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, September 18, 1998

the reason that his opinion had not been asked. President Boris YELTSIN appointed RYZHKOV deputy premier on Wednesday. RYZHKOV had to be asked seven time before considering the post. He said, "In a situation where people have not been paid their wages and pensions for many months and have to wait years for child allowances, where we face the worst kind of social collapse, it would be adventuresome on my part, as somebody who has never worked in [the social field] to take up this post." He stressed that, "We must ensure that this government is a serious, long-term affair. This is the last chance to pull out of our deep crisis by peaceful, democratic means in accordance with the constitution."

Russian Prime Minister Yevgeny PRIMAKOV has appointed Leningrad regional governor Vadim GUSTOV to the position of first deputy prime minister in charge of federal, ethnic, regional and youth policies in the new Cabinet. In his opinion, the new cabinet "should tackle only concrete economic problems for six to eight months," taking into account vast expanses and enormous natural resources of Russia, as well as the extensive potential of the military-industrial complex and the timber industry. Deputy Head of the Government Information Directorate (GID) Igor SHCHYOGOLEV has been appointed the press secretary of the Prime Minister. He is an expert on European countries and fluent in French, German and English languages. President Boris YELTSIN has relieved Alexander ALEXEYEV of his duties as Russia's ambassador to Pakistan in view of a trans

Russian Federation

Politics

EU Troika Meet Kremlin Leaders

· Austrian Foreign Minister Wolfgang SCHUESSEL, German Foreign Minister Klaus KINKEL, British Deputy Foreign Secretary Joyce QUIN, and European Commission member Hans VAN DEN BROEK held talks on Thursday with Prime Minister Yevgeny PRIMAKOV, First Deputy Prime Minister Yuri MASLYUKOV, Deputy Prime Minister Alexander SHOKHIN, Foreign Minister Igor IVANOV, and Speaker of the Russian State Duma Gennady SELEZNYOV. The meeting focused on the current social, economic and political situation in Russia and on the further development of contacts between Moscow and the European Union (EU). EU members briefed Russian leaders on the results of the September 14th meeting of the Group of Eight in London. IVANOV said that financial aid to Russia was not an issue considered at the talks with the EU troika. He said that negotiations with the EU will begin, "When the program is finalized and when the government is drawn up with a cabinet representative responsible for ties with the EU." SELEZNYOV said control of the use of foreign loans, including by the lenders themselves, is crucial. PRIMAKOV reassured the EU that Russia would continue reform and do everything possible to restore investor confidence. The EU accounts for 40 percent of investments in Russia and 30 percent of Russia's overall foreign trade turnover.

Ryzhkov Rejects Deputy PM Post

· Deputy Speaker of the Russian State Duma Vladimir RYZHKOV has rejected the post of deputy prime minister in charge of social issues. This was announced by speaker of the Duma Gennady SELEZNYOV, at the beginning of a plenary session Friday, who said that RYZHKOV rejected the post for

Today's News Highlights

Russia

Debt Delayed For Negotiations

Bank Merger Committee Formed

RJR Halts Russian Production

European Republics

Latvian Industry Hiurt By Crisis

Ukraine Unempolyment Figures

Nickelodeon Airs In Baltic, CIS

South Caucasus & Central Asia

Kazakh Criticizes S&P Rating

Turkmen Officers Sacked

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fer to another job. His new position has not been announced. ALEXEYEV has been replaced by Andrei GULYAYEV.

Economy

Ruble = 14.6/$1.00 (NY rate)

Ruble = 14.6/$1.00 (CB rate)

Apr May Jun Jul Aug Sep

Investigation of CB Finds Irregularities.

· Russian prosecutor-general Yuri SKURATOV said that initial results of the inspection of the Central Bank of Russia show that laws have been broken. SKURATOV said that the interdepartmental group of investigators with the participation of representatives of the Interior Ministry and the Federal Security Service (FSB) had been conducting an inspection at the Central Bank checking information about irregularities with the use of funds of the first currency tranche and information about remittance of large sums in foreign currency abroad. The Auditing Chamber is also investigating the Central Bank on instruction from the Russian State Duma. In a report to the Duma, it found that not a single dollar from the loans, received by Russia from international financial institutions, was used for purposes, for which the loans were granted. Chairman of the Duma Gennady SELEZNYOV blamed acting Finance Minister Mikhail ZADORNOV and added that the Supreme Court had already forwarded to the public prosecutor's office an appeal on instituting legal proceedings against the finance minister. A Central Bank spokesman Alexander VOZNESENSKY said, "An investigation of some of its staff does not mean an investigation of

the Central Bank in general. There could possibly be some individual instances or with individual workers at the Central Bank, but that's for the investigation to determine. Someone must always be guilty in our country but one organization cannot be responsible for everything that happens." The Duma has invited SKURATOV to make a full report on the investigation of the Central Bank on October 16th.

Debt Deadline Delayed For Negotiations

· Russia has decided to postpone the deadline for the controversial $40 billion domestic debt restructuring until September 25th. Deputy Prime Minister Alexander SHOKHIN said terms of the restructuring may be modified and that a delegation has been formed to hold talks with Western investors regarding obligations of Russian banks to them. However, he added that investors should not expect a full reversal of the previous government's default. SHOKHIN said, "We believe it possible to begin negotiations with banks [with regard to frozen payments]...and we are urging those banks to refrain from seizing the assets of Russian banks abroad or freezing those assets." The Central Bank is under enormous pressure to bail out the banks. The Central Bank Thursday said that it will purchase the treasurys or GKOs of select Russian banks at their nominal value. The buy back will be funded by the printing of new money, which could spark inflation, depress the ruble, and cut Russia off from international assistance. Central Bank first deputy chairman Andrei KOZLOV said that the bank would print money, but stressed that it would be limited. According to the Financial Times, the Central Bank issued three short-term bonds totaling 15 billion rubles to Russian banks in exchange for their GKO holdings at their August 14th value, several times greater than the current market level. Non-Russian banks were not invited to participate and only noticed the operation when traders spotted a gap in the bond serial numbers issued by the Central Bank. The Central bank decided it will also lower the reserve requirements, thereby freeing-up some funds for payments to alleviate the liquidity problem. Experts not only criticize the decision to print money, but also to bailout inefficient insolvent banks which need to be closed. The necessary banking reform is met by enormous political pressure from leading Russian banks formed by powerful oligarchs, who funded president Boris YELTSIN's presidential campaign.

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This preferential treatment to Russian banks further infuriates foreign investors, who complain they have been discriminated in the process.

Three Banks Form Merger Committee

· Three Russian banks Thursday formed a working committee to prepare a merger agreement. Uneximbank, Menatep, and Most-Bank are expected to form a new financial institution, RosBank, with the participation of MFK Bank, the three banks said in a joint statement. The merger committee is headed by chairman of Uneximbank board of directors Mikhail PROKHOROV. Other members include chairman of the Menatep board of directors Alexander ZURABOV and chairman of the Most-Bank council Dzhavanfar ZAMANI. The committee will first and foremost assess the banks' assets, prepare a merger model, work out a post-merger operating technology, and do explanatory work among the clients.

Business

US Business Losses Faith In Russia

· Head of the American Chamber of Commerce Scott BLACKIN said that US companies have lost over $500 million in Russia since the economic crisis, but more critically they have lost confidence in the Russian government. BLACKIN said that foreign businesses are ready to work with the new government, but needed signs from the government that it understood the systemic nature of the crisis and the problems for foreign business. He noted that major consumer goods companies have been dismantling networks they built to distribute goods because consumer buying power has plummeted. According to an American Chamber of Commerce survey, 72 percent of US businesses which responded cannot access funds frozen in Russian banks and in the Russian treasury bill or GKO market. About 58 percent of the companies have not been paid for their goods. All but one percent of the companies said they are prepared to stay in Russia, but admitted they will be forced to cut employees by almost 30 percent.

RJ Reynolds Tobacco Halts Production

· RJR Nabisco Holdings Corp.'s RJ Reynolds International Tobacco unit has temporarily ceased making cigarettes at its factories in Russia. RJR International spokesman Adam BRYAN-BROWN confirmed that no production is going on. He blamed the political and economic crisis and its affect on

ordinary Russians. "We and a lot of other companies have had no choice but to curtail or temporarily cease production in Russia. I can tell you we're not alone. There's very little trade going on. We're still selling cigarettes, but it is a struggle," Reuters reported. In August, RJR maker of Camel and Salem brand and a Russian brand called Peter I agreed to increase investment in Russian production by $120 million over the next two years; it has already invested more than $400 million since 1992.

LUKoil Receives Volgograd Tanker

· The Volgograd shipbuilders have completed the first tanker out of the ten river-and-sea type ships and handed it over to the LUKoil Company. Director-General of the Volgograd Shipbuilding Yards Alexei LITRA said that the LUKoil-1 super-modern tanker is fitted out with electronic devices, computers, and other first-class equipment. Its computerized system for controlling the cargo-handling operations and the ship's behavior in stormy weather not only meets the highest quality standards, but has no match anywhere in the world. The high level of automation allows many systems and mechanisms of the ship to operate unmanned. The ship is designed to carry crude oil and petroleum products at a capacity of 6,000 tons and a sea endurance of 15 days. The cost of the contract for all the ten ships amounts to 100 million rubles. This order was won by the Volgograd shipbuilders during a tender, which was keenly contested by firms from Russia, Finland, Greece, and Bulgaria. The Volgograd Shipbuilding Yards have built more than one thousand motorships, cargo vessels, trawlers, and tankers in the course of the 66 years of its existence.

European Republics

Russian Crisis Affects Latvian Industries

· According to the Latvian International Transportation Association, many Latvian companies have been waiting to export for several weeks because Russian consumers of western goods do not want to accept the goods now while the ruble exchange rate is out of control and prices are erratically changing. The situation in Russia has badly affected producers of fish and dairy products, who used to have a good sales market nearby. Metal processing and machine building industries had their exports to Russia strongly cut as well, falling 27.5 percent. The data released

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by the Latvian Economics Ministry shows that overall cuts of Latvian exports to Russia have reached 20 percent. The Ministry suggested measures to the Latvian government in order to improve the position of entrepreneurs. These measures include temporary financial assistance, lengthening of terms for reimbursement of credits, talks on cooperation with representatives of commerce from Turkey, Turkmenistan, Kazakhstan, Uzbekistan, and Tajikistan.

Ukraine Unemployment Rate Rises

· The number of unemployed in Ukraine reached 1.2 million at the end of August, which accounts for 3.08 percent of the work force. The unemployment rate in the first eight months of 1998 increased by 50 percent over the same period of last year. The rate in some states has reached five or six percent. So far this year, 875,000 Ukrainians have registered as unemployed, but with only 47,000 job vacancies, an average 18 jobless people will compete for each post. Economists in Kiev attributed the soaring unemployment rate to the decline in production.

Nickelodeon Airs in Baltics and CIS

· On Wednesday, Nickelodeon, the worldwide entertainment network for kids, signed a deal with Metromedia International Group to bring Nickelodeon programming to the Baltic states and the Commonwealth of Independent States (CIS). The 24-hour broadcast will be in Russian by the fourth quarter of 1998. General Manager for Global Network Ventures Nickelodeon Bruce TUCHMAN said, "We are confident that Nickelodeon will be a hit in this market because of our kid-first programming philosophy that has been so successful all over the world. Nickelodeon speaks meaningfully to kids and features kids as heroes in its programming while reflecting universal kid issues in a way that does not talk down to them." President of Metromedia Stuart SUBOTNICK said, "There is a clear need for imaginative and innovative children's programming in the region and Metromedia is uniquely positioned to partner with Nickelodeon to make this programming widely available to children and their families."

South Caucasus & Central Asia

Kazakh Rejects S&P Downgrade

· Kazakh government officials and analysts on Thursday criticized the decision by Standard & Poor's (S&P) to downgrade Kazakhstan's sovereign rating, calling it not objective. On Wednesday, S&P cut Kazakhstan's long-term foreign currency issuer credit rating from BB minus to B plus and its long-term local currency rating from BB plus to BB minus. The senior secured long-term foreign currency rating was also lowered from BB minus to B plus. S&P said the decision reflects Kazakhstan's "heightened vulnerability to an extremely negative environment," noting the slow pace of privatization, a high budget deficit, and the fact that Russia is Kazakhstan's largest trading partner. Adviser to the head of the State Investment Committee Nadir BURNASHEV said, "We do not consider this assessment to be objective or justified. We live in some kind of virtual reality when, regretfully, the international mass media and the investment community do not have objective economic information on Kazakhstan."

Turkmen President Sacks Top Military Officers

· Turkmen President Saparmurat NIYAZOV on Thursday sacked Defense Minister Danatar KOPEKOV, chief of General Staff Akmurad MULKAMANOV, deputy chairman of the national security committee Farid ATAMURADOV, and a number of top police officers. The decision came after the investigation of a terrorist act on Saturday in which five military deserters killed seven people in a shooting rampage. NIYAZOV said the arms depot of the military unit, where the terrorist stole five automatic weapons, 20 hand guns and 700 cartridges, was left unguarded on the day of the incident because officers were drunk, celebrating the Soviet-era professional holiday of tank troops. The commander of the regiment was discharged from military services and stripped of his military rank. Interior Minister Kurban KASYMOV was appointed Defense Minister, and First Deputy Interior Minister Poran BERDYEV became the nation's police chief.

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

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