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

Tuesday, June 16, 1998

Russian Federation

Politics

Russian Interior Forces To Be Reduced

· After briefing Russian President Boris YELTSIN on the restructuring program, Interior Minister Sergei STEPASHIN and Colonel-General Pavel MASLOV, the commander of the Interior Ministry troops, announced that the Ministry's troops will be cut from 250,000 to 120,000—140,000. The size of the Interior Troops grew significantly during Anatoly KULIKOV's tenure as interior minister. STEPASHIN said, "We must have a different internal military, which doesn't duplicate the ground forces." He added that the forces must, "usher in the 21st century as highly mobile forces." MASLOV said the principle of qualitative rather than quantitative indexes will be used in interior troops reforming. Officers and petty officers will be better trained. A larger share of troops will consist of those serving under contract, and troops will be streamlined to become highly mobile and more effective.

Economy

Ruble = 6.180/$1.00 (NY rate)

Ruble = 6.183/$1.00 (CB rate)

Ruble = 6.156|6.210/$1.00 (buy|sell rates)

Russian Stock Market Rebounds

· Reacting to news that the International Monetary Fund (IMF) is sending a team to Moscow to discuss additional lending, the Russian stock market rebounded 4.2 percent today after seven straight sessions of losses. On Monday due to new Asian anxieties and doubts and the drop of the Japanese yen against the dollar, the Russian trading system index closed at 165.11, falling 7.3 percent to its lowest point since 1996. Yields on short-term treasury bill rose from 63 percent to 71 percent above the

Central Bank's refinancing rate of 60 percent suggesting another increase in interest rates may occur soon. The ruble slipped outside of its trading band falling to 6.21 against the dollar. Russian equity strategist at Morgan Stanley Dean Witter John Paul SMITH said, "There's a complete loss of confidence in emerging markets across the board, and Russia is the worst hit," The Wall Street Journal reported. Investors are disillusioned by promises of reform and are waiting to see progress on economic structural reforms before returning to the market. Compounding the economic problems, the Russian government is under pressure to solve poor tax collection problems and pay off its debts. Russian Deputy Prime Minister Boris NEMTSOV said, "If we don't solve them during the summer, things will get very heated in the autumn." Investors are pinning their hopes on a stabilization package from western governments or international financial institutions.

On Monday, the European Union (EU) Finance Ministers said in a statement that the EU welcomes and supports economic reform in Russia. Having discussed the economic situation in the world and the key problems of the currency market, the Finance Ministers confirmed that the EU will render financial assistance to Russia. They added that it intends to consider and approve the program of assistance to Russia at the next session of the IMF. The US and other major industrial nations have told Russia it will be supported if more money is needed, however, they insist that their funds be channeled through the IMF.

Today's News Highlights

Russia

Rosneft To Be Completly Sold

Eni To Buy Gazprom Stake?

Economy Hit By Low Oil Prices

European Republics

IMF Considers Credit For Kiev

New US Ambassador To Latvia

South Caucasus & Central Asia

Exclusive Figures From Conflict

Georgian FM In Armenia

Turkmen Opens Sugar Refinery

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Russian Economy Hit By Falling Oil Prices

· In London the bench mark for Brent crude futures were trading at $12.30 per barrel Monday slightly above the lows of $11.90 per barrel in March, but still below Friday's closing price. These fresh falls in global crude oil prices will deal the Russian oil companies and the state budget another blow. MFK Renaissance analyst Jim HENDERSON said, "You can guarantee that none of the Russian oil companies are making any money at the moment on exports, it's having very serious consequences for the Russian oil industry in terms of cash generation." A spokesman for Russia's seventh largest producer Sibneft said that the company was reducing labor cost by cutting staff numbers. He said no decision has been made on cutting production in the light of low crude prices. But he added that Sibneft was, "watching carefully," and it will fully implement its cost-cutting program. The new drop in prices come only 10 days before a meeting of the Organization of the Petroleum Exporting Countries (OPEC) in Vienna, where cutting production to boost prices is expected to be discussed. Russia is to attend the session as an observer. Russian Fuel and Energy Minister Sergei GENERALOV said he is against Russia making any cuts in oil exports.

Business

Rosneft To Be entirely Privatized This Year

· Russian Deputy Prime Minister Viktor KHRISTENKO Monday said that Russia plans to sell the entire state-owned oil company Rosneft in 1998 and not just the 75 plus one percent stake sale that is currently on-going. In a letter read by the privatization ministry's spokesman, KHRISTENKO said, "After completing the competition for the sale of 75 percent plus one share in Rosneft the government proposes to hold a special auction which would allow a wide range of private investors to acquire the remaining shares." In May, the initial sale of the majority stake was canceled due to the lack of bidders, who balked at the high starting price of $2.1 million plus $400 million in further investments. The Rosneft stake is being offered again at a lower starting price of $1.6 billion with a required further investment of $65.5 million. The final day of bidding is July 16th. A consortium of Royal/Dutch Shell, LUKoil and Gazprom is a possible bidder for Rosneft, if Shell finances it. A Shell representative said the

company was considering the Rosneft bid, adding that price was the major issue, "as is always the way when considering investing in something."

Eni May Purchase Gazprom Stake

· Italian Energy group Eni is considering the purchase of a stake in Russian gas monopoly Gazprom. Eni's chief executive Franco BERNABE said Monday at a news conference that one of the topics in its alliance talks with Gazprom included Eni taking a stake in the Russian group, the Financial Times reported. Eni may also go ahead with a buy-back program, BERNABE said. The Italian energy group expects to conclude talks with Gazprom by the end of this year.

Gazprom announced that it has reduced the supply of natural gas to Belarus by 40 percent and to Moldova by 50 percent, effective today, because of the unresolved problem of debt repayment for supplied fuel. Gazprom's leaders had repeatedly urged Belarus in talks to clear its gas debt totaling $240 million. In April, Gazprom and Belarus agreed that Minsk will repay 26 percent of that debt in hard currency and 74 percent in goods.

High Tech Exhibition Opens In St. Petersburg

· An international high tech exhibition opened today in St. Petersburg the city, "promoting high technologies, innovations and industrial investment projects." Taking part in the exhibit of high-tech products, dual technologies and business services are over 100 organizations and companies from the state association Nauka [Science], the Russian Academy of Sciences, the Technological Development Fund and Russia's Fundamental Research Fund. A fund for promoting small business in the science and research field has organized an impressive display of products by small and mid-size firms. The organizers said, "Such an exhibition of achievements ensures effective interaction between researchers, industrialists, potential investors, bankers and business people." Among the largest foreign participants are the Samsung Advanced Technologies Institute and the Kaunas Innovation Center. A conference running parallel to the exhibition involves scientists and experts from Russia, Germany, France, the US, Finland and countries of central and eastern Europe.

Largest Baltic Food Store Opens In St. Pete

· A Lithuanian shopping center opened in St.

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Petersburg Monday, becoming the largest Baltic food store in the Commonwealth of Independent States. Lithuania has invested about $4 million in the project. The shopping center was built under a trade and economic cooperation agreement signed in 1996 at the St. Petersburg committee for external ties. The opening ceremony was attended by St. Petersburg Governor Vladimir YAKOVLEV and Lithuanian Minister of Agriculture and Forestry Edvardas MAKELIS. The Minister is accompanied by a delegation of Lithuanian businessmen, politicians and parliamentarians. Trade ties between St. Petersburg and Lithuania are developing rather intensively. St. Petersburg exports exceeded $99,000 in 1997, which was almost $25,000 more than in 1996. Imports from Lithuania during the same period amounted to $33,900 as compared to $30,200 in 1996. The main export items are oil, petroleum products, ferrous metals, vehicles and equipment. Lithuania supplies St. Petersburg with foods, medical and pharmaceutical goods.

tariff policy have also been discussed at the Ukrainian Ministry of Foreign Economic Relations and Trade. Negotiations with the IMF on this problem began in 1997.

New Ambassador To Latvian

· US President Bill CLINTON announced his intention to nominate James Howard HOLMES as US Ambassador to Latvia. HOLMES, of Springfield, Virginia, is a Career Member of the Senior Foreign Service and is the Coordinator for Eastern European Assistance at the Department of State, a program of transitional economic and political assistance to fourteen Central European and Baltic states. HOLMES was assigned to the White House Staff and was the recipient of several Superior and Meritorious Honor Awards from the Department of State.

South Caucasus & Central Asia

Exclusive Figures Of Georgia-Abkhaz Conflict

· Georgian President Eduard SHEVARDNADZE, in his weekly national address Monday, expressed approval of Moscow's "clear-cut and radical," assessment of the May fighting in the Gali district. He said that if Russia's stance does not change, they will classify the fighting as genocide and ethnic cleansing. Georgian Presidential press secretary Vakhtang ABASHIDZE reported that talks may resume as early as this week. The Abkhazian envoy to the talks Anri DZHERGENIYA said that a meeting between SHEVARDNADZE and Abkhazian leader Vladislav ARDZINBA, "should take place, and the sooner it happens, the better." It is still unknown whether Yerevan will help mediate settlement of the conflict. Concerning Georgia's demand that all refugees be returned to the Gali district of Abkhazia immediately, DZHERGENIYA said, "the leadership of Abkhazia will not return refugees spontaneously," because "it was an unorganized return of refugees that led to the tragic events in the Gali district in May 1998." Intercon has received exclusive excerpts from a report being prepared by the Georgian Procurator General's office after conducting extensive interviews with Gali refugees in Zugdidi. The prosecutors discovered that, "over 1,200 people including 172 women, 27 adolescents and 6 infants were victims of mass ethnic cleansing of civilian population by organized gangs of separatists from October 1993 to May 20, 1998. There are 480 people of 60 years old and

European Republics

IMF Considers Credit For Ukraine

· A mission of experts from the International Monetary Fund (IMF) on Monday began discussing possibilities for cooperation on the three-year extended credit facilities program with the Ukrainian government in Kiev. Director of the IMF Second European department John ADLING-SMEE, who heads IMF experts' mission, is expected to arrive in Kiev on Saturday. The IMF Board of Governors is to make a decision in August on allocating a credit of $2 billion to Ukraine provided it meets a number of terms. IMF experts will discuss questions connected with the fulfillment of the 1998 budget, and cutting its deficit to 2.5 percent through reducing the expenditures. The new program is offered instead of a stand-by credit. The stand-by credit to Ukraine was suspended in January 1998 because it ran a large deficit of the state budget. Government representatives say that financial stability has been reached in Ukraine. In the framework of the stand-by credit, Ukraine received about $252 million since August 1997. The last installment of the credit was allocated on January 28, 1998, for last December. The total sum of the loan was fixed at $542 million. The IMF has allocated credits to a sum of over $2.2 billion for Ukraine over the past five years. Questions of the

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over of people who were shot. There are over 100 people who were burnt alive and shot and their age is over 80." During the fighting in Gali since May 20th, "1606 houses were burnt in the village of the lower part of the Gali region." The villages include Tageloni, Nabakevi, Otobaia, Ganakhelba, Kvemo da Zemo Bargebi, Sida and Rephi. In the upper part of Gali, 181 houses are burnt from the villages of Dikhazurga, Saberio and Mukhur-Sesheleil. A total preliminary estimation of 1787 house are burnt and 49 civilian persons have been shot dead. Approximately 30,000 previously returned inhabitants of Gali were ousted from their homes. There are 13 people missing and 25 have been taken hostage. Comment: The Abkhazian conflict remains the most complete ethnic cleansing since the collapse of the Soviet Union.

Georgian Foreign Minister In Armenia

· Georgian Foreign Minister Irakly MENAGARISHVILI on Monday was the first member of the Georgian government to visit Armenia since Armenia's early Presidential elections in March 1998. Armenian President Robert KOCHARYAN said of bilateral relations that, "We must make sure that the level of our relations matches the strategic goals of our countries." MENAGARISHVILI briefed the President on the settlement process in Abkhazia and stressed that Georgian President Eduard SHEVARDNADZE has called for an extraordinary meeting of the CIS heads of state to discuss this issue. Yerevan refused to comment whether Armenia would mediate the settlement of the Abkhaz-Georgian conflict. Economic relations between Armenia and Georgia were discussed separately. Both sides agreed that trade relations have not reached the two countries' potential. KOCHARYAN said the development of transportation routes is a priority. He said Armenia is interested in using Georgia's transportation infrastructure, including the Batumi and Poti sea ports. The President also called for developing and implementing joint programs in this field. MENAGARISHVILI also met Foreign Minister Vartan OSKAN to discuss bilateral relations and regional issues.

Turkey-Kazakhstan Tighten Trade Ties

· Turkey and Kazakhstan have stepped up their efforts to boost the trade between them, planning to triple the volume in ten years. Kazakh President Nursultan NAZARBAYEV, in Ankara on Monday after talks with his Turkish counterpart Suleyman DEMIREL, said that he has ordered an outline on such a project to increase the trade with Turkey. The trade volume between the two countries stood at $267 million in 1997 with over 300 Turkish firms operating in Kazakhstan. Turkish construction firms have undertaken projects worth nearly $2 billion and the two parties agreed on continuing their efforts to encourage Turkish investments in Kazakhstan. DEMIREL said, "In the past six years [after Kazakhstan gained independence], relations between our two countries have reached such a level that normally could have only been reached in 30 years...It is our primary objective to contribute to the reconstruction and welfare of Kazakhstan." He also called on the Turkish banks to show more interest in operations in Kazakhstan, saying that a new $300 million loan of the Eximbank will be allocated for the country. The two nations also agreed to intensify cooperation in the fields of oil and natural gas production. Turkey and Kazakhstan on Monday signed an agreement on cooperation in the field of tourism. The Kazakh President is scheduled to meet with Turkish Prime Minister Mesut YILMAZ today.

Turkmen Launches Sugar Refinery

· In Turkmenistan's eastern town of Mary a $30 million sugar refinery has become operational. The plant, the first in Turkmenistan built without foreign investment, is capable of producing 100,000 tons of refined sugar a year for the domestic market. Turkmenstatprognoz, the official statistics committee, said that 4,319 hectares of land had been sown with Sugar beets so far, amounting to 54 percent of the planned area. Production from that area is predicted to total 34,000 tons of beets. Turkmenistan's Agricultural Ministry said that Turkmenistan's beet output should rise to 300,000 tons annually by 2000 because of an increase in planting area.

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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