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

Friday, August 28, 1998

Russian Federation

Politics

Chernomyrdin Says Economy Under Control

· Thursday night, Russia's acting Prime Minister Viktor CHERNOMYRDIN broke his silence on the financial crisis and told journalists, "Now I finally have a clear picture of the situation and can say it is indeed difficult but absolutely controllable. A series of decisions have been taken after consulting with Russia's best brains. The main goal is to stop the ruble's fall, not allow the economy to collapse and reduce the losses of every Russian from this financial turmoil." He said today that this is not a time for ambition or political horse-trading. CHERNOMYRDIN completely agreed with the parliament's plan to print money and spend Central Bank reserves. The document being drawn up by the acting government and the Russian State Duma may bring back elements of Soviet-era central planning to halt the collapse of the nation's finances. The Duma is calling for the government to impose currency controls, fixed prices, and state ownership. The draft from the commission will be presented to the Duma on Monday. Another proposal drafted by the tripartite commission outlines a plan to transfer some Presidential powers to the parliament in return for immunity from any attempt to prosecute YELTSIN if he resigns. The power sharing agreement would give lawmakers more say over cabinet appointments and government policies. The Russian State Duma on August 31 will vote on the candidacy of Viktor CHERNOMYRDIN for the Russian premiership.

Yeltsin Removes Challenges To His Power

· Russia President Boris YELTSIN today sacked reformers special envoy to international financial organizations Anatoly CHUBAIS and Deputy Prime Minister Boris NEMTSOV. CHUBAIS was in part responsible for negotiating Russia's $22.6 billion

bailout loan with the International Monetary Fund and the World Bank. YELTSIN also relieved chief of staff of the Russian government Nikolai KHVATKOV. He met with acting Prime Minister Viktor CHERNOMYRDIN, Federation Council speaker Yegor STROYEV and Moscow Mayor Yuri LUZHKOV.

The Kremlin today rejected a political power sharing agreement proposed by the Russian State Duma which included amendments to the constitution stripping YELTSIN of some of his powers and making the government fully responsible to parliament. A statement by the Kremlin says the agreement is, "one-sided and [only] represents the interests of the legislators taking part in its preparation." Leader of the parliamentary group Russian Regions Oleg MOROZOV said the document calls for amendments to be made to the law on the government, making it more independent and limiting the chances of the Russian president to interfere with current activities of the cabinet through decrees on personnel appointments.

YELTSIN addressed the nation tonight saying, "I'm not going to resign. I will work as I'm supposed to for my constitutional term. In 2000, there will be an election for a new president and I will not run." He also called for support of his candidate for prime minister, Viktor CHERNOMYRDIN.

US-Rus Summit Focused On World Security

· Russian President Boris YELTSIN and US President Bill CLINTON are expected to sign an

Today's News Highlights

Russia

SBS Agro To Be Nationalized

New Bank Merger

Playing Chicken In Russia

European Republics

WB Advises Belarus: Devlaue

Ukraine To Repay Gas Debts

South Caucasus & Central Asia

Georg.-Rus Defense Min. Meet

Kazakh Field Gets $1.76B

Turkmen-Pakistan On Afghan

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agreement on global security during next week's Moscow summit. YELTSIN has discussed details of the agreement with Russia's acting Foreign Minister Yevgeny PRIMAKOV and US Deputy Secretary of State Strobe TALBOTT. The joint statement of the Presidents of Russia and the US on common challenges to security on the threshold on the 21st century is important to both nations. YELTSIN pointed to the extreme importance of the document which will be of a strategic nature. PRIMAKOV and TALBOTT worked on preparing the agenda for the US-Russia summit, which will include arms control and security, international and regional problems, economic interaction and bilateral relations. The US-Russia summit will be held in Moscow from September 1st to 3rd

Yeltsin Meets With Bulgarian President

· Russian President Boris YELTSIN, today returned from his hunting lodge to quash rumors of his resignation and meet with Bulgarian President Petar STOYANOV. They discussed increasing bilateral ties, which both sides believed could be improved. STOYANOV said that they agreed, "to leave behind all former misunderstandings and quietly resolve all the matters." YELTSIN said, "Our bilateral ties have a very rich experience, but we have lost it over the recent years and must re-animate it now raising to a higher level in all fields without exception: production, space, culture, education." The Bulgarian leader also said he had raised the question of including Bulgaria in the scheme of trade and economic relations which involves many Russian neighbors and Russia paying its debts to Bulgaria in aircraft spare parts. Acting Deputy Prime Minister Boris FYODOROV, acting Foreign Minister Yevgeny PRIMAKOV and deputy chief of staff of the President Sergei YASTRZHEMBSKY participated in the talks.

Economy

Currency Trading Halted Indefinitely

· The Central Bank today halted all foreign currency trading for the third time this week and has suspended trading indefinitely. The decision was taken in accordance with the authorization the Central Bank granted to the Moscow Interbank Currency Exchange (MICEX). A Central Bank press release emphasized that the demand for foreign currencies must be ensured first of all through receipts from Russian exports, which amounted to about $40 billion in the first half of the year. In this connection,

the Central Bank noted that credit organizations must ensure that the provision on the obligatory sale of 50 percent of export receipts on the domestic market is observed. The Interbank currency market has remained paralyzed as Russian commercial banks fear doing business with each other. Economic analysts speculate that currency controls are almost inevitable. Head of Our Home Is Russia Alexander SHOKHIN said that the government is considering suspending of the ruble's convertibility and instituting price controls to cope with the crisis, The Journal Of Commerce reported.

Russia's Central Bank today decided it will offer one billion rubles worth of two-week discount bonds at an auction on September 2nd in an effort to manage liquidity of the banking system. Liquidity has completely dried up in the banking system as Russia's fiscal policy has spun out of control. The domestic government debt market was suspended on August 17th pending restructuring of short-term debt, depriving banks an instrument to regulate liquidity.

Ruble = 7.86/$1.00 (NY rate)

Ruble = 7.86/$1.00 (CB rate)

Apr May Jun Jul Aug

SBS Agro To Be Nationalized

· The Central Bank moved Thursday to take control of the second most popular commercial bank in Russia, SBS Agro, in an effort to ensure that 25 million private depositors get their money. SBS Agro, run by one of Russia's top businessmen Alexander SMOLENSKY, is deeply in debt due to the financial crisis. It has already received $100 million credit from the Central Bank to help cure its liquidity problem.

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Foreign investors and local banks are frustrated with the lack of coherent leadership to steer the country out of its financial turmoil. Acting Prime Minister Viktor CHERNOMYRDIN said, "We are seeking and we will find understanding from both financial structures and banks." If SBS Agro is nationalized, the move may provide a glimpse as to the economic policy CHERNOMYRDIN will prescribe for Russia. The New York Times reports that in the last two days 10 out of the nation's 15 biggest banks have either merged or been earmarked for Government takeover. Many small banks are fated to collapse.

Second Bank Merger Amid Crisis

· Another banking group was created in Russia on Thursday which includes National Reserve Bank (NRB) at the head, and Inkombank, Avtobank, Mezhkombank and Alfa Bank. NRB Chairman of the Board Alexander LEBEDEV was elected chairman of the council of official representatives of the group. According to a NRB press release, all members of the group will preserve their status of a legal entity. NRB will manage the process of the restructuring and recapitalization of the group, while the remaining banks will specialize on granting consolidated banking services to legal entities and natural persons. Senior executives of Avtobank and Mezhkombank are holding talks with some other big commercial banks about the expansion of the scope of the newly created integrated holding. This is the second major banking merger after Russian President Boris YELTSIN dismissed Sergei KIRIYENKO's government on August 23rd. The first merger Tuesday involved Uneximbank, Menatep, and Most Bank.

Business

US Companies Hopeful Of Summit Results

· The President of the American Chamber of Commerce in Russia and the President of the American-Russian Business Council, the two leading trade associations which represent the interests of over 700 American companies in Russia, have written an appeal to US President Bill CLINTON on American companies' rights in Russia. The memo to the President refers to such problems as the tax reform in Russia, the attraction of investments in the energy industry, the rights of shareholders, certification and licensing, the reform of the customs service, the protection of intellectual property and the copy

right, the cooperation with Russian regions, information technologies and a solution to the 2000 computer bug problem. It also says that American companies plan to keep their positions on the Russian market in the long-term prospect despite the current economic difficulties of Russia.

Playing Chicken In Russia

· The US-Russia business Council estimates that Americans have spent $2 billion in Russia last year in direct investment. Managing director of Tyson Foods' Moscow office Charles CLARK said that "The Russian market is a complement to the American market. This is a very important country for us." Americans like white meat. Russians like dark meat. Tyson has been taking advantage of this difference. Companies like Tyson are hoping that US President Bill CLINTON will use his upcoming summit with Russian President Boris YELTSIN to improve the climate for American companies doing business in Russia. With political and economic turmoil gripping the nation, financial investors have been "playing chicken" with their investments. CLARKE doesn't think the ruble's fall will hurt Tyson's sales of imported chickens. Although consumer prices are expected to rise, chicken legs will remain a bargain compared to other types of meat. Tyson remains cautious. The company is not confident in Russia's stability and therefore has put off plans to buy factories for domestic production.

European Republics

WB Advises Belarus To Devalue Ruble

· The head of the World Bank's (WB) office in Minsk David PHILLIPS, who is leaving in two weeks and will not be replaced, Wednesday called for the devaluation of the Belarus ruble following the sharp plunge of the Russian currency. PHILLIPS said that if the government decides against devaluation, the competitiveness of Belarus goods on the Russian market will drop dramatically and the advantages of the Customs Union will be destroyed. He believes that the drop in the competitiveness of Belarus products on the Russian market can have serious consequences for the nation because the economies of the two countries are so closely intertwined. Russia accounts for 70 percent of Belarus' exports.

PHILLIPS noted the main reason why the World

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Bank was removing its presence in Minsk was because Belarus had not carried out economic reforms. In June 1997, the World Bank and the Belarus government signed an agreement on a program for reforms, for the implementation of which the bank could render credit support. The most important provisions of the memorandum included the liberalization of the exchange rate, the abolition of price regulations, the limitation of the credit emission, a gradual annulment of subsidies and privatization. However, not a single measure has been implemented.

Ukraine To Repay Turkmen Gas Debts

· The Ukrainian Embassy in Turkmenistan on Thursday announced that the Ukraine has paid off about a third of a total of $713 million in natural gas and other debts to Turkmenistan from 1993. Economic advisor at the embassy Igor KOSTYNA said, "To date, Ukraine has paid off around $259 million from a total of $713 million that includes debts from Turkmen gas supplies in 1993 and interest rates." He added that another $106 million to pay off the debt had been earmarked in Ukraine's 1998 state budget. Ukrainian President Leonid KUCHMA and Turkmen President Saparmurat NIYAZOV plan to discuss resuming gas deliveries to Ukraine, during a planned meeting in Kiev later this year.

South Caucasus & Central Asia

Georgia-Russian Defense Ministers Meet

· Georgian Defense Minister David TEVZADZE and Russian Defense Minister Igor SERGEYEV agreed that the problem of Russian military bases stationed on Georgian territory will be resolved only when a concept of bilateral military cooperation is agreed to. The two ministers discussed military cooperation Thursday in Moscow. In response to journalists' questions on the prolongation of the mandate of Russian peacekeepers in Abkhazia, TEVZADZE noted that this should be a political decision and he was not authorized to answer this question. At the same time, expressing his personal

point of view he said, "From the military angle, as long as the peacekeepers are carrying out their duties, they are needed." Georgian President Eduard SHEVARDNADZE has accused Russian peacekeepers in Abkhazia of failing to do their duties, particularly in connection with the March attacks against ethnic Georgians in Gali.

Karachaganak Gas Receives $1.76 Billion

· Kazakhstan's giant Karachaganak natural gas and gas concentrate field may receive $1.76 billion in direct investment over the next three years, Paul JORDAN of Karacharganak's production structure. JORDAN added that Karachaganak field will remain the property of the Kazakhstan government. The field is capable of producing 5 million cubic meters of gas per day. JORDAN said, "We may export 10,000 tons a day of condensate, and we have plans to double this volume," Reuters reported. British Gas, Italian Agip, US Texaco, Russia's LUKoil, and Kazakh Oil in a production sharing agreement agreed to jointly develop the field.

Turkmen-Pakistan Discuss Afghan Situation

· Turkmenistan President Saparmurat NIYAZOV met visiting Pakistani Minister of State for Foreign Affairs Mohammad Siddiqi Khan KANJU on Wednesday to discuss the situation in Afghanistan. KANJU is in Turkmenistan as head of the Pakistani Foreign Ministry delegation which is winding up its tour of the Commonwealth of Independent State (CIS) countries adjacent to Afghanistan. Pakistan and Turkmenistan are interested in a speedy restoration of peace in Afghanistan. KANJU noted that Pakistan is involved in large regional and bilateral projects with Turkmenistan and expressed the hope that their implementation will help stabilize the region. He hopes that deadlines for the gas pipeline from Turkmenistan to Pakistan via Afghanistan will be met. Implementation of the project has been suspended because of the reluctance of head company Unocal to take active steps. The $2 billion pipeline is expected to transport gas from the Turkmenistan's Dovletabadskoye field to the Pakistani city of Multan.

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