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, August 11, 1998

Russian Federation

Politics

Yeltsin Appointments and Removals

· Russian President Boris YELTSIN Monday appointed deputy director of the President's office Alexander LIVSHITS as presidential envoy to the Asian-Pacific Economic Cooperation forum (APEC). LIVSHITS said that APEC is expected to be one of the most influential organizations in the 21st century. The organization has 18 members, including China, Japan, Canada, the United States and other Asian and South American countries and regions. Russia was designated as a member at an informal meeting of APEC leaders in Vancouver in November 1997. The next APEC meeting will be held in Malaysia this November. YELTSIN also appointed Prime Minister Sergei KIRIYENKO as the Russian co-chairman of the intergovernmental commission on economic cooperation between Russia and Uzbekistan. Previously, this position was held by Valery SEROV. The President also relieved Alexander AGEYENKOV of his duties as deputy secretary of the Russian Security Council in connection with his transfer to another job. He will be replaced by Viktor MELNIKOV.

Economy

Ruble = 6.2585/$1.00 (NY rate)

Ruble = 6.265/$1.00 (CB rate)

Ruble = 6.236|6.294/$1.00 (buy|sell rates)

Russian Stock Market Continues to Fall

· Despite receiving $300 million from a World Bank loan on Monday, Russia's Trading System fell 9 percent, pushing the index of leading shares to at two-year low, closing at 120.91, down from 132.86 on Friday. Trading volumes also fell from $22.7 million on Friday to $15 million. Since the International Monetary Fund, Japanese government, and

World Bank announced a $22.6 billion lending package, Russian share prices have dropped by 37 percent. Investors are apparently reacting to an increase in Russian domestic-debt yields from 90 percent to 112 percent for benchmark one-year notes, nearly twice the official rate of 60 percent, according to The Wall Street Journal. Today, trading on the Moscow market was stopped for 45 minutes after stocks dropped 11 percent. Traders blamed the weak economy on the continuation of the Asian crisis, as Japan today downgraded its chances of recovery. The ruble was again rescued by the Central Bank. Investors appear to be waiting for the government to implement strict tax reforms as required by the International Monetary Fund loan agreement. Head of research at Brunswick Warburg Per MELLSTROM said, "This is not an environment where people are willing to take risks, not an environment where people are willing to give the benefit of the doubt to a country with a bad track record. It's difficulty for Russia to recover in a major way. This is likely to be a nervous and volatile market for the coming weeks." A Finance Ministry official said that the government for the third time canceled a treasury-bill auction. In 1996 and 1997, Russia was the best performing stock market in the world. This year, with the market down 70 percent, Russia's stock market may be determined to be the worst.

Is Primakov To Blame For Russia's Economic Crisis?

· According to RFE/RL Newsline, Segodnya's Pavel FELGENGAUER has argued that Foreign Minister

Today's News Highlights

Russia

Ports Loose Out On Imports

Areoflot Chooses Unisys CLS

3KM Alcohol Pipeline Found

European Republics

AIG Baltic Presence Expands

Rus-Ukraine Begin Plan Project

South Caucasus & Central Asia

Azeri-Rus Commit To Ties

Metromedia-Azeri Telephones

Turkey Exports Turkmen Energy

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Yevgeny PRIMAKOV's success in arranging an extension of the UN's Oil-for-Food Mandate for Iraq to double its oil exports is actually the reason for Russia's economic defeat. He claims that the real reason for the economic fallout is not the Asian financial crisis, but the fall in the world's oil prices caused by new volumes of Iraqi oil. He said, "If just one bomb fell on Baghdad, oil prices would double by the beginning of the heating season in the northern hemisphere...that would be good for everyone. He added that Rosneft then might be sold for a higher price and the extra money from the sale could be used to pay off coal miners and military personnel suffering from wage arrears.

Russian Ports Loose Out On Import Boom

· Russian Ports have lost out on an increasing boom in import cargo due to their inefficiencies and costly delays. Director of development at Sea-Land Service Inc. Richard NICHOLSON said, "The sad fact for the Russians is that almost all the profits from moving their imports have gone to boosting the Baltic states and Finland," The Journal of Commerce reported. Russian Railway systems are only working at 50 percent of its capacity. Rail officials complain that Russia's far east maritime companies earn $260 for shipping a container 625 miles, but the rail system only earns $239 for shipping the same container 10 times that distance. NICHOLSON adds that, "The Russian ports are losing out. But they aren't losing because of port or lift charges [which are cheaper in Latvia and Estonia]. They are losing because of poor performance, which turns into costly delays for shipping lines and consignees." Ports in Latvia, Estonia, and Finland move cargo through at a faster rate. NICHOLSON is skeptical that a new ministerial study will solve the problem. "Every single port study and analysis has recommended the same thing. The Russian Ports have to get out of the business of running terminals. The St. Petersburg port would prefer to run a poor operation themselves, rather than become a landlord, and let stevedoring companies run the operations."

Tax Debt Crime Reaches 4,000 Cases

· The Russian tax police press service on Monday said that in the first half of 1998 it registered 4,000 crimes which inflicted damage worth 5.4 billion rubles ($870 million). Criminal proceedings have been initiated in 3,908 cases and more than 600 people

have been convicted. According to the press service, 9,300 violations of tax legislation were registered, the share of serious crimes reaching 42 percent compared to 34 percent in the same period of 1997. The tax police and the State Tax Service (STS) demanded perpetrators pay 14.6 billion ruble ($2.4 billion) in tax, but the budget has received only 1.8 billion rubles ($290 million). Head of the State Tax Service Boris FYODOROV Friday urged the Russian State Duma to adopt a package of draft laws introducing changes in the taxation system, specifically, to make amendments to the Law on the income tax for natural persons. FYODOROV said that a fixed share of the income tax should be channeled into the federal budget. He supports the plan to channel into the budget 50 percent of the income tax for natural persons, but 20 percent to 30 percent, suggested by the Duma, is also acceptable.

Business

Gov't Says Gazprom Will Pay By The Law

· Russian Prime Minister Sergei KIRIYENKO said on Thursday following a meeting with gas monopoly Gazprom's management that mutual commitment between the government and Gazprom have been clearly defined. He said, "Gazprom is expected to strictly keep its word on tax payments, as it was in July, while the country in turn would scrupulously carry out its gas payment obligations." Thus far, cash payments account for only 15 percent of the cost of gas supplied. KIRIYENKO believes that the solution should be in a program which provides for listing all budget-dependent gas and electricity consumers and setting strict limits and payment procedures and terms for them. A new presidential decree allowing those enterprises which pay at least 50 percent in cash for gas supplies will be granted a 50 percent discount. Gazprom chairman Rem VYAKHIREV briefed KIRIYENKO on results of debt negotiations with Minsk. He said, "if we strictly demand that Russian gas consumers pay for supplies, we should pursue the same policy in respect of our neighbors, including Belarus with which we are in a single economic space."

Gazprom paid 2.5 billion rubles in taxes in July, according to head of the Tax Service Boris FYODOROV. He added that the law on tax payments will be applied equally to all, including Gazprom. FYODOROV said Gazprom will be paying taxes in

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accordance with law, not the figures it chooses.

Aeroflot Chooses Unisys For CLS

· According to a Unisys press release, Russian Aeroflot International Airlines has selected the Unisys Corporation's Customer Loyalty System (CLS) to improve customer service offerings and increase competitiveness in the global market. In a contract valued at $1.1 million, Unisys will provide CLS and services for Aeroflot to establish frequent flyer and loyalty programs. With the program, Aeroflot hopes to enhance its revenue potential by delivering customized services and rewards targeted at narrow customer segments rather than broad mass markets. The offerings will have real value because they are based on customers' actual preferences, buying patterns, and travel experiences. CLS will improve Aeroflot's information tools for forming alliances with other airlines around the world. The CLS system also serves as a centralized database of customer information, which eliminates having valuable information in disparate databases. Aeroflot's Deputy Commercial Director Nikolai LEBEDEV said, "With Unisys Customer Loyalty System, we can establish high-quality programs that deliver consistently excellent service to our customers." Implementation of Unisys CLS is underway and expected to be completed in October 1998. Unisys Worldwide Transportation's Program Director for Customer Management Mike MCNAMARA said that, "Aeroflot is entering a new age of customer awareness, service, and marketing. Unisys is very proud that they have selected our solution to support this important business strategy." Unisys is an information technology solutions provider that has a portfolio of information services, technologies and third-party alliances needed to help clients capitalize on their information asset to enhance their competitiveness and responsiveness to customers.

Tuesday Tid-Bits

Three Km Alcohol Pipeline Found In Lithuania

· High duties on alcohol imports have caused many in the former Soviet Union to develop creative smuggling methods. Lithuanian alcohol producers have reported falling profits and today local police may have solve the mystery as to why their profits are going down the drain. Policeman Stanisolvas STONYS said, "After several days of surveillance,

we discovered a plastic underground pipeline of around three kilometers in length used for smuggling strong spirits from Latvia." The pipeline was found under the house of a former border guard in northern Lithuania. STONYS added that a small pump was installed to extract a capacity of alcohol of approximately 12 cubic meters. The Lithuanian government has said that fighting alcohol smuggling will be among its top priorities after first-half excise duties dell 139 million litas ($34.8 million) short.

European Republics

AIG Reinforces Its Presence In The Baltics

· American International Group Inc. (AIG) of New York, and Pohjola, a Finnish insurer, have formed an insurance company in Lithuania with their Estonian affiliate, Seesam International Insurance Co. Ltd. The new company, based in Vilnius, Lithuania, will be known as UADB Seesam, and is licensed in the country to sell all lines of non-life insurance to foreign and local companies, as well as to individuals, according to a AIG report. AIG and Pohjola each own 45 percent of the stock in UADB Seesam and Seesam owns the remaining 10 percent. In 1991, AIG and Pohjola formed Seesam International and, in 1993, all three companies formed a joint venture insurance company in Latvia, called Seesam Latvia. AIG senior vice president of foreign general insurance Martin SULLIVAN, said the acquisition is an important addition to AIG's existing network in Estonia and Latvia, establishing a complete presence for AIG in the Baltics.

Russia-Ukraine Begin An-70 Production

· Deputy Commander In Chief of the Russian Air Force in charge of Air Force armament Lieutenant General Yuri KLISHIN on Friday announced that Russian and Ukraine will begin to produce the An-70 military transport plane. He said the decision to begin production is not dependent on the decision of Western European countries to join or not join the program. Preliminary flight tests have been completed. The plane will now be transferred to the State Flight Trial Center of the Air Force, where military personnel will test it. The Aviant Plant of Kiev and the Aviacor Aircraft-Building Plant of Samara will assemble five planes each and 50 turbojet engines for them. The production of An-70 planes in Kiev will begin in 1999 and in 2000 in Samara. The demand

When you need to know it as it happens

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for An-70s in the CIS member states is estimated at 600 planes, of which 150 will be purchased by the Russian Air Force, Yuri KLISHIN said. Another 300 planes may be sold on the world market, specifically Middle East countries, he added.

South Caucasus & Central Asia

Azeri-Russian Commit To Deepening Ties

· Azeri President Geidar ALIYEV and Russian State Duma Foreign Affairs Committee chair Vladimir LUKIN last week confirmed that their countries stand for the development and deepening of bilateral mutually advantageous relations in all areas. LUKIN admitted that there is some criticism with regard to Azerbaijan in Russia, but he stressed that it does not reflect Moscow's official position. Both the Duma and the executive branch in Russia call for the expansion of relations with Azerbaijan, he said. LUKIN confirmed this citing the ratification of a number of important bilateral documents, including the framework treaty of friendship, cooperation and mutual assistance signed by the presidents of the two countries last year. LUKIN named the Nagorno-Karabakh conflict and the legal status of the Caspian Sea as two issues causing difficulties in relations between Russia and Azerbaijan. He said that Russia believes the conflict should be settles on the basis of the Lisbon principles, which were approved by all OSCE countries except Armenia. He noted that important steps were taken during recent talks between Azerbaijan and Russia on the Caspian Sea's legal status. ALIYEV said that the Caspian states have reached agreement in principle to divide the sea into national sectors and believes they should continue the talks in order to work out the legal status of the sea as a whole.

Metromedia Acquires Stake In Azeri Telephones

· Metromedia International Group Inc. said its International Telecommunications Inc. unit acquired a controlling stake in Omni-Metromedia Caspian Ltd., which is a participant in a joint venture to provide telephone services in Azerbaijan. Specific terms of the deal were not disclosed to the public. Omni-

Metromedia Caspian is participating in a joint venture with the Ministry of Communications of Azerbaijan to provide telecommunication services, including local, domestic, and international long distance telephone service, data service, and Internet access for Azerbaijan. The joint venture is equally owned between Omni-Metromedia Caspian and the Ministry of Communications.

CTFA To Export Turkmen Electric Power

· A group of Turkish companies called CTFA Monday received the exclusive right to export Turkmenistan's electric power to other countries. The move is designed to facilitate export projects with Turkey and Pakistan. Turkmenistan's power plants are capable of generating up to 17 billion kilowatt per hour of electricity a year, while the country needs only 10 billion kilowatt per hour. A condition of the agreement is that CTFA use its profits to finance projects to develop Turkmenistan's energy infrastructure and to increase the country's potential for exporting energy. CTFA plans to build an electric substation to transport power to Turkey via Iran and will lay a 500 kilowatt power line to Pakistan via Afghanistan. The combined cost of the two projects is approximately $290 million. Turkmenistan is expected to export 200,000 to 500,000 kilowatt per hour of electric power to Turkey and 1,000 megawatt of electricity to Pakistan annually.

Bouygues Wins Turkmen Contract

· Turkmen President Saparmurat NIYAZOV Friday announced that the French Bouygues Company has become the general contractor for construction works in the Turkmen capital of Ashgabat. The company's main architect presented the President with an outline of the Ashgabat Palace of Congresses. NIYAZOV expressed confidence in the success of Bouygues noting the building of the presidential palace in Ashgabat and the Geoktepin mosque not far from Ashgabat. The Palace of Congresses will be ready late next year. The Palace of Justice and the Defense Ministry building with a total cost of over $150 million will be finalized in 2000.

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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