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

Wednesday, September 2, 1998

Russian Federation

Politics

US-Russia Summit Focuses On Economy

· US President Bill CLINTON and Russian President Boris YELTSIN closed the two-day summit today by signing a number of accords of cooperation and security agreements. The accords include cooperation on investigation and prevention of air accidents related to civil flights and a mutual understanding of culture, humanitarian and public sciences, education and media. The two countries agreed to share information on worldwide launches of missiles or space-launched vehicles detected by their respective early warning systems. They agreed to remove from equally from their nuclear weapon arsenals 50 tons of plutonium, enough to make thousands of nuclear weapons. The two leaders also signed a joint statement on banning biological weapons, trade, investment, technological cooperation and contacts between non-government organizations. Both Presidents described the summit as a success, despite the Russian Duma failing to approve the START-II Treaty. YELTSIN said that CLINTON discussed ways to intensify US-Russian economic relations to pull Russia out of its economic downward spiral. CLINTON outlined five areas he believes are required for Russia to stabilize its economy and restore its confidence: a strong and fair tax system, rule of law, dealing forthrightly with financial institutions, regulation against abuses, and a safety net for people hurt during times of change. He said, "If the reform process can be completed, I for one would be strongly supportive of greater assistance to Russia from the United States and the other big economic powers." He added, "we have a strong, vested interest in seeing an economically successful Russia." YELTSIN responded that Russia needs moral, not financial support as he pledged to continue reforms. He said that once the US gives

Russia moral support, financial investors will pour into Russia. "We must carry out reforms to the end, to the end and receive returns for this accordingly." While YELTSIN says he is committed to market reforms, he insists on the appointment of Viktor CHERNOMYRDIN as prime minister, who in his previous tenure failed to implement reforms. Skepticism runs high that CHERNOMYRDIN will be able to accomplish economic recovery.

Chernomyrdin Outlines Priorities

· Acting Russian Prime Minister Viktor Chernomyrdin proposed a number of candidates for the new cabinet to Russian President Boris YELTSIN on Tuesday. He said that decisions have been made to pay all foreign debts due in September. He said his cabinet will consider improving conditions for investors in short-term domestic debt and reducing the huge budget deficit. The acting prime minister stressed overhauling Russia's tax system. He proposes a reduction in the profit tax to about 20 percent from the average of 30 percent. He has already ordered the Fuel and Energy and the Finance ministries to prepare by Thursday proposals on oil excise tax cuts. CHERNOMYRDIN said his government's priorities are guaranteeing citizens' savings, restoring and controlling currency markets, balancing an exchange rate policy and preserving the country's banking system and liquidity. CHERNOMYRDIN said that the government would move to boost state control over the economy.

State Customs Committee

Today's News Highlights

Russia

IMF Loan Depends On Reforms

Deputy Finance Min. Arrested

New Airport Security Device

European Republics

Estonian Banks Merge

Lit. Halts Milk/Meat Exports

South Caucasus & Central Asia

CE Head In Armenia

Tajik Issues First GKVs

New Kazakh Security Head

Politics-Economics-Business

Page

Wednesday

September 2, 1998

Intercon's Daily

Valery DRAGANOV said that CHERNOMYRDIN has approved his committee's proposal to reduce the average size of the custom's tariff on all imported goods. He said the proposal will increase the contribution of customs tariffs to budget revenues. DRAGANOV added that, "protectionism is impermissible at a time when there are no grounds for reviving production...the tariff should be balanced meeting the interests of protecting the domestic market and fiscal bodies." CHERNOMYRDIN's approval is a direct reversal of a policy imposed by the government of former prime minister Sergei KIRIYENKO. The acting prime minister met today with regional governors.

YELTSIN today signed a decree re-appointing six key ministers to the new interim Cabinet. The decree lists Foreign Minister Yevgeny PRIMAKOV, Defense Minister Igor SERGEYEV, Interior Minister Sergei STEPASHIN, Justice Minister Pavel KRA-SHENINNIKOV, Deputy Prime Minister and head of the Tax Service Boris FYODOROV and Emergency Minister Sergei SHOIGU.

Duma To Take PM Vote On Friday

· The Russian State Duma approved the second vote on Viktor CHERNOMYRDIN as prime minister for Friday September 4th, leaving little time for compromise or debate. The date, approved by a 298 to 1 vote, was accepted by all factions except Yabloko which urged for Monday, September 7. The Duma speaker Gennady SELEZNYOV said that CHERNOMYRDIN has "no chance" of being approved in a second round of voting, and called President Boris YELTSIN to hold a round of consultations with opposition leaders. The Duma must approve a candidate for prime minister and has a maximum of three rounds of voting to confirm CHERNOMYRDIN or another candidate. If the Duma fails to approve CHERNOMYRDIN, YELTSIN can dissolve the Duma.

The Communists are trying to block dissolution by pressing ahead with impeachment proceedings against YELTSIN. The Russian constitution forbids the president from dissolving the Duma once impeachment proceedings have begun. Governor Alexander LEBED said dissolution would be political suicide. "All Russians greatly dislike the Duma today, but they dislike the president even more."

Economy

IMF Loan Dependent On Reforms

· The next $4.3 billion installment of the $22.6 billion International Monetary Fund (IMF) aid package is likely to be delayed from September 15 to sometime in October or later, depending on the implementation of economic reform measures. IMF first deputy managing director Stanley FISCHER said, "Given what we know about the changes in the exchange rate, of course difficulties in the bank system, possible difficulties in the budget, it's clear that the Russians will have to do quite a lot before that money could be released, and that means we have to consider the possibility that it will take longer than this month." Despite the rescue package and economic restructuring measures agreed to by government and IMF officials, Russia was forced to devalue the ruble and default on some foreign debt. FISCHER said the political uncertainty is making the economic situation worse. "There isn't a Russian government and it's therefore very difficult to determine policy in Russia." He added that the main thing the West can do is to encourage Russia to follow through with the agreed upon reforms. IMF representative in Moscow Martin GILMAN suggests that aspects of the loan are out of date and need to be re-examined, specifically the banking sector.

GILMAN said, "They [Russia] are going to have to put a bottom in the market for the ruble. To put in a bottom they are going to have significantly limit additions of liquidity...Any liquidity which is injected into the economy will simply go out through the foreign exchanges." He added, "This is going to require extraordinary efforts because the situation is far worse than anything Russia has faced so far." The Central Bank has abandoned its currency policy, setting the exchange rate at 10.9 rubles to the dollar well outside the upper limit. On August 17th, the Central Bank set the upper limit at 9.5 rubles per dollar and vowed to defend it until years end. GILMAN warns that printing money and providing new credits would fuel inflation and in essence be "fool's gold."

Ruble = 11/$1.00 (NY rate)

Ruble = 10.9/$1.00 (CB rate)

Deputy Finance Minister Arrested For Bribery

· Russia's Federal Security Service (FSB) has arrested Deputy Finance Minister Vladimir PETROV

When you need to know it as it happens

Politics-Economics-Business

Page

Wednesday

September 2, 1998

Intercon's Daily

on charges of accepting a sizable bribe, in accordance with Article 290 of the Criminal Code of the Russian Federation. A brief statement released by the office of the prosecutor says 44-year-old PETROV is charged with, "illegal activity benefiting a commercial bank." The bank, one of many hit by Russia's deep financial crisis, was not named, nor was there any indication as to the reason for the bribe.

Business

Airport Installs New Nuclear Security Device

· US Energy Secretary Bill RICHARDSON and Russian officials tested new security equipment in one of Moscow's international airport designed to stop radioactive material from leaving Russia. The security barrier made by a Russian company and funded by the US Department of Energy is the latest measure in the international war against terrorism. Russian authorities are funding similar installations at Shermetyevo-2, the main international airport. Both sides are working to install the equipment at other critical airports, sea ports, and border crossing points over the next two years. On a number of occasions, smuggled radioactive materials have been confiscated in Europe with "indications" that it had come from Russia. Russian State Customs Committee Valery DRAGANOV said, "This is clear evidence of international cooperation in preventing the movement of illegal nuclear materials. We view this cooperation with great significance because it assures safety and security on a global scale."

Black Sea Terminals Halt Exports

· Late last week, Russia's Black Sea Novorossiisk and Tuapse export terminals halted lifting crude and oil products because of disputes over payment of custom duties. Trading and shipping officials had no confirmation that duties had been paid and refused clearance for loading of crude or products at the two Black Sea ports since Friday or Saturday. These customs duties are paid in US dollars. One London based trader said, "people don't expect this to be an outright stoppage and the situation may be resolved within two days or so, but again this is Russia and nothing is guaranteed." The root of the dispute is taxation and non-payment of duties due to the financial crisis in Russia.

Russia exports more than 620,000 barrels per day

from Novorossiisk, shipping and trade sources say that more than half of its total seaborne exports of over one million barrels per day and more than a quarter of the country's exports.

Federal Service Withdraws Broadcast Licenses

· The Russian Federal Television and Radio Service has withdrawn 26 broadcasting licenses over the past seven months. Most of the licenses were taken away after the broadcasting was found to be non-existent or stopped. Television company Alfa Izhevsk was punished for showing non-licensed video products. The service said 21 broadcasters received warnings over the seven months. These include the television company Simbirsk-Efir, Ulyanovsk, Zhanr, Vladimir, and Kolpinskaya Television Company. The Federal Television and Radio Service led by Mikhail SESLAVINSKY said the monitoring of operation of cable and satellite channels remains inadequate. The service's board has passed the decision to restructure the licensing procedure. The service plans to introduce a draft federal law to change the Russian code on administrative offenses to the Russian State Duma. The law lays down punishment of broadcasters that go on the waves without licenses.

Telecom, Health Exhibits Open In Vladivostok

· The Russian far eastern city of Vladivostok is hosting two conferences which open Tuesday, Telecom 1898 and Primorye Health 1998. Telecom 1998 will feature telecommunications, television and radio equipment, computer hardware, and ship navigation equipment. Acos Company will present satellite telephones Iridium, a system to be launched on September 23rd over the world. This year's exhibit will address an additional topic: Information Protection and Security Systems.

The Health Exhibit, organized by the association Farmatsia and German company Zollinger, is expecting 61 companies from 17 countries, including 30 companies of Russia to participate. They will present products from over 100 pharmaceutical factories, dentist and laboratory equipment, instruments and optical devices. The goal of the Health Exhibit is to introduce specialists to innovation in pharmacology and medical equipment. Both exhibits will be open through September 4th.

When you need to know it as it happens

Politics-Economics-Business

Page

Wednesday

September 2, 1998

Intercon's Daily

European Republics

Estonian 3rd and 4th Largest Banks Merger

· The third-largest commercial bank in Estonia, Forekspank, has announced it is merging with the country's fourth-largest, the Investment Bank, ETA reported on September 1st. Under an agreement signed by the boards of the two financial institutions, Forekspank will have a 50.25 percent stake in the Investment Bank. The new merged bank, with assets totaling 4 billion kroons (some $266.7 million), will be smaller than either Hansapank or Uhispank, which earlier merged with Hoiupank and Tallinna Pank respectively.

Lith. Suspends Milk/Meat Exports To Russia

· On Tuesday, Lithuania suspended its meat and milk exports to Russia. The suspension is based on Russia inability to pay due to the financial crisis. Spokesman for the Agricultural Ministry Jonas REKASIUS said, "The measure was taken mostly at the request of Russian customers." Russian companies used to pay in dollars to most Lithuanian exporters, REKASIUS said, adding that a stronger dollar made dollar payments loss-making for Russia, forcing it to refuse buying Lithuanian products. As of now, Russia owes Lithuania more than $10 million for these exports alone. Lithuania has been supplying 25 percent of its meat and milk to Russia, primarily to Moscow and St.Petersburg. In 1997, it exported almost 26,000 tons of meat to Russia.

South Caucasus & Central Asia

CE Head Visits Armenia

· The Secretary-General of the Council of Europe (CE) Daniel TARSCHYS said he was hopeful that Armenia can become a full member of the Council of Europe. TARSCHYS and Greek Deputy Foreign Minister Janos KRANTIOTIS, who is current CE president, met Armenian leaders to discuss their country's admission to the Council of Europe. Armenia is taking an active part in many initiatives of the Parliamentary Assembly of the Council of Europe

and various international programs and participates in CE sessions in Strasbourg. TARSCHYS also met with Armenian President Robert KOCHARYAN. The CE representatives visited Azerbaijan and Georgia as well. TARSCHYS pressed both KOCHARYAN and Azerbaijan President Geidar ALIYEV on a settlement of the Nagorno-Karabakh conflict. Progress toward reaching a settlement is a precondition for Azerbaijan and Armenia to receive full membership status in the council. Georgia, Azerbaijan, and Armenia have been granted "special guest" status.

Tajikistan Holds First T-Bill Auction

· Tajikistan today held its first auction of government treasury bills, called veksels or GKVs. A Central Bank spokesman said that the first issue was worth 1000 million Tajik rubles ($133,000), with each bill nominally priced at 10,000 Tajik rubles. The bills are due to mature in 28 days. According to the auction terms, foreign banks are allowed to participate in the auction through a domestic commercial bank. There are no limits on foreigners' share of the market. The spokesman did not say how frequently the Central Bank planned to hold the auctions or how much money Tajikistan hopes to raise for state coffers.

New Head Of Kazakh Security Committee

· Kazakh President Nursultan NAZARBAYEV Tuesday appointed his chief adviser Nurtay ABYKAEV as the new security chief in an effort to strengthen the ongoing national campaign against corruption. By decree, ABYKAEV was appointed chairman of the State Committee for National Security (SCNS) of Kazakhstan to replace Alnur MUCAEV, who was demoted to the rank of SCNS vice chairman. NAZARBAYEV said the personnel change was designed to strengthen the political force of the SCNS to meet the needs of the ongoing anti-corruption campaign in the country. He launched the anti-corruption campaign in June, vowing to root out graft, nepotism and restore the authorities' tarnished image. The issue of corruption reportedly presents a serious problem to the national economy and is a common problem in other former Soviet republics.

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