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 17, 1998

Russian Federation

Politics

Duma Approves Key Tax Legislation

· The Russian State Duma on Thursday approved the main parts of a new tax code, which will form the basis of the 1999 budget. The new code is designed to simplify Russia's existing tax legislation by cutting the number of taxes from 200 to about 30. After two attempts, the Duma approved by a slim margin the national sales tax law, a key element of the government-proposed stabilization plan. The five percent sales tax, which is expected to bring additional 40 billion rubles ($6.4 billion) in revenues to Federal and regional budgets, will be levied on luxury goods such as furs and travel agencies and not on essentials such as bread, meat, milk, and children's goods. The Duma approved a revised version of the law only after Finance Minister Mikhail ZADORNOV criticized the Duma for jeopardizing international loans. ZADORNOV accused the deputies of being irresponsible by approving corporate tax cuts from 35 percent to 30 percent, but rejecting tax rises. The Communist led Duma, complaining that the ordinary Russian cannot afford a sales tax, want to be seen as the protectors of the nation. The Federation Council, made up of regional leaders, was furious with the Duma's initial vote on the sales tax, because their regions would benefit from such a tax. The government has approved new measures designed to increase the tax burden of its new rich, taxing luxury cars, high-quality petrol, mobile phones and pagers. Specifically, a new 10 percent tax on the users of the pagers and cellular phones and a 450 ruble per ton duty on high-octane petrol replacing the 370 rubles per ton are planned to be instated. The Duma Thursday after three attempts rejected the new land code and land tax proposed by the government. The law would grant farmers some rights, but prohibit the purchase and sale of farmland. The

Duma failed to reach the 226 votes needed to pass the key legislation by one vote. Today, the Duma is expected to try again to pass the land code.

Senators in Russia's Federation Council announced that today, "The house will work as long as is required for deciding on each bill," which is passed by the Duma. Federation Council spokesman Yuri ALGUNOV said senators are to take into account all amendments proposed by the government and both houses of parliament. Chairman of the Council's budget and tax committee Konstantin TITOV clarified that, "any talk about confrontation with the government is out of the question." All the laws have been "worked out" and just small amendments remain, he added.

After the laws are passed by both houses of parliament, President Boris YELTSIN will sign them into law. It appears that the Duma has passed enough of the anti-crisis package to satisfy the International Monetary Fund (IMF). Russia's top foreign debt negotiator Anatoly CHUBAIS will participate in the IMF's board meeting on Monday, where they are expected to approve new credits for Russia. Comment: While the passage of key sections of the new tax code is a step in the right directions and shows the IMF that Russia is committed to reforms, the problem of fiscal imbalance can only be addressed when the government "collects" on these tax promises. Correcting the fiscal imbalance means that taxes must not only be levied, but must be collected in cash.

Today's News Highlights

Russia

T-Bill Volume Hits $1.8 Million

Tough Measures For Debtors

European Republics

Sino-Latvia Military Relations

Ukraine To Sell BLASCO

South Caucasus & Central Asia

Rus. Troops Stay In Georgia?

Kazakh Anti-Monopoly Comm.

Kazakh Crime Rate Rises

Turkmen-Russia Debt Problems

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July 17, 1998

Intercon's Daily

In Russia, more than half of all transactions are barter trades and fail to generate the necessary cash into the Federal budget. Whether these tough fiscal reforms will be accomplished continues to remain an open question. Some observers wonder how much of the bailout will be siphon off by corruption. Even the World Bank is experiencing an embezzlement investigation.

Gore To Visit Russia, Ukraine Next Week

· US Vice President Al GORE is scheduled to visit Ukraine and Russia next week at a time when both nations are facing economic reforms. In Ukraine, he will attend a regular session of the US-Ukrainian binational commission. He is also expected to inspect the devastation of the Chernobyl nuclear power reactor that exploded 12 years ago. GORE will reach Kiev just as an International Monetary Fund (IMF) mission is expected to conclude its review of Ukraine's reforms. Ukrainian President Leonid KUCHMA is desperate to clinch a $2.5 billion loan. A senior US official said, "This really comes at a time when economic reform issues and financial crises are the key issues both for Russia and Ukraine. The vice president will have a trip that focuses heavily on these issues and showing that we are supportive but we very much encourage those countries to move ahead with bold reforms." In Russia, GORE will meet for the first time Russian counterpart Sergei KIRIYENKO. They will discuss economic reforms, international lending, and preparations for the US-Russia summit in September.

Economy

T-Bill Volume Reaches $1.8 Million

· The Russian Stock Trading index early today rose to 191.62 after closing down on Thursday at 181.32. However, most of the money which rushed into the Russian market this week came from short-term traders. These investors have the capability of rushing out again, if there is trouble. Head of East European emerging markets for Paribas in London Giles FRANCK said, "The fundamental situation isn't yet that different. Real money investors are still rather skeptical about the Russian situation. They want to see results—spending cuts and tax collection," The Wall Street Journal reported. On Monday, the government is due to report on the results of the short-term Treasury bills (GKOs) swap. Treasury prices rose a bit, and the yield on the benchmark one-

year GKOs fell from 65 percent to 60 percent on Thursday. The market registered its largest-ever trading volume, as 11 billion rubles ($1.8 billion) of treasury bills changed hands. Deputy Prime Minister Viktor KHRISTENKO said the government expects to receive over $2 billion from the swap of GKO T-bills for Eurobonds and the current Eurobond floating. He said that, "Total requests have well surpassed this figure."

Ruble = 6.881/$1.00 (NY rate)

Ruble = 6.219/$1.00 (CB rate)

Ruble = 6.181|6.257/$1.00 (buy|sell rates)

Feb Mar Apr May Jun Jul

Business

Tough Measures To Force Debtors To Pay

· Electricity supplies have been completely cut for debts to 754 enterprises in the southern Russian Rostov region, including Rostselmash agricultural machinery plant. General Director of the Rostovenergo company Fedor KUSHNAREV explained the situation by the decision of Russian gas giant Gazprom to cut supplies to debtors in the region, which in turn triggered a decrease in energy provision by a third. On Thursday, KUSHNAREV desperately tried to find a solution, "And what can one do if the region owes for the consumed energy one trillion 800 million rubles which comprises a half of the annual proceeds of energy producers." He said six of the eight hydropower stations on the Don are idle. The biggest in the Northern Caucasus, Novocherkassk heat and power plant is operating only two of its eight generators. Approximately 2,700 workers remain jobless. KUSHNAREV described the situation as "supercritical" and warned that

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power supplies would be cut to some 2,000 debtors if they do not immediately pay. "The measures are tough, but necessary and are aimed to discipline consumers and teach them to pay the bills on time...The main thing is to pay, while the form of payment will be agreed upon," he stressed.

reduction of exports to Russia by 30 percent would boost export and import operations. LITVITSKY believes that Ukraine should take measures to protect export and import tariffs and determine the scale and limits of export liberalization. Currently, 30 percent of Ukraine's exports go to Asia and 44 percent to Russia. Over the first five months of this year, Ukraine's trade with Russia totaled $1.2 billion.

Ukraine To Sell Black Sea Shipping Co.

· The Ukrainian government plans to save its major Black sea shipping company BLASCO from bankruptcy. The Transport Ministry on Thursday submitted to the government a proposal to restructure BLASCO debts which amount to $120 million. BLASCO, which used to have 370 ships, runs only five of them and two of the five have been arrested in foreign ports for debts. Most BLASCO ships were sold or transferred to offshore companies created by the shipping lines in previous years. The Ukrainian government is drafting a BLASCO privatization program for the end of the year.

South Caucasus & Central Asia

Russian Peace Keepers To Stay In Georgia?

· Russian President Boris YELTSIN on Thursday proposed to the Federation Council prolonging the mandate of 3,000 Russian peace-keepers in the zone of the Georgian-Abkhazian conflict. The Federation Council is responsible for issues concerning Russian forces abroad. YELTSIN said that the peace-keepers were the, "only real force which ensures a stable cease-fire and conditions for a political settlement. The situation in the zone of conflict is such that the withdrawal of the peace-keepers would cause an explosion not only in the region, but, possibly, in the whole of the Caucasus." YELTSIN stressed that Russian peace-keepers, which were deployed in June 1994, are serving the interest of Russia in the region. YELTSIN said that the Russian troops should remain in the conflict zone until July 31, 1998. The UN Security Council extended the mandate of its mission in Georgia until July 31, 1998.

Central Asia Leaders To Meet And Celebrate

· Presidents of Tajikistan, Turkmenistan, Uzbekistan, Kyrgyzstan and Kazakhstan are holding a Central Asian summit today in Kyrgyzstan on the banks of Lake Issyk-Kul. Among the issues to be

European Republics

Sino-Latvia Military Relations Strengthened

· Latvian Defense Minister Talavs JUNDZIS today in a visit to Beijing met with Chinese Vice Premier LI Lanqing, Chinese Defense Minister CHI Haotian, and deputy chief of General Staff of the Chinese People's Liberation Army XIONG Guangkai. LI believes this visit not only helps to strengthen the friendly and cooperative army-to-army relationship, but also promotes friendship and cooperation between the two countries in other fields, including politics and trade. On Wednesday, Chinese Foreign Minister TANG Jiaxuan and JUNDZIS exchanged their opinions on international and regional issues. TANG noted that there is no conflict between the two countries nor impediment to developing bilateral relations. JUNDZIS said, "We share the same opinions as China regarding economic development and national defense construction. We wish to enhance cooperation with China in every regard."

Ukraine Urges Increased CIS Trade

· Ukraine on Tuesday urged all members of the Commonwealth of Independent States (CIS) to strengthen trade cooperation and make joint efforts to set up a free-trade zone. The First Deputy Foreign Minister of Ukraine Anton BUTEIKO said the CIS should make its basic task the establishment of a free-trade zone according to the principles set by the World Trade Organization. Instead of being a closed organization, the CIS should promote cooperation and exchanges with other international organizations, BUTEIKO said. Ukraine is hoping to coordinate its strategic objective of European integration with other CIS members, he noted. Pointing out the low efficiency of the CIS and differences on mutual cooperation BUTEIKO called for simplifying the administrative groups of the CIS.

Ukraine Considers Export Cuts To Russia

· Ukrainian presidential adviser Valery LITVITSKY on Wednesday said Ukraine should diversify its exports and reduce exports to Russia. He said the

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discussed are regional cooperation issues and transportation of oil and gas to world markets. Emomali RAKHMONOV, Saparmurat NIYAZOV, Islam KARIMOV will also be guests at the wedding of Kyrgyzstan President Askar AKAYEV's son Aidar to Kazakhstan President Nursultan NAZARBAYEV's daughter Aliya. Aidar studied economics at the University of Maryland. Aliya studied in London, but has plans to study art history in Washington. The match reviving the tradition of cementing political ties with family ones is certain to boost relations. Local reaction to the marriage has been mixed. The newspaper Slovo Kyrgyzstana [Word of Kyrgyzstan] said, "It is indeed a great honor for the whole of Kyrgyz people that the princess of our brotherly nation has taken the hand and heart of out brave Kyrgyz rider." A Almaty resident said, "Their fathers decided to marry them off. It's a political game and nothing more. Place your bets now as to how long it will last."

Kazakh Seeks To Disband Monopolies

· The Kazakhstan's Anti-Monopoly Committee today pledged to slash tariffs and clamp down monopolistic sectors. Committee spokesman Zharkimbek ALIMBETOV said, "Our aim is to create a competitive market. The President has ordered that by August 1st this years prices and tariffs charged by monopolies should be lowered, and that these should then be frozen until the end of this year." Committee chairman Nikolai RADOSTOVETS told a press conference in Astana that the national oil company Kazakhoil has increased the price of oil it supplies to refineries, despite a 17 percent decrease in the price of petroleum on world markets since the beginning of this year. RADOSTOVETS said the company, "needs to be de-monopolized." Other companies under review are Intergaz Central Asia, Kazakhtransoil, the railroad company Temir Zholy, Kazakhtelekom, and Almaty Power Consolidated. The latter is controlled by one of Kazakhstan's biggest foreign investor, Belgium utility firm Tractebel. Earlier this year, Tractebel clashed with the Anti-Monopoly Committee over heating prices and its

management of Kazakhstan's gas pipelines. The Committee also noted that it has the power to annul agreements signed by Kazakh monopolies, if they are not in the interest of consumers. The Committee also insists that purchase of equipment, raw materials and fuel by monopolies will be carried out through open tenders, awarding the contract to the lowest bidder with the best conditions.

Kazakhstan's Crime Rate Rises

· According to Kazakhstan's Interior Ministry, Kazakhstan registered 67,500 cases of civil and criminal offenses in the first half of the year. This is an increase of 4.2 percent from the same period last year. Interior Minister Kairbek SULEIMENOV on Wednesday said that of the total, criminal cases increased by 10 percent, with robbery and theft cases rising by 21.4 percent and 22.1 percent respectively. He added that 46,000 cases were resolved and 44,000 suspects prosecuted in the first six months.

Turkmen Criticizes Russia's Bartering On Debt

· Turkmen President Saparmurat NIYAZOV on Thursday complained that Russia's proposal to repay its debt to Turkmenistan in goods rather than money is, "unacceptable, given today's situation in Turkmenistan's economy...that needs hard currency as never before." Moscow's proposal to repay 70 percent of the $107 million debt in Russian goods. He did not mention what kind of good Russia was offering. NIYAZOV told a meeting of the republican People's Council that he had sent a message to Russian President Boris YELTSIN asking him to speed up the debt repayment. He stressed that the hard currency shortage has been caused to a considerable extent by a failure to reach an agreement with Moscow on prices for Turkmen gas transportation through Russia's territory. Noting that the trade turnover between the two countries has fallen to only $2 million, NIYAZOV said that his country has to look for other partners, "which are step by step replacing Russia in Turkmenistan's economy."

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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