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

Wednesday, June 10, 1998


Russian Federation

Politics

G-7 Approves Additional Aid For Russia

· Group of Seven (G-7) senior financial officials agreed today to extend additional credits to Russia through international lending agencies, if the country's financial situation worsens. US Deputy Treasury Secretary Lawrence SUMMERS said the G-7 nations confirmed additional support measures for Russia with the International Monetary Fund (IMF) playing a central role. They also urged Russia to reform its fiscal policies through enhancing the tax collection system. The deputies also called on Russia to reduce the country's interest burden by replacing long-term debt instruments with short-term ones. SUMMERS said, "Russia's new 1998 program, developed in consultation with the IMF includes important commitments with regard to fiscal, monetary, and structural policies." The deputies will continue contact and discussions on aid to Russia, and a final decision will be made at a future meeting of G-7 finance ministers. British Prime Minister Tony BLAIR said, "It's obviously tremendously important, not just for Russia, but for the whole of the world that the economic situation there improves." US Treasury Secretary Robert RUBIN said that the IMF would have funds available if needed to help Russia. He added that the US has "a strong stake" in Russia's economic recovery. He said recovery in Russia would contribute to US national security and to economic growth and political stability in the region. German Finance State Secretary Juergen STARK pointed out that G-7 aid is contingent on linkages to pledges or credible form in Russia. Germany, Russia's largest trading partner outside of former Soviet republics, has a credit risk of at least $30 billion. Some financial analysts believe Russia needs a new injection of emergency funds from G-7 nations to shore up investors confidence. They

speculate that $5 to $10 billion many be necessary to defend the ruble. European Union finance ministers last week said they believe any aid to Russia, if it needs it, should be funneled through the IMF. The IMF said that there is no immediate need to increase an existing $9.2 billion loan to Russia. Russia is due to receive a $670 million disbursement from this loan later this month. The deputies of the finance ministers from Britain, Canada, France, Germany, Italy, Japan and the United States also discussed the foreign exchange issue, but fell short of showing firm resolve to counter the yen's rapid fall against the US dollar. Today the yen dropped further. The Russian stock market reacted negatively to growing Asian fears, falling 6 percent with light trading.

Russia To Supply Germany With Uranium

· Chief of Tekhsnabexport, the foreign economic organization of the Russian Ministry of Nuclear Energy Albert SHISHKIN said Tuesday that Russia and Germany have agreed to sign a contract in autumn for Russia to supply 1.2 tons of highly-enriched uranium for Munich-2, a nuclear experimental reactor. After the signing of an intergovernmental agreement by Russian Atomic Power Minister Yevgeny ADAMOV and German Foreign Minister Klaus KINKEL on Monday, SHISHKIN said work will begin once the document is referred to Techsnabexport. It will take two or three months to draft the contract, SHISHKIN said. He added the contract will be struck with whatever firm proposes the most advantageous economic and technical terms to

Today's News Highlights

Russia

$10 Billion Misspent

Gazprom-Gov't Power Play

New State Oil Company

European Republics

Ukraine Fails to Elect Speaker

Diplomats Threaten Mass Recall

South Caucasus & Central Asia

Socar Worried Over AIOC Acts

Turkic Leaders Meet In Astana

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Wednesday

June 10, 1998

Intercon's Daily

Russia. The sides stipulated safeguards for Germany, which pledged not to use Russian uranium for the manufacture of nuclear weapons or other military purposes. He did not name the price at which uranium will be sold, saying this is a commercial secret. However, highly-enriched uranium, with the enrichment of over 90 percent for the isotope of arms-grade Uranium-235, is one of the most expensive nuclear materials in the world market.

Economy

Ruble = 6.142/$1.00 (NY rate)

Ruble = 6.172/$1.00 (CB rate)

Ruble = 6.143|6.201/$1.00 (buy|sell rates)

$10 Billion Misspent in Moscow

· Head of the Chamber of Accounts of Russia Venyamin SOKOLOV said that at least $10 billion, or one-sixth of Russia's federal budget, was misspent in 1997 through mismanagement, corruption and other means. "This is only the sum we've got documentary evidence for. My estimate is the real total is double that amount," the Financial Times reported. He said Russia's Finance Ministry had no systematic way of accounting for income and expenditure and had resisted attempts to persuade it to put a transparent accounting system in place. Russian officials and the International Monetary Fund (IMF) have said that the situation has improved since a western style treasury system was introduced this year. SOKOLOV noted that in 1995 and 1996, "not a single article of the federal budget law was observed." He listed several examples of abuse of funds, including millions of dollars aimed to assist the reconstruction of the Chechen economy which never reached their destination. Regarding foreign aid, SOKOLOV said he did not have concrete information on it because the government did not release the data. He believes the aid made its way into Russia's financial markets. He said, "There needs to be a radical change in the policy of the IMF and the US government." The Chamber of Accounts, established in 1995 to monitor government spending, is an agency with a strong Communist contingent. SOKOLOV has been described as a critic of Russian President Boris YELTSIN's reformist government.

S&P Lowers Long Term Rating

· Standard & Poor's (S&P) Tuesday lowered Russia's long-term foreign currency issuer credit

ratings and senior unsecured ratings to B+ from BB-. The ratings were also removed from CreditWatch, where they were placed with negative implications on May 27, 1998. The outlook on the long-term ratings is stable. S&P also affirmed its B short-term foreign currency issue credit rating. The rating agency noted that limited fiscal flexibility, poor payment discipline, weak legal system, and still developing democratic institutions were negative factors leading to the revision. However, it pointed out that Russia's continued commitment to disinflation and its ability to earn financial support from various international financial institutions, including the International Monetary Fund (IMF) and the World Bank, helped Russia earn a stable outlook. The downgrade reflects, "significant weakening of Russia's fiscal and external payments flexibility," the agency said. S&P warned that Russia's financial situation constrained by tax and budgetary payment arrears will result in an increase of, "widespread use of money and barter substitutes," which will distort the business climate.

Tax Service Aims To Boost Tax Collection

· Russian Deputy Prime Minister Viktor KHRISTENKO announced on Tuesday that the Russian government has instructed the State Tax Service to collect 40 percent more taxes in June than it did in May. He said that the tax service's work overall is, "unsatisfactory," but added that urgent measures implemented last month will improve collection. In accordance with a decision of the government commission for federal budget revenues, the budget plan for the second quarter of 1998 should be fulfilled by an extra ten percent. The State Customs Committee fulfilled the plan by 102 percent, and the State Tax Service failed to collect 30 percent of taxes, which was less than May 1997 collections. The commission will meet next week to focus on the fulfillment of a program for the mobilization of budget revenues, approved by the cabinet on May 25th. The commission outlined measures to prevent illegal and legal tax-dodging, primarily dodging of the VAT, KHRISTENKO said. Related instructions will be prepared by the Ministry of Finance and the State Tax Service in the near future. Changes will be introduced in the laws, and "the way to dodge the VAT will be closed," the deputy prime minister added.

In connection with Russia' crackdown on tax evad

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ers, Russian tax authorities seized the property of Dalenergo power utility to recover 7.9 million rubles ($1.3 million) in tax arrears. Dalenergo spokesman Alexander GELBAKH said tax police seized 33 half-built cottages owned by Dalenergo and worth approximately 8 million rubles. The property is to be sold at an auction to raise funds to pay the debts, but no mechanism for such an auction have been established. GELBAKH, however, complained that the federal government owes Dalenergo 900 million rubles and city government owes 704 million rubles. "Despite mutual debt, the government does not want to cancel out obligations, in order to at least partially solve the problem," GELBAKH said.

Business

Gazprom-Government Power Play

· In a strategic political power play between Gazprom Board Chairman Rem VYAKHIREV and the new government of Prime Minister Sergei KIRIYENKO, Gazprom is pressing the government to sell a further shareholding in the gas giant to a western partner for $1 billion, the Financial Times reported. The sale of a 2 to 3 percent stake, which would be the biggest equity offering from a Russian company this year, would bolster the government's stretched finances and strengthen the company's relationship with western energy groups. Although Gazprom is 40 percent owned by the government, the gas company exerts considerable influence over the government due to it being Russia's largest hard currency earner. The government, however, may be holding over Gazprom its large outstanding tax bill. The two may find a compromise in the 2 percent stake sell-off.

VYAKHIREV reiterated on Tuesday that Gazprom will decide on bidding for the 75 percent plus one stake in the oil producer Rosneft after consultations with its strategic partner Royal/Dutch Shell. He made it clear that the decision of the consortium which comprises Russia's Gazprom and LUKoil and Shell depends on whether the foreign partner finances the deal. The price of the Rosneft stake was cut to $1.6 billion by KIRIYENKO's decree signed on June 1st. The first tender, with a starting price of $2.1 billion, was canceled because of lack of bids.

New State Oil Co. Formed In Sakhalin

· Sakhalin Governor Igor FARKHUTDINOV has

approved a resolution to establish a new state oil company, called Sakhalin Oil Company. The company will ensure effective participation by the state in projects of prospecting for, developing and processing of mineral resources from Sakhalin oil and gas deposits. The new company is to sell oil and gas developed in Sakhalin on the conditions stipulated by the federal law "On sharing products," on the basis of which major projects for development of the Sakhalin-1 and Sakhalin-2 projects are being carried out. The authorized stock of the new company amounts to 100,000 rubles. In the near future the Sakhalin Oil Company may become a partner of the Central Fuel Company controlled by the Moscow City government. In April, 1998 the administration of Sakhalin signed a number of agreements to cooperate with the Moscow government and the Central Fuel Company. FARKHUTDINOV hopes this company will attract investors to Sakhalin

European Republics

Ukraine Fails For The 6th Time To Elect Speaker

· The Ukrainian legislature's sixth attempt to elect its speaker has been declared invalid due to the lack of a two-thirds quorum, RFE\RL Newsline reported. The Socialists/Peasants candidate Alexander MOROZ received 177 votes, while Gromada candidate Alexander PUKHKAL earned only 30. As on previous occasions, the Popular Democratic Party, Popular Rukh, United Social Democrats, and Greens refused to participate in the vote. They are demanding a "package vote" on a centrist speaker and two deputy speakers, representing the left and right-wing parliamentary groups. Some Ukrainian newspapers have dubbed the continued deadlock in the Supreme Council a "farce" that is preventing deputies from addressing the country's acute socio-economic problems. Several international figures including the head of the International Monetary Fund have encouraged deputies to break the deadlock for the good of the country.

Belarus Grants Diplomats One More Week

· Belarus President Alexander LUKASHENKO intervened in the growing eviction disputed between 22 foreign diplomats the Belarus government by extending the deadline for ambassadors to leave their homes in the Drozdy complex. The demand placed on ambassadors to leave their homes in one week is a violation of the Vienna Convention, which

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determines ambassadors' residences as sovereign territory. According to a Belarus Foreign Ministry ,"The President expressed his concern at the existing situation and ordered the deadline to be extended a week to enable the diplomats to look for the best options for moving. Western governments responded by postponing plans for a mass recall of ambassadors, but made it clear they expected Minsk to allow the diplomats to remain in their homes during repairs rather than moving to temporary accommodations. The US, France, Germany and Lithuania have formally protested the planned evictions. Even Russia, Belarus' only international and economic partner stated that, "We are not preparing to leave, the residence is the property of the Russian Federation," a Russian diplomat in Minsk said. US State Department James RUBIN on Tuesday accused the Belarus authorities of intentions to enlarge its real estate by taking possession of the Drozdy complex. He reiterated the warning made on Monday that if the Belarus government evicts the US ambassador from his residence adequate measures will be taken against the Belarus Ambassador in the US.

South Caucasus & Central Asia

Socar Concerned Over "Covert" Delays

· Vice President of Azerbaijan State Oil Company (Socar) Ilgam ALIYEV said that Azerbaijan is concerned over attempts by the British Petroleum-Statoil led consortium AIOC to delay the construction of a major oil export pipeline from Azerbaijan to Turkey by taking "covert" actions. ALIYEV said Socar has been forced to "struggle" for the major pipeline's construction because AIOC was trying to stall the project. "We already knew that the consortium was against the main oil pipeline or wanted to delay it. But, now these activities have reached a greater scope," the Dow Jones Newsline quoted ALIYEV as saying. AIOC is the multi-national consortium designed to run the production and export operations of Azerbaijan oil. Turkey, Russia, and Iran are competing to win an export route through their nation. AIOC prefers a route through the

Bosphorous Straits, an option to which Turkey objects for environmental reasons. Socar has already agreed with AIOC that the decision on the pipeline's construction and route will be made this October. The pipeline is expected to export Caspian crude when oil production reaches its peak in 2003 to 2004. AIOC members include British Petroleum, Norway's Statoil, Amoco Corp., Unocal Corp., Exxon Corp., Pennzoil Co., Ramco, Russia's LUKoil and Japan's Itochu Corp.

Turkic Leaders Meet In Astana

· Leaders of Turkic-language countries Tuesday opened their fifth annual summit meeting in Astana, the new capital of Kazakhstan to discuss economic and cultural cooperation. However, the leaders did not sign basic documents to that effect. Taking part in the summit are the Kyrgyz President Askar AKAYEV, Turkish President Suleiman DEMIREL, Uzbekistan President Islam KARIMOV, Azerbaijani President Geidar ALIYEV, as well as chairman of the Turkmen parliament Sakhad MURADOV. The summit is chaired by Kazakh President Nursultan NAZARBAYEV. Noting that the region is on the brink of an economic boom, DEMIREL said, "The Turkic world is at the heart of Eurasia. With natural resources and a strategic situation, all of this makes the 21st century ours." Each nation is proud that they are apart of the major transportation corridor called the Silk Road, linking trade between Europe and Asia. Along the corridor development is certain, prompting a rise in production of oil and gas. The leaders called for cooperation in getting their products and resources to hard currency markets. For oil transportation, Azerbaijan and Turkey have pushed strongly for the Baku-Ceyhan pipeline route. ALIYEV said, "We say that the best route is Baku to Ceyhan." Turkmenistan and Kazakhstan have also considered laying pipelines across the Caspian Sea. Azerbaijan and Turkmenistan share the common aim of bypassing Russia with future oil and gas export routes. In 1997, Kazakhstan signed a multi-billion oil transportation deal with China, moving its oil to markets in the east instead of west.


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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