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, August 12, 1998

Russian Federation

Politics

Outline Of Gazprom, Svyazinvest Sales

· Russian President Boris YELTSIN on Tuesday signed decrees to regulate the selling of shares of the gas monopoly Gazprom and telecommunications company Svyazinvest. The Russian government is instructed to sell 5 percent of the Gazprom shares as a single package at an auction for Russian and foreign investors. The buyer will be required not to re-sell the stakes within a five year period and barred from trading derivatives backed by the stake for the same period. If the auction is won by a foreigner, the rate of all foreign share-holders in the Gazprom charter capital shall be increased by 5 percent to 14 percent. As for Svyazinvest, its 50 percent minus one share will be sold. Twenty five percent plus one share will be sold at an auction for Russians and foreigners, and 25 percent minus two shares will be sold at a commercial contest with investment conditions for Russian and foreign investors. Last year, a 25 percent of Svyazinvest was sold to an international consortium led by Uneximbank for $1.9 billion. Losing bidders accused the government of fixing the auction in Uneximbank's favor. This is the primary reason why the Russian government has hired outside consultants to ensure the sale is fair. The Finance Ministry is expecting to collect 18 billion rubles or approximately $3 billion in privatization revenues in the second half of this year to bolster budget funds. Rosneft and LUKoil are two other privatization sales planned for this year. Co-head of research at United Financial Group in Moscow Stephen O'SULLIVAN said that Gazprom and LUKoil are likely to be the most successful energy sector offerings this year.

Russian Hijacking Ends in Peace

· On Sunday, a possible hijacking of a Russian

TU-154 aircraft from Tyumen to Moscow's Domodedovo airport ended peacefully when the Federal Security Service's (FSB) special Alfa commando forces surrounded the plane with armored personnel carriers forcing all passengers from the plane. Apparently, the crew found a hand written note threatening to blow up the plane unless $100,000 was provided. All the passengers disembarked, their luggage and passports were inspected and no bomb was found inside the aircraft. The FSB are searching and questioning the passengers to identify the author of hand-written note. The handwriting of each passenger is being compared with the note to trace down the terrorist who is suspected to be among the passengers. The FSB has indicated that there may be two terrorists aboard. No one has admitted to writing the note.

Economy

Ruble = 6.262/$1.00 (NY rate)

Ruble = 6.2685/$1.00 (CB rate)

Ruble = 6.241|6.296/$1.00 (buy|sell rates)

Yeltsin, Kiriyenko Continue With Economic Plan

· Despite the turmoil on Russia's financial markets, with stocks plunging 9 percent Monday and 11 percent Tuesday, Russian President Boris YELTSIN and Prime Minister Sergei KIRI-YENKO have stated they will not alter the course of plans to defend the ruble and shore up the nations finances with the austere economic program. KIRI-YENKO said, "No

Today's News Highlights

Russia

LUKoil Invests In Ukrainian Oil

Yaroslavl Motor Closes Down

Boeing's License Suspended

Gazprom Not To Bid For Rosneft

European Republics

Belarus Streses Econ. Reforms

Preparing Rus-Ukraine Summit

Ukraine PM Tough On Debtors

South Caucasus & Central Asia

Aliyev To Run For President

Politics-Economics-Business

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Wednesday

August 12, 1998

Intercon's Daily

kinds of changes in the policy of the Central Bank and government will happen. The worse the financial situation becomes, the harder we must work to fulfill the program." The new president of the European Bank for Reconstruction and Development (EBRD) Horst KEHLER expressed support for efforts by YELTSIN and KIRIYENKO to stabilize the economic situation in Russia and for the program of financial aid, being carried out under the guidance of the International Monetary Fund (IMF). KEHLER noted that the international aid, given to Russia recently, gives the country only a chance for, "a breathing despite." The government said it will continue to defend the currency, which is draining central bank reserves of approximately $8000 million to $1 billion a week. The question remains, how long can the central bank continue to bail out the ruble? Deputy Finance Minister Oleg VYUGIN predicts that the market will reach a break point sometime in mid-September, after the government has taken unspecified measures to address the situation. Investors still fear that the government will have a funding shortfall, which must be covered by nonresidential purchases of treasury bills, borrowing on the international capital markets, speeding up privatization, and calling on local banks to buy into the treasury bill market, The Financial Times reports.

Central Bank Reserves Equals $17.5 Billion

· Deputy head of the presidential administration Alexander LIVSHITS today said the gold reserve of the Central Bank of Russia totals $17.5 billion as compared to an estimated $18.4 billion as of July 31, 1998. Regarding the possibility of a ruble devaluation, LIVSHITS said this problem was not a issue since the Finance Ministry has enough funds for the next few months to service the entire debt. LIVSHITS noted that, "there is no need to touch what we have received from the International Monetary Fund (IMF) for the time being." LIVSHITS pointed out that, "...many officials have recently declared that the worst was over. However, there is much work in store for us. Although tax proceeds have improved their total amount satisfies no one yet." LIVSHITS believes that the world financial community is expecting consolidation of branches of power in Russia. He cited an opinion most frequently expressed in the West, "You'd better settle things between yourselves in Moscow, enact laws which you really need and work together."

Business

LUKoil To Invest In Ukraine's Oil Industry

· LUKoil President Vagit ALEKPEROV during a visit to the Crimea on Tuesday said that LUKoil is ready to invest $150 million to $200 million in the Ukrainian oil refining industry. LUKoil entered the Ukrainian market by signing an agreement with the Crimean government on the supply of Russian petroleum products to the peninsula and the Crimean agricultural products to Russia. LUKoil will consider the possible construction of its oil tanker fleet at the Kerch Zaliv Ship-Building Plant. ALEKPEROV hopes that the Ukrainian leadership will cooperate with LUKoil's drive to take part in the privatization of Ukrainian oil refineries. LUKoil, producing approximately 60 million tons of oil, has a shortage of refining facilities and is therefore interested in the Ukrainian plants, ALEKPEROV explains.

Yaroslavl Motor Works Stops Production

· Yaroslavl Motor Works stopped production Monday, after the main assembly line got paralyzed by a strike in the foundry shops. The workers have not been paid since Aprils and stated that they will not resume work until all back wages are paid in full. Consequently, a subcontractor plant manufacturing fuel equipment in Yaroslavl, 240 kilometers northeast of Moscow, had to halt production as well. Two other plants in Yaroslavl and four in Belarus are likely to follow suit. The diesel machine-building industry in Yaroslavl has been facing problems since disruptions began to occur in the fulfillment of a joint Russian-Belarus plan for the development and production of diesel-powered automobiles. Four Belarus and four Yaroslavl plants have their interests closely tied up with the plan. Negotiations have continued for a long time, but the expected tied-credit installments have failed to arrive in Yaroslavl and reach workers.

Caterpillar Breaks Ground In St. Petersburg

· Caterpillar Inc., which has traded with Russia since the 1920s, broke ground last week on a $50 million production plant outside of St. Petersburg. The plant will produce welded steel parts, fabrications and components for a range of excavators and forestry equipment finished at plants in Western Europe. The company's move to strengthen its presence comes without tax benefits from the government. Caterpillar's head of operations for Russia

When you need to know it as it happens

Politics-Economics-Business

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and other Commonwealth of Independent States (CIS) Stu LEVENICK said, "Tax and import duty relief is not a primary driver for Caterpillar's decision. Tax incentives aren't driving us. The long term perspective on the Russian and other CIS markets is," The Journal Of Commerce reported. He noted that the new plant will primarily use domestic materials, citing, "our experience with local steel suppliers has been very good." Disputes over tax benefits have impeded progress for many electronics companies and automakers working in Russia. Caterpillar recently opened a new office and celebrated 25 years of continuous operation in Moscow. Caterpillar has sales of $100 million in annual exports to Russia.

Boeing's Sea launch Venture Suspended

· The US State Department has suspended Boeing's license to participate in a $500 million project with Ukraine's Yuzhnoye and Russia's Energia to launch commercial rockets from a platform at sea, called Sea Launch. Boeing admitted to sharing information with its partners without obtaining permission from the State Department. However, Boeing said the information was not classified. The Customs and Justice Department are still investigation whether or not Boeing violated any law. Boeing spokesman Timothy DOLAN said that since the suspension on July 27th, 40 Russians and Ukrainians have been forced to leave the project's work-site in Longbeach, California. Sea Launch is also responsible for about 1,000 jobs in Ukraine and Russia, which represents economic stability to regions that were once dependent on the Soviet defense industry. DOLAN added that, "We're putting all our efforts into working with State to get these matters resolved. We want the suspension to be as brief as possible." The Sea Launch project faces further delays, after its launch date was already postponed until next year. Confusion surrounds the information which was transferred to the foreign partners, since Ukraine and Russia often operate with rocket technology that is superior to the US. This technology transfer is in sharp contrast to security disclosure to the Chinese, because Chinese rocketry is considered to be inferior to US space information.

New US-Russian Fund President, Chair

· The US-Russia Investment Fund on Monday named David JONES as president and chief executive officer of the fund. The Fund is a government

entity which invests in Russian businesses to promote growth. It can invest $440 million in US government funds and provide technical assistance to privately-held businesses. JONES, who succeeds Bruce SHEWMAKER, was previously president of investment banking and consulting firm Clarendon Capital. The Fund also announced that Patricia CLOHERTY has replaced retiring Michael BLUMENTAL as chair of the fund. CLOHERTY is co-chair and general partner of Particof & Co. Ventures Inc., a New York private venture capital company that manages about $4 billion in six countries.

Gazprom Not To Bid For Rosneft

· Russian gas monopoly Gazprom's chief Rem VYAKHIREV Thursday announced that Gazprom will not participate in the tender for a controlling stake in the state-owned oil company Rosneft. VYAKHIREV said, "For us it isn't the best time to buy anything. We are busy with the opposite process. We are selling everything that is redundant. We are selling everything except the system." Gazprom earlier said it will sell much of its non-core assets to meet payments of its massive tax debts. The stake of 75 percent plus one share in Rosneft is being privatized, with the extended bidding period expiring October 27th and results due October 30th. With the federal budget critically short of revenues, the government is making desperate efforts to secure a successful sale this time. The Russian government has appointed outside consultants to manage the oil company until the sale and another company to advise in the privatization process.

European Republics

Belarus Premier Stresses Economic Reforms

· Belarus Prime Minister Sergei LING expressed strong disagreement with the widespread opinion abroad that the republic doesn't carry out economic reforms. According to LING, factories of a non-state form of property put out even approximately 41 percent of all industrial goods. He also reported that Belarus transferred 40 percent of housing into personal property, while private owners received 1,200,000 hectares out of seven million hectares of farm land. Incidentally, private owners produce 70 percent to 80 percent of potatoes, fruits and vegetables in the republic. LING claimed that a psychological change towards businessmen and business has taken place in the minds of people in the country.

When you need to know it as it happens

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Rus-Ukraine Summit Preparations

· Russian presidential aide Sergei PRIKHODKO is in Ukraine this week preparing for the Kharkov consultations on September 18th and 19th between Russian President Boris YELTSIN and his Ukrainian counterpart Leonid KUCHMA. The two leader have held numerous telephone conversations to discuss bilateral cooperation and agenda items for the summit. Following their last summit on February 26th to March 1st, 1998, a joint statement on results of the summit stressed that the bilateral relations, "had a special nature and a priority significance for both countries." The Presidents signed a program of the Russian-Ukrainian economic cooperation for 1998-2007, which aimed to raise the level of the economic cooperation, upgrade the free trade regime and gradually form a common economic space. The sides called for a free access of the Russian and Ukrainian capitals to each other's markets, a boost on investment policy for a mutually beneficial basis and transnational financial-industrial groups. They stressed the special significance of the cooperation in the fuel and energy industry, the space exploration, the nuclear power industry, the electronic industry, the aircraft-building industry, transport and agriculture. Both leaders are calling for the ratification of the three basic agreements on the Black Sea fleet and the drafting of additional documents for the stay of the Russian Black Sea fleet on Ukrainian territory.

Tax Chief Presses Ukrainian Debtors

· Ukrainian Prime Minister Valery PUSTOVOITENKO has taken drastic measures to persuade tax debtors to pay up. Last week, he gathered more than 1,000 executives from debtor companies in a Kiev meeting hall and said that no one would be allowed to leave until their debts were paid. Many executives agreed to pay a large portion of their debt within days and the rest by the end of the month. However, since the meeting, only $36.5 million has arrived for the Pension Fund and $31.5 million for the budget. The Ukrainian Pension Fund

is short $1.5 billion and the budget $3.5 billion in revenues. This week, PUSTOVOITENKO has ordered 1,000 managers to take part in civil defense field exercises scheduled to begin today. He told executives that people have started rumors that teachers are being paid in manure instead of money. He said that if tax payments don't start arriving, the executives who will be attending the civil defense exercises may instead receive, "training in transporting manure."

South Caucasus & Central Asia

Aliyev To Run For President

· Tuesday on national television, President Geidar ALIYEV announced that he will run in the Azeri presidential elections scheduled for October 11th. He said his decision to run for re-election was based on the request of several electoral associations and initiative groups, which nominated Aliyev as their candidate in the elections. ALIYEV said he will do his best to justify the confidence of voters. He appealed to the Central Electoral Commission for registration as a presidential candidate. Other registered candidates include, Azerbaijan Party of National Independence chairman Etibar MAMEDOV, Independent Azerbaijan Party chairman Nizami SULEYMANOV, Association of Victims of Political Repression chairman Ashraf MEHTIEV, Hope Party chairman Abulfar AHMEDOV, Social Welfare Party chairman Hanguseyn KAZIMLI, Azerbaijan Communist Party-II chairman Firidun HASANOV, pedagogue Ilgar KERIMOV, and Abutalib SAMEDOV of the Alliance for Azerbaijan. United Communist Party of Azerbaijan Secretary General Sayad SAYADOV has expressed interest in running, but has failed to submit the necessary application and signatures in support of his candidacy. This will be the first presidential elections held under the constitution of independent Azerbaijan which was adopted in November, 1995. ALIYEV has called for a number of international observers to ensure that the democratic election is free and fair.

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

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