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

Monday, June 29, 1998

Russian Federation

Politics

Russia-Iran To Create Transport Corridor

· The Ministries of Transport of Russia and Iran on Saturday agreed to create a North-South transportation corridor that would pass through both countries. The project calls for establishing a joint shipping line, attracting cargoes from Europe, the Indian Ocean and the Persian Gulf to the Caspian Sea, and improving transportation infrastructure. Russian Transport Minister Sergei FRANK stressed the need to balance out bilateral and transit cargo flows by encouraging companies in Asia and Europe to ship their cargoes to the Caspian Sea through Russia and Iran. The two countries signed an accord to launch a ferry service between the ports of Olya and Anzali. The two ministers also agreed to consider establishing a joint company. Iran proposed to introduce visa-free regime for international road carriers in both countries. Iranian Minister of Roads and Transport Mahmoud HOJJATI, ending his five-day visit to Russia, thanked Russian authorities for the hospitality and the opportunity to tour aircraft enterprises in Ulyanovsk and Voronezh, the Tupolev and Ilyushin design bureaus in Moscow and the Aerohydrodynamic Institute in Zhukovsky.

Meanwhile in Switzerland, Iranian Deputy Oil Minister Seyed HOSSEINI expressed satisfaction that the Russian- Irani relationship is growing and, "will [be] broadening every day." He also stated that there are good prospects for Moscow-Tehran cooperation in the energy field. Iran is negotiating with gas giant Gazprom and other Russian companies on projects of great scale, including the second phase of the South Pars project, a gas storage in northern Iran, and prospecting the natural gas in northeastern Iran. HOSSEINI said the US threat of sanctions against companies investing in Iran's projects would not undermine Russia-Iran business cooperation. "As

for the sanctions, we are simply ignoring them. And we do not see any reason to think of it and take it seriously," HOSSEINI said.

Combating Crime Benefits Economy

· Russian Interior Minister Sergei STEPASHIN Friday said that the most important task of the Ministry in implementing the government's anti-crisis program is the effort to combat economic crime, specifically, tax evasion and money laundering. He said that in the framework of the implementation of this program the Ministry, jointly with the Central Bank of Russia, is preparing a document to extend the draft law passed by the Duma in the second reading, "On counteracting the legalization (laundering) of incomes illegally obtained." The first step will be taken by the law enforcement bodies toward fulfilling the anti-crisis program. Delivering a report, Viktor ILYUKHIN, chairman of the Security Committee, said the given law regulates relations of Russian citizens, foreign citizens and stateless persons permanently residing in Russia, of organizations making transactions with funds or other property, as well as state bodies controlling transactions with funds or other property. The purpose of the law is to forewarn, spot, and check actions involved in the legalization of incomes illegally obtained. LDPR leader Vladimir ZHIRINOVSKY said, "that the law cannot be passed as it will deal a blow to the economy and precipitate the flow of funds from banks." He believes the law, "will turn the entire Russian economy into a shadow economy...We have the Criminal

Today's News Highlights

Russia

Ruble Devaluation?

Alrosa To Increase Sales

Int'l Paper Buys Major Stake

European Republics

Shegen Laws To Be Adopted

Fitch Rates Latvia BBB

South Caucasus & Central Asia

Georgia Border Control Talks

Central Asia Electric Network

Loans To Tajikistan $228M

Politics-Economics-Business

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Monday

June 29, 1998

Intercon's Daily

Code to deal with the shadow economy," the LDPR leader said.

Lebed Leads New Peacekeeping Mission

· Governor of Siberia's Krasnoyarsk region and presidential hopeful Alexander LEBED has been appointed head of a new peacekeeping mission, which aims to coordinate efforts to avert conflicts in the Caucasus region. The new mission is supported by the authorities of the region, including Chechnya. LEBED has accused the Kremlin of neglecting the north Caucasus region, which he regards as dangerously close to spilling its conflicts into the surrounding regions. He said that turmoil in the Caucasus could create a heavy economic burden for Moscow, already battling a financial crisis. LEBED noted that the problems of the Caucasus comprise a complex patchwork of ethnic and religious struggles. He stressed that the Southern Caucasus region is equally fragile, with Georgia's rebel province Abkhazia, and Christian Armenia and Moslem Azerbaijan at an impasse on resolving the Nagorno-Karabakh conflict. "If these situations blow up into full-scale conflicts, then the economy of Russia will not weather such an explosion. This could lead to a devaluation of the ruble and would mean social agitation and civil war," LEBED said.

Economy

Ruble = 6.196/$1.00 (NY rate)

Ruble = 6.198/$1.00 (CB rate)

Ruble = 6.168|6.228/$1.00 (buy|sell rates)

Market Falls As Duma Considers Reforms

· The Russian stock market and government bonds fell again today while the Russian State Duma begins deliberations over new tax legislation as past of Prime Minister Sergei KIRIYENKO's anti-crisis program. The Russian Trading System's stock index was down 4.3 percent and government bond issues offered yields as high as 83 percent. The Central Bank raised the refinancing and Lombard rates from 60 percent to 80 percent. The ruble was stronger against the dollar. KIRIYENKO met Saturday with Communist leader Gennady ZYUGANOV to urge him to accelerate action on the plan. ZYGANOV and his party are opposed to Russia's dependence on international loan and want increased government spending, not less. Russian President Boris YELTSIN called on the Communist dominated parliament to

swiftly approve the government's austerity plan. The new plan earned the praise of the International Monetary Fund (IMF), which is negotiating an additional loan package with top officials. In order to become effective the Duma must approve the plan. KIRIYENKO today said that a failure to implement the plan immediately will, "pose a threat to state security and integrity." YELTSIN said, "we have no crisis and that's why I do not describe the [government] program as anti-crisis, but rather refer to it as a stabilization program. Comment: It appears the Russian economy is facing a crisis as it is desperate to prevent the devaluation of the ruble. KIRIYENKO said, "We proceed for the basis that a firm national currency is the most important accomplishment of the past period of reform in Russia, and it is an important condition for the normal development of the economy and the stable development of financial markets." So far, the economic crisis has been contained in the financial market. But, ruble devaluation would increase consumer prices and inflict further pain on ordinary Russians.

Zadornov On Ruble Devaluation

· Meeting with the Russian State Duma Budget Committee, the committee he chaired before joining the government, Finance Minister Mikhail ZADORNOV said the Duma should, "immediately pass" the package of tax laws introduced by the government. The committed is reviewing 12 stabilization laws sent by the government to the Duma in a legislative initiative. The package comprises draft laws on a single value added tax (VAT) and its levying on goods delivered. The Duma is set to debate a law which exempts from VAT equipment and goods imported into Russia in 1998. The law on individual income taxation shortens the number of benefits and deductions, and revises the tax scale. Budget Committee Chairman Alexander ZHUKOV of the Russian Regions faction has already backed the government's program. ZADORNOV says that if tax collection fails to rise by a third in the next few months, the government may have to devalue the ruble. ZADORNOV warned of the risk to the national currency saying, "The situation is critical." The Minister's remarks were the first hint that a devaluation might take place after all, despite repeated claims by Prime Minister Sergei KIRIYENKO and Central Bank chairman Sergei DUBININ that the currency would be kept at current exchange rates. Government officials say

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Monday

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Russia would use additional aid from the International Monetary Fund (IMF) to boost state currency reserves, which have been depleted by continuing support for the pressured ruble. Deputy Finance Minister Oleg VYUGIN announced on Friday that proceeds from the latest sale of Eurobonds have brought the gold and hard currency reserves to above the $16 billion level.

Business

Alrosa To Increase Diamond Sales

· Russia's largest diamond-developing company Alrosa in 1998, intends to increase the sales of diamonds worth up to $1.433 billion, which is 9.7 percent more than last year. The increase was announced on Sunday at Alrosa's annual general meeting of shareholders. Alrosa President Vyacheslav SHTYROV admitted that 1997 was, "the most difficult one over the entire five-year history of the company." Nevertheless, Alrosa earned a net profit of 1.3 billion rubles, making it one of Russia's top ten enterprises. Shareholders decided to pay dividends worth 152.2 rubles per share. Shareholders also agreed to call the company simply Alrosa instead of Russia's Diamonds—Sakha. In order to have the word Russia in its name, the company had to pay 70 million rubles a year. The meeting elected First Deputy Russia's Economics Minister Ivan MATEROV, Prime Minister of the Sakha Republic [Yakutia] Vasily VLASOV, and Andrei KIRILLIN co-chairmen of Alrosa's council. The council of observers also includes business manager of the Russian President Pavel BORODIN.

International Paper Buys Controlling Shares

· US company International Paper has purchased the controlling interest of Russia's Svetogorsk Cellulose Factory from Sweden's Tetra Laval. The agreement between International Paper and Tetra Laval was signed in the Finish city of Lappenranta. Terms and conditions of the deal have not yet been released to the public. Another Swedish company, Svenska Cellulosa, remains International Paper's partner. An International Paper official said the agreement would bring about an increase in the volume of sales in both Europe and Russia. However, more investment and an expanded range of end products are necessary to increase volume. Tetra Laval has invested in the factory $25 million over three years of ownership.

Gazprom, Neste Pipeline JV

· Russian gas monopoly Gazprom has formed a joint venture with the Finnish gas company Neste to explore building a $5 billion pipeline across Scandinavia to Germany, the Financial Times reported. The new pipeline to stretch under the Baltic Sea would give Gazprom shorter and more direct access to northern European Union (EU) markets than the continental European routes. By the end of the year a $20 million feasibility study will be competed to determine which route the pipeline should follow. Gazprom and Neste have equally formed the joint venture company, North Transgas, to oversee the project's responsibilities.

European Republics

Eastern Europe To Adopt Shengen Laws

· Central and East European countries, including the Baltics and Cyprus, which seek to join the European Union (EU), said that they are prepared to establish Shengen rules of open borders even before the accession to the EU. Their interior ministers participated in a conference involving Shengen countries which was held in Ostende. Shengen countries supported EU candidates' willingness to integrate into a European space with common borders. In a communique issued on Friday, they expressed readiness to help ensure control over borders with non-Shengen states. Shengen and non-Shengen countries agreed to fight illegal immigration, including organized, by taking concrete and effective measures to safeguard borders. Ukrainian President Leonid KUCHMA on Saturday said Ukraine's successful economic reforms have created better conditions for its integration into the EU. He stated his confidence that Ukraine and the EU would sign a free trade agreement in the near future. Ukrainian media reported that Ukraine submitted an application for EU associate membership on June 9th, and Ukrainian leaders repeatedly indicate that the country's policy for integrating itself with Europe and the European-Atlantic structure will not change.

Fitch Assigns BBB Rating For Latvia

· The International rating agency, Fitch IBCA today assigned a BBB long-term foreign currency rating to Latvia. A short-term foreign currency rating of F3 was also assigned as was a long-term local currency rating of A. These rating will apply to senior,

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unsecured sovereign debt issues. With this announcement, Fitch IBCA rates Latvia and Estonia together at BBB. Lithuania is rated at BB+, two grades lower. Since Latvia's banking crisis in 1995, the government has implemented a broad program of reforms that impressed Fitch. Economic growth in Latvia has increased significantly fueled by foreign direct investment and rising trade. The fiscal position has been stabilized and inflation is at one of the lowest levels of transition economies. Fitch stressed that there was some risk of the current strong macro-economic framework deteriorating over the near-term. Rapid rises in bank lending are driving domestic demand growth and brining in imports.

South Caucasus & Central Asia

Georgian-Russian Border Agmt. Initialed

· On Saturday, Georgian First Deputy Minister of Foreign Affairs Mikhail UKLEBA and Russian First Deputy Foreign Minister Boris PASTUKHOV initialed in Moscow a Georgian-Russian Border Agreement. According to Intercon sources, the agreement states that during the period of July to September Georgia will take control of its coast line; between September and December the agreement state that Georgia will assume control of one half of the Georgian-Turkish border; and by May 1999, Georgia will control the other half of the Turkish border in Adjaria. The US provided $17 million in aid to Georgia to assist in the development and training of Georgian border guards. By taking control of its borders, the Georgian government hopes to consolidate its sovereignty and increase its security.

Central Asia Agrees To Joint Electric Network

· Friday, the prime ministers of Kazakhstan, Uzbekistan, Kyrgyzstan, and Tajikistan in the Kyrgyzstan capital, Bishkek signed a draft agreement, "on parallel work of energy systems of Central Asia." The Central Asian nations plan to establish a joint electricity supply network. Tajikistan joined the Central Asian Union in April 1998. The energy agreement

is to ensure a stable supply of electricity to all the countries and put an end to independent operation of their energy systems which existed since the collapse of the Soviet Union. Other agreements create an international consortium which is to solve the distribution problem of water and energy resources of the Syrdarya river in Central Asia, provide economic integration facilities, and establishes joint scientific-technical programs.

Loans To Tajikistan $100 M (China), $128M (IMF)

· China has agreed to provide a loan in Chinese Yuan equivalent to $100 million to Tajikistan. The agreement was signed by Tajikistan's Minister of Foreign Economic Relations Davlat ISMONOV and a visiting Chinese government delegation. Both sides have also signed an exchange of notes in which China will provide a grant in the amount of 5 million Yuan ($600,000) to Tajikistan. The grant is intended to serve as economic aid.

Meanwhile, the International Monetary Fund (IMF) on Thursday approved a $128 million loan to Tajikistan to restructure its economy over the period 1998 to 2001. The first annual installment of $48 million is divided in two equal parts. The first to be disbursed immediately, while the second one will be delayed six months. The IMF noted that Tajikistan has been working to mount the macro-economics discipline, promote reforms and reschedule debts. It has succeeded in decreasing inflation, maintaining a stable national currency and assuring economic growth for the first time since the collapse of the Soviet Union. Privatization has accelerated and important steps to reform the banking sector have been made. The Tajik government plans a 4 percent to 4.5 percent gross national product (GNP) growth in 1999 to 2001 and inflation curb to eight percent in 2001 compared to 164 percent in 1997.

The Daily Report on Russia and FSU will not be published on Friday July 3rd and Monday July 6th in observance of Independence Day.

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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