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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

Friday, August 21, 1998

Russian Federation

Politics

Duma Calls For Yeltsin's Resignation

· The Russian State Duma today in a vote of 248 to 32 passed a resolution calling for President Boris YELTSIN to resign over the economic crisis. The resolution is non-binding and is likely to be dismissed by the Kremlin. The resolution states, "The country is in a deep crisis and the President is not taking measures to protect the constitutional rights of the citizens...which has created a realistic threat to Russia's territorial integrity, independence and security." The Communist Party leader Gennady ZYUGANOV said that the Communist Party is initiating proceedings for a no-confidence vote in the government. He said, "There is no normal executive power now. The government we have now will not cope with its tasks." He pointed out that the procedure of impeachment of the president continues and called on all deputies to back the move to depose the president from his post. The opposition believes that YELTSIN will be better off if he resigns of his own free will. Leader of the Agrarian Party Nikolai KHARITONOV declared that, "it was impossible to achieve economic stability under this President and this government." Chairman of the State Duma Gennady SELEZNYOV believes YELTSIN should give his opinion of a possible resignation of the government. The Duma also approved a resolution stating that the government's anti-crisis program is unsatisfactory. The Duma Council will resume meeting on Monday to prepare for the Duma's next session on August 25th.

Economy

Kiriyenko Says Crisis Is Just Beginning

· Speaking at the opening of the special session of the Russian State Duma, Russian Prime Minister Sergei KIRIYENKO said that the measures taken by

the government and Central bank on Monday were clearly aimed at, "protecting the country's banking system and preventing the flight of capital abroad." KIRIYENKO said there will be no quick fixes to Russia's economic situation. He explained, " I told you in April we were just entering the most difficult phase of the crisis and that by autumn we would feel the biggest burden of accumulated state debt and that the most difficult consequences of a fall in world prices for Russia's main exports." He stressed, "Today, we start experiencing all this. We have just entered a serious financial crisis...We cannot allow ourselves the luxury of being a popular government." Regarding the change of the government's monetary policy and the raising of the upper limit of the currency corridor, KIRIYENKO said, "this decision is rigid and difficult, but well-thought out and right." He said that the government would reduce debt payments by between 200 billion rubles ($28.5 billion) to 250 billion rubles by the end of 1999. After meeting with foreign investors including investment banks and companies Deutsche Bank, Citibank, Chase Manhanttan, JP Morgan and Merrill Lynch, special representative of the President for maintaining relations with international financial institutions Anatoly CHUBAIS, Deputy Prime Minister Boris FYODOROV, Finance Minister Mikhail ZADORNOV, and Central Bank chairman Sergei DUBININ, KIRIYENKO promised equal terms for foreign and domestic bankers over the restructuring of $40 billion in Russian treasurys due before year's end, of which foreigners hold $11 billion. He pledged total transpar

Today's News Highlights

Russia

Elf Reconsiders Sibneft Stakes

New Flight To China Over Russia

US Business Continues

European Republics

Rus Urges Latvia On Ethnicity

Rus-Estonian BorderTalks

Lith. Speaker On Taliban

South Caucasus & Central Asia

Zhvania Visits Armenia

Rus-Kyrgyz Border Hand Over

Politics-Economics-Business

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Friday

August 21, 1998

Intercon's Daily

ency in dealing with foreign investors. KIRIYENKO criticized the Duma for delaying the passage of bills submitted by the government as part of the stabilization program. He said that the, "cabinet will do its utmost to coordinate decisions with the State Duma and adopt them together," but it cannot put off the decisions needed in the present crisis conditions. The Prime Minister noted that, "Even if all revenues were now channeled toward repaying the national debt, they would not be enough for the purpose, and our social obligations would not be met."

Zadornov To Tighten Currency Controls

· Finance Minister Mikhail ZADORNOV told the Russian State Duma that the government is preparing to submit legislation which would place more controls and restrictions on taking money out of the country. He did not reveal details of the legislation but said that it may affect export revenues and the movement of capital. He said, "We think it necessary to tighten currency controls in a number of directions." He believes that in the current situation urgent measures should be taken for toughening the currency policy and for establishing control over the movement of capital and over export revenues. "Russia has limited for itself the opportunity to borrow money on the external and domestic markets for a period from six months to a year, as a minimum," he said. Analysts have estimated Russia's capital flight to be between $3.5 billion and $4.5 billion in the period from May to mid-August. ZADORNOV stressed that it is crucial to preserve the Russian banking system. He said that there is no threat for budget-financed institutions because since the beginning of the year 80 percent of the existing 115,000 budget-financed institutions were transferred to the accounts in the Treasury.

Dubinin Calls For Support Of Stabilization Plans

· In his report to the Russian State Duma, Central Bank chairman Sergei DUBININ said that some banks are likely to collapse amid the devaluation of the ruble, but that there have been no bankruptcies so far. DUBININ said that the country did not use its international loans to their full advantage. He said, "We did not learn to collect taxes, although this was one of the reasons for the respite. Now we shall have to learn to do that in more complicated conditions." DUBININ appealed to the Duma to support tough stabilization measures, taken by the government and the Central Bank.

Russian authorities announced Thursday that all deposits in Russian commercial banks would be 100 percent guaranteed. The Central Bank said a government backed system of guarantees would cover all deposits, an estimated $22 billion, in hopes that Russians would not run the banks. DUBININ did not disclose the mechanism by which deposits will be guaranteed. However, he said state savings bank Sberbank, which holds more than three-quarters of deposits already guaranteed by the government, will play a key role, The Wall Street Journal reported. DUBININ said, "We ask the citizens of Russia to walk calmly through the difficult trials of the financial crisis. We call on Russian depositors not to hurry to transfer deposits or withdraw their money." The Central Bank has set up a telephone hotline to answer depositors concerns.

He said that all Russian banks must abide by the 90-day moratorium imposed on Monday or face punishment. This statement was aimed at Russia's largest bank Sberbank and the largest oil company LUKoil, which pledged to meet foreign obligations despite the moratorium. DUBININ said he is not going to tender resignation again. He said he knew what should be done and believed that the management of the Central Bank would be able to cope through the situation. "Only time will show whether or not others will be able to manage the Central Bank. Let them try," he added.

Ruble = 6.995/$1.00 (NY rate)

Ruble = 7.005/$1.00 (CB rate)

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	Friday		August 21, 1998
	Intercon's Daily
	Business Elf Considers Dropping Sibneft Stakes · France's energy group Elf Aquatine Thursday said that it was reconsidering a deal with Russian energy group Sibneft to obtain a $500 million stake. A spokeswoman for Elf said that while the company has not renounced the plans to take the stake, talks with the Russian entity have been stalled pending clarity of the financial situation of the Russian economy. Since Monday's announcement by the Russian government and the Central Bank to widen the exchange rate band, thus devaluating the ruble, Elf has become less committed to investing a total of $570 million, including consideration for assets over and above the initial price. Sibneft suffered a downgrading by the rating agency Fitch IBCA. Negotiations between Elf and Sibneft have been going on for years. Talks seemed to come to a head when Sibneft and Yukos planned to merge. But, even after the merger failure, Elf remained in talks for the Sibneft stake. The question remains whether Elf's interest will weather through Sibneft's financial storm. New Flight To China Via Russia · US airline Northwest Airlines is offering regular passenger flights through Russian airspace between North America and the Chinese capital, Beijing. The first flight took off from Detroit Metro Airport Wednesday to test the new Polar 2 route to Beijing. Two officials from the Russian Federal Aviation Authority are aboard today's test flight as observers. The route is expected to reduce air-time for the 13 hour flight by almost an hour. The savings in time and fuel is expected to be greatest in winter, when airliners westbound across the Pacific Ocean fight powerful jet-stream winds. Northwest Airlines said excellent cooperation from Russian air-traffic controllers has helped to make the flight possible. Northwest said it will continue testing the route through mid-September before deciding with US and Russian officials whether to make it permanent. Northwest's Detroit-to-Beijing flight is the only nonstop passenger service between North America and the Chinese capital. Northwest was the first Western airline to operate a trans-Pacific passenger flight through Russian airspace in 1992. US Firms Continue Operations As Usual · Despite the Russian government's announce	ment Monday to "devalue" the ruble and "default" on loans, major US companies in Russia will continues operations as usual. According to US economists, the crisis is Russian will affect these companies, but only minimally. Staff member of the international economics institute Edward GRAHAM explained that the weakened ruble will affect their dollar revenues. They will also suffer losses due to the fact that rising prices will make inaccessible their goods to some sections of Russian consumers. This financial crisis highlights the risk companies take in emerging markets, but these companies are ready to face those risks. Chief executive officer of RJR Nabisco, RJ Reynolds' parent company Steven GOLDSTONE said, "this is not going to affect our long-term plans." RJ Reynolds, this week formally opened an expanded $300 million cigarette factory in St. Petersburg. It also plans to invest another $120 million in the factory. The Wall Street Journal reported that Coca-Cola and PepsiCo will suffer losses and experience positive influence from the cheaper ruble. Coca-Cola factories in Russia have 7,000 workers on their pay-roll, who receive wages in rubles. The overwhelming majority of materials used in production are Russian. Under these conditions, the weaker ruble will actually cut production costs in hard currency. A Coca-Cola representative stated that the company waits for a substantial growth in volumes of production as against the last year. Neither Coca-Cola, nor PepsiCo offered figures on the results of their operations in Russia at the present time. However, the newspaper suggested that Pepsi now suffers small losses, while Coca-Cola is in the black. Major American banks show a more cautious approach to operations in Russia. Chase Manhattan, Citicorp and JP Morgan limited their operations on the Russian market. A Chase representative said that the bank's presence in Russia is very modest.

		European Republics Russia Calls On Latvia To End Discrimination · On Thursday, Russia again urged Latvia to drop discrimination against Russian ethnics in the Baltic republic and called on the world community to help avert, "a nationalistic scenario" of developments there. Russian presidential aide on international affairs Sergei PRIKHODKO told the chairman of the Latvian Party of popular accord Ja JURKANS that, "Only the elimination of the existing Latvian

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Intercon's Daily

legislative provisions which discriminate non-indigenous population, the compliance of the legislative norms with international recommendations can normalize bilateral relations and bring economic cooperation to the level which meets the potential of the neighboring countries."

Meanwhile, at the annual session of the sub-commission for the aversion of discrimination and for the protection of minorities in Geneva, Russian delegate Oleg MALGINOV called on the world community to help avert a nationalistic scenario of developments in Latvia. "We do not demand anything special from Latvia, we only want that normal conditions be created for non-Latvians." He said that even modest amendments to the Latvian legislation regarding non-citizens have been blocked "on the initiative of the rightist aggressive nationalistic circles."

Rus-Estonia To Discuss Border Issues

· Russian and Estonian officials held talks in Moscow on Wednesday to discuss border issues, including the delimitation of the state border and the division of sea spaces between the two countries, the Foreign Ministry said. The two sides coordinated a series of issues concerning the line of the border on land and lake sections and agreed on the further plan of action, the ministry said. Lyudvig CHIZHOV of Russia and Raul MAELK of Estonia decided to hold the next round of talks in full composition in Tallinn in October 1998. Before the talks, Russian and Estonian experts held consultations on the delimitation of the land border and the division of sea spaces, the ministry added. "As a whole, the results of the meetings can be described as certain progress in the negotiating process. At the same time, there are questions to be finalized during the talks," the ministry pointed out.

Lith. President Distances Himself From Speaker

· Lithuanian President Valdas ADAMKUS expressed "confusion" over the statement of national parliament speaker Vytautas LANDSBERGIS about a possible recognition by the Baltic republic of the

Taliban movement in Afghanistan. LANDSBERGIS said that in case the situation in Afghanistan stabilizes, Lithuania, "may have concrete deeds which will promote relations" with the Taliban, Itar-Tass reported. ADAMKUS on Thursday said that the speaker's statement, "is the opinion of a private individual who does not represent the foreign policy of Lithuania." According to the Constitution, it is the President and the government who are responsible for the foreign policy.

South Caucasus & Central Asia

Zhavania Strengthens Ties With Armenia

· Chairman of the Georgian parliament Zurab ZHAVANIA arrived in Armenia today for an unofficial three-day visit. He is expected to meet in private with chairman of the Armenian parliament Khosrov ARUTYUNIAN. The counterparts will exchange views of the bilateral relations in terms of the inter-parliament cooperation. Armenia considers the visit by the Georgian parliament speaker as another stage in the development of neighborly relations between the two fraternal republics. Earlier this week, Georgian and Armenian Foreign Ministers signed a joint statement affirming their commitment to the principle of territorial integrity of countries, mutual respect, non-interference in each other's internal affairs, and desire to deepen partnership relations in all strategic directions. The agreement mentioned cooperation within the BSECO and within the TRACECA and INOGATE projects.

Russian Border Guards in Kyrgyz

· Director of the Federal Border Service of Russia Colonel-General Nikolai BORDYUZHA arrived in Bishkek Thursday to meet with Kyrgyz President Askar AKAYEV and First Deputy Minister of Security of the country Valery VERCHAGIN. They discussed the stage-by-stage replacement in Kyrgyz of Russian border guards fro Kyrgyz servicemen. The hand-over program will begin later in the year. The Russian border guard group has been guarding the state frontier of Kyrgyzstan with China under the interstate treaty of 1992.

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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Daily Report on Russia is for the exclusive use of the subscriber only. Reproduction and/or distribution is not permitted without the expressed written consent of Intercon. Daily Report on Russia Ó copyright 1998, Intercon International, USA.

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