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 24, 1998

Russian Federation

Politics

Clinton Vetoes Sanctions Bill

· US President Bill CLINTON on Tuesday vetoed legislation, passed by Congress, that imposes sanctions on foreign governments or businesses supplying ballistic missile technology to Iran, saying it would damage the national interest. The bill would cut off US aid and exports for two years to any entity charged with helping Iran's missile program. The CLINTON administration argues that the bill infringes on the president's right to conduct foreign policy and would harm cooperation with Russia to halt proliferation. President CLINTON's Press Secretary Mike MCCURRY said CLINTON believed Congress is trying to put, "hopeless shackles on the presidency with the legislation and to micro-manage US foreign policy." The presidential veto sets up a possible override by Congress in July. The House of Representatives passed the measure by 392 to 22, while the Senate approved it by a 90 to 4 margin. As The Washington Times noted, both votes are well above the two-thirds majority needed for an override. Representative Benjamin GILMAN (NY, Republican), chairman of the House International Relations Committee, calling the veto "deeply distressing," said, "If this veto is permitted to stand, it will signal indelibly that while the CLINTON administration is willing to talk tough about the need to contain proliferation and to rein in rogue regimes, it has been unwilling to take the necessary steps to back up those words." Pentagon spokesman Kenneth BACON said months of diplomatic efforts have not led to a cutoff of the Russian-Iran missile trade. US intelligence agencies have identified more than 20 Russian companies and institutes that are involved in assisting the Iranian missile program with special materials, equipment and technical training. Intelligence reports also have linked Russia's intelligence

services to the missile trade, specifically in setting up and facilitating the exchange of missile experts between Russia and Iran. However, Russian Security service (FSB) director Nikolai KOVALEV accused the US last month of conducting covert sting operations in Russia aimed at identifying missile shipments to Iran. US National Security Adviser Samuel BERGER said that contrary to Russian promises, missile cooperation with Iran was continuing after more than 18 months of US complaints and Moscow's promise to address them. In May, BERGER presented Russia with six demands it could take to prevent economic sanctions on Russia. A senior official has noted that Russia has complied with most of the steps and has the cutoff of missile training between the Baltic State Technical Institute and Sanam, an institute use by Iran as part of its missile program. What is not clear is whether these steps taken by Russia will be enough to turn around votes in the House and Senate. The CLINTON administration has confidence that despite the wide spread of votes, they will be able to turn around the 23 votes needed in the Senate to sustain the veto.

Economy

IMF Strict Loan Conditions

· Now that Prime Minister Sergei KIRIYENKO has presented the government's anti-crisis program, it is important for Russia to convince the International Monetary Fund (IMF) to release needed funds and the nation's parliament to approve urgent measures

Today's News Highlights

Russia

Gazprom Stakes Not For Sale

Rus-Iraq Sign Oil Equip. Deal

European Republics

Lith.Telecom Bids To Increase

Latvia Revises Citizenship Rules

South Caucasus & Central Asia

Silk Road Bill - US Senate Com.

Georgia Offers Airways Stake

Unocal Cuts Staff In Uzbekistan

Kazakh Seeks Foreign Invest.

Politics-Economics-Business

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Wednesday

June 24, 1998

Intercon's Daily

in order to receive IMF funds. While the fear of a real economic meltdown may convince deputies to pass legislation, the IMF is requiring strict reforms and investors are waiting for concrete results. Chair of Unified Energy Systems (UES) and government representative for talks with the IMF Anatoly CHUBAIS has said, "The overall amount of the package should be in the range of $10 billion to $15 billion. It is too early to say what the share of the IMF will be in this." He hopes to receive the remaining amounts from the International Bank for Reconstruction and Development (IBRD), private commercial banks, and bilateral assistance. CHUBAIS expects IMF negotiations to take one or two months. According to procedure, Russia has taken on certain obligations. These measures are numerous, and, "discussion is underway whether some of them can be regarded as fulfilled," he said.

CHUBAIS said Russia did not agree with some of the IMF's conditions for a new credit, including one that would involve the break-up of Russia's gas monopoly Gazprom and electricity monopoly UES. Russian Finance Minister Mikhail ZADORNOV expects the obstacles blocking the release of the next $670 million installment of an existing IMF credit to be cleared this week. KIRIYENKO continued negotiations with the IMF's First Deputy Managing Director Stanley FISCHER, which he described as, "highly constructive." He says the IMF loan will be used to stabilize Russia's fragile financial markets as a guarantee of Russia's credit-worthiness, and prop up the ruble, which has come under strong selling pressure amid rumors of devaluation. Kremlin spokesman Sergei YASTRZHEMBSKY says Russia is willing to discuss the tough conditions proposed by the IMF, but is unwilling to accept them. The IMF wants Russia to boost tax revenues and make drastic cuts in spending—unpopular measures the government fears may bring social unrest. To cope with the deficit the government has already called for spending cuts totaling 42 billion rubles or $6.8 billion. To encourage investment in Russian enterprises, down interest rates substantially to about 20 percent to 25 percent.

Ruble = 6.1905/$1.00 (NY rate)

Ruble = 6.192/$1.00 (CB rate)

Ruble = 6.164|6.220/$1.00 (buy|sell rates)

Business

Russian-British Oil Co. Begins Operations

· The joint Russian-British enterprise Komiarktikoil today has begun operations. Deputy minister of industry and transport of the Komi Republic Sergei KARAKCHIYEV said that after the end of the assembly and adjustment operations, the central pumping station of the joint Russian-British oil producing enterprise Komiarktikoil began working at full capacity in the Usinsk District of Komi. Oil workers from the Komi Republic tested the new pumping stations and put it on a technological monitoring regime. Russia's only industrial complex to prepare crude oil and purify casing-head gas, whose estimated cost is $40 million, was built only in two years. The complex delivers daily to the oil pipeline some 4.5 tons of high-quality oil. The amount is expected to increase substantially in the future.

Government Refuses To Sell Gazprom Shares

· Deputy Prime Minister Boris NEMTSOV today said that the Russian government does not intend to sell its 5.8 percent block of shares in Russia's natural gas monopoly Gazprom. According to NEMTSOV, "we do not want to make a decision of this sort at once, but in principle such a possibility exists. There is a shortage of money everywhere, and since the budget in is throes, it is necessary to make use of all possibilities, including the resources mobilized by sales of shares. But I do not think this should be done at this very point in time." He noted that the issue would be discussed at the shareholders meeting scheduled for next Friday. NEMTSOV was speaking at the Moscow State University.

Gazprom chairman Rem VYAKHIREV met with Ukrainian President Leonid KUCHMA, Prime Minister Valery PUSTOVOITENKO, and other leaders in Kiev today to discuss Kiev's gas deliveries debt, which is estimated to be $1 billion. Due to increasing pressure from Russian tax bodies, Gazprom has had to start extensive talks with all its debtors, including former Soviet Republics. VYAKHIREV noted that in 1997, CIS countries paid for only one percent of gas supplies and the situation is showing no signed of improvement in 1998. However, Gazprom has been required by the Russian Tax Service to transfer about 60 percent of the cost of gas it has supplied to the federal budget.

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Wednesday

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Russia and Iraq Sign Oil Equipment Deal

· A Russian company today signed a contract with Iraq to supply oil drilling equipment to the country. It is the first such deal since the UN Security Council passed a resolution to allow Iraq to import a limited amount of equipment for repairs. The contract, signed by Russia's Zarubezhneft, is worth approximately $1 million. Meanwhile Zarubezhneft and LUKoil have each signed contracts with Iraq to purchase 18 million barrels of oil under the oil-for-food deal. Other Russian companies agreed to purchase barrels, bringing Russia's total to 94 million barrels. The program allows Iraq to sell $5.25 billion worth of oil every six months to buy food and humanitarian supplies.

Russia threatened to implement trade sanctions against Latvia and change gas transits routes. Many ethnic Russians living in Latvia had failed to acquire citizenship. Latvian Foreign Minister Valdis BRIKAVS said, "It is good news as it is first of all a big step to the integration of society and secondly it is a big step to the European Union." The amendment widens the scope of those eligible for citizenship by removing a quota system under which people went through the process in age groups, with the youngest naturalizing first and the oldest waiting at the end of the line. The ruling Fatherland and Freedom Party has however mounted a challenge to the law by seeking parliamentary support for a popular referendum on the amendments. The party has collected 35 deputies' signatures enough to delay the amendment coming in to force for two months.

South Caucasus & Central Asia

Silk Route Bill Reported Out Of Committee

· The US Senate Foreign Relations CommitteeTuesday reported out of committee the Silk Route Bill, championed by Senator BROWNBACK (KS, Republican) and HEGEL (NE, Republican). The vote of 10 to 8 was along strict party lines. The opposing Senators cited that countries who would prosper from the Silk Route are human rights abusers and don't deserve the assistance. Senator SARBANES (MD, Democrat) attempted to add back Section 907 and it was defeated. One wording change was accepted. "Security assistance" has been changed to "border guard assistance" as per SARBANES' request. Senator KERRY (MA, Democrat) claimed the bill was a mercantile bill to aid large oil companies. "The modern version of the Great Silk Road," offers Georgia and its neighbors a unique opportunity of attracting foreign investors to assist in the transport of Caspian oil and gas to western markets. The corridor also transport cotton and other raw materials.

Chairman of the Georgian Parliament Zurab ZHVANIA, in April during his visit to Washington, DC, noted that the corridor is not only used for the exchange of goods, but also ideas and new political relationships. As oil and other commerce begins to further united the region, the corridor provides access to, "common approaches to the regional security and stability." ZHVANIA pointed out, "The strategic geopolitical location allows Georgia to play a

European Republics

Lithuanian Telecom Bids Expected To Increase

· The Lithuanian government is set to receive the final bids today in the nation's largest privatization of the Lithuanian Telecom. The sale of the 60 percent stake, valued at $600 million could be prolonged if bids are too low, one official said. Preliminary bids from Tele Danmark and a consortium of Finland's Sonera and Sweden's Telia were at $400 million, well below government expectations. The initial bids made in February came during a controversial introduction of tariffs on local telephone calls, which operators claim were necessary to balance operational costs with charges. Last week, Lithuanian President Valdas ADMAKUS signed a law securing Telecom's monopoly on terrestrial lines until 2000. Primarily due to the law, bids received today are expected to be higher than initial bids. Tele Danmark vice president Yves FARJOT said Telecom's, "biggest challenge is to accelerate the modernization and growth of the network and introduce more customer-oriented services."

Latvia Revises Citizenship Rules

· Latvia's Parliament Monday approve changes to the controversial citizenship laws. Deputies in a vote of 54 to 14 granted citizenship to stateless children, even if their parents are not citizens, provided they have lived in the country for at least five years. The law aims to make the naturalization process easier and meets recommendations from the Organization for Security and Cooperation in Europe (OSCE) as well as criticisms from Russia. The move should end months of highly charged debate, during which

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pivotal role in the process of new regional cooperation creation, which includes the network of countries of the Black Sea (Ukraine, Turkey, Bulgaria, Romania), republics of the Southern Caucasus (Azerbaijan, Armenia, Georgia) and the five Central Asian states (Turkmenistan, Uzbekistan, Tajikistan, Kyrgyzstan, and Kazakhstan)." For many of these former Soviet Republics, Georgia clearly represents the gateway to the west, democracy, market driven economies, regional security, and respect for sovereignty.

Georgia Offers State Airline Stake

· The State Property Ministry of Georgia Monday announced an international tender for a 49 percent stake in state-owned air carrier Georgian Airways. The ministry's press secretary Irma GOGOLADZE said the starting price for the stake is $2.5 million, but the winner will also be required to invest at least $12 million in the airline over the next 10 years, pay company debts of $3 million, and add two new western-made passenger jets to the Georgian Airways' fleet over the next two months. Other requirements include, guaranteeing positions for 60 percent of the company's work force of 430. Georgian Airways, currently 100 percent state-owned, has licenses to fly 10 international routes. Its fleet consists of five Tupelev-154, five Tupelev-134, and 11 Yak-40 aircraft. The tender opens on the first of July and closes on September 15th. GOGOLADZE notes that in order to participate, companies and consortiums must submit a refundable $250,000 preliminary payment to the State Property Ministry.

Ukraine-Armenian Business Forum

· The first Armenian-Ukrainian business forum opened in Yerevan Monday and will last until Thursday June 25th, under the initiative of the unions of industrialists and businessmen of the two countries and with the backing of Armenia and Ukraine. Ukrainian Ambassador to Armenia Alexander BOZHKO said the Treaty of Friendship and Cooperation between the two states, signed in May 1996, and the intergovernmental agreements that followed, permit

more active integration processes, including economic integration. Problems of economic cooperation and business partnership were discussed by Armenian President Robert KOCHARYAN and Ukrainian President Leonid KUCHMA during their meeting at Yalta, which was held in the course of the summit forum of members of the Black Sea Economic Cooperation Organization. The business forum will be attended by approximately 100 delegates from the Ukrainian side, including representatives from government structures and business organizations, as well as by important industrialists and Ukrainian parliament members. Chairman of the Union of Industrialists and Businessmen of Armenia Aram VARTANYAN said that the level of bilateral cooperation had dropped. In 1997, trade turnover equaled $25 million, which is 98 to 99 percent less than the figure for past years. Armenia still regards Ukraine as one of the economically strongest countries of the region, VARTANYAN added. Armenia still imports from Ukraine metal elements for the building industry, rolled stock, and other metal products. Another promising area is the servicing and sale in Armenia of automobiles produced by the Zaporozhye Automobile Plant. The two countries could also cooperate successfully in the processing of farm products, VARTANYAN noted.

Kazakhstan Continues To Seek Investment

· Kazakhstan First Deputy Prime Minister Alievich DJANDOSOV said that Kazakhstan is working to create a sound environment for foreign investment built on a steady economic policy. He said that attracting foreign investment was the top priority of the nation's economic agenda. Endowed with rich natural resources, including oil and natural gas, and cheap labor, Kazakhstan has become an attraction to foreign businessmen. Direct foreign investment in Kazakhstan over the past five years reached $6.2 billion with an inflow of $1.7 billion in 1997. More than 200 foreign companies have invested in Kazakhstan, making huge contributions to its economic development and social stability. Kazakhstan's gross domestic product grew by 2.5 percent last year,

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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