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

Monday, September 28, 1998

intricately connected with Russia's economic problems. He did not reveal where the government was able to find the finances to pay the military. Deputy Prime Minister Valentina MATVIYENKO said that the government has remitted 320 million rubles to pay overdue stipends to students due for Summer. She said that another disbursement of 80 million rubles will be remitted to pay overdue scholarships through the end of this month. MATVIYENKO said the government hopes to have overdue scholarship to students paid by October 1st. She added that the government is working to pay public utilities who supply power and heat to educational institutions.

Controversial Mayoral Elections

· The majority of voters in Vladivostok have rejected all the candidates for mayor in a massive no-vote Sunday. Russian President Boris YELTSIN's envoy to the region Viktor KONDRATOV said, "The election was valid. But no mayor was elected because 76,000 voters of a total of 140,000 of those who took part voted against all candidates." KONDRATOV said that over a thousand people contacted him about violations of the election law. A new election commission will most likely have to be appointed before new elections can be scheduled. Under the law, the city's electoral commission has to set a new date for the poll. If it fails to do so in time or is disband before then, the date for new elections will be set by the court. The commission feels the no-vote is the affect of incumbent Mayor Viktor CHEREPKOV being struck from the ballot at the last minute for violating election

Russian Federation

Politics

Cabinet Still Not Complete

· Just as Russian Prime Minister Yevgeny PRIMAKOV begins to put the final touches on his Cabinet, President Boris YELTSIN sacks some ministers, while others resign. On Friday, Mikhail ZADORNOV was re-appointed as Finance Minister which triggered the resignation of deputy prime minister in charge of finance and liaison for international lending institutions Alexander SHOKHIN and Chairman of the Federal Securities Commission Dmitri VASLIEV, who was a strong market reformer. SHOKHIN on Friday also failed to convince the International Monetary Fund (IMF) to release the next installment of $4.3 billion from an aid package signed in July worth $22.6 billion. Today, YELTSIN sacked reformer Boris FYODOROV as head of Russia's tax service and as deputy prime minister and formally dismissed Viktor KHRISTENKO as deputy prime minister. No new tax chief was appointed. YELTSIN re-appointed Farit GAZIZULLIN as Privatization Minister. Several cabinet positions are still without ministers, including Anti-Monopoly Policy Ministry, Health, Agricultural, and Labor Ministries. YELTSIN and PRIMAKOV are meeting today in the Kremlin to discuss the government crisis sparked by SHOKHIN's resignation and the nation's financial and economic situation.

Primakov Pays Military, Students To Follow

· Russian Prime Minister Yevgeny PRIMAKOV told President Boris YELTSIN today that the government has paid off its debt in back wages to the armed forces. According to estimates, Russia owed a total of $2.4 billion in back salaries and social payments. Of that sum, $233 million was owed to the military. PRIMAKOV has stressed that paying salaries and pensions is his government's first priority, since it is

Today's News Highlights

Russia

Zadornov Defends Decision

Financial Sector Lay-offs

Russia MTV In Moscow, St. Pete

European Republics

Belarus-Rus Joint Venture

Azeri-Ukraine Discuss Oil Export

South Caucasus & Central Asia

Georgia-Azeri Oil Talks

Georgia-Abkhaz Peace Talks

Rus-Armen Military Exercises

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Monday

September 28, 1998

Intercon's Daily

laws. He is accused of using city money to finance his campaign. CHEREPKOV's term expired on July 5th and elections have been delayed because of feuds between CHEREPKOV and regional governor Yevgeny NAZDRATENKO. CHEREPKOV is both loved and loathed by the region. Preliminary data shows 53.6 percent of registered citizens voted against all remaining candidates and 13.3 percent voted for Vladimir SHAKHOV, a deputy in the Russian State Duma and chairman of the Dalrosso-Group insurance company. The election is expected to be invalidated.

The mayoral race in Nizhny Novgorod is headed for a run-off election tentatively scheduled for October 11th. The city had earlier this year annulled a scandal-tainted election. Duma deputy Vladimir SEMAGO received 22 percent of the vote, former Mayor Dmitry BEDNYAKOV received 25 percent, and Yuri LEBEDEV, once YELTSIN's envoy to the region, received 33 percent. YELTSIN fired LEBEDEV earlier after an April election was won by Andrei KIMENTYEV, in jail over misuse of state loans.

Economy

Ruble = 15.88/$1.00 (NY rate)

Ruble = 15.8827/$1.00 (CB rate)

Ruble = 15.86|15.9/$1.00 (buy|sell rates)

Zadornov Defends August 17th Decision

· Finance Minister Mikhail ZADORNOV on Sunday defended the government's decision to devalue the ruble and freeze foreign debts on August 17th. He said that the government had little choice, but that it, "could be corrected." ZADORNOV said that the steps taken by the government and the Central Bank of Russia dictated by the aggravated financial situation in the country. He said that the financial deterioration, "began in several directions." He noted the banking collapse, suspended payments to the budget, investors started to withdraw money, and the reserves of the Central Bank became insufficient to maintain the ruble foreign exchange rate. During the 40 days since August 17th, no decisions of principal importance were worked out, said ZADORNOV. The situation remains undetermined, which is the worst thing, while banks continue to die, economic agents don't work and many people transfer money abroad, he added.

Finance Sector Lay-offs

· Because the Russian government still has not announced or implemented a new economic program to pull the country out of its financial crisis, many subsidiaries of the Russian national banks, local banks, and other financial institutions are abruptly laying off employees. Banks and brokerages which profited from six years of expansions are now down-sizing their operations. Moscow employment agencies predict that between 40,000 and 100,000 employees of Russia's financial sector will be laid off by the end of October. The SBS-Agro Bank in Tatarstan has cut the personnel by half in its district subsidiaries in Bugulma and Chistopol, each of which earlier employed 40 people. October and November are expected to be the highest lay-off months since under labor laws an employee must be served a two-month note before dismissal.

EU-Russia To Cooperate On Energy Supplies

· The European Commission plans to send an energy industry mission to Russia led by EU Energy Commissioner Christos PAPOUTSIS to begin cooperation talks in an effort to achieve global environmental objectives. PAPOUTSIS said, "Supporting the energy sector reform will contribute very much to improving the investment climate, and as a result, to increasing prosperity for all Russians. This will lead to more stability, security, and peace in Europe," The Journal of Commerce reported. He further emphasized that, "they should develop toward economic cooperation based on mutual benefits instead of one-sided technical assistance, which currently characterizes Euro-Russian relations." Russia depends on revenues from energy sales to finance its budget.

European Union chairman Rudolph EDLINGER of Austria, after a meeting of EU finance ministers on Saturday, said that the ministers called on Russia to continue structural reform in an attempt to achieve a socially oriented market economy and not to return to centralized management.

Business

Privatization Sales Fail To Raise Revenue

· The cancellation of the last state owned oil company Rosneft and the shelving of a five percent stake of gas giant Gazprom by the government has failed to raise revenues which were written into the 1998 budget, assuming a stable ruble. The Russian

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State Property Fund canceled the 75 plus one percent stake sale of Rosneft because it failed to attract investors in May and in July. Even after lowering its starting price from $2.1 billion to $1.6 billion, investors were fraught with a plummeting equity market, capital flight, falling global oil prices, and finally the collapse of the ruble. First Deputy Prime Minister Vladimir BULGAK has asked his aides to speed up efforts to sell off a stake in Slavneft oil company. The stake planned to be sold is 20 percent of the company, The Journal of Commerce reported. The only other privatization still possible is a 25 percent stake sale of Svyazinvest on October 13th. Russia is desperate for cash from privatization sales and international lenders. But as both options dry up, Russia's economic outlook looks bleak.

Gazprom Considers Production Cuts

· Deputy head of Russia's gas giant Gazprom Pyotr RODIONOV said that Gazprom may drastically cut annual production if authorities do not review terms of tax collection. Gazprom predicts that if the current tax system remains in place, it will make domestic sales unprofitable. He said that annual output may fall as low as 100 billion cubic meters which makes up one third of national consumption. RODIONOV noted that payments by Gazprom clients had fallen two times since the beginning of this year. Monthly payments in the winter totaled one billion rubles, whereas in July and August they only reached 700 million rubles and 450 million rubles, respectively. The financial crisis hitting Gazprom's clients have force the company to cut its investment by 28 billion rubles, a three-fold decrease from the planned volume. The company still plans to meet its commitments on a number of large international projects such as the construction of the new gas pipeline on the Black Sea bed which is to link Russia and Turkey and increase the latter's annual gas consumption by 16 billion cubic meters.

MTV Russia Hits Moscow, St. Petersburg

· MTV Russia hit network television on Saturday night. Chairman of the new network board of directors Boris ZOSIMOV said that MTV Russia began airing in Moscow and St. Petersburg at midnight on Channels 38, TeleExpo, and 51. Other Russian cities will begin to receive MTV program soon. The new channel, which will broadcast in Russian, will be received by 10 million subscribers. It is the first time

that a Western television network will be adapted to Russian. MTV Russia will produce its special programs in Russia and for Russia, including talk shows, quizzes and contests. MTV operates in 85 countries of the world, which means each fourth viewer in the world can see its programs.

European Republics

Rus-Belarus Siberian Joint Venture

· Belarus is planning to sign a joint venture with Siberian Russia's Altai Territory for the production of agricultural machinery for the needs of Siberia and the Far East. The key provisions of a cooperation agreement between Belarus and Altai Territory have been negotiated and agreed to, and the signing is scheduled for December. The agreement also provides for a center to be set up in the territory for the assembly of tractors, sale of spare parts, and testing of fuel nozzles, sprayers, and fuel pumps. However Belarus may reconsider signing the deal since two high-ranking customs officials, Deputy director of the Altai customs department Nikolai ABRAMOV and chief of the Biisk customs checkpoint Sergei VOROPAYEV, from Altai Territory have been arrested for embezzlement worth about $93,000.

Belarus PM Ling In Ukraine

· Belarus Prime Minister Sergei LING arrived for a two-day official visit in Kiev today. LING will hold talks with Ukrainian Prime Minister Valery PUSTOVOITENKO and meet with leaders of a number of ministries and departments. The sides will focus on the course of implementation of the agreements reached by Presidents Leonid KUCHMA and Alexander LUKASHENKO during their informal meeting in the Crimea late in August.

Ukraine-Azeri Discus Oil Export

· Azeri First Deputy Prime Minister Abbas ABBASOV met with Ukrainian President Leonid KUCHMA Thursday in Kiev to discuss the prospects for exporting some of Azerbaijan's oil by tanker from the Georgian port of Supsa to Odessa and then via pipeline to Brody in western Ukraine, RFE\RL reported. Ukrainian officials maintain that this is the shortest and cheapest route for transporting Caspian oil to Europe. Ukrainian first deputy Prime Minister Anatoly HOLUBCHENKO said completion of the half-built pipeline will cost approximately $400

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million and take some two year to build. The cost of the Baku-Ceyhan pipeline is estimated at $3 billion.

Meanwhile, a natural gas field with an estimated daily capacity of 100,000 cubic meters has been discovered off the Crimean shore of the Azov Sea in southern Ukraine. Director-general of the Chernomorneftegaz oil and gas company Nikolai ILNITSKY said the deposit contains enough gas to provide for half of the Crimean population.

South Caucasus & Central Asia

Positive Georgia -Azeri Oil Talks

· President of the Georgian International Oil Corporation Gia CHANTURIA on Thursday announced that Georgia and Azerbaijan have signed a protocol on building a major oil pipeline across Georgia. He explains that this protocol, "means that if Azerbaijan chooses the Baku-Ceyhan route as the main pipeline for transporting Caspian oil to world markets, it will definitely go through Georgia." The cost of the project is estimated at $3 billion. The annual capacity of the pipeline will be 50 to 60 million tons of oil (1.0 to 1.2 million barrels per day). CHANTURIA added that a similar document has been signed by Turkey and Azerbaijan. The pipeline route from Azerbaijan's capital Baku to the Turkish port of Ceyhan is favored by many involved in exporting Caspian oil. The final decision on the main export pipeline is expected to be made next month, however some speculate that it may be delayed until next year. Azeri President Geidar ALIYEV has regularly voice support for the Baku-Ceyhan route. Georgian President Eduard SHEVARDNADZE said the protocol will be the basis for a major treaty on the implementation of the oil transport project. The US supports the Baku-Ceyhan route and multiple routes that avoid Iran. Since the merger of Amoco and British Petroleum (BP), which does a considerable amount of oil exploration in the Caspian, the US may be warming towards BP's preferences. This aspect has not been thoroughly examined in the pipeline context.

Georgia-Abkhazia Take Steps Toward Peace

· Georgian Minister of State Vazha LORDKIPANIDZE

and a government delegation held talks with the Abkhaz leadership in Sukhumi on Thursday. Abkhaz President Vladislav ARDZINBA said the talks focused on defusing tensions. Georgian and Abkhaz interior and security ministers signed a protocol on the disengagement of forces along the Inguri River which divides Abkhazia from Georgia. A meeting between Georgian President Eduard SHEVARDNADZE and ARDZINBA is expected in the future.

The United Nations Security Council's foreign ministers have expressed support for the efforts of the Council and UN Secretary General Kofi ANNAN finding ways to settle the Georgian-Abkhazian conflict. They called on Georgia and Abkhazia to find solutions to key problems in the conflict.

Rus-Armenia Exercises Concerns Azerbaijan

· Russian and Armenian armies held joint tactical maneuvers on Thursday in Armavir region, western Armenia. Taking part in the maneuvers were units from the Russian military base in Armenia, deployed there in keeping with an agreement concluded between the governments of the two countries. They practiced defense actions of a motorized infantry unit, repulsion of an, "enemy offensive and counter-attack to regain lost territory."

Azeri State Counselor for Foreign Policy Vafa GULIZADEV said that these military exercises concern him and, "this concern is explained by the fact that the joint Rus-Armenian exercises are bound to increase the combat capacity of the Armenian armed forces, with which Azerbaijan is practically at war." He found it, "disturbing that Russia, which is Co-Chairman of the OSCE Minsk Group for Nagorno-Karabakh, has at the same time become Armenia's military ally." Armenian Defense Minister Vazgen SARGSIAN and Lieutenant-General Vladimir ANDREEV said that such concerns are unfounded and that the exercises do not have "any hidden intent." GULIZADEV feels this alliance is extremely undesirable at the time when the Armenian-Azerbaijan conflict remains unsettled.

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