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

Thursday, September 10, 1998

Russian Federation

Politics

Yeltsin Nominates Primakov For PM Post

· Russian President Boris YELTSIN today finally announced the anticipated nomination of a new candidate for prime minister. The President submitted a formal request for the Russian State Duma to consider acting Foreign Minister Yevgeny PRIMAKOV for the post of prime minister. The Duma, which has twice rejected former and acting prime minister Viktor CHERNOMYRDIN, must approve a prime minister by the middle of next week. CHERNOMYRDIN withdrew his candidacy earlier today. He said, "If Chernomyrdin is a stumbling block, if he is causing a split in power, if he is meddling, I will surrender my duties as prime minister...I cannot damage Russia, I cannot let the split bring about great disturbance."

Liberal politician Grigory YAVLINSKY first proposed PRIMAKOV Monday after the second rejection of CHERNOMYRDIN. He said, "We must confirm a prime minister who would not have to be sacked in three months. He should not belong to any political party. He should have sufficient political authority, be known in the world, and lack any desire to run for president. There is such a person. It is Yevgeny PRIMAKOV." PRIMAKOV's candidacy was also proposed and supported by the Communists, nationalists, and finally the Kremlin. Duma deputy chairman Vladimir RYZHKOV said PRIMAKOV's nomination, "will help stabilize the situation in the country and will allow to secure the transfer to a more stable development model." Leader of the Our Home Is Russia faction Alexander SHOKHIN said, "Yevgeny PRIMAKOV is a politician equally distant from all political forces, therefore he can be entrusted with forming a government." Russian Communist leader Gennady ZYUGANOV backs the new candidate. He

said PRIMAKOV, "is an absolutely sober and unengaged politician. He can carry on a course worked out by state bodies, has his own position, expresses his views clearly and is an experienced diplomat and statesman." The Communist leader said, "Good sense has prevailed this time...PRIMAKOV is known around the world where he stands up for Russia's interests. This will be good for Russia." ZYUGANOV's positive reactions is a signal that the Duma is likely to confirm PRIMAKOV in a vote on Friday. PRIMAKOV's confirmation would end the two week standoff between the Kremlin and the Duma during a time of extreme economic turmoil.

By choosing a compromise candidate to please all parties, YELTSIN is showing his weakness. Where typically he would have renominated CHERNOMYRDIN a third time and have the deputies choose whether to follow party lines and face dissolution, this time the tables were turned and deputies left the political choice to YELTSIN. Deputies threatened the president with impeachment proceedings which would have blocked Duma dissolution. Instead of the deputies giving into the President's demand, YELTSIN lost considerable ground to the deputies.

Description And Implications Of Primakov

· Acting Foreign Minister Yevgeny PRIMAKOV today has been nominated as the next prime minister candidate. PRIMAKOV, a career diplomat and former spy-master, appears to be an acceptable candidate for all factions in the Russian State Duma, even

Today's News Highlights

Russia

CB To Sell Dollars

India To Buy Russian Jets

Rosneft To Default On Payments

European Republics

Lith. Parliament Fall Session

Denmark Loans Kiev $100M

South Caucasus & Central Asia

Section 907 Repealed

US Satellites Explode In Kazakh

Kyrgyz To Host Peace Talks

Politics-Economics-Business

Page

Thursday

September 10, 1998

Intercon's Daily

though he is not linked to any political party. He is likely to be confirmed in a vote Friday. PRIMAKOV, a 68 year-old Jew, is fluent in English and Arabic. He worked as a correspondent for the State Gosteleradio Committee handling radio and television broadcasting under the Soviet Council of Ministers and as a Pravda correspondent in the Middle East. He served as a deputy director of the Institute of the World Economy and International Relations, a think-tank under the Soviet Academy of Sciences. In 1991, he was appointed director of the Central Intelligence Service of the Soviet Union and in 1996 appointed as Foreign Minister. PRIMAKOV has been criticized in the West for being strict in foreign relations and showing support for Iraq and other regimes at odds with the West. He is a fierce defender of Russian interests in the dispute with the West over NATO expansion. He has won respect among old Soviets for rebuilding diplomatic relations along Soviet lines.

PRIMAKOV's one draw back is his lack of economic experience. Because of this, he also has no economic policies to defend. He may be able to implement the tough and necessary reforms to turn around the nation's economic turmoil. Russian President Boris YELTSIN informed German Chancellor Helmut KOHL that, "the new government would continue the reform policy and do all it can to overcome as quickly as possible the dangers for the country's economic development that have arisen out of the critical development of the situation," according to a government spokesman.

Economy

Ruble = 15.8/$1.00 (NY rate)

Ruble = 15.7724/$1.00 (CB rate)

Ruble Rebounds On New PM Candidate

· Following the news that acting Foreign Minister Yevgeny PRIMAKOV is Russian President Boris YELTSIN's choice for prime minister, the ruble recovered against major foreign currencies. The ruble was firm in trading today on the interbank exchange, rising to between 11 and 14 to the dollar from the rate set at the close Wednesday of 15.7724 rubles to the dollar. The battered currency, which had slumped below 20 to the dollar last week, has recovered, jumping over 30 percent on Wednesday. PRIMAKOV's appoint is expected to bring stabilization to the political situation and once a working

government is in place, economic policies to ease the crisis will follow. The rebound is also credited to the intervention of the Central Bank and a sell-off of dollars to meet ruble payments by commercial banks and Russian companies, The Wall Street Journal reported. Currency controls announced Wednesday also slowed the ruble's fall.

The Russian State Statistics Committee announced that consumer prices rose 35.7 percent in Russia during the first week of September. The inflation rate reached 15 percent in August, a record high since the beginning of 1995.

EBRD Committed To Russian Projects

· European Bank for Reconstruction and Development (EBRD) vice president in charge of finance Steven KAMPFER said all commitments on allocations of the EBRD for Russia's projects remain in force. EBRD is the world's biggest foreign direct investors in the private sector of Russia. The bank said Wednesday that it will be forced to make provisions of around 159 Ecu ($181 million) in the third quarter against its exposure to Russia. EBRD has loan and equity investments as of the end of July totaling 2.7 billion Ecu, equivalent to 27 percent of its total banking profile of 9.9 billion Ecu for 87 projects in Russia. EBRD president Horst KOHLER said the board had, "strongly emphasized that the bank will not withdraw from Russia. The transition will take time and requires long-term commitment." He urged Russia to form a government without delay, move ahead with reforms, and deepen its commitment to the market economy and an growing investment climate, the Financial Times reported. The EBRD in its investment policy proceeds from the assumption that the Russian government's borrowing will be serviced according to schedule and that the core of the banking system will continue its operations. Programs of the EBRD's investment in Russia include Nizhny Novgorod's joint venture to be set up by Italy's Fiat and Russia's GAZ to assemble Fiat cars, and projects in chemical, oil refining and food industries. The EBRD had launched cooperation with Russian banks, primarily Inkombank and Uneximbank.

Central Bank Decision To Sell Hard Currency

· The board of Directors of the Central Bank of Russia on Wednesday decided that all exporters must sell 50 percent of their hard currency earnings

When you need to know it as it happens

Politics-Economics-Business

Page

Thursday

September 10, 1998

Intercon's Daily

on interbank currency exchanges operating under a license from the Central Bank. Deputy chairman of the Central Bank Alexander POTYOMKIN said that the decision had been screened by acting prime minister Viktor CHERNOMYRDIN. POTYOMKIN said no substantive changes will be made to the procedure of interaction between the exporters and the banks servicing them. Earlier, hard currency export earnings were sold for rubles directly to commercial banks. The Central Bank found it beneficial to concentrate sales at the interbank currency exchanges, including MICEX in the hopes that the dollar exchange rate against the ruble will be "fair" if set in trading. According to POTYOMKIN, the measure is designed to channel the main volumes of trading to a system that makes possible to control the currency situation. The decision on the mandatory sale of 50 percent of hard currency earnings from export is binding on all Russian currency exchanges.

Business

India To Buy Russian Fighter Jets

· India plans to purchase 10 more Russian Sukhoi-30MKI fighter jets in a contract worth about $350 million. The Soviet Union was India's major arms and weapons supplier. Under an existing military agreement, the two countries are developing anti-tactical ballistic missile systems as well as upgrading MiG-21 fighters and T-27 tanks that India already owns. In 1996, India agreed to purchase at least 40 Russian military jets before 2002. Russian military sales, which are typically made in dollars, represents a valuable source of hard currency and jobs. The multi-purpose plane is produced in Siberia by the Irkutsk Aircraft Production Association. Spokesman for the Russian Foreign Ministry Vladimir RAKHMANIN Tuesday stated, ""Bilateral cooperation in defense and in the military-technological sphere is Russia's and India's sovereign right and nobody intends to curtail it."

Rosneft Defaults On Funding

· Russian oil company Rosneft warned its joint venture partners, US Exxon and Japanese Sodeco, that it is defaulting on payments for the development of the Sakhallin-1 offshore oil project until October. The partners agreed to the delay. Rosneft did not give a reason for the delay in payments, but all indications point to the nations financial crisis. Rosneft

was scheduled to pay $2.92 million in July and $3.2 million in August into the joint venture. Rosneft is expected to pay a total of $18.8 million into the joint venture for the second half of 1998. Sakhalinmorneftegaz, a Rosneft subsidiary, is due to pay $25.4 million. Exxon and Sodeco own 30 percent of the joint venture each, while Rosneft owns 17 percent and Sakhalinmorneftegaz owns 23 percent. Rosneft is considering selling its share in the joint venture to a foreign investor.

Deputy Fuel and Energy Minister Viktor OTT, who is also a Rosneft director, Tuesday announced plans to request that the government cancel the auction for a controlling share in Rosneft and declare a moratorium on its privatization for at least one year. He cited, "unfavorable conditions in the financial market," as the main reason for his request. If the privatization sale is canceled, it would be the second time this year the government has failed to sell Rosneft. The starting price for a 75 percent plus one share of Rosneft is set at $1.6 billion, with an investment program of $65.5 million. In July, the government extended the bidding until October 27th.

European Republics

Lithuanians Parliament Opens Fall Session

· The Lithuanian parliament opened its fall session today. The first plenary meeting of the session is expected to last for few hours. The opening speech by Speaker Vytautas LANDSBERGIS will be followed by an address by Lithuanian Prime Minister Gediminas VAGNORIUS. The Prime Minister will inform the lawmakers of the measures taken by the nation to soften the negative impact of the financial crisis in Russia on the Lithuanian economy. He will also brief the parliament on the humanitarian aid provided to the Kaliningrad region, a Russian enclave neighboring on Lithuania. The parliament will also approve the draft timetable for the fall session.

Ukraine-Denmark Sign $100 Million Credit

· Ukrainian Foreign Minister Boris TARASYUK and Danish Foreign Minister Niels Helveg PETERSEN Wednesday signed an agreement on financial cooperation in Kiev. Under the agreement, Denmark is to offer Ukraine a $100 million credit. The loan will be used for the development of energy

When you need to know it as it happens

Politics-Economics-Business

Page

Thursday

September 10, 1998

Intercon's Daily

conservation, ship-building, and agriculture. The two nations also signed an intergovernmental agreement on interstate car communication as well as an agreement between Ukraine's European development and integration agency and the Danish investment fund for the countries of Central and Eastern Europe. PETERSEN met with Ukrainian President Leonid Kuchma, Prime Minister Valery PUSTOVOITENKO, Minister for Foreign Economic Ties and Trade Sergei OSYKA. Today he met with parliamentary speaker Alexander TKACHENKO. Accompanying PETERSEN are 14 business executives who are to hold talks at the Ministry of the Agrarian and Industrial Complex as well as at the Energy Ministry. Denmark also plans to contribute $3 million to solve problems related to the Chernobyl nuclear accident in 1986.

South Caucasus & Central Asia

US House Repeals Section 907

· The US House Appropriations Committee today repealed Section 907 of the Freedom Support Act of 1992 in its foreign operations conference. Section 907 prohibited the allocation of US foreign aid to Azerbaijan. The sanction was originally put in place until Azerbaijan, "ceases economic blockades and other offensive uses of force against Armenian and NagornoKarabakh." This is seen as a major victory for the Azeri lobby. The Amendment was presented by Republican chairman of the House Appropriations Committee Bob LIVINGSTON. A compromise amendment presented by Representative PORTER was defeated in a vote 30 to 19. LIVINGSTON said that it is time to end this sanction and support the request made by Secretary of State Madeleine ALBRIGHT to repeal Section 907. ALBRIGHT has said that Section 907 is counter productive, tying the hands of the US diplomatic efforts to end the Nagorno-Karabakh conflict between Armenia and Azerbaijan. Lifting the Section 907 sanctions would also allow US companies to develop energy resources in the Caspian Sea region and permit the government to provide financial support for the east-west pipeline

routes from Baku to Supsa and Ceyhan.

US Satellites Explode In Launch From Baikonur

· A Russian rocket carrying 12 US Globalstar satellites worth $180 million exploded shortly after take-off from Baikonur space center in Kazakhstan. Russian Mission Control says the Zenit-2 rocket suffered an unexplained engine failure after only four minutes, 32 seconds of flight, and crashed in the Altai mountains in southern Siberia. Russian television reports say the rocket exploded, but Mission Control officials say the booster rocket and its payload of satellites fell to the ground. The Space Department of the Russian Defense Ministry announced that a formal investigation is underway at the accident site by a state commission. The launch was the first of six to be carried out by Russia for Globalstar Telecommunications Ltd.. Russia agreed to launch a total of 36 satellites, to bring in $30 million to the cash-strapped Russian space program. The satellite explosion delayed Globalstar's completion of its $2.6 billion satellite-based global communications network. The loss sent the company's stocks plunging $7 to $10.875 in heavy trading on the Nasdaq.

Kyrgyz To Play Role In Afghan Peace Talks

· Kyrgyzstan's deputy foreign minister Alikbek DZHEKSHENKULOV today said that Kyrgyzstan is ready to host talks with Afghanistan's Islamic Taliban movement and the opposition alliance, under the auspices of the United Nations. The Taliban, which has made considerable advances against the opposition alliance in the last few months, is still recognized by only three countries: Pakistan, Saudi Arabia, and the United Arab Emirates. Four of the five Central Asian states along with Russia has expressed concern over the Taliban movement's advances close to the former Soviet Union's southern frontier and fears of a mass exodus of refugees. DZHEKSHENKULOV confirmed that he had received a letter from the Taliban expressing its readiness in a United Nations led international conference. He added that the conference will be held in stages with one of them being held in Bishkek.

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

available for non-profit institutions.

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.

When you need to know it as it happens

Politics-Economics-Business

Page