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

Wednesday, August 19, 1998

Russian Federation

Politics

Duma Plans Friday's Special Session

· Russian State Duma chairman Gennady SELEZNYOV today called for joint measures to be taken by both houses of parliament and the government to work out, "an emergency anti-crisis program." He said, "The government should stop talking about its proposing a stabilization program. There has been nothing to stabilize so far." SELEZNYOV expressed doubt that the government and Central Bank will be able to keep the ruble exchange rate band from expanding. He suggested that, "The government should until September 1st finance its debts to the army, the defense industry, and other workers of the state-run sector." Meanwhile, over 200 deputies have returned to Moscow for several extraordinary sessions. SELEZNYOV said that the Duma's special session on Friday may consider a government reshuffle. "The question of a coalition government may be raised so that the cabinet enjoy at least some support on the part of the State Duma. The Kremlin understands there is no other way out." He said he, "is not sure whether the resignation of the whole government would be efficient." The Duma will hear reports from Prime Minister Sergei KIRIYENKO, Finance Minister Mikhail ZADORNOV, and Central Bank Chairman Sergei DUBININ on the socio-economic and financial status of Russia. After that the deputies will consider the expediency of the resignation of DUBININ. Federation Council Yegor STROYEV said he favored a round table meeting, but Russian President Boris YELTSIN's spokesman rejected that proposal. Then on Tuesday and Wednesday the Duma will discuss the government-proposed stabilization bills.

Russia Asks Japan For Additional Aid Loan

· Russian Prime Minister Sergei KIRIYENKO has

sent a message to Japanese Prime Minister Keizo OBUCHI requesting that Japan extend to Russia before the end of this year $800 million, under the agreement signed during KIRIYENKO's July visit to Tokyo. The Japanese Foreign Ministry said that the message contains a request to grant Russia credit for $300 million in August and another $500 million before the end of this year. The ministry notes that Russia is not requesting more than agreed upon, but is asking for the loans ahead of schedule. The agreement provides a time frame in which Russia would receive $600 million in two portions this year, and the remaining $200 million before the end of March, 1999. The mentioned funds are component parts of the untied credits for the amount of $1.5 billion, which OBUCHI, then the Foreign Minister, had promised to extend to Russia during his visit to Moscow in February

Economy

Ruble = 6.885/$1.00 (NY rate)

Ruble = 6.990/$1.00 (CB rate)

Ruble Rate Change Affects Who The Most?

· The announcement on Monday by the Russian government and Central Bank, which turn backed seven years of support for the ruble and low inflation, freed the ruble, halted its domestic debt market, imposed currency controls and a 90-day moratorium in foreign commercial debts. Analysts fear that such a move will cause a run on commercial banks and a

Today's News Highlights

Russia

Svyazinvest Starting Price Set

Gazprom Stakes Not To Be Sold

Alrosa-Debeers Extend Agrmt

Aeroflot Prices Remain

European Republics

Lithuania Comments On Ruble

South Caucasus & Central Asia

Caucasus States Insulated

Kazakhs Steady Against Ruble

Kyrgyz Unaffected By Ruble

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collapse of the banking system, hurting ordinary citizens, foreign investors, and Russia's relations with its trade partners. Across Russia, reaction to the ruble devaluation is varied. According to RFE\RL Newsline, some Russians remained "icy calm," while other faced runs on foreign currency and goods. People in St. Petersburg bought durable goods and jewelry. In Novokuznetsk and Stavropol regions, there was little reaction to the de facto devaluation of the ruble. The expected panic run on the banks has been happening at a much lower rate than expected. As prices in many stores will remain the basically the same until inventories run out, there is no sense of hysteria. Part of the reason for this is that many Russians, skeptical of the government and banks, have opted to put their savings in their own mattresses and that many have their savings in the hard currencies, especially the dollar. Russia is the largest nation that has dollar holders outside of the US, with approximately $75 billion amongst Russians. Even though the ruble exchange rate will cause imports to be more expensive, many Russians are confident because their savings are outside the banking system. Only 30 percent of all Russians' savings are deposited in banks, 80 percent of which is in Sberbank, which is guaranteed by the government. While the Central Bank is offering support to certain commercial banks and sending inspectors to monitor operations, 800 bank failures are expected to take place. Banks expected to collapse don't meet western standards anyway. Many of these banks are fronts for high risk speculation in the stock market and money market. Director of the Moscow office of the Carnegie Endowment for International Peace Alan ROUSSO said, "They don't do commercial lending, credit cards, hold consumer deposits—nothing of what we would consider banking services. They just move money back and forth. More than half the banks may fail, but this, in some measure, will be good for the Russian economy."

However, foreign investors will be harder hit by the restructuring than local ones, according to a research report released by Credit Suisse First Boston (CSFB). The report quoted in The Financial Times said, "Foreigners are likely to be forced to accept low yielding, dollar-linked securities in return for their GKOs [treasury bills]: domestic investors on the other hand, will receive ruble-denominated bonds worth almost three times as much based on current

exchange rates. CSFB added, "If foreign investors face ex-post discrimination, current foreign investors will continue to leave and new investors will not enter [the Russian markets]. Russia will not obtain the capital and know-how it needs."

Concerning the international community, the affect to the de facto ruble devaluation will depend largely on the amount of trade and financial risk exposed to Russia. Germany has the largest burden with foreign loans to Russia totaling $30.5 billion. German Finance Minister Theo WAIGEL and Economics Minister Guenter REXRODT urged the Russian cabinet to carry out reforms without delay. WAIGEL said that, "long-term stabilization is possible only when the confidence in financial markets and in Russian society is restored." He believes the Russian tax system should be modernized first and then regulate the state budget. US banks are second to Germany, with $7.1 billion in outstanding loan, followed by France with $7 billion, and Italy with $4.3 billion. Spokesman for the European Commission Verros CONSTANTIN said that the Commission is studying the Russian case "very carefully" and is following the situation "closely."

Business

Svyazinvest Share Starting Price Set

· The Russian government on Monday set the starting price of 25 percent minus two shares of the stock of telecommunications company Svyazinvest at 6.492 billion rubles ($1 billion), according to a high-ranking official from the Russian State Property Fund. The deadline for bids is October 13th with results of the tender to be concluded by October 16th. The buyer is required to invest $100 million in the development of Svyazinvest's subsidiaries, $411 million in a GSM-900 mobile phone operating license, and pay $5 million for the expenses of the tender. The government has hired Merrill Lynch and HSBC as consultants to the sale. US financier George SOROS, who participated in the international consortium which won a 25 percent plus one share in the July, 1997 controversial auction, said that he might bid for the second stake.

Property Ministry Cancels Gazprom Sale

· The Russian State Property Ministry and Federal Property Fund today announced the cancellation of the sale of a 5 percent government stake in the oil and

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gas giant Gazprom. Acting chairman of the Federal Property Fund (FPF) Igor SHUVALOV said the cancellation is due to unfavorable market conditions. He said the decision came as the result of Deutsche Bank's, the financial consultant on the Gazprom deal, urging to abstain from holding an auction in the face of the current turmoil on the financial market. This cancellation comes only two days after the government and central bank raised the ceiling of the ruble exchange corridor to 9.5 rubles to the dollar. SHUVALOV said the Deutsche Bank will soon present the FPF with a memorandum on investors interested in the Gazprom shares. The government wants to sell its stake in Gazprom in order to raise much needed revenue in the face of a budget deficit. At least two Western consortiums planned to buy the Gazprom stake, SHUVALOV said. The starting price of the stake, originally set at 103 billion rubles ($1.65 billion), in accordance with the Central Bank's exchange rate as of August 13th, will most likely be changed, SHUVALOV noted. The buyer will be required to pay 320 million rubles ($50 million) in advance. The contract also stipulates that a foreign buyer must neither transfer the ownership of the lot and nor use it as basis assets for the flotation of securities and other documents among foreign participants for five years.

Alrosa-De Beers Extend Agreement

· The supervisory council of the Russian diamond-producing company Alrosa called for extending its agreement with world diamond monopoly De Beers until 2001, Alrosa said in a statement on Monday. Council members, who represent the government of Russia and the Russian region of Sakha Yakutia, said the current agreement of October 21, 1997, "developed and consolidated the advantages of the Russian side to protect the interests of the domestic diamond complex, including the Russian faceting industry." According to the council, the extension is to set up a quantitative basis for the integration of the Russian diamond complex into the international diamond industry. The agreement helps to stabilize the international market, raise prices, and increase Russia's budget revenues due to the training operations of Alrosa's which sticks to the one-channel selling system. According to the agreement, Russia annually sells De Beers diamonds worth $550 million. In 1993, Yakutia extracted diamonds worth $1.3 billion. The current agreement expires in 1998.

Aeroflot Prices Remain The Same

· Russian airline Aeroflot's spokesman Alexander LUCHANINOV said that Aeroflot has not increased the prices of its airline tickets. It did say that the prices in rubles will change according to the changes in the currency rate determined by the Russian Central Bank. He said that Aeroflot needs currency to pay for fuel, food, services, and various duties abroad. However the company sells tickets months beforehand and does not demand any additional payments with changes in the ruble rate. Aeroflot is following a price policy that ensures its competitive ability and does not run counter to Central Bank regulations, LUCHANINOV stated. Competitor Vnukovskiye Avialinii air company is also selling tickets according to the official exchange rate, but Transaero Company is selling its tickets according to a 7.5 rubles to the dollar exchange rate. The Domodedovskiye Avialinii air company has not changed the cost of tickets for foreign and domestic routes, but a company representative said on condition of anonymity they would have to stop all the passenger flights if the ruble drops quickly. Western air companies are selling tickets in Russia on a basis the exchange rate of 9 rubles to the dollar, a Lufthansa official said. A Lufthansa two-way ticket to Berlin cost 3,300 rubles on Monday; the new price is 4,780 rubles.

European Republics

Lithuania Comments On Ruble Measures

· Director of the market operations department of the Bank of Lithuania Arvidas KRIAGGE, commenting on the statement of the Russian government and the Central Bank of Russia said, "Moscow was apparently compelled to take decisive measures to avoid greater financial and economic problems." He believes that although Russia is Lithuania's chief economic and trading partner, the change of the Russian ruble's rate within the new currency corridor, "will not have a substantive negative impact on Lithuania's financial market as the settlement between major Lithuanian and Russian economic partners is made on a basis of foreign currency." He expressed concern that small Lithuanian enterprises exporting their products to Russian regions, particularly to the Kaliningrad region, which are paid in rubles, "may be affected." KRIAGGE also said that a number of Lithuanian commercial banks temporarily stopped the purchase and exchange of Rus

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sian rubles for Lithuanian currency on Monday. Today, Lithuanian blue chips index fell 3 percent to a new low. Vilniaus Bank dealer Robertas BERZHINSKAS said that the Russian psychological factor is influencing local and foreign investors.

South Caucasus & Central Asia

Caucasus States Insulated From Ruble Crisis

· International reaction to the devaluation of the ruble was initially shock and panic. Caucasus states, which have been extracting themselves from Russia's influence, have found themselves insulated from the Russian crisis. Georgia, Azerbaijan, and Armenia have seen little affect from Russia's new currency policy. Their economic protection is ironically tied to ethnic and civil conflicts in the region which has cut trade and economic relations with Russia to an almost insignificant level. These low levels have forced the Caucasus nations to look elsewhere for trading partners. Georgia's chief economic advisor to President Eduard SHEVARDNADZE said, "Our economy is tied to Russia's only to a certain degree. Between us there is little active trade." Georgia's main trade route with Russia along the Black Sea has been blocked due to the Georgia-Abkhaz conflict. Georgia instead is trading through a western route to European markets. Central Bank President Irakly MANAGADZE said that there are few operations with the ruble and noted that the lack of a full fledged stock market has insulated Georgia from global financial shocks. Georgia expects a increase in gross domestic product of 11.3 percent this year, making it the third straight year of double-digit growth.

Chief of securities at the Azeri Finance Ministry Bekhruz ALLAKHYAROV said, "The crisis in Russia won't have a serious effect on the economy of Azerbaijan. Trade between Azerbaijan and Russia was curtailed during the Chechen war.

Director of financial operations for the Armenian Finance Ministry Arman VARTANYAN said, "We haven't seen and don't expecting the future any

dangerous tendencies for the Armenian financial markets as a result of the situation in Russia."

Meanwhile, Armenian Foreign Minister Vartan OSAKANYAN begins an official visit to Georgia today. During the visit OSAKANYAN will have meetings with SHEVARDNADZE, the parliamentary speaker, the secretary of state, and the foreign minister. During the meetings, the sides will discuss bilateral issues, cooperation in international organizations, and participation in regional programs.

Kazakh Central Bank Steady Against Ruble

· Kazakhstan's Central Bank on Tuesday said that the nation's economy remains calm against the ruble devaluation rocking Russia's markets. However, officials warn that exports and the tenge currency may suffer because Russia is Kazakhstan's main trading partner. An analyst at Regent European Securities in Kazakhstan Meiram ZHAKSYBAYEV said, "This will really affect Kazakhstan. One should expect more Russian exports to Kazakhstan and fewer Kazakh exports to Russia." ZHAKSYBAYEV explained that Russian firms might turn to cheaper sources of raw materials, if the tenge is not devalued to make Kazakh export more competitive. The National Bank set the tenge exchange rate at 78 per dollar, a 0.45 percent devalue from last week's rate. Kazakh economists have predicted that the tenge might fall to 82 or 83 per dollar by year's end.

Kyrgyzstan Unaffected By Ruble

· Head of the Kyrgyz National Bank's currency department Emirlan TOROMYRZAYEV told the Vecherny Bishkek newspaper that the recent turmoil on the Russian financial market will not harm Kyrgyzstan's economy. He said that it may have a psychological affect on the local market. "The ruble situation can influence only the Russian-Kyrgyz trade turnover. We can expect an insufficient worsening of the payment balance, because the presence of Russian non-residents on the Kyrgyz market is minimum." TOROMYRZAYEV said, "We do not expect the Kyrgyz som to drop, bearing in mind our currency market does not depend on Russia."

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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