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

Thursday, July 16, 1998

to share the responsibility for politically unpopular measures," with parliamentary election just around the corner. He adds that, "At the same time, the Duma doesn't want to be held responsible for sabotaging the bailout." Important votes on personal income tax rates and procedures for determining value added tax are to be voted on Friday. The tax code and bills approved by the Duma will be passed on to the Federation Council for a vote, and then must be signed by YELTSIN to become law.

US Sanctions On Russian Cos. Delayed

· The CLINTON administration Wednesday said that it will impose sanctions against nine Russian enterprises including, the INOR scientific center, Grafit and Ployus research institutes, Tikhomirov institute, Glavkosmos, Komintern plant in Novosibirsk, MOSO company, Baltic State Technical University and Europalace 2000. White House spokesman Michael MCCURRY said, "These enterprises are believed to have violated Russian export controls and attempted to export goods or services which could contribute to weapons of mass destruction or missiles to deliver them...Consistent with the Russian actions and where consistent with our own assessment, the United States will suspend immediately any US government program or assistance to entities on this list and will proceed expeditiously to impose trade restrictions on such entities." Assistance to these companies were mostly research grants and scientific partnership programs intended to keep scientists working in the aftermath of the Soviet

Russian Federation

Politics

Good News and Bad News From The Duma

· The Russian State Duma today and Wednesday passed some of the economic reforms in the government's anti-crisis package and rejected others. The Kremlin has urged the Duma to pass 20 major measures of the package that must be enacted before the International Monetary Fund (IMF) board meets on Monday to approve the release of funds to Russia. The program is designed to spur tax collection and encourage competition. The Duma passed part of the new tax code and bills aimed at cutting and simplifying a 20 percent tax on small business, and trimmed corporate profit tax from 35 percent to 30 percent. Deputies also passed a bill on state regulation of alcohol products and a bill on children benefits. The Duma did pass a law stating that the tax regime will go into effect only when the entire tax code is passed. It rejected a proposal to introduce a 5 percent sales tax, as well as a proposal for a value added tax (VAT) payable at the time of delivery rather than time of payment. The opposition contends that many ordinary Russians, who haven't been paid in months, cannot afford a sales tax. Deputy Prime Minister Boris NEMTSOV estimates that the sales tax could bring in an additional 40 billion rubles ($6.4 billion) in revenues. Another bill introducing a 20 percent VAT by abolishing a special 10 percent VAT rate for food and good for children was withdrawn by the government.

The Duma's rejections lead many to believe that Russian President Boris YELTSIN may be forced to implement several bills by decree. However YELTSIN is unable decree some measures including taxation rates, which can only be enacted by legislation. Director of the Institute for Political Studies in Moscow Sergei MARKOV said that, "Deputies don't want

Today's News Highlights

Russia

FSB Internet Monitors

Rosvooruzheniye: $9Billion

European Republics

Williams Offers $3M To Lith.

Ukraine Hopes For IMF Loan

Belarus Places State Controls

South Caucasus & Central Asia

Border Guard Hand-Over Begins

Kazakh Oil Co. Seeks Protection

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July 16, 1998

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Union collapse and not to help Iran's weapons program. The White House announcement was timed to delay a House override vote on the Iran Missile Proliferation Sanctions Act for two days, which was originally passed by the House in a vote of 392 to 22, and in the Senate by 90 to 4 votes. The bill penned by Benjamin GILMAN (Rep. NY) would bar US exports and assistance for two years to any entity that transfers missile technology to Iran. US President Bill CLINTON vetoed the bill because it may create a backlash in Russia and because the "credible evidence" needed against these institutes was a low threshold of proof. One senior government official offered a solution saying that, "the real way you get to the heart of the problem is through the creation and effective enforcement of Russian controls, and you put that at risk with a confrontational sanctions route," The New York Times reported. Vice President Al GORE said, "We will continue to work closely with the Russian government at every level to close off exports of dangerous, destabilizing weapons technology. This includes imposing trade restrictions and suspending US government programs or assistance to entities under investigation." Meanwhile, Russia's relations with Iran continue both on a commercial and political level. Russian First Deputy Foreign Minister Boris PASTUKHOV is scheduled to visit Iran on July 17-20th to discuss the Caspian Sea, Tajikistan, the Caucasus region, and some aspects of bilateral relations.

A New Twist On Tapping Phones: The Internet

· While Duma deputies make speeches against the informational threat of the Internet, the Federal Security Service (FSB) is working out its own plans to monitor all Internet access. According to FSB documents, Internet providers together with the intelligence services will have to, "supply a record of all the information [incoming and outgoing] that belongs to concrete subscribers of the given network," the Moscow Times reported. Expenses to set up interceptive apparatuses are to be paid by the providers, but certainly will be passed on to Internet users. The providers would have to supply the FSB with the addresses and passwords of all Internet users. Not even the old Soviet KGB came up with such a remarkable approach. The promised wide-ranging measures are as impractical as the threats of the current authorities. "However paradoxical it may seem, the very people who speak about the

need to counter threats from the West are deeply convinced of it immutable superiority, and therefore cannot even think about competing honestly and openly as equals." This new monitoring system shows the authorities' deep contempt, hostility, and distrust for their own citizens, who if they are left alone for a moment will divulge national secrets to foreigners. Russia is seeking informational security, by intercepting Internet users' messages. In order to do this, Russia must first have computer professionals who are willing to work for the state and feel that it is not a hostile force.

Economy

Ruble = 6.213/$1.00 (NY rate)

Ruble = 6.216/$1.00 (CB rate)

Ruble = 6.178|6.254/$1.00 (buy|sell rates)

Dubinin Says No Ruble Devaluation

· Central Bank chairman Sergei DUBININ on Wednesday said, "We will not allow devaluation which would cause damage to the Russian economy." He believes that international credits will allow the government of Russia to "work calmly" to finalize the stabilization program within the next six months. He said, "we will receive the first part of the credit to an amount of $5.6 billion immediately after the Board of Directors of the International Monetary Fund [IMF] makes its decision," on Monday. According to DUBININ, the IMF did not put forth any political conditions for the credit. He stressed the need for energetic measures to increase budget revenues as soon as possible. LUKoil vice president Leonid FEDUN said that the oil producer favors a gradual depreciation of the ruble to make exports more profitable. He believes that this would best suit the economy if it is not sudden but planned. FEDUN said, "Probably only after the stabilization loan is received...will there be a correction. It is a question for the government, but we would be satisfied by around 20 to 25 percent." He noted that approximately 30 to 40 percent of the value of the ruble is from oil and gas income.

Business

Aeroflot Sets New Flight Record

· Aeroflot general director Valery OKULOV declared that the average daily flight time of Aeroflot's long range IL-96-300 has reached 13 hours. The

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world flight airtime standard for modern airliners ranges between 11 and 17 hours. The announcement was made during a festive meeting marking the fifth anniversary of regular IL-96-300 flights, attended by the leaders of the Federal Aviation Service, the Ilyushin Aviation Complex, the Voronezh series manufacturing plant, as well as the airline's pilots and technicians. Specialists agreed that the Russian aircraft manufacturers can create airliners to the world's best standards. Federal aviation service director Gennady ZAITSEV noted that over the five years, Russia's main aviation engine PS-90A was faultless in operation. General designer of the Perm-based Aviadvigatel stock company Alexander INOZEMTSEV declared that, "after five years of exploitation, we have succeeded in making the engine work for 8,000 hours without taking it off the wing for overhaul." Aeroflot has six IL-96-300 airliners and expects to add another 20 Ilyushin aircraft, mainly lL-96M and IL-96T, over the next few years.

Helicopter Plant Funding Denied

· Director general of the Arsenyev-based aircraft-making amalgamation Progress in Russia's Maritime Territory Viktor PECHENKIN said that it is possible that the company will not get a single state-placed order this year. He pointed out that funding for the construction of KA-50 helicopters, known under the codename Black Shark, has been fully excluded from the 1998 State budget. Earlier, the State order for their production ran at 80 million rubles. Vice Governor of Maritime Territory Konstantin TOLSTOSHEIN, who is in charge of defense enterprises, described this as a, "catastrophe for the aircraft-making amalgamation." Today, TOLSTOSHEIN sent a telegram to Prime Minister Sergei KIRIYENKO and Deputy Speaker of the State Duma Svetlana GORYACHEVA to look into the situation and avoid scrapping the state order.

Rosvooruzheniye Contracts Total $9 Billion

· Russia's arms trade company Rosvooruzheniye, as of the beginning of July, has orders totaling almost $9 billion. The fulfillment of the orders and payments for them will keep Rosvooruzheniye busy until 2001. On Monday, Rosvooruzheniye director general Yevgeny ANANYEV briefed Russian President Boris YELTSIN on the company's progress. He told YELTSIN that in recent months Rosvooruzheniye signed contracts for supplying weapons to countries

untraditional for Russia's military exports. The company's export incomes for the first half of this year increased by $25 million as compared to last year's same period. It was also noted that the company for the first time in its history has no debts to Russian defense industrial enterprises. Concerning the supplies of Russian missile complexes S-300PMU1 to Cyprus, a company spokesman said that the terms of the Russian-Cypriot contract would be observed and the supplies of the first batch of 3RK components will start in August.

European Republics

Williams Offers $3M For Lith. Oil Stakes

· Lithuanian Economic Minister Vincas BAILIUS on Wednesday revealed that Williams Cos. Inc. has offered to buy 33 percent stakes in three key oil companies for $150 million plus $150 million in reinvested profits. At a joint news conference, both sides said a final agreement on price has not been reached, but is expected in two weeks. Lithuania has been negotiating with Williams, the oil service and telecommunications company, to sell it one-third stakes in oil refinery Mazheiku Nafta, Birzhu Pipeline, and Butinge Oil Terminal. BAILIUS said that experts have evaluated the three companies to be worth $390 million. He said the three companies will be merged into one oil concern. After the merger, the government and Williams will hire an operator for the new company.

Ukraine Hopes IMF Loan Will Increase Rating

· Ukraine, facing similar cash crunch problems as its neighbor Russia, is hoping that the International Monetary Fund's (IMF) generosity will cross Russia's boundaries. Tuesday First Deputy Prime Minister Serhy TYHYPKO welcomed the IMF offer to Russia as a "positive step," which would have stabilizing effects on the region as a whole. President Leonid KUCHMA's administration hopes to reach an agreement with the IMF for a three-year Extended Fund Facility (EFF) of $2 billion to $2.7 billion, which is conditional on the implementation of macro-economic reforms, the Financial Times reported. Ukraine is desperately trying to boost investor confidence and encourage them to keep their investments in Ukraine. Investors have been redeeming their treasury bill holdings creating a cash crunch for the government. In August, a $450 million eurobond is

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due. Ukraine, like Russia, has a problem servicing its short-term debt. On Monday, Moody's rating agency downgraded Ukraine's outlook from stable to negative, assigning a B2 foreign currency ceiling for bonds and the B3 ceiling for bank deposits. Moody's said that if Ukraine is unable to receive an IMF loan, the country will run out of foreign currency reserves by the end of this year. The IMF loan is contingent on the Ukrainian parliament passing a 1998 budget and reduction of the budget deficit. The new parliament spent several months just agreeing on a speaker, which kept budget legislation off the agenda. The new speaker Alexander TKACHENKO said he is in favor of the new budget. It remains unclear as to whether the parliament will vote on the budget before the IMF mission arrives next week for negotiations.

Belarus Places Controls On Currency Trading

· Belarus' Central Bank today placed state controls on the exchange rate of the Belarus ruble against the Ukrainian gryvnia on the interbank market. The move closes a loophole whereby Belarus foreign exchange dealers tried to convert increasingly worthless rubles into stable currencies. According to a Central Bank (CB) spokesman, if you want to purchase Ukrainian gryvnias, you must place an order with the exchange explaining why a purchase needs to be made. The CB suspended trade in Ukrainian gryvnias on Monday on the interbank currency exchange after the Belarus ruble fell sharply. Last week, the CB stopped domestic banks from buying hard currency from foreign banks as part of the government's program to stabilize the nations' troubled currency market, Reuters reported. By Wednesday, the Belarus ruble dropped to the equivalent of 80,000 per dollar. Under the new controls, the Belarus ruble climbed to 30,700 for one gryvnia, equivalent to 65,000 per dollar. Belarus President Alexander LUKASHENKO is attempting to maintain a Soviet-style planned economy and has rejected calls by international lender to bring in market reforms. Both World Bank and International Monetary Fund's representatives have been recalled from Belarus due to its failure to fulfill agreements.

South Caucasus & Central Asia

Border Guard Hand-Over Begins In Georgia

· Today, Russian border guards began the handing over control of Georgia's sea area to the Georgian State Border Patrol. Head of Georgia's State Department for Border Protection Valery CHKHEIDZE left for the Port of Poti to prepare for assuming control over the sea areas within the nation's boundaries. Georgian President Eduard SHEVARDNADZE said, "One cannot argue that a country not protecting its borders itself is a defective state, therefore everybody should understand our drive for the independent protection of our borders." SHEVARDNADZE stressed that the June 27th agreement for the stage-by-stage hand-over from Batumi to Psou is a "timely and normal event." The hand-over is to be completed by July 10, 1999.

Kazakh Oil Co. Seeks Protection

· Kazakhstan's Chimkent Oil Refinery Monday urged the government to protect domestic processors of oil product imports. Kazakhstan has said it will remove "double taxation" with Russia as part of an overhaul of the tax system, which will make purchases from Russia cheaper. Plant deputy chairman Beibut AKHABAYEV said that the government should impose added barriers to avoid a flood of Russian oil products on the Kazakhstan market. He said, "If they are going to remove double taxation, then we would need some new mechanism to protect Kazakh refineries." Kazakhstan has three oil refineries with a combined capacity of around 400,000 barrels per day. The refineries sell almost their entire output on the limited internal market, due to the lack of product pipeline links to world markets. AKHABAYEV noted that Russian refineries have an edge over Kazakhstan rivals because they were part of vertically integrated companies. Meanwhile, Chimkent Chairman Nurlan BIZAKOV said that the refinery intends to invest $150 million over the next five years to modernize the plant and upgrade equipment. In the first half of this year, volumes were 8.2 percent higher than the same period in 1997.

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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