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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

Tuesday, July 14, 1998

Sino-Russian Relations Focus On Trade

· Talks between Russian Prime Minister Sergei KIRIYENKO and Premier of the Council of State of the People's Republic of China (PRC) ZHU Rongji focused on increasing bilateral trade and the forming of strategic relations between Russia and China. KIRIYENKO said that, "a solid legal basis has been created for bilateral cooperation and a settlement of arising problems." He pointed out the importance of bilateral meetings at summit and high levels have been efficient. Both Moscow and Beijing hope to see bilateral trade top $20 billion early in the 21st century, overall trade volume is dropping as Russia exports fail to crack the China market. Bilateral trade slipped 10 percent in 1997 falling to $6.1 billion. KIRIYENKO and ZHU also discussed the progress of a natural gas pipeline from Russia to China and Russian assistance in the construction of a nuclear power plant in eastern Jiangsu province. KIRIYENKO is to meet with Chairman of the PRC, JIANG Zemin later tonight to confirm the Chinese leader's visit to Moscow in early September. They are expected to concentrate on the expansion of Sino-Russian space cooperation and arms sales. Russian Foreign Minister Yevgeny PRIMAKOV will pay an official visit to China from July 22 to 26th at the invitation of his Chinese counterpart TANG Jiaxuan. The two ministers will discuss preparations for the September summit as well as bilateral and international issues.

Rus- Japan Discuss Economy

· During Russian Prime Minister Sergei KIRIYENKO's visit to Japan Monday,

Russian Federation

Politics

Yeltsin Tries To Charm Deputies

· Russian President Boris YELTSIN has decided to change tactics when dealing with the Russian State Duma. Since the International Monetary Fund (IMF) has agreed to provide $17 billion over the next two years, the next great hurdle for Russia is the passage of key fiscal legislation, on which the loans are contingent. YELTSIN today met with party leaders in the Kremlin on friendly terms, urging them to approve the government's austerity program quickly. He said, "We shall not be able to implement [the program] if you do not confirm it. Of course, I can decide some matters myself, but in the main, the destiny of the program depends on you." YELTSIN assured the deputies that there would be no early presidential elections or early elections to the State Duma. YELTSIN's press secretary Sergei YASTRZHEMBSKY said, "We are all one team. There will be no coups, changes to the constitution, no dissolution of the Duma, no early elections." The Duma will hold a special session on Wednesday to debate the economic package. The package seeks to revamp the tax system and cut the state's budget deficit, both of which the IMF has encouraged Russia to do. Agrarian Party Leader Nikolai KHARITONOV said, "We agreed that tomorrow, before the beginning of the plenary session in the State Duma, the Minister of Finance, Mikhail ZADORNOV, will explain to the deputies the conditions for the provision of the IMF loan." If the Duma rejects Prime Minister Sergei KIRIYENKO's anti-crisis package, the IMF and other international lenders may withhold the loans, which Russia desperately needs. The IMF's chief negotiator John ODLING-SMEE said the IMF board, "will make a judgement about the [loan] in light of whatever decision the Duma makes."

Today's News Highlights

Russia

Russian Aid To Bankrupt IMF?

Russian Military Without Clothes

European Republics

Belarus Visa Sanctions

Ukraine Output Rises

Six Banks Interested in Agribank

South Caucasus & Central Asia

Aliyev Offers Concessions

Caspian Pipeline On Schedule

Kazakh Implements Econ. Bills

Politics-Economics-Business

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Tuesday

July 14, 1998

Intercon's Daily

KIRIYENKO signed a pact with Japanese Foreign Minister Keizo OBUCHI for $800 million in untied loans as part of a $1.5 billion package to Moscow through the Export-Import bank of Japan and the World Bank. OBUCHI noted that Japan respects Russia's efforts in economic reforms. Approximately $400 million will be released by July 16th for economic infrastructure improvements. The two sides signed accords on investment protection and extended a joint space exploration agreement. KIRIYENKO arrived only an hour before Prime Minister Ryuarto HASHIMOTO resigned. Nonetheless, HASHIMOTO said that, "Regardless of my resignation, Japan-Russia relations must progress; it is something we must do." Foreign Ministry spokesman Vladimir RAKHMANIN said that, "Our relationship is anchored by strategic interests of developing the bilateral relations which are not affected by political fluctuations." Officials of the Japanese Ministry of International Trade and Industry (MITI) proposed 20 joint projects with Russia to prevent global warming. The 20 projects include repairing natural gas pipelines in Siberia and reducing carbon dioxide output at coal-burning power plants in Russia. MITI expects to spend more than 1 billion yen on the projects. KIRIYENKO today met with Japanese business executives, including Mitsui, Mitsubishi, Sumimoto and Itochu before leaving for Beijing.

Economy

Ruble = 6.212/$1.00 (NY rate)

Ruble = 6.213/$1.00 (CB rate)

Ruble = 6.181|6.245/$1.00 (buy|sell rates)

Russian Aid To Bankrupt IMF?

· When Russia was seeking additional aid of $10 billion to $15 billion from the International Monetary Fund (IMF), many speculated that the Russian need was greater, but that the IMF could only afford $5 billion to $6 billion due to huge bailout packages in Asia. On Monday, the IMF agreed to grant a loan of $11.2 billion, three-quarters of which will be provided from the "general arrangements to borrow" (GAB). The GAB is an extended credit line from the Group of Ten industrial nations. The GAB, created in 1962 to help the IMF deal with strains in the Bretton woods fixed exchange rate regime, has only been tapped nine times. Finance officials believe the GAB funds could be readily available since many of the Group

of Seven industrial nations have already voiced support for funding to Russia. The IMF's need to dip into the GAB fund, which has been dormant for two decades, not only illustrates the concern of G7 nations but also how far the IMF's financial condition has deteriorated since the Asian financial crisis. As of June 15th, the IMF had net uncommitted usable resources of around $30 billion. The ratio available resources to liquid liabilities was 44 percent, down from more than 120 percent in spring last year, the Financial Times reported. The Fund has $23 billion available under the GAB, of which $8.4 billion have been committed to Russia.

Economy Reacts Positively To Bailout

· Russian blue chips gained 15 percent on Monday following the news of the International Monetary Fund's (IMF) decision to give a multi-billion stabilization credit to Russia. The Russian stock market continued to rise today, following Monday's 9.16 percent jump. The stock and bond markets gained more than 13 percent and 10 percent respectively. Shares of the Russian Unified Energy System (UES) are leading the trading, totaling $19.57 million. Deals involving the LUKoil and Mosenergo shares have been estimated at $6.29 million and $3.97 million, respectively. The prices of Russian shares have been growing for two days as a result of an agreement reached by the Russian government with IMF and the World Bank on granting a stabilization loan to Russia. Experts of investment companies believe that a decision made by the government to restructure the internal debt is also a positive factor for Russia's finances, since it partially removes the problem of possible devaluation of the ruble.

The Russian Finance Ministry today invited holders of government T-bills (GKOs) maturing before July 1, 1999, to voluntarily exchange them into fixed-rate dollar Eurobonds with 7 to 20 year maturities (due in 2005 and 2018). The globals also can be acquired for cash, the ministry said. Goldman Sachs as lead manager said that the new globals will be issued in the amount of $2 billion, of which $500 million will be offered for cash. The swap will reduce Russia's debt servicing costs and relieve the pressure on the GKO market. Today, Russia is hosting investor road shows in Moscow and London followed by presentations in New York on Wednesday. The invitation and withdrawal period expires at 11:00 p.m. Moscow

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	Tuesday		July 14, 1998
	Intercon's Daily
	time, or at 8:00 p.m. London time, or 5:00 p.m. New York time, on July 17, if not extended or called-away. Business Execs. Discuss Yurubcheno-Tokhomsk Oil · Today, the chief executive of major Russian oil companies are meeting in Krasnoyarsk to discuss the problem of developing the oil deposits in Yurubcheno-Tokhomsk oil fields in the south of the Evenk Autonomous District. District administration chief Alexander BOKOVIKOV said that so far Slavneft is the only company with a licensing agreement to begin work. The Yurubcheno-Tokhomsk fields are predicted to hold several hundred million tons of oil. Due to the long distance separating them from the main transportation routes and poor development of the infrastructure, major investment in the development and in commercial quantities is expected. The Evenk District administration, which grants licenses for oil deposit development, is pushing for social welfare development in nearby towns. Tuesday Tid-Bits Will The Russian Military Go Without Clothes? · A laundry service in Izobilnoye, Russia's southern Stavropol region, has refused to return linens to two railway troop units because the servicemen have failed for pay for its services. It was forced to take such measures because it has been without payment for months. The laundry's water, electricity and heating supplies have been turned off. It also has no money to pay its employees. The regional committee of soldiers' mothers appealed to the heads of the North-Caucasian railway to provide extra work for servicemen repairing railway tracks, so that they might earn some money to repay their debts.	his entire Cabinet as well as a long list of government officials to 25. On Friday, the EU members decided to restrict Belarus visits and official contacts because of Minsk's continuing escalation of the diplomatic crisis. The government in Minsk first issued a strict deadline for diplomats to remove their belongings from official residences in the Drozdy complex near Minsk, and later began pulling down fences around the houses in violation of the Vienna Convention. LUKASHENKO dismissed the visa sanctions as "blackmail." He stated, "If it wasn't Drozdy, it would be something else." The United States, Britain, France, Germany, Greece, Italy and Japan, as well as a number of other countries have withdrawn their ambassadors from Belarus in protest. Ukraine's Industrial Output Rises · Ukraine's industrial output over the past six months rose by 0.7 percent compared to the same period in 1997, according to the cabinet press office. This is the first time Ukraine managed to have an industrial growth in nine years. The timber processing and building material sectors were the fastest growing industries with output rising by 22 percent and 12 percent respectively. However, the ferrous metallurgical and machine building sectors, the country's major industries, did not see any growth. Ukrainian State Statistical Commission said that during the first five months, the country's gross domestic product (GDP) rose by 0.1 percent. Ukraine's industrial output and GDP this year were projected at two percent and 0.5 percent respectively. Six Banks To Bid On Lithuanian Bank · Lithuania's Finance Ministry today announced that six banks have expressed their initial interest in buying state-run Agricultural Bank, the nation's third largest. The Ministry declined to name which banks bought the information packages. However, two of the country's leading banks, Vilniaus and Hermis, both said they are following the privatization process closely. The State holds 87 percent in Agricultural Bank. The tender to privatize the bank was launched in June and is expected to close by September 2nd. The tender is being held in two rounds, with the first deadline set for July 20th, when bidders must submit statements of qualifications and preliminary estimates of how many shares they would take, Reuters reported. The second deadline for which bidders must make binding share purchase offers and a

	European Republics EU And Ten Others Impose Belarus Sanctions · Bulgaria, Cyprus, the Czech Republic, Estonia, Hungary, Iceland, Norway, Romania, Slovakia, and Slovenia have joined the European Union in imposing travel restrictions on Belarus state officials because of the dispute over diplomatic residences at Drozdy, near Minsk. Today's move bring the number of countries banning admission to their territories of Belarus President Alexander LUKASHENKO and

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Tuesday

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Intercon's Daily

detailed business plan for the bank is on August 29th. The Bank posted a net profit of 13.3 million litas ($3.3 million) in the first half of this year, after reporting a 32.8 million litas full-year loss in 1997.

South Caucasus & Central Asia

Aliyev Offers Concessions To Opposition

· The Azeri parliament has approved President Geidar ALIYEV's amendments to Azerbaijan's election laws to ensure a free and fair presidential election on October 11th. According to an Embassy press release, many of ALIYEV's proposals were designed to comply with recommendations put forward by Office for Democratic Institutions and Human Rights (OCIHR) of the Organization for Security and Cooperation in Europe (OSCE), US national Democratic Institute, as well as proposals and objections by opposition political parties and individuals. Former President Abulfaz ELCHIBEY said that opposition candidates will contend the presidential elections only if certain conditions are met. Those conditions include parity in the composition of the Central Electoral Commission (CEC), "the democratization of the pre-election situation," the release of all political prisoners, the abolition of censorship, and the suspension of criminal proceedings against former parliamentary speaker Rasul GULIYEV and Musavat Party chairman Isa GAMBAR. According to the law, the composition of the Commission is half nominated by the parliament and half by the President. All of the candidates should be non-partisan. The parliament has already approved 11 members of the CEC, representing eight parties, including the ruling party and the opposition. ALIYEV appointed seven lawyers to the CEC, leaving the remaining five seats vacant until parties provide their nominees. Comment: ALIYEV clearly has been sensitize by international opinion and criticism, including the US Congress, concerning Azerbajian's slow progress in building independent and democratic institutions. By making these concessions to the opposition, ALIYEV is positively addressing these concerns and opening the political process in Azerbaijan.

Caspian Pipeline On Schedule

· The new president of Azerbaijan International Operating Company (AIOC) John LEGGATE said that, "Work on the pipeline from Baku to Supsa is on schedule." After touring the pipeline construction, he noted that the work is, "being done to international standards." The AIOC plans to transport early oil through the Western route to international markets in March or April of 1999. LEGGATE said, "The successful completion of the project to transport oil through the Western route is important, not just form the economic point of view, but also politically. The pipeline running through Azerbaijan and Georgia will be 850 kilometers long with a capacity of 115,000 barrels per day. The project's cost has increased by $275 million from the original estimate of $315 million to $590 million because entire sections of an existing pipeline needed to be replaced.

Kazakhs To Implement Economic Package

· Kazakhstan's government has agreed to implement a package of austere measures aimed at preventing an economic crisis. The measures include steps to, "consolidate the revenues of the Kazakhstan's state budget and to cut its expenditures," as well as cuts in government personnel, and the regulation of heating, electric, and communications equipment in government offices. The government said the move was necessary since low commodity prices are taking their toll on export revenues, the Financial Times reported. Most of Kazakhstan's exports are unprocessed commodities, mainly oil, metals, phosphates, and grain, each accounting for a quarter of Kazakhstan's annual trade revenues of $4 billion to $5 billion. Oil and metal prices have reached their lowest point in years. The government was forced to delay eurobond issues, after the Asian financial crisis dried up funds for emerging markets. The government plans to review contracts with foreign companies, which have failed to meet government obligations. It will work to improve tax collections, establish a national taxpayer registration system, and lower tax rates of crude oil and oil products to encourage exports of these products.

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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Daily Report on Russia is for the exclusive use of the subscriber only. Reproduction and/or distribution is not permitted without the expressed written consent of Intercon. Daily Report on Russia Ó copyright 1998, Intercon International, USA.

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