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

Thursday, July 23, 1998

is a fierce critic of the government's economic policies and advocates stronger state support for industry. He will be responsible for a range of industrial matters, including management of the state arms manufacturing sector. He will also influence Russia's external trade policy. His press secretary Anton SURIKOV said there had been negotiations with MASLYUKOV about taking the post, but "only he himself can say" what was the outcome. The Communist Party presidium passed a decision that MASLYUKOV, a member of the party's central committee, must not join the government. MASLYUKOV said on Wednesday that he would obey party discipline, although he saw the decision as a mistake and has not made a final decision. A high- ranking government official said, "It is possible that the scheme of three deputy prime ministers will have to be abandoned. There will be a fourth one. Perhaps new people from regions will come." He did not specify whether the incumbent deputy prime ministers will remain in the government.

Assassination Attempt Wounds Maskhadov

· Chechen President Aslan MASKHADOV has survived an assassination attempt, reportedly escaping with a wounded knee, after a car bomb exploded in the Chechen capital Grozny near the presidential entourage. Six bodyguards were seriously injured in today's attack, which destroyed two car in the motorcade and killed the driver. MASKHADOV was quickly driven away from the scene and the area sealed off by presidential security forces. Rus

Russian Federation

Politics

Government Responds To Oil And Gas Appeal

· In response to accusations by oil and gas companies of "unreasonable and irresponsible" economic policies, Deputy Prime Minister Boris NEMTSOV said that the failure of the Russian State Duma to pass the reform package in full meant that there is no budgetary slack to cut excises. He said, "If as a result of the August session of the State Duma, our package of laws is passed, we will be ready to return to the question of lowering oil excises." Russia has already curt taxes and fees for oil companies to counter low world oil prices. NEMTSOV added, "I hope we will reach an understanding form the point of view of the deputies and of the oil companies." Russia's international finance negotiator Anatoly CHUBAIS said that in this dire economic situation financial circles and industry should do, "everything possible and even impossible in order to help our government, not enter into a confrontation with it." He added that, "I have seen this appeal. I can understand of course that they do not want to pay the tax, the new tax. Actually there are several taxes which affect oilmen—a new 3 percent import duty, the presidential veto on the law reducing the excise tax on oil. It is not easy for them of course. It is all very painful for them...But unfortunately the government cannot always do pleasant things. The problem of wage arrears that exists in the budget sector today did not arise from nothing. It arose from taxes."

Kiriyenko To Appoint Trade And Industry Min.

· Russian Prime Minister Sergei KIRIYENKO confirmed on Wednesday that Yuri MASLYUKOV, the former head of the Soviet economic planning agency Gosplan, is to be appointed Minister of trade and Industry. MASLYUKOV is the communist chairman of the Duma economic policies committee. He

Today's News Highlights

Russia

J&J Accused Of Tax Evasion

Gazprom-Price Waterhouse

Strategic Enterprises Total 697

European Republics

Ukraine To Sell Fabric Factory

Gore-Kuchma Sign Agreements

South Caucasus & Central Asia

Georgia Asks Conflict Evaluation

Armenian-Iranian Agreement

EBRD Loans $40M To KKB

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July 23, 1998

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sian television reports that MASKHADOV returned to work at his office. The attack builds tensions in Chechnya, following a shoot-out last week which killed six and injured 15 people. MASKHADOV has many enemies among the warring clans of Chechnya, who seek to depose him and install a more militant, fundamentalist Islamic regime. However, MASKHADOV hinted that Russian special forces may be to blame for the attack. Although, he stopped short of directly accusing Moscow. Chechnya says it is an independent nation, after a bitter 21-month war of independence with Russia ended with the army's withdrawal and a cease-fire agreement two years ago. Russian politicians have said that the new tensions could lead to a civil war and spill over into neighboring regions. MASKHADOV's spokesman said that Russian media is exaggerating Chechnya's problems.

Economy

Ruble = 6.221/$1.00 (NY rate)

Ruble = 6.223/$1.00 (CB rate)

Ruble = 6.179|6.267/$1.00 (buy|sell rates)

Central Bank Receives $4.3 Million

· Of the $4.8 billion installment the International Monetary Fund (IMF) issued Russia, $4.3 billion today has been entered into accounts of the Central Bank to keep up gold and exchange reserves. Another $500 million will arrive later this week. A second installment of $5.6 million will be extended when the 1999 federal budget has been submitted to the Russian State Duma. Under next year's budget Russia's financial policy will be changed and debts will be serviced at the expense of internal reserves. Russia expects a total of $11.2 billion from the IMF this year. It has also asked the IMF for a $8 billion loan program for 1999-2001. Before the IMF funds reached the Central Bank, reserves were $13.6 billion falling $100 million in the period from July 10th to July 17th.

Business

J&J Charged With Tax Evasion In Russia

· Russian tax police on Wednesday accused Johnson & Johnson Ltd. (J&J), a unit of US health-care products giant, of failing to pay $4 million in back taxes and $15 million in fines. They also filed criminal charges against the Moscow-based subsidiary's former managing director John BAILEY and its cur

rent financial director Wayne BLANCHARD. This is the first action of it kind against a high-profile US multinational and falls on the eve of a visit by US Vice President Al GORE. J&J spokesman Jeff LEEBAW said the company owes the Russian government taxes for 1994, 1995, and the first nine months of 1996. He said, "The company intends to pay its entire current tax obligation to the Russian government," The Wall Street Journal reported. LEEBAW noted that J&J had been holding "good faith" talks with authorities to pay the entire amount. J&J had petitioned to get the amount of its tax liabilities reduce, but lost its case in a Russian court last fall. The company has already paid $28 million in taxes to the Russian government over the past three years. Russia's new chief tax collector Boris FYODOROV included foreign companies in his campaign against tax evaders and dead-beats. However, Moscow tax police spokesman Oleg MIKHAILOV said the case against Johnson & Johnson Ltd. isn't part of the new crackdown, but is related to a 1996 investigation. He pointed out that the charges against the company's management could result in jail terms as long as four years. Chairman of the American Chamber of Commerce Bruce BEAN said, "This is just what we don't need. No investor comes here expecting to be forgiven for taxes. But, they expect to find a system that administers fairly and evenhandedly." Comment: If Russia is hoping to build investor confidence, after their exodus form the Russian economy during the Asian financial crisis shock waves, and attract foreign businesses to compete in Russia, the Russian government must clearly define tax policy, pass, implement, and enforce tax legislation.

US Businesses Disappointed In Gore's Agenda

· US Businesses operating in Russia has a number of concern which they hope Vice President Al GORE will discuss with his new counterpart Prime Minister Sergei KIRIYENKO during his stop-over visit today. US businesses are disappointed that GORE and KIRIYENKO will find little time to address concerns surrounding business legalities between meeting KIRIYENKO for the first time, reviewing Russia's financial situation, and laying the ground work for the September summit between US President Bill CLINTON and Russian President Boris YELTSIN. They say that recent shifts in Russian policy threaten their well-being in Russia. US businesses say exports from the US have been hurt by Russia's financial

When you need to know it as it happens

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crisis and is expected to get worse before it gets better. One American trader said, "We lost an entire month of sales because our clients couldn't pay, and we were forced to delay shipments from the US," The Journal of Commerce reported. American poultry and red-meat exports are the single largest category in the US-Russian trade balance. American meat traders are concerned that the across-the-board three percent import duty, together with a new five percent regional sales tax and an increase of value-added tax for food, will cut into domestic demand and reduce orders. American oil businesses are worried about a Russian court ruling, involving the Canadian investor Robert FRIEDLAND, in which the court ruled that licenses issued to foreign companies for developing oil filed and mineral deposits, according to current practices, are invalid. The new legal doubt combined with cases of license fraud and extortion has virtually halted foreign investment in the mining sector. Amoco executive in charge of commercial development noted that new legislation passed by the Russian State Duma on production sharing agreements could end Amoco's bid for developing the Pribskoye oil field. Part of that legislation places a limit on production sharing agreements to cover no more than 20 percent of Russia's overall oil, gas, and mineral resources. Exxon has stated it is unwilling to invest in Russia's oil field projects unless it is assured the terms and tax regime can be fixed by a production sharing agreement.

Gazprom-Price Waterhouse Sign Contract

· Russian gas giant Gazprom and Price Waterhouse has concluded negotiation and signed a contract to create pilot projects of a future accounting and gas settlements information management systems. The deal, worth $120 million, was signed by Gazprom head Rem VYAKHIREV and LVS/Price Waterhouse managing partner Leonid BOGUSLAVSKY. The contract is extended over a period of two years. The pilot project provides for system integration with the use of enterprise management systems provided by the German company SAP. New infrastructures and computer networks for nearly 1,000 users will be designed.

Russia Reduces Strategic Enterprise List

· The Russian government today has reduced the number of enterprises listed as strategically important to national security, which are locked in govern

ment hands and not liable to early auctioning, from 3,000 to 697. The numbers surpass Deputy Prime Minister Viktor KHRISTENKO hope to reduce the figure to 1,000. He said the goal of privatization is to raise the productivity, profitability and competitiveness of the Russian enterprises and the creation of new jobs. According to the government's resolution the list includes enterprises in the atomic industry, machine-building, aircraft building, munitions, arms manufacturing, communications, radio electronics, rocket and space technologies, ship-building, petrochemistry, health service and medical industry, microbiology, forestries, metallurgy, communications, air transport, airports, shipping companies, merchant and sea ports, distilleries, foodstuff production, building, oil and gas, geophysics, power supply, coal mining, fuel production, precious metals and stones production and processing, commerce, film industry and mass media. The shares of more than 2,000 enterprises will be auctioned in the future.

European Republics

Ukraine Announced Privatization Plans

· Ukraine's State Property Fund today announced plans to sell 26 percent of Zhytomyrsky Zavod Khimychnogo Volokna at a commercial auction by December 31st. An Additional 15 percent stake in the company will be sold on the Ukrainian stock exchange and 9.85 percent stake will be auctioned for compensation certificates. The state will retain a 25 percent stake and employees are entitled to own 24.15 percent of company shares. The factory is the country's largest synthetic fiber producer.

Gore Presses Ukraine On Reforms

· Ukrainian President Leonid KUCHMA and US Vice President Al GORE on Wednesday signed a joint statement on the results of the second meeting of the GORE-KUCHMA commission and an agreement on mutual legal assistance. GORE after the signing ceremony said that the joint statement mirrors Ukrainian-American relations aimed at integrating Ukraine into global structures. He noted that, "We meet against the backdrop of a global financial crisis that is challenging countries on all sides of the globe. At this time, no country can pretend that it lives apart from its neighbors." KUCHMA stressed the nation's needs for "tangible financial support." GORE

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said, "Without continued and even bolder economic reforms, it would be difficult for Ukraine to reach agreement with the IMF [International Monetary Fund]." He believes that reforms will be implemented and that with those in place, the IMF will be able to seriously negotiate. Kiev is negotiating with the IMF this week for a $2 billion to $2.5 billion loan.

During their talks, KUCHMA and GORE discussed political, economic and military issues, nuclear non-proliferation and the closure of the Chernobyl nuclear power plant. Early on Wednesday, GORE met with US business executives working in Ukraine to discuss conditions of US companies' work on the Ukrainian market and prospects for financing Ukraine's economy by the US. There are approximately 450 US companies operating in Ukraine. KUCHMA expressed concern about a decline in the volumes of Ukrainian-American trade, connected with anti-dumping measures taken by the US directed against Ukraine. Ukraine relies heavily on US aid, and is the third-largest recipient of direct aid from Washington this year. However, the US is hesitant to provide more financial aid to Kiev, as the US is not satisfied with the slow pace of reforms, lack of legislative stability, and the meager amount of small-size business in the country.

South Caucasus & Central Asia

Georgia Asks For Assessment of Abkhazia

· Georgian Foreign Minister Irakly MENAGARISHVILI said that Georgia will insist at the Geneva talks that the international community make a "principled assessment" of the events that have occurred in the Gali district of Abkhazia in the last few months. He also noted that the Georgian delegation will raise the same question with the UN Security Council on July 25th to 31st. MENAGARISHVILI, who will lead the delegation to the UN-mediated talks on Abkhazian settlement beginning today, noted that Georgia seeks to create safe conditions for continuing the return of refugees. The talks will also include members of the

UN secretary general's Friends to Georgia group which consists of the United States, Russia, France, Britain and Germany. MENAGARISHVILI said, "the Georgian leadership is not considering either an extension of the mandate of peacekeeping troops in the zone of the Abkhazian conflict or their immediate withdrawal." Ukraine is interested in playing an active role in Abkhazian settlement. He said that, "Georgia welcomes the intention of one of the major countries in Europe and the world, Ukraine, to take an active part in the settlement of this conflict." MENAGARISHVILI noted that, "so far we have not be able to work out all procedural issues concerning Ukraine's accession to the Friends to Georgia group."

Armenian-Iran Sign Economic Agreement

· Armenian Chief of Government Staff Shahen KARAMANOUKIAN and Iranian Minister of Finance and Economic Affairs Hussein NAMAZI Monday signed an economic cooperation agreement in Tehran. Under the agreement, Armenia will receive a $5 million credit from Iran's Export Promotion Bank. Moneys from the loan will go towards the purchase of Iranian consumer goods and cooperation on expanding transport arteries linking Iran with Armenia Georgia, and Russia. RFE\RL Newsline reported that Iran is interested in purchasing molybdenum and cooper concentrate from Armenia.

EBRD To Be Shareholder In Kazkommertsbank

· The European Bank for Reconstruction and Development (EBRD) may become a shareholder in Kazakhstan's Kazkommertsbank (KKB) due to a $40 million loan and subscription agreement. Kazkommertsbank is the first bank in Kazakhstan to be granted a direct EBRD loan. The loan is to be disbursed over three years in two installments each worth $20 million. Through the subscription agreement EBRD has the option to acquire Kazkommertsbank shares for the first installment. The bank's capital is $112 million and is expected to grow during the three years. The loan is being used to finance medium and long-term projects in industry, transport, construction, and services.

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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