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 25, 1998

Russian Federation

Politics

Zadornov Hired, Shokhin Quits

· Ending days of speculation as to who would run the ministry which will have a key role in managing Russia's effort to pull itself out of its economic crisis and define the path the new government will take, Russian President Boris YELTSIN today appointed Mikhail ZADORNOV as Finance Minister. ZADORNOV held this same post in the governments of Viktor CHERNOMYRDIN and Sergei KIRIYENKO. ZADORNOV faces a tough fight for economic stability. He must restore Russia's financial and banking sector, rebuild domestic and foreign investors' trust, and counter calls within the Cabinet for a policy shift toward state intervention. In a move which jolted Yevgeny PRIMAKOV's Cabinet just as it was close to completion, deputy prime minister Alexander SHOKHIN announced that he had resigned because he disapproved of the appointment of liberal ZADORNOV calling it a "political mistake." SHOKHIN, who was appointed last week by PRIMAKOV to oversee finances and negotiations with international creditors, has publicly objected to the appointment of ZADORNOV. He noted that, "the key posts in the government are held by the people who have already deceived the country by declaring it bankrupt in an especially cynical manner, by violating the Russian laws." SHOKHIN extremely disgusted with the appointment said, "I could do nothing but the same thing I did in November 1994, when Vladimir PANSKOV was appointed finance minister without a prior consultation with me," but resign. Comment: Russia appears incapable of holding together a cabinet made up of divergent parties to resolve the nation's financial burdens. The lack of consultation by PRIMAKOV with SHOKHIN appears to be another political blunder which might have avoided his reaction. PRIMAKOV said SHOKHIN's decision is irre

sponsible and said he would have liked SHOKHIN to first complete negotiations with the International Monetary Fund and solve the problem of restructuring the government's short-term debt. The lack of contemporary economic experience of the team and its little understanding of western financial mechanics and rules reduces the likelihood that Russia will be able to pull itself out of the crisis and instead is headed for economic collapse.

YELTSIN appointed nine other ministers. Andrei SHAPOVALYANTS was named Economics Minister replacing discredited economist Yakov URINSON. Georgy GABUNIA will be the Minister of Trade, while Mikhail KIRPICHNIKOV will be the Minister of Science and Technology. Sergei GENERALOV will continue as Minister of Fuel and Energy, and Pavel KRASHENINNIKOV retains the Justice Ministry post. Sergei FRANK was re-appointed as Transport Minister as was Nationalities Minister Ramazan ABDULATIPV and Railways Minister Nikolai AKSENENKO. Another controversial appointment is Boris PASTUKOV, former deputy foreign minister, as Minister responsible for relations with the Commonwealth of Independent States (CIS). PASTUKOV does not have a positive relationship with former Soviet republics, especially Georgia. He was at one time considered for the post of foreign minister, but Igor IVANOV was chosen over him because of PASTUKOV's poor reputation with CIS nations.

Finland Accuses Two Russian Diplomat As Spies

· Finland on Wednesday ac

Today's News Highlights

Russia

UK Court Freezes Bank Account

Rosneft Sale Canceled

Boeing Signs Agreement

Byte/Russia Magazine Launch

European Republics

Ukraine Defaults Domestic Debt

South Caucasus & Central Asia

Georgian Pres.-UES Meet

Azeri Elections To Be Fair

Politics-Economics-Business

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Friday

September 25, 1998

Intercon's Daily

cused two Russian diplomats of collecting "classified information" concerning the European Union (EU). The EU leadership has been informed of the incident. A report of the Finnish Foreign Ministry says in this connection that the two diplomats have already left the country: one "long ago," and the second "last summer." The names of the Russian diplomats have not been given either by the Russian or the Finnish side. The information was passed by a Finnish Foreign Ministry official, who may soon be charged with espionage. The Ministry refused to disclose the name and the rank of the Finnish official, but some local newspapers report it is the son of former Foreign Minister Olavi MATTILA, Olli MATTILA. The Russian embassy in Helsinki's press secretary Vladimir SEREGIN said, "Indeed, such claims were expressed to us some time ago. However, we stated right away that the matter in question is a misunderstanding of some kind. If you follow such a logic, any diplomat can be accused of any sin, since exchange of information is an inseparable part of diplomatic work." Finnish European Affairs Minister Ole NORRBACK called the matter "serious," but said the image of Finland as an EU member would not be hurt. Finland, which will take the rotating chairmanship of the EU on July 1, 1999, is the only EU country to share a border with Russia.

Economy

Ruble = 15.61/$1.00 (NY rate)

Ruble = 15.6099/$1.00 (CB rate)

May Jun Jul Aug Sep

Uxeximbank, Inkombank Accounts Frozen

· Under a decision of the London supreme court

on the lawsuit instituted by the US Lehman Brothers investment bank, $26 million in accounts at Russia's Uneximbank and $87 million in accounts at Inkombank have been frozen. The decision was made following an announcement by senior Russian officials warning that they might default on their external debt without further international support. Uneximbank has not received any notification that its accounts have been seized. Lehman Brothers has not yet filed formal judicial claim for confiscation of the money. Lehman Brothers acted under strong pressure from its clients who had concluded large contracts for forward dealings with the ruble but had been unable to receive the earned money on time. The US investment bank's claims are not related to negotiations in Moscow between Western creditor banks and the Russian government regarding the frozen GKO treasury bill and OFZ bonds.

The real concern is that other banks may follow the Lehman Brothers, taking similar steps to seize funds. Russia's number two savings bank after Sberbank, SBS-Agro has defaulted on several hundred million dollars of foreign bank debts. Western lawyers in Moscow said that SBS-Agro is practically insolvent but not legally bankrupt. This is because Russian bankers lobbied the Kremlin to shield them from bankruptcy laws passed earlier this year. Central Bank chairman Viktor GERASHCHENKO warned that if "greedy" foreign investors and banks push too hard they risk losing everything, the Financial Times reported.

IMF Mission Leaves, No Installment Released

· Today the International Monetary Fund (IMF) mission is expected to wrap up its visit to Moscow. The IMF team is leaving Russia without a recommendation for the release of the September installment of a $22.6 billion loan package agreed to in July. Russia had been hoping to receive another $4.8 billion from the IMF by the end of this month to stabilize the economy. Deputy Prime Minister Alexander SHOKHIN said, "Reaching an agreement between the IMF and Russia is important for both of us. Today we need such support very much." The IMF has indicated that it will not release more money to Russia, until it has sound economic policies in place. The IMF mission plans to return on October 12th to continue negotiations on a new lending agreement.

When you need to know it as it happens

Politics-Economics-Business

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Friday

September 25, 1998

Intercon's Daily

CB Extends Transfer Time Limits

· Russia's Central Bank has extended until October 10, 1998, the period for submitting applications of individual clients to transfer their bank deposits to Sberbank savings bank, which expires on September 26th. Agreements with Sberbank on the transfers were signed by MostBank, Menatep, Mosbusinessbank, Promstrojbank, Inkombank and SBS-Agro. Many of the commercial banks have worked out a payment plan on accounts which will not be transferred to Sberbank. The banks are going to work out such a mechanism only after it becomes clear, what is the total amount of their liabilities are. The Menatep Bank suggests to its individual clients, who do not want to transfer their money to Sberbank, that their deposits be converted into hard-currency bills according to the exchange rate of the Central Bank on the day the application is submitted. The bills will be paid within one to three years. Sberbank will begin payments on transferred accounts on November 30th.

Business

Rosneft Sale Canceled

· A commercial tender for the sale of the government-owned shares of Russia's Rosneft oil company has been canceled, Prime Tass news agency reported. The Russian State Property Fund earlier announced it would receive applications for participation in a tender scheduled for October 27th. The starting price of the 75 percent of shares plus one share was set at 9.86 billion rubles ($616 million). The fund was forced to lower the starting price after a tender failed to attract investors.

Boeing-Zvezda-Strela To Sign Agreement

· The US company Boeing plans to sign a third contract with the Russian Zvezda-Strela state scientific-production center in mid-October 1998. The center's General Director and Designer Sergei YAKOVLEV said Boeing aims to buy supersonic target missiles, produced on a basis of the X-31A anti-ship aviation missile. He did not disclose the contract's details, but sources in the defense industry said the center will supply 20 to 50 missiles over the next five years. The reason for Boeing's purchase of Russian missiles is its victory in the US Navy contest for the design of a new supersonic target with a grazing flight trajectory over waters. The target is

to imitate the Russian supersonic anti-ship missiles of the Moskit 3M-80 type, which will be adopted by two destroyers the Chinese fleet in mid-2000.

30 Percent Yukos Shares Lost Collateral

· Thirty percent of one of Russia's largest oil companies, Yukos, were put up as collateral for a loan from foreign banks to Menatep bank, which is part of the same financial and industrial group as Yukos. When the financial crisis rocked Menatep, it was unable to pay its debts and the collateral is to be transferred to the foreign banks. Under Russian law, any stake above 25 percent gives the holder a blocking power and representation on the board. Head of Yukos and founder of Menatep Mikhail KHODORKOVSKY said, "The foreign banks can tomorrow claim these shares, but all I am asking is that they talk to me and consider the interest of the company." Brunswick Warburg estimates that last year Yukos incurred pre-tax loses of $374 million ($142 million on comparable exchange rates). Losses for this year are predicted to be $391 million, the Financial Times reported.

Byte/Russia Magazine Hits Newsstands

· Russian computer users can purchase their own Russian language edition of Byte Magazine on newsstands. As with its US namesake, the Russian edition of the magazine is aimed at technically proficient computer users, but focusing in on specific Russian issues. According to the publishers, Byte/Russia will concentrate its editorial resources on issues such as the development of network applications: development tools, operating systems, hardware, information security, network software and groupware, as well as Internet and Intranet technologies. Other issues being lined up for coverage include data management: database servers, database programming and management tools, information storage tools, instructions and documentations, hardware and software survey, data gathering and analysis. Alongside translations of the US edition, plans call for Russian- specific editorial to appear in the magazine.

European Republics

Ukraine Defaults On Domestic Debt

· The US Standard & Poor's rating agency has reported that the Ukrainian government followed Russia's lead by defaulting on its domestic debts.

When you need to know it as it happens

Politics-Economics-Business

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Friday

September 25, 1998

Intercon's Daily

Three weeks ago, Ukraine offered to exchange its domestic gryvnias denominated bonds for new bonds with a lower yield. Although the exchange was supposed to be on a voluntary basis, the holders of domestic bonds actually had no choice. An exchange like that means actual default, Standard & Poor's believes. The rating agency estimates that Western investors have already lost 50 to 60 percent of the initial value of the bonds as a result of the exchange. The recovery rate for foreigners holding Russian GKO domestic treasury bills was below 10 percent. If the current debt on the bonds is not paid soon, and in dollars, lawsuits may be brought against Ukraine. This will result in a collapse of the whole system of Ukrainian borrowings abroad, including Eurobonds. If the Central Bank does convert the gryvnias to dollars, it could cost them approximately $70 million in foreign exchange reserves which may jeopardize the $2.2 billion three-year International Monetary Fund (IMF) loan. Further disbursements of the IMF loan are based on the Central Bank holding reserves of $1.33 billion by the end of September.

Meanwhile, Ukrainian Prime Minister Valeri PUSTOVOITENKO and Central Bank governor Viktor YUSHCHENKO criticized parliamentary deputies for their opposition to crucial measures to contain the impending financial crisis. They specifically mentioned the Gromada and Socialist party, which are led by deputies which are considered to be candidates in the presidential election in 1999.

South Caucasus & Central Asia

Georgian Pres.-UES Discuss Energy Plans

· Georgian President Eduard SHEVARDNADZE and First Deputy Chairman of the Board of the Russian United Energy System (UES) joint stock company Oleg BRITVIN met in Tblisi Thursday. According to the Presidential press service, the two discussed orientations for the development of versatile cooperation in the field of energy. UES intends to establish a single power grid in CIS and Black Sea countries. It will work closely with the Russian-

Georgian Rosgruzenergo joint venture. UES and its Georgian counterparts have restored the Kavkasioni power transmission line, in prospect mulls the construction of a parallel power transmission line to run along the Black Sea coast. SHEVARDNADZE welcomed UES business proposals and expressed confidence that mutually beneficial cooperation would gain in scope in the near future.

On Tuesday, NATO Secretary General Javier SOLANA will visit Georgia as pat of this Caucasus tour. He will hold meetings with Georgian Foreign Minister Irakly MENAGARISHVILI, State Minister Vazaha LORDKIPANIDZE, parliament speaker Zurab ZHVANIA and will be received by SHEVARDNADZE in the evening. This will be SOLANA's second visit; he toured Georgia, Azerbaijan, and Armenia in 1997.

Azeri Elections To Be Free and Fair

· Azerbaijan will demonstrate to the world the nation's commitment to democracy and political pluralism when free and fair presidential elections are held October 11th, Azerbaijan Ambassador to the US Hafiz PASHAYEV said at a meeting hosted by the US-Azerbaijan Chamber of Commerce on Wednesday. He said that the new Election Law, which was debated and enacted, "is the product of difficult negotiations among a divers political constituency, and thus, is a product of compromise," according to an Embassy press release. He noted that the implementation of a fair election includes the following changes: additional seats on the Central Electoral Commission for opposition political parties, voting rights education, equal access to television and radio broadcasts fro candidates to present their campaign, abolishment of the censorship institution, and national and international monitoring groups to observe the election. There are six candidates on the ballot including Presidential incumbent Geidar ALIYEV. Leaders of opposition political parties and about 1,000 supporters protested the elections on September 20th. They appealed to the candidates to withdraw from the election so the campaign could start over on even ground.

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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