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

Thursday, May 7, 1998

today was in Moldova. Following his meeting with Moldovan President Petru LUCINSCHI, BEREZOVSKY said, "It is necessary to turn the Commonwealth into a vigorous mechanism which will be useful to each of its participants." LUCINSCHI said, "I repeatedly said that the reforming of the CIS should begin first of all in the economy. BEREZOVSKY is a person of a new formation, with economic thinking, which has played a decisive role in the appointment." He also emphasized the need to implement and update the 1994 CIS accord for a free trade regime. This afternoon BEREZOVSKY will meet with Ukrainian President Leonid KUCHMA in Kiev and finish the day meeting with Belarus President Alexander LUKASHENKO in Minsk. On May 10th, BEREZOVSKY will meet with Azeri President Geidar ALIYEV and then will fly to Yerevan to meet with Armenian President Robert KOCHARYAN.

Russia-Japan Treaty Still Postponed

· Following a meeting between Russia and Japan on the disputed Kuril Islands, deputy head of Russian presidential administration Sergei YASTRZHEMBSKY in charge of foreign policy affairs in the Kremlin said today, "Russia is not in the best of form now. Under all historic rules, geopolitical laws and laws of big-time politics, it is prohibited to discuss and decide territorial problems in such a state. A concession on one occasion may set off the domino effect." He emphasized that diplomats working on the peace treaty, "are guided by the principle of Russia's territorial integrity."

Russian Federation

Politics

Cutting The Government In Half

· Russian Deputy Prime Minister Boris NEMTSOV is committed to cutting out the fat of the Russian government. He said that the main task is, "to make the apparatus compact and not too bureaucratic...it is necessary to maximally cut the White House apparatus and to hand the right of the legislative initiative down to ministries." With the new government presidium in place, powers of its member ministers will be broadened, which is bound to improve the efficiency of the state apparatus, NEMTSOV said. He emphasized that this reorganization will assist in efficiently passing legislation. NEMTSOV revealed that Prime Minister Sergei KIRIYENKO on Tuesday outlined 60 priorities of the government which include the rational use of the budget, an effective industrial policy with an easier tax burden on enterprises, the adoption of the new tax code, effective privatization program, state-run investment projects, and the training of young entrepreneurs. NEMTSOV proposed raising budget revenues by taxing users of natural resources, who are now exempt, bringing normalcy to the alcohol market and giving gold-mining enterprises a license for marketing their products. He is in favor of auctioning off of radio wave bands to television, radio, and mobile communications companies.

Berezovsky Begins Quest To Rebuild CIS

· Newly appointed executive secretary of the Commonwealth of Independent States (CIS) Boris BEREZOVSKY has begun a tour of CIS member states in preparation for the next CIS summit in July. BEREZOVSKY said that his trip will also sum up the results of the first stage in the development of the CIS and map out tasks for the next stages. His first stop

Today's News Highlights

Russia

CB Predicts Financial Crisis

BP May Pull Out of Rosneft Bid

European Republics

US-Ukraine Sign Nuclear Deal

Latvia-Estonia Presidents Meet

South Caucasus & Central Asia

Iran To Construct Pipeline

Azeri Speaker Visits Georgia

Kazakh Changes Capital's Name

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Thursday

May 7, 1998

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Russian-Kuwait Discuss Regional Policies

· Russian Deputy Foreign Minister Viktor POSUVALYUK and Kuwait counterpart Suleiman AL-SHAHEEN met in Moscow on Wednesday to discuss problems of regional and international policy. At the meeting, the sides focused on regional development, the strengthening of stability and security in the zone of the Persian Gulf. The Russian side stressed that it, "firmly adheres to the course of ensuring territorial integrity and sovereignty of Kuwait." The deputy foreign ministers noted progress in the sphere of disarmament of Iraq, but expressed concern about the deadlock situation in the Middle East peace process. In their view, it is necessary to, "intensify efforts of the sides involved in the peace process in order to resume the talks at all levels on the basis of the principles of the Madrid meeting and the already achieved agreements."

Economy

Ruble = 6,136/$1.00 (NY rate)

Ruble = 6,138/$1.00 (CB rate)

Ruble = 6,110|6,160/$1.00 (buy|sell rates)

Finance Ministry Submits Budget Report

· The Russian Finance Ministry submitted a report to the Russian cabinet on the proposed budget policy through 2001 and the main characteristics of the federal budget for 1999. The report stresses that the aims of the state economic policy, include stable economic growth, creating macro-economic conditions, budget reform and growth of real incomes of Russian citizens. The Finance Ministry predicts revenues of the consolidated budget of 686.1 billion rubles for 1999, 725.4 billion rubles for 2000, and 764.1 billion rubles for 2001. Revenues of the federal budget are forecast to be 318.3 billion rubles for 1999, 348.1 billion for 2000, and 376.3 billion rubles for 2001, which amounts to 10.14 percent, 10.18 percent and 10.11 percent of the gross domestic product respectively. The decline in the shares of revenues of the federal budget in the GDP is because the fixed rate for some taxes will remain unchanged until 2001. The annual average exchange rate of the ruble to the dollar will rise by 5.5 percent between 1998 and 2001, reaching 6.72 rubles per dollar.

Gov't Provides Incentives To Oil Companies

· The Russian government has approved a bill to

cut the excise duty on production of oil and gas condensate until January 1, 1999. A senior government source told Reuters that Russia was considering cutting the duty from 55 to 45 rubles per ton. The bill will not become law until it is approved by the Russian State Duma. According to a new government directive, oil companies that have no tax debts to the federal or regional budgets will be allowed more access to state-owned pipelines as of July 1st. Since pipeline capacity is limited, the increased access for companies that pay their taxes will come at the expense of firms that are tax debtors. Oil companies that owe taxes will also be required to set up special bank accounts in order for the State Tax Service to collect taxes directly out of the proceeds earned through oil exports.

CB Chairman Warns Of Financial Crisis

· Chairman of the Russian Central Bank Sergei DUBININ today warned the new Russian cabinet that a new financial crisis may occur in two or three years, unless the problem of servicing the national debt is resolved. The Finance Ministry has predicted that expenditures for servicing the national debt will rise from 1999 to 2001. Despite the slowing down of the growth of the national foreign debt, the budget for 2001 will face the heaviest burden. Expenditures for servicing the foreign debt in 2001 will be 12.3 percent of the expenditures, or 58.5 billion rubles. Since 1993 to 1998 the expense for serving the national foreign debt has risen from $700 million to $6.85 billion. The Finance Ministry plans to draw on fewer external sources of financing the deficit of the deferral budget and to use them mostly on a medium-term basis for repaying Russia's foreign debt. DUBININ urged the cabinet for a more intensive effort for tax collection and for drafting budget expenditures on the basis of pessimistic figures. He also urged the cabinet to endorse the program of restructuring Russia's external and internal borrowings.

Business

Aeroflot May Win Precious Metals Contract

· Russian airline Aeroflot is hopeful that it may win a contract to export Russian precious metals platinum and palladium once they are permitted to be exported. Head of Areoflot's cargo department Vitaly KUZMIN said, "I think the government may prefer Aeroflot for export of this cargo because this is a big company with long experience." He added that

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Aeroflot has already carried other valuable cargo under Russian and foreign government contracts. Russia is the world's largest producer of palladium and the second largest of platinum. Neither metal has been exported so far this year, sending prices soaring. On Tuesday, the Russian media cited an unnamed source who said that Russian exports of platinum and palladium may be delayed until the end of the summer due to the consolidation of Russia's Economics Ministry and the Ministry of Foreign Economic Relations and Trade.

BP May Withdraw From Rosneft Bid

· British Petroleum chief executive John BROWN said his company may not participate in the bid for a 75 percent plus one stake in Russia's oil company Rosneft, RFE/RL Newsline reported. BROWN said that his reasons were related to the high price being asked for the shares. The Russian government established the starting price to be $2.1 billion, prompting other potential bidders to withdraw from the tender. Last November, British Petroleum became a minority shareholder in Sidanko Oil Company, which is controlled by Uneximbank. British Petroleum and Uneximbank were expected to jointly bid in the Rosneft auction, which is scheduled for later this month. The auction will be declared invalid if fewer than two bids are submitted.

between the United States and Ukraine under appropriate conditions and controls reflecting our common commitment to nuclear nonproliferation goals." PIFER noted that several US companies are interested in joining efforts to build two power generating units for the Rovno and Khmelnicky nuclear stations as future replacements to the Chernobyl station. The agreement was initialed by US Secretary of State Madeleine ALBRIGHT on her March 6th visit to Ukraine, which prompted Ukraine to cancel a $45 million nuclear deal with Iran and Russia. At present, Ukraine purchases its fuel rods from Russia to run its five nuclear power plant. TARASYUK said that, "Ukraine would continue cooperation with Russia in the field of nuclear power engineering." The agreement must now be ratified by the US Congress and Ukraine's new parliament, which is scheduled to hold its first session on May 12th.

EBRD Annual Meeting To Open In Kiev

· The European Bank for the Reconstruction and Development (EBRD) will hold its annual meeting in Ukraine on May 8 to 12th. Ukrainian presidential press secretary Alexander MAIDANNIK said today that Ukrainian President Leonid KUCHMA, "attaches a great importance to this forum, because by this Europe, particularly the EBRD, shows its attitude towards Ukraine." The Ukrainian President will take an active part in the forum of bankers and will address the meeting. Ukraine joined the EBRD in August 1992. Its stake in the Bank's charter fund is 80 million ECU. Despite some "errors" in which financing fell through for some state projects, last summer the EBRD decided to restore its activities in Ukraine. The Bank is preparing to create post-privatized funds. The first fund is expected to be launched in Odessa, with $30 million starting capital. EBRD post-privatization funds will continue to open in several large cities in eastern Ukraine.

Latvian-Estonian Presidents Meet

· Latvian President Guntis ULMANIS and Estonian President Lennart MERI will meet today in Valka in hopes of clearing the air after a recent disagreement over visas. During MERI's visit to Poland, he said that Estonia may introduce a visa program for citizens of Latvia and Lithuania, if it is required by terms for European Union membership. The two Presidents will also discuss other matters concerning bilateral relations. Meanwhile, in Tartu Latvian

European Republics

US-Ukraine Sign Nuclear Modernization Pact

· Ukrainian Foreign Minister Boris TARASYUK and the United States Ambassador to Ukraine Stephen PIFER in Kiev on Wednesday signed an agreement on cooperation in the peaceful use of nuclear energy. Under the agreement, the US will provide Ukraine with $30 million to modernize Ukraine's nuclear fuels sector. After the signing ceremony, TARASYUK said that the agreement had laid a foundation for furthering the strategic partnership between the two countries. PIFER said US technology would help Ukraine efficiently operate its nuclear reactors. US Undersecretary of State Strobe TALBOTT praised the agreement as opening new possibilities for nuclear cooperation, "that can bring practical and commercial benefits to Ukraine and the United States." US President Bill CLINTON commented that, "The agreement provides a comprehensive framework for peaceful nuclear cooperation

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Foreign Minister Valdis BIRKAVS and Estonian counterpart Toomas Hendrik ILVES will also be discussing bilateral issues at their level.

South Caucasus & Central Asia

Iran Competes With US On Caspian Pipelines

· Iranian Oil Minister Bijan Namdar ZANGENEH announced that Iran is set to begin construction on a 180 mile pipeline connecting Neka on the Caspian coast to Tehran's major refining complex in Tabriz. The pipeline, with the capacity of 380,000 barrels per day, will cost $400 million and is expected to be completed in two years. An international tender for the construction will begin in the next two months. The pipeline is part of Iran's plan to offer oil swaps, allowing Western companies to exchange landlocked Caspian crude for equivalent deliveries of Iranian oil through the Persian Gulf, The Journal of Commerce reported. Iran expects to make money on the swaps by charging netbacks to oil companies for handling or transporting their crude. Iranian netbacks could run as high as $5.50 a barrel if it undercuts other available transport route. The swaps are attractive to oil companies which otherwise face billion in costs and years of delay waiting for the east-west export pipeline under the US backed plan. Iran's announcement runs counter to the US strategy for a pipeline under the Caspian Sea to export oil from Kazakhstan's Tengiz oil fields to Azerbaijan's capital Baku. The US plan, bypassing Iran, has an estimated cost of $3 billion and faces environmental opposition. The US has been forging economical and political ties with Caspian nations in attempt to win their support of the Baku-Ceyhan pipeline. The US is pushing for multiple pipeline routes, so long as they avoid Iran. The US Appears to be losing Kazakhstan's support.

Kazakhstan Foreign Minister Kasymjomart TOKAYEV said, "Our President and myself have repeatedly said that we do not rule out Iran as a route to export oil." He noted that the route through Iran is the most economical. He also said, "Iran cannot be sanc

tioned and isolated. Such a policy is not applicable...Kazakhstan will never forgo cooperation with Iran, despite the political risks."

Azeri Parliament Speaker Visits Georgia

· Speaker of the Azerbaijan Parliament Murtuz ALESKEROV met with Georgian President Eduard SHEVARDNADZE on Tuesday. ALESKERVO described bilateral relations, "as crystal-clear and solid." He stressed that relations will continue to be strengthened by their active participation in the restoration of the historical Silk Road, transportation of Caspian energy-carriers to the West, and implementation of other major joint projects. SHEVARDNADZE during his meeting with ALESKEROV pointed out that the relations between Georgia and Azerbaijan were promoted over many centuries on the basis of good-neighborliness and fraternity, and that at present they were elevated to the rank of strategic partnership between two independent states. The Georgian President noted that Georgia and Azerbaijan were adhering to a common, concerted position at all the European and international forums, including the Commonwealth of Independent States (CIS). SHEVARDNADZE noted that it was necessary to work out a similar joint and concerted stand in order to, "make full use of the Caucasian factor in the promotion of peace and stability in the Caucasus."

Kazakhstan Changes New Capital's Name

· Kazakh President Nursultan NAZARBAYEV issued a decree Wednesday changing the name of the country's new capital Akmola to Astana. The President said the decision was made with wishes from different social circles and at the request of executive and representative organs in the capital city. The name of a national capital's name should project a positive image and meaning, NAZARBAYEV said. While Akmola in Kazakh means white tomb, the new name Astana means capital, and thus more fitting for Kazakhstan. Astana, 1,300 kilometers north of the former capital Almaty, covers 200 square kilometers with a population of 300,000. It became the new capital on December 10, 1997.

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