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 26, 1998

Russian Federation

Politics

Chernomyrdin Attacks Cental Bank Actions

· Russian acting premier Viktor CHERNOMYRDIN launched a fierce attack on the Central Bank criticizing the way it has handled the nation's monetary policy. He said he is "extremely dissatisfied" with the work of Central Bank and its chairman Sergei DUBININ. Chairman of the Federal Securities Commission Dmitry VASILYEV said the public prosecutor should be asked to probe the bank's actions, which he called a complete failure. He said, "Serious mistakes were allowed by the leadership at the highest levels including over the past two years...The huge amount of resources from non-residents was misused instead of boosting hard currency reserves and this in the final analysis led to the ruble's devaluation." Under the constitution, DUBININ cannot be removed by presidential decree; only the parliament has the power to sack him.

Russian acting Prime Minister Viktor CHERNOMYRDIN today met with Finance Minister Mikhail ZADORNOV and State Tax Service (STS) deputy chairman Vladimir GUSEV over ways to increase budget revenue. CHERNOMYRDIN must decided whether to save the banks by injecting more cash into the system which will unleash inflation or guard the nation's finances and let the banks go. Al BREACH, an economist with the Russian European Center for Economic Policy in Moscow said, "This is the crucial problem with Russia...The choice it makes will have the biggest bearing of all on the outcome of the financial crisis," The Wall Street Journal reported. Trading was suspended on the Moscow Interbank Currency Exchange (MICEX), after the ruble fell 5 percent to 8.26 rubles to the dollar. Tuesday's loss of 10 percent was the greatest one day drop since October, 1994.

Russian-Vietnam Relations

· Russian President Boris YELTSIN and Vietnamese President Tran DU'C LU'ONG Tuesday met in the Kremlin to discuss bilateral cooperation. YELTSIN said, "We should at least restore relations of the past times and concentrate on the oil-and-gas sector...The base created jointly by our two countries has been preserved. We are using it as the foundation on which to build the new edifice of our relations. No one and nothing can prevent this process." The Vietnamese President stressed that strategic importance to their bilateral relations. The two leaders signed a joint statement which commits the two nations to the construction of a new world, more perfect as regards politics, economics and the legal aspects. The leaders of the two countries confirmed the intentions to continue the development of friendship and cooperation. The statement says that the military-technical cooperation between Russia and Vietnam is, "not directed against third countries and does not undermine regional balance of forces." The Treaty between Russia and Vietnam on legal assistance and legal relations on civil and criminal affairs was also signed. In addition, the agreement was signed between the Russian and Vietnamese governments on cooperation in the construction and running of an oil refinery in the Vietnamese territory. The joint venture of Vietsovpetro has been successful and will produce 15 million to 16 million tons over the next few years. The sides also favor cooperation in the power industry, including construction of the Shonla Hydropower Station as well as other hy

Today's News Highlights

Russia

New Short-Term Debt Plans

Bank Mergers For Stability

Rus-Cyprus Joint Plant Talks

Car Show Opens In Moscow

European Republics

IMF Reassesses Ukraine Econ.

South Caucasus & Central Asia

Five Bombing Suspects ID

Georgian Def. Min In Moscow

EBRD Loans Uzebk $10M

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August 26, 1998

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dro power or fueled power plants in Vietnam as well as in the engineering, chemical, iron and steel, light and food industries and other economic sectors. Russia and Vietnam will cooperate in banking, insurance services, economic arbitration as well as in regulating migration of labor. The statement notes that the Presidents of the two countries agreed to strengthen the mechanism of mutual contacts between the heads of state, regular meetings between the heads of government and consultations between the foreign ministers in order to deepen mutual understanding and to increase bilateral cooperation between the two states. Several other documents at departmental level are also expected to be signed today, including the Agreement on cooperation between the Russian Justice Ministry and the Vietnamese Justice Ministry, the Agreement between the Russian and Vietnamese governments on cooperation in control over narcotics and psychotic substances. The Vietnamese President invited YELTSIN to visit Vietnam, Russian presidential aide for international affairs Sergei PRIKHODKO said. The visit may take place in 1999. Russian Defense Minister Igor SERGEYEV is expected to visit Vietnam over the next few months to discuss the development of military cooperation.

Economy

Ruble = 7.86/$1.00 (NY rate)

Ruble = 8.26/$1.00 (CB rate)

New Debt Restructuring Terms

· Late Tuesday night, Russian President Boris YELTSIN signed a decree drafted by acting Prime Minister Viktor CHERNOMYRDIN on the restructuring of $40 billion in short-term domestic debt, of which foreigners hold $11 billion. It appear that foreigners, who feared that Russians would get a better deal at their expense, are receiving equal terms. Under the long awaited plan, creditors will be able to exchange up to 20 percent of their holdings for dollar-denominated bonds that carry a coupon of 5 percent and mature in 2006. That yield is way below comparable yields on US Treasury bonds. The rest must be exchanged into ruble-denominated paper with maturities between three and five years. The three-year securities will pay interest of 30 percent, longer term bonds will pay 25 percent in the fourth year and 20 percent in the fifth year, the Financial Times reported. In addition, it is envisaged

that state securities can be exchanged for deposit certificates over Sberbank enabling the holder to withdraw monetary resources amounting to five percent of the face value of the security. The government also approved the procedure of the repayment of the T-bills and OFZ federal loan bonds. The procedure provides, in particular, for the suspension of purchase/sale of the said bills and bonds until the date of their redemption. Head of Russia's international capital markets department Oleg BOUKLEMISHEV said that the treasury swap, "will have no effect on the country's ability to meet its external debt payments. Foreign bankers predict that Moscow needs to service a $15 billion to $17 billion in foreign currency debts in 1999.

Uneximbank, Menatep, Most Banks Merge

· Tuesday Uneximbank, Most Bank, and Menatep announced that they will form a bank holding, with each of the three banks contributing 51 percent of their shares. Each of the banks will hold 33.33 percent stakes in the holding company. The holding will be headed by Chairman of the Uneximbank Management Mikhail PROKHOROV. The Chairman of the holding's Board of Directors will be appointed on a coordinated proposal of Menatep and Most Bank. The board of directors will consist of nine members: three representatives from each bank. The banks will ask leading Western investment banks and audit companies for consultations about the merger and the best structure of the new company. Uneximbank spokesman Sergei CHERNITSEV said, "The crisis was the catalyst for the merger." Vice chairman of Menatep Konstantin KAGALOVSKY stressed that Uneximbank will not be the dominant bank, "Out of three banks there will be one. It will be an equal partnership of all three...The idea is that we will create a real western-style bank." The merger will result in the formation of the largest joint stock bank in Russia, to be competitive in work with corporate and individual clients at the highest international standards.

Uneximbank, the fourth largest Russian bank, is part of the Interros Group controlled by Vladimir POTANIN. Uneximbank was formed in 1993 on a basis of 30 foreign economic companies with an annual turnover of $10 billion. Uneximbank specializes in work with corporate clients and is the community's leader on investments in the industry. Menatep, the sev

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enth largest bank, is part of the Rosprom Group controlled by Mikhail KHODORKOVSKY. Menatep was formed in 1988 on a basis of the Menatep center of interbranch scientific-technical programs. Menatep works in all the market segments and holds leading positions in the corporate financing, crediting, investments, operations on financial markets, financing of foreign trade operations and inter-bank payments. Menatep became the first Russian bank to default last week, unable to pay many of its depositors. Most Bank, the seventeenth largest bank, is part of Most media and banking empire run by Vladimir GUSSINSKY. Most Bank was formed in 1991. Most Bank is an institution which leads in the market of retail services. These three bank leaders are part of the power-elite which are accused of ousting former Prime Minister Sergei KIRIYENKO. The three Russian banks are part of groups which control two oil firms and a petrol retail network. However, one oil company spokesman said it was too early to talk of oil companies merging.

Deputy chief of the Russian Banks Association Alexei MASHKOV today announced that the association fully supports the decision of Uneximbank, Menatep and Most Bank merger. He said, "In order to consolidate the finance system, particularly system-forming banks, this measure is given unqualified backing so as to hold out in the present times and to develop effectively in future." MASHKOV explained that with the present situation in the banking system, a merger is the most promising way for consolidating bank capital and enhancing its stability. Russian First Deputy Minister of Finance Vladimir PETROV said that due to the mergers banks will become stronger. He said, "The more resources are amassed, the broader possibilities for maneuvering are and the easier it is to overcome financial problems."

National Reserve Bank, Inkombank Merge

· The troubled Inkombank, Russia's second largest, said it was negotiating a merger with the smaller National Reserve Bank. Earlier today a leading Russian business daily reported a possible alliance between Inkombank and Bank Rossiysky Kredit, but Inkombank clearly chose a safer partner with a smaller portfolio of bad debts. Inkombank has an estimated losses equal to four times its capital of 2.4 billion rubles ($300 million). Acting Prime Minister Viktor CHERNOMYRDIN has said the state will

guarantee private savings by forming a pool of banking resources, making it possible to transfer savings accounts to the state-owned Sberbank. The move was seen as an attempt to calm rising panic among individual investors, who have tried to withdraw their savings before weaker banks go under.

Business

Russia Plans Joint Plant With Cyprus

· Cypriot Minister of Finance Christodoulos CHISTRODOULOU on Tuesday said that the Cypriot government is pleased with a proposal from the Russian Nizhni Novgorod Company to build a plant capable of building light civilian planes on the island. The government takes into account the geographic position of the island and thinks that a joint company for the aircraft production will be set up on Cyprus. A final decision to the effect will be taken by the cabinet at a regular meeting. Cypriot Minister of Trade, Industry and Tourism Nicos ROLANDES and a representative of the Russian company have confirmed a proposal on the construction of the plant to offer 300 jobs. Several millions of Cypriot pounds will be invested in the project.

Lockheed-Krunichev-Energia Gets Go Ahead

· The Russian government today accepted an offer by the Russian space agency, the Defense Ministry and the Khrunichev State Space Center to attract investments for the Russian-US joint venture Lockheed-Khrunichev-Energia International. The joint venture is expected to receive $38 million in investments, while the Khrunichev center is to receive $68.6 million for stepping up the production of its Proton booster rockets. As a result, it is planned to build two additional Protons starting in the year 2000, and four rockets starting in 2001 on condition that foreign customers will be entitled annually to up to 12 commercial launches with the use of Proton. The government instruction emphasized that such launches will be made on condition of an "unconditional" priority to space launches in the interests of the Defense Ministry and the space program.

International Car Show Opens In Moscow

· More than 600 companies from 40 countries are participating in the fifth International Car Show which opened in Moscow today and will continue until Sunday. Over half of the participants are Russian. Other participants include companies from Britain,

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the US, Hungary, Germany, China, Finland, the Czech Republic, and Taiwan. The latest models are on display are Russian and Foreign-made cars, lorries, and buses. Car makers from countries of the Commonwealth of Independent States also participate in the show. The exposition shows spare parts and equipment for garages and maintenance stations. Organizers of the exhibition are backed by Russia and Moscow city government.

South Caucasus & Central Asia

Five Men Held In Connection With Bombing

· Georgian authorities have identified and are questioning five men being held in connection with the bombing of a Gali administration office in Zugdidi Monday. It is believed that these men are connected with the organization which planted the bomb. The suspects have been described as Zviadists and followers of the ousted late president Zviad GAMSAKHURDIA. Intercon sources report that they are also believed to have been working with the Abkhaz intelligence service. The investigation is continuing, as Georgian President Eduard SHEVARDNADZE is determined to punish the perpetrators. Three local residents were killed and 50 people injured during the explosion.

Georgian Defense Minister In Moscow

· Georgian Defense Minister David TEVZADZE is expected to arrive in Moscow today for a three-day official visit. A spokesman at the Russian Defense Ministry said that TEVZADZE will meet acting Defense Minister Igor SERGEYEV, General Staff chief Anatoly KVASHNIN, First Deputy Foreign Minister Boris PASTUKHOV, Security Council Secretary Andrei KOKOSHIN and CIS military cooperation headquarters chief Viktor PRUDNIKOV. The ministry official said TEVZADZE's talks will address Russia-Georgia military cooperation, the mission of Russian peacekeepers, and the stationing of three Russian military bases in Georgia. He will discuss with Russian officials the training of the Georgian military in Russia.

EBRD Lends Uzbekistan $10 Million

· The European Bank for Reconstruction and Development (EBRD) will give Uzbekistan three tranches to a total amount of $10 million. The credit will be provided to Uzbekistan's National Bank for Foreign Economic Activities to finance seven project jointly valued at $14 million. Most funds will be used to finance the production of consumer goods, bank officials said.

European Republics

IMF Reconsiders Ukraine Loan

· The International Monetary Fund (IMF) announced Tuesday that it is reassessing economic conditions in Ukraine before releasing a $2.2 billion loan due to repercussions of Russia's political and financial crisis in Ukraine. To secure the loan Ukraine has pledged to carry out an ambitious program of economic reform and fiscal discipline. The IMF board had been expected to consider the loan for Ukraine by the end of August to support a program of tough economic reforms and help Ukraine weather the Asian and Russian financial crisis. After the analysis is complete, the IMF will set a date of the meeting of its executive board to decide on the installment which may be $200 to 250 million. The devaluation of the ruble on August 17th and its continuing fall has put pressure on the gryvnia. The gryvnia has been trading just outside its trading band set by the Central Bank at 1.8 to 2.25 gryvnias per dollar. The National Bank in Kiev has spent some 15 percent of its reserves defending the gryvnia, leaving only about $1.75 billion in its treasury. Ukrainian officials said they will use the loan to bolster the National's Bank reserves. IMF's managing director Michel CAMDESSUS met with Ukrainian President Leonid KUCHMA and acting Prime Minister Viktor CHERNOMYRDIN in the Crimean Peninsula. An IMF spokesman said, the purpose of his visit is, "to discuss recent developments in Russia and their impact on the region, especially Ukraine." Ukraine sends more than 40 percent of its exports to Russia.

Paul M. Joyal, President, Editor in Chief Clifton F. von Kann, Publisher Jennifer M. Rhodes, Principal Editor

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