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

Tuesday, September 15, 1998

Russian Federation

Politics

New Appointments; Cabinet Still Not Full

· Russian President Boris YELTSIN issued an official decree appointing head of the Federal Boardguard Service Nikolai BORDYUZHA as secretary of the Russian Security Council. BORDYUZHA replaces Andrei KOKOSHIN, who was dismissed on September 10th. Itar-Tass earlier reported that KOKOSHIN would be replaced by former Interior Minister Anatoly KULIKOV. The decree specifies that BORDYUZHA was relieved of his duties as director of the Russian Federal Border Service. Robert MARKARIAN, chief of the Secretariat at the Foreign Ministry has been transferred to the Kremlin to be chief of Prime Minister Yevgeny PRIMAKOV's Secretariat. YELTSIN appointed journalist Dmitry YAKUSHKIN as presidential press-secretary, replacing Sergei YASTRZHEMBSKY who was relieved of the post late last week "due to a change of job." YAKUSHKIN is the fifth press secretary for YELTSIN. He is the son of former KGB station chief in Washington, D.C. during the 1970's. The President transferred Sergei PRIKHODKO from the post of presidential aide on foreign affairs to deputy chief of the presidential staff. Russia's executive director at the World Bank Andrei BUGROV will replace Anatoli CHUBAIS as presidential negotiator to international lending institutions. PRIMAKOV hopes to complete forming his cabinet by Thursday. He said that many of the old ministers will retain their posts.

Russia Still Capable Of Chemical Warfare

· The Central Intelligence Agency (CIA) and Defense Intelligence Agency (DIA) told lawmakers Monday that Russian firms are exporting weapons technology and that Russia is still able to revive its once massive chemical and biological warfare capability. The two agencies say that certain elements of

the Russian government may be seeking to circumvent arms control agreements that limit offensive chemical and biological weapons. The DIA reported that, "Key components of the former Soviet biological warfare program remain largely intact and may support a possible future mobilization capability for the production of biological agents and delivery systems...Moreover, work outside the scope of legitimate biological defense activity may be occurring now at selected facilities within Russia." The CIA reported that some biological weapons facilities in Russia have been deactivated in recent years but that other facilities remain able to produce biological weapons. The CIA also noted that private or quasi-governmental organizations in Russia are assisting other countries in weapons development and called the government oversight of these firms, "spotty." The CIA added law enforcement remains, "a major problem, given high levels of corruption, limited expertise and resource shortages." Commander of Russian radiation, chemical and biological protection troops Lieutenant-General Viktor KHOLSTOV said that Russia's federal program for the disposal of chemical weapons is going according to plans. He said the pace of the program is determined by Russia's economic conditions. With the fall of the ruble and the nation still forming a government, there is no telling how much the financial and political crisis has affected the program.

Economy

Ruble = 8.67/$1.00 (NY rate)

Ruble = 8.6707/$1.00 (CB rate)

Ruble = 7.5|10/$1.00 (buy|sell rates)

Today's News Highlights

Russia

IMF Head For Urgent Meetings

Transneft Proceedings Begin

Rus. Hosts Atomic Energy Conf.

European Republics

Belarus-Rus Summit Canceled?

Ukraine Rejects Budget Appeal

South Caucasus & Central Asia

Israeli Businesses In Georgia

New Kazakh Telecom. Minister

Turkmen Servicemen Kill Seven

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More Changes In The CB; Officials Resign

· Today, deputy chairman in charge of supervision of Russian commercial banks, Denis KISELYOV resigned from his post. On Monday, Sergei ALEXASHENKO, who had been carrying out the responsibilities of the chairman after former chairman Sergei DUBININ stepped down, resigned. Neither formally stated reasons for their resignations, but all indicators point to the change in course from reform to more leftist policies.

The newly appointed Central Bank chairman Viktor GERASHCHENKO said President Boris YELTSIN has approved all of eight candidates for the board of directors of the Central Bank of Russia: Lyudimla GUDENKO, Nadezhda IVANOVA, Andrei KOZLOV, Konstantin SHOR, Viktor MELNIKOV, Vyacheslav PROZOROV, Nadezhda SAVISNKAYA and Arnold VAILUKOV. The Russian State Duma Speaker Gennady SELEZNYOV said the Duma will meet on Wednesday to debate candidates for the board of directors of the Central Bank of Russia. He said, "even today, at the meeting of the [Duma] Council deputies had criticisms about proposed persons." GERASHCHENKO also discussed with YELTSIN the situation with private savings deposited in Russian banks and rescue measures for the banking system. He informed the president that the Central Bank is ready to issue its securities to be later exchanged for GKOs, or Treasury bills. GERASHCHENKO again told YELTSIN that he is in favor of printing rubles, but decided to wait until the Central Bank's board of directors have been confirmed by the Duma.

IMF Heads For Urgent Russian Meetings

· Russian Deputy Foreign Minister Georgy MAMEDOV told the Group of Seven (G-7) officials in London that Russia had invited the International Monetary Fund (IMF) team to return to Moscow this week for "urgent talks." The IMF mission is expected to meet with members of the new government to discuss the country's economic crisis and loan payments from a $22.6 billion rescue package arranged by the IMF and then-deputy prime minister in charge of negotiations with international financial institutions Anatoli CHUBAIS. Russia spent the initial installment of $4.8 billion on a futile attempt to defend the ruble. A second disbursement scheduled for mid-September has been delayed until a new Russian

government is in place and economic reform measures implemented. Late last week, CHUBAIS admitted to Kommersant Daily that the Russian government had conned the IMF into granting the loan. Russia is desperate to negotiation terms by which the IMF could release the standby credit of $4.3 billion. The G-7 nations have stated that no further funding will be granted if Russia strays from reforms. Russian Prime Minister Yevgeny PRIMAKOV will hold talks with IMF representative John ODLING-SMEE on Wednesday and if necessary with IMF Managing Director Michel CAMDESSUS in the future. MAMEDOV said that the meeting is intended to, "share analysis and reach a common appreciation of Russia's economic plight."

Gorbachev Era Economists Advise Primakov

· Economic advisers to former Soviet President Mikhail GORBACHEV met in the Kremlin today to advise Russia's new Prime Minister Yevgeny PRIMAKOV on a clear economic policy. PRIMAKOV and Russian President Boris YELTSIN have not announced a new economic program to pull Russia out of its financial crisis. But appointing two Communists First Deputy Prime Minister Yuri MASLYUKOV and Central Bank Chairman Viktor GERASHCHENKO to top economic policy positions shows a move towards reversing completely the reform measures of former prime minister Sergei KIRIYENKO and his team. Oleg BOGOMOLOV, director of the Institute for Internal Economic and Political Studies, said that, "Now there is hope for a more realistic policy...It is not just one side that can express their ideas, like our liberal radical economists. We are all in favor of reforms, but not reforms for their own sake, but reforms which serve the people," The New York Times reported. BOGOMOLOV proposes increasing the country's money supply by printing rubles and issuing new bank credits, while also asking the West to postpone debt payments. However, fellow GORBACHEV adviser and director of the Institute of Economy of the Russian Academy of Sciences Leonid ABALKIN proposes a different economic strategy. He believes Russia should use increased sales tax revenues to compensate income groups that have been hardest hit by the crisis. ABALKIN said "We are living under a firefighters' regime which puts out fires as they appear. For six years, not one government has explained to the people what they are trying to build,

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to what end we should all suffer." ABALKIN also met with MASLYUKOV concerning a program of anti-crisis measures which he said included, "social security of the population, retention of the banking system, fulfillment of obligations on internal and external debts as well as ways out of the crisis and the development of a middle-term program." PRIMAKOV has emphasized that the new economic policy will meet the needs of Russia's population and Russian industry, but has not specified where the money will come from to do so.

Business

Proceedings Against Ex-Transneft Officials

· Russia's Prosecutor General has launched criminal proceedings against former senior administrators of Transneft Oil Company, charging them with abuse of office. The managers are accused of illegally using company assets to buy out Transneft preference shares from employees and then transferring the shares to other firms they own. A new Transneft manager confirmed an investigation by the department of the Prosecutor General's Office. had taken place. He said, "We gave the investigators all the necessary documents and it is up to them to bring the case to court." During the privatization in 1995, 75 percent of Transneft ordinary shares were retained by the state, while 25 percent privileged were distribute to the employees. The investigation began after a tip from employees in March that managers had illegally bought their shares and received exaggerated dividends. Transneft's pipeline network carries 99.8 percent of Russia's crude both inside Russia and for export. In 1997, Transneft's shipments totaled 294.5 million tons of oil, including 110.3 million tons to Western markets.

Russia Hosts Int'l Atomic Energy Conference

· An international conference on the use of atomic energy opened Monday in the Russian city of Ulyanovsk. Participants, who include scientists from Britain, France, Russia, and Ukraine, will familiarized themselves with Russia's strategy to develop atomic power engineering. They will be informed about the performance of the local Scientific Institute for Nuclear Reactors, which has experience of providing cities with electric power. The three-day-long conference will discuss training and environmental problems as well.

New Entrepreneurial Movement

· Speaking on Saturday at the founding meeting of a new All-Russian political movement, Development of Entrepreneurial Activities, acting Minister of Labor and Social Development Oksana DMITRIEVA said, "Rescue of our country is in establishing small and medium businesses." According to the acting minister, it is possible to create new jobs which will give people means to subsistence only by developing a small business sector. Under the conditions of the crisis and mass unemployment, it is possible to develop regions where major factories are closed, only thanks to small enterprises, DMITRIEVA emphasized. She said that the employment services' small funds will be sufficient to create jobs in small business much more cheaper than at big enterprises. The new movement is being created at the initiative of State Duma Yabloko member Ivan GRACHEV. He said the aim of the movement will be, "efforts to boost numbers and to expand economic and political influence of small and medium businessmen." Moscow Mayor Yuri LUZHKOV said that it is not too late to offer support to small businesses. He believes that ignoring small businesses will enhance the threat to the country's economic security and may cause social conflicts. LUZHKOV also urged the government to review tax policies, as well as lower taxes which will provide more revenues to the budget and increase job vacancies. According to him, "Russia needs customs policy, not customs fleecing." He stressed the importance for Russia's economy the existence of the small and medium entrepreneurship, which, according to him, is the basis of the civil society, the political and social stability. Russia has only 850,000 small businesses, which employ 14 percent of the population and produces 12 percent of the gross domestic product.

European Republics

Belarus-Rus Summit To Be Canceled?

· A meeting of Belarus President Alexander LUKASHENKO and Russian leader Boris YELTSIN, scheduled for September 16th under the bilateral integration plan, is likely to be canceled. A statement to the effect was made during the main information-analytical program of the Belarus national television on Sunday. Belarus does not know for sure why the Russian President does not initiate a regular bilateral summit, Belarus Foreign Minister Ivan

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ANTONOVICH said in the Resonans program of the national television. "Russia is unable to overcome the crisis by its own," the minister noted.

Ukraine Rejects Gov't Appeal On Budget

· Ukraine's parliament on Tuesday rejected a government appeal to extend the deadline for presenting the draft of the 1999 budget until October 15th, 1998. The government said that its appeal is due to the uncertainty of Ukraine's economic outlook and because it had to correct the main items due to Ukraine's change in the gryvnia/dollar trade band from 1.8 to 2.25 gryvnias to the dollar to 2.5 to 3.5 gryvnias to the dollar. A government letter said, "An analysis of the development of the situation on Ukrainian and foreign financial markets show that it is necessary to correct indicators for inflation, volume of gross domestic product and the exchange rate." Under the Ukrainian Constitution, the government must present the draft budget for the coming year to parliament no later than September 15th. Parliamentary speaker Alexander TKACHENKO said the draft budget must be presented by day's end.

South Caucasus & Central Asia

Israeli Business In Georgia Rises

· Israeli businesses and joint ventures are thriving in Georgia. Many Israeli businesses were undeterred by unrest after the collapse of the Soviet Union and used their language skills, knowledge of the country and contacts to set up businesses in Georgia. Many of these business are owned by members of the 80,000 strong Georgian Jewish community now living in Israel. Ron FUCHS set up Seaways, N.V., a petroleum trading company that controls 40 percent of the downstream gasoline market in Georgia. "We weren't afraid of the mess here or the danger, we saw the potential here and for us it has paid off," the Financial Times reported. Israeli companies represent the largest foreign investment in Georgia with projects ranging from small trading deals to large private investments. About 30 percent of products on sales in Tblisi's new supermarkets are

Israeli products ranging from Dead Sea cosmetics to orange juice and biscuits brought over by shuttle traders on weekly flights from Tel Aviv. The Israeli telecommunications group Telerad has installed five new exchanges. Georgia's only fast-food chain, Pita-Hut is Israeli. With all this business, one would expect official investment figures for Israeli registered companies to be over the reported $18 million. Experts say that the figure is much larger and that investments are hidden by the fact that many companies registered in the Virgin Islands and the Netherlands are really owned by Israelis, wanting to avoid double taxation.

New Kazakh Transport And Telecom. Minister

· Kazakh President Nursultan NAZARBAYEV Monday appointed Serik Minavarovichi BURKITBAYEV, the national telecommunication company president, as the new Minister of Transport and Telecommunications. BURKITBAYEV successively served as a deputy director of Kazakhstan Radio Factory and the president of Kazakhstan Broadcasting and TV Ltd. Since November 1996, he has been the president of the national telecommunications company.

Turkmen Deserters Kill Seven

· Five Turkmen army deserters, who stole five automatic weapons, 20 handguns with 700 cartridges, and three bullet-proof vests on Saturday, went on a shooting rampage and kidnapping spree that left seven people dead. After stealing a truck, the five soldiers headed for the main highway, where they opened fire on a car killing two people. Then they drove to the village of Garagan and took seven people hostage. A Turkmen anti-terrorist unit tried to negotiate with the soldiers, but decided to free the hostages by force. Four of the five servicemen and a police officer died in the attack. The remaining serviceman was immediately arrested. Turkmen President Saparmurat NIYAZOV has ordered a full investigation into the incident adding, "We will not allow anybody to violate the peace of the people of our independent, neutral Turkmen government."

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