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 5, 1998

Russian Federation

Politics

Yeltsin Stresses Tax Responsibility

· In his weekly radio address today, Russian President Boris YELTSIN vowed to institute tough measures to collect taxes. He noted that Russian citizens have a right to, "effective work from the executive, legislative, and judicial powers, but the government is right to expect citizens to have a responsible attitude to the obligation to pay taxes voluntarily." Russia's new tax chief Boris FYODOROV said that fewer than 3 percent of Russian citizens filed their income tax report in 1997. Russia was hit by a financial crisis late last month and the government cited the huge deficit, partly due to poor tax collection, as one of the factors. "We have managed to defuse the situation considerably, but the main part of the work is still ahead," YELTSIN said. He pointed out that Russia must learn from the West's example and implement tough tax collecting measures. "But tough measures alone cannot solve the situation. We need to create an effective and flexible tax system, convenient for everyone for the state and for taxpayers." This YELTSIN said would help develop the economy, boost companies' and people's incomes, and reduce the number of shadow businesses. He added that unless Russian businesses and individuals start accepting their responsibility of taxes, there could be a return to Soviet-style ration cards and lines in the stores. "The time has come to demand and punish, including filing criminal charges," against tax evaders YELTSIN said. "If we don't collect taxes, we can't pay salaries." The government's inability to pay wages to state workers has led to labor protests, including last month's coal miner strikes which shut down major portions of the nations railroads. Deputy US Treasury Secretary Lawrence SUMMERS on Thursday said, "What is most crucial in this situation is the policy steps that Russia takes

going forward to improve tax administration, to reduce the budget deficit, to continue in the establishment of an attractive climate for private investment based on property rights." A new tax code is languishing in the opposition-dominated Duma.

Economy

CB Cuts Interest Rates To 60 Percent

· When the market closed on Thursday, the Russian Central Bank cut the interest rate and lombard credit rate to 60 percent, after hiking them last week to 150 percent to defend the ruble. A Central Bank statement said the decision was made because of the stabilized domestic financial market. Prime Minister Sergei KIRIYENKO said the decision was made on Monday, but added that the rate should be lowered when the financial market was stabilized. The rate revision was expected by the market and left key securities prices with little change. The securities market opened today with a "price correction" which dealers said was quite exceptable after the price surge. Dealers said the market is quiet and 50 percent yields are recognized as optimal for the conditions. The stock market is calm too, with blue chips having settled at Thursday closing quotations. Firebird Management New York analyst Harvey SAWIKIN said, "If they [Russia] can't push through [the necessary economic reforms] this won't be the last time we have a crisis like this." US Treasury Secretary Robert RUBIN said on Wednesday that the Group of Seven major industrial nations

Today's News Highlights

Russia

McDonalds Expands In Moscow

Duma To Bar Rosneft Sell-off?

European Republics

Belarus Seeking Jet Lease

BP Considers Gas Financing

Ukr-Romanian Ties Strengthen

South Caucasus & Central Asia

AIOC Consider Oil Sawps?

Socar Issues Rehab Tender

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June 5, 1998

Intercon's Daily

were continuing work on ways to help Russia's battered economy, including aid. KIRIYENKO said, "The support Russia needs is of one sort and one sort only...The creation of equal and open opportunities for competition. We are not asking for any other kind of support." He admitted that the Russian government lacks experience in dealing with outside influences on open markets, but stressed that economic stability attracting foreign investment is key.

Ruble = 6.168/$1.00 (NY rate)

Ruble = 6.169/$1.00 (CB rate)

Ruble = 6.140|6.198/$1.00 (buy|sell rates)

Jan Feb Mar Apr May Jun

Shareholders' Rights, Bankruptcy Reviewed

· Finance Minister Mikhail ZADORNOV said the two biggest areas of criticism against the Russian economy are the poor protection of shareholders' rights and the ineffective bankruptcy rules. Russian authorities have vowed to crack down on bankrupt companies and strengthen the protection of shareholders' rights. ZADORNOV said his commission will bar Russian companies from access to international capital markets unless their financial reports are of a high standard. Head of the federal bankruptcy agency Gregory TAL outlined new fast track bankruptcy procedures and named four companies targeted for bankruptcy. ZADORNOV reiterated the government's stance that it is not seeking western aid beyond the latest installment of the International Monetary Fund loan. However, the Russian stock market rebounded this week on the belief that a western aid package was forthcoming. If no support materializes over the next few week, investors could

again lose confidence in the Russian economy. Head of the Federal Securities Commission Dmitry VASILIEV said, "Of course, it is too early to say the crisis is behind us, but we do see some positive trends and I am cautiously optimistic about future development," the Financial Times reported.

CB Confident In Commercial Banks

· First Deputy Chairman of the Central Bank of Russia Andrei KOZLOV on Tuesday in St. Petersburg said it does not expect bankruptcies of commercial banks because of the situation on the Russian financial market. He is attending the seventh international banking congress, which opened on June 3rd. As compared to August 1995, when several commercial banks of Russia had a financial crisis because of a large amount of interbank unsecured credits, the banks have a different problem, KOZLOV explained. The excessively high interest rates on the financial market, "may bring the banks, on one hand, to the devaluation of their assets and, on the other hands, to excessive losses resulting from the high bank liabilities." However, "the situation, which does not seem to last for long, will quiet," and the fears will be gone, KOZLOV said. Within a week the Bank of Russia is planning to issue an instruction on the revaluation of the T-bill portfolio in commercial banks, which will help to restore the assets of commercial banks to the position of May 1st when the T-bill quotations dropped.

Business

MediSolution Wins Computerization Contract

· MediSolution Ltd., Canada's leading provider of information technology to the healthcare sector, Thursday announced its first major international contract to install computer systems and software at Russia's Samara Oncology Center, a new acute healthcare facility to be opened in 1999. The project is worth $7.8 million, with financing arranged by the Export Development Corporation (EDC). President of MediSolution Remi ST-HILAIRE said the company gained the contract in a partnership with Le concepteur-ensemblier Afcan Inc. (Afcan), a Montreal-based firm specializing in the design, construction and management of healthcare centers around the world. MediSolution is the exclusive information technology partner with Afcan and is currently involved in four other international healthcare bids, including projects in Kuwait, the

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Philippines and Turkey. "This contract is a strong endorsement of MediSolution's healthcare expertise, and establishes the company as a major provider to the healthcare sector internationally as well as in Canada," ST-HILAIRE said. MediSolution will be responsible for all aspects of information technology for the Center, from installation and implementation of computer systems and software to staff training. MediSolution offers a comprehensive suite of information systems, managed services, integration technology and professional services to more than 600 hospitals and institutions. MediSolution also has an installed base of practice management systems serving more than 6,000 physicians, pharmacists, and other healthcare professionals

Aeroflot Opens Route To Karlovy Vary

· Russia's international airlines, Aeroflot, today opened a direct route, linking Moscow with the Czech Karlovy Vary resort. A new Boeing 377-400 airliner will fly the route once a week on Fridays. Aeroflot's marketing and external relations department said that in the past, Russian citizens reached Karlovy Vary for rest and treatment via Prague. The purchase of the new aircraft made it possible to reduce prices and increase efficiency. Preliminary statistics show that one flight a week will be met by strong demand. The airlines does not rule out increasing flights on the direct route in the future.

McDonald's Expands In Russia

· McDonald's announced on Tuesday plans to open seven new restaurants in Moscow by year's end, brining the total number in the city to 28. Chairman of the board of the Canadian-Russian company that operates the restaurants in Russia George COHON said, "Moscow is still the best market for the company." COHON stated the first McDonald's in Moscow in 1990. The chain employs 6,000 and operates 33 restaurants in Russia. McDonald's plans to invest $25 million in Moscow in 1998 to develop restaurants and increase the capacity of its food processing plant.

Duma To Bar Rosneft Sell-Off?

· The Russian State Duma has put on today's agenda a draft resolution suspending the government planned sell-off of Rosneft oil company. Kazbek TSIK of the Communist faction proposed the motion to bar the tender. He called on the Duma, "not to give away the mineral wealth of Russia to private owner

ship." Duma committee chairman Pavel BUNICH argued that, "we have no law forbidding the privatization of oil companies," unsuccessfully. The Duma is expected to pass the resolution before midday. Earlier this month, the government announced new terms for the Rosneft sale, which include a starting price of $1.6 billion and a required investment of $65.5 million. The failure of the original Rosneft tender in late May to attract investors is one factor which fueled the economic crisis.

Unexim To Open Office In Beijing

· The Russian giant bank United Export-Import Bank, or Unexim, will open an office in Beijing, China later this month in an effort to increase China-Russian trade. Chief representative Fedor BRATAKH said the bank plans to upgrade the Beijing office to a branch, as soon as the Chinese mandated two year waiting period is over. Three other Russian banks have offices in Beijing, but none have upgraded to a branch. The Unexim office in Beijing is only the second which has opened overseas; the first being in Switzerland. BRATAKH pointed out that, "China is so big that we decided we had to have an office here, even though trade volume is not so large now." Last year bilateral trade totaled only $6 billion, well below the target of $20 billion set for 2000. Several factors contribute to the low levels of trade. These included strict foreign exchange controls on both currencies, economic slowdown in Russia, and the use of barter trade. Barter trade contributes over 10 percent of bilateral trade volumes. BRATAKH predicts the use of barter trade will lessen as banking services provided between the two nations improve. Uneximbank, the second largest bank in Russia, is ranked among the top 500 banks of the world based on registered capital, which totaled 5.8 trillion rubles in 1997.

European Republics

Belarus Negotiates Jets Lease

· The head of the State Aviation Committee Girgori FYODOROV on Thursday said that the Belarus state airline BelAvia is negotiating with US Boeing and European Airbus Industrie for lease-to-purchase deals. BelAvia is considering purchases of Airbus A-319 and A-320 aircraft, but provided no further details. He also announced that Belarus will start regular flights to Prague starting today. "Belarus is entering its next country, and in the future we

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plan to fly to New Delhi and the [North] American continent," FYODOROV said. BelAvia flies to 17 international destinations.

BP Considers Gas Financing In Ukraine

· Deputy head of state oil, Gas and Oil Refining Industry Ihor BAKAY on Monday said British Petroleum is considering financing of up to $5 billion annually in the development of Ukraine's natural gas deposits in the region between the Donetsk oblast and Dnieper River. He said that Gas de France had submitted a proposal to trade natural gas in Ukraine. BAKAY said, "I recently met with Gas de France, Italy Gas, Gazprom...They are all interested in cooperation, investments and creating joint ventures," in Ukraine, The Journal of Commerce reported. Ukraine consumes about 80 billion cubic meters of natural gas annually.

Ukraine-Romania Strengthen Relations

· Ukrainian President Leonid KUCHMA and his Romanian counterpart Emil CONSTANTINESCU agreed on Thursday to set up a joint coordination committee on bilateral cooperation. The two leaders are attending the Black Sea Economic Cooperation (BSEC) in Yalta. KUCHMA and CONSTANTINESCU discussed the implementation of the Ukrainian-Romanian good-neighborly relations and cooperation treaty, which was signed one year ago. Romania's relations with Ukraine are a top priority, said CONSTANTINESCU. The two Presidents also exchanged views on the expansion of the North Atlantic Treaty Organization (NATO). They both agreed that the eastward movement should not lead to a new line of demarcation.

South Caucasus & Central Asia

AIOC Members Discuss Oil Swap Deals

· On Thursday Iran's deputy oil and gas minister for the Caspian Sea Ali MAJEDI said that Azerbaijan International Oil Consortium (AIOC) had started talks on possible export swaps with the Islamic Republic. He said that British Petroleum, Ramco,

and Itochu are seeking to export through Iran's "oil swap" system, in which oil firms send Caspian oil to Iran's northern refineries in exchange for an equivalent amount in the Persian Gulf. MAJEDI added that AIOC's problems with developing initial export pipelines through Russia and Georgia had forced it to turn to Iran. AIOC denied this and declared today that it was not negotiating with Iran for oil export swaps on behalf of its oil company member. "It is the individual foreign oil companies who are the shareholders in AIOC who negotiate deals...We're responsible for the production and transportation of oil, we're not involved in any such talks," an AIOC spokesman said. Washington has promoted the AIOC group, which includes Exxon, Amoco, Pennzoil, and Unocal, as a leader in development of the Caspian region which is to become a major westward supply source of oil. Washington vehemently opposes the development of trans-Iranian export routes. Instead it supports the Baku-Ceyhan route.

Socar Issues Rehabilitation Tender

· Azerbaijan's state oil company Socar today announced a tender to rehabilitate the nation's five oldest offshore fields. The tender has been reviewed for the last 15 months, since Socar awarded a contract to MAI Consultants to evaluate the rehabilitation of the fields. The fields include Neft Dashlary, Bulla Deniz, NGDU Narimanov, Bakhar, and Palchyg Tapesi with remaining recoverable reserves ranging between 30 million to 108 million barrels of oil and condensate. Operations director of MAI Mike WOOD said that at least 25 companies have already expressed interest in the project. Socar is selling a data package on all five fields to interested companies. WOOD added that it is highly unlikely that any single company will bid to develop all five fields. The expected cost for all fields is in the range of $1.5 billion to $2 billion. WOOD said the smaller fields will cost around $100 million and the largest around $700 million. Socar decided to issue the rehabilitation tender because production can be increased, generating vital oil income before new projects come on stream.

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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