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 18, 1998

Russian Federation

Politics

Chubais' Post Temporary, But Ministerial Level

· Russian President Boris YELTSIN today announced that the appointment of the controversial reformer Anatoly CHUBAIS as the government's liaison with international financial institutions is only temporary. YELTSIN called on journalists not to draw, "any but normal conclusions. It is temporary." CHUBAIS has been given the rank of a deputy prime minister but will not formally join the government and will retain his position as head of Russia's electricity monopoly, Unified Energy Systems (UES). His appointment is clearly aimed at regaining international investors' confidence. CHUBAIS' favorable reputation with Western institutions is sure to advance negotiations with the International Monetary Fund (IMF) for additional aid, which is to take place next week. CHUBAIS today called for $10 billion to $15 billion in financial aid to stabilize Russia's markets, prop up the Central Bank, and defend the ruble, but he failed to mention where the assistance will come from. The government previously said it was capable of pulling itself out of the financial crisis. YELTSIN today admitted, "of course, we need certain support and investments." But later stressed, "we shall naturally count on our own efforts first of all." Today, the IMF decided to withhold the next installment of the $9.2 billion loan for a week, until Russia meets the agreed upon terms. The Russian stock market fell, as the new hit investors.

The negative response by the Russian State Duma was expected by YELTSIN who commented that the deputies have, "an allergy against CHUBIAS." He said that the appointment was made for the sake of Russia. Duma Deputy Speaker Vladimir RYZHKOV of Our Home is Russia argued that CHUBAIS' appointment will worsen already difficult relations be

tween the government and Duma. He noted that the government needs the parliament's cooperation in order to adopt key economic legislation. Regarding the CHUBAIS appointment, Communist Viktor ILYUKHIN accused YELTSIN of consigning, "our descendants to a debtors' prison." Still others believe that CHUBAIS will become the government's scapegoat for unpopular government policies.

YELTSIN, after a meeting with Prime Minister Sergei KIRIYENKO, hinted that the government had not been fully formed saying that, "new figures," might appear in the Cabinet. KIRIYENKO said, "Everybody in the government has his own office duties, and if one does not cope with them, then, naturally, changes are possible."

Rus. Security Chief Kokoshin In Washington

· The Secretary of the Russian Security Council Andrei KOKOSHIN arrived on Monday in Washington to conduct Rus-American talks. He met with Presidential National Security Adviser Samuel BEGER, First US Secretary of State Strobe TALBOTT, and Vice President Albert GORE. He also discussed a broad range of questions, including nonproliferation of nuclear weapons, the reaction to India's and Pakistan's nuclear tests, problems of export control and matters connected with Russian export to Iran with US Secretary of State Madeleine ALBRIGHT. He described these meetings as, "frank and very useful." Tuesday, KOKOSHIN held meetings on the Capitol Hill with Speaker of the House of Repre

Today's News Highlights

Russia

Russia To Cut Oil Exports

Gazprom Assets Seized

European Republics

NATO In Lithuania, Latvia

Belarus-Egypt Strengthen Ties

South Caucasus & Central Asia

2nd Round PeaceTalks?

Currency Futures on TICEX

Clinton Nominates Yalowitz

Uzbek Receives A310 Aircraft

Politics-Economics-Business

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June 18, 1998

Intercon's Daily

sentatives Newt GINGRICH, member of the Senate Foreign Relations Committee Richard LUGAR, as well as members of the House International Affairs Committee. He commented that, "Our possibilities for contact with the Congress are substantial and every meeting was rather useful. There have been no empty, ritual meetings." However, he described the Congress-passed 1998 law stipulating sanctions for transfer of missile technology to Iran by foreign companies, including Russia's, as "counterproductive." Intercon sources report that KOKOSHIN also expressed concern over US policy and involvement in the Commonwealth of Independent States. Wednesday, KOKOSHIN presented a statement at UN Headquarters in New York.

Economy

Ruble = 6.183/$1.00 (NY rate)

Ruble = 6.1855/$1.00 (CB rate)

Ruble = 6.158|6.213/$1.00 (buy|sell rates)

CB Cancels Domestic Debt Auctions

· The Finance Ministry on Wednesday canceled two of three domestic debt auctions, saying it was not prepared to borrow at excessively high rates. The cancellation included the sale of 182 day Treasury bills because investors demanded a 67 percent yield, which the government deemed too high. The cancellation suggests that either investors still remain skeptical about stability of the Russian economy and are demanding high interest rates or that the government has been able to secure a cheaper source of financing from government bonds or loans form the International Monetary Fund. The Finance Ministry may also launch a dollar denominated Eurobond this week with a follow up issue at the end of the month. The Eurobonds may be worth a total of $2 billion with a 30 year maturity term and the right to redeem them at face price in ten years. According to a ministry official, the initial offering of $1.5 billion has been announced, but Russia hopes that the issue will rise up to $2 billion. J.P. Morgan and the Deutsche Bank have been named the issue's lead managers. Their commission for placing Russian eurobonds will be 1 percent of the total value of the placed securities.

Russia Cuts Oil Exports

· Russian Deputy Prime Minister Boris NEMTSOV Wednesday said Russia has pledged to cut its oil

exports by 63,000 barrels a day, or approximately 1 percent of existing export volume, to support international efforts to boost the sagging price of oil. The export cut will begin July 1. As a major oil exporter Russia is very concerned about the continuing fall in oil prices. NEMTSOV said that Russia's position will be reiterated at the upcoming meeting of the Organization of Petroleum Exporting Countries (OPEC) in Vienna at the end of June.

Business

Gazprom Assets Frozen By Tax police

· The Russian State Tax Service chief Boris FYODOROV announced the seizure of assets of

a regional affiliated enterprises of the gas-industry giant Gazprom in order to, "forcibly extract of debts," toward the federal budget. Orenburggazprom enterprise' products, including natural gas, Orenburg Gazprom accounts, and the property of Uraltransgaz based in Yekaterinburg have been seized and frozen. All these measures have been taken despite the fact that Gazprom, to which Russian consumers owe about 100 billion rubles, finds it difficult to pay out back wages to its personnel. The State Tax Service has stipulated that all payments to the federal budget be transmitted in a centralized way by the main enterprise rather than regional enterprises. Gazprom is against these arrests and notes that its total debt to the treasury is 1 billion rubles less than payments due to Gazprom from the budget for the electricity consumed by state organizations and for the gas deliveries under Russia's interstate obligations. According to the Gazprom press service, the toughening of the tax policy regarding the biggest donor to the country's budget against the background of tax dodging and low tax collection all over the country has political undercurrents and may lead to unpredictable economic, social and political consequences in most Russian regions.

The Russian State Duma has unanimously passed by 288 votes a resolution supporting Gazprom gas monopoly on recovery of its tax debt. The Duma resolution urges the government to consider together with the Duma's committees measures for recovering Gazprom's debts with heed for Russia's social and economic situation and national security. The resolution says that the methods adopted by the Tax Service, "cannot be estimated except as an ill-thought out policy of further destruction of the do

When you need to know it as it happens

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mestic economy and industry, a real threat to national security of the country." The Duma said seizure of bank accounts and property of Gazprom's indebted subsidiaries, "are aimed at destruction of the integral gas supply system, endanger the technological process of the incessant gas supply to users, create a threat of an accident and eventually undermine national security of the country." A statement issued by Russia's Oil and Gas Producers Union said, "Instead of radically reforming the tax system which has in practice proved its uselessness and destructive character, the government's economic team has once again chosen the simplest way by applying tougher tax measures to a major contributor to the national budget."

number of regional and international issues of mutual concern, the latest developments in the Middle East peace process, as well as enhancing bilateral ties, especially in economy, trade and investment. The two leaders signed a number of agreements on reactivating economic and trade relations and encouraging foreign investments. The two presidents agreed to give preferential treatment to each other's companies to encourage them to launch projects in both countries. LUKASHENKO said MUBARAK decided to allow some Belarus products to be manufactured in Egypt, which would serve as a springboard for marketing these items in Africa and the Middle East. Belarus will promote Egyptian exports to the Commonwealth of Independent States, such as Russia, Ukraine and Kazakhstan. Egypt and Belarus signed accords on preventing dual taxation and enhancing bilateral cooperation in higher education. Accompanied by a number of Belarus businessmen, LUKASHENKO met with Egyptian businessmen to discuss bilateral cooperation in boosting trade ties. Trade exchange between the two countries stood at $63 million last year, including $3 million of Egyptian exports to Belarus and $60 million of Egyptian imports from Belarus. Belarus Foreign Minister Ivan ANTONOVICH visited Egypt in January and signed two agreements on encouraging foreign investments in the two countries and promoting bilateral economic and technical relations.

South Caucasus & Central Asia

Georgia, Abkhazia To Hold More Peace Talks

· Georgian President Eduard SHEVARDNADZE on Wednesday held peace talks with Russian special envoy for Abkhazia Gennady ILICHEV and General Sergei KOROBKO, the commander of the Russian peacekeeping forces deployed in Abkhazia's Gali district. During the meeting SHEVARDNADZE accused the Russian peacekeepers of failing to prevent the Abkhaz Interior Ministry forces from bringing heavy artillery into the conflict zone, RFE/RL's Newsline in Tblisi reported. But KOROBKO pointed out that the peacekeepers' mandate does not empower them to intervene in hostilities. ILICHEV and SHEVARDNADZE agreed on the need to expedite the return to of ethnic Georgians their homes. The Georgian President said that, "Russia can and must" speed up the process of resolving conflicts in the South Caucasus. SHEVARDNADZE said that he

European Republics

NATO Visits Lithuania, Latvia

· NATO Secretary-General Javier SOLANA visited Lithuania on Wednesday for a one-day visit. Lithuania's leadership informed him of the steps the nation had taken towards NATO membership. The NATO chief met with Lithuanian President Valdas ADAMKUS, Parliament Speaker Vytautas LANDSBERGIS and with the Ministers of Foreign Affairs and Defense. Vilnius, which actively participates in NATO's Partnership for Peace program, has not yet received an invitation to start entry negotiations with the Alliance.

Today, SOLANA visits Latvia where he is expected to discuss with Latvian officials some problems of bilateral cooperation, relations of the Baltic republics with Russia and the CIS countries, domestic reforms in Latvia, etc. Defense Minister Talavs YUNDZIS said that the Latvian side was planning to inform the guest on the reform of the country's armed forces. He will also inform SOLANA about plans to integrate Latvia into the North Atlantic Alliance and will cite examples in favor of accelerating this process. Russian Foreign Minister Yevgeny PRIMAKOV last week noted that the accession of the Baltic states to NATO was unacceptable to Russia.

Belarus- Egypt Strengthen Trade Ties

· Belarus President Alexander LUKASHENKO arrived in Cairo Monday for a two-day official talks with his Egyptian counterpart Hosni MUBARAK on bilateral ties and other issues of mutual interest. The talks between the two presidents focused on a

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When you need to know it as it happens

Politics-Economics-Business

Thursday

June 18, 1998

Intercon's Daily

does not believe the Caucasus will become a center of confrontation between Russia and the West, despite their conflicting interests in the region. Meanwhile, US, French, British, German, and Russian ambassadors to Tblisi were in Novy Afon for peace talks with Abkhaz President Vladislav ARDZINBA.

CIS Executive Secretary Boris BEREZOVSKY is expected to arrive in Abkhazia on Friday to attend another round of Georgian-Abkhazian talks. ARDZINBA will meet special representative of the Georgian President Vazha LORDKIPANIDZE. Aside from BEREZOVSKY, Russian First Deputy Foreign Minister Boris PASTUKHOV will also take part in the talks. After meeting with Russian President Boris YELTSIN, BEREZOVSKY stated that, "I do not think the present situation at the Georgian-Abkhazian talks is a deadlock." He praised the progress made at Moscow's Georgian-Abkhazian talks. YELTSIN today approved the coordination of efforts between the Russian Foreign Ministry and the CIS executive secretary to settle the Abkhazian crisis.

Georgia Starts Currency Trading

· First deputy President of the Tblisi Interbank Currency Exchange (TICEX) Vkhtang KHOMIZURASHVILI said that Georgia plans to launch the daily trading in currency futures today, Reuters reported. The move is due to demand by non-resident participants in Georgia's treasury bill market. He said recent minor fluctuation in the exchange rate of the lari currnecy forced foreign investors to insure themselves against unpredictable falls. TICEX intended to introduce currency futures trading in 1997, but put it off because the lari was stable at 1.25 to 1.30 per dollar. It has since slippedto 1.347 to the dollar. KHOMIZURASHVILI said the futures market could be of major interest to local commercial banks with foreign partners. TICEX plans to organize a secondary treasury bill market in Georgia by September. KHOMIZURASHVILI noted that the introduction of a secondary market will cause a reduction of treasury bill yields, "which is very profitable for the Finance Ministry." He said that foreign institutions

and individuals will have the right to particpate in secondary trading on an equal basis with domestic participants."

Clinton Nominates Georgian Ambassador

· US President Bill CLINTON Friday announced his intention to nominate Kenneth Spencer YALOWITZ as US Ambassador to Georgia. YALOWITZ, of Reston, Virginia, is a career member of the Senior Foreign Service. He entered the Foreign Service in 1966 and last served overseas as the US Ambassador to Belarus from 1994-97. He has also served twice in Moscow, in The Hague, and at the US Mission to NATO in Brussels. YALOWITZ speaks Russian and French. He has won Senior Performance Awards in 1989, and 1992, and an individual and group Superior Honor Award. Currently, he is the dean of the Senior Seminar, the preeminent training program for senior US government officials at the Foreign Service Institute. YALOWITZ testified before the Senate on Tuesday. After US Ambassador at large and special advisor to the Secretary of State on Newly Independent States Stephen SESTANOVICH met with Georgian President Eduard SHEVARDNADZE, he made an urgent call to the Senate Foreign Relations Committee urging them to speed-up the process of appointing an ambassador. Georgia, a nation which Washington values as a strategic partner in a region of critical importance, has been without a US ambassador for 8 months.

Uzbekistan Airways Receives A310 Aircraft

· Airbus Industrie's Director General Arslan RUZMETOV and the West European consortium's Chief Operating Officer Dietrich RUSSELL presented Uzbekistan Airways with its first A310 aircraft to be named Bukhara after the famous Central Asian historical city. The plane, featuring a spacious three-class configuration seating 193 passengers and is powered by Pratt & Whitney PW4000 engines, will be used to open new non-stop routes to France. Uzbekistan Airways' A310s became the first Airbus Industrie plane in the CIS with a national registration.

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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