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

Thursday, July 2, 1998

Wednesday approved the issue of 7.5 billion ruble bonds in payment for the company's arrears. The issue will be carried out in three tranches. According to KamAZ general director Ivan KOSTIN, the company last year manufactured 13,000 trucks, which is a 66 percent increase from 1996 and equal to the daily output of KamAZ during the pre-perestroika period. KamAZ doubled production of Oka Baby cars to 18,000. However, KOSTIN noted that the company is losing 1.3 rubles from every ruble invested into production. Chairman of the plant's anti-crisis commission Nikolai LYAPIN said the main objective of the company is to break-even by November.

Russia's Inflation Rate In June

· The State Statistics Committee announced that Russia's inflation for the month of June was 0.1 percent, reaching a record low level since the beginning of the year and October 1997. The committee on Wednesday said that the price of paid services rendered to the population increased by 0.6 percent in June, while the price of food and manufactured products remained the same. The average cost of a basket of 23 basic food products grew by 0.1 percent in June and reached 250.5 rubles by the end of the month. In Moscow, the cost of the basket increased by 1.8 percent to 303.6 rubles, in St. Petersburg by 0.4 percent to 249.3 rubles.

Tax Collection In June Increase

· The Russian Tax Service collected 11 billion rubles in taxes in June. Officials from the government information department today stated that this is an increase of 4

Russian Federation

Politics

Duma Passes Some Tax Measures

· Despite bitter arguments from theCommunist Party's, the Russian State Duma gave into pressure from President Boris YELTSIN and Prime Minister Sergei KIRIYENKO and granted preliminary approval to nearly half of the anti-crisis legislative package. The approved measures include a 20 percent value-added tax, a new flat tax on small businesses like newsstands and gas stations, a cut in corporate profit taxes, and the repeal of a provision that taxes companies forced to sell products at a loss, The New York Times reported. The Communist party warned that sales and value-added taxes would hit consumers directly. Communist leader Gennady ZYUGANOV said, "We will support the package of laws which eases the tax burden and develops our industry." Experts predict that the emergency measures could bring in as much as $22 billion per year. The government's forecasters have valued the package at about $16 billion. KIRIYENKO said that monthly debt payments are about 1.4 times the federal government's monthly revenue, causing the government to borrow money to cover past debts. On Wednesday, the government canceled a planned domestic debt auction because of a lack of demand. The government is hoping the parliament will pass the emergency package of reforms before its summer break begins on July 16th.

Economy

Ruble = 6.202/$1.00 (NY rate)

Ruble = 6.203/$1.00 (CB rate)

Ruble = 6.173|6.233/$1.00 (buy|sell rates)

KamAZ Issues Bond To Pay Arrears

· The Russian giant motor works KamAZ on

Today's News Highlights

Russia

Gov't Hardball With Gazprom

Banking Conf. In St. Petersburg

European Republics

Caspian Oil Through Odessa?

Chernobyl Funds Embezzled

South Caucasus & Central Asia

Georgian-Romanian Oil Talks

Allocation of Refugee Funds

Uzbek-Rus Direct Air Service

Five Nation Summit In Almaty

Politics-Economics-Business

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Thursday

July 2, 1998

Intercon's Daily

percent from May collections. The officials, citing a preliminary Tax Service report, said the collected sum does not include tax payments by the major gas producer Gazprom.

Business

Gazprom- Government Conflict Resolved

· Prime Minister Sergei KIRIYENKO earlier today at a government meeting said that he instructed Deputy Prime Minister Boris NEMTSOV to cancel a trust contract on administering the state block of shares with Rem VYAKHIREV. "If Gazprom repays taxes, everything will be OK," NEMTSOV said. Otherwise, he emphasized, the tough measures announced by KIRIYENKO at a government meeting would be applied to Gazprom. The treaty on the trust management of 35 percent of Gazprom shares was signed on December 22, 1997, by VYAKHIREV, Chairman of the Company's Board, and KIRIYENKO, who at the time was the Minister of Fuel and Power. Under the trust treaty, VYAKHIREV exercises trust management of the 35 percent State-owned block of the Company's shares. The treaty was to remain valid until March 1, 1999. After a carefully mediated telephone call with VYAKHIREV, Gazprom agreed to pay the federal budget 4 billion rubles (about $645 million) each month. NEMTSOV said, "Despite the quite stormy nature of the discussions, an agreement has been reached. Gazprom will pay all it owes to the budget, and the state will fulfill all its obligations arising from July 1st. In connection with these decisions the tax inspectorate will stop all seizures of Gazprom property." The trust will remain intact.

Before the negotiations, the State Tax Service was instructed to arrest the Gazprom property, including vacation homes and pleasure boats, due to some 13 billion rubles (about $2 billion) in unpaid taxes. It also announced that a special meeting of the board of directors will be held. Last week, at Gazprom's regular annual meeting VYAKHIREV lost his position as the head of the board of directors, but remained chief executive officer. State Property Minister Farit GAZIZULLIN replaced VYAKHIREV as chairman of the board. Deputy Prime Minister Oleg SYSUYEV pleased with the results stressed, "This means that now when the entire government thinks how to pull the country out of the difficult situation, nobody, including Gazprom, can so blatantly duck paying

taxes...Gazprom paid only a third of taxes for June from what it had to pay." In fact, other monopolies and large enterprises may be next on the government's list. KIRIYENKO said at the government meeting that the presidential emergency tax and budget commission at one of its nearest meetings would handle tax non-payment by the electricity utility Unified Energy Systems of Russia (UES). Deputy Prime Minister Viktor KHRISTENKO said the Temporary Emergency Commission (VChK) will freeze the assets of a unit of Norilsk Nickel and two other companies, if they do not pay their tax arrears within one month. Norilsk's Severonikel owes 250 million rubles ($40 million), Chepetsky Mechanical Factory owes 175 million rubles and coal firm Rostsibugol owes 400 million rubles.

Comment: Clearly, the government's rigorous measures against the national gas and electricity providers worked. These results are sure to positively affect on-going negotiations with the International Monetary Fund (IMF) and the World Bank for a $10 billion to $15 billion stabilization loan to Russia and on lending terms. The IMF has increased the pressure on Russia calling for the break-up of Gazprom, rationalizing gas prices, permitting competitor access to it pipeline network, and most of all an increase in tax collections. However, NEMTSOV has said, "There won't be any breaking up."

Banking Conference Opens In St. Petersburg

· The third North-Western banking conference opened in St. Petersburg Wednesday. The conference will be attended by senior executives of commercial banks from Moscow, the Urals, Siberia, the North-Western Territory and the Southern Territory of Russia, from other CIS members states such as Belarus, Ukraine and Georgia, from the Baltic states, as well as by representatives of a number of western banks. Addressing the conference will be representatives of the Central Bank, the St. Petersburg authorities, international rating, auditing and consulting companies. Approximately 100 participants in the conference are expected to discuss the problems, which are especially crucial for the banking system of the country. These include the merging of banks and the consolidation of capital, the role of banks in the economic life of the regions, the state and prospects of the development of the plastic cards market and other problems.

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Transneft Exported 50 Percent Of 1997 Oil

· Russian oil company Transneft in 1997 exported over 50 percent of all oil pumped by pipelines. It supplied 294.5 million tons of oil last year, which is slightly above the 1996 figure, according to statistics released at the Transneft annual shareholders' meeting today. Non-Commonwealth of Independent State (CIS) countries received 110.3 million tons of oil. Net revenues of the company totaled 1.3 billion rubles last year. Shareholders are expected to approve dividends of 85.91 rubles for a preference and 14.32 rubles for an ordinary share. Approximately, 75 percent of the company's shares belong to the state, and 25 percent of shares were distributed free among the personnel of the company.

the situation shows lack of control on the part of responsible services over Chernobyl Fund finances. Inspectors have referred to courts 70 cases where aggregate embezzlement reached 790,000 gryvnas ($395,000). Responsible officials were fined 13,000 gryvnas ($6,500). Violations were exposed in the use of the Fund's money for housing programs for Chernobyl victims and almost one million gryvnas ($500,000) were misappropriated in ten districts of the Kiev region as were some two million gryvnas ($1 million) allocated as social benefits. According to the press service, two million gryvnas ($1 million) were returned to the Fund. Ukraine's Auditing Service has taken control over compensation to the Fund.

South Caucasus & Central Asia

Positive Georgia-Romanian Oil Talks

· Georgian President Eduard SHEVARDNADZE and Romanian President Emil CONSTANTINESCU signed a raft of agreements Wednesday in Tblisi to cement ties after talks on furthering bilateral cooperation in the Eur-Asia Continental Bridge zone. The two nations plan to step up cooperation in defense under the Partnership for Peace Program set up by the North Atlantic Treaty Organization, education, culture and sports, as well as establish embassies in Tblisi and Bucharest and consulates in Poti and Constanta. However, the transportation of Caspian oil was the focus of these talks. Speaking at a news conference, SHEVARDNADZE said that the construction of the pipeline along the so-called "western" route for transit of early Caspian Sea oil is now at a final stage, and will be put into operation approximately in February 1999. He also noted that a final decision on the choice of Caspian transit routes will be made before the end of the year. He voiced his support for the Baku-Supsa route, pointing out that from Supsa Caspian oil can be transported in the directions of Ceyhan and to Europe through the Romanian port of Constanta. CONSTANTINESCU agreed that the Baku-Supsa route was, "the most logical from the geographic, geological, and geopolitical viewpoint."

Georgian Earmarks Funds For Abkhazia

· Georgian President Eduard SHEVARDNADZE on Wednesday allocated additional financial resources in the amount of 300,000 lari (about $230,000) from the presidential fund for rendering aid to refu

European Republics

Ukraine Seeks Caspian Oil Through Odessa

· Acting chairman of the state committee for oil and gas industry of Ukraine Vladislav TOROSHEVSKY, at an international conference The Oil and Gas Industry in Kiev, announced that the Ukrainian Cabinet of Ministers is continuing necessary preparatory measures to ensure the transportation of the Caspian Sea oil along the Eurasian corridor. Last week, a meeting was held in Odessa to resolve problems concerning the establishment of an international consortium for ensuring transportation of the Caspian Sea oil through the Odessa terminal and further along the Odessa-Brody pipeline. Ukrainian Prime Minister Valery PUSTOVOITENKO reported that a resolution on the establishment of the consortium would be passed in the near future. TOROSHEVSKY informed conference participants that the adoption of the resolution was delayed in connection with reforming the oil and gas branch and the setting up of the national company Neftegaz of Ukraine. It has not been decided yet whether the Verkhovna Rada (the Supreme Soviet) will agree on Ukrainian pipelines to be a part of the international consortium.

Chernobyl Funds Embezzled

· Ukraine's Finance Ministry inspectors have said some ten million gryvnas ($5 million) from the Chernobyl Fund were embezzled, misappropriated or misused. The government press service on Tuesday said that the Ministry's auditing department had exposed 2,600 violations when checking 5,000 companies and executive organizations. An analysis of

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gees from the Gali district of Abkhazia. A press release from the President's office notes that 100,000 lari (about $75,000) under the President's order will be earmarked from the Presidential fund for the restoration of the water system in the Borzhomi district, where refugees' children from the Gali district of Abkhazia have rest in mountainous resorts. From May 19 to May 26 a total of 40,000 residents of the Gali district, "in an attempt to save their lives from attacks by Abkhazian armed formations," were forced to leave their homes and move to neighboring districts in western Georgia. Later, after signing a cease-fire the Abkhaz withdrew from the occupied territory burning stores and homes.

Uzbek Airlines Begins Regular Service To Rus.

· The national Uzbek air company Uzbekistan Khavo Yullari launched regular air service from Tashkent to Moscow on Wednesday. One of the best aircraft of the company, airliner A-310, will fly to the Russian capital once a week. At present, there is an air bridge between Moscow and Tashkent, along which the Uzbek national carrier makes daily flights. The peculiarity of the new route is that the new airline will not only link the capitals of the two states but also offer passengers from Moscow destinations to the ancient Central Asian cities: Bukhara, Khiva and Samarkand.

Five-States Summit To Meet Without Yeltsin

· On Friday July 3rd, five Central Asian nations are meeting in Almaty to formalize a border agreement and discuss a broad range of regional security and economic cooperation. Russia, China, Kazakhstan, Kyrgyzstan, and Tajikistan will discuss international problems such as the situation in Afghanistan and in South Asia in view of the nuclear tests conducted by India and Pakistan. The Kazakhstan Ambassador to the People's Republic of China Kuanysh SULTANOV clarified that the meeting, "by no means signifies any unification into some bloc and is not fraught with any threat to the interests of other countries." The summit is expected to give an impetus to further mutual understanding and trust between China and the four

neighboring countries. The upcoming Almaty summit is the third of its kind by the five nations. Russian Foreign Ministry spokesman Vladimir RAKHMANIN said, "participants in the Almaty meeting will consider the course of the implementation of the Shanghai and Moscow agreements, discuss the ways of strengthening of interaction on problems of ensuring peace and stability in Central Asia." He stressed that the meeting is, "expected to become an important stage in the development of interaction and cooperation among Russia, China, Kazakhstan, Kyrgyzstan, and Tajikistan in the interests of prosperity and stability in the Central Asian region." Russian President Boris YELTSIN is the only President of the Group of Five who will not attend the meeting due to the financial crisis in his country. In his stead, YELTSIN has sent Foreign Minister Yevegeny PRIMAKOV. YELTSIN was scheduled to meet with Kazakhstan President Nursultan NAZARBAYEV on July 1st, attend a meeting of the Commonwealth of Independent States' Customs Union in Almaty on July 2nd, and join the China, Kazakhstan, Kyrgyzstan and Tajikistan to discuss the demarcation of the former Sino-Soviet border on July 3rd.

Kazakhstan and China are expected to sign a bilateral border agreement outside of the Group of Five and discuss major energy deals signed last year, in which China committed a $9.5 billion investment in Kazakh oil production and transportation. This will be the first foreign trip of Chinese President JIANG Zemin's since his re-election in March. China and Kazakhstan have a common border of more than 1,700 kilometers. A Chinese Foreign Ministry spokesman TANG Guoqiang said that the two sides reached a consensus on border alignments for two remaining regions which will supplement the original border agreement signed in 1994.

The Daily Report on Russia and FSU will not be published on Friday July 3rd and Monday July 6th in observance of Independence Day.

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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