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Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Thursday, October 1, 1998

Russian Federation


Russia To Appoint New Ambassador To US

· Russian Foreign Minister Igor IVANOV said in an interview with Nezavisimaya Gazeta said that Russian Deputy Foreign Minister Yuri USHAKOV is to be appointed as Ambassador to the US posted in Washington, DC. The Foreign Minister said that the, "Foreign Ministry is a work collective of personalities and that any reshuffle should be made with extreme care, taking into account many factors." IVANOV underlined that rotation had been perpetual the Foreign Ministry and that it was in no way connected with his coming into office. "Naturally, vacant posts have to be filled. We discuss such matters collectively. I have no people on staff either close to me or kept aloof," IVANOV said.

Nemtsov Predicts Paths For Russia

· Speaking at The next Generation: Is it on the Right Track conference sponsored by the Central Intelligence Agency and the Eurasia Group in Washington, DC, former first deputy prime minister Boris NEMTSOV presented paths for Russia to take economically and politically. First, the Central Bank could decide not to print rubles, allowing some commercial banks to go bankrupt and continue promoting privatization. In this case the ruble could remain at the exchange rate of 20 ruble to the dollar. He regard this as highly unrealistic. Second, the Central Bank could print 50 billion to 60 billion rubles over a two week period. This would spark inflation to grow at 20 percent per month. By the end of 1998 the exchange rate would be 35 rubles to the dollar, while at the end 1999 the rate could grow to 200 rubles per dollar. Inflation for 1999 could reach 700 to 800 percent. The last option would be for the Central bank to print 120 billion rubles. This is the Communist Party's approach. This would make the exchange

rate 40 rubles to the dollar and causing inflation to increase at a rate of 30 to 40 percent per month. This is unlikely. Strong social pressure will start in January and again in the Spring especially in Moscow if rising unemployment hits the growing middle class. NEMTSOV believes that Russia must develop its economic program by itself, without pressure from the International Monetary Fund.

NEMTSOV predicts that the economic crisis will cause changes in the government make-up. In one scenario Prime Minister Yevgeny PRIMAKOV could fire his dysfunctional Cabinet and appoint Yabloko leader Grigory YAVLINSKY. Another shows President Boris YELTSIN firing the entire government and appointing Moscow Mayor Yuri LUZHKOV. The last scenario assumes that large strikes will lead to impeachment of the President by the Communists in the Spring. Concerning Presidential elections in 2000, NEMTSOV predicts a run-off election between Communist Party leader Gennady ZYUGANOV and Krasnoyarsk governor Alexander LEBED or LUZHKOV. In either case, NEMTSOV believes ZYUGANOV will lose. He predicts that a democratic candidate will only be elected as president in 2004.

Luzhkov Considering Run For Presidency

· Moscow Mayor Yuri LUZHKOV, meeting in London with Britain's Labor Party, denied reports that he has announced his candidacy for President in the 2000 elections. "I have never said that I shall run for presidency in the year 2000 and I am not going to

Today's News Highlights


Caninet Considers Econ. Plan

Reaction To Printing Money

Hilton Invests In 5-Star Hotel

Trans-Sib Attracting Cargo

European Republics

Primakov Visits Belarus

Lith. Passes Capital Gains Tax

South Caucasus & Central Asia

Update on Tblisi Bombing

ADB Opens In Uzbekistan




October 1, 1998

Intercon's Daily

make such statements. However, this does not imply that I am not following the political situation in the context of the coming presidential elections. My position is that I do not want to give up Moscow. But if I notice that the contenders running for the presidency do not have the positions and views that will bring stability and prosperity to Russia, then I may throw my hat into the ring If I see that there is the right candidate I shall actively and aggressively support him in the best sense of this word," LUZHKOV said.

Other presidential candidates reacted to LUZHKOV's statement. The Communist Party said that it is prepared to rally around LUZHKOV as a candidate to form a center-left coalition. Communist leader Gennady ZYUGANOV praised LUZHKOV's achievements and voiced support for a coalition with the Moscow Mayor. Former prime minister and leader of the Our Home Is Russia movement Viktor CHERNOMYRDIN, who is a presidential hopeful, was not surprised by LUZHKOV's statement that under certain conditions he will run in the presidential elections in the year 2000. According to the former prime minister, the alliance of LUZHKOV and Communist leader ZYUGANOV, "has already formed." CHERNOMYRDIN said he was also open for all possible alliances, including with the Moscow mayor.


Ruble = 15.91/$1.00 (NY rate)

Ruble =15.9056/$1.00 (CB rate)

Economic Plan Is Nouveau Communism

· The Russian newspaper Kommersant Daily printed an unofficial copy of First Deputy Prime Minister Yuri MASLYUKOV's economic policy which is being debated by the Cabinet's inner council today. The plan defines a spending program without stating how it will obtain funding for it. It urges the nationalization of commercial banks, the creation of a government Reconstruction and Development Bank to funnel credits to the Russian industry and a large increase in the money supply. The plan calls for the Central Bank to set the ruble exchange rate on the basis of Russia's balance of payments, gold and foreign exchange reserves, and inflation. The Central Bank sets its ruble rate mostly on the basis of results of the electronic trading system of the Moscow Interbank Currency Exchange (MICEX). MASLYUKOV's proposes to raise the amount of

obligatory foreign exchange sales by exporters from 50 percent to 75 percent. Exporters would be required to sell 50 percent of foreign exchange earnings through authorized banks and 25 percent to the Central Bank. However, Central Bank chairman Viktor GERASHCHENKO disagrees with some of these proposals, denying the possibility of nationalizing the banks. "If nationalization takes place, I will not work in this system. I will retire," GERASHCHENKO said. He added that, "10-20 special banks will not solve the problem. It is dangerous even to think about this." Chief economist at MFK Renaissance brokerage firm in Moscow Roland NASH describes MASLYUKOV's plan saying, "I would not say it is a return to Soviet-style economics, but I would say it is an attempted return to something ominously similar. It is a nouveau Communist style." He said the plan aims to increase various state controls including on trade in the ruble and movement of capital. "It is a recipe for financial and economic disaster because state control has proved to fail in the past, it goes against all economic logic."

Former tax chief and deputy prime minister Boris FYODOROV said that the economic plans are sketchy at best and that in the face of the growing economic problems the government is clueless. According to FYODOROV, President Boris YELTSIN has detached himself from the economic policy and that Prime Minister Yevgeny PRIMAKOV is unable to comprehend the degree of the economic turmoil. "He was very far from the economy all of his life. I think at this stage he practically does not understand." FYODOROV urges the International Monetary Fund, World Bank, European Bank of Reconstruction and Development, and the Group of Seven nations not to provide Russia with additional aid. "Giving us drugs in the form of more money does not help Russia...Demand from Russia drastic economic reforms," The New York Times reported. He suggests that the G-7 nations should present Russia with a list of 10 steps to build a market economy and make sure they are implemented before offering billions in additional funding.

Should Russia print money?

30.7 percent said it was undesirable

20.8 percent said it should not be done under any circumstances.

When you need to know it as it happens




October 1, 1998

Intercon's Daily

Does the government need to print money to pay wage and pension arrears?

10.3 percent said yes

26.5 percent said they did not know

According to an opinion poll taken at the end of September by the Mneniye opinion polling service

Oil Transport Tariff To Triple

· Russia's Federal Energy Commission (FEC) plans to triple the fixed tariff for transporting crude oil through export pipelines in the third quarter from $.50 to $1.50 per ton. Earlier this year the fixed rate was $3 per ton. According to an FEC source, "A resolution on this has not yet been approved, but the decision has been taken in principle. The new tariff will become effective today. The increase was needed to cover the cost of maintenance, repairs of the pipeline system, and imported equipment. The hard currency portion of the tariff is paid directly to the Transeft monopoly which runs the pipeline system, while the other portion, determined by the distance transported, is paid in rubles to the budget.


Hilton International To Build A 5-Star Hotel

· The subsidiary of Britain's Ladbroke Group, which owns Hilton International, announced plans to build a five-star luxury hotel in downtown Moscow. The hotel company is betting that by the time the hotel is completed in 2001 to 2002 the time will be ripe for foreign businesses to return to Russia and invest. While these investors are fleeing the country due to the state of the economy, Hilton plans to invest $5 million in the joint venture project. The total cost of the hotel will be approximately $60 million, with some $22 million to $25 million to be funded by equity, including the $5 million from Hilton. Chairman and chief executive of the Ladbroke Group Peter GEORGE said that he realizes Russia may experience further difficulties in the years to come, but that it is important to take a long term view for investments."Our ambition is for more hotels in Moscow. We are actively examining projects which may complement this one."

Rus-Ukraine Aircraft To Receive Funding

· Russian President Boris YELTSIN on Monday signed an instruction confirming that the Rus-Ukrai

nian An-70 transport aircraft the project is, "a priority trend in the development of Russian aviation and international cooperation in the aircraft industry." YELTSIN instructed the federal government to include the An-70 project in the federal program for the development of Russian aviation, to ensure its steady financing from extra-budget sources. The President has also instructed the Russian government shortly to repay the debt from the Federal budget for the aircraft's development and testing.

Trans Siberian Rails Attract Cargo

· Secretary-General of the International Coordinating Council for Trans-Siberian Transportation Gennady FADEYEV last week said that the Trans-Siberian Railway is attracting Western transporters because its is able to transport cargo fast and at a low cost. According to FADEYEV, Russian railway workers organized for the first time this year high-speed container routes from the port of Nakhodka to the western border of Russia. Cargoes transport time can be less than two weeks or 18 to 20 days from "door to door," while the transportation of containers from Japan to Western Europe by sea takes 30 to 32 days. On the whole, Trans-Siberian transit tariffs for freight transportation are lower than sea tariffs. FADEYEV said Russian is not planning to increase tariffs until the 1999.

Meanwhile, Deputy Chief of the Omsk branch of the West Siberian railway Vladimir ARTEMCHENKO said railway has stopped handling mail vans of Russia's State Committee for Communication and Information because the postal service owes 28 million rubles to the railway. Air mail is so far delivered on time, said chief of the Omsk regional agency of the federal post service Vassily RULKOV. There is concern over the delay with the delivery of Moscow newspapers and magazines.

European Republics

Primakov Elected Head of Rus-Belarus Union

· In his first foreign trip since becoming Russian Prime Minister, Yevgeny PRIMAKOV held what has been described as pragmatic talks with Belarus President Alexander LUKASHENKO and his Belarus counterpart Sergei LING, in Minsk. PRIMAKOV told Belarussian leaders that the most important priority now is to, "exert maximum effort to implement

When you need to know it as it happens




October 1, 1998

Intercon's Daily

the decisions made earlier," and that the new Russian government would try its best to strengthen the Russia-Belarus Union. "Seeing that participation in the Union is advantageous for the two states, all other states of the Commonwealth of Independent States will become increasingly inclined to join the Union," PRIMAKOV said. The next meeting of the Executive Committee of the union is scheduled for October 16th. Under a document signed during the meeting, PRIMAKOV was appointed chairman of the Executive Committee. They named First Deputy Prime Minister Vadim GUSTOV to be his deputy. LUKASHENKO expressed the belief that the new Russian government would be able to stabilize the domestic situation. He also pledged support to Russia in overcoming the current crisis, saying that in the adverse economic situation facing both Belarus and Russia, Minsk will be coordinating with Moscow efforts aimed at resolving economic problems. Russia has agreed to be paid by Belarus for its gas debt in tractors and other goods. Belarus arrears total $220 million from $95 million in January. Belarus Deputy Prime Minister Vasily DOLGOLEV said, "We make no secret of the fact we have no hard currency. Either we pay in kind or we do not pay at all."

Lithuania Approves Capital Gains Tax

· The Lithuanian parliament on Tuesday approved a 15 percent capital gains tax to be levied on Lithuanian investors beginning January 1st, 1999. The new tax is a compromise between the parliament, which proposed a 29 percent tax, and President Vlada ADAMKUS, who backed a lower tax. In July, brokers at the local bourse briefly halted trading as a protest against the tax proposal. Brokers said it would deter locals from investing in the market. Head of Lithuanian Brokers Association Romas MATIUKAS said, "Our suggestion was that the tax should not be more than 10 percent but it's certainly better at 15 percent than at 29 percent," the Financial Times reported. Local individuals investors account for about 17 percent of all investments on the Vilnius bourse. The new law does not tax re-invested capital gains and all profits below 3,000 litas ($750).

South Caucasus & Central Asia

Update Of Tblisi Bombing

· Sources in the Georgian Security Ministry involved in the investigation of Tuesday's bombing in the center of Tblisi say that the bombing is not related to a dispute with the construction of the Tblisi Hotel as previously reported by Intercon. Sources discount the view expressed by other law enforcement entities that this was a business dispute. It appears more likely that the bomb, made up of plastic explosives, was symbolically detonated to show that such an event could happen in Tblisi. The bomb exploded in the middle of the night, ensuring no one would be injured, before NATO Secretary-General Javier SOLANA arrived for talks. An investigation is underway and a determination of responsibility for the bombing is expected in two to three weeks.

ADB Mission Opens In Uzbekistan

· The Asian Development Bank (ADB) formally opened its Uzbekistan Resident Mission in Tashkent on Monday. ADB Vice President Peter SULLIVAN said that the opening of the Mission acknowledges the importance of Uzbekistan as a development partner of the Bank. The Mission will play an important role as the first point of contact between the Government and the Bank on any problems relating to the Bank's operational program in Uzbekistan. The new vision for the Bank is to transform its role from a conventional project financier to a broad-based development institution. Policy reform, institutional strengthening and capacity building are central to this new role of the Bank. SULLIVAN held a wide-range of discussions with political leaders and senior government officials, including Uzbekistan President Islam KARIMOV, Prime Minister Utkur SULTANOV, and Deputy Prime Minister of Macroeconomics and Statistics and ADB Governor for Uzbekistan Bakhtiyor KHAMIDOV, and Chairman of the National Bank of Uzbekistan and ADB's Alternate Governor for Uzbekistan Rustam AZIMOV. The ADB's lending to Uzbekistan as of September 1998 totaled $160 million in three separate loans.

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

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When you need to know it as it happens