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Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Wednesday, July 22, 1998

Russian Federation


IMF's Gazprom Requirement To Be Fulfilled?

· As part of the International Monetary Fund's (IMF) additional aid package, the Fund required Russian natural gas monopoly Gazprom to pay its tax debt to the Russian government in cash. On Tuesday, Prime Minister Sergei KIRIYENKO announced plans to allow Gazprom to lower its monthly tax bill from 4 billion rubles ($644 million) to 2.5 billion rubles, while some 660 million rubles in mutual debts between the company and state-owned consumers will be canceled, The Journal of Commerce reported. It is unclear why the government agreed to a tax cut worth approximately $241 million a month in exchange for a write-off of only $106 million. As one expert indicated it was more important for the Russian government to forgive the old debt in order to clear the way for obtaining going forward monthly payments. However, the decrease in this amount is still perplexing. Gazprom's tax liabilities account for one-fourth of the funds owed to the federal budget. By deciding to write-off tax debts, Russia appears to be ignoring economist calls it to start dealing in cash payments instead of barters and off-sets. RFE\RL Newsline today reported that KIRIYENKO denied that part of Gazprom's debt to the federal budget will be canceled against the state's debts to the company. He reportedly said Gazprom will pay its tax debts in cash, and budget-funded organizations will settle their debts to Gazprom in cash. KIRIYENKO did suggest that there may be, "adjustment of debt and synchronized procedure of their restructuring." Comment: These contradictory remarks appear to validate the IMF's hesitant move to reduce the initial installment of $5.6 billion to $4.8 billion until the Russian State Duma full complies with International Monetary Fund requirements.

Sino-Russian Summit Preparations

· Russian Foreign Minister Yevgeny PRIMAKOV in Beijing today met with Chinese Premier ZHU Rongji to discuss a range of international issues concerning Kosovo, the Middle East, the Korean Peninsula, nuclear build up in India and Pakistan, and to prepare for the upcoming Sino-Russian summit between Russian President Boris YELTSIN and Chinese President JIANG Zemin scheduled for September 4th in Moscow. Other subjects to be discussed will be security in the North Eastern Asia and creation of a Central Asian zone free of nuclear weapons. ZHU reiterated that China's fixed policy is to develop good-neighborly friendship with Russia based on long-term stability and mutually beneficial cooperation. He noted that his talks with Russian counterpart Sergei KIRIYENKO were highly effective. ZHU and PRIMAKOV briefed each other on their country's economic situation. PRIMAKOV expressed admiration for China's strong economic strength in face of the crisis. Deputy Foreign Minister ZHANG Deguang attended the meeting along with Russian Deputy Foreign Minister Grigori KARASIN.

Russia Inquires About 1999-2001 IMF Credit

· Deputy Chief of Staff of the Russian government Sergei VASILYEV said that Russia has sent a letter of inquiry to the International Monetary Fund (IMF) about the possibility of opening a credit facilities program for 1999-200. He stated that the aggregate amount of borrowings may be more than $8 billion. The Russian government had informed the IMF of its inten

Today's News Highlights


Inflation To Be Six Percent

Contract Killers Arrested

Oil Cos. Accuse Gov't of Abuses

Cleanser Wars Hit Russia

European Republics

Estonia Offers Sea Ports To CIS

Ukraine's 1999 Target Figures

South Caucasus & Central Asia

Azeri Pres. Signs Oil Deals

Uzbek Bank Talks Loans




July 22, 1998

Intercon's Daily

tion to conclude a new extended credit facility program for 1999-2001 on July 13th. At that point, Head of the IMF's Second European Department John ODLING-SMEE welcomed Russia's intentions, pointing out that aid within the framework of extended credit facilities might run at $2.6 billion annually.

Manevich's Contract Killers Arrested

· Four men arrested in Uzbekistan and Kyrgyzstan have confessed to taking part in the contract killing of Mikhail MANEVICH, Russia's Deputy Governor of the Leningrad region and privatization chief for St. Petersburg. Russia's prosecutor general Vyacheslav ISAYENKO said that the suspects are believed to be connected to a gang that specializes in contract killings. He said that 10 gang members are already in custody. Head of the Interior Ministry's crime-fighting division Vladislav SELIVANOV said the four suspects have been charged with a series of contract killings in numerous Russian cities from 1993-1997. MANEVICH was shot to death by unidentified assailants on August 18, 1997. His death was thought to be connected with his privatization activities. He was one of the most prominent of dozens of businessmen and government officials killed in apparent contract murders last year.

Chechen Security Chiefs Fired

· On Sunday, Chechen President Aslan MASKHADOV signed a decree dismissing all senior law-enforcement officers who were involved in clashes with Islamic extremists last week in Gudermes, Chechnya's second biggest town. The decree described the clashes as military actions, "not authorized by the Chechen government and resulting in casualties, including among civilians." Criminal proceedings have been initiated to look into the July 14 and 15th murderous clashes between MASKHADOV's security forces and rebels in Gudermes. Six people died and 15 were injured in a shoot-out which involved as many as 1,000 fighters. The decree promises that the rank-and-file participants in the Gudermes clashes would not be prosecuted unless they committed grave crimes. The clash coincided with a jailbreak in the Chechen capital Grozny, in which prison guards freed 35 dangerous criminals and fled themselves. Saturday, MASKHADOV, extended the curfew for 10 days.


Russia's Predicts Six Percent Inflation

· The Economics Ministry's analytical report on the social and economic situation in Russia in the first

half of 1998 and the expected results of the year show that inflation in Russia by December 1998, could drop to 6 percent compared to the same month of 1997. The growth of consumer prices slowed down by more than 50 percent compared to the same period of 1997 and prices grew by about 4.1 percent. Industrial producers' prices in the first half of 1998 grew by 0.5 percent from 6.3 percent in the first six months of 1997. Economics Ministry experts believe this testifies to a decrease in the inflation potential in the economy.

New Custom Duty To Hit Consumers

· The new three percent import duty imposed by the Russian government will not apply to goods imported from other CIS countries. The government resolution on the import duty says that the new duty will apply to goods brought into the country from Belarus, if they were intended for free sale in Belarus without the payment of the duty or without the transfer of paid sums to the federal budget. The document was adopted in response to the Central Bank's proposal to take measures to maintain the balance of payment in Russia. The bank proposed the three percent import duty for all goods entering Russia to be levied in addition to the existing customs duties. The new duty will be in affect from August 15, 1998 to December 31, 1999. Leading economist and chairman of the Duma Committee on Ownership, Privatization and Economic Activity Pavel BUNICH said, "The resolution increasing import duties by 3 percent is another measure in the government's efforts to collect money at all costs. This has not been done to support domestic producers." He added that, "the increase will apply to everything that goes through customs. But since the quality of Russian products is inferior to that of imported goods, Russians will buy foreign-made goods anyway, but at higher prices." BUNICH believes that the three percent increase is bad because it will hit Russian consumers.

Ruble = 6.220/$1.00 (NY rate)

Ruble = 6.222/$1.00 (CB rate)

Ruble = 6.178|6.266/$1.00 (buy|sell rates)


Gazprom Denies Joining Oil Cos. Appeal

· Today, Russian natural gas giant Gazprom denied joining major oil companies in an appeal against economic policies approved by the International

When you need to know it as it happens




July 22, 1998

Intercon's Daily

Monetary Fund (IMF) as conditions for the $11.2 billion credit. According to a company spokesman, "This is shameless exploitation of Gazprom's name." Sidanko said it had not signed the document yet and Eastern Oil Company officials declined to comment. Surgutneftegaz said the text of the appeal distributed by LUKoil differed from its version. Many news services reported that oil and gas conglomerates Yukos, LUKoil, Gazprom, Sidanko, Sibneft, Surgutneftegaz, Tyumen, and Eastern Oil Company, accounting for 90 percent of Russia's oil output, accused the government of yielding to the pressure of international financial institutions and pursuing policies "fraught with serious social consequences." The appeal states that, "We are obliged to declare that the economic policies of international financial organizations towards the key sectors of industry is unreasonable and irresponsible. It deepens the crisis, aggravates the social situation and will lead to the bankruptcy of those few enterprises that are capable of working efficiently." They believe that the oil and gas sector will be hit with irreversible consequences in two to three months. This appeal follows Russian President Boris YELTSIN's veto of a proposed cut in oil excise duties.

Oil Tanker Ceremony In Nizhny Novgorod

· The former defense-industry base now converted into a shipyard on Tuesday held a ceremony marking the launching of an oil tanker at Krasnoye Sormovo Plant joint-stock company in Nizhny Novgorod, Itar-Tass reported. The sea-going ship, intended for shipping in the Baltic and designed by local specialists, will be built under an order placed by the SFAT Russian-US-British jointly-run company. The firm also placed an order for another four tankers and does not rule it out that a whole series of such vessels will be built at the Krasnoye Sormovo shipyards in the future. This order would help the shipyard to get out of the financial crisis. The conversion of this former defense enterprise, which used to build nuclear and diesel-powered submarines, has gained experienced from economic upheavals in recent years.

Cleanser Wars Hit Russia

· US-based Procter & Gamble and London's Unilever are waging an escalating cleanser war to win over Russian consumers in the enormous dirt and germ market. Analysts have discovered that Russians are well aware of the need to disinfect and

kill germs in the home, but for years have lacked extra income to purchase cleansers and laundry detergents. Director of Unilever's home and personal care products division Stephane BARRAL said, "Russia is a very, very big bleach market. They like white and they are very aware of germs. But money demand is lower. So the challenge for us was to launch something that was unique, effective and affordable," The Journal of Commerce reported. Unilever, with offices in Russia since 1992, according to company documents reports that sales volume has doubled every year, claiming that all-product sales in Russia reached $300 million. In 1993, Procter & Gamble took over a Moscow-region detergent producer and Unilever followed in 1994 taking over Severnoye Siyaniye, an old perfume factory in Russia. Conversion and modernization of these plants has been slow. Before 1997, the two companies attacked the Russian cleanser market with fully imported products. In world wide sales, Procter & Gamble and Unilever each have a 21 percent market share and Germany's Henkel about 5 percent.

European Republics

Estonia's To Use Sea Ports To Its Advantage

· The Estonian government on Tuesday agreed to offer its sea ports to six countries of the Commonwealth of Independent States which have no exit to the sea. The Estonian future partners are Kazakhstan, Kyrgyzstan, Turkmenistan, Uzbekistan, Azerbaijan, Georgia, Armenia and Belarus. Estonian Transport and Communications Minister Raivo VARE said that Estonia is interested in signing a transit agreements with these countries because their imports from western countries had been growing and these countries had interesting proposals for exports to the European market. Estonia is interested using its geographical position to its advantage for international transit. The Baltic nation is facing competition from its neighbors. For instance, Russia has a strong sea port complex in St.Petersburg and is building another sea port in Ust Lug. Latvia is also working to attract support for its ports. Cargoes will be transported to Estonian sea ports by highways and railways and cargoes from Armenia and Georgia will be brought by air. An agreement on railway transit with Belarus will enable Estonia to ease traffic on its main railway arteries connecting it with Russia.

When you need to know it as it happens




July 22, 1998

Intercon's Daily

Ukraine Announces Economic Targets for 1999

· The Ukrainian Cabinet Tuesday passed an economic plan establishing financial targets for 1999, which predicts a gross domestic product (GDP) growth of 2 percent. According to the economic plan, Ukraine's GDP should reach 112 billion gryvna next year, a 2 percent growth compared with this year's 101.1 billion gryvna. The plan sets industrial and agricultural output value increases for 1999 at 1.8 percent and 2.5 percent respectively. The Cabinet hopes to reduce the budget deficit to 1.5 percent of the GDP next year, while keeping the inflation rate below 8 percent. Efforts will be made to prevent the gryvna from devaluating further, keeping the scope of devaluation against the US dollar within this year's 18 percent limit. According to the Cabinet, at the end of 1999, the exchange rate between gryvna and the US dollar is forecast to be 2.42 to 1. Ukraine's unemployment rate is expected to rise from this year's planned 4.6 percent to 6.2 percent in 1999. In the first half of 1998, Ukraine's real GDP grew to reached 0.2 percent. The Cabinet's GDP target for the whole year is 0.5 percent. This week the International Monetary Fund (IMF) is reviewing Ukraine's economic reforms and privatization programs. Kiev is negotiating with the IMF for a $2 billion loan. The IMF earlier this year suspended a $542 million standby credit and set 92 conditions for Kiev, including slashing its budget deficit and pushing ahead with stalled privatization. The US supports Kiev's talks with the IMF for financial aid. However, the US side will most likely not for lobby Kiev's interests.

South Caucasus & Central Asia

Azeri President Signs Three Oil Contracts In UK

· Azeri President Geidar ALIYEV on Tuesday in the presence of Great Britain's Prime Minister Tony BLAIR signed three oil contracts with British oil companies British Petroleum (BP), Monument Oil & Gas, and Ramco Energy. The largest contract is a production sharing agreement between BP and Azerbaijan State Oil Company (Socar) for the Abikha oil field, around 170 kilometers from Baku. BP will

have a 30 percent stake to be split with Norway partner Statoil and Socar will hold 40 percent. The contract represents a total investment of $10 billion. Under the agreement, three wells will be drilled by 2001, with up to five additional exploration wells by 2004. This is the third major BP project in Azerbaijan, following the recent success in oil production exceeding 70,000 barrels a day from the Chirag/Azeri Project, and the start of drilling of Shah Deniz area.

Another contract provides for Monument Oil & Gas' participation with US Amoco Inam Petroleum and Russia's Central Fuel Company in the Azerbaijan-Russian-American project for the development of the Inam oil field. The Inam block has the potential for more than 1.4 billion barrels of recoverable oil. Socar will have a 50 percent equity interest, Amoco Inam Petroleum will hold 25 percent and Monument Oil & Gas and Central Fuel will each hold 12.5 percent.

The third contract with the Scottish company Ramco Energy will develop the Muradkhanly oil field with the prospected reserves of 100 million tons. The Ramco deal, worth $1 billion in long term investments, is the first production share agreement for an onshore field. Ramco was the first oil firm to establish a strategic oil position in Azerbaijan and brokered the initial Azerbaijan International Operating Company (AIOC) deal.

Uzbek Bank Talks Loans With Japan, Germany

· Uzbekistan's government agent on foreign markets, Uzbekistan National Bank for Foreign Economic Activity held talks Friday with Japan's Export-Import Bank and separately with Germany's Deutsche Bank. The Uzbek Bank said in a press statement that it discussed loans to the textile sector with the Export-Import Bank worth 11.7 billion Japanese yen ($85 million). The money would be used to build two textile plants in Uzbekistan. Uzbekistan National Bank also discussed credits with German banks worth 1 billion marks ($560 million) toward 25 infrastructure projects. Uzbekistan National Bank for Foreign Economic Activity has assets worth $3.4 billion and total shareholder equity of $514 million.

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

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When you need to know it as it happens