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

Tuesday, July 28, 1998

Russian Federation

Politics

US-Russia Nuclear Disappointments

· Russian deputy director of uranium export agency Tekhsnabeksport Alexei GRIGORIYEV accused the US of failing to honor its commitments under a $12 billion 1993 agreement to buy diluted uranium from dismantled Russian nuclear missiles. "Russia is not satisfied with the agreement as the American side is only paying for part of the delivered material. Russia is suffering from this loss." In the agreement, Russia was to convert 500 tons of highly enriched material into low-grade uranium over 20 years. The US agreed to pay for both the natural and enriched components the make up the low-enriched uranium. At the end of 1996, the US stopped paying for uranium's natural component. Instead, it was willing to pay for the enriched part, and return an equal amount of the natural uranium. But, last week, the United States Enrichment Corporation (USEC), Russia's partner in the 1993 agreement, was privatized by the US government in a controversial public offering that raised $1.45 billion. The CLINTON administration approved the offering last month, but required USEC to buy Russian uranium removed from nuclear warheads even after the government-owned corporation becomes a private company. Under a new deal signed last Friday by US Vice President Al GORE and Russian Prime Minister Sergei KIRIYENKO, both sides planned for spending $1 billion each in the next five years to convert 50 tons of plutonium from nuclear weapons.

Russia-Iran Aiding Afghanistan

· Russians and Iran are secretly supplying heavy weapons, training and logistical support to rebel factions controlled by former leaders of the Afghan mujahedeen, the Islamic guerrillas, who fought the Soviet Army in the 1980's with the backing of the

Central Intelligence Agency, The New York Times reported. The rebel coalition is waging a civil war against the Taliban, the militant Islamic group the controls most of the country and is backed by Pakistan and Saudi Arabia. US State Department spokesman James RUBIN said a number of countries are involved in sending arms to Afghanistan, but stressed that possible transfers from Russia, "are far outweighed by concerns from other countries, in particular, Pakistan and Iran." The aid is "part of a larger Russian strategy to reassert influence over Central Asia and its vast oil reserves," the paper quoted a senior US official as saying. Moscow has denied arming the alliance and an opposition leader has said that the equipment is coming from the Russian mafia, not the government. While Russia is expanding its influence in Afghanistan, the US continues to support neither side and refuses to recognize the Taliban as the government of Afghanistan. The loose collaboration between Russia and Iran serves their political interests, fearing that spread of Taliban radicalism, and their economic interests, blocking efforts to build pipelines across Afghanistan to India.

Economy

Russian Economy Still Unstable

· The Russian Trading System index dropped sharply on Monday falling 9.1 percent after a 17 percent slide last week. The index closed at 143.46, wiping out gains recorded since the International

Today's News Highlights

Russia

Inkombank Prepares Issues

Gazprom Considers Subsidiary

European Republics

EU-Baltics R&D Programs

IMF To Announce Kiev Loan

South Caucasus & Central Asia

Ambass.Offer State Min. Post

No Peace Resolution Reached

IMF Releases $80M To Georgia

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Monetary Fund (IMF) announced the $11.2 billion financial support package. Late last week, $4.8 billion of the loan reached Russia's Central Bank and were used to increase foreign exchange and gold reserves. Yields on short term domestic government debt (GKOs) soared to above 55 percent. Dollar denominated bonds, restructured Soviet-era debts, fell to all time lows, about 20 percent lower than before the landmark GKO conversion program led by Goldman Sachs was completed a week ago. Interest may be fortified by a wide gap between the yield and the new discount rate of 60 percent. Traders say the Central Bank brought down the discount rate prematurely. The market activity shows that investors are still weary of the government's ability to pull itself out of domestic and international debt. Many are waiting for Russia to follow through with commitments made to the IMF to change tax collection and its spending policies. An analyst for Salomon Smith Barney said that promises of reforms are good news, but not good enough to satisfy skittish investors, who have seen similar promises fail before, The New York Times reported. The Kremlin plans to sell five percent of its Gazprom holdings to raise more revenues. However, with the market sliding it is unlikely that the government will not receive the shares' full value on foreign markets, $1.4 billion. Several privatization sales, in the last few financially difficult months, have had to be canceled due to lack of bidders. For the failed Rosneft sale, bidders claimed that the high asking price along with poor market conditions were the main factors in their decision not to bid. Comment: The likely hood of a currency devaluation has dramatically increased as a result of the Russian economy's continued decline.

Ruble = 6.240/$1.00 (NY rate)

Ruble = 6.232/$1.00 (CB rate)

Ruble = 6.190|6.274/$1.00 (buy|sell rates)

Inkombank Prepares Shares Issue

· Russia's Inkombank president Vladimir VINOGRADOV on Monday announced that the bank will place the eighth issue of its shares in September through November, 1998. Foreign banks will be permitted to purchase a part of the issue. VINOGRADOV confirmed that the European Bank for Reconstruction and Development (EBRD) will increase its share to 10 percent. He predicts that the purchases of shares by foreign investors will bring

Inkombank approximately $150 million to $200 million in cash. VINOGRADOV also noted the ninth issue will be placed before the end of the year. It will include the blocking package of shares which will be purchased by Gazprom.

Business

Russia To Cut Tariffs To Model Payers

· Russian President Boris YELTSIN Monday signed two decrees cutting in half the gas and electricity tariff for companies and traders which pay their bills in full and on time. A Kremlin press statement said that the decrees were aimed at, "stimulating the growth of industrial production in the Russian Federation." It also is designed to break the circle of non-payments in the Russian economy. The statement said firms with small debts also would pay less for their gas and electricity but the size of the discount for them would depend on the size of their debt. Russia's industry has been crippled by unpaid debts, with major companies failing to pay one another or to pay taxes to the state. Russia's gas monopoly Gazprom and United Energy Systems (UES) collect cash payments for far less than half of the energy they sell to customers.

Gazprom Considers Transportation Subsidiary

· Russia's gas monopoly Gazprom is considering creating a gas transportation subsidiary modeled on the Mezhregiongaz, vice president Pyotr RODIONOV announced at a press conference Monday. A recent meeting of the board of state representatives for Gazprom discussed the restructuring program which has been under way for some years now. RODIONOV said the Gazprom management reported the restructuring program to the government as far back as May 1997. Plans show that the transportation subsidiary would be fully owned by the state as the trading company Mezhregiongaz is operated. RODIONOV said Gazprom is absolutely transparent now and any party concerned can get access to its financial and production records. The company compiles its statistics in accordance with the law and its reports are transparent. "We are transparent. It is impossible to hide profits and disguise expenditure as, say, agricultural or production costs," he said. RODIONOV commented on the crisis of non-payments stating that the management has been forced to reduce capital construction by more than 50 percent. He

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also noted that the new shipment tax, "will deal the heaviest blow to Gazprom" because of the sales tax.

Tuesday Tid-Bits

Seals Attack Humans in Kazakh

· In a bizarre turn of events worthy of a thriller, fright movie, Kazakhstan's city of Aktau registered 40 incidents where seals have attacked and bitten humans in mid June. Victims of seal attacks are being vaccinated against rabies and medics say they show no graver symptoms than mere bites and scratches. Local residents blame seals' aggressive behavior on the hot weather, although specialists from the veterinary services say such untypical behavior might have been provoked by a viral disease which is not dangerous for humans. Examinations of carcasses of dead seals, however, have so far yielded no evidence proving this hypothesis.

Standard & Poor's Rating Group (S&P) added to the financial frenzy stating that Ukraine's financial position is "precarious." It noted that Ukraine has foreign exchange reserves of less than $2 billion, not enough to cover debt redemption and prevent currency devaluation. The gryvnia's stability has been one of Ukraine's greatest macro-economic success story. Ukraine's chief banker Viktor YUSHCHENKO said Ukraine has to keep its nations currency within the declared band of 1.95-2.25 per dollar. He added that, "The Fund is not insisting we meet all the starting conditions of the [loan] program. Ukraine should shoe that the measures that have already been taken will lead to the desired result, particularly to a balanced budget."

S&P said IMF support is, "crucial if Ukraine is to avoid a financial crisis." Ukraine's President Leonid KUCHMA admitted last week that his nation is in worse financial shape than Russia, which just received $11.2 billion in additional financial aid from the IMF. S&P also said that the Ukrainian economy is stifled by, "one of the most difficult business environments in eastern Europe, reflected in poor transparency, excessive taxation, burdensome regulatory constraints, contradictory legislation and widespread criminalization," The Wall Street Journal reported. On Friday, the IMF mission will conclude reviewing Kiev's economic reforms and announce the loan. Pending the loan decision, the Ukrainian parliament will have to approve amendments to the 1998 budget which call for the reduction of the budget deficit to 2.3 percent of the gross domestic product. By July 1, 1998, arrears of payment in Ukraine reached six billion gryvnias ($3 billion).

South Caucasus & Central Asia

Lordkipanidze Offered State Minister Post

· Georgian President Eduard SHEVARDNADZE has offered the post of the Georgian State Minister, to Georgian Ambassador to Moscow Vaza LORDKIPANIDZE. The State Minister is the second most important post in Georgia after the Georgian President. LORDKIPANIDZE met with SHEVARDNADZE and asked him for two days to consider the proposal. After the meeting, LORDKIPANIDZE said, "The President believes, and I fully agree, that we must accelerate the pace of reforms in both domestic and foreign policy."

European Republics

EU Proposes R&D Programs With Baltic States

· The European Commission requested authorization from the Council of Ministers of European Union (EU) on Monday to negotiate the association of Estonia, Latvia, and Lithuania, with its research and development (R&D) programs. Associated candidate countries for EU membership will contribute to the budget of the R&D programs and in return participate in the programs on an equal footing with EU member states. They will enjoy basically the same conditions especially with regard to funding. Once approval has been obtained from the Council of Ministers, the commission will negotiate association with each of the 11 candidate countries. Bulgaria, Estonia, Latvia, Lithuania and Slovakia are also applying for EU membership.

IMF To Announce Ukrainian Loan Friday

· Ukraine is pinning its hopes for an International Monetary Fund (IMF) extended finance facility (EFF) of $2 billion to $2.5 billion to bail the nation out of a series of large debts due in August. Ukraine must make good on a $450 million dollar-denominated Eurobond that matures on August 29th, while also finding funds for $500 million in treasury securities denominated in gryvnias. However, when it comes to selling new domestic issues there are no takers.

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The former Georgian state minister, Niko LEKISHVILI, who had been Georgian state minister since December, 1995, resigned from his post Sunday and urged the rest of the Cabinet to follow suit. Almost the entire cabinet has resigned except Agricultural Minister Bakur GULUA and Communications Minister Pridon INDJIA. According to RFE\RL Newsline, INDJIA has been accused of misappropriating a $4 million credit, accentuating SHEVARDNADZE's drive to weed out corruption. The President said that if INDJIA, "doesn't resign, then he will be dismissed." SHEVARDNADZE is planning a major reshuffle of the government, keeping some ministers and replacing others, which he hopes to complete by mid August. He is sparing the Defense Ministry, Security Ministry and Interior Ministry for fear of aggravating instability in the region. One area the government's reshuffle which is unlikely to be affected is the local financial markets and treasury bill yields. A dealer at Bank of Georgia Lasha GOGILAVA said, "The situation in the financial markets in Georgia was not a reason for the government reshuffle, These serious political processes could not have an influence on treasury bill yields or the national currency rates." Zurab ALAVIDZE of United Georgian Bank said that, "We have seen how the recent government reshuffle in the Japan affected the rate of their national currency. But we face a different situation in Georgia. I don't see any connection between the political changes and the financial market in our country." In fact, many believe SHEVARDNADZE's reorganization will bolster Georgia's financial position.

Georgian-Abkhaz Fail To Reach Peace Agrmt.

· Georgia and Abkhazia on Saturday agreed to continue a dialogue to settle the conflict during the closing day UN-sponsored talks in Geneva on Saturday. The sides confirmed their commitment to the Tblisi statement of August 14, 1997, which, particularly, bans to use force for the settlement of disagreements. The document also allows refugees and displaced persons to return to their homes. At the same time, the three-day round did not permit to settle all disagreements and, primarily, the most

acute issue concerning the state and legal status of Abkhazia. The other major task is to overcome the negative consequences of the May events in the Gali district of Abkhazia, which left six hundred dead and drove 40,000 ethnic Georgians from their homes. UN Secretary-General's special envoy Liviu BOTA read the final statement which declared that the sides do not reach agreement on key problems. Georgian Foreign Minister Irakly MENAGARISHVILI and Abkhaz counterpart Sergei SHAMBA are expected to hold the next peace-talk meeting in Athens before the year's end to work out measures to strengthen trusty relations. The diplomats from countries-members of UN Secretary-General Friends to Georgia group, including Russia, Britain, Germany, the United States and France, called on the conflict sides and Russia to "support the continuation" of the CIS peace-keeping operation in order to "ensure favorable and peace conditions" at further talks. The Abkhazian delegation is in favor the extension of the CIS peace-keepers' mandate, which expires on July 31.

IMF Releases $80 Million To Georgia

· The International Monetary Fund's (IMF) executive board on Tuesday agreed to release a delayed $80 million loan installment to Georgia. Temur BASILIYA, special economic adviser to Georgian President Eduard SHEVARDNADZE, said the decisions was made after Georgia met all four conditions of the IMF, except for solving a $400 million debt dispute with Turkmenistan over gas deliveries. BASILIYA said the decision is a testament to the nation's economic reforms. The funds are being transferred to the National Bank's account within the next 15 days. In 1996, the IMF agreed to a $246 million Enhanced Structural Adjustment Facility (ESAF) to be disbursed in three installments. The loan is intended to help Georgia push through structural reforms in its new market economy.

Daily Report on Russia & the FSU

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August 3rd to 7th for Intercon's summer break.

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

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