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 8, 1998

Russian Federation

Politics

Russian Spy Games Forces Retaliation

· On Saturday during a secret meeting with his Russian contact, CHO Sung Woo a South Korean spy working under a diplomatic cover was arrested by the Federal Security Service (FSB). The FSB discovered that a Russian contact systematically provided confidential information to the South Korean secret services, thus causing substantial damage to Russia's political and economic interests. After the South Korean diplomat had completed all formalities at the FSB, he was handed over to embassy officials. The Russian government ordered CHO to leave Russia because he was involved in activities, "beyond his diplomatic capacity." The FSB instituted criminal proceedings against his Russian accomplice in accordance with Article 275 of the Criminal Code on High Treason. Informed sources report that the diplomat in question is deputy director of the Foreign Ministry's First Asian Department Valentin MOISEYEV. The press bureau of Russia's Foreign Intelligence Service (SVR), refused to comment on the media reports that MOISEYEV is a SVR man. After arriving in South Korea on Tuesday, CHO said he did "nothing shameful" as a diplomat.

In retaliation, Seoul today has expelled counselor of the Russian Embassy in Seoul Oleg ABRAMKIN from South Korea. ABRAMKIN was notified that he is "persona non grata" and has been given 72 hours to leave South Korea. South Korean Vice Foreign Affairs and Trade Minister SUN Joun Yung explained that, "The government has made the decision after ascertaining Counselor ABRAMKIN had engaged in activities incompatible with his diplomatic status since being assigned in Seoul in September 1994." Nevertheless, the press-secretary of

the South Korean Embassy in Moscow expressed the hope that the fact of the expulsion of the Russian diplomat, "would not be detrimental to the relations between the two countries." Seoul established diplomatic ties with Moscow in September 1990.

Chechen Prime Minister Resigns

· Chechen Prime Minister Shamil BASAYEV on Friday tendered his resignation to President Aslan MASKHADOV as the six-month term for which he accepted the post has expired, RFE\RL Newsline reported. BASAYEV noted that his cabinet succeeded in reducing government staff and creating thousands of new jobs, despite falling oil prices and increased oil thefts. He ruled out any reversal of his decision to step down, saying he plans to focus on the work of the Congress of Peoples of Chechnya and Dagestan, which aims to merge the two republics. MASKHADOV has not yet accepted BASAYEV's resignation, but it is predicted that the Chechen parliament will insist the resignation is accepted and the entire cabinet step down.

Chechen Bank Seeks To Extend Agreement

· The National Bank of Chechnya on Saturday sent an official notice to the Central Bank of Russia notifying it about the National Bank's desire to extend their agreement for one more year. Chechen National Bank chairman Aburashid ZAKAYEV said that the inter-bank agreement signed last year expired on May 12, 1998. He noted that while other intergovernmental agreements between Russia and

Today's News Highlights

Russia

IMF Aid Package Still Unknown

Aeroflot Modernizes With Chase

European Republics

Ukraine Elects Speaker

Estonian Residency Permits

Belarus-Tajik on CIS and Union

South Caucasus & Central Asia

Azeri Ratifies Oil Deal

Sino-KazakhSign Border Agmt.

Turkmen-Iran Discuss Caspian

Politics-Economics-Business

Page

Wednesday

July 8, 1998

Intercon's Daily

Chechnya were not implemented, the inter-bank deal proved to be quite effective and bodes well for the development of relations between the central banks of Russia and Chechnya. ZAKAYEV said he will sign a new inter-bank agreement in Moscow as soon as the Central Bank of Russia replies to the request. He believes such an agreement should be signed by the head of the National Bank of Chechnya and the Central Bank of Russia since they have intimate knowledge of their institutions and should be able to reach an agreement faster than other officials. The draft of a new inter-bank agreement, being studied by the Central Bank, was changed slightly by the Chechen side, but does not alter the substance of the document and should not cause disagreements between Grozny and Moscow.

Economy

Ruble = 6.209/$1.00 (NY rate)

Ruble = 6.209/$1.00 (CB rate)

Ruble = 6.179|6.239/$1.00 (buy|sell rates)

IMF Aid Package Amount Still Undetermined

· President Boris YELTSIN's special liaison to international financial organizations Anatoly CHUBAIS is confident that a decision on a stabilization loan to Russia will be made before the end of the week. CHUBAIS said he and head of the International Monetary Fund (IMF) office in Moscow Martin GILMAN, head of the World Bank's office in Moscow Michael CARTER, and deputy director of the IMF's European II Department Jose MARQUES-RUARTE will meet again Thursday. GILMAN said Tuesday's meeting produced a list of key problems which Russia, the IMF and the World Bank need to agree on within the next week. CARTER urged Moscow to go through serious structural reform to move the economy forward, saying the World Bank would do its best to back such efforts. CHUBAIS, although noting that Tuesday's negotiations were difficult, said, "We have reached understanding on major issues. First of all, it is clear that the credit package itself is important for Russia, but at the same time, our own actions to [tackle] financial, tax and structural issues are also important for our economy." GILMAN said the issues of additional financial assistance would be linked with the Russian government's economic stabilization measures. CHUBAIS earlier said that Moscow needs $10 billion to $15 billion in loans to stabilize the economy and prop up the ruble

which is under increasing pressure for devaluation. A Senior official from Moody's sovereign risk department David LEVEY said Russia may need up to $20 billion in aid to roll over its debt. The exact amount of financing to be provided by the IMF is still under negotiation. But, with IMF resources limited after huge Asian bailout packages, the fund may only be willing to provide $5.6 billion. Officials at the fund emphasize that the precise amount will depend on how much Russia is prepared to put is fiscal house in order and reorganize its economy. The IMF has insisted that Russia reduce the budget deficit, pass a new tax code, adopt legislation on budget procedures, tighten bank regulations, and end the practice of non-payments, The New York Times reported. Russia also hopes to negotiate $1 billion from the World Bank and hasten a $1.5 billion loan from the Japanese government through the World Bank. The World Bank has placed its own conditions on the release of funds, including the controversial break-up of the Russian gas monopoly Gazprom. Russia is scrambling to meet with other financial institutions and commercial banks to seek additional aid.

Business

Aeroflot Modernization Financed By Chase

· Russian Airline Aeroflot is using 100 percent financing from Chase Manhattan Bank through a combination of an 85 percent US Ex-Im Bank guaranteed loan and a 15 percent non-guaranteed loan to break into Western international lending markets. The loan arranged by Chase is for $350 million loan, of which $297.5 million is guaranteed by the US Ex-Im Bank. Commercial banks will provide $32.8 million and Boeing is carrying a $19.7 million loan.

Areoflot received the first of two 777-200s to be leased from International Lease Finance Corporation on June 23rd. This latest delivery together with an order for ten Boeing 737-400s this spring is another significant step by the Moscow-based carrier to upgrade its fleet and compete more effectively internationally. Vice president of Ex-Im's Aircraft Finance Division Bob MORIN said, "US Ex-Im Bank support for this transaction is the first time any export credit agency has supported an aircraft transaction for a Russian airline." Aeroflot's President and chief executive officer is Valery OKULOV, President Boris YELTSIN's son-in-law. It employs over 13,000 and in 1997 earned a profit of $47.25 million. Areoflot flies

When you need to know it as it happens

Politics-Economics-Business

Page

Wednesday

July 8, 1998

Intercon's Daily

to 100 different countries and plans to expand this year in Europe, United States and possibly Southeast Asia.

sentences of more than one year. The law allows citizenship through naturalization, effectively obstructing it for many people of advanced age by imposing the requirement of their passing an exam in Estonian and in Estonian laws. An estimated 100,000 ethnic Russians prefer more readily available Russian citizenship.

Belarus-Tajikistan On CIS And Customs Union

· Belarus and Tajikistan said Tuesday the Commonwealth of Independent States (CIS) is an acceptable format for cooperation among former Soviet republics in a transition period. In a joint communiqué released before Belarus Foreign Minister Ivan ANTONOVICH ended his two-day stay in Dushanbe, he and his Tajik counterpart Talbak NAZAROV called for speeding up the CIS integration and stressed the need to restore the unity of its economic space, and promote concerted actions in the political, military, and international domains. The sides examined the situation with the Customs Union which was joined by Tajikistan last spring. The two ministers also exchanged views on the situation in Belarus and Tajikistan. ANTONOVICH stated after the meeting that the methods of settling the conflict in Tajikistan were unique and could serve as an example for several other CIS countries. They also vowed to further improve the CIS mechanism that has been grouping the 12 countries, including Russia, together since the disintegration of the Soviet Union. Tajikistan President Emomali RAKHMONOV said reform is a must for the CIS, and every member state of the grouping should live up to its commitments under multinational treaties. The Tajik President called for expanding bilateral trade ties and speeding up the preparation for a bilateral friendship and cooperation treaty. ANTONOVICH also met with parliament speaker Safarali RADZHABOV and Prime Minister Yakhye AZIMOV.

South Caucasus & Central Asia

Azeri Ratifies Major Oil Deal

· The Parliament of Azerbaijan on Tuesday ratified an international deal on the exploration and development of oil fields worth $2.5 billion to $3 billion. The contract, signed by Azerbaijan's state oil company Socar and an international consortium which consists of Italy's Agip, Japan's Mitsui, Turkey's NPO, and Spain's Repsol with shares of 50, 25, 15, 5, and

European Republics

New Ukrainian Speaker Finally Elected

· The Ukrainian Parliament Tuesday, after 20 attempts to elect a speaker holding up legislation for two months, has finally appointed Alexander TKASHENKO, from the left wing- Socialist/Peasant bloc, as the speaker with a vote of 232 out of 314 to 37. Formerly the Agricultural Minister and President of Land and People company, TKASHENKO replaces Alexander MOROZ who had forged the two month long confrontation between the parliament and President Leonid KUCHMA. On his part, KUCHMA had organized a bloc of 200 deputies to prevent the nomination of MOROZ. A western diplomat explained that, "TKASHENKO is believed not to have presidential ambitions, which is why he may have succeeded where MOROZ failed," the Financial Times reported. TKASHENKO immediately vowed to work with KUCHMA and the government to, "achieve consensus within society," and concentrate on passing legislation. Waiting in the wings has been crucial legislation, which is a condition on the release of a $2 billion to $2.5 billion loan from the International Monetary Fund (IMF) needed to alleviate the nation's budgetary crisis. These include a new state budget for 1998, which incorporates a 30 percent expenditure cut. On July 3rd, the Ukrainian Cabinet endorsed the revised 1998 draft national budget. According to an official from the Ministry of Finance, under the new draft, deficits for 1998 were reduced from 3.38 billion gryvnas (about $1.6 billion) to 2.34 billion gryvnas (about $1.1 billion).

Estonia Offers Russian Residence Permits

· Beginning July 12th, Estonia's permanent residents with no citizenship can apply for permanent residency permits. According to the Citizenship and Migration Department said an estimated 250,000 people are eligible for the residence permit. Under Estonian law on foreigners, an individual is required to have lived three of the past five years in Estonia with a temporary or term permit and have a permanent lawful income to be eligible for the permanent permit. The law bans from the permanent permit former army officers of foreign states and their families and persons convicted of crimes carrying

When you need to know it as it happens

Politics-Economics-Business

Page

Wednesday

July 8, 1998

Intercon's Daily

5 percent, respectively, provides for the joint exploration and development of oil fields at Kyurdashi 140 to 130 kilometers south of the Apsheron peninsula. Kyurdashi includes three deposits: Kyurdashi proper, Araz Deniz, and Kirgan Deniz. The fields are estimated to hold 100 million metric tons. Under the contract, the consortium will pay Azerbaijan $36.35 million for permission to dig for oil, and Baku will receive another $2.5 million if oil and gas are discovered. Azerbaijan will also receive $10 million at the beginning of the development of the oil fields.

Sino-Kazakh Sign Border Agreement

· Chinese President JIANG Zemin and his Kazakh counterpart Nursultan NAZARBAYEV signed a supplementary agreement on border issues between the two countries on Friday. The Chinese President said the signing of the accord, the second of its kind, marks a complete resolution to their remaining border issues. China and Kazakhstan signed a border agreement in April 1994 and a supplementary border agreement in July 1996. The new supplement delimits the last two remaining disputable sections of the border, the Bai-Murza Pass in eastern Kazakhstan and a 380 square kilometer area along Sarychildy River in the Almaty region. Forty-seven percent of the debated areas goes to China and 53 percent to Kazakhstan. JIANG noted the agreement has proved that the two countries are capable of solving any complicated issues between them as long as they observe the principles of consultation based on equality, mutual understanding and respecting mutual interests. JIANG expressed confidence in the development of the good-neighborly relations between China and Kazakhstan. The two leaders talked on a range of bilateral trade issues, including mineral resources and agricultural products, oil, electricity, telecommunications etc. JIANG noted that the two countries should intensify their mutual investment. Both leaders called on their governments to prepare an economic cooperation program for the next 15 years. JIANG said China will considerably increase its investment in Kazakhstan, build an automobile plant in the country,

develop oil fields in its western regions, and build gas and oil pipelines to the Chinese border. The Western Kazakhstan-China oil pipeline is valued at more than $3 billion.

Turkmenistan-Iran Discuss Caspian Sea

· Turkmen President Saparmurat NIYAZOV in Tehran Tuesday during a meeting with Iranian Parliament Speaker Nateq NOURI and Iranian counterpart Mohammad KHATAMI, said that the Caspian Sea should be divided among the five littoral states equally and fairly. The two officials discussed the division of Caspian resources and Caspian oil transport through Iran. NIYAZOV stressed that differences among the littoral states arise from the lack legislation on the Caspian's status and mechanisms for the exploration of Caspian resources. NOURI said that the five states should make their final decision on a legal regime to stop others from taking advantage of the current situation. Iran, which does not have substantial oil resources along its coastline, hopes each state will have equal rights to the sea's resources. As a result of talks, Turkmenistan has removed from an international tender for development rights three promising fields, located close to the Iranian border. The talks follow the signing of an agreement in Moscow between Russia and Kazakhstan dividing the northern sector of the Caspian Sea. A gas pipeline inaugurated earlier this year pumps 3.8 billion cubic meters of natural gas a year from Turkmenistan to Iran. The US has been pushing to isolate Iran from the oil rush in the Caspian. Iranian officials have said that a pipeline through Iran would be 10 time less costly than a subsea line, which they said would cost $3 billion. However, in order to be chosen as a route for oil, Iran must first agree to legislation which would treat the Caspian as a sea and not a lake. NOURI and NIYAZOV criticized the west for its doubles standards in treating their allies and non-allied states on human rights issues. NIYAZOV also met with high-ranking Iranian officials. NIYAZOV is expected to sign an agreement on cooperation in political, economic and health fields with the Iranian side and set up six joint commissions.

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