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

Tuesday, September 29, 1998

Russian Federation

Politics

Who Is In Charge Of Forming A Cabinet?

· While the Russian constitution says that it is the responsibility of the Prime Minister to present a Cabinet proposal to the Russian President, there is cause for concern that Yevgeny PRIMAKOV does not have control over his Cabinet's make-up. Since he won confirmation as the compromise candidate for prime minister, PRIMAKOV has had to deal with appointments and resignations of finicky opposition members and trying to find a balance of political factions. Tribuna, a newspaper financed by Gazprom, today characterized the PRIMAKOV cabinet as "chaotic." It said that part of the reason why the Cabinet is dysfunctional is because certain Cabinet officials have been spending time lobbying for job for their friends and "torpedoing" positions for their enemies, including former deputy prime minister Alexander SHOKHIN and Deputy Prime Minister Yuri MASLYUKOV. Today, MASLYUKOV presented parliamentarian Georgy BOOS to the staff of Russia's Tax Service as their new chief. BOOS was considered for the appointment two weeks ago. Since the removal of tough tax chief Boris FYODOROV, the position remains vacant. A Kremlin spokesman said he was not aware of any decree from YELTSIN appointing BOOS, who has no experience in the government. On Monday, first deputy prime minister Vadim GUSTOV claimed that the government formation had been completed. He added that YELTSIN is expected to sign a decree appointing Valery KIRPICHNIKOV minister in charge of regional policy. KIRPICHNIKOV is the vice-governor of the Leningrad region and also president of the Union of Russian Cities. This also has not been confirmed by the Kremlin. Comment: As the new cabinet make-up shows a shift from reformer market oriented policy to socialistic Soviet era ideals, so too has the process

by which the Russian Cabinet is formed. It appears that crony capitalism has dropped the capitalism and is returning to the ways of the past.

Federal Securities Commission chairman Dmitry VASILYEV said his resignation plea handed in to President Boris YELTSIN last Friday has not been granted yet. VASILYEV declined to name his possible successor, but said he would like to be replaced to a person who did not vote for the restriction of the rights of foreign investors who have shares of the United Energy System of Russia and who would seek to protect the interests of all investors alike.

Primakvo Meets Regional Leaders

· Russian Prime Minister Yevgeny PRIMAKOV met with Russian regional governors to discuss the affect of the financial and economic crisis on Russia's regions. The regional leaders stressed the need for the center to give more attention to the interests and needs of the provinces. The regional leaders are mainly concerned about budgetary relations with Moscow. The Central Russian Association leader, governor of Yaroslavl Anatoly LISITSYN called for removing petty financial regimentation imposed by the Kremlin and letting the provinces to show more initiative in the sphere of financial interaction. He also urged a revision of approaches to the tax collection, which would facilitate the payment of wage and pension areas in the regions. Many regional leaders insist on preserving a single economic space.

PRIMAKOV said the, "government should prepare a

Today's News Highlights

Russia

Gov't Denies Criticisms

LUKoil-Romanian Car Oil Co.

Rosneft Loses Court Appeal

European Republics

Rius Delegation In Ukraine

South Caucasus & Central Asia

Bomb Explodes In Tblisi

NATO's Solana In Georgia

Georgia-Armenia Sign Agrmts.

US Pulls Out Of Tajik Embassy

Politics-Economics-Business

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Tuesday

September 29, 1998

Intercon's Daily

new concept of the regional and national policy" which he said should seek, "development of regions and preservation of the integrity of the state." PRIMAKOV noted that the crisis had badly affected tax collection, with "only half of taxes planned by the budget has been collected in September." He said the measures envisioned stabilizing the ruble rate, preventing illegal capital transfer abroad, rehabilitating the banking system, attracting private savings into operation, reforming the tax system and measures for social security of the population. PRIMAKOV added that proceeds from the planned monopoly of the state on alcohol production and sales, "will be divided practically equally between the federal center and local budgets....however, the whole country must know that all obligations of regions, including of paying wages to [budget-funded organizations] and pensions must be meticulously met." Regarding food supplies, he said that railway rates on potato, fruit and vegetable shipments will be reduced 50 percent in October. PRIMAKOV said regional administrations could participate in sell-offs of enterprises with government stakes. He said Russia has 2,500 enterprises with government holdings. Many are loss-making and heading for bankruptcies.

Economy

Ruble = 15.99/$1.00 (NY rate)

Ruble =15.9932/$1.00 (CB rate)

Ruble = 16.06|16.10/$1.00 (buy|sell rates)

Government Denies Vasilyev's Criticisms

· Following his resignation, Federal Securities Commission chairman Dmitry VASILYEV deeply criticized the new government and its failure to revive the banking sector. He claimed that the government is not distinguishing between banks which are working and those that have failed, and instead is choosing favorites to back. He said that mistakes in the Cabinet are, "making financial and political catastrophe inevitable." The new economic leadership, VASILYEV warns is a, "violation of the principles of market economy and of regression of the economy to the closing years of the GORBACHEV period." He said that Central Bank chairman Viktor GERASHCHENKO is turning the Central Bank into a creditor to industry and will recklessly print money as a solution to the nation's financial crisis. Dan WOLFE of the Troika Dialog banking group also believes that GERASHCHENKO will repeat the

same mistakes he made in the early 1990's of printing too much money.

Prime Minister Yevgeny PRIMAKOV's press secretary Igor SHCHYOGOLEV said, "The accusations of attempts of nationalization and of backing especially large banks do not correspond to the reality. The Russian government backs banks regardless of their name or composition of owners, backs the whole banking system and all banks which open their files." GERASHCHENKO said, "The current economic situation does not allow us to say that all 100 percent of deposits in Russian banks will be saved." SHCHYOGOLEV said the accusation of bias made by VASILYEV were underlined by, "a lack of knowledge of the real state of affairs."

Government Reps. To Meet With Foreign Banks

· Russian Finance Minister Mikhail ZADORNOV said that a meeting with investor holders of government bonds, known as GKO and OFZ, will be held this evening. The government representatives of the official working group for talks with investors was formed on Saturday by Prime Minister Yevgeny PRIMAKOV. The group headed by Economics Minister Andrei SHAPOVALYANTS and ZADORNOV, includes ministers, government representatives, and Central Bank officials. The government will offer them a plan for reorganizing securities. ZADORNOV said, "these will be official proposals by the government and the Central Bank to investors." He stated that it is too early to give details for the debt restructuring of GKO and OFZ. The government suggests that only the general framework of the plan has been worked out and that details will be filled in during negotiations with investors. The Minister noted that talks would be held with all investors and with all Russian and Western government bond holders, and that there would be no infringement on the rights of investors. "There will be no discrimination. We shall offer all investors similar instruments for reorganizing government securities at their choice," ZADORNOV emphasized.

Business

LUKoil Creates Car Oil Company In Romania

· Russian oil company LUKoil Saturday laid the cornerstone for its first car oil company in Romania, which will be the biggest of its kind in Central and Eastern Europe. The company, as a new unit of the

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Petrotel Refinery purchased by LUKoil, is estimated to cost about $4 million and will be operational in six months. Romanian President Emil CONSTANTINESCU said that LUKoil had brought, "not just money but also the wish to be at the top in its field." LUKoil General Manager Vagit ALEKPEROV said the ceremony marked the beginning of a unique project since his company was the first Russian private company to invest in Romania. He highlighted the good relations between Russia and Romania in the field of oil. CONSTANTINESCU said that LUKoil has rapidly modernized the Romanian refinery with high-tech devices. LUKoil bought the Petrotel Refinery, upgraded it, and rehired 3,000 Romanian workers, keeping the Romanian management, the President added. In February, LUKoil purchased the majority share package of Petrotel with an investment of $300 million. ALEKPEROV said that LUKoil will continue to invest in Romania by setting up a Black Sea distribution center for its products in Bucharest.

Rosneft Loses Appeal of Purneft Stakes

· Russian oil company Rosneft on Monday said its appeal to reverse the seizure by creditor of its Purneftegaz subsidiaries, which later sold for $10 million, failed. A Rosneft spokesman said that the Moscow Arbitration Court rejected Rosneft's suit to stop the seizure of 38 percent of Purneft, 51 percent of voting shares. According to Rosneft estimates, the stake was worth $400 million to $500 million. The spokesman said, "The Moscow Arbitration Court ruled that the action of the bailiff was legal and the seizure of packet of shares of Purneftegaz was made in accordance to the law," adding that Rosneft would again appeal the ruling. The Purneft shares were seized in June for Rosneft debts, including 34.5 million rubles ($2 million) to MAPO-Bank and 1.29 million rubles to Mestbank.

Tuesday Tid-Bits

Lukashenko Awards Cars For Good Crops

· Belarus President Alexander LUKASHENKO has awarded new Lada cars for the nation's 12 most successful harvest-combine operators, six new cars to collective farm managers, and six regional leaders in Nyasvizh. LUKASHENKO told recipients at the end of summer harvest celebration, "You saved the country. You secured its security, at a minimum, for

the next two to three years," RFE\RL Newsline reported. On a surprise inspection of farms in Minsk and Vitsebsk Oblasts, LUKASHENKO expressed his dissatisfaction with the, "quality of land cultivation and the situation of farms and machinery pools." Maybe instead of giving cars as awards for crops, LUKASHENKO should focus those finances toward modern farm equipment.

European Republics

Rus-Ukraine To Improve Economic Relations

· Speaker of the Russian State Duma Gennady SELEZNYOV led a delegation of deputies of all factions to Ukraine. Speaking to the Ukrainian parliament SELEZNYOV said that, "Ukraine and Russia are linked by their historic past which cannot be forgotten and cannot be disregarded...Russia views Ukraine as an independent sovereign state, playing a remarkable role in Europe." He urged the parliamentarians to "synchronize the legislative base" to improve trade and economic relations between Ukraine and Russia. SELEZNYOV said that Ukraine should not be just an observer to the Inter-Parliamentary Assembly but a permanent member, adding that Ukraine should also join the Rus-Belarus Union. According to SELEZNYOV, the current, "economic, financial and political crisis in Russia is crippling" the economies of all the CIS countries, Ukraine included. If a comprehensive Ukrainian-Russian treaty on friendship, cooperation and partnership came into force, many economic and political problems existing in relations between the two countries would be settled, Chairman of the Ukrainian parliament Alexander TKACHENKO said Monday. The Ukrainian Foreign Ministry will work for bills on division of the Black Sea Fleet with Russia to get through the Ukrainian parliament, Foreign Minister Boris TARASYUK said after meeting with SELEZNYOV. TARASYUK said the Black Sea Fleet accord met most of opposition from Communists in the Ukrainian parliament. The Russian delegation is to meet with Ukrainian President Leonid KUCHMA, Prime Minister Valery PUSTOVOITENKO, as well as parliament members.

South Caucasus & Central Asia

Bomb In Tblisi Linked To Hotel Dispute

· A bomb went off in the center of Tblisi early this morning within 100 meters of the Georgian parlia

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ment building and 200 meters from Georgian President Eduard SHEVARDNADZE's office. The blast shattered window glasses of adjacent buildings, but no one was injured. While many have speculated that the explosion is related to the visit of NATO Secretary-General Javier SOLANA or the fifth anniversary of the fall of the Abkhaz capitol Sukhumi, Intercon sources explain that the explosion was related to a dispute over the building of the Tblisi Hotel. The dispute involves ownership objections, the rights of people living in the area, and a squabble over the construction. The project is financed by American Bob WALSH of Bob Walsh Enterprises. The police are withholding any comment as an investigation is still in progress.

NATO To Visit Georgia, Armenia, Azerbaijan

· NATO Secretary-General Javier SOLANA arrived in Georgia today for meetings with Georgian President Eduard SHEVARDNADZE, Foreign Minister Irakly MENAGARISHVILI, Defense Minister David TEVZADZE, State Minister Vazha LORDKIPANIDZE, and Parliamentary Speaker Zurab ZHVANIA. Press secretary of the Georgian president Vakhtang ABASHIDZE said that SOLANA was expected to discuss boosting their participation in the Partnership For Peace program of NATO. Before his trip, SOLANA said the purpose of his visit is to stress NATO's interest in the cooperation with the regional countries and establish a close partnership between NATO and the states. After leaving Georgia, SOLANA will continue on Wednesday to Baku, Azerbaijan.

Georgia-Armenia Sign Agreements

· Georgian State Minister Vazha LORDKIPANIDZE and Armenian Prime Minister Armen DARBINYAN signed several economic agreements over a two day visit in Yerevan this past weekend. One agreement levies indirect taxes at the place of destination of the goods, creating more favorable conditions for economic managers and entrepreneurs of the two countries in mutual trading. Another accord calls for the protection of property rights of Georgian and Armenian citizens engaged in business with each other.

The new quality of relations between the two Caucasus nations was described by DARBINYAN as, "exceptionally important." The two will also work on resolving questions about the mutual application of the free trade regimen with respect to the goods and services produced in their nations. LORDKIPANIDZE said, "We value highly prospects for regional cooperation, the possibility of attracting international organizations to the financing of specific projects which will be of significance for the development of our economies." Bilateral trade only totaled $16 million in the first eight months of this year. LORDKIPANIDZE expressed satisfaction with the Armenian Prime Minister's participation in the Baku forum within the framework of the EU TRACEKA program. Armenia has already started supplying Georgia with the first 30 megawatt of electric energy of an agreement for supplies throughout the winter months. Armenian Energy Minister Gagik MARTIROSYAN said that both countries will benefit technically, financially and economically from this energy deal. The Georgian State Minister said the plans for cooperation in the energy field between the two Caucasian nations had promising prospects and expressed gratitude to the Armenian energy sector for the beginning of power supplies to his country, which has been suffering from power failures.

US Withdraws From Tajik Embassy

· The US State Department Friday instructed American diplomats to leave the Central Asian republic of Tajikistan because of security concerns following the bombing of US embassies in East Africa. The move apparently comes after a security review of the embassy in Dushanbe, which is located in a hotel and is difficult to protect against a possible terrorist attack. The Tajik Foreign Ministry expressed bewilderment and regret over the US withdrawal. According to a ministry statement, "The decision was announces at a time when Tajikistan's government and local authorities had taken more measures to ensure the security of the US embassy in Dushanbe." The Tajik ministry hopes the US will reconsider its decision and return to Dushanbe.

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

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