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

Monday, August 10, 1998

Russian Federation

Politics

Yeltsin Rejects Duma Amendments

· Russian President Boris YELTSIN Saturday resolutely denied a draft law submitted by the Russian State Duma on transferring the president's powers to the prime minister when necessary. According to Duma speaker Gennady SELEZNYOV, the President said that the draft law, "on ensuring the continuity of presidential powers in cases when Russian president is unable to carry out his duties," is, "conceptually unconstitutional and is not subject to further consideration." YELTSIN noted that the draft law contains a mechanism of temporary removal of the president from office, which is prohibited by the constitution. He stressed that Article 92 of the Constitution allows the prime minister to temporarily assume the functions of the head of state only in exceptional cases when the president objectively cannot carry out his duties. Neither medical treatment in sanitariums or on resorts, nor a vacation of the president fits this description, YELTSIN was quoted by the presidential press service as saying. He believed a long illness or treatment in hospital cannot be considered as a sufficient argument compelling the head of state to temporarily transfer his powers to the prime minister. YELTSIN believes an adoption of these amendments will considerably tip the scales in favor of the legislative branch, thus jeopardizing the constitutional system in Russia.

Meanwhile, YELTSIN signed a decree permitting the sale of state-owned shares of the stock companies Vostsibneftegaz, the Eastern Oil Company, Sibur, TNC, Komi TEC, and Norsi-Oil. According to another presidential decree, Bashkirugol and the Krasnoyarsk Coal Company have been ruled out from the list of companies, of which shares owned by the state will be turned over for trust management in a priority

order. This was done according to the decree, "for purposes of putting into effect measures for demonopolization of management of coal-mining enterprises in the Russian Federation, of improving the financial situation of the stock companies and of creating favorable conditions for replenishing the federal budget."

Russia-Israel Discuss Technology Transfers

· Secretary of the Russian Security Council Andrei KOKOSHIN and Israeli Minister of Industry and Trade Natan SHARANSKY met in Israel on Saturday to discuss prospects for the Russian-Israeli cooperation in high technologies, the situation in the Middle East, and joint efforts against terrorism. SHARANSKY stress Israel's concern over the leakage of rocket technologies from Russia to Iran. Israeli Prime Minister Benjamin NETANYAHU emphasized this urging Russian to curb its missile technology from transferring to Iran. He said that Iran is developing ballistic missiles, which poses a, "direct threat to Israel's security." Last month, Iran test-fired the Shahab-3 missile, which with its range of 1,300 kilometers is capable of hitting Israel and the US troops in Saudi Arabia. Russia has denied helping the Iranian missile project, and Iranian officials also rejected claims that Russian helped build Shahab-3. KOKOSHIN said Russia sees Israel as the key to ensure that a US threat of sanctions against Russian companies allegedly transferring missile technology to Iran is not there at the time of the YELTSIN-CLINTON summit in September.

Today's News Highlights

Russia

WB Approves $1.5B Loan

Russian Arms Exports Expand

IBM Subsidiary Pleads Guilty

European Republics

Adamkus Responds To Latvia

Belarus-Gazprom Debt Agrmt

South Caucasus & Central Asia

New Georgian State Minister

Azeri Receives WB Loan

Armenian Prosecutor Shot

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Meanwhile, Iranian Ambassador to Moscow Mehdi SAFARI said that Iranian students are expected to study in colleges and universities of the northern Komi region. He boasted about increasing economic and trade relations with the region. "We annually purchase paper from abroad for the amount of $50 million. Deliveries from Komi will be the largest," SAFARI noted.

Economy

Ruble = 6.255/$1.00 (NY rate)

Ruble = 6.262/$1.00 (CB rate)

Ruble = 6.233|6.291/$1.00 (buy|sell rates)

World Bank Approves Loan To Russia

· The World Bank on Thursday unanimously approved the bank's largest loan to Russian ever of $1.5 billion to help the country reform its banking and private sector and boost tax collections, with the first installment of $300 million received today. The loan is part of an international lending package of $22.6 billion announced in July by the International Monetary Fund (IMF), Japan, and the World Bank. The loan agreement requires major changes to the gas monopoly Gazprom, including allowing independent producers access to Russian pipelines, an audit of pipeline firm Transneft, and a new tax regime for the oil and gas sector. The bank also said that Russia must improve its tax collection and carry out fiscal reforms. Russia's tax arrears, estimated to total $800 million, are seen mainly as the cause of the country's growing fiscal deficit.

The loan will be paid in installments, with amounts rising as Russia meets a series of increasingly difficult economic reform benchmarks, bank officials said. The official added that an installment of $500 million is planned for December 1998 and $700 million in June 1999. World Bank country director for Russia Michael CARTER said that the $500 million payment will be dependent on progress in restructuring Gazprom. Both the World Bank and the IMF stressed that future installments hinge on progress by Moscow in implementing promised economic reforms. The loan is to be repaid in seven years with a three-year grace period. In the period from 1992 to 1997, the World Bank extended a $9.8 billion worth of loans for the implementation of 40 projects in Russia. Russian Deputy Premier Viktor KHRISTENKO Friday expressed satisfaction with the World Bank loan for approving Russia's loan.

Business

Arms Exports Expand To Latin America

· Russian Air Force press service chief Alexander DROBYSHEVSKY today said that Moscow plans to expand its arms deliveries to Latin America, stating their interest in multiple rocket launchers of the Smerch type, BMP-3 armored personnel carriers, T-80U, T-80UK and T-90S tanks, anti-tank missile complexes, Buk-M1 and Tor-M1 air-defense missile systems, Su-27SK aircraft, submarines, and other equipment. Russian producers are ready not only to offer Latin American buyers the most advanced samples but also to organize their assembly in importing nations, he said. Moscow has offered to set up the necessary infrastructure, provide material and technical support, ensure maintenance services, organize personnel training centers, and supply spare parts.

Russia's interest in Latin America is explained by the fact that the volume of the international arms market has reduced from $60 billion to $80 billion in the late 1980s to $25 billion to $35 billion now. Latin America accounts for $800 million to $1.5 billion, which is about 4 percent to 7 percent, and its market is marked by tough competition. Russia's share in Latin American market is about $100 million to $120 million, which is approximately 10 percent, compared to the US control of 50 percent of the arms imports into the region. Brazil, Columbia, Cuba, Ecuador, Mexico, Nicaragua, and Peru are Russian partners in military cooperation. Moscow has interesting projects to implement with Argentina, Brazil, Chile, Columbia, Ecuador, Mexico, Peru, and Venezuela. The Gagarin Air Force Academy in Monino outside Moscow on Tuesday will host an international conference on the possibilities of Latin American nations using Russian military aviation equipment.

A US magazine drawing ratings of leading figures in the defense sector has placed a Russian arms exports manager among top 40 businessmen and politicians exerting the greatest influence on this market. General manager of Russia's Rosvooruzheniye Yevgeny ANANYEV, the only company permitted to trade in all kinds of arms, is tied on the list together with the head of a German industrial giant, Deimler-Benz Aerospace Manfred BISCHOFF,

When you need to know it as it happens

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and US Secretary of State Madeleine ALBRIGHT.

IBM's Russian Subsidiary Pleads Guilty

· The Moscow subsidiary of International Business Machines (IBM) pleaded guilty to illegally exporting 17 supercomputers, which specialize in the design and development of nuclear weapons, worth $1.5 million to a Russian nuclear weapons laboratory in 1996. IBM agreed to pay the maximum penalty for violations of the US Export Control Laws, $8.5 million. While IBM worked with US government officials to close the investigation, the Russian government failed to cooperate. IBM Chief Spokesman Rob WILSON said, "We regret the involvement of our Russian subsidiary in this case." He added that the company is pleased the matter is resolved. In 1995, the IBM subsidiary began negotiations to sell computers to the laboratory through a Russian company named Jet InfoSystems. The US Department of Commerce rejected IBM's request to sell the computers to stating US guidelines which preventing the export of powerful computers for non-civilian use in Russia. Following Commerce's decision, Russia accused the US of withholding technology need to simulate nuclear tests in the laboratory. Russia claimed it need the technology to comply with the nuclear test ban treaty. In September 1996, IBM sold the computers, two fiber channels switches and related hardware and software to the Russian affiliate, knowing they were destined for the laboratory.

while Ventspils has a capacity of 20 million to 25 million tons per year and exports approximately 11 percent to 12 percent of Russia's crude. President ADAMKUS urged Latvian and Lithuanian institutions to work together in, "constructive and productive cooperation."

Belarus-Gazprom Discuss Debt

· Russian gas giant Gazprom's Chairman Rem VYAKHIREV and Belarus President Alexander LUKASHENKO on Thursday agreed to a plan to settle Belarus' gas debts involving the supply of goods worth $300 million to Russian budget institutions. LUKASHENKO noted that if Russia had been making payments to Belarus in cash rather than stocks of goods there would have been no problem resolving the nation's debt to Gazprom. In this connection, the president said that to liquidate insolvencies the system of offset payments must be put into effect. The overall debt owed by Belarus for Russian gas exceeds $250 million, and its debt to Russian oil companies makes up $170 million. Belarus proposed a plan to offset the debt by deliveries of goods not just for Gazprom, but for other Russian entities funded by the federal budget, and in government bonds. The goods would include, cars, tractors, and refrigerators. Belarus Prime Minister Sergei LING suggested that the only way out of the deadlock was to resume the practice of offset payments widely used last year in payments to Gazprom. In this connection, LING noted that this idea had been approved by Deputy Prime Minister Boris NEMTSOV. LUKASHENKO commented on the problem of the construction of the Yamal-Europe gas pipeline and stressed that the construction of this gas pipeline met mutual interests of Russia and Belarus.

South Caucasus & Central Asia

New Georgian Appointments, Resignation

· Georgian President Eduard SHEVARDNADZE's candidate to be the State Minister, Vazha LORDKIPANIDZE, was approved by the parliament on Friday in a vote of 122 to two. Parliament speaker Zurab ZHVANIA gave his support for LORDKIPANIDZE on Wednesday for the post, which is regarded as being second in importance only to that of the president. Addressing a special session of the parliament, LORDKIPANIDZE said that, if

European Republics

Lithuanian Oil Terminal Threatens Latvia?

· Lithuanian President Valdas ADAMKUS responded to Latvian President Guntis ULMANIS ecological concerns about the Lithuanian Butinges Oil Terminal calling them groundless. A press release stated that, "In the letter [ADAMKUS, a former US environmental official] emphasized that such fears were groundless and in some cases reflected the dishonest competition and improper political lobbying of some oil export and transport companies." Environmental advocates, protesting outside the Lithuanian embassy in Riga, fear that an oil accident could damage the Latvian coastline. However, local analysts say that the motivation for the protest is really the fear that Latvia's key oil export terminal Ventspils would be hurt by competition for Russian crude. Butinges has a capacity of 8 million tons of crude and 2.5 million tons of oil products per year,

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elected to the post, he will place top priority on the settlement of the conflict in Abkhazia and South Ossetia. He noted that the priority was not only for himself, but also for the new government. Since 1995 he served as Georgia's Ambassador in Russia.

On Saturday, the parliament confirmed four of the President's candidates appointed to ministerial positions in the government. Lawyer and a member of the Georgian Justice Council Lado CHANTURIA was confirmed as the new justice minister; Professor Aleko KARTOZIA, Ph.D. was confirmed as the new education minister; former deputy foreign minister Mikhail UKLEBA was confirmed as the new minister in charge of state property management and privatization; and former Tblisi mayor (1996-1998) Badri SHOSHITAISHVILI was confirmed as the new minister of industry. Konstantin ZALDASTANISHVILI, who was the minister of trade and foreign economic relations in the previous government, was appointed Georgia's representative to the European Union. The parliament will continue confirmation debates on Tuesday.

Georgian Government aide Roman REKHVIASHVILI has said that Georgian Post and Telecommunications Minister Pridon INDZHIA, "has handed in this resignation," on Thursday completing SHEVARDNADZE's cabinet clean-out. INDZHIA has been accused by members of parliament of illegal business practices and abusing his post by running private telecommunications while serving as minister. He was the only minister who refused to resign in late July when SHEVARDNADZE forced out almost the entire government. The defense, security, and interior ministers were the only ones asked to stay on. SHEVARDNADZE said he will probably re-appoint many of the old ministers to the new team, which he hopes to complete later this month.

Azeri Receives World Bank Loan

· Azerbaijan and the World Bank have signed a $40 million agreement providing the Azeri government with financing for two major projects. The first one

aims to revive the Agdam, Ter-Tersky and Fizuli regions in the Azeri west and south-west, which were stricken by the Armenian-Azeri conflict. The World Bank will allocate $20 million for the three-years-long project. The overall cost of the regions' revival is $54.2 million. The restorations will be assisted by the UN Development Program ($3.2 million), the Office of the UN High Commissioner for Refugees ($21.1 million), the European Union ($9.5 million) and the government of Azerbaijan ($9.4 million). The World Bank will also allocate $20 million for a five-years-long environmental project. The money will be used to build a sturgeon farm in the mouth of the Kura River in the Neftechala region, 170 kilometers south of Baku, ($9 million), and clearing the town of Sumgait, the northern part of the Apsheron peninsula, from mercury ($8.1 million). Both credits are easy-term and given via the International Association for the Development. The $40 million credit is given with a 0.75 percent annual interest rate for 35 years with an eleven-years grace period.

Armenian Prosecutor Assassinated

· According to the Armenian Interior Ministry, after attending a cabinet meeting Armenia's Prosecutor General Genrik KHACHATRYAN was shot and killed in his office on Thursday. His assassin former republican transports prosecutor Aram KARAPETYAN then turned his Makarov pistol on himself committing suicide. KHACHATRYAN, 59, was appointed to the post in May 1997. President Robert KOCHARYAN said KHACHATRYAN had carried out the struggle for the sake of establishing lawfulness in Armenia, adding that he was an honest person and well-known scientist. The President said he had ordered police to expose as soon as possible all circumstances linked with the crime as well as its motives. No data about motives behind the killing has been reported. People, who knew KARAPETYAN well, thought there could be a third man in the office at the moment of the crime. One theory notes that the office door was locked, giving the true assassin time to escape. However, the investigators have no information to that effect.

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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