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, September 11, 1998

However, with Communists at the core of a soon to be formed coalition government, strict policies nationalizing important sectors of industry and restoring state monopolies on exports of raw materials and energy are expected to be implemented. As one Kazakh spokesman said earlier today a return to the "old guard" is at least more predictable.

Yeltsin Continues Government Reshuffle

· Russian President Boris YELTSIN continues to thrive on dramatic unexpected measures. On Thursday he surprised the world by nominating Yevgeny PRIMAKOV as Prime Minister, a favorable candidate for Communists. He also appeared to be his unpredictable self by announcing some government changes. YELTSIN abruptly dismissed Security Council Secretary Andrei KOKOSHIN, replacing him with former Deputy Prime Minister and Interior Minister Anatoly KULIKOV. KOKOSHIN sent the acting prime minister Viktor CHERNOMYRDIN a letter setting forth the emergency economic stabilization measures before his dismissal. In the letter, KOKOSHIN said the Russian government and Central Bank statement of August 17 and all the ensuing decisions should be disavowed. KOKOSHIN suggested that foreign currency trading and the convertibility of the ruble should be restored, and the moratorium on repayment of the foreign debts by Russian banks be lifted. No reason was give for his dismissal other than a transfer to another position. Today, Itar-Tass reported that acting Deputy Prime Minister Oleg SYSUYEV intends to quit the

Russian Federation

Politics

Primakov Confirmed As Prime Minister

· The Russian State Duma today confirmed Russian President Boris YELTSIN's candidate Yevgeny PRIMAKOV as Prime Minister in a vote of 317 to 63 with 15 abstentions. After PRIMAKOV's confirmation, attention shifted to the formation of a new government. PRIMAKOV named Communist economist Yuri MASLYUKOV as his first deputy in charge of economic affairs. PRIMAKOV called MASLYUKOV, "a decent, clever, and honest man." PRIMAKOV hinted that he is seeking a coalition government, which may even include Nationalists from Vladimir ZHIRINOVSKY's Liberal Democratic Party. Russia's NTV television station reported that reformers acting deputy prime minister Boris FYODOROV, acting Finance Minister Mikhail ZADORNOV, and acting Economic Minister Yakov URINSON plan to leave the Cabinet.

YELTSIN in a national television address said, "The tasks facing the government are difficult—to get prices down, to return goods to the shelves, restore the banking system and guarantee deposits. YELTSIN and PRIMAKOV, in a meeting prior to the vote, agreed that the main thing to be done now is to curb the current economic crisis by creating the necessary prerequisites for economic growth. PRIMAKOV promised to present the President with the government's short- and medium-term plans as soon as the nominee is confirmed in the State Duma. PRIMAKOV told the Duma that, "First we must carry out reform. Only with the continuation of reform do we have a way out of this current situation." He said the state must regulate and intervene where necessary, and promised measures to defend domestic producers during this economic crisis. He said, "This is not a return to the administrative and command system."

Today's News Highlights

Russia

Russia Defaults German Loans

Gaz Launches New Make

European Republics

Moody's Downgrades Ukraine

Ukraine Changes T-Bill Rules

South Caucasus & Central Asia

Russian Troops Withdraw

Caspian Affected By Events

Tajik Bank Restricts Ruble Sales

Kyrgyz Receives ADB Loan

Politics-Economics-Business

Page

Friday

September 11, 1998

Intercon's Daily

Cabinet and transfer to a high-level diplomatic job. The Russian Foreign Ministry could not confirm SYSUYEV's transfer to a diplomatic position. YELTSIN appointed first deputy foreign minister Igor IVANOV to take over as Foreign Minister, if PRIMAKOV is confirmed.

Economy

Ruble = 12.87/$1.00 (NY rate)

Ruble = 12.8749/$1.00 (CB rate)

Ruble = 11.2|13.2/$1.00 (buy|sell rates)

Apr May Jun Jul Aug Sep

Geraschenko Nominated As CB Chairman

· Russian President Boris YELTSIN has accepted the resignation of Central Bank chairman Sergei DUBININ and asked the Russian State Duma to approve Viktor GERASCHENKO as DUBININ's replacement. GERASCHENKO has been the Chairman of the Board of the International Moscow Bank since 1996 and was formerly head of the Central Bank from 1992 to 1994. Critics blame GERASCHENKO of fueling inflation with huge credits to ailing industry and agriculture. He has been labeled by many as, "the worst central bank governor in history." GERASCHENKO said he would be more cautious about printing money, but added that he will rule out a currency board to control inflation. The Duma budget committee has recommended GERASCHENKO and agreed that if GERASCHENKO is confirmed by the Duma, it would recommend that the Central Bank board step down and six new members be appointed by GERASCHENKO. He is respected by commercial bankers who are confident in his commitment to

reforms, without blind conviction that market forces can regulate the system. With the Communist Party support and its allies who dominate the Duma, there is little doubt GERASCHENKO will win enough votes for confirmation.

As of Tuesday, the hard currency reserves of the Central Bank totaled $11 billion. The cash kept by Russian residents at home is estimated at $30 billion to $50 billion.

Russia Defaults On German Hermes Loans

· Russia has delayed payment of interest on debt to the German government, heightening concerns that Moscow could default on its huge foreign and sovereign debts. The export credit insurance company, Hermes, which acts as an agent for the German government said that only part of a DM800 million ($462 million) interest payment on rescheduled Soviet debt, the Financial Times reported. The payment was due at the end of August. An Hermes spokesman said that part of the debt had been paid, that they expect the rest to be paid, but he did not specify when. Germany is Russia's biggest ally and creditor with about $20 billion in debt. Bonn has said that further government-backed Hermes export credits will be extended to Russia, only if Moscow makes good on debt payments. Director at Fitch IBCA David RILEY said, "This shows Russia is in significant distress. This could be the first in a series of defaults. Head of Interros, Vladimir POTANIN echoes RILEY's comment predicting that Russian banks will be unable to repay their debts to western creditors unless terms are re-negotiated. "All our banks have collapsed. We now understand clearly that to fulfill our debts fully is impossible, so I think that banks must begin talks with their creditors now, while they are still alive." POTANIN was referring to the banking branch of Interros, Uneximbank. He noted that such negotiations are likely to be difficult. POTANIN said, "Either extend the maturity [of the credits] or let us go through bankruptcy proceedings and we will give you the assets. If you think we are poor managers, go ahead and take the assets." Major assets include prime Moscow real estate and industrial enterprises such as Perm Motors.

Business

US Steelers Claim Foreign Rivals Are Dumping

· The nation's steel makers and the steelworkers

When you need to know it as it happens

Politics-Economics-Business

Page

Friday

September 11, 1998

Intercon's Daily

union say their rivals in Russia, Japan and other economically troubled countries are dumping steel on the US market. The industry is calling the trade situation a crisis and, "an extraordinary threat to US jobs." Bethlehem Steel Corp., LTV Steel Co.; and USX Corp. along with the United Steelworkers of America outlined their demands during meetings Thursday with congressional leaders on Capitol Hill, calling on the federal government to intervene by halting imports of foreign-made steel at below-cost prices. The industry claims foreign steel makers' trade practices are unfair and illegal under US as well as international laws. USX's US Steel Group President Paul WILHELM said, "The United States steel industry is just the front line of what will be a growing number of United States industries lining up to defend themselves against unfair foreign steel dumping, unless we take action quickly."

Telerate-RosBusinessConsulting Agreement

· Telerate, formerly known as Dow Jones Markets, has announced a cooperation agreement with RosBusinessConsulting, the Russian information agency. Under the agreement, Telerate terminal users worldwide will have access to the RosBusinessConsulting stock market and associated data. The aim of the link-up is to allow Telerate users to have direct access to real-time information from Russia, rather than rely on third-party services. In return for the information feed, customers of RosBusinessConsulting terminal services are allowed an opportunity to get Telerate's information for free or at nominal costs.

Gaz Launches New Model

· Russia's Nizhny Novgorod-based car making plant GAZ on Thursday launched the production of a new car make, Sobol. The launch coincides with the opening of the third national industrial and economic forum within the framework of the Nizhny Novgorod Fair. The new make has several modifications, including trucks, vans and buses. In outward appearance, it resembles the Gazel make, but is 0.5 meter shorter. Sobol is an economical car with a carrying capacity of one ton. It is touted as being well adjusted for city and country driving. The plant plans to make 1,000 Sobol cars by year's end.

Economic Forum Opens In Niznhy

· The third national industrial and economic forum

opened in Nizhny Novgorod Thursday and will last through the weekend. The forum is a prelude to the Russia at the Turn of the Century conference. The opening session, "Russian towns, was attended by participants from 50 Russian regions and 16 foreign countries," said Vladimir BESSARAB, general director of the Nizhny Novgorod Fair company. Federation Council speaker Yegor STROYEV was the keynote speaker at the forum. Because of the burgeoning financial and economic crisis, the forum program had to be curtailed, but is still following an active schedule. The forum will feature the exhibition of Russian regions' achievements and the Congress of governors and mayors, which will focus on economic policy, the situation in small and medium-sized towns, structural reforms in the Russian industry, the emerging stock market.

European Republics

Moody's Downgrades Ukraine's Currency

· Moody's Investors Service has downgraded Ukraine's rating for foreign currency debts from B2 to B3. It also downgraded foreign currency bank deposits from B3 to Caa3. Moody's cited, "the depletion of Ukraine's foreign-currency reserves to dangerously low levels over the past few months." According to Moody's, the low levels suggest, "an increase in the risk of default on [Ukraine's] foreign debt obligations." With Central Bank reserves only at $800 million, Moody's said that Ukraine only has enough to pay for one month of imports. The rating service also said the International Monetary Fund's (IMF) $2.2 billion loan approved in July will only postpone financial crisis if radical economic reform is not implemented.

Ukraine Restructures Treasury Bills

· The Ukraine Finance Ministry on Wednesday announced that foreign investors may exchange Ukrainian OVPD treasury bills issued in 1997 and 1998 which mature on or before October 23, 1998 for new bonds maturing on September 22, 2000. Bills maturing after October 23rd will be converted into new bonds maturing on December 22, 2000. Foreign investors hold about 1.8 gryvnia ($590 million) in treasury bills. The Finance Ministry is requesting investors swap OVDPs for longer-term lower-yielding maturities. They have the option of rolling over maturing t-bills into two year securities with a mini

When you need to know it as it happens

Politics-Economics-Business

Page

Friday

September 11, 1998

Intercon's Daily

mum dollar yields of 22 percent and gryvnia yields of 40 percent to 45 percent. Ukraine's Finance Minister Igor MITYUKOV said the conversion is necessary to ensure the government's continued solvency. Investors fearing an overflow of Russia's economic crisis, have dumped government bonds and moved their money out of the country. The future of the gryvnia depends largely on the success of the treasury bill conversion. The Central Bank has sold hundreds of million of dollars in reserves over the past month, taking levels to a low $800 million.

South Caucasus & Central Asia

Russian Border Troops Withdraw From Georgia

· Russian border guards in Poti asked for support from their comrades stationed in Batumi. Their Russian comrades attempted to proceed to Poti. The Russians from Batumi were stopped by Georgian border guards, who said that they had no right to travel with arms within Georgia without the expressed permission of the Georgian parliament, according to legislation. The Russians returned to Batumi and Russians stationed in Poti withdrew from the port. The firm and confident approach of the Georgian border troops defused the potentially dangerous confrontation.

Caspian Projects Affected By World Events

· Special Adviser on Caspian Energy Problems to the US President and Secretary of State, Richard MORNINGSTAR delivered a report to the Central Asia Institute on Thursday in which he commented on the affects of world events on projects to tap into Caspian oil and gas resources. He said that the Russian financial crisis and the merging of British Petroleum and Amoco are bound to influence Caspian projects. He said that while the merging of the British and American giants can be a positive role, the Russian crisis is a complication. He noted that several Russian companies participating in the Caspian projects are facing financial difficulties. MORNINGSTAR realizes that the Russian economic turmoil could overflow into many countries in

the region, which have strong trade relations with Russia. He believes that the Russian crisis will make foreign investors analyze more closely all the key projects in the Caspian region, and therefore the implementation will be increasingly difficult. MORNINGSTAR said this will affect the plans to build an underwater pipeline from Russia to Turkey and on plans to construct a gas pipeline from Turkmenistan to Northeastern Turkey via Azerbaijan and Georgia. He reaffirmed the US support for multiple pipelines transporting Caspian energy to world markets, which US President Bill CLINTON and Russian President Boris YELTSIN agreed upon during their September summit. MORNINGSTAR stressed that the US is not seeking to exclude Russia from the Caspian projects. He said, "Russia is our partner in this region and the project of the Caspian Pipeline Consortium, which selected the route across Russian territory, ranks among the main ones." He pointed out that the US did not want any competition, but only mutually advantageous cooperation, which would be profitable for all the sides involved.

Tajik Bank Restricts Ruble Sales

· Tajikistan's national bank has called on local residents to stop trading Russian rubles for the time being. The bank said that some traders might bring in a huge amount of rubles, exchange them for the Tajik currency, then buy dollars, and take them out of the country. This operation might inflict damage on both the country and its citizens. Despite Russia's financial turmoil, the local dollar exchange rate has been set at 754 Tajik rubles per dollar.

Kyrgyz Receives ADB $50 Million Loan

· The Asian Development Bank (ADB) announced Thursday that it has approved a loan of $50 million for rehabilitating a road which links Kyrgyz, Bishkek with the country's second major city of Osh. The Bishkek-Osh road, running through four of the country's six regions, is essential to the nation's economy. It is also part of the transnational route linking Uzbekistan and Tajikistan with Kazakhstan, China and Russia's Siberia.

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.

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

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