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 2, 1998

Russian Federation

Politics

Yeltsin Urges Bankers To Invest In Economy

· Russian President Boris YELTSIN met today with prominent Russian businessmen and bankers to discuss the Russian financial market crisis of last week. The meeting was originally scheduled for May 29th, but was postponed because of the removal of Tax Chief Alexander POCHINOK. Prime Minister Sergei KIRIYENKO, deputy heads of the presidential administration Valentin YUMASHEV and Alexander LIVSHITS, chiefs of the groups Rosprom-Yukos Mikhail KHODORKOVSKY, Media-Most Vladimir GUSINSKY, Interros Group Vladimir POTANIN, Alfa-group Mikhail FRIDMAN, SBS-Agro Alexander SMOLENSKY, the Bank of Russian Credit Vitaly MALKIN, chief of the Gazprom Rem VYAKHIREV, chairman of the board of the Unified Energy Systems of Russia Anatoly CHUBAIS, heads of the companies LUKoil Vagit ALEKPEROV and Surgutneftegaz Vladimir BOGDANOV attended the meeting. Opening the meeting YELTSIN said, "We seldom meet; it happens when things get unbearable, when the state is hard pressed and the economy starts to run cracks, when foreign investors begin to flee and no investors put money into Russia's industry." He scolded participants for their lack of faith in the economy. YELTSIN said, "If you want foreign investors to keep their money here then oyu must tell your investors not to pull out." Businessmen, bankers, and the government agreed to form a commission to restore faith in the economy. The Russian stock market, which has fallen 44 percent this year, rebounded slightly today closing 12.2 percent higher. Analysts speculate that the rebound is due to rumors that the US and Germany will prop-up the Russian economy. The financial crisis has so far only affected investors, not ordinary citizens. Deputy Prime Minister Viktor KHRISTENKO said, "If the government is

able to quickly and effectively eliminate the consequences of the past week, the stability of the real sector of the economy will be preserved."

Rus, Germany, France Sign Agreement

· Russia, Germany, and France today agreed to cooperate in a project to convert Russian weapons-grade plutonium into commercial nuclear fuel. Russia's Atomic Energy Minister Yevgeny ADAMOV said the intergovernmental agreement includes building a plant which would process about 50 tons of Russian plutonium into mixed oxide fuel or MOX, to use in nuclear power plants. He said that three military reactors are still producing weapons-grade plutonium and the US has promised aid to end this production by 2000. Also planned is a new reactor at Russia's Beloyarsk power plant designed specifically to burn MOX. ADAMOV hailed the plan as a safe and efficient way to get rid of excess plutonium and reduces the risks of nuclear proliferation, the Associated Press reported. Russian and Western environmentalists have warned that taking plutonium out of military control and placing it in civilian hands could cause security problems.

Yeltsin Appoints KGB Agents To Admin.

· With the Russian stock market struggling to overcome last weeks plunge, new cabinet members being tested in their new posts, and companies and citizens refusing to pay their taxes, Russian President Boris YELTSIN has called in the old guard to enforce rules and bring order to his government.

Today's News Highlights

Russia

Tax Collection Actually Worsens

BMSquibb Procduces Lipostat

European Republics

Kiev Headed For Budget Crisis

Ukraine Half Way To NATO

Sino-Belarus Relations Strong

South Caucasus & Central Asia

Azerbaijan Signs Three Oil Deals

Tajik Opposition Against Law

US ExIm-Uzbek Sign Agreement

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June 2, 1998

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YELTSIN has appointed three former spies to key positions in his administration dealing with Russia's regions. YELTSIN appointed Vladimir PUTIN, a former KGB intelligence officer, as his deputy chief of staff in charge of relations with Russia's regions. Next, he appointed General Viktor ZORIN, former deputy chief of the Federal Security Services (FSB), as head of the Department for Special Programs, which is believed to be involved with regional issues. Finally on Monday, YELTSIN appointed General Nikolai PATRUSHEV, a high ranking FSB official, as head of the Presidential Main Control Directorate, which controls how regional officials spend money from Moscow. Several regional problems, ranging form the election of a convicted embezzler in Nizhny Novgorod to the misappropriation of funds from Moscow, have embarrassed the Kremlin. An analyst with the Carnegie Endowment for Peace Andrei RYABOV said the appointments were made to tighten control over the disobedient regions. He added that. "YELTSIN has obviously sought to find a counterbalance to the growing pressure of the powerful financial groups." Russian commentator Yevgenia ALBATS warns that in general former KGB agents detest YELTSIN's free market reforms and their loyalties are doubtful. "It's not that they are all bad guys, but they have been brought up in the system based on violence and lawlessness," ALBATS added. The appointment of PUTIN and PATRUSHEV, both from St. Petersburg region brought to Moscow by former first deputy prime minister Anatoly CHUBAIS, appears to show CHUBAIS' continued presence in the government and presidential appointments. CHUBAIS was also in Washington last week on the behalf of the Russian government and his position at Russia's United Energy Systems (UES).

Economy

Ruble = 6,165/$1.00 (NY rate)

Ruble = 6,166/$1.00 (CB rate)

Ruble = 6,140|6,192/$1.00 (buy|sell rates)

MICEX Unaffected By Rossiiskaya Birzha

· On Monday the Rossiiskyaya Birzha, a prominent futures exchange in Moscow, suspended all trading indefinitely due to problems in settling brokers orders. The exchange trades in futures contracts on stock in several leading Russian companies. The Moscow Interbank Currency Exchange (MICEX) Russia main currency and government

debt exchange, however, stated that it was unaffected by the problems at Rossiiskaya Exchange. A MICEX official said, "Trade of futures instruments on the MICEX exchange on June 1st proceeded in complete normal trading regime." In addition to foreign currency exchange and government debt trading, MICEX trades stock in five leading Russian companies and future contract on the US dollar, one year treasury bills, shares of LUKoil and national electric company United Energy Systems (UES).

Tax Collection Actually Worsens

· Russian President Boris YELTSIN today at meeting with chiefs of law enforcement and fiscal bodies said, "Rather than improving, the situation with tax collection worsened, particularly in the past two months." He asked, Where are the funds to come for the settlement with miners, teachers, doctors, for the settlement with the budget-financed sector? He threatened major non-payers with tough punishment, going as far as starting criminal proceedings. YELTSIN also threatened to dismiss a number of prominent directors by a presidential decree. YELTSIN believes that former chief of the Tax Service Alexander POCHINOK was inactive and that candidates to important posts should be more thoroughly selected. "I have dismissed POCHINOK for total inertia." The meeting was attended by Deputy Premier Viktor KHRISTENKO, new chief of the State Tax Service Boris FYODOROV, Finance Minister Mikhail ZADORNOV, Director of the Federal Tax Police Service Sergei ALMAZOV. The Russian State Tax Service will clamp down on tax evaders from among individuals since the, "situation in the area of tax collection now depends on millions of individuals rather than on 5-10 major taxpayers," FYODOROV said. He complained that there are lots of people who have not paid taxes for years. In his words, what he is going to do as head of the Tax Service is, "actually, not a tax reform but rather a mere attempt to approach the problem of tax collection, which can be resolved, to a greater extent, through educational work among people as taxpayers."

Business

Oil Companies Scrutinize New Rosneft Terms

· Late Monday Prime Minister Sergei KIRIYENKO announced the new sale terms for Russia's last state owned oil company, Rosneft. The starting price of 9.862 billion rubles ($1.6 billion) has been fixed by

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the Russian government for 75 plus one percent stake of Rosneft, which is almost half of the original starting price. The winner would also be required to invest $65.5 million in the company. Last Month the original sale of Rosneft was canceled because no one bid on the stake. The failed auction of Rosneft was seen by some as a factor that contributed to Russia's financial crisis. The Russian government quickly re-started the Rosneft sell-off in an attempt to show that its privatization program is working. A number of Russian and foreign companies have expressed interest in acquiring the Rosneft stake, including the alliance of Gazprom, LUKoil and Royal/Dutch Shell, the Unexim-British Petroleum group and the Yukos-Sibneft together with their financial groups. The President of Rosprom-Yukos holding Mikhail KHODORKOVSKY said that the price for the Rosneft shares is, "fair enough." However, LUKoil Vice President Leonid FEDUN complained that the new price still did not reflect the current real value of Rosneft, given low world oil prices. He believes the real price should be about $1 billion.

Bristol-Myers Produces Lipostat In Russia

· US pharmaceutical company Bristol-Myers Squibb announced on Monday that it has started production of Lipostat in Moscow by a US-Russian joint venture Bristol-Myers Squibb-Akrikhin. Lipostat is a medication used to lower blood cholesterol levels and reduces the risks of cardiovascular diseases. Russia has more deaths from cardiovascular diseases than any other country except Bulgaria, due to the traditional fatty diet. According to a company study, more than 150,000 Russians age 36 to 65 die of coronary heart disease per year. The surgeon who performed Russian President Boris YELTSIN's quintuple bypass surgery in 1996, Renat AKCHURIN said that only a fraction of Russians needing similar operations were lucky to receive one. Russia's health service has suffered from chronic under funding during the transition from a planned to a market economy.

catastrophe, because the country completely lacks finances. The failure of the budget is proved by the fact that the revenues accounted for 4.1 billion gryvnas (a bit more than $2 billion) in the first quarter of this year, while the internal and foreign loans amounted to 4.7 billion gryvnas. The budget spending were 300 million gryvnas ($150 million) more than the sum for repayment of the state debt, SIMONENKO said. The expenditures for repayment of the state debt are equal to all the revenues and almost all the expenses. This indicates that the country is faced with a serious financial crisis. Ukraine expects to have a budget deficit of 2.3 percent of the gross national product by the end of 1998.

Ukraine Close To NATO Standards

· Former US national security adviser Zbigniew BRZEZINSKI, visiting Kiev, on Monday said that a country seeking North Atlantic Treaty Organization (NATO) membership should meet four standards: stable democracy, well-managed free market economy, efficient supervision of the military by the civilians and freedom from border disputes. Ukraine has achieved two of the four standards, BRZEZINSKI said, admitting that objective attainment of the standards did not mean that Ukraine would subjectively decide to join NATO. He speculated that Ukraine will not be able to hold serious NATO membership talks until 2010. During a meeting with Ukrainian President Leonid KUCHMA, BRZEZINSKI suggested the Ukrainian parliament elect a middle-of-the-roader speaker in order to win more support from the West and international finance organizations. He also told KUCHMA that his visit is connected with the United States' long-term policies towards Ukraine. During the visit, BRZEZINSKI also met the Secretary of the State Committee on Security and Defense Vladimir GORBULIN and Foreign Minister Boris TARASYUK.

Sino-Belarus Defense Ministers Meet

· Chinese Premier ZHU Rongji today in Beijing welcomed visiting Belarus Defense Minister General Alexander CHUMAKOV. China highly appreciates the Belarus government's support to China on the issues of Taiwan, Tibet and human rights. ZHU added that China will always support the independence, sovereignty and territorial integrity of Belarus. CHUMAKOV Monday met with Chinese Defense Minister General CHI Haotian, who is also vice-chairman of the Central Military Commission and State Councilor, and some other military offic

European Republics

Ukraine's Budget Lacks Funds; Crisis Ahead?

· Ukrainian Accounts Chamber Head Valentin SIMONENKO, reporting to deputies on the state of budget revenues and expenses, warned the parliament today that Ukraine is approaching a budget

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ers. CHI said relations between China and Belarus have developed rapidly in recent years, and the two countries have only common interests, without conflicts of fundamental interests, and they share a consensus on many international issues. CHI said relations between the two armed forces is increasingly enhanced with the development of country-to-country relations, and China has always taken a positive attitude toward developing relations between the two armed forces CHI said that China is ready to make concerted efforts with Belarus to advance the multi-level and multi-sector friendly and cooperative ties oriented toward the 21st century between the two countries. CHI and CHUMAKOV also exchanged views on international and regional issues of common concern.

South Caucasus & Central Asia

Azerbaijan To Sign $4 Billion In Oil Deals

· Azerbaijan is expected to sign three new agreements with foreign companies worth $3 billion today, with in the framework of the Caspian Oil and Gas Exhibition. The largest deal, involving Azerbaijan's state oil company SOCAR, Italy's Agip, Japan's Mitsui, and Turkish Petroleum worth $2.5 billion over the next 25 years, is to survey and develop the Kurdashi oil field about 150 kilometers south from Baku. Assistant to the SOCAR President Rafik ABDULLAYEV said that the Kyurdashi fields are estimated to hold 100 million tons of crude. The second contract will be signed by SOCAR with Union Texas Petroleum and the British Canadian Commonwealth Oil Refining to develop the Kobystan land oil field about 35 kilometers from Baku. The price of the contract for the estimated reserves of 20 million tons of oil and 12 billion cubic meters of natural gas will be about $800 million. The third agreement is to be signed between US Frontera and SOCAR lays down basic principles for the development of Kursangya and Karabagly oil fields in the Mugan steppe some 140 kilometers south from Baku. The project is estimated at some $700 million. The site is predicted to contain over 19 million tons of crude.

Concerns Surround Political Parties Law

· The leadership of the movement of the Islamic Revival of Tajikistan addressed the parliament of the republic demanding the annulment of the May 23rd law on political parties, which has been criticized for its "discriminatory" character. The leaders of the movement believe this law, "contradicts the General agreement on the establishment of peace and national accord." A statement from the movement stresses that, "the article of the law which bans the formation and activities of parties of a religious character, as a matter of fact removes from the political arena and participation in the oncoming parliamentary elections," the movement of the Islamic Revival of Tajikistan. Earlier the movement was called the Islamic Party of Revival, but in the spring of 1993 it was banned by the Supreme Court of Tajikistan. The coming of this law into force will undoubtedly have a negative effect on the whole peace process, which, although slowly, but still has been advancing, the statement says. The adoption of the law on political parties by the parliament of the republic was denounced by the US State Department and the UN Security Council.

US-Uzbek Banks Sign Cooperation Agreement

· The US Export-Import Bank Board Chairman James HARMON and the National Bank of Uzbekistan signed a cooperation agreement, which envisions US assistance in the development of small and medium-size business in Uzbekistan, which purchase of US exports financed on a non-sovereign basis or without governmental guarantees. The Export-Import Bank also agreed to cooperate with Uzbek commercial banks on guarantees provided by the National Bank of Uzbekistan. HARMON pointed out that the Uzbek partners were very particular about making payments and were intent on continuation of economic reforms. While in Tashkent HARMON also met with Uzbek President Islam KARIMOV to discuss bank programs and increased opportunities for cooperation. Since 1995, the US Export-Import Bank has financed US exports to Uzbekistan worth $800 million.

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