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

Thursday, September 3, 1998

Russian Federation

Politics

Yeltsin Tries To Revive Political Power Pact

· Kremlin chief Valentin YUMASHEV told Russian State Duma speaker Gennady SELEZNYOV that Russian President Boris YELTSIN wants to revive negotiations with his enemies in the Duma to reach a political agreement and convince them to approve his candidate for prime minister, Viktor CHERNOMYRDIN. YUMASHEV said the text of a proposed agreement, which broke down on Sunday, with minor changes would be presented to the Duma today. SELEZNYOV gave no details as to the new changes designed to persuade the Communists to drop its opposition to CHERNOMYRDIN in Friday's vote. However, a Kremlin source said that the pact offers concessions to parliament in exchange for the approval of CHERNOMYRDIN. On Sunday, Communist leader Gennady ZYUGANOV refused to sign the political pact because there were no guarantees that YELTSIN would follow through with the agreement. If the Duma fails to confirm CHERNOMYRDIN three times, YELTSIN has the power to dissolve the Duma. ZYUGANOV said that dissolution could provoke a civil war. He told the US television network ABC, "Everything that's wrong with our country in the minds of our [people] is connected with YELTSIN and CHERNOMYRDIN."

Berezovsky Backs Away From Yeltsin

· Influential business tycoon and executive secretary of the Commonwealth of Independent States, Boris BEREZOVSKY, who spearheaded efforts to bring back Viktor CHERNOMYRDIN as prime minister, has privately broached Russian President Boris YELTSIN on the issue of resigning, The Washington Post reported. BEREZOVSKY previously served as deputy secretary of the Kremlin's Security Council and has close ties with YELTSIN's daughter Tatyana

DYACHENKO. BEREZOVSKY said, "If there is not strong authority, Boris [YELTSIN] will have to resign before his term expires to clear the field for the creation of such strong authority." He also said that if there is a strong figure in control, this person could, "tolerate the fact that the president cannot participate in the fast-moving events as he should." BEREZOVSKY did not explicitly say that CHERNOMYRDIN is his idea of this, "strong authority." BEREZOVSKY, always keeping his hands in the political sphere, has been backing both Moscow Mayor Yuri LUZHKOV and Krasnoyarsk Governor Alexander LEBED in their candidacy for Presidential elections in 2000. However, elections may be called earlier, if YELTSIN resigns.

Should Yeltsin resign?

66 percent said yes

Who is to blame for the ecnomic crisis?

67 percent blame YELTSIN

34 percent blame CHERNOMYRDIN

10 percent blame Sergei KIRIYENKO

*Russia's Public Opinion Foundation in a poll of 1,500 Russians

Economy

Fyodorov Presses "Argentine Model"

· Acting Deputy Prime Minister in charge of Russia's economic policy Boris FYO-DOROV presented a report to the Russian government today behind closed doors. According to the sources, acting Prime Minister Viktor CHERNOMYR

Today's News Highlights

Russia

CB Bond Sale Fails

Boeing Committed To Russia

Siberian Mayor Survives Attack

European Republics

Chirac On Ukrainian Reforms

South Caucasus & Central Asia

Lugar On US-Georgia Relations

Azeri-Franco Trade Agreement

Kyrgyz Constitutional Vote

Politics-Economics-Business

Page

Thursday

September 3, 1998

Intercon's Daily

DIN gave some instructions on further actions of the group. On Wednesday, FYODOROV said that Russia is at a clear crossroads. The nation must choose whether print rubles spurring inflation or tackle tough reforms to pull the country out of its deepening financial crisis. FYODOROV believes Russia should adopt the "Argentine model" of recovery, instituting a currency board to restore confidence. He said, "Runaway inflation never led any country to prosperity. In my view, the Argentine model with certain modifications is the only radical way out of the free fall," the Financial Times quoted FYODOROV as saying. A currency board takes the power of monetary policy out of the government's hands and automatically sets interest rates according to the level of foreign currency reserves it holds at a fixed exchanged rate. He added that the financial crisis and banking paralysis has undermined tax collections. In August, tax collections fell to 11.2 billion rubles ($83 million) which is 2 billion rubles short of planned targets. Russia's gas giant Gazprom turned over approximately half a billion rubles less than expected for the month of August.

CB Requires Six Banks To Transfer Accts.

· The Russian Central Bank has forbidden six commercial banks to carry out operations with private deposits opened before September 1, effective today. The six banks are SBS-Agro, Most-Bank, Menatep, Inkombank, Promstroibank and Mosbusinessbank. The decision is aimed at protecting private deposits in commercial banks. The Central Bank also ordered these banks to sign agreements with the Savings Bank, Sberbank, on the transfer of private deposits. All the six banks have large private deposits. A depositor can choose whether to transfer his or her account to Sberbank or whether to leave it in the original bank under the conditions of the deposition agreement. The currency accounts transferred to Sberbank will be converted into rubles at the September 1 rate and are guaranteed by the government.

The commercial banks have criticized the Central Bank's transfer plan saying the decision will hurt commercial banks and cause depositors to lose part of their savings. President of the Bank Association Sergei YEGOROV said the decision will increase jitters or account holders. He noted that more than 15 percent of private deposits at commercial banks

already have been withdrawn during the financial crisis. While YEGOROV agrees that the Central Bank guarantees will help restore the confidence of depositors, he said commercial banks need depositors to survive. He also said that depositors with foreign accounts will be hurt by the transfer, since the Sberbank will pay these holders only in rubles at the official rate of 9.33 ruble to the dollar.

Central Bank Bond Sale Fails

· A sale of one billion rubles in Central Bank bonds on the secondary market failed today. Head of the Central Bank Open Securities Market Department Konstantin KORISCHENKO said the 60 percent to 70 percent yields offered by the Central Bank were too low to attract commercial bank interest. He added that the Central Bank has no intention of substantially increasing the yield on the bonds. "Increasing the rate would serve only to strengthen negative trends on the Russian financial market. Traders must cool off and realize that they can't live on speculative [foreign exchange] deals alone," the Dow Jones Newswire reported. This failure to find any buyers comes one day after the Finance Ministry was forced to declare an auction for short-term bonds null and void. The Finance Ministry refused to admit why the sale was declared void, but it appears that the bids submitted were extremely aggressive. The government had offered 200 percent annual interest, but the market was expecting much higher rates of return. Prices ranged between 79.41 and 92.88 of the bond's face value. KORISCHENKO noted that 42 banks have signed agreements with the Central Bank to trade bonds.

Ruble = 12.819/$1.00 (NY rate)

Ruble = 13.4608/$1.00 (CB rate)

Ruble = 16|22/$1.00 (buy|sell rates)

Business

Lukoil Increases Crude Output

· Russia's biggest oil producing company LUKoil on Wednesday announced that it increased its consolidated crude output to 31.7 million tons in the first half of 1998 from 30.51 million tons in January to June of 1997. LUKoil Vice President Leonid FEDUN said that this figure includes 27.81 million tons produced by LUKoil subsidiaries in Russia, 0.62 million tons produced abroad, and 3.27 million

When you need to know it as it happens

Politics-Economics-Business

Page

Thrusday

September 3, 1998

Intercon's Daily

tons extracted by joint ventures. The oil and gas industry in Russia is receiving a double blow of hardship due to low world oil prices and the financial crisis in Russia. FEDUN said, "Regardless of inflation, we are trying to keep the production costs at a level of 3000 rubles per ton."

Boeing Continues Committment To Russia

· The aerospace giant Boeing Company released a statement re-affirming its commitment to projects with its Russian partners amid the economic crisis. General director of Boeing's international operations Douglas DAVIDSON said, "Not only doe we not plan to reduce our staff in Russia, but we plan to increase it." He said that thousands of Russian specialists are working with Boeing, "on a spectrum of programs including the International Space Station, the Sea Launch project, development of new materials, support of Russian airliners as well as scientific research and designer activities."

Assassination Attempt On Siberian Mayor Fails

· Nizhnevartovsk Mayor Yuri TIMOSHKOV, his car driver, and bodyguard were hospitalized Wednesday when a car bomb exploded as they drove past. They are in critical condition. An investigation was immediately launched into the assassination attempt. High on the suspect list are gangs supported by various oil leaders. Deputy head of the Tyumen Oil Company (TNK) Yuri SHIRMANKIN said, "The essence of the bid to kill TIMOSHKOV is the desire of a certain group to gain influence through the mayoral post on the Nizhevartovsk budget and have an opportunity to influence oil companies here." Nizhevartovsk is home to TNK's biggest oil and gas producing unit, Nizhnevartovskneftegaz. This is the second attempt on TIMOSHKOV's life; the first was last April. TNK head Yuri VERSHININ survived a similar attack last year.

fruit." He welcomes Ukraine's goal to create strong relations with Europe. "France wants to accompany you along this path. We welcome your willingness to forge closer ties with the European Union. We understand and support with all our force your desire to tie yourself to Europe." CHIRAC noted that he has contacted Germany, the European Union, and the US on the possibility of a loan. Ukraine is expecting a decision within a few days on a $2.2 billion three-year loan from the International Monetary Fund.

Several bilateral agreement are expected to be signed concerning nuclear safety, education, and energy cooperation. During his visit, CHIRAC will meet with Ukrainian President Leonid KUCHMA, parliament speaker Alexander TKACHENKO and Prime Minister Valery PUSTOVOITENKO. CHIRAC is accompanied by French Foreign Minister Hubert VEDRINE and secretaries of state for industry and health, Christian PIERRET and Bernard KOUCHNER, who will meet with their respective counterparts. Approximately a dozen French business leaders are expected to encourage Ukraine to do more trade with France. France's investments account for only $50 million of the $2 billion of all foreign investment in Ukraine since 1991.

South Caucasus & Central Asia

Lugar On US-Georgian Relations

· US Senator Richard LUGAR of Indiana praised the Georgian President Eduard SHEVARDNADZE for leading his country towards democracy in the wake of the collapse of the Soviet Union and for developing strong ties with the US. In LUGAR's address to the President and members of the parliament late last week, he pointed out that the US has a strong interest in the development of Georgia not only for its capacity as an energy carrier on the east-west transit corridor, but also in, "the growth of democracy and a free market economy to facilitate Georgia's own development and its integration into the larger international community." He stressed that the US policy towards Georgia is different than the 19th century's Great Game and the 20th century version to use, "ideology as a pretext for invasion." He said, "The Silk Road Strategy Act, in contrast, is a testament to the idea that the Caucasus and Central Asia should constitute their own spheres of democratic and free market influence." LUGAR said

European Republics

Chirac Encourages Ukraine

· French President Jacques CHIRAC is the first president of his nation to visit Ukraine since its independence from the Soviet Union. CHIRAC said that he supports Ukraine's efforts to reform the nation's economy. "Be confident. Ukraine has a number of trumps up its sleeve. And it will still have them in the future as necessary reforms steadily bear

When you need to know it as it happens

Politics-Economics-Business

Page

Thursday

September 3, 1998

Intercon's Daily

that democracy is a prerequisite for lasting economic progress. He hopes that the Georgian-Abkhazian conflict will be resolved with the help of the UN Friends of the Secretary General, US, Russia, Germany and France through the OSCE and Minsk process. "The region as a whole must function peacefully in order to prosper as a region-wide market without trade barriers." He said the US is encouraged by SHEVARDNADZE's campaign to fight against official corruption. "Official corruption is also, quite simply, disastrous for economic growth and for an increasing standard of living for most citizens." He noted the partnership between the American Bar Association and the Georgian Judges to build a fair judicial system is another step to establishing a free, prosperous, and secure Georgia. "If you regulate your business environment to create stability and predictability, while you create a legal system able to dispense justice to resolve disputes, many more Georgians will invest their money in their country." LUGAR said that these measures—forming an economic corridor, practicing democracy, reducing corruption, and forming a sound justice system—are some of the reasons why Georgia stands out ahead of its former Soviet counterparts. He noted that further democratization and success in fiscal stabilization have led the US to increase development assistance in Georgia to $97.5 million for Fiscal Year 1998. He stressed, "Georgia is a linch-pin for progress in the entire Caucasus region."

Azeri-Franco Trade Agreement Signed In Paris

· The French Ministry of Finance on Tuesday said that France has signed a trade protection agreement with Azerbaijan. The agreement grants French investors the same rights as locals when investing in Azerbaijan. The accord is the result of the first Franco-Azeri bilateral trade commission and aims to increase French foreign investment in Azerbaijan. French investments in that country total approximately 540 million Francs, the Dow Jones Newsline reported. French companies mainly involved in the oil industry and plan to expand into food.

Western Pipeline 80 Percent Complete

· The Azerbaijan International Oil Company (AIOC) has complete more than 80 percent of the Western Route Export Pipeline, which will transport Azeri oil from Baku to the Georgian port of Supsa on the Black Sea. The AIOC is scheduled to begin pumping oil through the pipeline by the end of this year, an Azerbaijan Embassy Newsletter reported. The pipeline project employs more than 1,150 workers, 75 percent of which are Azerbaijan employees.

Kyrgyz Constitutional Referendum Set For Oct.

· Kyrgyz President Askar AKAYEV has announced that a referendum on changes to the constitution will take place sometime in October. This will be the third time in four years that a referendum has been held to change the constitution. Under the amendments to be voted on, the number of deputies in the Legislative Assembly would increase from 35 to 67 and the number of representatives in the People's Assembly would decrease from 70 to 38. Fifteen of the seats in the legislature would be given to representatives of parties that receive more than 5 percent of the vote in elections. Parliamentary candidates would be required to reside in the country and their constituency. Immunity for deputies would be limited, and greater freedom for the media guaranteed. A key provision would be the introduction of private land ownership. AKAYEV accused the parliament of dragging its feet over land legislation. He hope the introduction of private land will boost the Agricultural sector. The referendum, which will cost about 10 million soms ($500,000), infuriated members of the main assembly. Deputy Abyt IBRAIMOV called AKAYEV's move "a slap in the face" to the parliament. Deputy Daniyar USENOV noted that AKAYEV himself had said there would be no more referenda until the year 2000, RFE\RL Newsline reported.

The Daily Report on Russia and Former Soviet Republics

will not be published on September 7th

in observance of Labor Day.

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