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

Wednesday, July 29, 1998

Russian Federation

Politics

Cabinet Agrees On Need For Chechen Policy

· On Tuesday according to a government spokesman, the Russian cabinet agreed with a statement issued by four prominent political figures, who argued for a clear Chechen policy. He added that the call was "belated." Sent to the cabinet on Monday by former premier Viktor CHERNOMYRDIN, Tatarstan leader Mintimer SHAIMIYEV, CIS Executive Secretary Boris BEREZOVSKY and Krasnoyarsk governor Alexander LEBED, the appeal stated, "We are turning to the Government of the Russian Federation with our anxiety. It must immediately formulate a position on the Chechen Republic and the North Caucasus as a whole, understandable for society, and consistently implement it...We have paid too dear a price for recent mistakes and silence and Russia has no right to return to the mid-1990s again [years of civil war with Chechnya]." Russian Prime Minister Sergei KIRIYENKO and Chechen President Aslan MASKHADOV agreed to meet later this week, but the time and location for the meeting has not been set yet. The four leaders said, "the meeting will take place against the backdrop of the deteriorating social, economic and political situation in the Chechen Republic." Ivan RYBKIN, who heads the Russian part of the bilateral commission, singled out a block of social and economic issues as the most pressing of those to be discussed at the meeting. SHAIMIYEV on the Echo of Moscow radio program said, "We should proceed from declarations to practical deeds. Nothing is so far done to restore the Chechen economy, although there are economic agreements with Russia." He hopes the future meeting of KIRIYENKO and MASKHADOV, "will start a constructive dialog and practical deeds." BEREZOVSKY on Wednesday said, "Merely stating that the problem of Chechnya exists and doing nothing to resolve

it is the worst in the present situation." Asked whether the document signed by the four politicians creates a political alliance for the run-up to the election campaign, BEREZOVSKY said that the people who tend to see that the document implies something else merely lack political culture. "They do not seem to understand what the address actually implies and instead, read between the lines what they would like to read," BEREZOVSKY said.

Economy

Ruble = 6.240/$1.00 (NY rate)

Ruble = 6.235/$1.00 (CB rate)

Ruble = 6.193|6.277/$1.00 (buy|sell rates)

Is Russia's IMF Bailout Working?

· Last week the International Monetary Fund's (IMF) first installment of additional aid filled the Russian Central Bank's currency and gold reserves. Immediately following the announcement of a $11.2 billion agreement, the Russian stock market leaped more than 25 percent and short term interest rates dropped from 150 percent to 50 percent. Today, however, market conditions have all but lost the gains earned during the funding wave. The stock market had six straight days of losses with Russian government treasury bills near 80 percent up 30 percent from a few weeks ago. The Russian downturn is in part due to investors' lack of confidence in the government to make crucial financial reforms. During IMF negotiations Russian President Boris YELTSIN de

Today's News Highlights

Russia

Year 2000 Problem For Russia?

Aeroflot-Voronezh $1Billion Deal

Russian Cars Sell In Finland

CTZ Rumor Quashed

European Republics

Belarus Upset Over Import Tax

South Caucasus & Central Asia

Georgia Gets $7M EBRD Loan

Georgia Appeals To UN

Turkmen-France Economic Ties

Politics-Economics-Business

Page

Wednesday

July 29, 1998

Intercon's Daily

creed sweeping overhauls to the tax and spending policies. Russian Deputy Prime Minister Boris NEMSTOV said that the tax collection rate will show a modest increase and the government would soon issue policies aimed at ruble stabilization. He stressed, "There will be no devaluation. Devaluation will happen with other governments, not with ours." NEMSTOV said that the sliding market was also the result of a, "public relations problem" caused by a vacuum of reliable information. To combat this, NEMSTOV said the government hopes to begin issuing weekly reports on important economic issues, including statistics on tax collection, currency and markets. "What Russia needs, what the government needs, is a very transparent policy to explain to everyone what is happening," on economic issues," The New York Times reported.

Since investors have lost interest in Russia's financial opportunities particularly its foreign currency debt, Russia canceled plans to sell two large lots of Treasury bills (GKOs). The government wouldn't reveal the reason behind the cancellation, but earlier this week it lowered the amount which it expected to raise through the sale. Still, the sale of State Federal Loan Bonds (GFOs), which are the replacement for GKOs, are not attracting foreign investors. NEMSTOV countered that foreign investors are overlooking other promising opportunities in the Russian economy, including industrial sectors like automobile production. Foreigners, however, are not willing to invest in Russia until there is reliable news, better conditions, and enforcement of economic reforms. In order to provide investors with improved market conditions, Russia must now look inward and implement tough measures.

Business

West To Help Solve Millennium Problem

· US Vice President Al GORE and Russian Prime Minister Sergei KIRIYENKO discussed the year 2000 computer problem, during meetings last week. Chairman of the State Committee on Communications and Information Alexander KRUPNOV said Russia, because its computer technology is less developed, is less threatened by the computer glitch. He estimated the cost of updating Russia's computer systems at $500 million. The federal budget will not assign funds to cover this conversion. Commercial banks and the Defense Ministry have said they will

enlist the help of the Telecommunications Committee, RFE\RL Newsline reported. The telecommunications industry will rely on help from Western companies that supply their computer systems.

Aeroflot-Voronezh Plant Sing $1 Billion Deal

· Russia's largest airline, Aeroflot International Air Company and the Voronezh Aircraft Building Plant, have signed an agreement to supply Aeroflot with 20 IL-96 type passenger and cargo planes equipped with American engines and avionics. The deal is worth $1 billion. The signing ceremony was attended by Russian Prime Minister Sergei KIRIYENKO, Aeroflot General Director Valery OKULOV and General Director of the Voronezh Plant Vyacheslav SALIKOV. KIRIYENKO said the agreement is, "the first serious real step in the support of the domestic industry." The Voronezh Plant, like most Soviet-era industrial giants, has stood idle because of lack of government orders. The new orders will jump-start the plant and pull it out of a grave financial position. Its debt reached 543 billion rubles by the end of 1997, and the staff was cut by 1,5000 people. Not a single plane was sold over a one year period. The plant will receive part of the $1 billion loan granted to the project from the US Export-Import Bank. The agreement will enable the plant to work at a full capacity for five years. The IL-96M is capable of transporting 318 passengers a distance of 13,000 kilometers. It is able to make non-stop flights from Russia to the United States and Australia. Despite this, Russian companies, including Aeroflot and Transaero, prefer American Boeings to Russian-made planes.

Russian Cars Sell In Finland

· Deputy Prime Minister Boris NEMSTOV's campaign to, "buy Russian" has been heard in Finland. Russian-made Samara cars have received a European certificate, which allows the cars to be sold. On the first day of selling seven cars were sold and another 30 ordered. Director of Konela Commercial, which produces the Samara, Dmitry KOVALENKO said, "We plan to sell several hundreds of cars within the year." Three Samara models are offered to Finnish buyers. A total of 876 cars were sold last year. Russian cars have to compete with European and Japanese rivals, which offer more comfortable and better equipped models but for much higher prices. A relatively low price of high-quality cars, with durability and easy repairs, makes

When you need to know it as it happens

Politics-Economics-Business

Page

Wednesday

July 29, 1998

Intercon's Daily

the Russian cars competitive, dealers say. Over 60,000 out of 200,000 Russian cars, which were sold in Finland, are still on the road.

CTZ Not To Be Bought By Foreigners

· Trustee-in-bankruptcy of Chelyabinsk Tractor Works (CTZ) Valery PLATONOV quashed rumors today that CTZ will be bought by a foreign firm. PLATONOV said negotiations on the sale of the reorganized tractor plants are being conducted primarily with the directors of the Russian Gazprom joint-stock company, the United Energy Systems, and the Rosstroj of the Federal Road Service, whose subdivisions have been and remain the leading users of CTZ-made tractors. He admitted that foreign companies are interested in CTZ, particularly the trans-national corporation Komatsu which seeks to organize the assembly of its own tractors here, not by CTZ. Negotiations are under way with Komatsu.

LEBARON said that the EBRD was impressed with Georgia's reforms and monetary policy, and therefore able to forge a relationship between two banks. The EBRD has made considerable investments in the development of the private sector in Georgia, specifically the construction of a new airport in Tblisi and other infrastructure projects. The Bank has invested a total of $31 million in Georgia's financial sector, opening credit lines to eight commercial banks. The current loan to the Bank of Georgia will be used to support small and medium-sized business in Georgia, and part of the sum will be used to invest into the Bank of Georgia's authorized capital. Bank of Georgia's President Vladimir PATEISHVILI, who is also chairman of the supervisory council, said that the bank's balance profit for the first six months of 1998 exceeded the figures for 1997 by 80 percent. Assets increased more than two-fold and as of June 1, 1998, the bank's shareholder ownership capital reached $16.6 million, which is 2.7 times more than at the end of last year.

Georgia To Appeal To UN On Abkhazian Conflict

· According to an article by Paul GOBLE today, the United Nations Security Council Thursday will consider a Georgian government request to condemn as ethnic cleansing the actions of Abkhazian rebels against ethnic Georgians living in the separatist region. In May, a new outburst of violence erupted between Abkhaz rebels and Georgian troops, which led to the flight of 40,000 ethnic Georgians from their homes in the Gali district and the deaths of several hundred. For the past four years, the Georgian government has offered similar requests to the UN and failed to receive its support. There are several reasons why the international community has not taken action against the Abkhaz rebels which are related to the similarities and differences of the Georgian-Abkhazian conflict to other genocide battles in the world. The neither sides of the Georgian-Abkhazian conflict has significant political influence. The international community does not have a clear policy to deal with ethnic aggression within a country and it does not want to challenge disrupt the sphere of influence in former Soviet republics. Russia, a UN Security Council member with the power to veto, has posted troops in Abkhazia as peace-keepers. Russia says that it stepped in to keep the peace when other countries would not. However, Georgia authorities have accused Russian troops have collabo

European Republics

Belarus Upset Over Russian Import Duty

· Belarus Deputy Prime Minister Vassily DOLGOLEV on Wednesday said that Minsk authorities take a "very negative" view of Russia's new three percent tax on imports without consulting the Belarus side. "This will not have an economic impact on us, but it is politically improper. This is no way for allies to act," he said. Belarus is expected to confront Russia on this problem at the next executive committee meeting of the Union of Belarus and Russia. DOLGOLEV said he had sent a letter to Russian Prime Minister Sergei KIRIYENKO to point out that ally states have a special procedure for coordinating customs duties. The Prime Minister recalled that the rules of the Union of Belarus and Russia envisage the introduction of customs duties in extreme situations. DOLGOLEV warned that Belarus, "could take tougher measures," in response to Russia's actions, stressing that, "the situation will be settled."

South Caucasus & Central Asia

Georgia Receives $7 Million EBRD Loan

· The European Bank for Reconstruction and Development (EBRD) and the Bank of Georgia on Saturday signed an agreement on a $7 million loan for a five year term. Head of the EBRD financial department, who signed the agreement, Roger

When you need to know it as it happens

Politics-Economics-Business

Page

Wednesday

July 29, 1998

Intercon's Daily

rated with rebels against ethnic Georgian and believe Russia is more interested in influencing the laying of Caspian oil pipelines to the West than keeping the fragile peace. The UN's decision on Georgia's request will be a significant indicator as to nation's support from the international community regarding its social needs in comparison to foreign investors interest in Georgia's geo-strategic position. If the UN ignores Georgia's request to condemn Abkhaz activities, the UN despite its best intentions may be contributing to even more ethnic cleansing. Intercon diplomatic sources report that the US will not support Georgia's resolution condemning the Abkhazian policy of ethnic cleansing in the Gali district. The reason for the US refusal to support Georgia's request is a claim that it would complicate present negotiations with Abkhazia. Other sources indicate the real reason for the US position is Russia's request that the resolution not be supported by the Friends of Georgia, the US, England, and Germany. Georgian officials remain perplexed how this resolution could complicate matters since the Abkhaz have refused to negotiate in good faith since the conflict in 1993. Others comment that this is part of a broader effort to look the other way as crimes of ethnic cleansing continue.

US Businessman Invest $100M In Yerevan

· Vaagn OVNANYAN a prominent businessman in the Armenian diaspora in the US has decided to invest $100 million in the construction of a cottage district in Yerevan. OVNANYAN owns and operates a big construction company. He met with Armenian President Robert KOCHARYAN on Friday. The project is important in the consolidation of ties between Armenia and foreign Armenian diaspora as well as for attraction of large investments into the country's economy. The President believes the project will provide new jobs and a large scope of construction works. OVNANYAN said that a total of 20,000 Armenian workers will participate in the construction at various stages. When the construction is completed, various services there will employ

between 1,200 and 1,500 people. The price for a cottage will vary from $80,000 to $150,000. OVNANYAN said that he wanted the prospective district to have the sphere typical of American towns. Besides American-type houses, the community will include a hospital, restaurants, clubs, park and a sport complex, said Yerevan Mayor Suren ABRAMYAN.

US Grants Kazakh Nuclear Destruction Funds

· The United States Defense Department Monday announced that the US has earmarked funds to Kazakhstan, Ukraine, and Russia to assist in the dismantling of nuclear arsenals. Kazakhstan will receive $300,000, Ukraine $76.7 million, and Russia $127.9 million. The aid to Kazakhstan will cover logistics support for communications-related facilities, the department said. The new funds will bring the total of US aid to the country to $172 million.

Turkmenistan-France Seek Economic Ties

· Turkmenistan foreign minister Boris SHIKHMURADOV in Paris on Tuesday met his French counterpart Hubert VEDRINE to discuss possible aid of France in establishing legal status of the Caspian sea. France has stressed that the problem should be solved as soon as possible. French Foreign Ministry's spokeswoman Anne GAZEAU-SECRET described the talks saying, "In the countries' shared opinion, the problem of the Caspian sea status should be cleared up as soon as possible, including by means of international law." The two foreign ministers also discussed the situation in Afghanistan and other international issues. VEDRINE expressed hope that the two nations could boost economic ties. Since the collapse of the Soviet Union the sides economic partnership has grown significantly.

Daily Report on Russia & the FSU

will not be published during

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

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

available for non-profit institutions.

Daily Report on Russia is for the exclusive use of the subscriber only. Reproduction and/or distribution is not permitted without the expressed written consent of Intercon. Daily Report on Russia Ó copyright 1998, Intercon International, USA.

When you need to know it as it happens

Politics-Economics-Business

Page