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 17, 1998


Russian Federation

Politics

One More Week Before Cabinet Is Complete

· Russian President Boris YELTSIN said he would consider a newly proposed Cabinet, but warned that it could take another week to form a complete team. The appointment of a Finance Minister, a crucial appointment in this time of economic crisis, seems to be the stumbling block. YELTSIN said, "The question of the Finance Minister is a difficult question, but I think it will be solved within a week." Today, he met with Defense Minister Igor SERGEYEV, Interior Minister Sergei STEPASHIN, and governor of the Saratov region Dmitry AYATSKOV. YELTSIN asked AYATSKOV about the region's economic situation, preparations for the winter, situation with pensions and condition of military units stationed there. The regional governor said it will take his region a year or two be weaned from budget subsidies.

Prime Minister Yevgeny PRIMAKOV met with Nizhny Novgorod regional governor Ivan SKLYAROV and Krasnoyarsk regional governor Alexander LEBED. PRIMAKOV discussed with the governors the government's cooperation with regions in searching for strategies to pull Russia out of the crisis. PRIMAKOV plans to meet later in the day with Oleg MOROZOV, leader of the Russian Regions faction in the Russian State Duma. PRIMAKOV is going to continue political dialogue with parliamentarians which was started last week during his confirmation for the post. He is building a relations with deputies in an effort to form bonds which will not break when the economic program needs to be passed.

Primakov Meets Trade Union Leaders

· On Tuesday, Russian Prime Minister Yevgeny PRIMAKOV and leaders of the country's trade unions

agreed to renew the work of the government-unions-employers' tripartite conciliatory commission. Leader of the Russian coal miners' independent trade union Ivan MOKHNACHUK confirmed that the commission will resume its work. PRIMAKOV expressed concern over the wage arrears problem, and said that, "the government was trying to sort things out." He further suggested that meetings with trade union leaders be held on a regular basis. The so called bloc-meetings between members of the government and representatives of the trade unions for budget-sector employees, defense workers and others are planned to be held along with the conciliatory commission sessions. During the meeting, PRIMAKOV also agreed to participate in the work of the General Council of the Russian Federation of Independent Trade Unions, which is to be held in the end of September.

Of Russia's Urban Population:

59 percent approve of Primakov's Appointment

17 percent disapprove of Primakov

4 percent approve of Yeltsin

* According to a poll conducted by All Russian Public Opinion Research Center

Russian Launches Int'l Ballistic Missile

· On Wednesday, Russia launched an intercontinental ballistic missile from the Plesetsk cosmodrome in northern Russia. The RS-12M Topol or SS-25 missile, launched at 11:10 GMT, hit an exercise target in the area of Kamchatka in the Far East. The success of the launch means that the missile, commis

Today's News Highlights

Russia

Restructuring GKOs?

S&P Downgrades Russia

Rosar Brewery Acquired

European Republics

Estonian Air Expands Routes

Yeltsin-Kuchma Summit

South Caucasus & Central Asia

US To Mediate Caspian Dispute

Armenia-Lebanon Sign Agmts.

CIS Border Chief Council Meets

Politics-Economics-Business

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Thursday

September 17, 1998

Intercon's Daily

sioned more than 10 years ago, remained intact in terms of its technical and military qualities. "The launch once again convincingly proved the high combat readiness of the force and the reliability and technical readiness of intercontinental ballistic missiles of this type," the press service of the Strategic Missile Force said. It added that previous launches of Topol systems were successful after the completion of joint flight tests. The launch was part of Russia's efforts to prolong the service life of the Topol missile system.

Economy

Ruble = 12.45/$1.00 (NY rate)

Ruble = 12.4509/$1.00 (CB rate)

Ruble = 12.91|12.07/$1.00 (buy|sell rates)

Restructuring Deadline Nears, New Plan?

· Twenty-five major Western banks including Britain's on Wednesday set up a group responsible for negotiations with Russia over rescheduling its debts which arose in the wake of its default on GKO, or Treasury bill, payments. The banks are expected to set up an appointment to meet with the Russian Finance Ministry and the Central Bank. Russia's moratorium on GKO payments was decreed by the government of Sergei KIRIYENKO on August 17th. The group, without official status, has been formed on the initiative of Japan's investment bank Nomura. It comprises American investment groups Goldman Sachs, Merrill Lynch and JP Morgan, Germany's Deutsche Bank and Switzerland's Credit Suisse First Boston. The first, organizational meeting of the banks was held on Wednesday afternoon at Nomura's headquarters in London. The group is meeting again today to generate a strategy towards Russia's crisis. A representative of one of the banks said that the group's goal is not to allow Russia's "discriminating" approach to payment on overdue GKOs. Under the terms of August 17th, bondholders have less than two days to notify the Finance Ministry whether they have decided to trade in notes maturing before the end of 1999 for cash and new securities at a great loss. If they miss the deadline, they may get even less. The ministry still has not explained where old bonds should be deposited or redeemed. Foreign Investors, who hold more than $11 billion in notes, want to re-negotiate terms which they call confiscatory and favoring Russian banks. The decision to modify the terms is the responsibility of the

Finance Ministry, which still does not have a Finance Minister to lead it. Deputy of the Finance Ministry's securities Igor KOVTUN and first deputy chairman of the Central Bank Andrei KOZLOV confirmed that a new restructuring deal is in the works, The Wall Street Journal reported. The government will face tough negotiations and choices. It must decided whether to stick to the August 17th terms, risking Russia's reputation on the international capital markets, or issue better terms for investors, diverting need funds for paying wage and pension arrears.

Luzhkov's Economic Plan

· Moscow Mayor Yuri LUZHKOV has condemned the monetarist policies of the previous government of Sergei KIRIYENKO, which he referred to as, "young and inexperienced." He called on the new government to print money. In a meeting with Prime Minister Yevgeny PRIMAKOV, he also urged the new government to nationalize some "criminally-privatized" companies and prosecute those responsible. The meeting centered upon the participation of Moscow in the crisis liquidation. LUZHKOV proposed introducing state monopoly on tobacco, alcohol, audio and videocassettes. A possibility of reducing prices on alcohol under the state monopoly was also considered. The mayor suggested that sales tax be introduced instead of profit tax. According to LUZHKOV, this would improve situation with tax collection, and resolve numerous conflicts between tax collectors and manufacturers. After the meeting, LUZHKOV said, "We don't have an economy; we have a buffoonery." On Tuesday he decreed that Moscow city retailers may not mark up basic food staples by more than 20 percent, at least until November 1st. The products include 27 categories such as sausage, cooking oil, sugar, matches and baby food. One store owner Mikhail KOCHETKOV said, "It's turning my work into a total mess." He said that the store must raise prices by 25 to 30 percent with each delivery just to stay in the black. Store and markets are being monitored by Moscow police.

S&P Downgrades Russia

· The international rating agency Standard and Poor's (S&P) has revised downward Russia's long-term hard currency borrowing credibility, from CCC to CCC minus. The short-term rating remains at C. The rating prognosis is negative. S&P said in explanation that Russia's new government has limited

When you need to know it as it happens

Politics-Economics-Business

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Thursday

September 17, 1998

Intercon's Daily

possibilities of stabilizing the economy and of servicing debt commitments that come due in late 1998 and in 1999. The S&P statement said, "The local financial payments system has been virtually paralyzed...Meaningful structural reforms appear to be off the agenda, at least for now." The agency said the immediate priorities of the government of Yevgeny PRIMAKOV are paying off budgets debts, primarily in wages, and stemming Russia's dramatic liquidity problem by printing rubles. S&P warns that these measures will result in heavy inflationary pressures.

Business

Sibneft Not To Default On Debts

· Sibneft, Russia's seventh largest oil company, today announced plans to repay $254 million in foreign debts despite the moratorium imposed by the government on August 17th. According to a company statement, "Sibneft...will meet in full its obligation to redeem the $200 million 6-month zero coupon Promissory Note issued on its behalf by Salomon Brothers in March, 1998, falling due on September 18, 1998." Sibneft also said it had refinanced commercial terms of a $54 million short-term loan from Raiffeisen ZentralBank of Austria which fell due on September 15, 1998. Sibneft plans to continue to service the interest of its three-year $150 million eurobond, launched in August 1997. It added that, "Honoring all our debt commitments is an absolute priority."

Cargo Companies Prefer Foreign Markets

· At the opening ceremony of the first seminar of the International Air Cargo Association Tuesday, Alexei ISAIKIN, who heads the Volga-Dniepr cargo air company and chairman of the Association's branch in the CIS countries, announced figures which show that Russian air cargo companies have left the domestic market, preferring to work on international markets. The cargo turnover of Russian carriers on the international market exceeds 75 percent of the total cargo turnover of the Russian cargo aviation. ISAIKIN said the reasons for this include absence of stable customs rules, the weak state regulation of prices for fuel offered by natural monopolies, as well as prices for airport services, air traffic control services, a sharp reduction of solvent demand for cargo transportation, and inefficient tax policies. Experts in the cargo air transportation note that conditions on the world market are becoming

more difficult for Russian air cargo companies. Customers make tougher demands to the tariffs and the quality of the services. New branch standards are being introduced. They restrict the possibilities of the use of Russian planes of the present generation. Governments of foreign states impose restrictions affecting the interests of Russian carriers.

Interbrew N.V. Acquires Rosar Brewery

· Belgian-based Interbrew N.V. has acquired Rosar Brewery of Omsk, Siberia. Rosar is the fourth largest beer maker in Russia and the largest in Siberia. An Interbrew executive said, "Notwithstanding the present difficult situation in Russia, we believe in the medium and long-term potential of the Russian beer market."

European Republics

Estonian Air Expands Network

· Estonian Air is expanding its European network to two new destinations linking Tallinn with Oslo and Frankfurt beginning October 25th. Four flights weekly between Tallin and Oslo will be offered on Mondays, Wednesdays, Fridays and Sundays. Service between Tallinn and Frankfurt will also operate with four flights weekly, on Tuesdays, Thursdays, Saturdays and Sundays. The addition of Oslo and Frankfurt will increase the airline's network to 13 destinations Estonian Air's Senior Vice President Commercial Toomas LEIS said, "Estonian Air has undergone rapid development since its part privatization, which has resulted in sustained growth and the enhancement of services in the air and on the ground." Estonia's national airline is set to receive a delivery of a third Boeing 737-500 aircraft, leased from Maersk Air, Denmark's leading independent airline and a major shareholder in Estonian Air. The expansion of Estonian Air's fleet will offer greater flexibility and enable the airline to increase capacity on key routes. Estonian Air is owned by Maersk Air (49 percent), Baltic Cresco (17 percent), and the Estonian government (34 percent).

Yeltsin-Kuchma Summit

· On Friday, Russian President Boris YELTSIN and Ukrainian President and Leonid KUCHMA will have an informal summit to discuss regional issues and the construction completion of two units at the Khmelnitskaya and Rovenskaya nuclear power stations in Ukraine. KUCHMA intends to propose the

When you need to know it as it happens

Politics-Economics-Business

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Thursday

September 17, 1998

Intercon's Daily

creation of free trade zones. "This could become the best way out both for Ukraine and Russia in the current situation," he said. The Ukrainian-Russian program for economic cooperation has been delayed by the Russian side, since the CHERNOMYRDIN government resigned and the KIRIYENKO government failed to implement it. KUCHMA noted that the Russian political leadership understands better with every passing day that it is necessary to be guided not only by its own interests but also by common interests with Ukraine. On Saturday, Russian Prime Minister Yevgeny PRIMAKOV will meet with KUCHMA, after holding negotiations with Ukrainian counterpart Valery PUSTOVOITENKO.

South Caucasus & Central Asia

US To Mediate Caspian Disputes

· US Secretary of Energy Bill RICHARDSON at the seventeenth Congress of the World Energy Council (WEC) in Houston on Monday said that the US is considering mediating the dispute between Turkmenistan and Azerbaijan over several Caspian oil deposits. He said that he had discussed the problem of settling the dispute between Ashkhabad and Baku with his Turkmen counterpart, who took part in the Congress. RICHARDSON said that his department intended to take an active part in the talks on the Caspian Sea, "as part of a major effort to accelerate energy security needs for the United States and our allies." The United States regards the Caspian region as a very important area from the point of view of the national security interests not only of America, but of all the world, RICHARDSON stressed. He said that the US has "policy preferences" for the disputed route of a pipeline to transport Caspian oil and gas, but refused to give any concrete details. RICHARDSON said that energy could potentially serve as the key to stability and prosperity in all the regions of the planet. US oil companies have already invested more than $3 billion in the region and their joint venture commitments total almost $40 billion, the Financial Times reported.

Armenia-Lebanon Sign Agreements

· According to the Lebanese National News Agency, Armenian Prime Minister Armen DARBINYAN and his Lebanese counterpart Rafik HARIRI Wednesday signed four cooperation agreements concerning tourism, high education and preventing dual taxation. HARIRI said commercial exchange between the two countries is limited and hopes bilateral ties will be boosted through the agreements signed and to be signed in the near future by the two countries' businessmen. DARBINYAN also met with some of the 110,000 Armenian emigrants living in Lebanon. Approximately 18 percent of Lebanese industrial enterprises are owned by Armenian emigrants. According to statistics from Lebanon's economy ministry, trade between Lebanon and Armenia stood at about $1 million. DARBINYAN is expected to also meet with Lebanese President Elias HRAWI and House Speaker Nabih BERRY.

CIS Border Chiefs Meet In Yerevan

· The Commonwealth of Independent States Council of the Border Troops Commanders (CBTC) opened its 31st meeting in Yerevan today to discuss matters aimed at refining the guarding of the Commonwealth of Independent States' (CIS) outer state borders. Participants also expected to discuss the guidelines for reforming the Council and its working body, the Coordinating Service. Azerbaijan is represented by Chief of Staff of the Azerbaijan border troops Colonel Inayat KHALILOV. Russia is represented by Secretary of Russia's Security Council Colonel-General Nikolai BORDYUZHA and his replacement to the post of director of the Federal Border Service (FBS) Colonel General Konstantin TOTSKY. BORDYUZHA has also been relieved of his duties as the Council chairman, to which the council will seek a replacement. The CBTC was established by a decision of the CIS Council of the Heads of State and is one of the most effective bodies of the CIS. It is a collective body for CIS Heads of State and Government on matters aimed at coordinating the guarding of the outer borders and economic zones of CIS countries and coordinating the CIS border guards.


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

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