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, July 10, 1998

Russian Federation

Politics

Federation Council Supports Anti-Crisis Plan

· After Russian Prime Minister Sergei KIRIYENKO addressed the Russia's Federation Council, it approved a resolution to accept the main points of the government's austere anti-crisis program by a vote of 97 to four. The chamber gave its support to the plan despite opposition from a group of powerful governors. The draft resolution says the government's tax policy needs correction, which is exemption from the value added tax of Russia's exports to CIS states and of advance payments for machine tools. The Federation Council called for the federal investment program and Russian development budget to be complete with the government's pledges against investment projects with heed for proposals of Russia's component states. The Federation Council will form a committee responsible for coordinating and implementing regional investment programs. Federation Council Yegor STROYEV said economic difficulties had fostered unity. "We have virtually no differences over where and how to move forward. I am happy that we now have one economic program, and not one for the government and one for the Federation Council," he said. The Russian State Duma must still adopt the legislation. It plans to meet in a special session on July 15th and 16th.

Kiriyenko's China Visit To Be Busy

· Following his visit to Japan on Monday, Russian Prime Minister Sergei KIRIYENKO is scheduled for a busy visit to Beijing on Tuesday July 14th. KIRIYENKO will meet with Chinese Prime Minister ZHU Rongji to negotiate new opportunities for the strengthening of bilateral economic cooperation. Head of the Foreign Ministry's First Asia Department Leonid MOISEYEV said, "All work will be aimed at the upcoming informal Russian-Chinese summit slated

for the beginning of the autumn in order to prepare a package of economic agreements for the September meeting of the leaders of the two countries." The two premiers will also discuss progress on the Commission for Cooperation's work. KIRIYENKO is expected to hold talks with Chinese President JIANG Zemin to consider the most important topics of Russian-Chinese relations and international issues. Russian Foreign Minister Yevgeny PRIMAKOV is expected to visit China on July 20th to confer with Chinese counterpart TANG Jiaxiuan on a wide range of issues, including the situation in South Asia, Kosovo, the Asian financial crisis, interaction of the two countries in international organizations, primarily in the United Nations.

Economy

IMF Loan Depends On Reform Measures

· Russia's chief financial negotiator Anatoly CHUBAIS says he is confident Russia will receive a multibillion dollar bailout loan from the International Monetary Fund (IMF) after a new round of talks in Moscow with IMF official John ODLING-SMEE. CHUBAIS' statement that, "We have made progress and we will have a decision shortly," boosted the Russian stocks by one percent. Many analysts, including Moody's believe that a bailout package needs to be at least $20 billion to convince the markets that the government has significant reserves. The Russian government was seeking a loan of between $10 billion and $15 billion from the IMF, up to $1.5

Today's News Highlights

Russia

S&P Downgrades Rus.Banks

Rosneft Auction Extended

European Republics

WB Rep Pull Out Of Belarus

South Caucasus & Central Asia

Azeri Resumes Oil Exports

Mobil, Monument, Turkmeneft

Kazakh Ambassador Nominee.

Uzbek-Rus Air Cooperation

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Friday

July 10, 1998

Intercon's Daily

billion from the Japanese government, $600 million from the World Bank, and the remaining from commercial banks. "If all this happens, we could be close to $20 billion from all sources of financing," CHUBAIS said. However, the IMF has been stretched to its limits by the turmoil in Asia. The IMF said its capacity to lend to Russia is limited and it could not provide $10 billion to any one country in the current situation. One western analysts noted that, "The real issue is not how much money they get, but how strong is the government's reform program going to be. I hope investors will focus more on this," the Financial Times reported. Desperate to attract capital, Russia offered government bonds for sale at interest rate around 100 percent, but investors bought only about one quarter of the $1 billion in bonds. Russia's problem is that it relies too heavily on foreign investors to finance large budget deficits. Foreign investors like the IMF are waiting for results from new reform measures before putting more money in an economy which continues a downward trend. An IMF official said that Russian leaders, "have an abysmal record of announcing policies but not implementing them, and in this particular case things are going to have to be implemented before we sit around the table and approve more money."

The developed nations' banks and exports exposure to Russia and the rest of Eastern Europe (in Billions)

Source: Bank for International Settlements; HSBC Securities

Banking Sector Vulnerable By Crisis

· On Wednesday, Uneximbank, the fourth largest bank in Russia took over the country's 34th largest Unikombank, forming a financial institution with assets equivalent to $4.5 billion, according to Fleming UCB bank analyst Holger MUELLER. Little is known

Country Bank Exposure % Of Total Exports

Germany $50.10 10.90%

France 10.5 4.4

US 10.5 1.8

Austria 9.4 1.6

Neth. 5.9 4.4

Itlay 5.6 9.9

Japan 4.2 0.9

UK 2.8 4.2

Sweden 0.5 7.2

Finland 0.3 14.1

what state Unikombank's loan portfolio is in or how much Uneximbank plans to invest. This latest bank buy out follows the failure of a rescue attempt for Tokobank, the 17th largest bank. Tokobank creditors are expected to suffer losses of at least 20 percent, the Financial Times reported. The Bank of Moscow, controlled by the city government, agreed in May to invest $150 million in Tokobank in exchange for a major equity stake. On Friday, however the Central Bank withdrew from the agreement, after it discovered that the necessary investment totaled three times the original estimate. The bank held forward dollar contracts worth $14 billion or 50 times the bank's capital. Head of risk management for Tokobank Andrei SEDIN explains that, "The problem with the bank is not with forward deals but with liquidity." Analysts agree that more banks in Russia are vulnerable due to their reliance on foreign dollar-denominated borrowing, which may expose them to any ruble devaluation. Although top Russian officials have vowed to defend the ruble, with an International Monetary Fund (IMF) loan not yet in sight, they may be force to put the financial crisis burden on ordinary citizens, risking social and political upheaval. Russian Ambassador to the US Yuri VORONTSOV said that devaluing the Russian ruble would lead to increases in food prices and other commodities that would provoke widespread social unrest.

S&P Lower Russian Bank Ratings

· Standard & Poor's today lowered its rating of the following Russian banks: Inkombank, SBS-Agro Bank, SBS-Agro Finance, Aljba Alliance, Rossiyskiy Kredit Bank, Rossiyskiy Kredit Securities, Alfa Bank, Alfa-Russia Finance. The outlook on five banks remains negative. But, Alfa Bank has been removed from CreditWatch, and been placed with negative implications. Risks of a systemic crisis have increased since interests rates were raised past 100 percent, liquidity tightens, ruble is pressured, and the market continues to fall. S&P outlined three ways in which banks are vulnerable. First, declining values of their government bond portfolios in the volatile interest rate situation will result in trading losses. Second, banks' currency could be exposed to devaluation, if the ruble collapses. Finally, the financial crisis has caused some banks to call in their loans in order to insure their liquidity position, which impacts their loan portfolio.

When you need to know it as it happens

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Friday

July 10, 1998

Intercon's Daily

Ruble = 6.211/$1.00 (NY rate)

Ruble = 6.212/$1.00 (CB rate)

Ruble = 6.182|6.242/$1.00 (buy|sell rates)

Feb Mar Apr May Jun Jul

Business

Rosneft Sale Extended

· Deputy Privatization Minister Alexander BRAVERMAN today announced that Russia has extended the closing date of a tender to sell off 75 percent plus one share of state-owned oil company Rosneft. BRAVERMAN said bids for the auction will be accepted until October 27th, in hopes that the world oil prices will be strengthened by export limits of the Organization for Petroleum Exporting Countries. BRAVERMAN also noted that, "the first payment, 50 percent, will be made in November and the second by the end of the year." Last week, two major bidders, Royal/Dutch Shell and British Petroleum, pulled out of the auction claiming unfavorable world oil market conditions. The oil giants were followed by Russia's Gazprom, LUKoil and Uneximbank, which claimed they didn't have the money to buy Rosneft. This is the second time the government has had to postpone the sale due to the lack of bidders, scrapping the state's plans to net $1.6 billion for the Rosneft stake by August ,which are critical to the budget. However, BRAVERMAN said that the government would help Russian industrial groups Interros and Rosprom find foreign partners to finance part of the Rosneft deal. He also noted that the State Property Fund plans to hire a foreign consultant to

help attract foreign financial investors. Acting Russian Federal Property Fund (RSPF) chairman Igor SHUVALOV said that, "one out of five leading US oil companies," showed an interest in the tender and is prepared to finance the project independently.

European Republics

WB Representative To Pull Out Of Belarus

· World Bank representative to Belarus, David PHILLIPS has been recalled from Belarus because the government failed to fulfill agreements. He said, "If agreements have been signed and are not fulfilled we have to abandon Belarus." The withdrawal of the World Bank from Belarus along with Ambassadors from major western countries and Japan because of a row with the government over their personal residences, leaves Belarus even more internationally isolated. The International Monetary Fund's (IMF) representative last Sunday left for similar reasons. The World Bank provided Belarus with a loan of $170 million and a grant of $10 million to assist in economic reform from 1993 to 1995. Belarus failed to liberalize the nation's economy. In fact, in March after the Belarus ruble fell against the dollar, President Alexander LUKASHENKO placed foreign exchange and price controls. On Wednesday, the Belarus Central Bank imposed further restrictions on foreign exchange trading.

South Caucasus & Central Asia

Repatriation Document Ready For Signatures

· Abkhaz presidential envoy Anri DJERGENIA and Georgian Ambassador to Moscow Vazha LORTKIPANIDZE have reached agreement on "the basic principles" of a document to be signed by Georgian President Eduard SHEVARDNADZE and Abkhaz counterpart, Vladislav ARDZINBA, RFE\RL Newsline reported. DJERGENIA said the planned meeting between the two presidents can now take place "in the very near future." The document focuses on measures to repatriate and guarantee the security of the estimated 35,000 ethnic Georgians who fled from Abkhazia's southernmost Gali district during the devastating fighting in late May.

Azeri Resumes Oil Exports

· Azerbaijan State Oil Company Socar has granted

When you need to know it as it happens

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permission for its joint ventures to resume oil exports via the Russian Black Sea Port of Novorossiisk. Exports had been suspended due to poor oil prices. A Socar official Tuesday said that, "Under the agreement with Russia, Azerbaijan may export 400,00 tons of oil via Novorossiisk this year." He noted that in the first quarter Socar and its ventures exported 120,000 metric tons via the port. An added 280,000 is expected to be delivered this year, The Journal of Commerce reported.

Mobil, Monument, Turkmenneft Sign PSA

· Mobil Corp. has become the first US oil company to sign a production sharing agreement (PSA) with Turkmenistan to pursue exploration and development opportunities in the Garashsyzlyk sector with an area of approximately 4,500 square kilometers. The signing of the PSA follows the formation of a strategic alliance announced earlier this year between Mobil, Monument Oil & Gas plc, Turkmenistan and its producing association Turkmenneft. Mobil Exploration and Producing Turkmenistan Inc. will operate the venture with a 52.4 percent interest. Partners are Monument Oil & Gas plc with a 27.6 percent stake and Turkmenneft with 20 percent. The new production sharing agreement covers the exploitation of underdeveloped deeper resources discovered below the Kotor Tepe, Barsa Gelmes and other fields, as well as exploration and appraisal activities outside the boundaries of existing producing fields in the block. President of International Exploration and Producing, Mobil Corp. M.W. SCOGGINS said at the signing ceremony that, "Turkmenistan is a country with great ambition and substantial potential and we are proud to be making an important contribution to the efforts of the Government and people of Turkmenistan to realize their goals." Mobil was the first major international oil company to invest in Turkmenistan, joining Monument Oil & Gas plc in its production sharing agreement to develop and explore opportunities in the 2000 square kilometer Nebitdag concession. Mobil and Monument are expected to spend about $100

million or more over the next three years. By signing this agreement, Turkmenistan makes significant gains in the race with other Caspian countries to compete in attracting foreign capital for development of oil and gas fields.

Clinton Nominates New Kazakh Ambassador

· US President Bill CLINTON Monday announced his intent to nominate Ambassador Richard JONES to be US Ambassador to Kazakhstan. JONES is a career member of the Senior Foreign Service. He has served as a diplomat for 22 years, concentrating on the Middle-East and economic issues. Prior to becoming US Ambassador to Lebanon in February l996, he served as director of the Office of Egyptian Affairs in the State Department. He has received US Government awards for his work as Ambassador to Lebanon, for his performance in Saudi Arabia during the Gulf War, and for his contributions to commercial and trade negotiations. JONES speaks Arabic, French, German, and Russian.

Uzbek-Rus Airlines Form Cooperation

· The National Air Company of Uzbekistan and the Federal Air Service of the Russian Ministry of Transport signed an agreement on cooperation in Tashkent. Head of the National Air Company of Uzbekistan Arslan RUZMETOV said, "the document signed between our airline and the Federal Air Service of the Ministry of Transport of Russia...is a new significant step in relations between the civil air fleets of the two countries." According to RUZMETOV, the agreement will help regulate legal and financial issues connected with flights of Russian aircraft over Uzbekistan and Uzbek planes over Russia. From now on, the Aeroflot is granted the so-called fifth degree of freedom in flights from Moscow via Tashkent to third countries specifically, Sri Lanka, India and Pakistan. Cargo carriages by Russian aircraft will be now performed via Tashkent, not via the United Arab Emirates. As a result, Russia will save fuel and time of flights. "Not only Russia but Uzbekistan as well will be the gainers," RUZMETOV stressed.

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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