Presidential aids Mikhail KRASNOV and Anatoly KORABELSHCHIKOV were dismissed because of their transfer to other jobs.

Progress In Search For Vlasov in Chechnya

· The Russian President's envoy to the Adygei Republic, Dagestan, the Kabardino-Balkar and Karachai-Cherkess republics and the Stavropol region Pyotr MARCHENKO said that the release of Russian Presidential envoy to Chechnya Valentine VLASOV, who was kidnapped on May 1st, is expected soon. He said the terms have become more specific and substantial, but MARCHENKO did not reveal VLASOV's whereabouts and how contact with his kidnappers had been established. Russian Interior Minister Sergei STEPASHIN said VLASOV, "is alove, but his location is constantly changing." An official statement from Arkhangelsk's Chechens from VLASOV's hometown said that, "We believe nobody associates a group of bandits engaged in the kidnapping business with the Chechen people, who themselves suffer from their disgraceful and criminal actions." The Arkhangelsk Chechens also noted that all of them are willing to exchange places with VLASOV or raise money for a ransom if needed.

Economy

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

Ruble = 6,160/$1.00 (CB rate)

Ruble = 6,136|6,184/$1.00 (buy|sell rates)

Russian Stocks Continue Downward Trend

· The Russian stock market continued its downward spiral today with stocks of Russian companies and government securities slipping. Most liquid stocks dropped 5 to 6 percent during the opening hours of the Russian Trading System. By the afternoon the index had fallen by more than 2 percent. Treasury bills slipped 1.5 to 2 percent. Treasury bill yields with redemption in March-May of 1999 climbed to 55 percent and businesses expect it to grow to 58 percent. The drain of non-resident money from the Russian securities market is going with a higher demand for dollars. The ruble was weak against the dollar. Dealers expect the demand for dollars to remain as brisk, with banks' starting to buy the hard currency from the Central Bank. The question remains whether Russia will be able to maintain a stable ruble and avoid investor and civilian panic that would follow a currency devaluation. The ruble exchange rate to ordinary Russians is seen as a barometer of Russia's economic and political stability. A stable ruble would support the solvency of banks and prevent the growth of the government's debt. Two other semi economic indicators are the Tokobank's ability to survive after a plan for the Central Bank to prop it up has ended and the sale of Rosneft, a state-owned oil company. If Tokobank collapses, it could send shock waves through the banking sector. If Rosneft does not attract bidders, the failure to sell the oil company would signal investors that Russian assets are no longer desirable. With the next two to three weeks being a critical period, investors believe that Russia is set to be challenged by three tests: avoiding the collapse of cash-strapped banks, attracting bidders for sell-offs of state property, and winning the International Monetary Fund's (IMF) release of $700 million installment of a $10 billion loan, The New York Times reported. Prime Minister Sergei KIRIYENKO reassured foreign investors that, "We [Russia] intend to live up to our financial obligations." He said that he would work to protect shareholder's rights, promote tax reform, and reduce the government's borrowing costs by cutting spending dramatically.

When you need to know it as it happens

Politics-Economics-Business

Page

Tuesday

May 26, 1998

Intercon's Daily

Business

Yukos-Sibneft Cancels Merger Plans

· Yukos and Sibneft have canceled merger plans which would have created the world's largest oil group, Yuksi. The two companies announced that instability on the Russian stock market, dropping more than 30 percent in the past two weeks, and falling world prices for crude complicated their plans. The management teams of Yukos and Sibneft also proved to difficult to combine. Yukos and Sibneft will continue the implementation of their joint projects announced earlier. Yukos will help sell Sibneft products through its retail network, while the Omsk oil refinery, which is owned by Sibneft, will continue to process oil supplied by Yukos. The collapsed merger raises questions for French oil company Elf Aquitaine. Elf Aquitaine had agreed to buy 5 percent of Yuksi for $528 million. One possibility, under consideration, is for Elf Aquitaine to instead buy 12 percent of Sibneft for the same price.

On January 19, 1998, Yukos and Sibneft announced their consolidation plans and signed a corresponding protocol. The deal also involved the Eastern Oil Company (VNK) and the Eastern Siberian Oil and Gas Company (VSNK). All four companies would have operated independently within a single holding. After consolidation by the end of 1998, Yukos would own 60 percent of shares in the holding and Sibneft 40 percent. By January 1, 1998, Yukos' explored reserves were estimated at about 3.2 billion tons of oil and gas. In 1997, it extracted 65 million tons of oil, or 22 percent of all oil production in Russia. It processed 43.4 million tons of oil, while the company's sales in 1997 reached $10.2 billion. Yukos' earnings in 1997 amounted to $5.2 billion, Sibneft earned $3.1 billion. By January 1, 1998, the proven reserves of Yukos were 2.1 billion tons of oil and those of Sibneft 725 million tons.

Rosneft Sale Closes Today

· What has been hyped-up and hailed as the biggest oil company sell-off will end today, as the bidding for the last state-owned Russian oil company Rosneft closes. The participants in the Rosneft tender are expected to be announced May 29th. The Russian government is asking for a starting price of $2.1 billion for 75 plus one percent stake in Rosneft, with an additional $400 million invested in improvements and debt reduction required by the buyer. Due

to the slump in oil prices, down about 15 percent since January 1st, and the high starting price oil sector leaders have refused to participate in the bid. They regard the high price tag as overstated and unacceptable in the current economic conditions which are hard for Russian companies. At least, two bidders are necessary for the tender of Rosneft to be legal. The government is desperate for money to reduce the budget deficit and pay wage and pension arrears, particularly in the wake of the coal miners' demands for back wages. Prime Minister Sergei KIRIYENKO reiterated that the tender will be held in accordance with the established rules. "There are rules of holding tenders and auctions to sell packages of shares in companies and will strictly abide by these norms," KIRIYENKO said.

Russian gas monopoly Gazprom said that the Russian government, which owns a 40 percent stake in the company, was pressing Gazprom to bid in the oil company sale of Rosneft. Gazprom plans to make its final decision today, before bidding on Rosneft closes. Gazprom's spokesman Sergei SMIRNOV said the government was targeting the company, "to take part in the sale because no other company has such an amount of money." He added, "but we also don't have spare money." Gazprom was expected to participate in the tender among a consortium together with the LUKoil company and Royal/Dutch Shell company. By Monday night, a high-level official of a company which is part of the alliance, said the LUKoil, Gazprom and Shell will not participate in the tender. LUKoil President Vagit ALEKPEROV made it clear last week that his company alone will not participate in the contest.

Chechnya's acting Prime minister Shamil BASAYEV has contacted KIRIYENKO with an official request to participate in the Rosneft tender. He said, "We are ready to acquire all the shares of the company. Not for cash, but in the form of Russian compensation for the damage inflicted by Moscow during the military action on out territory." It is unlikely that Russia will consider Chechnya's offer seriously.

South Caucasus & Central Asia

Georgia-Abkhazia Sign Cease-fire Agreement

· Georgia and its breakaway region of Abkhazia reached a cease-fire deal in Gagry on Monday which was signed by the UN secretary general's special

When you need to know it as it happens

Politics-Economics-Business

Page

Tuesday

May 26, 1998

Intercon's Daily

envoy to the region Liviu BOTA and the commander of the CIS Collective Peacekeeping Force in Abkhazia, General Sergei KOROBKOV. The protocol obligates the sides to cease fire starting 6 a.m. this morning, withdraw their forces, and creates special groups involving UN military observers and representatives of the CIS Collective Peacekeeping Force to oversee compliance with the protocol. This should facilitate the return of refugees to the Gali district. The protocol also requires Abkhazia to refrain from illegal coercive actions with regard to civilians in the Gali district, while Georgia will have to take effective measures to prevent terrorist, subversive and armed groups from entering Abkhazia. To this end, the two sides will immediately set up the necessary structures which will also involve representatives of the UN mission in Georgia and CIS Collective Peacekeeping Force. Abkhazian envoy to Russia Igor AKHBA said, "The Abkhaz side is firmly fulfilling all of its obligations and is preventing violent acts against the civilian [Georgian] population of the Gali district, as it is written in the protocol."

Last week, 800 Abkhazian rebels forced partisan civilians to flee their village by shelling it and firing at them. As the Abkhaz withdraw from the occupied villages they are burning the stores and homes. Just before the cease-fire a battle broke-out near a power station leaving ten Georgians dead. Georgia maintained control of the power station. Georgian President Eduard SHEVARDNADZE said in his radio address Monday that 30,00 ethnic Georgian who had returned to their homes after the war have again been forced out. He accused the Abkhazians of carrying out an "ethnic purge in Gali, but said he would not dispatch Georgian troops to avoid trigger another war. SHEVARDNADZE said, "Getting the regular army involved will lead to a full-scale war. We all know which forces would fight in a new war on the opposing side," referring to Russia. Georgia has long claimed that forces in Russia are working to destabilize and discredit Russia as a contender for a huge new oil pipeline to carry Caspian Sea crude oil. SHEVARDNADZE's chief of staff Petre

MAMRADZE said, "We know the Russian peace-keepers help the Abkaz, but there is nothing we can do. We cannot allow our country to be dragged into another war, which is what many in Russia want." Georgia has accused Russian peace-keepers of helping and training Abkhaz rebels. Georgian officials allege that the 1,500 Russian peace-keeper troops in the region have allowed the Abhkaz rebels to infiltrate the buffer zones between the opposing sides. In a statement released by the Chairman of the Parliament of Georgia Zhurab ZHVANIA, he says, "These Russian peace-keepers have failed to prevent the invasion of significant Abkhazian separatists forces, who are deploying heavy weapons within the security zone. The sole purpose of the invasion is to punish the ethnic Georgian population, who have returned to their homes since the 1993 ethnic cleansing conducted by the Abkhaz separatists...Georgia directly appeals to the Russian Federation to fulfill its obligations as guarantors of peace. If this duty cannot be performed then Georgia will be forced to seek alternative solutions."

Iran, Greece, Armenia Sign Memorandum

· Iran, Greece and Armenia signed on Saturday a memorandum of understanding aimed at expanding and deepening tripartite cooperation in the fields of transport and communications. The memorandum underlines the need for further promotion of cooperation in the fields of surface and air transportation, transit of goods and passengers as well as technical and educational cooperation among the three countries. The memorandum was signed in pursuant of an agreement reached during the first meeting of the foreign ministers of Iran, Greece and Armenia last year in Athens, Greece. The three countries consider to issue three-year visas for drivers of vehicles transporting passengers and cargoes between the three states in order to expedite international transport cooperation. They also voiced readiness to render any kind of service needed for construction of roads, terminals and other infrastructures vital for transportation industry, according to the Iranian news service IRNA.

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

available for non-profit institutions.

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.

When you need to know it as it happens

Politics-Economics-Business

Page