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 17, 1998

the Cabinet in March during the government reshuffle, but has remained an influential figure.

Earlier this month Russia's top bankers and industrialists issued an unprecedented statement pledging full support for KIRIYENKO's government and confidence in market reforms. YELTSIN invited the tycoons to the Kremlin and urged them to help overcome Russia's financial crisis by investing more actively in the domestic economy. Western investors are encouraged by the news as they still view CHUBAIS as a guarantee for reform. Many ordinary Russians and the Communist oppose CHUBAIS, who they accuse of corruption and selling off state assets well below their value.

Russia Accuses US Of Start I Violations

· The Russian military in a meeting with General Henry SHELTON, chairman of the US joint chief of staff, voiced concerns that the US has violated some provisions of the START I arms reduction treaty. The military complained that Britain is testing Trident ballistic missiles to see whether they are capable of carrying 10 to 12 warheads, which is more than the eight allowed by START I, at a US test range with American assistance. The fear is that the US and Britain are cooperating to circumvent the Treaty. The US Embassy in Moscow responded to these accusations by saying that, "we consider START I to be a significant arms control success. In any agreement as complex as this there are bound to be issues and questions of interpretation." The military also ac

Russian Federation

Politics

Chubais Becomes Kremlin Lending Chief

· After holding a meeting with Prime Minister Sergei KIRIYENKO, business and financial leaders rated Anatoly CHUBAIS, a key architect of Russia's market reforms and head of the electricity monopoly Unified Energy Systems (UES), as the best candidate to become the Kremlin's chief negotiator with global lending institutions. They also proposed that CHUBAIS be awarded the rank of deputy prime minister, while remaining chief executive of UES. KIRIYENKO said, "Anatoly CHUBAIS is being considered as the most plausible candidacy." The choice of CHUBAIS was approved late Tuesday by KIRIYENKO and Kremlin administration chief Valentin YUMASHEV. Today, Russian President Boris YELTSIN signed a decree naming CHUBAIS his special representative to negotiations with international financial bodies. Other candidates for coordinator in the rank of deputy prime minister were monetarist architect of Russia's reforms Yegor GAIDAR, newly appointed Tax Service chief Boris FYODOROV, who used to be Russia's representative at the World Bank, and the Russian State Duma's Our Home faction leader Alexander SHOKHIN. The Prime Minister stressed the necessity of, "coordinating the activities of all the branches of power regarding relations with international financial organizations," such as the International Monetary Fund (IMF) and the World Bank. Western nations and international lenders have praised KIRIYENKO's anti-crisis measures aimed at restoring investors' confidence and protecting the ruble. Last month when Russia was struggling to defend its ruble, CHUBAIS was sent to Washington on behalf of the government for talks with senior US, World Bank and IMF officials. CHUBAIS was ousted from

Today's News Highlights

Russia

IMF Mission Considers Aid Pkg.

Xerox To Invest $30M In Russia

European Republics

Kroon Eurobond Issued

CalEnergy Joins Lith. Project

South Caucasus & Central Asia

Turkmen Creates New Oil Co.

Turkmen Awards Mobil Tender

CIS Peacekeepers In Tajikistan

Union of Four Parliaments Meet

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June 17, 1998

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cuses the US of changing the coating on its landing gear parts of B-1B strategic bombers, making it easier for the US to restore the capability of carrying cruise missiles. These concerns are sure to further delay the passing of START II, which the Communist dominated Russian State Duma is stalling. By pointing to US violations, Russia can deflect criticism over delays to ratifying START II and point the finger elsewhere if the treaty gets stuck in the Duma indefinitely. The Kremlin said Russian President Boris YELTSIN confirmed his commitment to ratification of Start II in a telephone conversation on Monday with US President Bill CLINTON, Reuters reported. The START I treaty, signed by US President George BUSH and Soviet President Mikhail GORBACHEV in 1991, cut the two countries' nuclear arsenals by one-third. START I provides for inspections by both sides at about 120 sites, including 33 in the US.

Economy

Ruble = 6.180/$1.00 (NY rate)

Ruble = 6.184/$1.00 (CB rate)

Ruble = 6.158|6.211/$1.00 (buy|sell rates)

IMF Mission Boosts Market Outlook

· Russia's financial markets rallied on Tuesday 4.2 percent, following news that the International Monetary Fund (IMF) team of analysts are going to Moscow for further aid negotiations. The IMF's chief representative to Russia Martin GILMAN said, "extensive dialogue" is planned when the team arrives on Monday, but refused to say what kind of aid package may be offered. It is clear however, that additional aid is contingent on major budgetary reforms and overhauling of the tax system. Deputy Finance Minister Oleg VYUGIN said, "Representatives [of the IMF] are coming to propose such help, but on the condition that the Russian Federation implements a specific economic program." He confirmed that, "We are talking about extra financing which could be made available as early as this year." However, he noted that no official agreement for additional funds has been reached between Russia and the IMF. VYUGIN speculated that a new aid package may be as high as many media sources report, $10 billion. The aid will be used to fill gaps in the Russian budget caused by increasing domestic debt servicing burden and disappointing tax collection rates. In a show of strict tax collection measures, the assets of the daughter company of Russian gas

monopoly Gazprom have been frozen by the federal tax service in an effort to extract taxes. US White House spokesman Mike MCCURRY complemented Russia's new economic policies saying, "We note with some satisfaction the work that Prime Minister [Sergei] KIRIYENKO is doing with his economic team, which we think is focused exactly on the issues that can lend fundamental strength to the Russian economy. The IMF has assessed positively some of the steps that they are taking."

Kiriyenko Meets With Businessmen

· Russian Prime Minister Sergei KIRIYENKO had a working meeting with drafters of the governmental anti-crisis program and businessmen on Tuesday. A spokesman for the premier Konstantin VOITSEKHOVICH said the meeting was attended by leaders of Gazprom, the Unified Energy Systems of Russia (UES), LUKoil, SBS-Agro Bank, Alfa Group, Interros, Menatep, Surgutneftegas Company, Rosprom-Yukos and others to exchange opinions on the Russian financial markets and stabilization measures. The businessmen voiced their support in the fulfillment of the anti-crisis program and agreed on a possibility to assign their experts to assist in the implementation.

Business

New Tech Conf. In Energy, Communications

· The Russian Academy of Technological Science, the gas giant Gazprom, and the Tatarstan government headed by President Mintimer SHAIMIYEV are sponsoring an international conference on new technologies for the gas, oil, energy and communications industries which opened today in Tatarstan's capital Kazan. It is estimated that about 500 businessmen, researchers and bankers from Russia, the US, Germany, Norway, Ukraine, Belarus, Kazakhstan, Azerbaijan and other countries as well as Gazprom chairman Rem VYAKHIREV, some regional leaders, members of the Russian government and both houses of parliament will attend the conference. Co-chairman of the conference's organizing committee and president of the Russian Academy of Technological Science Vladimir ALFEYEV, "Economic problems, the unprecedented fall in oil prices, technological advance make it necessary to continuously look for new technologies and introduce them into the economy." He noted that, "just a few years ago, the Gazprom

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company spent $8 billion to purchase equipment from abroad, while now all its pumping stations and other equipment are made in Russia and are not inferior to the world analogues. The company makes a wide use of the technology that was earlier applied only in the defense industry—aircraft building and the space industry. As a result, Gazprom, which disposes of one third of the world's gas reserves, has become a world leader."

Svyazinvest Stakes Appraised

· The US evaluating firm American Appraisal on Tuesday said the market value of a 25 percent stake minus two shares of Russia's communications company Svyazinvest is $1.4 billion. Managing director Martin BELL told reporters that the firm had proposed to Russia's State Property Ministry and Federal Property Fund three variants to sell the interest. An inter-departmental commission on privatizing Svyazinvest decided to hold a tender whose terms include a $400 million investment program. The reserve price of the stake is to range between $950 million and $1.25 billion. Experts say the final price may exceed the reserve cost because investors are willing to pay for the right to control the stake and for its size. First Deputy State Property Minister Alexander BRAVERMAN said a presidential decree on terms for the Svyazinvest tender will be released in July, 1998.

Rus. Air Companies Need Modern Equipment

· Russian presidential aide Yevgeny SHAPOSHNIKOV at the opening of Engines 1998 International show said that Russia is in desperate need of modern aircraft. He noted that while foreign companies have completed many flights to Russia since 1992, Russian companies are unable to do the same. He said, Russia is unable, "to be the strongest and best on its own...There is a need for cooperation with Western companies, which are ready to interact with Russian plants. The West recognizes the highest level of technologies and science of our aerospace companies." SHAPOSHNIKOV believes ideological factors no longer influence relations between Russian and foreign companies. The relations are based on, "joint ventures, joint capital and mutual interest," SHAPOSHNIKOV added.

Xerox To Invest $30 Million In Russia

· The leading manufacturer of copier, fax and

scanner equipment Xerox Corporation intends to invest between $ 25 million and $30 million in Russia over the next two to three years. Xerox General Director and board chairman Paul ALLER announced the corporation's investment plans during his visit to Moscow. ALLER's visit was aimed at familiarizing himself with developing trends in the Russian market. To date Xerox has invested about $50 million in Russia. Shares of Xerox went up 7 percent today.

European Republics

IFC Launches Estonian Eurobond

· The International Finance Corporation (IFC), the financing arm of the World Bank, on Tuesday issued a three year Eurobond of 100 million Estonian kroon ($7 million), paying 10 percent per coupon. Analysts view the deal as offering high yields, but retaining safety measures since it is pegged to the mark. A director at RBC Dominion Securities said, "We are playing convergence, but more so because the Estonian kroon is fixed to the mark." The kroon has an eight-to-one peg to the mark, and as long as that is maintained, investors can receive a high yield over mark debt. Three year German government debt current yields 4.18 percent. More investors are seeking convergence plays as the launch of the euro draws near. Many syndicate manages at other firms said that the kroon was too unfamiliar and that Estonia had too small an economy to draw major investors. The uncertainty of emerging markets was thought to keep investors away. One unnamed manager said, "I don't think it [Estonian kroon Eurobonds] will develop its own area because there are better currencies that offer better value."

CalEnergy Joins Lith. Power Project

· According to a CalEnergy Company Inc. press release, Monday the company signed an agreement with Akcine Bendrove Lietuvos Energija, the Lithuanian integrated electric utility, to develop, construct, own, and operate an electricity transmission project interconnecting the Lithuanian and western European power systems. The project aims to transmit up to 1,000 megawatts of electricity from Lithuanian across Poland into western Europe. CalEnergy , acting on behalf of the PowerBridge Group consortium, will have a majority stake in the project and will be responsible for the development, financing, construction, and operation of the high-voltage power

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transmission line and ancillary facilities between the Lithuanian and Polish power grid. The initial term of agreement will be 10 years, during which CalEnergy will own, operate, and maintain the project. When the term expires, the project will be transferred to Lithuania Energy. CalEnergy manages and owns interests in over 5,000 net megawatts of power generation facilities in operation, construction, and development worldwide.

South Caucasus & Central Asia

Turkmenistan Creates New Oil Company

· Turkmen President Saparmurat NIYAZOV on Tuesday signed a resolution, "On measures on licensing of prospecting and extraction of hydrocarbons on the territory of Garashsyzlyk," creating a new oil company. This territory, which includes the large oil fields of Barsa-Gelmes and Katur-Tepe, with about 300 million tons of industrial reserves in upper layers, has recently become an object of cooperation with American-British alliance Mobil-Monument. During his official visit to the United States in April this year, NIYAZOV signed an agreement with these companies on strategic partnership in prospecting and extraction of the oil resources on the Garashsyzlyk territory. In view of the Turkmen President, an independent Turkmen company should participate in this investment project.

Turkmen Awards Mobil Tender

· US gas company Mobil has been awarded the rights for prospecting and development of the Caspian Turkmen shelf deposits. Mobil has won the first ever offshore oil and gas tender, which was announced on September 1, 1997, in the Serdar bloc with estimated oil reserves of 150 million to 200 million metric tons. Turkmenistan and Azerbaijan argued over an agreement of the State Oil Company of Azerbaijani Republic (SOCAR) and the Russian LUKoil and Rosneft companies on the development of the Kyapaz deposit in July 1997. The dispute was won by Turkmenistan in August, after Russian President Boris YELTSIN was forced to annul the deal. The Turkmen Presidential resolution also names the

winners in the Gaplan bloc. A consortium of the British Kern Energy Company and the Chinese Xianggang Texuna will develop the deposit, which has an estimated 90 million tons of oil. Production sharing agreements with the winners will be prepared by a Turkmen interdepartmental group. The five littoral countries bordering the Caspian Sea have yet to reach consensus over how the Sea should be divided. Even without such an agreement, Russia and Kazakhstan, as well as Turkmenistan, and Azerbaijan have clashed over specific projects. Kazakhstan, Turkmenistan, and Azerbaijan are pinning their economic hopes for the new century on oil and gas exports to Europe and other markets, thereby breaking their dependence on Moscow's pipelines. For this to happen, the Caspian Sea status and pipeline routes must be resolved.

Russia Concerned Over CIS Pull Out In Tajik

· Russian State Duma speaker Gennady SELEZNYOV on Tuesday after a meeting of the Interparliamentary Committee of Belarus, Kazakhstan, Kyrgyzstan, Russia and Tajikistan said it is too soon to withdraw CIS peacekeeping forces from the Tajikistan-Afghanistan border. He said that there is no proof on the border that there is a prospect for stability. Tajikistan representative Safarali RADZHABOV said the CIS peacekeepers issue is to be discussed by heads of those CIS states whose troops are stationed along the border with Afghanistan. According to speaker of Kyrgyzstan's parliament upper house Abdygany ERKEBAYEV said, "Tajikistan is living though a process of normalization, hence, as soon as the situation is finally normalized we will pull out our peacekeepers."

Four-Country Interparliamentary Com. Meets

· The 6th session of the Interparliamentary Committee (IPC) of Belarus, Kazakhstan, Kyrgyzstan, and Russia, as well as a meeting of the IPC Bureau were held at the head office of the Interparliamentary Assembly of the Commonwealth of Independent States Tuesday. A delegation from Tajikistan, headed by parliament speaker Safarali RADZHABOV, attended the IPC session for the first time.

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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