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

Monday, June 1, 1998

an emergency loan is needed separately. They said use of the so-called systemic reserve facility in the IMF is a likely option for granting Russia an emergency loan as the three countries agree to endorse disbursements from the facility. The facility started last year with the aim of extending emergency loans to help a recipient protect its currency. The Russian stock market today fell 10 percent. Most of the activity came from Russian bankers, fearful that the government doesn't have enough money to cover Treasury bills that are coming due.

Meanwhile, former Russian reform chief Anatoly CHUBAIS, who left the government two months ago, held top level meetings with US treasury Secretary Robert RUBIN and his deputy Lawrence SUMMERS on Friday. State Department spokesman James RUBIN said, "My understanding is that, in his meetings with the administration, Mr. CHUBAIS did not ask for such an additional package." The Russian Embassy commented that CHUBAIS' visit was planned in advance of the financial crisis. CHUBAIS said his trip was to discuss matters related to his position with Russia's United Energy Systems (UES) and American shareholders. However, Prime Minister Sergei KIRIYENKO said that CHUBAIS went to Washington to discuss the current situation on Russian markets and ask for unspecified "support." CHUBAIS also met with World Bank President James WOLFENSOHN and IMF's Deputy Managing Director Stanley FISCHER. A World Bank spokeswoman confirmed that, "There is no such

Russian Federation

Politics

Clinton Backs Aid To Russia

· US President Bill CLINTON Sunday said that the US would support additional financial assistance to Russia if needed from the International Monetary Fund (IMF) and the World Bank to promote stability in Russia. "The United States endorses additional conditional financial support from the international financial institutions, as necessary to promote stability, structural reforms and growth in Russia," CLINTON said in a statement. The Presidential statement comes in the wake of a plunge in Russian share prices and a tumble in the Russian currency, which forced the Russian government last week to triple interest rates to 150 percent to protect the ruble against the risk of a devaluation. His statement is aimed to boost investors confidence in Russia's nervous financial markets. The statement made it clear that no bilateral support for Russia, from the US or anywhere else, was under discussion. A senior official said the focus was on support from international organizations, "and on Russia's efforts to raise resources from the private sector rather than on bilateral support. It's too early to know amounts or precise methods, which will depend very much on how the situation evolves."

On Friday, CLINTON welcomed Russia's new economic program for 1998 and the allocation of an IMF $670 million loan installment. "This program, developed in consultation with the IMF, signals Russia's commitment to a bold economic reform agenda to strengthen financial stability and encourage investment and growth," he noted. "What is now important is to carry out these reforms decisively and resolutely," he stressed. The US, Germany, and Japan believe the IMF loan released last week is not enough for Russia to survive its economic crisis and

Today's News Highlights

Russia

IMF Relases $670 Million Loan

Tax Chief To Lower Taxes

Banks Help Aviation Industry

European Republics

Ukraine-German An-70 Talks

South Caucasus & Central Asia

Kazakh Not To Build Nuclear

Turkmen-Japan Economic Proj.

Caspian Energy Projects Critical

Politics-Economics-Business

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Monday

June 1, 1998

Intercon's Daily

major emergency package under consideration by the bank." CHUBAIS was accompanied by the Russian governmental apparatus' deputy chief Sergei VASILYEV.

Rus-Chechnya Sign Cooperation Agreements

· The heads Russian and Chechen law enforcement bodies signed on Thursday a package agreement on cooperation, which includes three separate documents between the Russian Interior Ministry and the Chechen Ministry of Shariat National Security, the general-prosecutors' offices and the ministries of justice. The documents were signed by Russian Interior Minister Sergei STEPASHIN, Prosecutor-General Yuri SKURATOV, Justice Minister Pavel KRASHENINNIKOV and their Chechen counterparts. The agreements provide for immediate notification to each other when gathering information on terrorist acts and other grave crimes. The sides also agreed to maintenance social benefits to police veterans, living in Chechnya. STEPASHIN reported that resumption of the operation by the office of the Russian Interior Ministry in Grozny this week would be the first step in implementing the agreements. Kazbek MAKHASHEV, head of the Chechen delegation at the talks, stated that, "experience shows the need for taking such decisions." According to MAKHASHEV, the signed documents will help to boost the sphere of cooperation between Russian and Chechen law enforcement bodies.

Economy

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

Ruble = 6,165/$1.00 (CB rate)

Ruble = 6,139|6,191/$1.00 (buy|sell rates)

IMF To Release New Installment By June

· The International Monetary Fund (IMF) on Friday said it would release the latest installment of $670 million out of a $9.2 billion loan by the end of June. Director of the IMF Second European Department John ODLING-SMEE believes that the governmental measures to increase the budget revenues and cut the spending will curtail the budget deficit to five percent of the gross domestic product. He said that Russia and the IMF have held, "no formal discussions" on granting a special multi-billion dollar loan to calm Russian financial markets. ODLING-SMEE added that Russian officials have inquired about the IMF supplement reserve facility, which

provides short-term credits at higher interest rates than normal IMF loans. He feels that Russia does not need these short-term credits or a full bail out package. ODLING-SMEE also stated, "The government's economic policies are wholly coherent and there is no reason for devaluation." The IMF is confident of the government's emergency policies. It is widely believed that Russia is meeting with western banks, including Deutsche Bank for additional financing. The move, seeking a private rescue package, has been criticized by the IMF. ODLING-SMEE said, "I would not advise the Russian government to do it until stability has returned in financial markets...Otherwise, there is a risk either that it can't be done or that the price that will be paid for that kind of financing will be very high," the Financial Times reported.

New Tax Chief Calls For Lower Taxes

· Newly appointed chief of the State Tax Revenue Service (STRS), Boris FYODOROV on the NTV's nightly analytical review program Itogi said, "I believe that the collection of taxes can be improved. But, in order to collect them more than previously, taxes should be lowered. He suggested lowering the top income tax rate from 35 percent to 20 percent. He said that Russians must get used to paying their taxes, and if they do not they should be put in prison. He noted that the current taxation system favors foreigners, "when buying Russian shares than any Russian citizen...It is our people, first of all, who should buy the shares of Russian enterprises." FYODOROV said that discipline is of critical importance as Russia tries to straighten out the financial crisis. He stated several abuses of the system which should not continue: non-payment of wages and pensions for years, failure to pay taxes, and the existence of "half-dead" bankrupt companies. He stressed that "radical measures are essential" and urged the Russian State Duma to quickly adopt a new Tax Code. This would be making only an approach to a real taxation reform, not a reform proper, he said. "And without making this step, we shall not approach anything," FYODOROV emphasized. FYODOROV's rank has been increased to that of a minister in the cabinet.

Business

Menatep, Inkombank To Help Build Aircraft

· Two big Russian banks, Menatep and Inkombank,

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President Leonid KUCHMA agreed that they did not want a decision on the Russian-Ukrainian Antonov 70 project feasibility to be delayed. The two leaders call for the feasibility study to be completed swiftly so that a decision on the project could be made before January, 1999. KOHL hopes that the An-70 will be a significant part of the European response to the huge US aerospace group merger of Boeing and McDonnell Douglas. Germany's Defense Minister Volker RUHE ordered Daimler-Benz Aerospace (Dasa) to study the An-70 as an alternative to the Future Large Aircraft (FLA), which has been developed so far by European Airbus Consortium. Airbus had refuse to participate in the An-70 project on the grounds that it would be unreliable and too costly to maintain. The Bonn government clearly sees political and commercial advantages. However, RUHE said it would not back the project on only political grounds, but said it might help reduce Russia's hostility to the eastward enlargement of NATO. KUCHMA said Kiev is confident that the study will confirm that the An-70 is, "an aircraft of the 21st century," adding that his country would consider it an "insult" if the An-70 remained just a Russian-Ukrainian project. On the sidelines of the bilateral talks, the two countries also signed an agreement Friday under which Germany will grant Ukraine 30 million marks ($17 million) in loans to help promote the country's small and medium-sized companies.

South Caucasus & Central Asia

Kazakhstan Not To Rebuild Nuclear Arsenal

· Kazakh Defense Minister Mukhtar ALTYNBAYEV on Friday said that Kazakhstan will never develop nuclear weapons since it has already depleted its nuclear arsenal. "Kazakhstan will not seek to fall back on nuclear weapons since we have already gotten rid of them," the visiting ALTYNBAYEV said at a meeting with his Polish counterpart Janusz ONYSZKIEWICZ. Kazakhstan has transported all the nuclear warheads it inherited from the former Soviet Union back to Russia, and gained support from the whole world, including Poland, ONYSZKIEWICZ said. The two defense ministers also exchanged views over the Indian and Pakistani nuclear tests over the past two weeks. ALTYNBAYEV said the tests are an important indicator of a renewed arms race. They also discussed military cooperation between Kazakhstan and Poland.

have pooled their efforts to assist the aircraft building industry in overcoming the economic crisis. For the first time since the beginning of the reform, the leasing mechanism is place, making it possible for Russian air companies to acquire and use planes of Russian make. The Aviastar aircraft building complex in Ulyanovsk signed an agreement on the sale of two medium-range TU-204 planes to the leasing company Inkom-avia, created under Inkombank. The two banks financed the building of two TU-204 planes at Aviastar, costing approximately $25 million each. Avistar plans to deliver them to Inkom-avia in November 1998 and March 1999. The two banks will lease them to the Khabarovsk United Air Company. Menatep will render financial assistance to Khabarovsk in closing the deal on the leasing of planes. According to the Menatep press service, under the agreement signed with the Khabarovsk United Air Company, it is also planned to organize the leasing of another modification of the TU-214 plane produced in Kazan. Menatep-leasing and Inkom-avia companies also plan to form the New Aviation Leasing Company. The Russian banks are counting not only on the participation of foreign partners in their projects, but also on the support of the state, because the development budget for 1998 envisages state guarantees for aviation programs, including those connected with the leasing of planes. Financial details for the projects, both those which are implemented and those which are still planned, were not made public.

Cargo Planes Leave For Chongju

· According to The Journal of Commerce, Russian chartered cargo and passenger planes are expected to begin service to Chongju, South Korea in August. The Chongju airport was completed in April, 1997, as an international facility at a cost of $53 million. Due to the lack of traffic, coupled with the Korean economic slowdown, international flights were suspended last January. To attract foreign carriers, the Ministry of construction and Transportation has cut in half fees for airport facilities and plans to cut land operation fees and provide free offices to airlines. A temporary international cargo terminal should be operational by July.

European Republics

Ukraine-Germany Discuss An-70

· German Chancellor Helmut KOHL and Ukrainian

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Iran-Turkmenistan Oil Cooperation

· Iranian Foreign Minister Kamal KHARRAZI and Turkmen counterpart met on Saturday in Ashkhabad and agreed to instruct companies conducting feasibility studies on the proposed pipeline form Turkmenistan across Iran to Turkey and then on to European markets. Oil giant Royal/Dutch Shell is conducting a study to build this pipeline. KHARRAZI also met with Turkmen President Saparmurat NIYAZOV to mainly discuss the Caspian Sea issue and the laying of an oil pipeline between the two countries. Both sides believed the best legal regime for the Caspian Sea status was a joint ownership by the littoral states, KHARRAZI said. He added that if the littoral states decided to divide it, the division should be equal and just, and there should be a regime concerning the sea bed. The two countries also underlined the need to announce the Caspian Sea as a nonmilitary region, he said. KHARRAZI said NIYAZOV considers Iran the best and most suitable route for Turkmen oil and gas exports. KHARRAZI added that the two countries will continue to discuss the envisaged oil pipeline project between the two countries. In April on a visit to Washington, NIYAZOV said that he supported Washington's idea for multiple pipeline routes for Turkmen oil and gas, but did not rule out an Iranian route. Washington, admits that the Iranian route is the most cost-effective, but it opposes the Iranian option because of political differences with Tehran. Iran has announced that NIYAZOV will visit Iran to sign a comprehensive agreement on bilateral cooperation in culture, economy, politics and education.

Turkmen-Japan Committee Plans New Projects

· The Turkmen-Japanese Economic Committee opened its regular meeting in Ashgabat today. The Committee plans to discuss a specific mechanism for the realization of the Japanese business community's increased interest in Turkmenistan's economy. They will also focus on a project to build a North-South railway corridor, which would open up new opportunities for the transit of freight across Russia, Kaza

khstan, Turkmenistan, and the Gulf. Representatives from 20 major Japanese companies and investment foundations are expected to participate in the meeting. The Committee is co-chaired on the Japanese side by Mr. MUROFUSHI, president of the Itochu Corporation, who stated more than once that the rapidly developing Turkmenistan was of immense interest to members of the Japanese business community.

Caspian Projects Key To Regional Stability

· Last week at the "Crossroads of the World" conference in Istanbul, US Energy Secretary Federico PENA expressed Washington's opinion that billion dollar energy and transportation projects in the Caucasus and Central Asia are the key to regional stability in the volatile region. The conference is aimed at accelerating more than 60 major infrastructure projects scattered from Romania to Istanbul. PENA announced the formation of a Caspian Sea Initiative to support these projects, produce feasibility and help, "leverage private sector capital." The US sees export opportunities of more than $20 billion from huge deals under discussion at the talks, organized by the US Trade and Development Agency (TDA). "Our government believes this region...is the most singularly exciting in the world in terms of the opportunities available," TDA director Joseph GRANDMAISON said. He added that US companies must expect to transfer technology, employ local workers and buy materials locally if they were to make use of these opportunities. While economic gain may be the objective of some, political obstacles stand in their way. Turkish electric power projects worth more than $15 billion are obstructed by domestic legal difficulties. Disputes across the region overshadow another $20 billion of planned gas and oil pipelines. International rivalries, such as the dispute between Azerbaijan and Armenia over the Nagorno-Karabakh region, put projects in danger of begin scrapped. The US believes that if these projects are completed, they would not only help resolve these conflicts, but strengthen the sovereignty of former Soviet Republics.

Paul M. Joyal, President, Editor in Chief Clifton F. von Kann, Publisher Jennifer M. Rhodes, Principal Editor

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