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

Thursday, July 9, 1998

Russian Federation

Politics

Health Rumors Force Yeltsin To Appear on TV

· After rumors that Russian President Boris YELTSIN was dead or had been removed by a military coup, YELTSIN appeared on television today looking well and promoting Russia's ability to overcome its financial difficulty and defend the ruble. He said, "We have the capability...We have a plan of action" to defend the ruble. Kremlin spokesman Sergei YASTRZHEMBSKY said that the vicious rumors were being spread by people seeking to further political, economic or financial interests. He added that, "The best countering to these rumors are personal communication of journalists with the President, bypassing the press service." Russia's political and financial houses have been in the spotlight for many months as it tries to battle shock waves of the Asian financial crisis, low oil prices, falling stock market, as well as lack of a new tax code, poor tax collections, and budget expenditures outside its means. Russian media have carried reports that political instability may result from the government's financial difficulties, which have forced foreign investors to find safer markets for their investments.

Miners Continue Blockade For Wages

· Coalminers still blocking the Trans-Siberian Railroad outside Anzhero-Sudzhensk, Kemerovo region have caused an economic loss of 16.1 million rubles ($2.7 million), delaying 25 trains and diverting 17 others; only passenger and postal trains are getting through. The miners who began this railway strike on July 3rd are protesting wage delays. Head of the Kemerovo region Federation of Coalminers' Trade Union Anatoly CHEKIS said miners were pressing for the implementation of two protocols signed in May. The protocols called for back wages, pensions, and welfare to be paid not just to miners

but throughout the region. CHEKIS noted the government is, "sending the money to miners only." The Kemerovo regional legislature on Wednesday night sent a telegram to Prime Minister Sergei KIRIYENKO urging Deputy Prime Minister Oleg SYSUYEV to make another trip to the region for probing together with miners into implementation of the protocols which ended the railway blockade in May protests of coal-miners. Deputy Prime Minster Boris NEMTSOV, cutting short a trip to Russia's Far East, returned to attend a meeting coalminers' congress in Moscow. He told the miners that the federal government had paid all the budget money it owed so far this year. NEMTSOV noted that as soon as the government conquers tax evasion, more money will be sent to the coal sector. "Until we learn to collect taxes and while the rich do not pay taxes, including firms, we will not get things in order," he said. In Moscow, over 200 miners from the northern Inta coal basin are continuing their sit-in outside Government House, and the demonstrators are threatening to picket the Kremlin. The miners say they are tired of promises and are calling for President Boris YELTSIN's resignation.

Economy

Japan To Invest In Russia

· While in Japan next week Russian Prime Minister Sergei KIRIYENKO will meet with Japanese counterpart Ryutaro HASHIMOTO and confirm protective accords, investment and infrastructure projects, and space cooperation. Japan's gov

Today's News Highlights

Russia

Rosneft Sale To Be Extended?

Trans-Polar Air Space Opens

European Republics

US-Baltic Charter Commission

Ukraine-Russia Foreign Trade

NATO's Solana To Urkaine

South Caucasus & Central Asia

Misinformation Raises Tensions

Repeal of 907 Gains Support

Politics-Economics-Business

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Thursday

July 9, 1998

Intercon's Daily

ernment and Ex-Im Bank are considering a loan arrangement for $1.5 billion and $500 million respectively in financial aid to Russia. During the visit, the parties will initial an accord on bilateral protection of investments and announce the formation of a commission for founding a Russian-Japanese investment company. The agreement is to show Japanese businessmen that money invested in Russia will not be lost. It guarantees not only the material side of the matter, but also a mechanism for reviewing possible debates. It is expected that $250 million of Japanese Ex-Im Bank's loan will be used to modernize the Yaroslavl-based petrochemical company Yaroslavnefteorgsintez. The first tranche of the Japanese government loan will be approximately $400 million and may be issued this autumn. Tokyo has proposed 12 joint projects with Moscow to improve infrastructure in far eastern Russia. The projects include the construction of a road between Chita and Khavarovsk, a power plant along the Amur River, a thermal power plant in Yakutsk, railway line between Tommot and Berkakit, modernization of an airport in Sakhalin, a bridge over the Amur River, three gas line projects, and three mine projects. Each project amounts to several hundred million dollars. The Ex-Im Bank of Japan and Vneshekonombank of Russia will draw up an agreement on investment in plastic bottle productions in Russia's Daghestan. The two nations will also agree on a five-year extension of a treaty on the peaceful use of outer space. The current treaty expires in October. Russia and Japan are working, together with the United States, Europe and Canada, to build an international space station. KIRIYENKO will meet with HASHIMOTO and Foreign Minister Keizo OBUCHI, but they are unlikely to hold concrete discussions on a territorial row over a group of islands off Hokkaido.

Ruble = 6.209/$1.00 (NY rate)

Ruble = 6.211/$1.00 (CB rate)

Ruble = 6.181|6.241/$1.00 (buy|sell rates)

Palladium Exports Fall

· It is predicted that the biggest producer of palladium Russia could have exports fall by 20 percent to 2 million troy ounces this year. The level would be the lowest of exports from Russia since 1992. New York-based consulting group CPM warned that there will not be a shortage of palladium, which is used mainly in electronic equipment and for

automotive anti-pollution catalysts. The CPM reported that last year demand outpaced supply for the first time since 1989. The firms' latest report shows this year's supply deficit will be 1.214 million ounces an increase from 562,000 ounces in 1997. Supply is expected to fall by 1.1 percent to 5.1 million ounces and demand to fall by 1.9 percent to 5.1 million ounces, the Financial Times reported.

Business

Rosneft Sale To Be Extended?

· Despite the withdrawal of Royal/Dutch Shell, Uneximbank and British Petroleum from bidding on the 75 percent plus one shares of the Russian state-run Rosneft for $1.6 billion, criticisms that the sale is over before it has begun, and low oil prices, the Rosneft sale will continue. Today, the Federal State property Fund said that the Russian government may extend the deadline set for July 16th until later this fall. A decision on the extension will be made later this week. Acting head of the fund Igor SHUVALOV noted that financial groups Interros and Rosprom, as well as oil company Sibneft continue to be interested in bidding on Rosneft. His announcement comes as a surprise since Uneximbank, part of the Interros group has withdrawn. In addition bank Menatep and Yukos part of Rosprom group are thought to have been experiencing financial difficulties.

An earlier bid for 75 percent plus one shares of Rosneft, with a starting price of $2.1 billion failed because of lack of bidders. A similar failure at a lower starting price would be a severe blow to Russia's privatization program and budget. The Property Fund, government, and media have billed the Rosneft sale as the greatest privatization since its successful sale of Svyazinvest, a state telecommunications company which sold for $1.88 billion. However, the Rosneft sale so far has been the greatest disappointment. If the sale fails again, the fund has three choices: lower the price again, split up the stakes and sell it asset by asset, or hold on the sale until world oil prices are more attractive. The first seems out of the question as it would undermined other privatization sales and the third would signal a defeat. Head of oil and gas research at United Financial Group Stephen O'SULLIVAN said that breaking up Rosneft and selling its assets would be a more profitable strategy, the Financial Times reported. Two popular assets are Purneftegas in western Siberia, which

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accounts for most of Rosneft's production, and Sakhailnmorneftegas on Sakhalin island. The Russian government is desperate for the sale revenues to tide it over during negotiations with the International Monetary Fund (IMF) for a release of an additional credit package in the amount of $10 billion to $15 billion.

Russia To Open Trans-Polar Air Space

· According to an International Association of Air Carriers (IAAC) press release, the IAAC and Russia have agreed to open the Russian air space over the Arctic Ocean for regular passenger air transportation. The first trans-polar flights from the South-East Asia to the United States will begin in 1999. The new routes will fly over Novaya Zemlya, the port of Dixon and East Siberia previously closed zones for foreign planes. The fact that Russia will permit foreign air carriers to fly over part of the earlier closed territories makes it possible to sharply reduce the flight time which will in turn save fuel. The IAAC and Russia are still working out major details concerning the technical maintenance of flights. There is not a single radar station for the aircraft guidance over the extensive territories of the north and east of Russia. Together with British experts, Russia is developing a satellite air-traffic control system. Britain, Holland, Japan, China and the United States have expressed interest in developing new trans-polar routes. For flights over the territory of Russia along the trans-polar routes, these countries will earmark dues: $1 per mile of the flight counting each passenger. This will amount to roughly $700 million a year.

discussing ways to settle the crisis trough diplomatic channels. SOLANA is to meet President Leonid KUCHMA and Defense Minister Alexander KUZMUK later today. He is also expected to inform the Ukrainian government about the appointment of a NATO liaison officer in Ukraine. The Alliance plans to open its military mission in Kiev in accordance with the Charter signed by the 16 NATO countries and Ukraine. He will leave for Dnepropetrovsk to visit Yuzhmash, a major Ukrainian defense complex plant.

Ukrainian-Russian Foreign Trade Figures

· Head of the Department for Cooperation with the Commonwealth countries and the Baltic states in the Ministry of Economics of Ukraine Alexander SAMODUROV announced that the total trade turnover between Ukraine and Russia for January-April 1998 amounted to $4.6 billion, a decrease of 15.2 percent as compared with the same period in 1997. The unfavorable foreign trade balance with Russia reached $1.2 billion. Ukrainian export of goods and services to Russia declined as compared with the same period in 1997 by 25.6 percent reaching $1.7 billion, and imports decreased by 7.4 percent to $2.9 billion. Over 75 percent in the structure of imports to Ukraine from Russia accounted for energy resources. SAMODUROV noted that, since September 1, 1996 when Russia imposed a value-added tax on import of Ukrainian goods, they became noncompetitive. However, even after the abolition of the value-added tax in February this year, the situation has not improved as the Russian market "was partially lost" for Ukrainian suppliers.

US-Baltic States Cooperation

· The United States and the three Baltic States Wednesday agreed to strengthen their military cooperation at the first session of the US-Baltic Partnership Commission in Riga, Latvia, chair by US First Deputy Secretary of State Strobe TALBOTT. In attendance are Latvian President Guntis ULMANIS and the Latvian, Lithuanian and Estonian foreign ministers. The Commission is expected to sign an American-Baltic memorandum on cooperation in agriculture. In a joint communiqué, the US, Estonia, Latvia and Lithuania, "stressed the importance of continued US military assistance for improving self-defense capabilities" of the three states. They also vowed to continue efforts of integrating the Baltic States into European and trans-Atlantic institutions

European Republics

NATO's Solana To Ukraine

· After talks with visiting NATO Secretary-General Javier SOLANA, National Security and Defense Council chairman Vladimir Gorbulin said that Kiev and NATO would work jointly on several military and technical projects, including weapon compatibility. SOLANA's visit marks the first anniversary of the conclusion of the Charter of Distinctive Partnership signed by the Alliance and Ukraine in 1997. SOLANA noted that Ukraine and the alliance could pool efforts to help achieve peace and stability in Europe. Speaking about the Kosovo conflict, he said NATO was after a political solution to the standoff. The contact group held an important session on Wednesday

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such as the European Community, NATO, and the World Trade Organization. The Partnership Commission was established under the Charter of Partnership among Estonia, Latvia and Lithuania and the US to review annually the activities of their military and economic working groups. All three Baltic States are eager to join NATO, a move opposed by Russia. In an effort to calm Moscow's concerns, the joint statement said that the partners, "agreed to intensify efforts to promote the security, prosperity and stability of the region, including the participation of Russia in regional cooperation." Earlier in Vilnius, TALBOTT met with President Valdas ADAMKUS parliament speaker Vitautas LANDSBERGIS, Prime Minister Gediminas VAGNORIUS, and foreign and defense ministers. ADAMKUS expressed hope that at the NATO summit, scheduled for April 1999 in Washington, "Lithuania will be invited to participate in the second stage of the NATO expansion." After the Commission's meeting, TALBOTT will continue on to Tallinn.

South Caucasus & Central Asia

Misinformation Increases Caucasus Tensions

· Interfax News Agency incorrectly reported on July 8th that newly appointed US Ambassador to Georgia Kenneth Spencer YALOWITZ said the US intends to promote the deployment of a peacekeeping force in Abkhazia under the aegis of NATO. The Russian media has been replaying the story spreading anti-NATO attitudes. This misinformation of NATO and US forces being deployed to the Caucasus region adds fuel to the fire of growing tensions in the region. Intercon sources report that YALOWITZ made no such statement. Interfax, which in the past has been faulted for inaccurate reporting by some and being a transmission belt for disinformation by others, has magnified concerns in Russia concerning the true intentions of NATO through this story. This apparently anti-NATO story comes on the heels of Russia's rebuke of Ukrainian Foreign Minister Boris TARASYUK for describing NATO's eastward

enlargement as, "The expansion of a zone of security and stability in Europe." In May, TARASYUK inflamed Russian officials by claiming that NATO's expansion was in Ukraine's national interest.

Repeal of Section 907 Wins Support

· Speaking at a hearing before the US Senate Foreign Relations Subcommittee on International Economic Policy, Export and Trade Promotion, chaired by Senator Chuck HAGEL, Special Advisor for the Secretary of State for the New Independent States Stephen SESTANOVICH, Assistant Secretary of State for European and Canadian Affairs Marc GROSSMAN, and former National Security Advisor to President Jimmy CARTER Dr. Zbigniew BRZEZINSKI voiced support for the repeal of Section 907 of the Freedom Support Act of 1992. Section 907 is a provision of law that prohibits any direct assistance form the US government to Azerbaijan, which was intended to punish Azerbaijan for its blockade against Armenia and Nagorno-Karabakh. SESTANOVICH said, "Our efforts on Nagorno-Karabakh. And our Caspian diplomacy as a whole would be better off without Section 907 of the Freedom Support Act." BRZEZINSKI said that Section 907 projects US on one side of the dispute between Armenia and Azerbaijan. He noted that, "It's repeal would give the United States more flexibility to address both sides of the conflict." Lifting the sanctions would allow US companies to develop energy resources in the Caspian Sea region. It would also permit the government to provide financial support for the east-west pipeline routes from Baku to Supsa and Ceyhan. Maryland Senator Paul SARBANES disagreed with the CLINTON administration saying that "Pipeline politics should not overshadow our other inters in the region." He called Azerbaijan, "the third most corrupt developing country in the world," citing a Control Risks Group report. SARBANES said that improvements in the Azeri government's human rights record must preclude the repeal of Section 907. The US State Department has asked Congress to consider the repeal of Section 907.

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

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