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

Monday, September 21, 1998


Russian Federation

Politics

Cabinet Plan To Be Released This Week

· Russian President Boris YELTSIN today appointed Gennady KULIK as deputy prime minister responsible for agriculture. KULIK from 1965 to 1990 held different posts in the Ministry for Agriculture of the Russian Soviet Federate Socialist Republic (RSFSR). In 1991, he was appointed to the post of Chairman of the Inter-State Economic Committee; Member of the Committee for Operational Management of the National Economy of the USSR. KULIK has been a deputy in the Russian State Duma since January 1996 and is Deputy Chairman of its Committee for the Budget, Taxes, Banks, and Finances. KULIK is member of the Agrarian Party of Russia. The formation of the new Russian cabinet is expected to be completed this week. Since being confirmed as Prime Minister ten days ago, Yevgeny PRIMAKOV has yet to fill his cabinet or outline an economic rescue plan. "There will be no return to the administrative-command system. We will not yield an inch in the principle of society's democratization and the protection of fundamental rights and freedoms of citizens. But there will be, certainly, considerable corrections in our reforms and these corrections will be oriented at the needs of people," PRIMAKOV said. He noted a two steps to conquer Russia's financial problems: first pay salaries and pensions, then broaden the tax base.

Two British hostages Freed In Chechnya

· British hostages Camilla CARR and John JAMES were freed from Chechen captors Sunday. British Ambassador to Moscow Andrew WOOD said the kidnappers released the two after realizing they would not receive their ransom demand. The hostages were working as aid workers for a Russian organization called the Center for Peacemaking and

Community Development helping Chechen children recover from postwar syndrome when they were abducted in July, 1997. The two were moved to 14 different locations dyeing their captivity. CARR and JAMES are in good physical condition. The success of the operation in Chechnya resulted from a set of measures conducted jointly with Russian partners, the understanding of the kidnappers that they would not be paid, and the moral strength of the hostages, the Ambassador said. Russian officials, Commonwealth of Independent States Executive Secretary Boris BEREZOVSKY, Chechen leaders, Georgian President Eduard SHEVARDNADZE and Azeri President Geidar ALIYEV, all helped to liberate CARR and JAMES.

It is possible that Presidential envoy Valentin VLASOV was held captive with CARR and JAMES since May, 1998. The British aid workers said a Russian prisoner had problems with the heart and kidneys, but the kidnappers gave him medicines. On September 14th, Chechen field commander Salman RADUYEV said VLASOV was alive and might be set free together with CARR and JAMES without any preliminary conditions. As of September 10, 1998, a total of 794 had been regarded missing in Chechnya. They include 490 servicemen of the Defense Ministry, 199 servicemen of the Interior Ministry, 22 officials of other law enforcement agencies, and 83 civilians, according to Konstantin GOLUBOVSKY.

Economy

Ruble = 16.38/$1.00 (NY rate)

Ruble = 16.38/$1.00 (CB rate)

Today's News Highlights

Russia

New Economic Figures

New Toll Road Opens

Gov't To Regulate Tobacco

European Republics

Rus-Ukraine Summit Results

Rus-Lith Postpone Pipeline Talks

South Caucasus & Central Asia

Georgia Plans To Boost Taxes

House Fails To Repeal 907

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Monday

September 21, 1998

Intercon's Daily

CB Prints Money To Pay Debts

· The Russian Central Bank has printed almost $55 million worth of new rubles and issued short-term credits in an effort to get cash flowing through the paralyzed banking system. The bank printed the money to redeem frozen government debt at a pre-default rate, enabling commercial banks to pay their depositors. First deputy chairman of the Central Bank Andrei KOZLOV said that the Russian financial crisis has caused a backlog of payments totaling over $2 billion. The Central Bank rescue plan for banks aims to help them clear their debts to one another in a debt-swap system, which allows banks to use reserves stored in the Central Bank to pay their liabilities. Some officials estimate that the bank may print up to 9 billion rubles to cover the banks' debts as well as 45 billion rubles later this week to pay wage and pension arrears. KOZLOV today said that these measures will not cause significant inflation, changes in exchange rates, or harm foreign investors. Unfortunately, foreign banks and international lending institutions fear just this. A group of 18 European, US, and Japanese banks represented by Deutsche Bank's Edson MITCHELL and members of Credit Suisse First Boston, ABN Amro, Chase Manhattan, Citibank, Nomura and four other banks will meet this week with the Finance Ministry and Russian regulatory authorities. The banks feel that proposed terms were, "unacceptable and [were] being forced upon creditors unilaterally in an unacceptable manner." On senior bankers said, "If they don't sit down and negotiate, they are going to be sued all over the world. All their assets will be attached. Every time an Aeroflot aircraft lands, it's going to be seized," the Financial Times reported. Russian banks seem to understand that discrimination against foreigners will only further damage confidence in the economy.

Acting Russian Finance Minister Mikhail ZADORNOV submitted to the Russian government a proposal to readjust the restructuring of short-term GKO treasury bills, OFZ bonds. The basic principles of these proposals are to approach all investors equally, a larger share of state securities redeemed on the settlement date, as well as the resumption of secondary trading at the exchange.

New Economic Figures

· According to an official report of the Russian State Statistical Committee released today, Russia's gross

domestic product dropped by 2.1 percent in the period of January to August, 1998. Industrial output declined 2.6 percent. Russia's gross domestic product and industrial output in August amounted, respectively, to 226.1 billion rubles and 115 billion rubles, decreasing, by 8.8 and 11.5 percent as compared with August 1997 figures. The number unemployed in Russia, calculated by the International Labor Organization, has increased by 0.01 percent in August, compared to July, and reached 8,349,000 people. This makes 11.5 percent of the economically active population of Russia. The number of officially registered unemployed was reduced by 0.8 percent by the end of August against the end of July, to the level of 1.8 million people. This makes 21 percent of a total number of the unemployed and 2.4 percent of the economically active population.

Business

Government To Regulate Alcohol, Tobacco

· Russian Prime Minister Yevgeny PRIMAKOV on Friday said that the government will introduce a state monopoly for alcohol and tobacco. According to him, the government on September 24th will discuss concrete ways to carry out the state monopoly for the production and sale of vodka and other beverages. PRIMAKOV said the proceeds will go to the federal and local budgets. However, Russian government spokesman Anton SURIKOV denied plans of a state monopoly saying, "measures to put in order manufacturing and import of tobacco," were being considered. He added that a state tobacco distribution network may be established, but he failed to provide details. On Saturday, First Deputy Prime Minister Yuri MASLYUKOV said, "The government is working on measures to stop illegal deliveries and manufacture of tobacco products." About 60 billion cigarettes were illegally supplied to the Russian market last year alone, which accounted for some $1.2 billion of losses to the federal budget. SURIKOV said the, "state of things is inadmissible, the Russian government is drafting measures to ensure state control, including the introduction of declared licensing for import of tobacco products, creating a wholesale network, as well as the annulment of current privileges and banning the issuance of new privileges for tobacco imports."

New Toll-Road Ends Traffic Jams

· The opening of a toll road at the busy railway

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Monday

September 21, 1998

Intercon's Daily

connecting Saratov with the center of Russia has put an end to traffic jams near the railway cross in the city. The toll is three rubles, while the authorities preserve an alternative free passage for economical drivers. Opening traffic along the new four-lane 200-meter-long bridge over the railway Central Asia-Center, Governor of the Saratov region Dmitry AYATSKOV said, "Saratov becomes closer to other regions of the country." While the commissioning a week ago of a through stretch and a bridge at the Saratov-Penza highway reduced the route to Moscow by 100 kilometers, the new 200-meter trestle lessened the traveling time by almost one hour.

Russian To Consider Coffee Any Time Of Day

· Promotions Manager at the International Coffee Organization (ICO) Michael HEATH said, "Russia and China are important emerging markets for coffee, where we can hope to increase consumption." At an international conference organized by local coffee roasters, shops and large coffee groups such as Nestle, Kraft, and Cafe de Columbia, participants could taste coffee and attend media briefings at universities in St. Petersburg and Moscow. The ICO believes the Russian coffee market is likely to be larger than China's, because in China there is a cultural preference to tea. In Russia, "Coffee penetration is 70 percent in urban areas," HEATH said. He added that Russians typically drink coffee only at breakfast and that a key marketing point will be to raise awareness that coffee is for all times of day. As a new tea craze is following coffee's lead in the US, will the Starbucks and coffee bars move in on the Russian market?

anti-crisis group will be headed by Deputy Prime Minister Sergei TIGIPKO, Prime Minister Valery PUSTOVOITENKO, who accompanied KUCHMA on the visit to Russia, with participation from the Ministry of Foreign Economic Ties and Trade and other ministries concerned. PUSTOVOITENKO expressed the hope that as soon as Russia appoints its co-chairman to the Russian-Ukrainian coordination council, engaged in the implementation of a long-term economic cooperation program, it will be possible to begin actual work. Returning from Russia, KUCHMA said, "I saw the determination of the Russian side to raise the Russian-Ukrainian relations at a qualitatively new level, to do away with everything that was false and that had often been presented as basic differences in the relations." YELTSIN was "positive in principle" towards a Ukrainian proposal to create free trade zones between the two countries.

PUSTOVOITENKO and PRIMAKOV discussed the implementation of the government's decision to reduce the share of barter in economic turnover, to repay tax indebtedness and replenish the state treasuries. They focused on a better trade and economic cooperation and ways to put it on a stable long-term basis. PRIMAKOV and PUSTOVOITENKO agreed to itemize the cooperation problems and focus on the search for non-standard forms of mutual off-sets and the production cooperation. The premiers urged a boost in the fulfillment of the long-term economic cooperation program, to be in effect till 2007. The priorities are the aero-space industry, ship- building, machine-building and the military-technical cooperation. The two sides also reached an agreement on Russia's participation in completing two power-generation units at Ukraine's Rovno and Khmelnitsk nuclear power plants and Russia's loans for these projects in 1999. The Russian-Ukrainian cooperation committee will hold a fall meeting to discuss bilateral trade.

The two Presidents reiterated their adherence to the path of strategic partnership, and KUCHMA stressed that Russia has always been Ukraine's major partner. Trade between the two nations totaled $17 billion last year, 40 percent of Ukraine's total and 15 percent of Russia's. Ukraine imports over half of its primary energy from Russia, which will be much in demand with the winter approaching.

European Republics

Russia-Ukraine To Form Anti-Crisis Committee

· Russian President Boris YELTSIN and Ukrainian President Leonid KUCHMA agreed Friday to increase cooperation by setting up a joint anti-crisis committee and pledged to re-develop trade links. KUCHMA said, "We are guilty of the fact that when this [crisis] started, we should have gathered together. And because of this, so far, each has been dying separately. We have agreed to be together, one for the other." He said talks with YELTSIN and Prime Minister Yevgeny PRIMAKOV were geared toward creating common mechanisms to find a way out of the current crisis. The Ukrainian part of the

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Monday

September 21, 1998

Intercon's Daily

Rus-Lithuania Put Off Pipeline Talks

· Russian-Lithuanian talks on the construction of a gas pipeline have been put off until October 6th, an official with the Lithuanian embassy said today. The talks between Russia's major gas producer Gazprom and the Lithuanian government had been scheduled for September 21st and 22nd, economic counselor Rimutis KLEVECKA said. The pipeline is planned to connect Minsk to Russia's Baltic enclave of Kaliningrad via Lithuania. It may later join the European system of transit pipelines. Gazprom asked to Vilnius for talks on the issue in June 1997. Lithuania is proposing rather low tariffs for the transit of Russian gas. The new pipeline is expected to provide Kaliningrad with 2.5 billion cubic meters of gas a year by 2005 and with three billion cubic meters by 2010. The fuel in part will be used at a local gas electric power plant which is now being constructed. Vilnius can earn $32 million to $40 million a year from the transit of Russian gas, helping it renew its gas network and create jobs.

South Caucasus & Central Asia

IMF Tells Georgia To Collect More Taxes

· Georgian Finance Minister Mikhail CHKUASELI on Thursday said that Georgia must significantly boost tax collections if it is to qualify for continued lending from the International Monetary Fund (IMF). A team of IMF representatives are visiting Georgia until September 24th. The IMF mission has examined the 1998 budget, the level of tax collection, and debt rescheduling packages concluded with creditor countries. The IMF team, however, have not commented on their visit. The Georgian State Statistics Department said tax revenues in the first eight months of 1998 totaled 217.1 million lari or 74 percent the planned level. CHKUASELI said parliament expenditures in the same period were 446 million lari instead of the planned 520 million lari. Earlier this year the IMF delayed disbursing a $40 million installment of a three-year $240 million Enhanced Structural Adjustment Facility (ESAF) due to

the government's failure to collect scheduled revenues. One reason for the significant drop in revenues is the requirement by the IMF for high tariffs of 20 percent on cigarettes and alcohol. In neighboring Armenia and Azerbaijan taxes on these same goods is only 5 percent. This disparity is caused by the IMF's requirements. If the IMF continues to levy Georgia's tariff requirements, it should take the tariff into consideration with regard to their other policies in the region, thereby reducing the risk of smuggling and corruption.

House Fails To Repeal Section 907

· After a recommendation from the US House Appropriations Committee to repeal Section 907 of the Freedom Support Act of 1992, the US House of Representatives voted not to repeal the Act. Section 907 prohibits the allocation of US foreign aid to Azerbaijan, unfairly singling out Azerbaijan from other former Soviet republics. According to an Embassy of Azerbaijan press release, the Appropriation Committee called for its repeal for four reasons. It is: "inappropriate and unfair in light of Armenia's aggression and illegal occupation of 20 percent of Azerbaijan, which has resulted in almost one million refugees and displaced people; counter-productive to both US and international efforts to resolve the Armenia-Azerbaijan conflict; harmful to Azerbaijan's ongoing democratic and free market reforms and to US-Azerbaijan bilateral relations; and a serious impediment to America's ability to be an impartial and constructive influence in the region on security, energy, and trade matters." Azeri Ambassador Hafiz PASHAYEV said, "While I am disappointed by the results of yesterday's House vote, I am grateful to the House Appropriations Committee and to those Members who supported chairman LIVINGSTON's efforts to promote America's national interests in this region." He also thanked the CLINTON administration and US Secretary of State Madeleine ALBRIGHT. PASHAYEV confirmed Azerbaijan's commitment to ending discriminatory and unfair provisions against Azerbaijan and its citizens.


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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