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

Friday, June 26, 1998

Russian Federation

Politics

Yeltsin Cancels Trip To Kazakhstan

· Russian President Boris YELTSIN has canceled plans to visit Kazakhstan next week because of the continuing financial crisis in Russia. He will stay in Moscow to monitor next week's debate by the Russian State Duma on the government's economic austerity plan. YELTSIN was scheduled to meet with Kazakhstan President Nursultan NAZARBAYEV on July 1st, attend a meeting of the Commonwealth of Independent States' Customs Union in Almaty on July 2nd, and join the Group of Five (China, Kazakhstan, Kyrgyzstan, Russia, and Tajikistan) to discuss the demarcation of the former Sino-Soviet border on July 3rd. In a telephone conversation, YELTSIN and NAZARBAYEV discussed some international problems and issues of bilateral cooperation. The presidents joined in the opinion that there should be no pause in the friendly bilateral relations and outlined a plan of Russian-Kazakh joint actions for the near future. The two leaders were scheduled to sign an Eternal Friendship Treaty and a treaty on the Caspian Sea, which may happen at a meeting in September instead. Central Asian leaders seemed to be surprised by YELTSIN's decision. NAZARBAYEV's spokesman said that "other meetings are also likely to be canceled. It is unlikely that JIANG Zemin will come now, although we do not yet have official confirmation of this." Kazakhstan and China had been expected to sign a bilateral border agreement outside of the Group of Five as well as discuss major energy deals signed last year, in which China committed to invest $9.5 billion in Kazakh oil production and transportation.

Siberian Mayor Killed In Contract Shooting

· A Russian Interior Ministry spokeswoman said Vladimir PETUKHOV, the Mayor of the Siberian

town of Nefteyugansk, was shot dead today in what appears to be a contract killing. PETUKHOV died in the hospital of severe wounds and his bodyguard was also critically injured. Local police were not available for comment; an investigation is ongoing. However, local sources speculate that the killing was in response to PETUKHOV's crackdown on a lucrative market in town, which is home to the major oil company Yuganskneftegaz. Approximately 8,000 to 9,000 residents gathered at the Mayor's office to demonstrate their indignation at the killing. Unfortunately, PETUKHOV is just another in scores of contract killings of bankers, businessmen, and government officials which occur each year.

Economy

Russian Reduces Foreign Trade

· According to a Russian government resolution, Russia has decided to reduce trade missions in 43 foreign countries to the status of embassy. The reorganization followed the elimination of the Foreign Trade Ministry; its functions have been transferred to the new Industry and Trade Ministry. The government at the same time kept the number of employees and financing of the transformed trade missions. The resolution concerns trade missions in such countries, as Australia, Albania, Algeria, Angola, Bangladesh, Bahrein, Guinea, Israel, Jordan, Ireland, Yemen, Cambodia, Kenya, Cyprus, North Korea, Columbia, Kuwait, Laos, Latvia, Lebanon, Madagaskar, Macedonia, Malta, Mexico,

Today's News Highlights

Russia

Aeroflot Gets New Boeing Planes

UES Reduces Investments

European Republics

Kiev Seeking Deportation Funds

Kuchma Running Economy

South Caucasus & Central Asia

Greco-Armenian Relations

Azeri Issues Licenses

Caspian Agreement Postponed

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June 26, 1998

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Malaysia, Morocco, Mozambique, Mongolia, New Zealand, Nigeria, Nicaragua, the United Arab Emirates, Panama, Peru, Portugal, Saudi Arabia, Tanzania, Tunisia, Uruguay, the Philippines, Chile, Ethiopia, and South Africa.

Too Little Too Late; IMF Releases $670 Million

· The International Monetary Fund (IMF) on Thursday approved a delayed credit disbursement of $670 million to Russia, bringing the total disbursement of a four-year $10 billion IMF extended Fund Facility to $5.8 billion. The loan was granted by the IMF in February 1996 to expedite the country's shift to a market-based economy. The IMF Board was scheduled to meet last Thursday to approve the payment, but the session was suspended because of Russia's slow action on collecting back taxes. The Russian government has recently promised to take steps to collect such taxes, estimated to total more than $800 million and which are partly responsible for Russia's growing fiscal deficit. The Russian government is reportedly considering tapping the export earnings of debtor oil companies to collect the taxes. The IMF Board also approved Russia's request to extend the three year loan by a further year. Payment will be made until 2000. Russian President Boris YELTSIN's chief negotiator with world financial institutions and Unified Energy System of Russia (UES) chairman Anatoly CHUBAIS argued that, "it is important in principle that IMF Board members...regard the ailments of the Russian economy as quite curable." Negotiations for an additional $10 billion to $15 billion loan will begin next week. Russia hopes to receive the funds to boost the reserves of the Russian Central Bank, ease pressure on the ruble and bring stability to the markets, which have lost almost 50 percent of their value since an exodus of foreign investment in May. The stabilization plan, if approved by parliament, will overhaul the inefficient tax system and slash spending to balance the budget. Deputy finance minister Oleg VYUGIN believes talks should be completed in the first 10 days of July. IMF first deputy managing director Stanley FISCHER said further credits will be a subject of very difficult talks which will last weeks. Speaking of the anti-crisis program of the Russian government which was submitted to the IMF delegation on Wednesday, FISCHER said the delegation studied the program in general outline, as well as description of measures and speeches. But the

delegation will have to discuss what this means from the viewpoint of the budget. According to FISCHER, chronic tax problems are the major roadblock to addition funds.

The First Deputy Speaker of the Russian State Duma Vladimir RYZHKOV believes, "the allocation of the IMF tranche is a good news, but it does not solve systemic problems existing in Russia now." He added that, "this shows that Russia is in a normal state and that parameters of its economic policy are quite normal and there is financing in a usual mode." However, he stressed that full recovery will take, "coordinated action of branches of the authorities in taking anti-crisis measures to bring about economic recovery in Russia and preserve our political and social system." Russian traders said the new installment from the IMF was too little too late to relieve the pressure on share and bond prices and the ruble. Traders, businessmen, and government officials are focused on the additional loan negotiations, while the rest of Russia waits for the next crisis. Today, the Russian stock market fell 5 percent to 163.30 and interest rate were set at 70 percent.

Ruble = 6.194/$1.00 (NY rate)

Ruble = 6.196/$1.00 (CB rate)

Ruble = 6.166|6.226/$1.00 (buy|sell rates)

Feb Mar Apr May Jun

Business

UES To Decrease Investment

· Unified Energy System of Russia (UES) chairman Anatoly CHUBAIS on Tuesday said that Russia's major energy company's investments to the country's

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electric power engineering sector will drop to $400 to $500 million against $1 billion in 1997. UES treasury department head Alexander LOPATIN, at a conference of the SC First Boston investment bank, said that by year's end, the company will have finally determined the list of investment projects it will no longer finance and a list of projects to be transferred to the regional level. He did not rule out that the company will cede the financing of the Nizhegorodnovenergo and Marienergo projects to regional authorities. In his words, UES will focus attention on financing the construction of electricity supply lines and generating plants of the federal level. Along with decreasing investments into electrical power engineering, the company will lower the investment component in the electricity tariffs, which currently exceeds 50 percent.

Goldman Sachs Opens In Russia

· Goldman Sachs, Wall Street's most renowned trading firm, formally opened its doors in Moscow, the Financial Times reported. In an opening speech held in the Hall of Columns in the House of Trade Unions, former US President George BUSH stressed the virtues of free people and free markets. Chairman and chief executive officer of Goldman Sachs Jon CORZINE said his company can act as the gatekeeper to global capitalism. With Russia's economy in a state of devastation and foreign investors weary about market conditions, Goldman Sachs' new office emphasizes its commitment to Russia. Managing director of Goldman Sachs' Glen EARLE said, "We wanted to make sure that when we came back in we did so in a serious way and with a commitment to stay through the good times and the bad. Goldman Sachs' first bank opened in 1991 to advise the Yegor GAIDAR government on how to attract foreign investment. CORZINE is confident in his copmany's advice and the ability of Russia to pull itself out of its financial difficulties to emerge as one of three or four leading countries in the next century. It appears that Goldman Sachs, which styles itself the "ultimate capitalist" has firmly invaded the one time capital of communism.

Aeroflot Receives Boeing 777-200 Jets

· Russia's international airline Aeroflot has received the first of 10 Boeing 777-200 jets as part of an ambitious re-equipment plan. Aeroflot general director Valery OKULOV said the airline intends to put the jet into service immediately on the busy

Moscow to London and Moscow to New York routes, replacing smaller Boeing 767s and Airbus A-310s. Aeroflot is also in the process of receiving 10 Boeing 737-400 short-haul jets for its domestic and European network, replacing old Russian Tupolev-134 twinjets and Tupolev-154 trijets. The Russian airline says it has spent over $400 million on the purchase of the Boeing 777s. Aeroflot says the new aircraft will give it a competitive edge against Delta Airlines and British Airways, which use smaller Boeing 767s on flights to Moscow.

Russian economics minister Yakov URINSON said the Russian government was planning to issue a decree concerning protection of the Russian aviation industry and allowing Russian air carriers to buy foreign planes at beneficial customs duty rates on the condition that they acquire Russian-made airplanes at the same time. URINSON said that a specific investment agreement will be signed simultaneously with every individual contract for the purchase of airplanes.

European Republics

Ukraine Seeks Funds For Deported Nations

· Ukrainian Deputy Prime Minister Valery SMOLY said at an international conference in Kiev today that the Ukrainian government with the help of donor countries is seeking to raise 13.8 million gryvnas ($7 million) for the implementation of the program of settling the deported nations of the Crimea. According to SMOLY, the money will be spent on providing housing for about half of the repatriates, who returned to the Crimea, and on creating new jobs for them. Approximately, 60 percent of them are unemployed. A total of 450,000 Germans, 250,000 Crimean Tatars, 38,000 Armenians, Bulgarians and other nations have returned to the Crimea. Ukraine spent 3.8 million gryvnas ($2 million) on measures for the integration of the deported nations over the past two years. $300 million were allocated from the budget for the needs of the deported nations after 1992.

The leader of the Tatar population of Ukraine's Black Sea peninsula of Crimea Mustafa DZHEMILEV threatened that if his people remained without formal representation in the Crimean parliament they would be forced to, "solve [our] problems in the public squares," the Financial Times reported. Tatars, who constitute 12 percent of the population of Crimea,

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until March had been guaranteed 14 seats in the 98 seat Crimean parliament, by a temporary law which was not renewed for the March elections.

Kuchma Continues To Run Ukraine's Economy

· Ukrainian President Leonid KUCHMA Thursday said that the economy remains in a, "very difficult" situation despite the fact that the nation's GDP and volume of industrial output have shown an upward tendency. The situation on the financial market, following the Asian financial crisis, is most alarming, KUCHMA said. "The estimated borrowing rate may reach 72 percent next year," and if the situation remains the same, Ukraine may in 1999 spend $5 billion each month servicing its foreign debt. The President said he must assume the entire responsibility for the situation of the Ukrainian economy and plans to issue additional decrees aimed at stabilizing the economy and the financial sphere. He added that he may also enact an amended budget for this year by decree. A cut in the budget deficit is the IMF's major condition for granting a $2 billion credit to Ukraine. KUCHMA's economic management by decree is due to the paralysis of the activities of the Supreme Council, which has devoted the past six weeks to a dozen unsuccessful attempts to elect its speaker. KUCHMA's latest decree raised the minimum wage by 10 gryvnas ($5) to 55 gryvnas.

South Caucasus & Central Asia

Armenia Praises Relations With Greece

· Armenian parliament speaker Khosrov ARUTYUNYAN's meeting with Greek parliament speaker Apostolos KAKLAMANIS on Thursday confirmed that the two nations will develop close relations and facilitate the strengthening of peace and stability in the Caucasus and the Black Sea region. The Armenian speaker informed his counterpart about the situation in Nagorno-Karabakh saying that Armenia is ready for dialogue if international guarantees have been ensured. KAKLAMANIS noted a high level of cooperation between the two countries and stressed that both countries intend to expand it in all

fields. Both speakers said that they intended to increase cooperation between the two parliaments.

Azeri Grants Licenses To US Accounting Firms

· After a long struggle with Azerbaijan's State Audit Chamber, Azerbaijan has granted operating licenses to US accounting firms KPMG and Arthur Andersen. Both firms had to complete repeated applications for seven months, in a process which should only take two weeks. The continuing battle to win approval of Azeri agencies highlights the growing problems foreign companies encounter when trying to set up in Azerbaijan. The issue was only resolved when President Geidar ALIYEV was notified. While waiting for their licenses to be approved, KPMG and Arthur Andersen were not permitted to operate. KPMG restricted its services to offshore business for its international clients. Earlier this year, Arthur Andersen was fined approximately $1,000 by the state prosecutor for operating without a license. Auditors Ernst & Young and Price Waterhouse, which have been operating in Azerbaijan for several years, received re-newal notices for five years.

Caspian Division Agreement Postponed

· Russian President Boris YELTSIN and Kazakhstan President Nursultan NAZARBAYEV were expected to sign a treaty on the division of the Caspian Sea that would bring an end to a long dispute over the use of natural resources under the Caspian Sea. YELTSIN has canceled the trip to work on solving Russia's economic crisis. The five littoral nations have not reached an agreement on how to divide the seabed, holding up multi-billion dollar oil and gas deals. Kazakh Foreign Minister Kassymzhomart TOKAEV said, "Azerbaijan and Turkmenistan share our approach...they agree that the Caspian Sea should be shared. Only Iran is left out." Iran believes that neither the seabed nor the waters of the Caspian should be divided, claiming that the Caspian is a lake not a sea according to the drainage on the surrounding terrain. Initially, Russia support Iran's view, but has accepted the division on the basis of a "middle line" equidistant from the shore of each nation.

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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