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

Thursday, May 28, 1998

Russian Federation

Politics

Yeltsin Reassures Investors

· After an emergency meeting with Russian Prime Minister Sergei KIRIYENKO, Finance Minister Mikhail ZADORNOV, and Central Bank chief Sergei DUBININ on ways to stabilize the economic situation in Russia, President Boris YELTSIN assured investors that the government would defend the ruble. "Russia's financial market will not collapse. The Central Bank and Finance Ministry have sufficient reserves to control the situation." Russia has spent $1 billion in the past week to defend the ruble, leaving reserve levels at a low of $14 billion. However, $4.5 billion of those reserves are in gold and are not readily available to spend to shore up the ruble. Following the increase of interest rates to 150 percent, the Russian market responded to the ruble saving measured by rebounding to 5.7 percent. The ruble was also higher against the dollar. DUBININ said YELTSIN ordered the Central Bank and the Finance Ministry to protect the, "interests of every ordinary man, protection of the Russian ruble." YELTSIN said that he would continue government reshuffling, declaring that "two-to-three heads," will roll at the Provisional Extraordinary Commission to the President for the tightening of tax and budgetary discipline on Friday.

Deputy Finance Minister Oleg VYUGIN said moral support from the International Monetary Fund (IMF) could be crucial to calming the current crisis, which he describes as mostly psychological. Head of the IMF Moscow's office Martin GILMAN confirmed that, "There have been no discussions about some kind of bailout." Analysts and traders said Russian ADRs were roiled by rumors of an IMF emergency aid package to bolster the economy. Firebird Management portfolio manager HUNTER commented, "I would say that if the IMF thought that Russia was in

trouble, was an Indonesia, they would be handing over large amounts of funds. They are not."

KIRIYENKO did his part in a late night meeting Wednesday to assured key bankers that the government would stick to its strict fiscal policy. Participating in the meeting were Yuksi President Mikhail KHODORKOVSKY, Media-Most general director Vladimir GUSINSKY, Uneximbank President Vladimir POTANIN and other key financiers. The bankers backed the cabinet's actions promising to make efforts to explain the government's position to financial circles. YELTSIN said he would call on foreign leaders, such as US President Bill CLINTON and German Chancellor Helmut KOHL, to lend moral rather than financial support. US State Department spokesman James RUBIN expressed the US confidence in Russian President Boris YELTSIN's economic team amid turmoil in the country's financial markets. He called YELTSIN's new team of reforms as "fully capable" in leading the economy in the right direction. RUBIN said, "The central bank raised interest rates sharply and reconfirmed its commitment to ruble stability. In addition, the president approved a package of fiscal measures designed to reduce the budget deficit."

KIRIYENKO said at the cabinet meeting today that the President, "fully supports the program of actions to stabilize the situation in the financial markets that is being implemented by the government." KIRIYENKO believes the current crisis is the failure, "to live within

Today's News Highlights

Russia

Spy Mobile Phone Developed

Alrossa Receives $25M Loan

European Republics

Ukraine Economy Dependent

South Caucasus & Central Asia

Geor. Pres.Balmed For Fighting

Armenia-Russian Relations Rise

IMF Praises Kazakh Reforms

Ex-Im Loans $96M To Turkmen

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Thursday

May 28, 1998

Intercon's Daily

our means as the expenses born by the state are not compensated for by revenues," resulting in, "debts to the budget and a debt of confidence." The question remains whether the interest rate hikes along with the austere policy measures will be enough to prevent an economic catastrophe.

Russia Prepared To Scrap Nuclear Submarines

· After the signing a Russian-Norwegian agreement on protecting the environment on Tuesday, Russian President Boris YELTSIN told visiting King Harold V of Norway that Russia is prepared to scrap its old nuclear submarine fleet in the Barents Sea if Norway helps pay for the dismantling. YELTSIN said, "We do not need [old)] submarines. We can remove old submarines from the Barents Sea region and declare a [nuclear free] security zone." Norway, which shares a border with Russia, is concerned about the state of old nuclear submarines left by Russia to rust in Arctic ports. Norway has promised $35 million to help clean up the nuclear mess after the submarines are dismantled. Russia has committed to building a plant to process nuclear waste and used nuclear fuel from decommissioned submarines, and Norway has agreed to help finance construction of the plant. YELTSIN said, "Once the financial question is resolved in the form of credits from the Norwegian side, we can immediately begin dismantling the submarines." Russia is believed to have almost 100 old nuclear submarines in the Northern Fleet, which used to patrol the Arctic and Atlantic Oceans. Environmentalists believe it will take billions of dollars to completely clean up the Barents Sea area, as the Soviet Union simply dumped spent nuclear fuel onto the sea bed for decades, rather than process it on land. Sunken nuclear subs may also pose a danger, as rust could eventually cause a leak of nuclear fuel from reactors.

Economy

Ruble = 6,162/$1.00 (NY rate)

Ruble = 6,166/$1.00 (CB rate)

Ruble = 6,146|6,186/$1.00 (buy|sell rates)

Russia Commits To Strict Tax Enforcement

· Russian President Boris YELTSIN today after a Kremlin meeting said tax evasion was a most serious offense and vowed that the names of all tax-dodgers will be made public, regardless of their rank or position. YELTSIN signed a decree permitting tax

authorities to seize tax debtor's property, "if it is necessary." He instructed the chairmen of the Constitutional Court and the High Arbitration Tribunal to analyze the current legal practice and come up with proposals to make it more specific. YELTSIN backed the government's proposal to pool the efforts of all tax-collecting departments. Tax and customs authorities, the Interior Ministry and the Prosecutor General's Office will take joint actions against taxes evaders. He also noted that it is important to control tax collection in spheres, such as alcohol production and customs duties. Prime Minister Sergei KIRIYENKO said the Presidential Provisional Emergency Commission on Tax and Budget Discipline (VChK) is schedule to meet Friday to discuss a range of measures which he said would introduce faster bankruptcy proceedings and property seizure. "The task is to ensure that all the taxes for May be paid. A number of enterprises tried to take advantage of the government crises to avoid payments to the budget. They will not be allowed do so," the premier said. KIRIYENKO cited a, "plan of coordination of activities of law and order bodies in tax collection," with individual taxation as a special target. He made it clear that the government plans to crack down on, "the richest Russian citizens, whose amount of non-payment of taxes is largest." The government will use severe sanctions against the three major tax evaders: the United Energy System of Russia (UES), oil giant Gazprom and Railways Ministry. Government experts claim these tax measure can be most effective when applied to energy and transportation companies, which explains the choice of these three monopolies. Deputy Prime Minister Viktor KHRISTENKO believes the commission may take the toughest measures against the leaders of these enterprises, including to their dismissal. Elaborating on the essence of accelerated bankruptcy proceedings, he said, "this is not about making everybody bankrupt tomorrow. This is about using effective way to find efficient owners who will pay wages, keep jobs and pay taxes. If you do not like laws, if you cannot abide by them and if you cannot pay [taxes], you have to either gradually quit your business or scrupulously comply with the requirements."

Business

Russia Develops Spy Mobil Phone

· Russia's FAPSI spy agency, which used to be linked with the KGB says it has developed an

When you need to know it as it happens

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encrypted analog mobile phone technology. The agency plans to deploy the system among agencies across Russia which use the analog NMT cellular system that operates at 450 megahertz. Unlike in the West, the GSM digital system is not widespread in Russia. According to FAPSI officials, the encrypted phone technology was originally developed for use by senior statesman for top security applications, but has now been refined into an "end user" product, albeit the size of a small suitcase. FAPSI claims that the phone uses a 256-bit algorithm to encode the transmissions, which require special equipment at the exchange or the other end of the communications link, to work. Although GSM encryption systems exist in the West, analog cellular encryption systems are not common due to the problem of using conventional scrambling systems across a cellular transmission architecture. On cellular links, the full available audio bandwidth cannot be guaranteed. If the underlying carrier signal is lost, the call is almost impossible to decode. The FAPSI system uses the unusual process of converting the analog audio stream to a digital stream, which is encrypted and then relayed across the cellular audio channel using a modem-like set of carrier signals. Using this approach ensures that most of the digital data stream can be received. It also has the advantage that cellular calls can also be carried across radio and even hardwired PSTN (public switched telecommunications network) links.

Alrossa Receives $25 Million Renovation Loan

· The Russian diamond giant Almazy Rossii-Sakha (Alrossa), has received a $25 million loan for modernization of its mines in western Yakutia. According to a company statement on Tuesday, the loan comes in one installment, on an annual interest of 13.6 percent, under a deal between Alrossa, the US Export-Import Bank and New York-based Lazar Kaplan International. These three parties signed an memorandum of understanding earlier this month. The loan is to be paid off on October 30, 1998. Alrossa President Vyacheslav SHTYROV said this was, "the most successful of all projects being implemented within the framework of the American-Russian inter-governmental commission on economic and technical cooperation." Through this cooperation, Alrossa has received a total of $72 million in loans over the past two years for buying from the US mining machinery and equipment it

needs. The company plans the 1998 diamond output worth $1.4 billion.

Meanwhile, the Diamonds Chamber of Russia, where diamond deals will be concluded, is to be opened in Moscow on May 28. The Chamber will house the offices and state officials responsible for licensing diamond deals and for customs formalities linked with them. A permanent court of arbitration to deal with diamond disputes will be set up under the Chamber. The new institution is expected to turn in the foreseeable future into a leading Russian center for wholesale diamond deals, integrated into the world diamond market. The Russian Diamond Camber is planning to join the World Federation of Diamond Exchanges and other international organizations this year, to promote cooperation with foreign structures of its kind, including diamond exchanges, clubs, associations, and unions.

European Republics

Ukraine Economy Following Russia's Trend?

· The Ukrainian Central Bank chairman Viktor YUSHCHENKO said the bank has increased its key refinancing rate from 45 to 50 percent and its Lombard rate from 50 to 56 percent today. YUSHCHENKO said the move was widely anticipated in the market following the turmoil on Russia's stock market. It was Ukraine's second rate increase in just over a week. YUSHCHENKO said Ukraine's gross currency reserves stood at 4.4 billion gryvnias ($2.14 billion), enough to cover non-resident debts of 2.7 billion gryvnias ($1.31 billion). Market turmoil has driven up yields on already expensive domestic debt. He explained that Ukraine's financial stability is heavily dependent on the market situation in Russia. He stressed that, "We must send strong signs and signals that we can keep the economy under control." Ukraine, abandoned by foreign investors in recent months due to strict policies and poor economic outlook, is facing a cash crunch over rising domestic debt and wage arrears.

South Caucasus & Central Asia

Shevardnadze Blamed For Ethnic Cleansing

· Deputies of Georgia's parliamentary factions met on Wednesday to discuss Georgian President Eduard SHEVARDNADZE's decision not to send govern

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ment troops to support partisan fighters during last week's fighting in Abkhazia. Demonstrators protested outside the parliament building blaming SHEVARDNADZE and the government for the ethnic cleansing of 30,000 Georgians from the buffer zone separating Georgia and rebel province Abkhazia, the Financial Times reported. Refugees blame SHEVARDNADZE for doing nothing to protect them. One refugee Georgy KETSUBA said, "The Abkhaz come in and burn down our houses and our government does nothing. Is our country really that weak?" Georgy KHUTSISVILI from the Institute of Conflict and Negotiations said that the President's decision and lack of action could fuel opposition and, "destabilize the situation in Georgia making it much harder to find a solution to the conflict." There is growing concern that this discontent could be used by external forces to further exacerbate problems in Georgia.

Armenia To Boost Relations With Russia

· Armenian Prime Minister Armen DARBINYAN said he considers relations with Russia very valuable and stable. DARBINYAN on Friday met a Russian parliamentary delegation in the first session of an inter-parliamentary commission for cooperation. He emphasized harmonization of the countries' laws, especially tax codes, as extremely important for the development of bilateral cooperation. DARBINYAN said that, with certain tax barriers removed, the two nations have enormous potential to increase trade. Russia and Armenia agreed that launching direct ties between Russian and Armenian enterprises are of vital importance. Lawmakers of both the Russian State Duma and the Federation Council were among the delegation. The commission is designed to create real opportunities for enhancing the friendly relations between the two countries. Its members are to bring in line the Russian and Armenian laws in the spheres of mutual concern, to work out recommendations for the intergovernmental commission, and to define the common grounds for a concerted participation in various interparliamentary forums, the Armenian parliament speaker Khosrov ARUTYUNYAN said.

IMF Praises Kazakh Economic Reforms

· The International Monetary Fund's (IMF) managing director Michel CAMDESSUS praised the emerging Central Asian nation of Kazakhstan and its leader for the implementation of economic reforms. He said, "It was a great pleasure... to come back here [Almaty] after five years and to see the change which has taken place in Kazakhstan under the leadership of this gentleman." He praised Kazakhstan's liberal market reforms, which included rapid sell-offs of oil and gas firms last year. Kazakhstan's currency, tenge, is stable at around 76 per dollar. Inflation fell to 11.2 percent last year from 28.7 percent in 1996. Gross domestic product, which grew by 2 percent last year and 1.1 percent in 1996, is expected to grow by 3 percent this year. After meeting with Kazakh President Nursultan NAZARBAYEV, CAMDESSUS confirmed that there was nothing in Kazakhstan's economic policies to criticize. NAZARBAYEV pledged to boost cooperation with the IMF and attract investors to sectors other than oil and gas, such as agriculture, small and medium-sized businesses, and the banking sectors.

US Ex-Im Bank Loans $96 Million To Turkmen

· The US Export-Import Bank on Tuesday signed an agreement to lend Turkmenistan $96 million to develop its natural gas industry. The Bank announced that it was prepared to lead the financing of a gas pipeline from Turkmenistan to Turkey across the Caucasus. The route is vital for Turkmenistan to break its dependence on Russian pipelines. Turkmenistan's gas exports have been suffering due to halts on transportation agreements by Russia. Chairman of the Ex-Im Bank James HARMON said, "We are prepared to provide significant funding for this pipeline....The Caspian Sea region is very important for US policy." He added that the trans-Caspian gas pipeline should be built even if Russia resume its gas committments. The Ex-Im Bank has loaned Turkmenistan a total of $535 million since 1994. Turkmen President Saparmurat NIYAZOV signed an order financing $212 million in gas projects, with the money coming from several foreign banks.

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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