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

Tuesday, August 18, 1998


Russian Federation

Politics

Livshits Becomes The Economic Fall Guy

· Russian President Boris YELTSIN today accepted the resignation of his top economic adviser and deputy head of the presidential administration Alexander LIVSHITS, relieving him of his duties in connection with the transfer to another job. LIVSHITS was an aide to the President in 1994. In 1996-1997, he held the post of Deputy Prime Minister and was Russia's Finance Minister. LIVSHITS said, "I have been working alongside the president for six years. I have done my best for Russia. Possibly I bear a share of responsibility for what has happened on the financial market. I have failed to help the President and therefore I am leaving."

Prime Minister Sergei KIRIYENKO and chairman of the Central Bank Sergei DUBININ also submitted their resignations because of a new wave of financial crisis, but YELTSIN disagreed with their proposals. Russian mass media reported concern over the possibility of several resounding resignations at the top echelon of Russian power. According to a government representative, "The President disagreed with these proposals and made it incumbent on the Premier and the head of the Central Bank to continue work on rectifying the situation." YELTSIN has decided to continue his vacation in his countryside residence outside of Moscow for the next few days, thereby continuing his vacation. He said that he has been completely briefed of all economic issues and will return to the Kremlin or meet with top officials if there is a need.

Fyodorov Promoted To Deputy Prime Minister

· Shortly after the Monday night meeting with Russian Prime Minister Sergei KIRIYENKO, President Boris YELTSIN issued a decree appointing

head of the Russian Taxation Service Boris FYODOROV to the post of Deputy Prime Minister for the second time. He will be in charge of macroeconomics and state debt issues, a post which was rumored to be given to Anatoly CHUBAIS or Yegor GAIDAR. Presidential spokesman Sergei YASTRZHEMBSKY said FYODOROV, who served as Deputy Prime Minister of the Russian Federation in 1993-1994, will continue to head the State Tax Service. He was Finance Minister of the Russian Federation in 1993-1994. His newest appointment comes after the government and the Central Bank Monday announced the widening of the currency exchange rate against the dollar to 9.5 rubles to the dollar. FYODOROV said that the government must now clamp down on any banks or businesses that try to cheat customers. "No one should use the difficulties the country is experiencing in order to try to deceive citizens."

Economy

Ruble = 6.43/$1.00 (NY rate)

Ruble = 6.885/$1.00 (CB rate)

Russia Chooses To Use All Options

· The Russian government and Central Bank on Monday announced what Prime Minister Sergei KIRIYENKO calls a, "second line of defense," aimed to fulfill its financial targets adopted under the anti-crisis program. They freed the ruble, halted its domestic debt market, imposed currency controls and a 90-day

Today's News Highlights

Russia

IMFReaction To Ruble Measures

Will The Banks Survive?

Korea Advises Against Exports

European Republics

Ukraine Fears Devaluation

South Caucasus & Central Asia

Presidential Candidate Register

Central Asia On Afghanistan

Anthrax Found In Kazakhstan

Politics-Economics-Business

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Tuesday

August 18, 1998

Intercon's Daily

moratorium in foreign commercial debts. Due to this decision, the Russian Trading System index fell 4.9 percent Monday. The Central Bank raised its overnight credit rate by 100 percentage points to 250 percent. The ruble's official exchange rate dropped from 6.31 to 6.43 to the dollar. The new band is from 6 to 9.5 rubles to the dollar from the previous range of between 5.27 and 7.13 rubles to the dollar.

Letting the ruble float marks a major change in President Boris YELTSIN's policy, which after seven years of economic reforms could point to stable currency and low inflation as two key achievements. But his strategy has been overwhelmed by the crisis brought on by Russia's economic realities and the insolvency of its banking system. The unanimous decision by the leading industrialized countries of the Group of Seven (G-7) to not provide Russia with further official international finance appears to have been crucial in encouraging the Russian government to devalue its currency and take other appropriate actions to stop the downward economic spiral. Russia has already been promised a $22.6 billion aid package by the International Monetary Fund (IMF), World Bank, and Japanese government. In addition to this decision, the beginning of a run on the banks prompted the government to reconsider its currency policy, expanding the band width for ruble exchange.

Director of emerging markets research at Donaldson, Lufkin, and Jenrette, Inc. Charles BLITZER said, "At this point, we don't know where the ruble will settle down and when. They are allowing it to float, and will try to use monetary policy and currency intervention to control it. But it remains to be seen whether they will be able to do it," The New York Times reported. David SIMMONDS, head of research for central Europe at Citibank agreed that how far the ruble will fall is dependent on whether a run on the ruble by Russian corporations and citizens can be contained, The Financial Times reported. As the banking crisis erupted last week, G-7 nations refused additional support, and the market situation worsened, economists debated whether the government would opt to restructure its domestic debt, default on loans, or at least extend its foreign currency loans, or devalue the currency. In the end, the government decided to chose all of those steps. The new change in currency and fiscal strategy does not bode well for YELTSIN or KIRIYENKO, who have promised Russians as late

as Friday that no devaluation would occur. As one Russian put it, "He [YELTSIN] cheated us again."

IMF Reaction To New Currency Strategy

· The Russian President's envoy to international financial organizations Anatoly CHUBAIS said on Monday that the IMF had backed the expansion of the ruble exchange rate band and other stabilization measures by the government and the Central Bank. After about an hour talk with IMF top officials John ODLING-SMEE and Martin GILMAN, CHUBAIS said the IMF was not pleased about the measures. "International monetary organizations, naturally were not enthusiastic about our proposal to restructure the state debt. But they showed understanding of the situation," CHUBAIS said. The IMF reiterated its earlier pledges to allocate the second tranche of the stabilization loan to Russia in September contingent on whether Moscow met all the necessary conditions. "The measures taken by the government and the Central Bank on Monday do not cancel our cooperation with the IMF," CHUBAIS stressed. IMF managing director Michel CAMDESSUS said, "It will be especially important for Russian authorities to take all necessary steps to strengthen the fiscal position," urging Russia to pass key legislation.

Will The Banks Survive?

· The ruble devaluation announce on Monday had been expected to cause many Russian commercial banks to collapse, which are dependent on devalued-ruble-based assets. However, the Central Bank said they would pool the resources of leading banks to limit the damage. Several banks received special credits from the Central Banks to keep operations going and to protect Russian depositors. Deputy Chairman of the Central Bank Sergei ALEKSASHENKO said that some Central Bank intervention will be made in the banking system, but he said not all banks can be saved, The Journal of Commerce reported. Russians have an a estimated $4 billion in savings deposited in private commercial banks. Eighty percent of private Russian savings are held in Sberbank, which is guaranteed by the government. Twelve leading Russian banks, Sberbank, Vneshtorgbank, UNEXIM Bank, the National Reserve Bank, MENATEP, Most-Bank, Inkombank, the Bank Moskvy, Alfa-bank, SBS-AGRO, the Rossiisky Kredit, and the Central Bank agreed to cooperate with one another to create a special clearing house.

When you need to know it as it happens

Politics-Economics-Business

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Tuesday

August 18, 1998

Intercon's Daily

S&P Downgrades Regions and Companies

· Standard and Poor's (S&P) on Monday lowered its long-term foreign currency, issuer credit rating on Russia from B- to CCC. Russia's short-term foreign currency, issuer credit rating remains at single C. The downgrade reflects the announcement by the Russian government and Central Bank of steps that could lead to a unilateral restructuring of the government's ruble debt and trigger defaults by private sector issues on their external obligations. The outlook is negative. Following its currency downgrade, S&P has decided to cut rating on some Russia's regions as well as companies and banks. Long-term foreign currency issuer credit rating of Moscow, St.Petersburg, Yamalo-Nenetsky Autonomous District, Tatarstan, Irkutsk, Samara and Nizhni Novgorod regions went down from B- to CCC as well. The rating of Russia's Alrosa diamond monopoly was cut from B- to CCC-, whereas the rating of Russian companies Rostelecom, MGTS, LUKoil, Mosenergo, Tatneft and Vympelcom went down to CC. All of the companies which were downgraded were previously rated at B- with a negative outlook. Although details of the government's plans still remain unclear, maturing obligations of at least some corporate issuers likely will be affected. The rated corporate issuers that have foreign currency debt payments within the moratorium period of 90 days have been downgraded to CC as, according to an S&P press release, a default is increasingly probable. The rated corporate issuers that do not have any foreign currency debt payments during this period have been downgraded CCC- to reflect the substantially increased risk of default following Monday's announcement.

Business

South Korea Advises Halt To Exports To Russia

· South Korea's Commerce Ministry issued a statement advising Korean companies to stop export shipments to Russian until the financial situation there becomes more clear. The statement also said, "We are also advising that South Korean firms' branches in Russia decrease their ruble reserves. Watching the Russian market and the government's moves, we will carry out measures at the appropriate time to prevent loss." It said that the Russian economic crisis would cause South Korean exports to Russia to decrease. In the first half of this year,

exports to Russia fell 10.8 percent year-on-year to $720 million. In 1997, South Korean exports to Russia totaled $1.77 billion, down from $21.97 billion in 1996. The ministry warned that some investment firms could see a cut in operating profits with Russian investments falling. New investments in Russian in the first half of 1998 were worth $9.88 million.

Nuclear Ministry Plans To Make Money

· Russian Nuclear Minister Yevgeny ADAMOV in Sosnovy Bor on Friday said that the Russian Nuclear Ministry plans to earn money by utilizing nuclear-powered submarines, selling uranium and the uranium enrichment services as well as processing the nuclear fuel. He said that, "we plan to unload the used fuel, which creates the largest radiation danger, from all nuclear-powered submarines and provide for the fuel's civilized storage and further processing." Meaning that the used fuel will be transported to the processing site in special containers. After the processing, the fuel will be delivered to nuclear power plants. Some of the proceeds will come from selling the submarines, both with nuclear reactors and without them, as scrap metal. The Nuclear Ministry expects to get some money from the federal budget. However, considering the recent condition of the budget, ADAMOV said that the ministry will count on commercial activities for funding. "A main type of the commercial activity of the Nuclear Ministry is the selling of uranium and the uranium enrichment services when we take uranium, extracted outside Russia, and enrich it for uses as a fuel for the nuclear power plants." He concluded that, "most of all we count on an environmental program, which includes the utilization of submarines' reactor sections and the processing of the nuclear fuel. This is a huge market, which just begins to develop. We should enter it and win a place there. There is enough money on the market to make the program self- sufficient."

European Republics

Ukraine Concerned Over Ruble Devaluation

· The board of the Ukrainian National Bank is concerned over the situation on the financial market of Russia. Ukraine's Central Bank chief Viktor YUSHCHENKO said that the lowering of the low limit of the ruble corridor in Russia may cause a devaluation of the gryvnia and toughen the monetary

When you need to know it as it happens

Politics-Economics-Business

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Tuesday

August 18, 1998

Intercon's Daily

policies in Ukraine. The gryvnia fell 370 points to 2.1805 per dollar on Monday down from 2.1435 per dollar on Friday. YUSHCHENKO said that the Ukrainian National Bank monitors the situation on the financial markets of Russia twice daily. At the chief's request Ukraine's Interbank Currency Exchange suspended trading today until 2 pm. Trading of the dollar, the German mark and the ruble was also suspended most of Monday. Ukrainian markets are bracing themselves from the fallout from the Russian currency devaluation and Moscow's moratorium on foreign debt. YUSHCHENKO is expected to address the markets later today. He said that the current level of liquidity in banks is about 510 million to 530 million gryvnias. Economists speculate that Ukraine will have to either devalue the gryvnia or further tighten its monetary policy.

South Caucasus & Central Asia

More Presidential Candidates Registers in Baku

· Three more presidential candidates have been registered in Baku, Azerbaijan. These are the chairman of the Party of Social Prosperity Khangusein KYAZIMLI, first secretary of the Azerbaijan Communist Party Firudin GASANOV, and the president of the Association of the Victims of Political Repression Ashraf MEKHTIYEV. KYAZIMLI, an economist by training, heads one of the departments in the parliament. GASANOV, an is engineer by training, has served in various positions in party and Soviet bodies. MEKHTIYEV, is a journalist. Current President Geidar ALIYEV registered with the Central Electoral Commission. Also registered are the leader of the National Independence Party Etibar MAMEDOV, and the chairman of the Independent Azerbaijan Party Nizami SULEIMANOV. The ballot papers are likely to contain the names of these six politicians. The leader of the Alliance for Azerbaijan, Abutalyb SAMEDOV, the chairman of the Umid Party Abulfaz AKHMEDOV, and businessman Ilgar KERIMOV have been denied registration due to irregularities in the collection of signatures to support their candidacy.

Central Asian Leaders Discuss Afghanistan

· Kazakh President Nursultan NAZARBAYEV, Uzbek President Islam KARIMOV, Kyrgyz President Askar AKAYEV and Tajik President Emomali RAKHMONOV on Monday agreed to send their foreign and defense ministers' to meeting in Tashkent to discuss the future of Afghanistan. The four leaders were, "unanimous in the opinion that the military conflict in Afghanistan must be discussed in detail from the point of view of stepping up security in Central Asia," according to NAZARBAYEV's press service.

First deputy chief of the General Staff of the Russian Armed Forces Col. Gen. Valery MANILOV, said top officials of the Russian Defense Ministry believe that hostilities in Afghanistan may spill over to other neighboring countries. "We have taken certain steps" to respond to the situation as it develops in Afghanistan, MANILOV said. "Under the Collective Security Treaty, Russia will look after the Commonwealth of Independent States borders. We must be prepared to prevent and, if necessary, counter the radical development of the situation in the region."

Anthrax Break Out Found In Kazakhstan

· Seven people have been seriously affected by the deadly poison anthrax in the village of Zholdama of the Kustanai region, Kazakhstan. Sixty other people who contracted the sickness have been subjected to strict medical check-up. Deputy head of the Kazakhstan Sanitary Surveillance Department Faisulla BISMILDINOV said that the epidemic was caused by a family from the Zoldama village who ate contaminated meat of their sick cow. However, BISMILDINOV blamed the local veterinary service as well. Several horses had been killed by anthrax a few days before the epidemic broke out in the village. Local veterinary doctors had neither vaccinated the cattle, nor carried out necessary medical check-ups. There were 78 incidents of anthrax in Kazakhstan over the past year and a half. In most cases the disease was caused by the local population who dodged vaccination of cattle on private and state farms.


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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