DAILY REPORT ON RUSSIA

AND THE FORMER SOVIET REPUBLICS

INTERCON INTERNATIONAL USA, INC., 725 15th STREET, N.W., SUITE 903,

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Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Friday, August 14, 1998

Russian Federation

Politics

Yeltsin Calls On Duma For Special Session

· Russian President Boris YELTSIN arrived in Novgorod today and appeared to be walking slowly and seemed to be having difficulty understanding reporters' questions about the economy. Upon arrival, he said that there was no need for a special session of the Russian State Duma to consider the government's economic austerity plan. But, within an hour, he granted Prime Minister Sergei KIRIYENKO's request to suggest that the Duma hold a special meeting to discuss a package of stabilization draft laws. Without the passage of the economic austere measures, a devaluation of the ruble appears to be almost inevitable. KIRIYENKO said on Thursday that if the Duma Council decides to convene an extraordinary meeting of the parliament after August 20th and the Duma passes the submitted draft laws, they could go into effect as early as September 1st, only after being endorsed by the Federation Council. Leader of the Russian Communist Party Gennady ZYUGANOV who met with KIRIYENKO on Thursday said that the Duma could convene sometime before September 1st.

Despite the turmoil on the Russian Trading System's index, YELTSIN said he would not cut short his vacation, which began in July. He said, "That would signify that there was turmoil, that would signify that there was a disaster and that everything was collapsing. On the contrary, everything is going as it should." He said that his main tasks after vacation will be, "certain financial and personnel issues," suggesting yet another reshuffle. He noted that he would keep KIRIYENKO on his team. Comment: This demonstrates why a lack of confidence in YELTSIN and his government is the common perception. To pretend that a hands-on approach would cause further diffi

culties is ridiculous. As much as the condition of the Russian economy is in question, so too is the mental and physical capacities of its president.

Economy

Russian Ruble Devaluation Inevitable?

· After more than a week of drops and the Russian Trading System index reaching a two year all time low, the Russian stock market rallied today up 13 percent on news that the US was working together with world leaders to augment the International Monetary Fund (IMF), Japanese government, and World Bank financial bailout. Traders remain skeptical. The market liquidity is low and the volumes traded small. Traders say no growth can be expected in the conditions of a banking crisis. The quotations in the currency sector have also gone up.

Russian President Boris YELTSIN said Russia's economic difficulties stem from a new wave of Asian problems. He vowed not to devaluate the ruble and appealed the Russian State Duma to hold a special crisis session to approve economic reform measures as part of the anti-crisis austere program aimed at restoring economic stability and improve tax collection. "There will be no devaluation—that's firm and definite," YELTSIN said. "At the moment there is a new wave of world financial crisis and we have to brace ourselves again to be able to deal with this situation. We've calculated out reserves and are ready to resist this wave." Russia has spent billions in Central

Today's News Highlights

Russia

Is There A Banking Crisis?

TU-204-120 Aircraft In Cairo

Nemtsov On Svyazinvest Board

European Republics

Transfet, LUKoil On Ventspils

South Caucasus & Central Asia

Master Destabilization Plan

Communications Min. Confirmed

Azeri Ambass. On Sanctions

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Friday

August 14, 1998

Intercon's Daily

Bank reserves defending the ruble. The crisis of the banking system is keeping the banks from starting active operations. Major rating agencies cut the ratings of several Russian Banks. Standard & Poor's (S&P) lowered its long-term counterparty credit rating on Alfa Bank, Rossiyskiy Kredit, Bank Imperial, Inkombank, Vozrozhdenie Bank, and SBS Agro Bank. The rating changes reflect the severe confidence crisis, drying up of liquidity sources of the Russian banks which has led to a spate of non payments by several Russian banks, according to an S&P press release.

Besides trader and investor skepticism, the local Russian press has shown little sympathy to Prime Minister Sergei KIRIYENKO and his reformist strategy. Nezavisimaya Gazeta said. "It is as clear as day that KIRIYENKO's government cannot handle the crisis and even cannot adequately understand what is happening on the markets. The country needs another kind of government which would know what to do, how to meet its tasks, have backing from the parliament and president." The media also points out that a devaluation would be admitting that their social and economic course of the last few years had failed.

Russian has some options to try and pull itself out of economic turmoil: devaluation, additional international lending, lengthening the maturity of bonds, and adopting severe economic reforms. The Financial Times on Thursday printed a letter from American financier George SOROS calling for the ruble to be devalued and then fixed against the dollar or the euro. His plan was instantly rejected by the Central Bank. SOROS distanced himself from the economic drop on Thursday stating, "The turmoil in Russian financial markets is not due to anything I said or did." Tycoon and leading Russian business man Boris BEREZOVSKY has been campaigning for a devaluation. SOROS also called for the Group of Seven industrialized nations to put up another $15 billion, as part of a $50 billion needed in reserves. Another option is increasing the maturity length of ruble-denominated bonds. The government could also hope that the austere economic program proposed by KIRIYENKO's government and the International Monetary Fund (IMF) will be enough to pull the nation out of the crisis. However, getting the Russian State Duma to pass the legislation will be a struggle. Geoffrey DENIS, head global emerging-markets

strategist at Deutsche Bank in London said, "The problem we have with Russia is that the IMF program of last month has failed to break the vicious circle of high interest rates and refinancing problems. That's why, in the end, devaluation is probably inevitable." Deutsche Bank, a major lender to Russia, on Thursday notified its clients that, "A ruble devaluation is now a serious policy option."

Ruble = 6.2585/$1.00 (NY rate)

Ruble = 6.290/$1.00 (CB rate)

Ruble = 6.270|6.310/$1.00 (buy|sell rates)

Mar Apr May Jun Jul Aug

Is There A Banking Crisis?

· Russia's banking system is on the edge of a serious crisis as many large banks, which have sustained considerable loss due to the dramatic depreciation of government securities, refuse to repay loans. Many banks decided to stop trading on the interbank market. In fact, the trade of rubles was virtually non existence with bank fearing that debts to each other will not be paid. Concerns have increased over the stability of Russian banks. Although no defaults have been reported, the Central Bank said that it was investigation problems with SBS Agro and Inkombank. At one SBS branch in Moscow, customers were only permitted to withdraw money in rubles, even if their accounts were established in dollars. Those who wanted dollars were asked to fill out a form and return in five days. Only some major banks can purchase foreign exchange within the Central Bank's established limits on the condition of pre-payment. The Journal of Commerce reports that, "Tokobank and Mosbusinessbank are

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regarded by Russian banks as vulnerable to whispering campaigns and hostile takeovers, abetted by the Central Bank, because they are not allied to any of the major financial groups that largely control the press and influence the Kremlin." Deputy head of the Russian Banking Association Vyacheslav ZAKHAROV said there is no systemic banking crisis, and that the Central Bank was being supportive. Statements by government officials and fiscal authorities that there is no serious risk to the banking system have had little effect, because the crisis of current banking liquidity is a fact of life, traders say. They believe the Central bank's urgent actions aimed at maintaining ruble liquidity are unlikely to have early results. One Western bank adviser in Moscow said, "This is much bigger than a bank liquidity crisis. The entire economic policy of the government is collapsing, and that means the political future of President YELTSIN, too."

Business

Five TU-204-120 Aircraft To Operate In Cairo

· The first five Russian Tu- 204-120 medium-range airliners powered with Rolls-Royce engines will be put in service with the Egyptian Cairo Aviation Company. Sirocco Airspace Leasing Company is the first foreign leasing company to order five Russian medium-range airliners and place an option for 25 more airliners of the Tu-204-120 class. The Cairo Aviation operator is to be established in Egypt expressly to fly a fleet of Russian-made Tupolev airliners to Europe, Middle East countries and Russia. The British Rolls-Royce company has delivered ten engines to the Ulyanvosk-based Aviastar Industrial Complex to be installed on the first five Tu-240-120 airliners ordered by Sirocco Airspace. Four of the engines have already been installed on two fully assembled planes and the remaining six are on the assembly line where three other airliners are being manufactured. Earlier, the Tu-204-120 airliners were expected to be sold to Russia's Krasnoyarsk Airlines but the Russian air carrier could not afford buying the craft as the foreign-made engines and some other components pushed up the cost of the plane by 58 percent making it "exorbitant for domestic airlines."

Nemtsov To Chair Svyazinvest's Board

· The Russian government has appointed Russian Deputy Prime Minister Boris NEMTSOV as

chairman of the board of state representatives in the joint stock company Svyazinvest. The board is to represent state interests in the activities of the company, a part of shares in which belongs to federal property. State representatives in the company's management act according to a single position worked out by a majority of the board. The chairman of the board is to control the working out of a single position and its implementation. On Tuesday, Russian President Boris YELTSIN signed a decree on regulate the privatization of 25 percent minus two shares of telecommunications company Svyazinvest.

European Republics

Transneft, LUKoil To Consider Ventspils

· Latvian company Western Pipelines System (WPS) has approached Russian oil companies Transneft and LUKoil with an offer to sell them part of a 25 percent stake in Ventspils port in exchange for increased volumes of oil shipments through the port's terminals. LUKoil President Vagit ALEKPEROV today is meeting with the Ventspils Mayor to discuss the issue. WPS, which is majority-owned by Ventspils, has begun consultations with Russian and western firms over their participation on a planned pipeline, running either from Belarus or Russia. If built from Polotsk, Belarus the pipeline will cost $435 million and if from Nevel, Russian $510 million. A group of design specialists are working in Ventspils to develop by end-October a plan to expand the Latvian oil transit corridor. The projected participation in the project of WPS is the following: 10 percent of the EBRD, 40 percent of Russian companies, 10 percent of Belarussian, 20 percent of Western, and 10 percent of Latvian companies.

South Caucasus & Central Asia

Attempt On Shevardnadze Part Of Master Plan

· Georgian Security Minister Djemal GAKHOKIDZE has said that while Georgia's Security Service is beefing up security around Georgian President Eduard SHEVARDNADZE due to reports of a planned third assassination attempt on the President's life, his ministry has discovered an increasing pattern of activities all across Georgia aimed at not only removing the government but causing "serious destabilization" in the nation. Three examples of unrest are already apparent throughout the nation. First, in the border district of Adjaria opposition leader Aslan

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ABASHIDZE is actively attacking SHEVARDNADZE directly. He is calling for the removal of SHEVARDNADZE because he claims the President is ruining the country. In Gali, armed Russian mercenaries from the North Caucasus are engaging in raids on the Zugdidi side of the river, which divides the district. Finally, in the Armenian ethnic region of Georgia, Javaheti, joint military exercises between Russian and Georgians were held on a Russian military base located there. The exercises angered Armenians, who believe that Georgians have no right to operate in the Javaheti region. These incidents appear to be part of a coordianted campaign to destabilize Georgia, especially before the upcoming local elections in November. Georgian intelligence sources have indicated to Intercon that Russian military intelligence is behind the campaign and the Russian military suggestions for joint maneuvers appears to be part of a provocation to stir up the ethnic Armenians in Georgia. Intelligence sources report that the potential assassins would be recruited from the Russian and Georgian military personnel.

Georgian Parliament Confirms Comm. Minister

· Georgian President Eduard SHEVARDNADZE's candidate for Communications Minister Sergo ESAKIA was overwhelmingly approved today by the Georgian parliament. He replaces Firdon INDZHIA, who resigned last week. INDZHIA was accused by members of parliament of illegal business practices and abusing his post. This appointment completes SHEVARDNADZE's cabinet reshuffle. State Minister Vazha LORDKIPANIDZE, Justice Minister Lado CHANTURIA, Education Minister Professor Aleko KARTOZIA, Ph.D., State Property and Privatization Minister Mikhail UKLEBA, and Minister of Industry Badri SHOSHITAISHVILI were confirmed as cabinet members on Saturday.

Azeri Ambass. Calls For Lifting Of Sanctions

· In today's The Washington Times, Azerbaijan's Ambassador to the United States Hafiz PASHAYEV launched an argument calling for the US Senate Economic Sanctions Task Force to recommend to

Congress that US sanctions against Azerbaijan under Section 907 of the Freedom Support Act of 1992 be lifted. The sanctions bar US aid to Azerbaijan, "until it ceases economic blockades and other offensives uses of force against Armenian and Nagorno-Karabakh." PASHAYEV noted that since the sanctions have been imposed, no blockade against Armenia exist, trade regularly flows through its borders, and the Nagorno-Karabakh conflict has been in a cease-fire phase for four years. Besides this, he noted that Azerbaijan has been actively reaching out to the US and United Kingdom to develop stronger diplomatic and business ties. He said, "Section 907 represents an excellent example of a US sanctions policy that has no justification in current political or diplomatic reality, and which serves to interfere with the building of constructive relations between the United Stated and a key partner nations in a strategically and economically important region of the world." PASHAYEV pointed out that, "The US will benefit from a Caucasus region characterized by stability, economic cooperation and secure, internationally-recognized borders." Azerbaijan and the US are working together to make critical decisions on Caspian oil pipelines routes, which will export Caspian oil to European markets. Both nations are pushing forward the Baku-Ceyhan pipeline route. Azerbaijan has implemented a progressive economic reform program, which has yielded a rise in gross domestic products (GDP) of 9 percent in the first half of 1998. PASHAYEV said that Azerbaijan welcomes and US companies in the energy sector, construction, mineral exploration, business services, and telecommunications. He also pointed out the Azerbaijan is gearing up for its presidential elections in October. The National Democratic Institute for International Affairs, the International Foundation for Elections Systems, and the Organizations for Security and Cooperation in Europe helped draft new election legislation and will monitor voting stations in October. However despite these advances and US interest in the region, "US sanctions continue because Congress is under strong pressure from Armenian lobbying groups."

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

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