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

Wednesday, June 3, 1998

Russian Federation

Politics

Russia To Ask G-7 For Emergency Aid?

· The Russian government is expected to formally ask the Group of Seven (G-7) industrialized nations' deputy finance ministers and other private financial institutions on June 9th at their Paris meeting for more than $10 billion in emergency financial assistance to help resolve the country's financial situation, the Nihon Keisai Shimbun reported. The Kremlin and Central Bank have denied such reports, insisting that they would prefer to fix their problems themselves by reducing government spending and improving tax collection. However, an agreement has been reached within the government that the ruble cannot be stabilized without such emergency aid. An official at Japan's Ministry of Finance (MOF) said that any possible aid is likely to be extended through international institutions rather than bilaterally. US Treasury Secretary Robert RUBIN confirmed that the G-7 nations are in constant contact over Russia's financial situation, but said that no decision has been reached on whether to provide aid. Russian share prices and the Russian currency plunged sharply last week, prompting the government to raise interest rates to protect the ruble.

The G-7 deputies are expected to study the use of a special International Monetary Fund (IMF) reserve established last year to extend emergency loans to Russia to protect its currency. They will also study the feasibility of World Bank loans to Russia. The Paris meeting is expected to consider the possibility of granting Russia financial aid on easier terms along the lines of a long-term low-interest loan. Many analysts feel that the strategy of the Russian government aimed at restructuring the foreign debt by turning short-term loans into long-term ones, as well as the course directed at lowering the total borrowing is absolutely correct.

Senate Wants US-Rus. Plutonium Levels Equal

· New Mexico Republican Pete DOMENICI, chairman of the Senate Appropriations Energy and Water Development subcommittee and US Senator, on Tuesday recommended that funds for turning US plutonium stockpiles into a non-weapon form should be tied to Russian pledges to convert the same amount of excess weapons plutonium. He believes that unless changes are made to the plutonium conversion plans, the US would be permitting, "unequal disarmament." DOMENICI stressed, "We have to ensure that Russia destroys at least as much weapons plutonium as we do because they have many times as much as we do." The subcommittee said a $56.7 million portion of the $168.9 million Fissile Material control and Management program is contingent on a bilateral accord that requires equal conversion rates for US and Russian weapons plutonium. DOMENICI said that the key to permanent nuclear arms control is the destruction of the excess material, making it unavailable to states or groups prepared to build nuclear weapons. He personally proposed the destruction of 10 tons per year to speed the "build down" process. In 1997, US and Russia agreed to halt production of weapons-grade plutonium in a deal calling for the US to assist Russia in converting three plutonium production reactors to civilian use by 2000.

Russia To Cut Railway Transportation Fees

· Russian Railway Minister Nikolai AKSENENKO on Tuesday said that, as a result of the coal miners strike, the Ministry plans to cut

Today's News Highlights

Russia

AVVA To Compensate Investors

UES Turns To Real Investors

European Republics

Latvia Shuts Down Nuclear Plant

Ukrnafta Not To Split Up

Tsenrenergo Issues GDR's

South Caucasus & Central Asia

EU Helps South Caucasus

Baku Opens Oil And Gas Exhibit

Kazakh Savings Linked To Euro

Politics-Economics-Business

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Wednesday

June 3, 1998

Intercon's Daily

transportation fees for the delivery of coal, ore, and oil on the railroad by 25 percent, starting June 15th. He added that the ministry plans additional cuts by October 1st. "The transport fees cut by 25 percent will enable the government to honor its obligation to the miners and ensure the stability of the situation in the coal industry," AKSENENKO said. The Railway Ministry has suffered losses of 50 million rubles due to the miners' strike and blockades.

New Chechen Security Minister

· Chechen President Aslan MASKHADOV has appointed his close ally Brig.-Gen. Aslambek ARSAYEV head of the State Security Ministry. ARSAYEV replaces Islam KHALIMOV, who the parliament asked to resign earlier this month. He was sacked because of his inability to combat kidnappings and other crimes after the Chechen war for independence and for failing to solve the abduction of Russian President Boris YELTSIN's envoy Valentine VLASOV.

Economy

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

Ruble = 6,167/$1.00 (CB rate)

Ruble = 6,142|6,193/$1.00 (buy|sell rates)

Russia Issues One-Week T-Bills

· In an attempt to refill government coffers and stabilize its financial market, the Russian government has issued rare one-week treasury bills today. The move is expected to boost the economy after last week's sharp drop in the stock market. On Tuesday, the stock market regained significant ground rising 12 percent and today the market rose another 9 percent. The short-term treasury bills are designed to raise quick cash so that Russia can make payments on its existing debt and reassure investors that it will not default. The government sold most of the issues by midday, signaling a strong demand. With the demand for T-bills rising, prices will rise and yields will fall, proving investors' confidence in the government's ability to pay. T-bill yields were the first to signal the crisis two weeks ago, when investors pulled funds out of Russia, worried by Asian financial woes and a Russian budgetary squeeze caused by poor tax collection and lower oil prices. Economics Minister Yakov URINSON said the rise in T-bill yields prompted the Central Bank to triple its refinancing rate to 150 percent. He added that the Central bank

could lower refinancing rates by the end of this week. Tuesday, Russian President Boris YELTSIN discussed with senior Russian businessmen and bankers the country's financial problems. They presented proposals, which YELTSIN promised to weave into the Russian anti-crisis campaign to be presented to parliament on June 30th. Business leaders made suggestion to improve tax collection, ease the cash flow crisis in the energy sector, and revise railway and energy tariffs.

CB Investigates Illegal Money Shipments

· The Central Bank, State Tax Service and Federal Tax Police are investigating the illegal transfer and shipment of money abroad. The Russian tax inspectors are ready to submit to the Central Bank the first information about commercial banks' illegal monetary shipments of several hundreds of million dollars. It appears that the main export channel for these shipments are Latvian Banks. The information on such operations may entail the revoking of banking licenses. Russian banking experts, assisting in the investigation, do not exclude that import-export companies may soon have to open deposits for their deals in order to prevent fake import operations used for the illegal money shipments abroad. The scheme is the following: a company transfers money to accounts in foreign banks for the announced imports. The imports are not brought to Russia and the company ceases to exist after the end of the operation. In the opinion of banking experts, the deposit system will give guarantees against such companies and prevent fake deals.

Business

Flemings Bank Expands Operations In Russia

· The Flemings Bank, one of the biggest British investment banks, announced Tuesday that it is expanding its activities on the Russian investment market and plans to establish a new trust fund by the end of August whose funds will be invested in securities of Russian enterprises only. The trust fund founders are the Flemings Bank and the Russian commercial Guta-bank. Moscow investment Joint City Bank (OGB) has expressed interest in the project, but has not formally committed to the fund. A spokesperson for the Flemings Bank pointed out that they had gained a considerable experience successfully cooperating with Russia and that, "curtailing business with Russian partners was out of the

When you need to know it as it happens

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question." He added that profits made by the first investment fund established in the Russian Federation in 1995 had grown by 65 percent. The Flemings Bank expressed confidence in the Russian stock market recovery. The Flemings bank, founded in 1873, is one of the most prosperous financial institutions in Great Britain. It has branch departments in 41 countries and has around $108 billion invested in trust funds controlled by the bank.

AVVA To Compensate Investors

· The All-Russian Automobile Alliance (AVVA), formed in 1993 by business tycoon Boris BEREZOVSKY, has agreed to compensate its investors with either cash or shares in the car manufacturer AvtoVAZ, reported RFE/RL Newsline and Kommersant Daily. The newspaper called the AVVA, "one of the largest Russian financial pyramids," which attracted some $50 million, ostensibly for the construction of an AvtoVAZ factory that was never built. AVVA director general Nikolai KOSOV says the alliance is seeking to, "bring [its] affairs in line with existing legislation." The newspaper said the compensation plan was approved because AvtoVAZ is to be audited in preparation for a joint venture with the German company Adam Opel AG, the European subsidiary of General Motors. The Menatep Bank is reportedly the largest single financial backer of Kommersant Daily.

UES Turns To Real Investors

· Head of the Unified Energy Systems (UES) Anatoly CHUBAIS said UES hopes to count on real investors instead of the federal government in its modernization plans. The company wants to earn a profit and become attractive to investors. UES, strangled by a vicious circle of debt and debtors, has developed a new concept of interaction with regions in an effort to prevent energy supply problems in the fall and winter. The company will also carry out tough measures against those who can pay for energy supplies, but don't. CHUBAIS stressed that UES does not want to harm regular payers. UES has also decided to abandon a new building in Moscow in order to save money. With the savings, the company plans to pay obligations to the budget and pension fund, pay salaries, and receive payments from debtors. CHUBAIS said for the first time in company history, UES management is working with a budget. The Russian financial crisis has almost halved the

value of the company from $14 billion to just over $6 billion. A similar devaluation has hit Russian gas giant Gazprom and LUKoil.

European Republics

Estonia Takes New Fiscal Measures

· Estonian Prime Minister Mart SIIMANN today said that the government will take additional measures to squeeze the country's widening account deficit, while maintaining its strict fiscal policy. On Tuesday, the government approved in principle a plan to tax luxury goods ranging from cosmetics to cars. "As for new measures, we plan to apply technical tax measures to regulate consumption related to imports, including to fully tax luxury goods," SIIMANN said. He added that the government is considering a plan to abolish tax on time deposits, "to encourage savings." Estonia's gross domestic product (GDP) grew by 11.4 percent in 1997, but the account deficit is currently 13 percent of the GDP. SIIMANN said that government does not plan to increase the current tax burden and will not increase the public sector debt burden, which is 5.5 percent of GDP. The government will also try to limit public sector spending, which is predicted to grow by 1.8 percent this year.

Latvia Closes Its Nuclear Reactor

· The Latvian government on Tuesday decided to closed down its only nuclear reactor. Education and Science Minister Janis GAIGALS said, "Latvia will stop being a `nuclear superpower.'" The reactor, which opened in 1961 when Latvia was part of the Soviet Union, will be shut down on June 19th the day its nuclear fuel runs out. The government said it was closing the reactor due to wear and tear and the cost of supplying it with nuclear fuel. The plant's capacity is 5,000 kilowatts, compared to the 3 million kilowatts at Chernobyl.

Ukrnafta Not To Split Up

· Deputy head of the State Property Fund Sergei HLUSHKO said that the Ukrainian government has no plans to split blue-chip oil and gas company Ukrnafta into two companies. The government holds a 61 percent stake in the company. Ukrnafta's private shareholders, who own 30.5 percent of shares, have worried over the possible separation of the Okhtyrkanaftagas oil producing unit from Ukrnafta.

When you need to know it as it happens

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HLUSHKO said, "We believe that the question of demerging Okhtyrkanaftagas from Ukrnafta has been nullified by the governmental decree on creation of state-owned company Naftagas, of which Ukrnafta will be a part." The government has been forming Naftagas, whose share capital will be 50 percent plus one share of Ukrnafta shares. Naftagas shares will be issued by the end of 1998.

Tsentrenergo To Issue GDR's

· Ukraine's third largest energy generator Tsentrenergo today issued global depository receipts (GDR's), becoming the first former Soviet Republic to do so. ING Barings, acting as the custodial bank, said that one GDR equals 10 shares in blue-chip Tsentrenergo. The company produces 10 percent of Ukraine's electricity.

South Caucasus & Central Asia

EU Helps South Caucasus States

· The European Union (EU) intends to render political and economic aid to the former Soviet Republics of the South Caucasus region and is determined to promote stability, democratization and the economic development in Azerbaijan, Armenia and Georgia. With that end in view, member of the European Commission in charge of relations between the EU and former Soviet Republics Hans VAN DEN BROEK left for the Caucasus region where he will devote special attention to problems of oil transportation. VAN DEN BROEK will urge Azeri, Armenian and Georgian leaders to develop regional cooperation more intensively, especially in the field of transportation of energy resources. The European Union began the implementation of two programs connected with this problem: the TRASEKA and INOGATE, having invested in each of them 50 million ecu. The purpose of the aid from the European Union is to help the South Caucasus build alternative pipelines for the transportation of power resources from these states, as well as from the Central Asian countries to Europe.

Oil And Gas Conference Opens In Baku

· The world's leading companies, including Exxon, Amoco, Mobil, Chevron, LUKoil, British Petroleum, Statoil, Itochu and Agip, are taking part in the fifth international exhibition Oil and Gas of the Caspian Sea in Baku which opened on Tuesday. Attendance at the show has doubled since last year with a total of 429 companies participating. Most of the companies make oil and gas equipment, construct pipelines and render transportation services. Heads of the energy and industry departments of Russia, France, the United States, Italy, Belgium, Japan, Norway, the Netherlands and India are expected to attend the show. In the opinion of the organizers, that testifies to the increased interest in Azerbaijan and the Caspian region, to be the leading suppliers of oil and gas to the world markets in the 21st century.

Kazakh Expected To Reap Savings From Euro

· Deputy head of the monetary operation department of the Kazakhstan Central Bank Medet SARBAYEV expects that Kazakhstan's nascent banking sector will reap considerable savings after the launch of the euro next year. He said, "The figures show the share of Kazakhstan's economy held by countries within the future monetary union, and they show how important the euro will be for its financial institutions." The euro will appreciate in terms of, "lower settlement and conversion costs, the cost of insuring against currency risk and attracting capital on international financial markets." SARBAYEV said that 18 percent of total Kazakh exports went to European Union countries and 17 percent of imports cam from that region. For the Central Bank, the introduction of the euro could mean a change in the currency composition of its reserve, with European currencies accounting for 10 to 15 percent of the total $1.52 billion. Senior vice president of Dutch Abn Amro Bank Peter SURA said that the euro's share of global trade and payment traffic could eventually reach 40 to 45 percent. Kazakhstan has already planned to issue $300 to $500 million worth of bonds in June or July on euro-denominated paper.

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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