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, June 11, 1998


Russian Federation

Politics

Western Banks Supply Secret Loans

· Over the past week, the Russian government secretly borrowed at least $200 million from US commercial bank Chase Manhattan to support its financial stabilization program. The short-term bank borrowing appears to ease the pressure on the government to borrow through the domestic debt market, the Financial Times reported. The Russian government received a one-year $200 million ruble-denominated loan from Chase Manhattan at a rate below Russian treasury bill yields, set at 53 percent on Wednesday. The Russian Finance Ministry would not confirm the loan. Russia borrowed a similar loan from Lehman Brothers earlier this spring. Both loans protected the lenders from currency risk, by linking the coupon to the ruble exchange rate. The International Monetary Fund (IMF) bankers were aware of the latest loan, but warned against excessive foreign borrowing during the financial crisis. East European economist at ING Barings Philip POOLE assessed the situation by saying, "The Russian government perceives their problem to be a short term issue linked to their high refinancing requirements [in the Treasury-bill market]." Russia continues to follow this trend of raising emergency funds from foreign lenders to cover critical financial needs. Late last summer, US financier George SOROS loaned Russia several hundred million dollars, which was paid back within the month, to cover back wages to federal employees.

IMF Aid Contingent On Russia's Fiscal Reform

· The International Monetary Fund (IMF) has not made public a confidential letter sent to the Russian government listing steps it should take to qualify for billions of dollars in extra loans, according to an article in The New York Times. The IMF says its

demands are intended to advance long stalled economic reforms. It calls on the government to slash its budget deficit and overhaul its tax system. Under the IMF's plan the deficit would be cut to 2.5 percent of the nation's gross domestic product in 1999, well under the 4.5 percent target set by the government. Russia was asked to adopt a new tax code with lower rates and a new code on budgetary procedures. The IMF calls for passage of the stalled land reform and budget laws, tax increases, and boost in the value added tax. All these tasks are difficult for Russia to implement because they must be approved by the parliament. The government doesn't have a majority in the Russian State Duma. The Fund wants Russian gas giant Gazprom, which is 40 percent owned by the state government, to separate its gas pipelines operation and its extraction operations. It calls on the Central Bank to strengthen the banking industry, by being more open about its activities. It is speculated that the IMF additional loan could be between $5 billion to $10 billion. Director of emerging markets for Donaldson, Lufkin & Jenerette Charles BLITZER said, "the sooner the size, timing, and composition of the support is known the better. Waiting to see if words alone stabilize the market is a form of Russian roulette." A fund official explains, "We are not saying there will be no money for the Russian government. But we are not saying that it is guaranteed and we need to know if Russia can meet the conditions." While many worry that the IMF is asking too much of Russia at a time when it is strained by economic turmoil, newly appoint Federal Tax Service chief

Today's News Highlights

Russia

Tax Chief Warns Foreigners

Upcoming Privatization Sales

Gaprom In The News

Novosibirsk Telecom Shares

European Republics

Estonian Bank Liquidation

Rus-Belarus Union Meeting

South Caucasus & Central Asia

Rus-Georgian Foreign Mins.

Kazakh Telecom For Sale

Politics-Economics-Business

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Thursday

June 11, 1998

Intercon's Daily

Boris FYODOROV disagrees. He said, "I have never said the IMF is too tough. My personal view is that the IMF is never pressuring Russia enough."

Economy

Ruble = 6.172/$1.00 (NY rate)

Ruble = 6.174/$1.00 (CB rate)

Ruble = 6.138|6.210/$1.00 (buy|sell rates)

Fyodorov Warns Foreign Businessmen

· The tough-minded, free marketer, federal tax service head Boris FYODOROV warned the embassies of the Group of Seven industrial nations to make sure their citizens living in Russia pay their taxes. "Once a couple of important western businessmen who are resident here in Moscow are stopped at the border and are told, `Hey guys, you cannot leave, you are tax offenders, probably have to spend a couple of years in Siberia,' I think that will make a very good example," FYODOROV said. Initially when FYODOROV became head of the Russian State Tax Service, western businessmen praised the move. Now they may wish he was less of a tax enforcer. He has outlined several plans to boost tax collection and shift the tax burden to individual taxpayers. Currently, individuals represent only 10 to 13 percent of all taxes collected by the government. FYODOROV said, "I cannot change the tax legislation, and obviously without real tax reform, without boosting incentives for capital investment and lost of other things, you cannot change the whole country," the Financial Times reported. But he is trying to persuade Russians to obey the law and pay their taxes. He believes that one way to foster tax payments is a simpler tax declaration, except for about 5,000 richest people of Russia. "We should think about ways to involve in the legal circulation the money hidden from taxation in Russia and abroad," FYODOROV said. He believes that the Russian tax code, to be adopted this year, is not the "the tax reform" the country now needs.

Business

Upcoming Privatization Sales

· First Deputy Property Minister Alexander BRAVERMAN today said that the Russian State Property Ministry plans to unfreeze a 5 percent government stake in Russian gas giant Gazprom. He said, "The first steps towards selling such a stake will be ready in a few weeks." BRAVERMAN said the

ministry intends to sell 24 percent of Rosneft shares to individuals after a strategic investor purchases the company's 75 percent stake plus one share. He noted that Federal Property Fund and the Ministry of State Property on Friday begins a presentation series in Britain and the United States to increase the number of potential bidders for the Rosneft stake. Priority will be given to strategic investors not directly linked with oil business. The Royal/Dutch Shell-Gazprom consortium, the consortium Sidanko-British Petroleum, UCOS and Sibneft, which is likely to participate in the tender together with its strategic partner Alf-Acquiten have all expressed interest in bidding. The ministry will determining the terms for a sale of a 19.36 percent stake in oil company Slavneft by June 18th. The 25 percent stake to be sold this year in Russian telecom Svyazinvest has been valued at $1.5 billion by American Appraisal. BRAVERMAN said, "In our opinion, that would be a fair starting price." He said proceeds will probably be divided between the government, receiving $1.1 billion, and the company, receiving the remaining $400 million. The date and terms for the sale have not been announced. Last year, a 25 plus one percent stake was sold for $1.9 billion. Air Force commander Anatoly KORNUKHOV on Wednesday announced that Russia is putting some 600 combat and military transport aircraft up for sale. He said that reforms in the military allow it to, "free a lot of equipment...which are in demand." Offered for sale will be Mig-27, Mig-23 and Su-22 fighters, an L-39 training plane and transport aircraft. The Air Force is also planning to sell outdated air defense complexes S-200 and S-125 with guided missiles and space parts, KORNUKHOV said. The revenues will be used to boost the military's budget.

Gazprom-UES Cooperate In Non-payments

· The Russian giant gas company Gazprom and the Unified Energy Systems of Russia (UES) have agreed to cooperate in solution of the non-payment problems and act jointly on international energy markets and in the reconstruction of power plants, Gazprom Board Chairman Rem VYAKHIREV said at a news conference on Tuesday. VYAKHIREV met with UES head of management Anatoly CHUBAIS last week to outline joint priorities. The sides agreed to specify the gas component of the electricity production, which will help to untie the knot of mutual debts. Power plants are traditional debtors of gas

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Politics-Economics-Business

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Thursday

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companies. They make up to 40 percent of the debt for natural gas supplies.

VYAKHIREV has said that Media Most President Sergei ZVEREV will become his deputy, RFE/RL Newsline reported. He will head Gazprom Media, which is in charge of structuring and developing Gazprom's numerous media assets. Viktor ILYUSHIN, who until now headed Gazprom Media, will become head of Gazprom's public relations and regional relations department. VYAKHIREV said ZVEREV was appointed as part of a reshuffle of Gazprom's media holding. Gazprom owns a 30 percent share in NTV, Media Most's main electronic media asset.

Gazprom has postponed the issuing of an international bond which was scheduled for June. VYAKHIREV said, "Gazprom has been ready to issue bonds for a long time, but the current market situation is not favorable." A new date for the international bond has not been agreed upon yet.

Novosibirsk Telecom Authorizes Shares

· Siberian telecommunications company Novosibirsk City Telephone authorized today 200,000 ordinary shares. This will represent an increase of 13.27 percent in voting capital, if issued. Head of the securities department maxim PASHKOVSKY said no date has been set for issuing the shares. He alluded, however, that the issue would probably take place after launching an American Depository Receipt (ADR) program to allow easier foreign trade of shares. The ADR program is planned to begin before the year's end.

the central bank, Eesti Pank, Kaia KELL said, "At this time we can confirm that negotiations involving two leading Estonian banks in the rescue of Maapank are being held. The rescue package would involve the takeover of the bulk of assets and liabilities and would also include a securities transaction." KELL did not reveal which banks are involved. Maapank on Monday failed to meet a central bank deadline for re-capitalization. The central bank suspended Maapank's banking license. The voluntary liquidation has to be approved by a general meeting of shareholders on June 18th. According to unconfirmed reports, Uhispank and Hoiupank, the two largest banks, are ready to buy the performing assets of Maapank. The government reiterated it will not save Maapank if the rescue deal fails. Any losses by private depositors will be partially covered by a new deposit insurance law.

Rus-Belarus Union Stresses Economic Ties

· Russian Prime Minister Sergei KIRIYENKO said, "we must build a strong economic foundation for the political achievements reached by Russia and Belarus in their bilateral relations." He said this economic foundation should be based on growing industrial production both in Russia and Belarus and expanding bilateral trade. He stressed that Russia and Belarus must not limit their trade to an exchange of products, but they should take the next step toward integration by developing broad cooperation between producers in the two countries. The Russian-Belarus talks focused on economic cooperation, the development of foreign economic ties, financial and credit issues, and Belarus' debts for Russian energy supplies, which now totals $430 million. The Prime Minister hailed the agreements reached during his talks with President Alexander LUKASHENKO and at a meeting of the Executive Committee of the Russia-Belarus Union. He said, "I did not feel any difference between the Russian and Belarus representatives at the negotiating table. We have nothing to divide. Those who try to do this, have engaged themselves in useless work." The sides also, discussed customs related issues and the activity of the Customs Union.

KIRIYENKO said cargoes heading for Russia through Belarus should be customs cleared in Belarus under Russian laws. He noted that Russian and Belarus customs services should coordinate their actions.

European Republics

Estonian Bank To Liquidate

· The sixth largest bank in Estonia by assets Maapank announced this week that it has voluntarily opted for liquidation. Maapank, or Rural Bank, which last year registered significant losses owing to unsuccessful stock market ventures, has frozen deposits worth some 842 million kroons ($58.9 million). Of that sum, 260 million kroons belong to private individuals and 500 million kroons to the government. Prime Minister Mart SIIMANN said the crisis is a, "serious matter" but does not reflect the state of Estonian banking in general since the market share of the Rural Bank was "rather small." Spokesman for

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Politics-Economics-Business

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Thursday

June 11, 1998

Intercon's Daily

The Prime Minister supported Belarus' proposal to provide customs terminals with banking data systems. KIRIYENKO stated that it was necessary to establish a dependable and effective customs information system. He stressed that it was absolutely intolerable when businessmen declare that their goods, imported into the territory of the Belarus-Russia Union, cost of $10 million are reduced to $1 million when they pass through customs in Moscow. This means that the budgets of Belarus and Russia lose quite considerable sums. There are ten checkpoints on the Brest sector of the border with more than two million vehicles crossing annually.

South Caucasus & Central Asia

Georgian-Russian Foreign Ministers Meet

· Georgian Foreign Minister Irakli MENAGHARISHVILI met with his Russian counterpart Yevgeny PRIMAKOV Wednesday in Moscow to discuss the situation in Abkhazia. Georgian President Eduard SHEVARDNADZE said that the Georgian National Security Council had instructed MENAGHARISHVILI to demand the immediate implementation of articles of the May 25th protocol that requires the repatriation of ethnic Georgians who were forced to flee the Gali district. Abkhazia has demanded that repatriation be linked with relaxing of restrictions on its border with Russia and an end of economic sanctions. The Abkhaz also insist that refugees accept Abkhaz citizenship, which is not internationally recognized. SHEVARDNADZE said the timetable proposed by Abkhazia for the return of refugees is unacceptable for Georgia. He noted that the opening of the border along the Psou river and the resumption of railway traffic through Abkhazia can become possible with the implementation of decisions made by the CIS summit in Moscow. Abkhazian leader Vladislav ARDZINBA, however said, "We are ready to immediately begin the process of refugees' return, but it should be controlled." Tblisi has accused Abkhazia of violating mutual agreements by sending armor to the security zone

which is guarded by Russian peace-keepers. "The armor has not been sent to the security zone from anywhere and that was thanks to the peace-keepers," ARDZINBA said.

Due to the conflict with Abkhazia, Georgian citizen's attitudes toward the SHEVARDNADZE government is under increasing criticism. This lack of confidence appears to have enabled Socialist Party candidates in two districts in the Lagodekhi region to outpoll the majority Union of Citizens of Georgia candidates in local elections on June 7th. The Lagodekhi local election commission has applied to the Georgian Central Electoral Commission to review the voting results. Leading Georgian politicians have complained that, "every conceivable sort of violation," was committed during the voting. Whether this is true or not, Intercon sources in Georgian report that agitation among the refugee population in and around Zugdidi is being undertaken by former Gamsekgurdia supporters and possibly foreign military intelligence operatives and assets.

Kazkommertsbank Seeks Investor

· Kazkommertsbank Tuesday said it might sell its 30 percent stake in Kazakhstan's telecoms monopoly Kazakhtelekom buy the end of the year. Head of the corporate financing department at Kazkommerts Securities, the investment arm of Kazkommertsbank Nikolai VARENKO confirmed the plan. "We have only one condition. We believe this sale can only be to an investor experienced in operating telecoms," VARENKO said. According to a Kazkommerts statement, "None of the financial investors, who have purchased the shares of Kazakhtelekom have any obligations towards Kazakhtelekom or the government of Kazakhstan." VARENKO added that negotiations with potential bidders will start once Kazkommerts completed a memorandum with US bank Chase Manhattan. Kazakhtelekom President Serik BURKITBAYEV said on Monday that Kazkommerts Securities and Chase Manhattan had bought a 40 percent stake in the telecoms monopoly held by South Korean Daewoo Corp. in February.


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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