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

Monday, June 8, 1998

Russian Federation

Politics

Business Tycoons Support Gov't Measures

· Heads of Russia's ten major financial and industrial corporations on Friday issued a joint statement granting their support to the urgent measures taken by Russian President Boris YELTSIN, the Cabinet and the Central Bank in order to overcome the recent financial crisis. The statement was signed by Alpha-Group President Mikhail FRIDMAN, Gazprom Board Chairman Rem VYAKHIREV, Unified Energy Systems (UES) Board Chairman Anatoli CHUBAIS, President of the Interros holding Vladimir POTANIN, LUKoil President Vagit ALEKPEROV, Media-Most President Vladimir GUSINSKY, Rosprom-Yukos President Mikhail KHODORKOVSKY, President of the Rossiisky Kredit bank Vitaly MALKIN, SBS-Agro bank head Alexander SMOLENSKY and President of Surgutneftegaz Oil Company Vladimir BOGDANOV. This is the first time since the 1996 Presidential Elections that businessmen have put petty conflict aside and joined forces in support of YELTSIN. According to the joint statement the business magnates believe, "The decisions taken by the government bears tough character. But they are necessary, [as] without them any development of economy is impossible. We support the reorganization of the tax system, under which the pressure on enterprises and citizens is reduced, but on the other hand, has a more severe impact on tax dodgers." The businessmen appealed to employees of enterprises facing bankruptcy to have faith that restoring, "effective management of every enterprise, every firm is the only way out of the corrupt circle of non-payments and wage arrears." They also appealed to foreign investors, reassuring them that, "We stand for the open market, for fair competition between Russian and foreign companies. Russia is a very rich country

with the enormous economic potential. Those who will secure their place in the Russian market will undoubtedly be the winners." Finally, they appealed to members of the government the presidential administration, deputies of the Federal Assembly and regional authorities to compromise on legislation, "only a constructive cooperation between all branches of power can radically change the situation." Their statement is the culmination of views expressed during a meeting with YELTSIN.

Ratification Of Start II Delayed Until September

· Communist Russian State Duma speaker Gennady SELEZNYOV, Foreign Minister Yevgeny PRIMAKOV, Defense Minister Igor SERGEYEV, and Atomic Minister Yevgeny ADAMOV met Friday to discuss ratification of the Start II strategic arms reduction treaty with the US. SELEZNYOV refused to reveal the substance of the meeting but said he thought the treaty would not come up for vote this summer. Hearings are scheduled on the issue for June 16. SELEZNYOV said he expected Start II would be debated in the Duma in September. He put two conditions on the ratification: the passage of a bill on strategic nuclear forces and releasing funds allocated to the defense budget. The government has only released 3 percent of the army's budget since the beginning of the year. The US Senate ratified the Start II treaty in 1996. US President Bill CLINTON has said he will not hold a summit with Russian President Boris YELTSIN in Moscow, until after the treaty is passed by the Duma.

Today's News Highlights

Russia

Tax Agency Targets Debtors

Nemtsov Confident In Economy

Gazprom Buys Inkombank Stake

European Republics

Lith. Telecom Bids Below Target

South Caucasus & Central Asia

Georg. Pres. Meets Kiriyenko

Armenia Not For Customs Union

BSEC Adopts Constitution

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Monday

June 8, 1998

Intercon's Daily

In connection with the Start I treaty, US Strategic Command chief General Eugene HABIGER inspected a Russian ballistic missile base in the Saratov region and found no violations of the Start I strategic arms reduction treaty. Start I cuts back the total number of inter-continental ballistic missiles carried by submarine and bombers to 1,600 and the number of their warheads to 6,000. The treaty envisions a range of monitoring methods relying on national technical means to control compliance, 12 types of field inspections, continuous monitoring of factories producing mobile ballistic missiles, periodical exchange of information and a notification system. HABIGER said he was favorably impressed by what he saw at installations of the Russian missile troops. HABIGER said ratification of the Start II treaty meets priority interests of both nations. HABIGER noted that Start I set the ceiling of 6,000 warheads for the sides, and Start II further limits it to 3,000 to 3,500 warheads. A Start III treaty would reduce disarmament further to 2,000-2,500 warheads.

Economy

Ruble = 6.1685/$1.00 (NY rate)

Ruble = 6.170/$1.00 (CB rate)

Ruble = 6.141|6.199/$1.00 (buy|sell rates)

Nemtsov Confident In Economic Recovery

· Russian Deputy Prime Minister Boris NEMTSOV has confidence in the Russian economy to overcome the financial turmoil, which has battered its stock market. He said, "We have shown the whole world that it is possible to battle a crisis." Last week, Russian stock markets recovered slightly with share prices rebounding and the Central Bank reducing interest rates from 150 to 60 percent. Russian President Boris YELTSIN pinned the problem on Russia's budget deficit, which mushroomed to 6.8 percent. He suggested that solutions include a harsh approach to tax collection and a more frugal bureaucracy. NEMTSOV said that since the government has put legal muscle behind its tax policy, the cabinet will be relentless in collecting taxes. NEMTSOV pointed out three laws which will give the government levers it needs to overcome. These laws are:, "swifter bankruptcy rules; a new procedure whereby the state can claim the revenues of companies which owe taxes; and a new system whereby oil companies pay their taxes out of the same hard-currency ac

count into which their export revenues are deposited," the Financial Times reported. He added that privatization will also refill government coffers. NEMTSOV said, "I have signals that western companies, without Russian partners are ready to participate [in the Rosneft tender]. This is crucial, I would be pleased." Indeed, western companies acting independently would be a precedent for the privatization process. Although NEMTSOV says, "Russia will do everything in order to stabilize the situation," he also stated that outside support from international financial institutions will speed the recovery of Russia's economy.

Tax Agency Targets Five debtors

· Russian Deputy Prime Minister Viktor KHRISTENKO, who chaired Friday's meeting of the Interim Extraordinary Commission for Strengthening Tax and Budget Discipline (VChK) said that, "substantial sums of taxes," will be exacted from Russia's five biggest tax debtors. He named these companies to be Chernogorneft, Varyeganneftegaz, Varyeganneft, Kondpetroleum, and the Omsk Oil Refinery, adding that the sums must be enforced until July 1st, 1998. KHRISTENKO did not reveal the exact amount of the debts, but it is estimated that the overall tax debt of the seven companies reviewed by VChK was 863 million rubles (over $143.8 million) on May 1st, 1998. The VChK members on Friday met to decide whether bankruptcy procedures shall be instituted against seven debtors and whether the debtors' assets shall be arrested. The deputy prime minister said that in case of default, any of the five companies listed, as well as their parent companies, will face enforcement of the tax arrears in court. KHRISTENKO stressed that, "It is not VChK's goal to bankrupt all and sundry and carry out the re-division of powers. The goal is to normalize the process of payment to the federal budget." He added that tax revenues collected in May were below government targets.

Fitch IBCA Lowers Russia's Rating

· London-based Fitch IBCA Agency has lowered long-term credit ratings of Russia's St. Petersburg, Krasnoyarsk territory, Leningrad region and republic of Komi from BB+ to BB, following the lowering of Russia's national credit rating. The agency also lowered Russia's Savings Bank Sberbank, oil companies Tatneft and Sibneft, and Tatneft's subsidiary

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Tatneft.Finance.Peak. to BB. The national short-term credit rating remained unchanged, at the B level. The Sberbank's rating is the national upper limit, reflecting the bank's role in the national banking system, as well as the state's share in its capital. The credit rating level is applicable to all basic Russian unsecured borrowings and is an upper limit for long-term credit ratings of foreign currency borrowings by all Russian issuers. The reduction is due to the turmoil in Russia's financial markets. The agency stressed that Russia's effort to shore of the ruble helped diminish the financial risk. Fitch believes that if Russian authorities realize a package of documents, agreed upon with the International Monetary Fund (IMF), to secure a well-grounded program of state expenditures and tax collection the economic outlook will improve. It added that improved tax collection and a financial aid package would speed-up the recovery process.

Business

Gaprom Buys Inkombank Stake

· Russia's gas giant Gazprom bought a 13.2 percent stake in Inkombank, one of the country's largest commercial banks. Head of the bank's supervisory board Vladimir GROSHEV said the Inkombank's shareholders had also decided to hold two more share issues. The eighth issue will be sold to foreign investors. He added that Inkombank is currently holding talks with possible investors. The ninth issue will be sold to Gazprom again because it intends to boost its stake in the bank to 25 percent plus one share, enabling it to veto decisions by other shareholders, The Journal of Commerce reported.

Svyazinvest To Be Privatized

· In an effort to raise quick cash to cover short-term financing, the State property Ministry today announced plans to hold a tender for Svyazinvest telecommunications company. According to a ministry statement, "Experts, taking into account the necessity of securing revenues for the state budget and investment in the development of the company, voiced support for holding a commercial tender with investment requirements." Svyazinvest's chief executive officer Nail IZMAILOV last week said that four types of auctions were being considered. He added that the company is hoping the stake will be bought by a single strategic investor, who would be required to provide additional investment in the company. The

statement did not mentions specific terms for the 25 percent minus two shares stake or if foreign participation in the sale would be reconsidered. A presidential decree governing Svyazinvest's privatization bans foreign participation. Svyazinvest's deputy chief executive for investment policy Vasily SIDOROV said the company expects the foreign ban to be lifted. The ministry's special commission is working with the international company American Appraisal to calculate a basis for a starting price for bids. "American Appraisal has proposed several options for calculating the value of the state share being offered for sale, especially linked to the size of the investment in the event of a tender being held with investment conditions. In each option, the cost of the stake is valued in a concrete price-range," the statement pointed out. Svyazinvest has controlling stakes in almost every Russian regional telecom company as well as the long distance carrier Rostelekom.

Civil Aviation Service Agency To Be Privatized

· The director general of the Russian Civil Aviation Air Service Chief Agency Yuri FILIMONOV said at a press conference that the state-owned agency will be privatized. FILIMONOV said that the agency would buy out an estimated $35 to $40 million worth of rented property from the state before the sell-off.

The agency's personnel is to hold a 26 percent stake. A 33 percent stake will be offered to a commercial bank which can pay in cash, negotiations with Inkombank are being conducted. The Russian Civil Aviation Air Service Agency is drafting several investment projects with the Soyuzaviakosmos bank. One of projects is to invest over $2.5 million in a Polyot-Sirena air service booking system. Another project plans an over $10 million investment in a program leasing aircraft engines manufactured by Rybinskiye Motory, Yaroslavl, for Il-75 and Tu-154M passenger airliners. The agency has direct contracts with 125 air companies and with over 100 agencies and travel companies. In 1997, sales totaled about $500 million.

European Republics

Lithuanian Telecom Bids Fall Short

· A source, close to the Lithuanian Telecom privatization, said that preliminary bids for a 60 percent stake are below $400 million. Many speculate the hesitation is due to uncertainty over the business outlook for telecommunication companies. Govern

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ment officials estimated that value of the stake to be $1 billion. The bids received in March were reported by local media to be in the range of $400 to $500 million, Reuters reported. Tele Danmark and a consortium of Finland's Sonera and Sweden's Telia are in the process of completing their final bids, before closing on June 24th. UBS was chosen by the Lithuanian government to advise on the sale, the first major privatization of infrastructure in Lithuania. Lithuanian Telecom, a 100 percent state-owned monopoly which provides fixed-line telephone services, introduced its first ever charges for local calls as the initial bids were being accepted.

South Caucasus & Central Asia

Shevardnadze Pleased with Kiriyenko meeting

· Georgian President Eduard SHEVARDNADZE praised his meeting with Russian premier Sergei KIRIYENKO. "My meeting with the Russian Prime Minister in Yalta the other day was, although not long, very interesting," SHEVARDNADZE said today in an interview with National radio. He noted that since, "many problems have accumulated in Russian-Georgian relations and since Russian President Boris YELTSIN is too busy to come to Georgia in the nearest future," SHEVARDNADZE believes that it is important and necessary for Russia's new prime minister to visit Tblisi for discussion of questions related to the development of Georgian-Russian relations.

Armenia Not Interested in CIS Customs Union

· Head of the Armenian department of budget revenues of the Ministry of Finance and Economics Gevork ARZUMANYAN on Friday said that Armenia has no intention to join the Commonwealth Customs Union and does not pin its hopes on the union for restoring its industrial potential and developing trade and economic ties with the member countries of the alliance. He believes that if Armenia joined the Customs Union, it would be forced to accept the foundations of the Russian customs policy, while the foreign economic principles of Armenia and Russia

are entirely different. ARZUMANYAN forecasts that this would also threaten the policy of reducing the deficit of its balance of payments, which will lead to the reduction of its gold and foreign currency reserves. Minister of Industry and Trade of Armenia Garnik NANAGULYAN agreed with ARZUMANYAN stating that the laws of Russia and Armenia on regulating a trade differ greatly. "We have been trying to find the ways of harmonization, in particular, resolve the problem of double taxation as regards a value-added tax," he noted. This he said creates serious barriers to relations. ARZUMANYAN stated that the Armenian government has once chosen a liberal trade model for its development and will strictly adhere to this model.

BSEC Adopts Constitution

· Presidents and some prime ministers of 11 Black Sea countries on Friday approved and signed the constitution for the Black Sea Economic Cooperation (BSEC) to officially launch the regional group. Under the constitution, signed at the fourth summit of the Black Sea countries held in Yalta, all member countries undertake to promote bilateral and multilateral cooperation and improve the management of businesses in their respective country, Itar-Tass reported. The constitution said that all the member countries will strive to strengthen mutual confidence, dialogue and cooperation. According to the constitution, a rotating chairmanship of six months will be set up for coordinating activities in the group and to ensure that all resolutions be implemented. The organization's permanent secretariat will be in Istanbul, together with a foreign ministers' council and a Black Sea Trade and Development Bank. A declaration adopted at the summit reiterated that all member states have the obligation to liberalize their trade and proposed that the European Union (EU) and the World Trade Organization (WTO) support all Black Sea countries' bid to join the WTO. Founded in 1992, the organization is aimed at promoting regional cooperation in the fields of transportation, communications, energy, agriculture, mining, tourism, industry, medicine and environment.

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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