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 24, 1998

Russian Federation

Politics

Yeltsin Flexes Muscle; Fires Government

· After five weeks of vacation and accusations that the he is suffering ill-health which interferes with his official duties, Russian President Boris YELTSIN flexed his political muscle on Sunday firing his young reformer Prime Minister Sergei KIRIYENKO and his entire government and then re-appointing Viktor CHERNOMYRDIN as acting Prime Minister. This is the second time in five months YELTSIN has changed prime ministers. YELTSIN's decree sacking the Cabinet is almost an exact copy of the unexpected decision he made in March to replace CHERNOMYRDIN with KIRIYENKO. CHERNOMYRDIN was removed in March because YELTSIN said he was delaying implementation of necessary economic reforms. KIRIYENKO, who faced a month long battle to be approved by the Russian State Duma, was appointed by YELTSIN to bring in a new era of youth and a new impetus to stalled reforms. This turnabout in leadership and policy comes less than a week after KIRIYENKO's government and Central Bank raised the ceiling of the ruble's exchange corridor from 6.3 to 9.5 rubles to the dollar, which amounted to a devaluation of the national currency and imposed a 90-day moratorium on repayments of foreign debts. KIRIYENKO on Friday said, "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...We have just entered a serious financial crisis...We cannot allow ourselves the luxury of being a popular government." He later added, "this decision is rigid and difficult, but well-thought out and right." Apparently, YELTSIN, who's reputation is on the line since suffering opposition calls for his impeachment and strong criticism of his government, is

choosing to be popular with the oil and gas industries and banking conglomerate by appointing their political ally CHERNOMYRDIN, rather than implementing tough reforms needed to alleviate the country's financial difficulties. YELTSIN has claimed that in these economically difficult times, it is better for the country to have an experienced prime minister. The move means YELTSIN has decided to make a scapegoat of KIRIYENKO, after the dramatic plunge of Russia's financial markets and the devaluation of the ruble. KIRIYENKO has also be accused of failing to end the severe financial crisis, which has most of its roots in the policies implemented or delayed by CHERNOMYRDIN's previous government.

YELTSIN has called on the Duma to approve his a candidate. Deputies have announced that they will not convene until next week and asked for more time to consider the appointment, On Friday, legislators overwhelmingly called for the resignation of both KIRIYENKO and YELTSIN. It has been reported that KIRIYENKO and Central Bank chairman Sergei DUBININ offered their resignations to YELTSIN a week ago but were asked to stay on. However, the KIRIYENKO government succumbed by waning investor confidences was unable to overcome political and economical turmoil.

After appointing CHERNOMYRDIN as acting Prime Minister, YELTSIN today endorsed CHERNOMYRDIN as his successor in 2000. "Chernomyrdin has probity, honesty, and is responsible. I think that those

Today's News Highlights

Russia

New Economic Policy?

Unemployment Increases

Toyota Reconsiders Van Plant

Oil Companies Owe $7 Million

European Republics

Ukraine Expect IMF Approval

Lugar Visits Ukraine

South Caucasus & Central Asia

Shev. On World Issues

Central Asia Meets On Afghan.

Politics-Economics-Business

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Monday

August 24, 1998

Intercon's Daily

will be the decisive factors in the presidential elections," the Russian president said. Kremlin spokesman Sergei YASTRZHEMBSKY told a briefing on Monday that, "the President is interested in the stability of power and the development of the market economy at the forthcoming elections...The president views CHERNOMYRDIN as guarantor of such continuity." Former Soviet President Mikhail GORBACHEV said, "It looks like the President is starting to withdraw from office step by step and handing over power to the heir." Former Soviet Prime Minister Nikolai RYZHKOV said YELTSIN's decision was, "absolutely devoid of any logic whatsoever."

Possible New Cabinet Make-up

· Viktor CHERNOMYRDIN agreed to his appointment as acting Russian prime minister subject to certain conditions, which he laid down during his meeting with President Boris YELTSIN. In particular, CHERNOMYRDIN insisted that he have full personal control over the appointment of all government ministers, including the heads of power ministries and key economic agencies. Unless these conditions were satisfied, Chernomyrdin would not return to the Cabinet. In a television address broadcast to the nation, YELTSIN said he had discussed the new cabinet's line-up with CHERNOMYRDIN. Kremlin spokesman Sergei YASTRZHEMBSKY said "Viktor CHERNOMYRDIN is open" for reasonable proposals on the government's plan of action and membership, and already has started broad consultations with regional governors and members of the Duma, to continue in the nearest days. Today, CHERNOMYRDIN said he will name the new cabinet's members only when his appointment was approved by the State Duma. It is likely that Foreign Minister Yevgeny PRIMAKOV and Federal Tax Service Head Boris FYODOROV will retain their posts. Russian business tycoon Boris BEREZOVSKY, who is currently the executive secretary of the Commonwealth of Independent States, dismissed media rumors that he would be offered the post of deputy prime minister in the new government. Former Prime Minister Sergei KIRIYENKO declined the offer to become first deputy prime minister. Boris NEMTSOV, a deputy prime minister in the dismissed Cabinet of KIRIYENKO, has already received a "good offer" to take a new position outside a new Russian government. Today, CHERNOMYRDIN is holding talks with KIRIYENKO and is expected to meet for consultations with Grigory

YAVLINSKY, who leads the Yabloko faction, and Vladimir ZHIRINOVSKY, the leader of the Liberal Democratic faction. CHERNOMYRDIN wants, "to hear proposals of leaders of the Duma factions, including on personnel issues."

Economy

Ruble = 7.0005/$1.00 (NY rate)

Ruble = 7.14/$1.00 (CB rate)

New Economic Policy With New Government?

· Russia's acting Finance Minister Mikhail ZADORNOV and acting State Tax Service head Boris FYODOROV today are briefing acting Prime Minister Viktor CHERNOMYRDIN on the situation regarding short-term government bonds, or GKOs. ZADORNOV said, "It is up to him [CHERNOMYRDIN] to make a decision," as to whether the former government's stabilization program would be further implemented Presidential spokesman Sergei YASTRZHEMBSKY said, "I am sure that the stabilization program [of the latest government] will not be revised overall. Many of its provisions will work further on." He added that, "The framework and the vector of the country's economic course will remain unchanged, which in the first place will be manifest as development of market relations, but the program of the previous government is awaiting serious changes." After Russia's stock market plunged to record lows amid an ever weaker ruble, the economic prospect looked as bleak as ever, if not worse. Prices of the most liquid shares on the Russian market shed an alarming 25 percent to 40 percent over the past week alone amid extremely thin trading. Observers had expected the stock market to recover somewhat today when the government, now the ex-government, was scheduled to announce details of a planned swap of short-term government treasury bills into longer-term securities, another step announced last Monday. CHERNOMYRDIN said that, "The first thing I will do as acting head of government is to analyze the situation on Russia's financial and stock markets." However, he did not reveal what kind of stance his new government will take.

The government originally said it would clarify details of the restructuring of the $40 billion short-term debt last Wednesday, of which foreigners hold $11 billion. But the announcement was put off after rumors that initial terms would be biased against foreigners

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making their new securities valued at only a third of those received by Russians. Investors fear that the latest government reshuffle will further delay the terms, which were to be announced this afternoon. The Government said that no decision had been made to suspend the publication of the restructuring measures because of the resignation of the government of Sergei KIRIYENKO.

Russia Unemployment Increased 0.2 Percent

· According to estimates by the methodology of the International Labor Organization, unemployment in Russia in July increased by 0.2 percent from June, reaching 8,348 million people. This figure represents 11.4 percent of the Russia's economically active population the State Statistics Committee said on Wednesday. By the end of June, the number of officially registered jobless people decreased by 1.3 percent from the end of June to 1,769 million, or about 21.2 percent of the total number of unemployed people and 2.4 percent of the country's economically active population. The total number of jobless people in Russia has increased by 5.8 percent since the end of July 1997, but the number of officially registered jobless people decreased by 20.2 percent. The economically active population was 72.7 million as of the end of July 1998, which is about 49 percent of the country's population. The committee said that 66.7 percent of those employed worked in large- and small-sized enterprises.

Business

Toyota Reconsiders Joint Venture In Russia

· Executive vice president of Toyota Motor Corp. Kosuke YAMAMOTO today said that Russian financial and political turmoil may affect the carmaker's plans for a joint venture in Russia. "We haven't worked out any specifics yet for out venture plans in Russia, but they could be affected," YAMAMOTO said. He added that Toyota will be watching Russia's situation closely. In May, Toyota opened an office in Moscow. Japanese media have reported that Toyota had been considering producing vans near Moscow.

Oil Companies To Pay 7.054 Million Rules

· Deputy Prime Minister and head of the Russian Taxation Service Boris FYODOROV met heads of Russia's biggest oil companies on Thursday. The focus of meeting according to the State Taxation Service was prospects for taxation revenues to the

federal budget to be contributed by enterprises of the oil sector in August-December, 1998. Preliminary estimates show that oil companies are expected to contribute 7.054 million rubles to the federal budget by year's end. On Wednesday, Deputy Prime Minister Boris NEMTSOV met with World Bank Director of Russia Michael CARTER. CARTER expressed the World Bank's concern about the situation in the field of taxation in the oil industry. He believes that the tax burden on Russian oil companies is too heavy and may undermine their further development in conditions of depresses oil prices on the world market. The World Bank is also concerned about the fact that taxes in Russia are paid from the oil companies' earnings, while in other countries they are paid from a company's profit. NEMTSOV said the tax commission draft proposals on changes to the system of taxation in the oil industry. The Ministry for Foreign Economic Relations and Trade Wednesday announced that Russia exported 67.2 million tons of oil to former Soviet republics and other countries over the first six months of this year. The volume of oil export to former Soviet republics rose by 18.8 percent and to other foreign countries by 7.3 percent compared against 1997 indexes. At the same time, the ministry registered a decline in export of petroproducts by 29 percent to countries other than former Soviet republics at 1.1 million tons, while the export of petroproducts to former Soviet republics did not change at 20.4 million tons.

European Republics

IMF To Consider Ukraine Loan

· Ukraine is confident that the International Monetary Fund (IMF) will approve a $2.2 billion loan this week which will help the country overcome its economic difficulties. Ukrainian President Leonid KUCHMA said the loan, "would be a significant moral, political and economic support." He said that IMF managing director Michel CAMDESSUS during a telephone conversation confirmed that the Fund is ready to promote economic stabilization in Ukraine. KUCHMA quoted CAMDESSUS as saying that, "The IMF shall not leave Ukraine alone with its problems at this difficult time." CAMDESSUS also expressed confidence that a program for extended financing, backed by the Fund's mission during its visit to Kiev this August, will be finally approved in the near future. CAMDESSUS noted that measures,

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implemented by Ukraine to stabilize and reform the economy, find full support from the IMF. Ukraine has been experiencing a deep financial crisis caused by its massive foreign borrowing, the lack of foreign investors, and its inability to collect billions of dollars in tax debts. KUCHMA noted that emergency economic decrees issued in the summer have helped retain some major foreign investors in Ukraine.

Lugar Impressed With Missile Destruction

· Ukrainian President Leonid KUCHMA said Sunday the United States has provided aid mostly for the purpose of missile destruction, while ignoring the issue of converting the missile fields into arable land. KUCHMA made the statement when meeting with Senator and chairman of the Agriculture, Foreign Relations, and Select Intelligence Committees of the US Senate Richard LUGAR. LUGAR expressed his satisfaction at the process of the destruction of Ukraine's strategic missiles and their launching silos, and reiterated that there would be no change in the US policy of aiding Ukraine. Secretary of the Ukrainian State Committee on Security and Defense Vladimir GORBULIN discussed with LUGAR the issue of how to reuse the rockets with solid propellant. LUGAR is will also meet with Ukrainian Foreign Minister Boris TARASYUK and Defense Minister Alexander KUZMUK. For the past six years Washington has allocated $590 million to Ukraine for the destruction of nuclear arms. With this aid, Kiev destroyed 126 intercontinental ballistic missiles, hundreds of launching silos and built 840 houses for its servicemen. LUGAR is in Georgia today and will travel to Azerbaijan later this week.

South Caucasus & Central Asia

Georgian Pres. On Major World Issues

· Georgian President Eduard SHEVARDNADZE in a written statement on Saturday support US missile attacks on targets in Sudan and Afghanistan. He said, "International terrorism poses the greatest threat to the contemporary world. If the international community fails to eliminate it promptly, the world will

find itself threatened by serious cataclysms." He condemned individuals and nations which provide assistance to terrorism or safe-haven to their groups and organizations. Referring to attempted assassination attacks on him in August 1995 and February 1998, SHEVARDNADZE said, "Regrettably, Georgia has on more than one occasion experienced the horror of terrorist acts." Georgian officials have linked assassination attempts to hard-liners in Russia, who oppose SHEVARDNADZE's pro-Western agenda. The Russian government denies any role in these acts and insists it cannot locate suspected criminals linked to these attacks within their borders.

Concerning Russian President Boris YELTSIN's latest government reshuffle, in which he fired Prime Minister Sergei KIRIYENKO and his government replacing him with former prime minister Viktor CHERNOMYRDIN, SHEVARDNADZE in his national radio address said that, "Stability in [Russia] is of paramount importance, especially for Georgia." He added that, "The most important thing for Georgia and the whole world is that Russia should preserve and strengthen its stability. My wish is that the decision of the Russian President will meet this goal."

Central Asian Nations Meet On Afghanistan

· The Defense and Foreign Ministers of Central Asian states, except Turkmenistan, held a closed-door meeting in Tashkent on Saturday. The Uzbek Defense Ministry said that the foreign and defense ministers of Uzbekistan, Kazakhstan, Kyrgyzstan and Tajikistan discussed regional security in light of the advances of Afghanistan's Taliban on their borders. Based on the results of the discussion, the ministers adopted a joint confidential statement, which has not been released. Interfax reports that Tajik Ambassador to Uzbekistan Tajiddin MARDONOV said the ministers discussed, "possible scenarios of the events [in Afghanistan] and measures," the four states could take. The meeting was held in line with an agreement between Kazakhstan President Nursultan NAZARBAYEV and his regional counterparts signed last Monday.

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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