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 29, 1998

Russian Federation

Politics

Yeltsin Fires Tax Chief

· Russian President Boris YELTSIN has sacked head of the federal tax service Alexander POCHINOK for poor tax collection. He has been replaced by former finance minister Boris FYODOROV, who now heads a private investment bank. FYODOROV has called for a general lowering of the tax burden, but advocates prison sentences for tax evaders. Tax authorities plan to investigate at least 20 major companies that are among the largest tax evaders. By the end of June, the government will exact at least five billion rubles from the companies. The Russian government issued a directive on measures for stabilization of the financial market, and the budget and tax policy for 1998. The government calls for the implementation of "immediate acts" to increase the budget revenue and decrease the spending. Russia hopes to close the gap between what it spends and what it collects. The International Monetary Fund (IMF) has pressed Russia to step up its tax collections. YELTSIN has postponed a meeting with tax officials and bankers scheduled for today until June 2nd. He said the decision was made at the request of the Cabinet because of POCHINOK's removal and new proposals from bankers on the economic situation still need to be reviewed.

Rus-Solvakia Sign Agreements

· Russian Prime Minister Sergei KIRIYENKO held talks with his Slovak counterpart Vladimir MECIAR and signed a package of agreements based on these talks. KIRIYENKO described the talks as, "a new step in the development of bilateral trade and economic cooperation." The package includes an intergovernmental agreement on cooperation in the field of tourism, Economics Ministries, higher education

for 1998-1999, and a working program for scientific and technical cooperation between the Agricultural Ministries. The Russian Space Agency and the Slovak Defense Ministry scheduled a flight of a Slovak cosmonaut on the Mir Russian orbital station. KIRIYENKO noted that Russian specialists were participating in the construction of the nuclear power station in Slovakia. "Cooperation in the atomic field must further develop," he said. He also described a cooperation project between Russian and Slovak aircraft designers to equipped Yak-130 and Yak-131 air planes with Slovak engines. After meeting with MECIAR, Russian President Boris YELTSIN gave his support to MECIAR saying, "We very much hope that you'll win the elections. Further contacts are to the good of both Slovakia and Russia." He also added that, "We in Russia are pleased that you are strictly pursuing the policy in Europe of providing your own security, friendship with Russia, contacts with Russia, pretty good economic indicators." Slovakia has been left out of the immediate list of membership candidates to the European Union and NATO. It has been criticized by the West for a poor democratic record.

Economy

Credit Agencies React To Economic Crisis

· In a desperate attempt to defend the ruble, Russia has spent $1 billion of reserves and increased its interest rates to 150 percent. In reaction to the Central Bank's move, the credit rating agency Standard

Today's News Highlights

Russia

Rosneft Head Fired, New Sale

Gazprom Increases Exports

Corning Opens In St. Petersburg

European Republics

Still No Parliamentary Speaker

Ukraine Caol Min. Dismissed

South Caucasus & Central Asia

OPIC Supports Caucasus Fund

Baker & Botts To Open In Baku

Politics-Economics-Business

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Friday

May 29, 1998

Intercon's Daily

and Poor's (S&P) Thursday put Russia's sovereign credit rating on a negative Credit Watch. S&P said higher domestic interest rates could lead to a worse than expected budget deficit because of the higher cost of servicing the government's domestic debt. The rating agency's decision to downgrade is dependent on how quickly Russia can improve tax collection and whether it receives financial assistance from international agencies such as the International Monetary Fund (IMF). S&P also put seven private Russian banks on negative outlook, warning of the severely negative effects of a ruble devaluation on their balance sheets. The agency said that those banks with significant exposure to foreign currency loans and bonds would suffer the most. The European rating agency Fitch IBCA also warned investors of the vulnerability of Russia's sovereign rating. Moody's Investor Service has already downgraded Russia's sovereign credit rating due to the enhanced risk of a credit default. According to a Moody's statement, Russia's foreign currency bonds has been reduced to a B1 rating from Ba3. "The volatility that characterizes international and domestic capital market will continue to create periodic problems and an enhanced risk of default as long as basic structural issues are not adequately addressed." Moody's included as basic structural issues, "fiscal imbalances, external sector inefficiencies, political instability, lack of policy credibility and an inhospitable socio-juridical environment for foreign investment."

Jan Feb Mar Apr May

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

Ruble = 6,164/$1.00 (CB rate)

Ruble = 6,138|6,190/$1.00 (buy|sell rates)

Business

Rosneft Head Fired, Sale Revised

· Thursday, Prime Minister Sergei KIRIYENKO fired Rosneft President Yuri BESPALOV and board chairman Alexander PUTILOV for failing to attract bidders in Russia's fifth largest oil company and "active opposition to privatization plans for the company." They are to be replaced with Rosneft Vice President and a deputy minister of fuel and power engineering. A government source said, "Managers of other companies in which the state owns a controlling stake, who do not carry out government orders, will also be fired." In fact, Valery CHERNYAYEV, head of Russia's crude oil pipeline monopoly Transneft, was dismissed. KIRIYENKO announced that the government has scrapped his plan to reduce the excise duty paid by oil producers from 55 rubles per ton of oil to 45 rubles. It can no longer afford to forego this revenue. The government also stipulated that beginning July 1st, oil exporters, who have paid their taxes, will be permitted to transport crude oil through export pipelines to profitable markets

The State Property Ministry on Wednesday announced revisions to the sell-off of Russia's final state-owned oil company, Rosneft. After failing to receive a single bidder in the initial auction which closed on Tuesday, KIRIYENKO was forced by law to cancel the auction. Many investors regarded the cancellation of the initial sale as a vote of no confidence on the Russian economy. State Property Ministry officials declared that the starting price for the 75 plus one percent stake in Rosneft will be in the range of $1.6 billion to $1.7 billion. This is a 19 to 24 percent reduction from the first starting price of $2.1 billion with an additional requirement of $400 million to invest in the company's debt. Specific terms are to be released on June 1st. First Deputy Property Minister Alexander BRAVERMAN said that the government's asking price corresponds to the evaluation of the international firm Dresdner Kleinwort Benson, which in March determined a fair price for the Rosneft stakes. The government decided to press ahead with the Rosneft sale in order to get much-needed funds for the budget. Co-head of

When you need to know it as it happens

Politics-Economics-Business

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Intercon's Daily

research at United Financial Group in Moscow Stephen O'SULLIVAN said, "The government had budgeted to get that money and had planned to spend it."

Gazprom Increases Gas Exports

· The Russian gas giant Gazprom in a company press release announced it will bid for a stake in the state-owned oil company Rosneft under new tender terms as a part of the consortium comprising Russia's LUKoil and Royal/Dutch Shell. The statement says, "The three companies are retaining interest in the possible acquisition of the 75 percent package in Rosneft, and they hope to take part in the competition when its new terms are announced." Gazprom said the consortium approved the bidding arrangements of the first tender which met international standards of transparency and access of foreign bidders. However, with world oil prices sliding and the Russian financial market in deterioration, the consortium, "had no possibility to take part in this competition at the announced starting price."

Gazexport's Director General Yuri KOMAROV Thursday said that Gazprom plans to export approximately 117 to 118 billion square meters of gas outside the Commonwealth of Independent States (CIS). In 1997 Gazprom's gas exports reached 116.8 billion square meters, up 5 percent against 1996 figures. He noted that Gazprom is exploring new markets in South-Eastern Asia. Gazprom's annual export earnings stand at $8.5 billion and are expected to go up to $15 billion by 2005.

Corning Opens Lab In St. Petersburg

· The world's largest producer of optical fiber, Corning Incorporated, has opened an independent laboratory in St. Petersburg to conduct research in the fields of optics and photonics used in telecommunication networks. The laboratory will initially employ about 30 Russian scientists who formerly worked at the Vavilov State Optical Institute or the Institute of Silicate Chemistry in St. Petersburg. Corning's chairman and chief executive officer Roger ACKERMAN said, "By integrating the St. Petersburg laboratory into our global research effort, we not only tap into extensive Russian expertise in optics and photonics, but strengthen our relationship with the scientific community in Russia. Corning already has research contracts with General Physics Institute and the

Institute of Chemical Physics both in Moscow. In the past three years, Corning has increased its research, development, and engineering budget by 60 percent and spent over $250 million in 1997. Corning also has laboratories in the US, France, and Japan. Corning manufactures optical fiber and optical networking components for communications industries, high performance glass and components for televisions, and other electronic displays and equipment.

Russia To Maintain Auto Trade Barriers?

· A decree issued by the Kremlin last month being reviewed by lawyers appears to be in violation of international trade rules. The auto decree offers tax and tariff incentives to foreign investors who assemble autos inside Russia. But to qualify, 50 percent of the car's contents must originate in Russia. The preferences last for five to seven years, according to The Journal of Commerce. Tariffs for most auto imports are about 30 percent more than 10 times the level in developed countries and high enough to deter trade in any model that competes with Russia-made products. The local content rule has the effect of discouraging imports of auto parts and is likely a violation of World Trade Organization (WTO) rules. Russia, applying to become a member of WTO, has encountered difficult negotiations with the WTO. The US in the past has protested local content rules which are used to help spur development of a country's auto industry. However, US auto leaders in general are comfortable investing in Russia to gain a piece of the market. But long-term barriers to trade will make competition more difficult. Russian consumers bought roughly 1 million autos in 1997, and sales are projected to rise about 7 percent a year for at least a decade, doubling purchases to 2 million by 1998. Some form of a temporary preference program may be inevitable, since granting transition has been common for countries joining the WTO. The US agreed to temporary local content rules with China as a price for Beijing's WTO membership.

European Republics

Ukraine Fails To Elect Parliament Speaker

· The Ukrainian Supreme Council Thursday failed for the third time to elect a parliamentary speaker. 214 out of 438 registered deputies took the ballot papers, but only 176 legislators actually cast them, falling short of the necessary two thirds major

When you need to know it as it happens

Politics-Economics-Business

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Intercon's Daily

ity required for a valid vote. Communist leader Pyotr SIMONENKO ran against Progressive Socialist leader Natalya VITRENKO, and independent Alexander RZHAVSKY. The Popular Democratic party, Rukh party, Greens party, and Social Democrats, as in the two previous elections, abstained from voting. They insist that the speaker and his two deputies should be elected together in, "one package." Several lawmakers have already warned that the parliament can be dissolved if it fails to elect a speaker.

Ukraine Coal Minister Fired, Strikes Continue

· Before leaving on a trip to Germany, Ukrainian President Leonid KUCHMA fired Coal Minister Stanislav YANKO, while several hundred miners marched in Kiev, demanding back wages. The strike began earlier this month and has spread to the eastern cities of Luhansk and Dnipropetrovsk. In Dnipropetrovsk approximately 1,000 miners have embarked on a 260 mile march to Kiev. Some miners have not been paid since last August. Miners are owed more than $1 billion in back wages. The miners are also demanding that the government stop purchasing cheap coal from Russia, and increase in wage, pension, and energy funding. Prime Minister Valery PUSTOVOITENKO ordered government officials to sign a "realistic" agreement with striking miners and to make funds available for the construction of new mines. He told a government session that, "The government views payments to the miners as a priority and it shall adhere to this position."

South Caucasus & Central Asia

OPIC Supports Caucasus Fund

· Overseas Private Investment Corporation (OPIC) President and Chief Executive Officer George MUNOZ, according to an OPIC press release, announced on Thursday that OPIC has signed a formal commitment for $30 million to support the new $46 million Caucasus Fund. The Caucasus Fund will provide equity capital to private sector projects in Armenia, Azerbaijan and Georgia. MUNOZ said, "As

the first fund to make private equity capital available in the Caucasus, this fund is a landmark event for the region. This $46 million fund also is significant as it marks the first time a pool of capital of this size has been dedicated to promoting regional cooperation and development among Armenia, Azerbaijan, and Georgia." He noted that this fund will support necessary infrastructure and development surrounding the Caspian oil pipeline project. The Caucasus Fund investments aim to help region growth and economic diversity, including agribusiness, real estate, transportation, and service sectors. The Fund will set up offices in each of the three countries to assure a steady flow of quality, local deals and provide careful management of the fund's portfolio. The fund compliments a portfolio of OPIC-supported funds that provide direct investments in private sector projects in Russia and other states of the former Soviet Union. The fund is jointly sponsors by Commonwealth Property Investors (CPI) and Junction Investors Ltd., both affiliates of AEW International.

Baker & Botts Opens Office in Azerbaijan

· Baker & Botts announced Thursday that it will establish an office in Baku, Azerbaijan. The office will employ six or seven lawyers and is expected to open this summer. Baker & Botts have been active in Azerbaijan since 1992, through its representation of Pennzoil Company, Azerbaijan International Operating Company (AIOC), and Howard Energy International. The firm seeks to serve existing clients and develop new clients based on the dramatic increase in legal work related to gas and oil deals. Baker & Botts attorney George GOOLSBY said, "We see the opening of the Baku office as a natural progression of our involvement in the area." Baker & Botts' extensive experience in Azerbaijan involves a broad spectrum of issues in connection with natural resource projects and infrastructure, specifically export pipelines. Initially, its legal work consisted of Product sharing, joint operating, and similar agreements, as well as evaluation of rights and issues involved in ongoing operations.

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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