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

Tuesday, July 21, 1998

about $8.3 billion to support the government's economic program for 1998, and about $2.9 billion under the Compensatory and Contingency Financing Facility (CCFF) to compensate for a shortfall in export earnings. Of the augmented amount, an equivalent of about $5.3 billion is to be made available under the Supplemental Reserve Facility (SRF). KIRIYENKO called the loan approval an "absolute victory." The Russian government decided to publish the stabilization program in the near future. This will be a new step by Moscow towards "transparency" of economic policy, which is requested by foreign partners. CHUBAIS noted that this will also confirm that these partners have not attached conditions which are not connected with the economy. He said, "There were no demands to dismember the Gazprom company or to dismember Russia, as some Russian newspapers wrote." During his visit to Washington, CHUBAIS met World Bank President James WOLFENSON, FISCHER and members of the IMF board of directors, and later US Secretary of State Madeleine ALBRIGHT, Treasury Secretary Robert RUBIN and his first deputy Lawrence SUMMERS. The US supports the IMF board's decision and expects full implementation of these reforms and additional moves which will put Russian finances on a firm foundation.

Russian-Turkey Parliamentary Relations

· Russian State Duma Speaker Gennady SELEZNYOV said that the Duma plans to consider the ratification of the agreement with Turkey on the avoidance of double taxation at the beginning of

Russian Federation

Politics

IMF Approves $11.2B Loan, Releases Funds

· On Monday, the International Monetary Fund (IMF) approved an $11.2 billion loan for Russia, but the Fund reduced the initial installment by $800 million to $4.8 billion of the additional aid package. The $800 million will be released in September with the second installment, if the Russian State Duma fully complies with IMF conditions which include changes to personal income tax laws, pension laws, and improvements in tax collection. IMF Deputy Managing Director Stanley FISCHER expressed his disappointment in the Duma's failure to approve key elements of the government's economic plan. He stated that the Fund believes the reduction would not harm the market but would still send a warning signal to the Duma. Russia's aid negotiator Anatoly CHUBAIS described the last minute talks as "very difficult," because of the Duma's refusal to back all of the government's reforms. Over the weekend, Russian President Boris YELTSIN and Prime Minister Sergey KIRIYENKO scrambled to pass key legislation by executive decree to meet IMF requirements. On Monday, the government introduced new value-added taxes to become effective August 1st. Duma Speaker Gennady SELEZNYOV said the parliament will hold another extraordinary meeting to consider new government-proposed bills, most likely to be held sometime between August 15 to 20. He said that, "There will be no lack of cooperation on our side as soon as the adopted bills will help people to live decently and will enable our enterprises to operate properly, not tightening the noose."

The IMF money is intended to boost Russia's foreign currency reserves, avoiding a devaluation of the ruble. The financing consists of an augmentation of Russia's extended arrangement by the equivalent of

Today's News Highlights

Russia

GKO Swaps Reach $6.4 Billion

Who Is To Be Buried Next?

European Republics

Latvia Seeks EU Membership

South Caucasus & Central Asia

Azeri Calls For Western Support

Kazakh-US Military Ties

Kyrgyz To Join WTO

UN Conference In Almaty

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Tuesday

July 21, 1998

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its autumn session. SELEZNYOV, who is in Ankara on an official visit, said that the adoption of a series of laws, including the law on foreign investments, the general part of the Tax Code and Budget Code, will create a, "new favorable climate" for foreigners in Russia. SELEZNYOV's talks with Turkish parliament speaker Hikmet CETIN focused on cooperation in fields such as economy, trade, investment, finances, culture and science. He said, "We should cooperate more actively for the benefit of the region. For this we should exchange visits more often both at the highest and other levels." SELEZNYOV will also meet with President Suleyman DEMIREL and Deputy Prime Minister Bueltent ECEVIT. Sources in Ankara do not rule out that SELEZNYOV and the Turkish leaders will discuss the export of S-300 anticraft system to Cyprus and the issue of navigation in the strait area of the Black Sea. Russia is critical of new regulations for navigation in Bosphorus and Dardabnelles introduced by Ankara in 1994. Russia sees the new regulations as contradicting the free navigation convention. Turkey argues that the new rules had decreased the rate of incidents in one of the most intensive shipping lanes in the world.

Economy

Ruble = 6.181/$1.00 (NY rate)

Ruble = 6.221/$1.00 (CB rate)

Ruble = 6.179|6.263/$1.00 (buy|sell rates)

GKO Swaps Total $6.4 Billion

· According to a Russian Finance Ministry press release, in the country's largest foreign debt issue investors exchanged ruble-denominated treasury bills (GKOs) for $5.9 billion in eurobonds, while the remaining $500 million were sold for cash. The aggregate nominal sum of all bonds, issued by Russia, totaled $6.4 billion. Russia is paying an annual yields 9.4 percentage points higher than comparable US Treasurys, or 14.88 percent on the seven year bonds and 15.12 percent on the 20 year bonds, The Wall Street Journal reported. An analyst at United Financial Group in Moscow Alexei ZABOTKIN said that most demand had come from international investors looking to lock in a high interest rate in hard currency. The dollar-denominated bonds, which mature in 2003 and 2018, shift a large part of Russia's high yielding debt further into the future. By retiring high-yielding treasury bills maturing in the next few months, the Russian govern

ment cut its debt servicing costs for 1998 by about $4.5 billion, bring this year's budget deficit closer into line with the International Monetary Fund's strict requirements. Goldman, Sachs & Co., the underwriter for the swap, stated that the exchanges were, "definitely in the upper range of what was expected."

Business

Government Increases Privatization Program

· On Monday, the Russian government announced more privatization plans in a move to raise cash. Later this year, the government plans to sell off government stakes of partially privatized companies, including LUKoil, Russia's electric utility the United Energy System, and telecommunications holding company Svyazinvest. Two other wholly state owned companies Rosneft and Slavneft are also to be sold. The government had postponed major sales because of the fall in Russia's equity market. The Russian State Duma has long opposed major sell offs of about 3,000 stakes, on the grounds of strategic importance. Deputy Prime Minister Viktor KHRISTENKO said the number should be cut down to 1,000. According to KHRISTENKO, the goal of privatization is to raise the productivity, profitability and competitiveness of the Russian enterprises and to create new jobs. He said priority will be given to projects which can bring about maximum replenishment of the budget, increase the number of privatized facilities and improve the quality of privatization deals. KHRISTENKO said Russia will carry out privatization plans within the framework of open and professional projects.

Tuesday Tid-Bits

The Tsar Has Been Buried, Who's Next?

· On Friday, Russia buried Tsar Nicholas II, his family and some loyal servants in the Peter Paul Cathedral in St. Petersburg, closing a chapter in Russia's imperial history. The burial has prompted questions about what should be done with the corpses of Soviet leaders. Founder of the Soviet State, Vladimir LENIN's embalmed corpse on display in Red Square remains a popular tourist attractions, though less than in Soviet times. Russian President Boris YELTSIN and some top Orthodox Church official say that they favor burying LENIN next to his mother, as he had requested. But Communist lawmaker Vassily SHANDYBIN believes that LENIN's

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body should remain in the mausoleum forever because he was, "a great man and the leader of the world's first socialist state." Outrageous ultranationalist Vladimir ZHIRINOVSKY has suggested a mass grave be built in St. Petersburg for all of the country's leaders since the Tsar. He said the remains of LENIN, Josef STALIN, Nikita KRUSHCHEV, Leonid BREZHNEV, Yuri ANDORPOV and Konstanini CHERNENKO, "must be put into this grave and space should be reserved for subsequent leaders."

Russian Crook Imitates Tax Chief's Voice

· The security service of the Belgorod tax police arrested a 25-year-old swindler, who imitated the voice of Natalya MIKHAILOVNA a senior official in the city tax inspection service to gain employment. He would call a big company, imitate MIKHAILOVNA and request, recommend, and sometimes demand that managers give her beloved nephew, cousin or a close relative a job. The crook even threatened that the tax service would look unfavorably on the company, if they refused. This is how the swindler fooled over a dozen of big company managers or owners of private firms. The crook apparently worked with MIKHAILOVNA as a book-keeper years ago and was able to reproduce her voice accurately.

divisions. He added that admission to the EU will depend on Latvia itself. "They [Latvian lawmakers and the President] both know that much more needs to be done. The date of accession is in their hands," he said. VAN DEN BROEK noted that, "the quicker they implement the necessary rules and reforms, the quicker they will join [the union]." He pointed out that he had clearly told the Russian leadership that the Union did not back Moscow's efforts to mix political and economic issues, and that this organization was against unfounded pressure on countries-candidates to the EU.

South Caucasus & Central Asia

Azeri President Calls For Caucasian Support

· Azeri President Geidar ALIYEV on Monday in Great Britain said, "The West has to expand its presence in the Caucasus, particularly in the South Caucasus countries [including Azerbaijan]—both its economic presence and its presence in supporting the development of democratic processes in these countries." He also condemned the visit of Russian Defense Minister Igor SERGEYEV to Armenia and its strengthening of military ties, which he called a blow to regional stability. An Azeri Foreign Ministry press release stated that, "In particular plans to strengthen military cooperation between Russia and Armenia, in our opinion, will not further the restoration of peace in the Caucasus or help resolve the Armenian-Azeri conflict," over the region of Nagorno-Karabakh. SERGEYEV and Armenian Defense Minister Vazgen SARKISYAN sign a number of Russia-Armenia military cooperation accords and implementation of an air defense agreement between Commonwealth of Independent States (CIS). Azerbaijan has accused Russia of sending Armenia $1 billion worth of military hardware from 1994 to 1996. Russia, along with the US and France, is acting as a mediator to try and resolve the conflict. However, Russia's contradictory actions are becoming more apparent and may be a violation of the Conventional Forces in Europe (CFE) Agreement.

On Monday, Russian President Boris YELTSIN signed a law ratifying the agreement between Moscow and Yerevan which regulates the use of arms by Russian troops outside the Russian military base in Armenia. The law allows Russian troops to use guns in case of unexpected attacks. The agreement was

European Republics

Latvia's Chances of EU Membership Grows

· During a visit to Riga on Monday, member of the European Commission in charge of foreign policy Hans VAN DEN BROEK noted the progress achieved by Latvia in many fields. He called Russia's pressure on this Baltic republic unproductive. VAN DEN BROEK and Latvian top diplomat Valdis BIRKAVS discussed Latvian reforms, progress, the enlargement of the European Union (EU), and an outlook for Latvia's joining this organization. The European Commission is preparing a new analytical review on Latvia. Latvian President Guntis ULMANIS informed VAN DEN BROEK in detail the amendments to the citizenship law, widening the range of citizens of the country. On his part, the representative of the EU noted that the Union only wanted Latvia to fulfill recommendations of the Organization for Security and Cooperation in Europe (OSCE) concerning the law on citizenship. VAN DEN BROEK considers these amendments to be one of the most essential achievements of Latvia as they reduce societal

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passed by the Russian State Duma on June 19, 1998 and approved by the Federation Council on July 9, 1998. Russia's move has escalated the tension in an already fragile region. Azerbaijan forced Russian troops to leave its sovereign land in 1993 and ties between Azerbaijan and Russia have been strained since the break-up of the Soviet Union. Comment: ALIYEV's call for support echoes many regional leaders, including Georgian President Eduard SHEVARDNADZE, who realize that Russia is still trying to control its Commonwealth partners. Until Russia accepts and respects the sovereignty of the former Soviet republics, these nations will continue to look to the west for security guarantees, economic support and advice on national democratic institutions.

Kazakh-US Military Cooperation

· US Defense Secretary William COHEN and Kazakhstan Defense Minister Mukhtar ALTYNBAYEV have agreed to strengthen a joint program aimed at reducing the number of weapons of mass destruction in the former Soviet republic. They made the announcement following a wide-ranging discussion Monday at the Pentagon. Kazakhstan is working with the US to dismantle its weapons of mass destruction. It is also tearing down its infrastructure for those weapons by destroying missile silos and filling in missile transportation tunnels. Kazakhstan agreed to help form a special Central Asian peacekeeping battalion that will be composed of troops from Kazakhstan, Uzbekistan and Kyrgyzstan. Defense Department officials said the battalion is a key element in maintaining stability in Central Asia. COHEN agreed to allow Kazakh troops and officers to train at US military schools. COHEN stressed that US military cooperation with Kazakhstan is important for peace and stability. ALTYNBAYEV will review several US military bases during his visit. COHEN plans to visit Kazakhstan in the future.

Kyrgyz First FSU To Join WTO?

· The Central Asian nation of Kyrgyzstan on Friday finished on a positive note its 30-month bid to join the World Trade Organization (WTO). Chairman of the

Kyrgyz-WTO entry talks Jean Marie METZGER confirmed that the working committee had completed all the accession accords. The former Soviet republic is expected to be approved as the 133rd member in the autumn, beating out Russia and Kazakhstan. Kyrgyzstan's entry negotiations were accelerated by the nation's willingness to bring its economic and trade regime in line with WTO norms and passing necessary legislative instruments, The Journal of Commerce reported. It is speculated that Kyrgyzstan will have tariff levels of 20 percent on certain energy and chemical products and will reduce these to a level of 10 percent by 1999. Kyrgyzstan agreed to open its telecommunications sector to foreign competition by January 1, 2003 and lift the 49 percent foreign equity limit on insurance companies by January 1, 2002. The nation has no foreign equity limits on banking and other financial services. Of the former Soviet republics, next in line for WTO membership consideration is Armenia, followed by Azerbaijan, Belarus, Estonia, Georgia, Kazakhstan, Latvia, Lithuania, Moldova, Russia, Ukraine and Uzbekistan.

UN-Central Asian Conference In Almaty

· A three-day international conference on prospects for the economic and social development of Central Asia republics began in Almaty on Monday. Organized and financed by the United Nations Organization, the conference is being attended by the envoys of the presidents, parliaments, and governments of the states in the region, by scientists and specialists from many countries. Much attention is being devoted to matters concerning closer cooperation between international organizations and various national research institutes which tackle socio-economic development matters. Acting Representative of the UN Development Program in Kazakhstan Knut OSTBY said, "The main practical purpose of the conference is to promote a rise the incomes and employment of the population in Central Asia countries and to protect the socially vulnerable sections of the population and advance the development of manpower potential."

Paul M. Joyal, President, Editor in Chief Clifton F. von Kann, Publisher Jennifer M. Rhodes, Principal Editor

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