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

Wednesday, July 15, 1998

tax in advance. Member of the budgetary committee Georgy BOOS who introduced the law said such small businesses are known to be tax dodgers at present as they, "escape into the shadow" becoming invisible to tax agencies. The Duma made considerable changes to the draft law submitted by the government. The main change is that the imputed income tax shall be taken from the federal to regional level. Meaning the regional government must pass their own laws to enforce the federal law locally. However, 50 percent of the collected imputed income tax revenues will be channeled towards the federal budget and extra-budgetary federal funds, and the other 50 percent will go to the local budgets, as envisaged by the government.

Rus-Israel Discuss Security Issues

· Director of Russia's Security Services Nikolai KOVALEV met with Israeli Prime Minister Benjamin NETANYAHU, Defense Minister Yitzhak MORDECHAI, Industrial Trade Minster Natan SHARANSKY and Israeli security officials today in Jerusalem. Their talks focused on security issues and cooperation in combating organized crime and international terrorism. Israel demanded that Russia do more to stop the sale of missile technology to Iran, contending that the Russian government has not taken measures to stop individual Russian companies from selling technology. In Moscow, the Russian government commission on export control exposed several enterprises which attempted to export dual technologies in violation of the existing rules and

Russian Federation

Politics

Duma In Special Session On Reform Package

· The fate of the huge international bailout package for Russia depends on whether the Russian State Duma will approve the government's anti-crisis measures during a special session beginning today. Deputies have passed some of the measures, but rejected or postponed a vote on others, claiming that they place a heavy burden on ordinary citizens. Many deputies are demanding to be informed of exactly what promises the Kremlin made to international lenders for the $22.6 billion loan over the next two years. Finance Minister Mikhail ZADORNOV said, "The verbal agreements we reached with the IMF [International Monetary Fund] are now being formalized in documents...these documents have not yet been signed and do not exist. When they are formally prepared, the government will at once submit them to the State Duma." The Duma is expected to debate between 15 and 20 laws today, with the possibility of meeting again on Thursday and Friday. The government and Russian President Boris YELTSIN want to have most of the laws in place by August. Leader of Our Home is Russia Alexander SHOKHIN said he thought the Duma would approve many of the laws immediately. YELTSIN discussed the country's economic situation late on Tuesday with former Prime Minister Viktor CHERNOMYRDIN, also of Our Home Is Russia.

The Duma today on second reading passed the first of the package of draft laws concerning the single tax on the imputed income for certain kinds of activity carried out by subjects of small enterprises. The approval of this law necessitates changes to laws regarding the Russian tax system. Under the new law, small enterprises, such as small retail outlets, restaurants, and petrol filling stations must pay this

Today's News Highlights

Russia

Terms On International Loans

Gazprom Refuses Clinic Cuts

European Republics

Kiev To Sell Stakes in Electricity

South Caucasus & Central Asia

UN Observer Murdered In Tblisi

Rus Defense Min. In Armenia

Kazakh Pipeline Cost Rise

Guliyev Embezzeld $74 Million

Politics-Economics-Business

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Wednesday

July 15, 1998

Intercon's Daily

threatened administrative and even criminal charges against them. Chairman of the commission Economics Minister Yakov URINSON said the commission, "considered the facts of violations by several enterprises and companies of the established state system of export control and of attempts to export double-purpose goods and services connected with weapons of mass destruction and missile means of their delivery." The list of the companies includes, INOR scientific and production center, Grafit and Polyus research institutes, the Tikhomirov instrument-making research institute, Glavkosmos self-financed state organization, Komintern plant in Novosibirsk, MOSO company, Europalace-2000 and the Baltic state technical university. The commission has launched investigations against these institutes which may result in, "administrative and, in certain cases, in criminal charges." The Russian government firmly stated that it support the halting of non-conventional weapons technology to Iran. However, Russia's Atomic Energy Minister Yevgeny ADAMOV said Russia would complete the construction of a nuclear plant near the Iranian town of Bushehr. "We have a contract; we have to finish the construction of the Bushehr plant and we will execute this contract."

Miners Reject Appeal To Lift Blockade

· Striking Siberian coal miners Tuesday rejected an appeal by the regional governor to lift their blockade of the trans-Siberian railways. Leaders of the strike Committee in Anzhero-Sudzhensk and Yurga said that the blockade would remain in place until all of their demands are met by the government. These demands include payment of back wages for not only the miners but all government workers in the region, an overhaul of the economy, and most importantly the resignation of Russian President Boris YELTSIN. Leader of the Independent Coal Miners' Union Alexander SERGEYEV said, "We put YELTSIN in his job, and now we will remove him." In a letter to the cabinet, strike leaders accused the government of failing to meet commitments made under an agreement that ended the railway strike in May. Deputy Prime Minister Oleg SYSUYEV said the government is prepared to negotiate with the miners only if they lift the blockade. Twenty-nine trains have been immobilized on the West Siberian railway by the blockages set up by the striking Kuzbas coal miners, but passenger trains are being permitted through. A train carrying uranium to a nuclear power plant in the

Tomsk region, has been stranded for several days and poses a threat to the environment, the governor of the Kemerovo region Aman TULEYEV said. The Ministry of Railways has estimated the losses incurred by the blockages to be 45.6 million rubles ($7.6 million). In May, the railway strike caused losses to the national rail system of 487 million rubles ($79 million). Many Western freight forwarders say import and export shipments have been mostly unaffected. P&O Nedlloyd, a major carrier in the region that uses the trans-Siberian rail network, is advising its clients shipping from the US West Coast or Asia to use maritime routes to bypass the risk of delays. It stated that there are no problems on the rail routes linking Western and Eastern Europe and the Baltic States to western Russia, The Journal of Commerce reported.

Economy

Ruble = 6.212/$1.00 (NY rate)

Ruble = 6.214/$1.00 (CB rate)

Ruble = 6.180|6.248/$1.00 (buy|sell rates)

IMF Requirements To Be Presented To Duma

· Russian State Duma deputies demanded that Finance Minister Mikhail ZADORNOV reveal the promises the Kremlin made during negotiations with the International Monetary Fund (IMF), World Bank (WB), and Japanese government for additional aid (see chart). While ZADORNOV promised to submit the documents to the Duma one they are formally prepared, he outlined some of the terms of the loans, which he described as "extremely soft." The package from the IMF will be provided as three loans with annual interest rates of 4.6 to 4.8 percent. One of the loans is for five and the other for ten years. ZADORNOV said Russia will repay only the interest over those years and not the principal. Loans from the WB and Japan have a 17-year term. The Japanese government charges the interest of two percent. He said the Russian government will take no more than $3 billion to $4 billions of $14.5 billion for the state debt. The bulk of the IMF loans will go into currency reserves of the Central Bank. ZADORNOV said, "the goal of the accords is single: it is not so much supporting the budget as securing the country's currency reserves and calming the financial markets." He also stated that, "there will be no dismemberment of the natural monopolies, including Gazprom and the Unified Energy Systems of Russia."

When you need to know it as it happens

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Wednesday

July 15, 1998

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1998 1999

Entity Previous $ New $ Previous $ New $ TOTAL

IMF $1.3 B $11.2 B $2.2 B $0.4 B $15.1 B

WB $0.90 $0.80 $1.10 $3.20 $6

Japan $0.60 $0.90 $1.50

TOTAL $2.20 $12.60 $3.30 $4.50 $22.60

Business

Gazprom Against Clinic Cut-Offs

· Despite pressure to collect payments from customers or cut off supplies, Russia's gas monopoly Gazprom chief Rem VYAKHIREV on Tuesday called on governors to prevent gas cutoffs at facilities of vital social value. "The cabinet of ministers mandated our company to be maximally firm on debtors, most of which are concentrated in the industry. But we will never take the liberty of switching off [gas supplies to] schools, kindergartens, hospitals and other institutions of that kind," VYAKHIREV said. On Friday, Gazprom warned Russian governors of its plans to curb or cut off gas supplies to bad debtors but no cuts have taken place by this Tuesday, the company said. According to a Gazprom statement, "Gazprom's decision to press on chronic debtors by means of supply cuts is a forced measure. It has not been applied to domestic consumers so far." However, the company understands that it will not be able to repay its tax debts, demanded by the government, until it is reimbursed by consumers in full. The industrialized Sverdlovsk region alone owes Gazprom 4.82 billion rubles ($803 million).

Financial assistance to be made available to Russia by the IMF, World Bank, and Japanese Government in the second half of 1998 and 1999

Source: World Bank Press Release

GKOs Offer 837.5 Base Points Over US T-Bills

· Russia is offering a spread of at least 837.5 basis points over the yield of US Treasuries to investors who swap their Russian government bonds (GKOs) for dollar-denominated Eurobond securities. The offer is limited to foreigners and banks licensed to make foreign currency transactions. Russia hopes investors will cash in at least $2 billion in ruble-denominated Treasuries under the deal announced on Monday. An Executive director of Goldman Sachs in Moscow, which is managing the conversion, Sergei STANKOVSKI said, "If the exchange is successful, [investors] will get no less than 837.5 basis points over 10-year and 30-year US Treasury yields for the seven-year and 20-year bonds." The exchange aims to reduce the number of Treasury bills maturing in the coming months, giving the government more time to implement reforms intended to ease the nations financial problems. Deputy Finance Minister Mikhail KASYANOV said, "The key benefit is to convert short-term debt into long-term debt. It gives us space to manage the domestic market and you [investors] the chance to diversify currency risks." The government has decided to stop issuing short-term GKOs. Major Russian banks had been able to make enormous profits from GKOs. An analyst from Regent European Securities Eric KRAUS said, "Banks will no longer be able to simple make easy money on GKOs. They'll have to invest in the real economy," The Washington Post reported. Yields of GKOs are hovering around 50 percent to 60 percent on the Russian markets. Traders said that the government may have to increase the spread to attract complacent investors. The Russian Trading System index climbed nearly 17 percent Tuesday, which is the biggest single day rise so far this year.

European Republics

Ukraine To Tender Stakes In Major Electric Cos.

· The Ukrainian State Property Fund today announced plans to sell 24 percent stakes in all four of Ukraine's electric companies by February 1999. The Fund said that smaller stakes will be sold on domestic stock markets, while the government will retain 51 percent for itself. Dniproenergo's 24 percent stake will be sold by October 10, 1998 via a noncommercial tender, in which investment conditions take precedence over cash bids. A tender for 24 percent of Tsentrenergo will be sold by November 1st and Donbassenergo by December 31,1998. In 1999, the Fund plans a sale of 24 percent of Zakhidenergo by February 1st. Ukrainian law permits foreign investors to take part in the tenders, but specific terms have not been determined. Ukraine also plans to sell 0.64 percent of Dniproenergo, 5,15 percent of Donbassenergo, 4.34 percent of Zakhidenergo and 2.62 percent of Tsentrenergo on the stock exchange. Ladenburg Thalmann International and its Ukrainian affiliate, Ladenburg Thalmann Ukrainian Securities, will serve as investment advisors to

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Politics-Economics-Business

When you need to know it as it happens

Wednesday

July 15, 1998

Intercon's Daily

Zakhidenergo on the issuance of American Depository Receipts (ADRs) to be publicly traded on the US OTC market. The Bank of New York will serve as depository for Zakhidenergo's ADR program. Ladenburg Thalmann International President Alexis BEDOS said, "As more Ukrainian companies seek to expand their investor bases abroad, there is significant opportunity for US investors to invest directly in these Ukrainian blue chips. Zakhidenergo is a strong company with outstanding growth prospects."

South Caucasus & Central Asia

UN Observer Murdered Outside Apartment

· Polish UN military observer Maria Magalena WEWIORSKA was murdered at point-blank range outside of her apartment in Georgia. Her apartment was ransacked by the murderer. Georgia's Interior ministry has launched an investigation. Deputy chief of the Criminal Investigation Department of the Prosecutor's office Gigla OGULASHVILI said that police have examined the crime scene and gathered enough evidence to arrest the killer. A Foreign Ministry statement said, "The government and law enforcement agencies of Georgia are doing everything possible to establish the reason for murdering Maria WEWIORSKA, 31, to identify the assassin and punish him." OGULASHVILI said that this could have been a "domestic crime" or that there might be some "personal reasons" for WEWIORSKA's death. Unconfirmed reports speculate that WEWIORSKA may have been involved in black market activities. This may have been the motivation for the crime, to which OGULASHVILI alluded. UN military observers are in Georgia to monitor the fragile truce the government and separatists in Abkhazia.

Russian Defense Minister Visits Armenia

· Russian Defense Minister Igor SERGEYEV met with Armenian Defense Minister Vazgen SARKISYAN, Prime Minister Armen DARBINYAN, and President Robert KOCHARYAN over Russia-Armenia military cooperation and long term prospects as well as regional, and international prob

lems. SERGEYEV said bilateral military cooperation includes mutual training of specialists, additional admission of Armenian servicemen to Russian military colleges and joint military exercises. He emphasized that pulling Russian troops out of the Caucasus region, "is not in our plans." SERGEYEV is expected to sign a number of accords before leaving tonight. He is also scheduled to inspect a military unit stationed in Armenia in line with an inter-state treaty.

Kazakh Caspian Pipeline Cost Rise

· Kazakhstan Prime Minister Nurlan BALGIMBAYEV, during a meeting with Caspian Pipeline Consortium (CPC) participants Mobil, Chevron, Amoco, and Royal/ Dutch Shell, expressed concern over the growing cost of the pipeline route from Tengiz oil fields to Russia's Black Sea port of Novorossiisk. A government spokesman Viktor KIYANITSA said that BALGIMBAYEV reminded participants that the initially agreed upon cost was $2 billion, and now may reach $3.7 billion and said, "this is completely unacceptable." The spokesman added that the Western oil firms agreed that the cost calculated by their subcontractors was unacceptable. The pipeline is expected to have a capacity of 28 million tons with the room for expansion up to 67 million tons.

Former Azeri Speaker Embezzled $74 Million

· The Azeri Interior Ministry and prosecutors on Tuesday said Azerbaijan's investigators have proved that ex-speaker Rasul GULIYEV embezzled at least $74 million worth of state funds. They reiterated that the investigation has not been concluded and plans to continue as, "more and more facts are coming to light." Two months ago, the sum of moneys believed to be embezzled by the former speaker was estimated at $45 million. Tuesday's report said that in 1992-1993 GULIYEV, then manager of a Baku oil refinery and later the vice president of Azerbaijan's State Oil Company Socar, collected gains from illicit exports of over 150,000 tons of diesel fuel and about 32,000 tons of aircraft gasoline, Itar-Tass reported. The ministry and prosecutors say this deal inflicted nearly $30 million in damages on Azerbaijan.

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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