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

Monday, July 20, 1998

Russian Federation

Politics

Yeltsin Implements Tax Measures By Decree

· During the three-day special parliament session last week, the Russian State Duma approved enough measures not to be blamed for ruining Russia's chance for an International Monetary Fund release, but did not approve enough measures to satisfy Russian President Boris YELTSIN or Prime Minister Sergey KIRIYENKO. Measures passed by the Duma have been estimated to provide only one quarter of the government's target aimed to please the IMF. KIRIYENKO expressed concern that the measures passed by the Duma benefit regional budgets and raise only $480 million in additional funds for the Kremlin. Sunday by decree, YELTSIN signed measures that will raise taxes on land four times, allow producers of precious metals to export their product directly, and regulate the sales and production of alcohol. He vetoed two tax-cutting laws passed by the Duma involving profits and excise taxes that would have reduced revenues by the billions. Together with the Duma savings, the measures will make-up about $7.7 billion of the $12.6 billion in revenues lost because of the delay in passing the anti-crisis package. KIRIYENKO on Saturday signed a decree increasing import duties by three percent, as part of the governmental stabilization program agreed upon by the International Monetary Fund (IMF). He said the higher import duties would improve the balance of payments and provide more protection for domestic producers. First Deputy Economics Minister Ivan MATYOROV said the measure is estimated to bring in over one billion rubles in revenues to the federal budget. The governmental decree introduces a three percent duty on customs clearance of all imports, specifically foods. Prime Minister Boris NEMTSOV supports "reasonable protectionism for domestically produced goods. He said

it is important for the government to, "create equal conditions for competition, including reasonable protectionism, and simply provide normal working conditions for enterprises."

The IMF board and Russian debt negotiator Anatoly CHUBAIS meets today to approve the release of $5.6 billion. The IMF has not made public the conditions it has set for approval of the loan. Before leaving for Washington, CHUBAIS said commented that, "We have bought time, which can be wasted together with the money we have borrowed, or we can use it to carry out the work we need to do." He is also scheduled to meet with US Treasury Secretary Robert RUBIN and his deputy for international affairs, Lawrence SUMMERS.

Iran-Russia Clarify Stance On Caspian

· On Sunday, Iranian Foreign Minister Kamal KHARRAZI and Deputy Foreign Minister Morteza SARMADI and his Russian counterpart Boris PASTUKHOV issued two joint statements clarifying their stance on the Caspian Sea. Both littoral nations have called for a quick resolution to the legal regime of the Caspian Sea. They agreed that the legal regime must be determined by consensus of all littoral states, which also include Kazakhstan, Turkmenistan and Azerbaijan. They said the 1921 and 1940 agreements signed by Tehran and Moscow on joint ownership of the Caspian waters and resources will remain valid until the new regime is worked out. The statement said Iran and Russia support equal

Today's News Highlights

Russia

GKO Results To Be Reported

Gazprom-Gov't Write-Off Debts?

European Republics

Vote On Citizenship Amend.?

Ukraine To Sell Kherson Stake

South Caucasus & Central Asia

Turkey-Azeri Sign Social Agmt.

Voters Needed In Azeribaijan

Central Asian Agreement Fails

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July 20, 1998

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partition of the seabed among the bordering states, but did not reach a consensus on how the sea resources should be utilized by the countries. The two countries underlined the need to protect the Caspian environment and strongly opposed the transfer of oil and gas through sub-sea pipelines. Russia and Kazakhstan signed an agreement July 6th on dividing the northern part of the Caspian Sea into national zones, which aroused Iran's concern about the future of the world's large inland water. The Caspian Sea has an estimated reserve of 16 billion barrels of oil and 8.3 trillion cubic meters of gas, but reportedly far from the shore of Iran.

Miners Lift Trans-Siberian Blockade

· Striking coal miners in Siberia lifted their blockade of the Trans-Siberian railroad on Sunday after Deputy Prime Minister Oleg SYSUYEV agreed to meet with the miners and negotiate their demands. The miners' blockade resumed on July 3rd to protest non-payment of wages, which the government had promised to pay in May to end a similar strike. SYSUYEV said that the government would pay its debts to the miners by next Wednesday and the living conditions of the pensioners and public sector workers in the Kemerovo region would be improved. He also said that the government will set up a commission in August to examine economic and social conditions in the Kemerovo coal-mining region. The blockade caused regional damages of more than 125 million rubles ($20 million). The Kuzbass section of the Western-Siberian railway has suffered losses of more than 26 million rubles (about $4 million), and the Tomsk region's economy, over 100 million rubles ($1.6 million). SYSUYEV held talks Sunday with leaders of strike committees and trade unions, representatives of the local authorities and enterprises. He also met with senior law-enforcement officials to discuss the situation. The region's prosecutor Valentina SEMUCHENKOVA said that over 180 criminal cases involving managers of mines, intermediary firms, and local administration officials had been launched.

Economy

Ruble = 6.205/$1.00 (NY rate)

Ruble = 6.220/$1.00 (CB rate)

Ruble = 6.180|6.260/$1.00 (buy|sell rates)

New Figures Released By State Statistic Com.

· The Russian State Statistic Committee on Friday

citing official data announced that Russia's gross domestic product dropped by 0.5 percent in the first half of 1998 from the same period last year and was 1,181.5 billion rubles. But the industrial output in the first six months of 1998 increased by 0.1 percent against the same period last year to 767 billion rubles. Russia's unemployment declined slightly, while wage arrears continued to rise. The number of jobless Russians decreased by 0.1 percent to 8,332,000, or 11.5 percent of the economically active population, the State Statistics Committee reported. The committee estimates Russia's able-bodied population at 71.4 million, or about 48 percent of the total population. The number of registered jobless decreased by 0.2 percent to 1,792,000 from the end of May to make up 2.5 percent of the economically active population. During the year since June 1997, total unemployment dropped by 4.4 percent, including registered unemployment by 22.6 percent. Meanwhile, the aggregate wage debt rose by 4.6 percent to 69.97 billion rubles ($11.66 billion) from June 1 to July 1, the committee said referring to data obtained from enterprises. Not all companies have reported information about payrolls to the agency.

GKO Results To Be Revealed

· Russia's Central Bank and Goldman, Sachs & Co. today are to announce the results of a week-long swap of Treasury Bills (GKO), aimed to retire short-term debt to prevent another cash-crunch. The plan allowed investors to exchange a minimum of $2 billion in ruble-denominated Treasurys for dollar-denominated Eurobonds with maturities of seven to 20 years. The total value of the swap is expected to be between $4 billion and $8 billion. Deputy Prime Minister Boris NEMTSOV confirmed that one of the top priorities tasks facing the government on the stock market is to replace short-term expensive securities with long-term low-yield, but safe ones. Speaking at the founding conference of the city branch of the Buy Russian Association in St. Petersburg on Saturday, NEMTSOV said that, "by the time KIRIYENKO's government began operation, its obligations on the GKO market slightly exceeded 400 billion re-denominated rubles." He said the government, "has restructured foreign credits and we have to pay our debts within 25 years under the agreements with the Paris and London clubs." Unlike foreign loans, "internal obligations, that is GKOs,

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which consisted most of short-term securities with very high yields ranging from 17 to 110 percent, were not restructured," he said. NEMTSOV remains optimistic because, "the yield of some issues was 17 percent on Thursday...and yields dropped by more than two times in less than 24 hours."

Business

Gazprom-Government To Write-off Debt

· Russia's Minister of Fuel and Energy Sergei GENERALOV, speaking at a meeting of the Chernozemye (Black Earth Zone) Association in Oryol on Saturday, said that the Russian government has prepared a draft agreement with the gas giant Gazprom to write off each other's debts. GENERALOV noted that other sources of financing the program of gas supplies in the Central Russia and the Black Earth Zone include borrowing from Russian commercial banks and the World Bank. Prime Minister Sergei KIRIYENKO confirmed that part of the debts owed to Gazprom will be used to supply gas to Russian regions. He said the federal government can pass its right to collect debts from enterprises for the gas they have consumed to regions. The sums they recover can be used for supplying gas to their residents. Concerning the recently strained relations between the government and Gazprom, KIRIYENKO said the Cabinet, "has attacked and will attack" the concern for its failure to pay taxes to the budget. He added the government, "intends to fight unreasonable gas cutoffs" to regions. However, the government cannot force Gazprom to sell gas at below cost price. GENERALOV said that the price for gas inside Russia is 2.3 to 2.4 times less than world markets prices. As for gas supplies to Ukraine, Moldova and other former Soviet republics, the price is somewhat lower than the world one, although higher than in Russia.

Russia To Buy More Iraqi Oil

· Russian oil company, Tyumen Oil on Thursday signed a contract to purchase 3.6 million barrels of oil from Iraq under the UN oil-for-food program. The program, an exception to UN sanctions against Iraq, allows Iraq to sell $5.25 billion worth of oil every six months to buy food and humanitarian supplies. The oil is scheduled to be shipped to Russia by late November. The value of the contract was not made public. However, it is known that Iraq sells its oil for

around $12 per barrel, making the contract worth approximately $43 million. Earlier this year, Russia signed contracts to buy 94 million barrels of oil from Iraq under the same deal. Russia, eager to maintain close ties with Iraq, is the leading buyer of Iraqi oil under the oil-for-food program.

European Republics

Referendum On Citizenship Amendment?

· Latvian Prime Minister Guntars KRASTS on Friday proposed a referendum to settle the dispute arising from Latvia's revised nationality law. He believes that a referendum is the "best way" to resolve such dispute. The Latvian parliament last month adopted the amended nationality law, which stipulates that children, born after the 1991 independence, can be given Latvian citizenship. The revised law would help improve the status of the Russian minority in Latvia. However, the revised law brought heavy opposition from the Union for Fatherland and Freedom and other parties, and has not yet been enacted. As a member of the Fatherland and Freedom party, KRASTS said, "We oppose that citizenship has been granted automatically and hope that the referendum will approve our position." The Latvian Prime Minister assured the audience that non-residents enjoy the same rights that the republic's citizens, adding that Russians do not want to acquire Latvia's citizenship. KRASTS said Russia was dissatisfied with the law adopted by the parliament, stressing that this issue is only Moscow's pretext to implement its geopolitical and economic ideas. He accused Russia once again of imposing sanctions against Latvia, but recognized that they have not been officially announced. The Organization for Security and Cooperation in Europe (OSCE) has made Latvia's nationality law as the major condition for the accession to the European Union (EU). KRASTS thanked the Northern European countries for their support, and said he hoped the EU would open its market for Latvia's farm produce.

Ukraine To Sell Stake In Kherson Refinery

· Today, Ukraine's State Property Fund said it would try for a third time to sell a 56 percent stake in the Kherson Oil Refinery in two auctions by November 1, 1998. Two previous stakes in February and April of this year to sell stakes in Khersonnnaftopererebotka failed. The Fund has

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specified that it will sell 30 percent and 26.01 percent in non-commercial tenders, which will involve investment conditions. Five percent of the refinery will be sold on the stock exchange, and 10 percent will be transferred to the state investment fund Gosinvest Ukraina. Employees are entitled to 23.92 percent of shares. The refinery processed 1.46 million tons of crude in 1996, compared to 2.29 million tons in 1995.

South Caucasus & Central Asia

Turkey-Azeri Sign Social Security Agreement

· On Friday in Ankara, Turkey and Azerbaijan signed an agreement to enhance cooperation on social security affairs. It was signed by Turkish Minister of Labor and Social Security Nami CAGAN and his Azerbaijani counterpart Ali NAGIYEV. Under the agreement, a Turkish or Azerbaijan citizen can be treated at health services in the other country if he pays premiums in his own country. CAGAN said at the signing ceremony that the deal would help improve conditions of Turkish or Azerbaijan employees working in the other state and protect their social security rights.

Nat. Indep. Leader Calls For Voter Participation

· The leader of the National Independence Party of Azerbaijan Etibar MAMEDOV appealed to President Geidar ALIYEV and the leaders of Azeri opposition to, "stop mutually ignoring each other," and "accusing one another of being an enemy of the Azeri people," according to a RFE\RL Newsline press release. MAMEDOV, a presidential candidate, called for sustained effort to restore the faith of the people of Azerbaijan in the rule of law and in peaceful, democratic change within the framework of the law. He said he was encourage by the recent passage of amendments to the elections laws. These he believes will help ensure free and fair elections. MAMEDOV noted that Azerbaijan needs, "to go through several free and fair elections," in order for democracy to become firmly rooted in the country. One of his party's goals is to increase voter awareness and participation. Many opposition parties

have declared that they will boycott elections unless the government meets their demands to have the Central Election Commission (CEC) equal represented in the parliament. According to the Azeri law, the composition of the Commission is half nominated by the parliament and half by the President. The President has appointed seven lawyers to the CEC, leaving the remaining five seats vacant until parties provide their nominees. ALIYEV has met several other of their demands. It is speculated that they will soon overturn their decision and will participate in presidential elections on October 11th.

Central Asian Union Fails To Sign Security Pact

· Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan on Friday failed to adopt a joint declaration on regional security and will be postponed until their next summit in October. The declaration was to focus on measures to consolidate regional security in view of the instability in Afghanistan and its negative impact on the four states. Kazakh President Nursultan NAZARBAYEV explained that the document failed to be adopted because Uzbek President Islam KARIMOV could not attend due to health problems related to high blood pressure. He noted that, "Uzbek Prime Minister [Utkir SULTANOV] was authorized to sign the documents of the summit...but the signature of the head of state is preferable." Tajik President Emomali RAKHMONOV stressed the importance of such an agreement by stating, "Over 100 kg [220 lbs] of drugs, including more than 50 kg [110 lbs] of pure heroin are transported daily across the border. This problem is not only regional, but global as well." Kyrgyz President Askar AKAYEV said that the four states decided to rename the Central Asian Union as the Central Asian Economic Community. "We think that over the last four years we have created favorable conditions for our economic cooperation, according to the European model," AKAYEV noted. Russia has already received the status of observer to the union. AKAYEV said that Georgia has sent an official request to be an observer, which Ukraine and Azerbaijan are also considering.

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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