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

Friday, September 4, 1998

Russian Federation

Politics

Vote On Chernomyrdin Delayed

· The Russian State Duma today voted 294 to 51 with three abstentions to postpone the second attempt to confirm Viktor CHERNOMYRDIN as Prime Minister until Monday, allowing Russian President Boris YELTSIN time to hold more consultations with the opposition. Last Monday, the Duma overwhelmingly rejected CHERNOMYRDIN and looked set for a repeat vote today, despite YELTSIN's bid on Thursday to re-open negotiation talks with the opposition on a political power sharing agreement. Communist party leader Gennady ZYUGANOV said he had no objection to postponing the vote, but stressed he has no intentions of signing any political pacts with YELTSIN. "We are not going to review any agreements on Monday or sign anything. It's completely pointless." He added that Communist members are resolved to hold an open vote on Monday, a move which will increase party discipline. ZYUGANOV said his party will not vote for CHERNOMYRDIN because they believe he created many of the current problems.

Federation Council Backs Chernomyrdin

· The Federation Council today expressed support for the candidacy of Viktor CHERNOMYRDIN for Prime Minister in a vote of 91 to 17 with six abstaining, after CHERNOMYRDIN presented a plan for to save the economy. CHERNOMYRDIN is calling for an "economic dictatorship" to be implemented in January 1999. He said, "The choice is—either the abyss of hyperinflation or the mobilization of control over the economy." He said he would back the ruble by gold and foreign currency reserves under a proposed currency board, give "absolute priority" to domestic goods and services, pay soldiers, pensioners, and workers by the end of the year, and close

down inefficient businesses. He would also work on firing dishonest managers and officials and reducing taxes to a flat tax of 20 percent. CHERNOMYRDIN also said it would be necessary to inject rubles into the economy. "I stress the printing of money would be controlled." He added, "The country is in a critical state, and we must increase the Central Bank reserves." He called for the Federation Council to support these reforms saying, "It may be our last chance to build a normal economy in Russia. Our actions will be unpopular and we will be attacked by everyone. But allow us to do something which would move the country away from the borderline between life and death."

Economy

Is A Currency Board A Viable Solution?

· Russia's acting Prime Minister Viktor CHERNOMYRDIN told the Federation Council that a currency board is being set up to help stabilize the ruble. A currency board allows only as much money to circulate as can be backed up with the hard currency reserves of the state at a fixed exchange rate. With the currency board, authorities give up control of monetary policy, such as setting the rates of interest or exchange, and are prevented from printing money at will. However, CHERNOMYRDIN admitted the government would have to begin a "controlled emission," printing rubles to cover the government's immediate wage and pension debts to the population. Central Bank chief Sergei DUBININ said the

Today's News Highlights

Russia

Oil Prices Reach $13+/Barrel

Rus Send Specialist To Japan

Gazprom Ready For Winter

European Republics

Lukashenko To Skip CIS Forum

Lith. Host Euro-Atlantic Integ.

Kiev Sets New Currency Band

South Caucasus & Central Asia

Abkhaz Considers Pipeline

Azeri To Monopolize Drilling

Politics-Economics-Business

Page

Friday

September 4, 1998

Intercon's Daily

formation of a currency board is one option to end Russia's financial crisis, but that it needed political will, "We need to find our own way and our own version and the move to what is called a currency board is one of a number of strong measures. These are tough steps...but they may promise success, if there is real political will to carry out this plan to the end without deviations," DUBININ said. Former Argentine Economics Minister Domingo CAVALLO, who was invited to advise acting Deputy Prime Minister Boris FYODOROV and his team on Russia's financial crisis, agrees. He said that Russia must swiftly introduce a radical financial stabilization program to prevent the economy from plunging into hyperinflation. CAVALLO used a currency board in 1991 to stave off Argentina's hyperinflation. He said that FYODOROV's team, "If they decide to implement a monetary reform like the one we implemented in Argentina, they have the technical capacity to do it," the Financial Times reported. He says that the big question is whether Russia's leaders, who have been weakened by the political crisis, will summon political will to pursue difficult reforms. He noted that it is critical for Russia to implement the currency board and serious tax reforms simultaneously. Western analysts are skeptical that a system will work, if it is put in place. Richard GRAY, an economist for emerging markets at Bank of America in London, said, "CHERNOMYRDIN is trying to throw out pieces of information...But you've got to back a currency board with reserves, and where those reserves are going to come from is the missing link." CAVALLO believes, "The only way to produce stabilization is with some support from the International Monetary Fund and the G-7." The foreign ministers of the G-7 plus Russia group of industrialized countries are scheduled to meet in New York on September 24th to discuss the impact of the Russian financial crisis on the world economy. Russia's crisis is also expected to dominate the October 3rd meeting in Washington of the G-7 finance ministers and heads of central banks. This meeting will be followed by an annual series of consultations of the International Monetary Fund and the World Bank.

Oil Prices Reach Above $13 per Barrel

· Oil prices appear to be recovering as concerns grow over the potential of long disruptions of Russian supplies. The benchmark Brent burst above $13 a barrel Thursday for the first time in a month, trading

at $13.01 and closing at $13.44 per barrel for October deliveries. Wednesday's close was $12.46 per barrel. Supplies from Russia, one of the world's largest oil producers, specifically from its Black Sea and Baltic ports have been severely restricted. These restrictions are the result of the banking crisis, which has prevented lifters from getting money to pay customs duties. Russia is also a large supplier of oil products, such as gas oil and fuel oil. A global stock glut built up early this year as Asian demand fell away has been stifling any upturn, despite some 3 million barrels per day of producer cuts aimed at re-balancing the market.

Ruble = 12.8198/$1.00 (NY rate)

Ruble = 16.99/$1.00 (CB rate)

Apr May Jun Jul Aug Sep

Business

Russian Vogue Launching Ill-timed

· Conde Nast last week launched the inopportune debut edition of Russian Vogue, with a price per issue equivalent to approximately $3.50. Due to the economic and political crisis, it tactfully canceled a gala for 400 scheduled for September 10th in the National Historical Museum on Red Square. International chief for Conde Nast, a unit of Advance Publications Inc., Jonathan NEWHOUSE said, "I don't have a crystal ball and we are in a crisis, but Russia has been through worse. The population is highly educated, rich in cultural tradition and the women there appreciate and understand beauty. We are completely committed to publishing Vogue in Russia," The Wall Street Journal reported. Conde

When you need to know it as it happens

Politics-Economics-Business

Page

Friday

September 4, 1998

Intercon's Daily

Nast executives hope that the beauty and fantasy of Vogue's fashions will prove uplifting. Vogue even has a back up plan if the economy worsens. They say that in addition to altering editorial content they will, "show readers how to use ingenuity and taste to put things together. There is always the niche in the life of any society for the beautiful things," Russian Vogue's editor in chief Aliona DOLETSKAYA said. However, Conde Nast may want to take a lesson from its main competitor Hearst Corp., which through a joint venture publishes Russian editions of Cosmopolitan, Good Housekeeping, Marie Claire, and Harper's Bazzare magazines. In Russia, distributors not the magazine dictate how many magazines are shipped. Due to the economic hardship, Russian distributors are already hinting they may scale back orders. Advertisers, like L'Oreal, have canceled future advertising in Hearst publications because the are experiencing difficulty importing their products into Russia. Conde Nast's hope of bringing beauty, color, and happiness to a drab and depressed country in crisis may in reality be ridiculous as Russia's are forced to stash their life's savings into their mattresses and not frivolous fashion and beauty products.

Banking Specialist Leave For Training in Japan

· Seventeen Russian specialists from the banking system, industrial and trading enterprises of Khabarovsk Territory left Thursday to attend a three week advanced training course in Japan. Five of them will stay in Tokyo to familiarize themselves with Japan's financial system, the activities of banks and the Japanese securities market while another five trainees from the Amur area will take an advanced training course on marketing. Japan's Consul-General in Khabarovsk Toshimitsu MORI emphasized that Japan, "makes efforts to promote success of economic reforms in Russia."

Gas To Be Supplied Through The Winter

· Head of Russia's gas giant Gazprom Rem VYAKHIREV said on Thursday that his company was ready to fully satisfy Russia's gas demands in the coming autumn and winter. "Gazprom has enough gas supplies for that," VYAKHIREV said, adding that despite an adverse financial situation in the country there will be no problems with supplies to consumers and electric power stations. VYAKHIREV said the company was facing the task of making preparations

for the coming winter season. Foodstuffs must be brought to the extreme north region, which accounts for 90 percent of Russia's gas production. The gas chief pledged that despite difficulties, the company will do all possible to provide normal working conditions for its staffers.

European Republics

Lukashenko Will Not Attend CIS Summit

· Belarus President Alexander LUKASHENKO will miss the summit of five Commonwealth of Independent States (CIS) heads of state scheduled to take place in Kazakhstan on September 8th through the 10th. He said that there will be no progress regarding the creation of a single economic space. "The main reason why I am not going to attend is that the major agreement concerning the single economic space has not reached consensus among the states. There are no guarantees that a decision on the issue will be made at the meeting," LUKASHENKO said on Thursday. The summit was to be attended by heads of state and government of Belarus, Russia, Kyrgyzstan, Tajikistan and Kazakhstan. LUKASHENKO instead proposes that it would be appropriate to hold a meeting of prime ministers first, and then later the heads of state could gather two weeks to make the final decision.

Vilnius Hosts Euro-Atlantic Integration Forum

· An international conference on Euro-Atlantic integration opened in Vilnius on Thursday. Attending are over 100 politicians from 20 counties including Russia, Belarus, and Ukraine, as well as NATO, European Union (EU), and Western European Union officials. Lithuanian President Valdas ADAMKUS and his Polish counterpart Alexander KWASNIEWSKI said at the beginning of the forum that only membership of NATO and the EU could guarantee the security of their countries, the region, and entire Europe. Poland's joining NATO will not be aimed against any other countries including Russia, KWASNIEWSKI said, adding that there would be no stable Europe without Russia's involvement in integration processes. In 1997, a conference was held in Vilnius on good-neighborly relations as a key factor in achieving security. It was attended by 12 eastern and central European nations.

Ukraine Shuts Down Currency Market

· Today, Ukraine shut down dollar trading on its

When you need to know it as it happens

Politics-Economics-Business

Page

Friday

September 4, 1998

Intercon's Daily

Interbank Currency Exchange market after the gryvnia fell against the dollar. The gryvnias was fixed at 2.2500 per dollar today. In the wake of the Russian ruble's collapse, the Ukrainian currency has been supported by the Ukrainian Central Bank. The Central Bank has moved to suspend trading to save its currency reserves, which have dropped to $800 million from $950 million to $960 million on August 28th, according to Central Bank chairman Viktor YUSHCHENKO. Ukraine's deputy prime minister in charge of economic reform Sergei TYHYPKO set a new gryvnia trading band at 2.50 to 3.50 per dollar, from 1.80 to 2.25 gryvnias per dollar, effective September 5th. Chief currency dealer at First Ukrainian International Bank Yuri SAKHAROV said, "This is a devaluation, it is obvious...it's the wrong step as we cannot support a new trading band as the interbank rate will soar, particularly after today's new trading band announcement." The new trading band allows the dollar to appreciate a further 55.5 percent against the gryvnia.

Meanwhile, Ukraine is anxiously waiting for word from the International Monetary Fund's (IMF) executive board on whether it has secured a $2.2 billion three-year loan. A first installment of $220 million is expected to be approved today.

South Caucasus & Central Asia

Abkhazia Interested In Oil Pipeline?

· The Abkhaz government delegation to the Coordinating Council, meeting in Sukhumi Wednesday, indicated that the breakaway republic's leadership is interested in the proposed construction of an oil export pipeline linking Russia's Black Sea terminal of Novorossiisk with the Georgian port of Supsa, RFE\RL Newsline reported. The Abkhaz say that construction of the pipeline would contribute substantially to restoring the region's economy and reducing unemployment. But Georgian presidential adviser Levan ALEKSIDZE Thursday said that talks on economic reconstruction in Abkhazia should be

shelved until the ethnic Georgians forced to flee fighting in Abkhazia in 1992-1993 and in May 1998 have been allowed to return to their homes. Comment: The ruble crisis is indeed affecting the economic situation in Abkhazia. The Abkhaz have refused to use the Georgian lari for their currency, and many are now scrambling to convert ruble to lari in order to shelter themselves from devaluation and the inflationary cycle. It is interesting to note that the current financial turmoil in Russian may provide an opening for Abkhazia and Georgia to move the resolution process along. Georgia remains insulated from the financial crisis in Moscow because of low bilateral trade. It should be noted that the principle means for commerce in the Soviet days were through railways and roads running from Sochi through Abkhazia. This pipeline proposal underlines the importance of restoring Georgia's territorial integrity.

Azeri To Continue Drilling

· President of the State Oil Company of Azerbaijan Natik ALIYEV said Azerbaijan plans to restore its monopoly of 50 years for prospecting and exploratory drilling in the Caspian Sea. On Wednesday he attended a ceremony of launching the semi-submerged drilling platform Shelf-5. The platform is second of 11 floating plants that are used by the State Oil Company in the development of Caspian offshore oil fields. Shelf-5 was modernized by Baku's club of users of drilling platforms which comprises the Caspian International Oil Company, North Apsheron Operational Company, Britsh Petroleum (BP) Exploration, and Azerbaijan International Operational Company (AIOC). All are partners of the State Oil Company in four energy projects in Azerbaijan's sector of the Caspian Sea. The platform was put in operation after renovation which cost $210 million.

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