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 17, 1998

Meanwhile concerning the effort to free Moscow's envoy to Chechnya Valentin VLASOV, who has been held by kidnappers since May, RYBKIN said that it is a, "matter of honor for law enforcement agencies of the whole of Russia, including the Chechen Republic." RYBKIN said that negotiations with the kidnappers remains volatile and are still at an impasse, because the Russian-Chechen negotiating commission believes there, "should be no ransom" turned over to the terrorists. RYBKIN also stated that the President's envoy to Chechnya should be held by a person who, "has knowledge of the processes in the North Caucasus and of the concrete people who manage these processes."

Economy

Ruble = 6.2725/$1.00 (NY rate)

Ruble = 6.430/$1.00 (CB rate)

New Currency Policy Equals Devaluation

· The Russian government and the Central Bank in a joint statement today issued a number of new currency policies, which effectively constitutes a devaluation of the ruble. According to the statement signed by Prime Minister Sergei KIRIYENKO and Central Bank Chairman Sergei DUBININ, "the Government and the Bank of Russia deem it necessary to take a set of measures aimed at the normalization of the financial and budget policy." Effective today, the Central Bank is introducing a floating exchange rate for the ruble. The new exchange rate will be set

Russian Federation

Politics

Duma To Discuss Economic Crisis Friday

· Communist Leader Gennady ZYUGANOV today announced that the Russian State Duma's managing council has decided that the Duma will hold an emergency session on Friday. The Duma plans to mainly debate the government's economic performance. The Duma is not likely to consider draft laws prepared by the government as part of its anti-crisis program, which was the point of Prime Minister Sergei KIRIYENKO and President Boris YELTSIN's request. ZYUGANOV noted that the Duma will probably consider the draft legislation at a later session. Head of the pro-Communist Agarian faction in the Duma Nikolai KHARITONOV said that the Duma invited YELTSIN to attend Friday's session. However, it is unlikely that YELTSIN will take another break from his month long vacation. Russian State Duma deputy chairman Vladimir RYZHKOV called on all branches of government to cooperate in managing the country's "highly critical," situation.

Moscow Emphasizes One Russia To Chechnya

· Russian envoy to the Commonwealth of Independent States (CIS) Ivan RYBKIN on Saturday said that, "Chechnya can join the international community only as a member of Russian Federation." In an interview with the Ekho Moskvy radio station broadcast live, RYBKIN said that the recent trip by the Chechen President Aslan MASKHADOV to Turkey and the United States can prove that, "no one needs Chechnya but Russia." Commenting on MASKHADOV's statement that Turkish and US leading businesses are ready to facilitate Chechnya's integration into the world community, RYBKIN noted that only those who are against Russia's guarantees can provide finances for Chechnya's problems.

Today's News Highlights

Russia

IMF Counsels Russia On Econ.

Diamond Mining License Dispute

European Republics

Ukrainian Reserves Drop

Ukraine's Foreign Invest. Grows

South Caucasus & Central Asia

The Armenia Hotel Sold

Tajik Admin. Murdered

Iran To Drill Wells In Turkmen

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August 17, 1998

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between 6.3 and 9.5 rubles to the dollar. The statement says, "In the current situation, there is no point in maintaining rigid daily boundaries within which the ruble may fluctuate." The ruble rate, "will be fixed on the results of daily operations at exchange and non-exchange sectors of the internal currency market. Fixing the official ruble rate on a basis of its market quotations will make it possible to ease the acuteness of speculative attacks on the Russian ruble that lead to unjustified spending of the currency reserves of the Bank of Russia." It will be using the interest policy for the same purpose. After the devaluation, the Russian stock market went into a panic, with exchange authorities postponing the day's opening for about two hours. A decision was simultaneously taken to turn GKO (treasury bills) into new securities. A 90-day moratorium was also announced on payments for financial credits, received from Russian non-residents, on the payment of insurance on credits insured by the mortgage of securities. Non-residents in Russian are prohibited from investing funds into ruble assets with the repayment time of up to one year.

Many Russian banks are expected to go bankrupt in the aftermath of the ruble devaluation as most are over-dependent on now devalued ruble assets, but the government has promised to pool the resources of leading banks to minimize the damage. The government and the Central Bank are also urging the Federation Council to tighten control over the exodus of currency resources to other countries. The government and the Central Bank urged the Russian State Duma to hold an extraordinary session before the end of August to pass key draft laws helping to ensure the timely payment of pensions and wages to workers in the state sector, to create legislative procedures for banks' stabilization and to strengthen the system of currency regulation and control.

Commonwealth of Independent States (CIS) Executive Secretary and business tycoon Boris BEREZOVSKY has said he backs the Russian government's financial measures aimed at expanding the ruble exchange band stating they are, "right although belated." He believes this policy should have be implemented half a year ago. Calling for a cabinet reshuffle BEREZOVSKY said, "The current financial situation points out the mistakes which have been committed, (and) those who have made

them should bear responsibility before taxpayers." KIRIYENKO said he did not rule out that the reshuffle might affect Cabinet members responsible for financial and economic block of issues. The Russian President's special representative for relations with international financial institutions Anatoly CHUBAIS said today that he regards the government measures as, "an adequate and timely reply" to the very grave threat for economic and political stability of Russia. CHUBAIS said, "In response to the threat of financial panic, the government was forced to take extraordinary measures. These measures are, in no way, a retreat from the earlier announced course."

The ruble devaluation today follows a denial last Friday by President Boris YELTSIN that such a move was impossible. "There will be no devaluation—that's firm and definite," YELTSIN said. Although when interviewed, reporters noted that the President appeared to be having difficulty understanding questions about the economy. The devaluation is expected to ease the government's budget crunch, but would raise the prices of imports in Russia, which depends heavily on foreign-produced goods, including more than half the food sold in stores. These new measures are likely to hit ordinary Russians hard. With price hikes and inflation, they will experience less buying power. In the panic which is hitting the streets of Moscow, Russians have been seen scurrying between banks in an attempt to exchange their rubles for dollars. Lines at exchange kiosks are reported to be at least 40 people deep. Central Bank Chairman Sergei DUBININ said the government actions are, "above all to protect the citizens of Russia and domestic manufacturers."

IMF To Counsel Russia On Finances

· Russian Prime Minister Sergei KIRIYENKO is expected to meet with International Monetary Fund (IMF) officials later today to discuss the country's financial situation. Early today the government and the Central bank released a joint statement calling or the ruble exchange rate to be lowered from about 6.3 to the dollar to 9.5 to the dollar. KIRIYENKO said that discussions will focus on the, "actions in the new market realities." The IMF officials, led by John ODLING-SMEE, chief of the fund's Second European Department, arrived here Sunday night on an emergency visit. The IMF experts have arrived here in response to the revision of the ruble exchange rate

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policy. Not all the steps announced by the government and the Central Bank have been approved by the IMF. KIRIYENKO called the new ruble exchange rate, "simply means a new approach to the currency policy." ODLING-SMEE is expected to also meet the Russian President's representative for relations with international financial institutions Anatoly CHUBAIS, Finance Minister Mikhail ZADORNOV, governor of the Russian Central Bank Sergei DUBININ and other executives of federal agencies. The sides focus on the situation which developed on the Russian bond and stock markets in connection with the continued financial crisis in Asian countries as well as measures which can be taken jointly by the Russian government and the IMF to improve the situation in Russia. The sides will also discuss periods of granting Russia next tranches of the IMF credit. The question on appropriating Russia the second tranche of the IMF credit is to be discussed at a meeting of the IMF board of directors to be held in September. The board's decision will be based on information of a IMF special mission whose visit to Moscow is scheduled for late August. Japan's Vice Finance Minister Koji TANAMI said today the IMF and the Group of Seven (G-7) major economies will maintain close contact to resolve financial turmoil in Russia. "The IMF and the G-7 countries have discussed the Russian financial turmoil from various viewpoints, and I expect it to be settled smoothly," he said at a regular press conference. World concern which surrounds Russia's financial crisis, is based not so much on Russia's affect on world markets, but rather concerns regarding the political state of the nation.

Business

Diamond Debate Over License Agreement

· Harry OPPENHEIMER's Vancouver exploration company, Archangel Diamond Corporation, is accusing its Russian partner, Arkangelskeoldobycha (AGD) in the Verhkhotina project of withholding a mining license. Archangel Diamond Corporation has filed a request for arbitration with the Arbitration Institute of the Stockholm Chamber of Commerce, to which the partners previously agreed as a way to solve disputes between them. Archangel's President Tim HADDON said that the company has already invested $10 million on the Verkhotina project and was planning to spend another $8 million. Further work has been halted until the license dis

pute can be resolved. As recently as May, the OPPENHEIMERs, via a private investment company Task Holdings, invested another $10 million in Archangel, The Financial Times reported. This investment followed a report from a De Beers technical team which evaluated one of the diamond bearing pipes. They estimated that the Grib pipe contained 51 million carats of diamonds worth $72 a carat, making it possibly one of the world's richest diamond mines. It is speculated that AGD's resistance to transfer the mining license to their joint company Almazny Bereg (AB) is based on these new findings. Archangel owns 40 percent of AB, while AGD owns 50 percent. Archangel is claiming that AGD agreed to turn over the license, once Archangel had invested a specified amount, which was met in March.

European Republics

Ukraine's National Bank Reserves Fall

· Ukrainian National Bank Chairman Viktor YUSHCHENKO says the bank's reserves dropped to $1.15 billion from $1.49 billion in August, following the repayment of a loan to Nomura International, RFE\RL Newsline reported. The government initially planned to repay the loan with foreign aid but was unable to secure such assistance because of the lack of confidence in Ukraine among foreign investors. YUSHCHENKO remains optimistic about the country's financial prospects. He said, "The largest payments in 1998 have been made, and now everything should be done to win the confidence of both market operators and Ukraine's creditors in the Ukrainian market."

Ukraine's Foreign Investment Grows

· Ukraine absorbed $517.7 million of foreign investment in the first half of 1998, an increase of 54.3 percent over the same period of last year. The Ukrainian State Committee for Statistics Sunday attributed the rapid growth to a series of government measures designed to encourage foreign investment. Earlier this year, Ukraine marked three economic zones in Donetsk and adopted a preferential tax policy for foreign-invested enterprises. In the past seven years since independence, Ukraine has received a total of $2.5 billion in foreign investment. Foreign investors often complained about the country's poor investment environment, loophole-

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fraught legal system and rampant corruption. The United States topped the list of major investors with $430 million. The Netherlands came second with $230 million, and Germany third with $200 million.

South Caucasus & Central Asia

Armenian Hotel Sold To Bostonians

· The Armenia Hotel, the premier hotel on Yerevan's central square, has been sold to the AK Development Company, which is run by ethnic Armenian businessmen from Boston, Nshan ATINIZYAN and Paul KARYAN. The deal cost $30 million. The hotel will be run by the Mariotte International Company. Under the contract, the AK Development Company will invest $2 million in the hotel modernization to be finalized by January 2001, when the 1,700th anniversary of the state religion of Christianity is marked in Armenia. The new owners of the hotel are ready to promote tourism in Armenia and turn the hotel into a center of businesses and conferences. They aim to make The Armenia a high-grade luxury hotel to correspond to the Mariotte criteria and teach the local Armenians hotel businesses and services so that the hotel guest enjoy the Armenian traditional hospitality. The buyers thanked the Armenian government for the professional approach in the privatization of the hotel. The Mariotte Company runs 1,700 facilities in 53 countries. The Armenia, which used to belong to the Soviet Intourist Company, was built in 1958 and became a monument of the Armenian architecture.

Tajik Administrator Murdered

· Head of the Shahrinav Region, Kalandar KHAIDAROV was murdered on Saturday by unknown assailants. A high ranking Tajikistan Interior Ministry official said that, "KHAIDAROV likely fell victim to a gang war between mobsters, fighting in the district for spheres of influence on the local market. He noted that there was no "political reason" for the assassination. Apparently, a group of armed men dressed in camouflage, entered KHAIDAROV's home and in front of frightened family members

forced the administrator into the street. KHAIDAROV's body was found later with multiple bullet wounds.

Kharrazi-Niyazov Discuss Caspian Sea Status

· Iranian Foreign Minister Kamal KHARRAZI met with Kazakh President Nursultan NAZARBAYEV in Astana on Friday to discuss the Caspian Sea. NAZARBAYEV said the Russian-Kazakh agreements on the division of the sea could serve as a model for resolving the Caspian's status. KHARRAZI said the sea should be de-militarized to, "become a sea of friendship and peace." The two also discussed resuming shipments of Kazakh crude oil to Iran via the Caspian. The Iranian Foreign Minister noted that the planned Neka-Persian Gulf pipeline will be completed in two years and that shipments of crude oil will then resume. The two also expressed concern over the fighting in northern Afghanistan. KHARRAZI said, "A broad coalition government should be set up in Afghanistan to take the interests of all its ethnic minorities into account." He added, the fighting, "can undoubtedly affect the security of Central Asian countries." Russian President Boris YELTSIN said that Russia, Tajikistan, and Uzbekistan had agreed to cooperate and "raise a barrier to the Taliban" by strengthening the adjacent countries' borders.

Iran To Drill Oil Wells In Turkmen

· Director General of the National Iranian Drilling Company (NIDC) Heydat BAHMANI announced Sunday that, "In line with the national policy of export of technical services, Iran will drill for oil in Turkmenistan." Over the next 18 months under a $25 million contract, Iran will drill four oil wells. Iran will send 64 technicians and its Iran-Khazar platform to Turkmenistan to carry out the drilling in the Turkmen Bashi region. Iran and Turkmenistan have been involved in crude swaps which have allowed Turkmenistan and international firms to lift crude from Iran's export terminals in the Gulf in exchange for delivering oil produced in Turkmenistan to Iran. Turkmenistan produced an average of around 111,000 barrels per day of crude in the first half of this year, compared to Iran's, 3.6 million barrels per day.

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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