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

Friday, June 19, 1998

Russian Federation

Politics

IMF Funds, Eurobonds: The Hope For Russia

· Russia's economic troubles may soon be alleviated, as government and International Monetary Fund (IMF) negotiations for additional assistance and the success of Russia's largest Eurobond issue begins to restore investors' confidence in the Russian economy. Thursday, newly appointed government representative for talks with the IMF Anatoly CHUBAIS formally declared Russia's need for $10 billion to $15 billion in additional assistance. CHUBAIS is set to meet with IMF's first deputy managing director Stanley FISCHER on Monday to discuss Russia's financial needs and requirements surrounding an aid package. FISCHER will also meet with Russian Prime Minister Sergei KIRIYENKO and Deputy Premier Viktor KHRISTENKO. The IMF postponed until next week the release of an approved $670 million installment of an existing $9.2 billion loan. An IMF spokesman said the delay was designed, "to allow Russian authorities to complete implementing the actions necessary" to secure the credit. Russia is working to increase tax collections and reduce the domestic debt. CHUBAIS earlier made it clear that Russia would not automatically comply with every condition proposed by the IMF, even though it offers the cheapest form of financing available. News of the IMF postponement coincided with the launch of a $2.5 billion 30 year term maturity Eurobond. J.P. Morgan Securities Ltd. and Deutsche Bank financed the oversubscribed Eruobond offering with a yield of 13 percent, which is 7.5 percentage points above US Treasury bills. Demand for the eurobond was so great that they increased the offering from an initial $1.5 billion to $2.5 billion. Russian Finance Minister Mikhail ZADORNOV said the proceeds would be used to restructure the expensive short-term government debt market. Per

MELLSTROM, head of research at Moscow's investment firm Brunswick Warburg, said, "Investors are sensing that the risk of a complete [financial] collapse is abating. But, that does not mean Russia is out of the woods yet, and we can still expect a lot of uncertainty," The Wall Street Journal reported.

Economy

Uneximbank Establishes Office In Beijing

· The opening of Russia's Uneximbank representative office in Beijing was attended by Bank representatives, the Bank of China, People's Bank of China, Ministry of Foreign Trade and Relations of China, officials of other Chinese organizations, the Russian ambassador to Beijing and other officials. The primary goal of the office is to assist Uneximbank, its subsidiaries, stockholders and clients in operations in the Chinese market. The bank will assist in financial settlements of Russian-Chinese trade operations and in the process of military cooperation, participation in the crediting of Russian machine-building exports to China. The bank will also provide consulting and marketing services to Uneximbank and its clients. The president and chairman of Uneximbank's board, Mikhail PROKHOROV has signed an agreement of inter-bank cooperation with the chairman of the board and president of the Bank of China Van Xuebing.

Meanwhile, Russian Atomic Energy Minister Yevgeny ADAMOV has proposed a program to the Chinese leadership for closer atomic cooperation.

Today's News Highlights

Russia

Gov't Approves Spending Cuts

German GM Rep. To Moscow

Rus. Steel Floods US Markets

European Republics

Kuchma Signs Econ. Decrees

Estonia To Slow Economy

South Caucasus & Central Asia

US, Turkey To Fund Pipelines?

Kazakh-China Military Ties

Politics-Economics-Business

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Friday

June 19, 1998

Intercon's Daily

Through the implementation of these orders, the Russian atomic industry will receive orders worth, "hundreds of millions, billions of dollars," ADAMOV said. He said nuclear cooperation was a, "sensitive business" and called for strict state control in that field. Along with an atomic power plant in Jiangsu Province and a uranium-enrichment factory, both of which are being constructed, cooperation in this field might include fundamental physics research and conversion studies, he said. ADAMOV also added that it will be difficult for US atomic specialists to withstand the competition for the Chinese market as Moscow is proposing cheaper credit conditions to Beijing. Comment: Russia's nuclear plans with China and the continuation of a Soviet-era agreement with India are sure to draw criticism from the United States Congress. Benjamin GILMAN pointed out in The Washington Post that, "Russia provides advanced weapons and military technology to China, likely to contribute to future challenges to the ability of American forces to defend our friends in the Pacific, as Chinese missile firings off Taiwan have portended." However, with scandals surrounding US President Bill CLINTON regarding the transfer of missile technology to China and his visit to Beijing next week, the US needs to balance the sanctions, trade policies, and human rights in its delicate and confusing relations with China and its allies.

Ruble = 6.1845/$1.00 (NY rate)

Ruble = 6.187/$1.00 (CB rate)

Ruble = 6.158|6.216/$1.00 (buy|sell rates)

Jan Feb Mar Apr May Jun

Gov't Approves Spending Cuts

· Russian Finance Minister Mikhail ZADORNOV Thursday said the government approved a program cutting budget spending to save 42 billion rubles (about $6.7 billion). The Russian budget this year will have a deficit of tens of billions of rubles thanks to economic recession, sagging exports and tax revenues, as well as rising domestic and foreign debts. According to the program, the number of government employees will be cut by between 60,000 and 70,000 by the year's end. The program also envisages cutting the list of direct receivers of federal funds, reorganization of budget-financed organizations, as well as limiting their electricity and gas consumption. The move is certain to be welcomed by the International Monetary Fund (IMF) mission when it arrives in Moscow Monday for aid negotiations.

CIS Economic Conf.Opens In St. Petersburg

· Chairman of the Council of the Commonwealth of Independent States (CIS) Interparliamentary Assembly Yegor STROYEV Wednesday opened the St. Petersburg Economic Forum saying that forum may play an important role in the integration of national economies not only of the CIS member states, but also of the world community in general. Russian Prime Minister Sergei KIRIYENKO addressed the St. Petersburg Economic Forum at the headquarters of the CIS Interparliamentary Assembly. The Russian Prime Minister believes there is a need for joint actions in the framework of the Commonwealth to overcome the economic crisis as there is a very high degree of mutual dependence in the financial and economic area. The anti-crisis program must not be oriented only at the situation in the world financial markets, must not depend on the rate of the Japanese yen and other factors.

Representatives from more than 10 countries, including Belarus, Kazakhstan, Germany, France, Great Britain, will take part in the forum. More than 2,000 participants from 150 delegations will hold roundtable discussions of the economic integration, credit, monetary and fiscal policy, transportation and communications, aviation and the space industry, the fuel and the military industrial complexes, the northern territories, the labor market, financial and industrial groups, regional economies, education and science, environment protection and health care. The Economic Forum will discuss the eco

When you need to know it as it happens

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Intercon's Daily

nomic strategy of CIS member countries and prospects for the Commonwealth's development on the threshold of the 21st century. Representatives of major companies will be working at the CIS Interparliamentary Assembly residence from Wednesday to Saturday, including such companies as LUKoil, Rosprom-Yukos, Gazprom, Russia's Unified Energy Systems (UES), Rosvooruzheniye, Siemens, Erickson, as well as some chambers of industry and commerce. Banks will be represented at the residence by Inkombank, Promstroibank, Drezdner Bank, the Swiss Unified Bank, the International Trust Corporation of Bankers and others. Representatives of the Russian trade union of workers in public education and science picketed the forum calling on KIRIYENKO to control the paying out of back wages and scholarships. Other picketers, representatives of the Russian Communist Workers Party and Labor, voiced sharp criticism of the government's anti-crisis program and proposals for industrial transformation.

Business

German GM Rep. Move On To Moscow's Market

· Chairman of Opel, the German subsidiary of General Motors (GM), David HERMAN has been transferred to Moscow to oversee GM's expansion in the former Soviet Union. "[Because of the Asian crisis] an interesting thing is about to happen. The whole world is about to reorientate itself towards the former Soviet Union," HERMAN was quoted as saying in the Financial Times. HERMAN, controversial figure within Opel, has been accused of declining profits in Germany, which totaled a loss of DM 228 million ($127 million) in 1997 and the loss of ground in European markets to its rival Volkswagen. HERMAN admitted that he was distracted by GM's long running battle with Volkswagen over alleged industrial espionage involving Jose Ignacio LOPEZ, the GM executive who went to work for Volkswagen. However, he said, "My ethics and my sense of justice meant that I had to defend my company. But I cannot say my other work suffered because I had to deal with the public aspects," of the scandal. Despite these failures in Germany, HERMAN is well qualified for the GM post in Moscow. His parents were from Belarus and he majored in Russia Studies at Harvard.

Russian Steel Floods US Market

· A steel trade for Cargill Inc. in Moscow Andrei

KIMRYAKOV said that cutbacks in steel orders from Southeast Asia are leading steelmakers like Novolipetsk Metallurgical Combine to redirect their rolled products to American buyers. Novolipetsk, the second largest steelmaker in Russia, is leading the trend whereby Russian steel makers are depending on the US market to continue demand for Russian Steel products. Russian exports of steel products to the US, Canada, and Mexico has doubled in volume since 1995 to between 4.5 and 5 million tons, The Journal of Commerce reported. American steelmakers are accusing Russia of "flooding" the US market and hinting at possible anti-dumping measures. Internationally recognized trade law advocate Gary HORLICK of O'Melveny and Myers assessed the possibility of an anti-dumping case by saying that so long as domestic US demand remains strong, and American steelmakers are operating at current capacity levels, "no dumping case against Russian steel is likely...There will be no new steel cases in the US until the boom stops." While there may be a strong demand from Russian made steel products, the Association of Russian Metal Exporters issued a report showing that overall production was down in 1997. Total Russian iron and steel production was 46.9 million metric tons, which is a reduction of 8 percent from 1996 figures. The Russian government has said that iron and steel output in 1997 was 48.4 million tons, down 2 percent compared with a year earlier. Russian exporters are quick to note that anti-dumping complaints in 1997 against Russian sales of cut-to-length steel plates were settled by a voluntary agreement on volume and minimum prices.

European Republics

Kuchma To Pull Ukraine Out Of Economic Ruin

· Ukrainian President Leonid KUCHMA has signed a series of economic decrees aimed to pull the country out of its current financial situation, which the President described as close to crisis. The decrees are expected to lower the 20 percent value-added tax, simplify tax procedures for small business, and introduce a fixed tax rate on agricultural products. He harshly criticized the "paralyzed" parliament for its inability to elect a speaker and address legislative tasks. "I am taking responsibility on myself...to issue the necessary decrees," he said. KUCHMA warned that the nation's heavy international borrowing was nearing a critical mark which could undermine the

When you need to know it as it happens

Politics-Economics-Business

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Friday

June 19, 1998

Intercon's Daily

stability of its currency. The government is negotiating a $2.5 billion loan from the International Monetary Fund (IMF) and plans to lay off 112,000 state employees by year's end.

Estonia Struggles To Slow Economy

· Following concerns over strong economic growth and the large account deficit, the Estonian government and Central Bank have agreed to revise economic policy for 1998. The new program developed in cooperation with the International Monetary Fund (IMF) contains steps to control demand and reduce the deficit by increasing the public sector surplus by a half a percentage point to 2.5 percent of gross domestic product (GDP). The government also plans to reduce its expenditures by 1 percentage point, to 32 percent of GDP. Estonia's Central Bank predicts that its growth will be 8 percent this year, an increased compared with earlier targets of 5.4 percent. Estonia's balance of Payments deficit in January to March totaled $130 million or more than 11 percent of GDP. The main reason for the high balance of payments deficit is the trade deficit. Exports increased in the first quarter by 41 percent to $630 million. Imports remained high at $867 million, an increase of 31 percent over 1997 first quarter figures.

South Caucasus & Central Asia

US, Turkey Hint At Caspian Pipeline Financing

· The United States and Turkey have been hinting that they may step in and finance the Baku-Ceyhan Caspian pipeline, if oil companies continue to delay construction due to increasing costs. Last week of vice president of the State Oil Company of Azerbaijan (Socar) openly accused western oil companies of stalling on a plan to construct a pipeline from Baku to Ceyhan. Washington supports the east-west strategic pipeline in an effort to avoid at all costs oil exports through Iran or Russian control of pipelines. The US, Azerbaijan, and Turkey have already endorsed the Baku-Ceyhan route, although 11 routes are being considered before the October 1st deadline. The Journal of Commerce cited a number of

reasons why companies are reluctant to finance the pipeline. These include falling oil prices, small returns, disappointing prospects, and costs. World oil prices remain low reaching only $11 per barrel, causing many oil companies, especially in Russia, to be loosing profits on exports. A number of wells have been drilled only to find gas rather than oil or dry holes. Company officials are saying that volumes so far do not justify building a pipeline capacity of 1 million barrels per day. While recent estimates show the cost at $2.3 billion, many speculate a more realistic figure is $4.5 billion. At an Istanbul energy conference, US officials said there will be $6 billion in available financing for Caspian projects from the Export-Import Bank and other financial agencies. Azeri officials interpreted this remark to mean that Washington will provide funding for the Baku-Ceyhan pipeline, if companies do not. As Intercon reported, US Presidential energy adviser Jan KALICKI promised Georgian President Eduard SHEVARDNADZE US political, moral and financial support to the Baku-Tblisi-Ceyhan project. Meanwhile, Turkey's Energy Minister Cumhur ERSUMER said his country would finance the entire pipeline, providing Azerbaijan eases its demands for control.

Kazakh-China To Strengthen Military Ties

· Chief of Staff of the Kazakh Armed Forces Bykhtyzhan YERTAYEV and Chief of Staff of the Chinese Armed Forces FU Quan ended talks in Beijing on Wednesday with a declaration to develop and strengthen military contacts. It was underlined that the development of friendly contacts between the armies of the two neighboring countries was an important factor of stable bilateral relations. The two officers discussed a broad range of problems pertaining to bilateral military cooperation as well as the present military political situation in Asia. YERTAYEV expressed his satisfaction with relations between Kazakhstan and China and between their armed forces and said he hopes his visit will help increase cooperation. He also praised China's achievements in developing its military and said that the Kazakh army is willing to learn from China.

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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