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, October 13, 1998

Russian Federation

Politics

Yeltsin Cuts Central Asian Trip Short

· Russian President Boris YELTSIN cut short his trip to Central Asia due to a bronchitis infection and slight fever. Initially, presidential aides suggested that YELTSIN was returning to the Kremlin because of the heightening tension in Kosovo. But presidential press secretary Dmitry YAKUSHKIN dropped the pretense, revealing that YELTSIN was following doctors' ordered to rest. He is not expected to resume work at the Kremlin before Friday. YELTSIN's trip to Uzbekistan and Kazakhstan, his first since a May trip to England, was intended to show that the President is capable of leading Russia, backfired and instead showed him physically and politically weakened. It appears YELTSIN has never fully recovered from his heart surgery in November, 1996. During his visits, YELTSIN was unsteady on his feet, often supported by his hosts, spoke in slow and exaggerated tones, suffered coughing fits, gave incoherent, confusing speeches, and painstakingly outlined each letter of his name when signing documents in Kazakhstan. He was often describe by reporters as, "pale and unsteady." Despite his health problems and calls for his resignation or a nationwide referendum, the President insists on serving out his term, which ends in 2000. The question now remains, whether the Russian nation will continue to permit such a man to rule, as its citizens fight off economic and financial collapse with little help from him, its new Prime Minister, and the government. The New York Times reported that only 2 percent of those Russians surveyed had confidence in YELTSIN's ability to govern. Many Russian newspapers have already called on Russians to act. Nezavisimaya Gazeta said his absence from the Kremlin during the current economic crisis, "amounts to a state catastrophe," and called on President YELTSIN

to immediately surrender most of his powers to Prime Minister Yevgeny PRIMAKOV.

Nine Servicemen Released From Chechnya

· After negotiations between Russian business tycoon and Executive Secretary of the Commonwealth of Independent States (CIS) Boris BEREZOVSKY and Chechen officials, eight Russian servicemen and a retired soldier were released from a Chechen prison on Sunday. The soldiers had been kidnapped earlier this year. BEREZOVSKY said the servicemen's release was secured by the Federal Security Service (FSB), Defense Ministry, and Interior Ministry.

Meanwhile, the Chechen Security Service has launched an all out search for British telephone company Granger Telecom's workers, Peter KENNEDY, Darren HICKEY, Rudolf PETSCHI, and Stanley SHAW. The workers were kidnapped on October 3rd. They were working on installing 300,000 telephone lines across Chechnya. Chechen acting Security Minister Aslambek ARSAYEV said that a thorough search is being conducted in Chechnya's mountainous regions, where hostages are usually held prisoner for ransom.

Economy

Ruble = 15.84/$1.00 (NY rate)

Ruble = 15.79/$1.00 (CB rate)

Primakov Meets With Bankers On Restructuring Scheme

· Prime Minister Yevgeny

Today's News Highlights

Russia

Gazprom To Pay Taxes In 1998

Chevron Waiting For Permit

European Republics

Ukraine Budget Deficit Figures

Estonia Not To Use IMF Loan

South Caucasus & Central Asia

Azeri Presidential Elections

Rus-Kazakh Sign Agreements

Rus-Uzbek Sign Agreements

Kyrgyz Detains Afghan Arms

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Tuesday

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PRIMAKOV, First Deputy Prime Ministers Yuri MASLYUKOV and Vadim GUSTOV, chairman of the Central Bank Viktor GERASHCHENKO and major Russian bankers, including chiefs of Sberbank, Menatep, Most-Bank, Promstroibank, Vneshekonombank, Unexim Bank and SBS-Agro, are meeting today to focus on restructuring the banking system. PRIMAKOV stressed restoring the efficiency of the banking system, winning back confidence for banks, ensuring the preservation of deposits of the population and restoring payments and settlements. He said, "restructuring does not mean that we will save individual bankers or banks. We do not aim to preserve all the banks." PRIMAKOV said that only efficient banks will be able to remain active in the market. He said the government will not back proposals to nationalize a number of major banks. He said that the problem of frozen accounts in several major banks will not be solved by nationalizing banks. "The government believes the broadening of the activity of foreign banks in Russia and the increase of the share of foreign capital in the assets of Russian banks cannot be avoided," PRIMAKOV said.

The Financial Times reported that Central Bank deputy chairman Alexander TUBANOV said that early data shows 50 percent of rubles deposits have been transferred, while far fewer deposits in foreign currencies had been switched to Sberbank. The deadline to transfer accounts to Sberbank was October 10th. In September the Central Bank ordered Most-Bank, Promstroibank, Rossiya, Menatep, Inkombank, SBS-Agro, and Mosbuiznessbank to reach agreements with depositor to transfer their accounts to Sberbank, the state-owned Savings Bank. PRIMAKOV pointed out to the chiefs of banks that even during the crisis from $1.5 billion to $2 billion are flowing out of Russia every month.

4th Quarter Budget To Be Submitted Next Week

· The Russian Finance Ministry plans to submit a finalized budget for the fourth quarter of 1998 to the government early next week. According to a report from the ministry's public relations department, the main aim of the budget policy up to the end of the current year is to ensure funds for mandatory expenses on the basis of rising revenues. The main parameters of the federal budget for October thru

December are based on a forecast for macro-economic indicators of development, real estimate of the income basis, sources for setting off the deficit and the need for financing the most socially important expenses as well as expenses, connected with the execution of the state's obligations to pay and service the state debt. In the ministry's opinion, mobilization of revenues in the final quarter of the year can be achieved by improving the operation of the Russian State Tax Service and making amendments to tax legislation, enabling the government to quickly set off incurred revenue losses. It is still considering the possibility of imposing export duties among other measures. The report stressed that saving on the federal budget's expenses will not affect priority items, including current payments of wages, monetary allowances to the military, stipends to students, as well as expenses to buy medicines and foodstuffs. A mechanism of compensating inflationary losses to population in wages, pensions and benefits is planned to be worked out by year's end and to envisage these expenses in the 1999 budget. The Finance Ministry also plans for the fourth quarter of 1998 to subsidize the coal industry, finance expenses to fulfill the state defense order and military reform.

Business

Director General Of Rosenergoatom Appointed

· Director of Rosenergoatom's press center Georgy KAUROV today announced that Leonid MELAMED has been appointed director general of the Rosenergoatom firm, which is a department of the Russian Atomic Energy Ministry in charge of nuclear power stations. MELAMED had been a member of the Board of directors of the Novosibirskenergo company, participated in the realization of a program developed by the United Energy System joint stock company under supervision of Anatoly CHUBAIS, and worked at raising the efficiency and continuing transformations in Russia's electric power engineering. Russian Atomic Energy Minister Yevgeny ADAMOV appointed MELAMED to replace former director general Yevgeny IGNATENKO, who was appointed first deputy director of the Rosenergoatom.

Gazprom Promises To Pay Taxes

· Russian Prime Minister Yevgeny PRIMAKOV and Gazprom's Chairman Rem VYACHIREV on Monday approved an agreement, signed on Friday between the Russian gas giant and the State Tax

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Service led by Tax chief Georgy BOOS, for the company to pay its taxes for the rest of the year. Gazprom is to pay all its taxes due from export revenues worth 2.1 billion rubles ($130 million) in October, 2.7 billion rubles in November and more than 3 billion rubles in December. Gazprom will pay mostly in cash, but also with some supplies of gas for the state. BOOS said that along with the company's assistance the tax service studied company figures and the need for tax payments and from there worked to find a mutually acceptable solution.

Chevron Waiting On Russian Pipeline Permit

· The Wall Street Journal today reported that Chevron Corp is waiting for Russia to issue a federal permit that would allow it to work on the first major oil-export pipeline from the Caspian Sea. Chevron hopes to received the permit by the end of October. President of Chevron Overseas Petroleum Inc. Richard MATZKE said, "There is speculation that the situation in Russia has enhanced the chances of the Caspian Pipeline Consortium" the group seeking to build the pipeline. Oil executieves believe Russia will give the go-ahead as a way of spurring Russian business and bringing taxes to Moscow. The consortium's proposed pipeline is to run from Kazakhstan's Tengiz field west through Russia to a terminal near Novorossisk on the Black Sea. The pipeline, with an initial capacity of 540,000 barrels per day and expansion to 1.34 million barrels per day, could be operation by the end of June 2001. This would make the Caspian Pipeline Consortium the fourth and the largest new energy-export pipeline to be built from the Caspian Sea region. The US supports multiple pipeline routes to export Caspian oil. A decision on the route from Azerbaijan to European markets is to be made later this month.

targets for the 1998 budget deficit to 2.5 percent of GDP from 3.3 percent approved by the parliament, Reuters reported. The budget deficit in 1997 totalled 6.298 billion gryvnias or 6.8 percent of GDP.

Estonia Survives Crisis Without IMF Loan

· Vice President of the Bank of Estonia Peter LOHMUS told the annual meeting of the International Monetary Fund (IMF) and World Bank that Estonia is able to sustain itself during the financial crisis in Russia without drawing on a $14 million support loan from the IMF, RFE\RL Newsline reported. LOHMUS stressed that Estonia has not requested a loan from the fund for a long time and there will be no need for one in the near future.

South Caucasus & Central Asia

Georgian Defense Minister In Turkey

· Georgian Defense Minister David TEVZADZE arrived in Turkey today for a three-day visit. He is scheduled to meet Turkish officials to discuss bilateral military cooperation. Turkish Deputy Prime Minister Ismet SEZGIN believes that the visit will have a positive influence on the development of friendship and cooperation with Georgia.

Azeri Elections Marred By Irregularities

· Azerbaijan citizens on Sunday voted between an incumbent former KGB chief and Communist party boss during the Soviet Era and five other candidates for President. According to a joint statement of the Organization for Security and Cooperation in Europe and the Council of Europe, "very serious irregularities and violations were observed." They reported various, "blatant violations of the law," in the election process, but did not say whether the fraud was significant enough to invalidate the election outcome. Under Azeri law regional election commissions have two days to compile results from polling stations and the Central Elections Commission has several more days to issue results. According to preliminary figures, 77.9 percent of Azerbaijan's 4.2 million voters participated in the elections and Geidar ALIYEV received 79 percent, Etibar MAMEDOV polled 13 percent, and Nizami SULEYMANOV earned 6 percent. ALIYEV supporters are claiming a victory. Even Georgian President Eduard SHEVARDNADZE

has congratulated ALIYEV on his victory, decribing it as historic. He wished ALIYEV success for the

European Republics

Ukraine Budget Deficit Figures

· According to the Central Bank, Ukraine's budget deficit in the first eight months of 1998, stood at 1.659 billion gryvnias ($485 million) or 2.7 percent of gross domestic product (GDP), compared to 3.1 percent in the first seven months. Figures released this weekend showed budget revenue in January to August 1998 totalling 9.397 billion gryvnias. Expenditure totalled 11.057 billion gryvnias. Earlier this year, President Leonid KUCHMA signed a decree cutting

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benefit of Azerbaijan and the entire Caucasus region. ALIYEV said, "I am satisfied with the results. This is the first time that presidential elections in Azerbaijan have proceeded on a democratic level and show the whole world that Azerbaijan is on the road of democratic development." However, his main challenger disagrees. MAMEDOV claims he received 35 percent, and therefore is entitled to a second run-off. "If there isn't a second round, this will be a glaring example of lack of democracy." MAMEDOV said that police had threatened voters in some regions; observers were kicked out of polling stations by ALIYEV's forces; ballot boxes were stuffed; and that electoral boards were doctoring results. Final result will not be released until October 15th.

Rus-Kazakhstan Sign Cooperation Accords

· Russian President Boris YELTSIN cut short a visit to Kazakhstan at the invitation of Kazakh President Nursultan NAZARBAYEV. However, the two leaders were able to sign a number of documents and discuss a wide range of issues. YELTSIN and NAZARBAYEV signed about 10 joint documents, including a Russian-Kazakh agreement on economic cooperation in 1998-2007, protocol on the delimitation of the Russian-Kazakh border, a guarantee of social rights for citizens at the Baikonur complex, agreement on mutual cooperation on money laundering crimes and illegal drug and arms trafficking, establishment of cultural centers, terms for diplomatic missions, an agreement on scientific and technical cooperation under the international thermonuclear experimental reactor project, and an agreement on cooperation between the justice ministries of the two counties. Annual trade turnover between Russia and Kazakhstan amounts to $4.2 billion and grew by 26 percent over the first six months of 1998. NAZARBAYEV said, "There were no political problems, now there are no financial and economic problems."

Rus-Uzbek Sign Econ. And Security Accords

· An ailing Russian President Boris YELTSIN and Uzbek President Islam KARIMOV signed a number

of documents calling for economic and security cooperation. YELTSIN and KARIMOV signed a document that will deepen economic cooperation in 1998 until 2007. Under this agreement, the two sides will create favorable conditions for organizing "tariff and non-tariff regulation of foreign economic activity, indirect taxation, customs services, and coordination of measures to protect national manufacturers." Russia and Uzbekistan agreed to cooperate in telecommunications, culture, protection of computer software, and checking illegal financial transactions. The two leaders also signed two security declarations. Earlier this year, Russia-Uzbekistan-Tajikistan formed a troika to fight extreme Islamic fundamentalism together. YELTSIN and KARIMOV signed a declaration on military assistance if any nation of the troika is attacked. Tajik President Emmoali RAKHMONOV signed that trilateral document earlier. The three countries will cooperate in coordination with the UN, the Organization for Security and Cooperation in Europe (OSCE) and the Commonwealth of Independent States (CIS) and other interested countries. If one country believes there is a threat, they will immediately hold trilateral consultations directly or through the these international organizations. Russia and Uzbekistan signed a declaration on the situation in Afghanistan. Both nations are concerned about the influence of the Taliban militia and influx of arms and drugs from Afghanistan. KARIMOV said, "Together we stand for peaceful settlement of the conflict in Afghanistan and restoration of stability in Tajikistan."

Kyrgyz Officials Detain Afghan Arms

· Customs officials in southern Kyrgyzstan have detained a shipment of weapons and explosives. Deputy Chairman of the State Customs Inspection Nadyrbek TURGANBAYEV said the shipment was destined to be smuggled into Afghanistan. A 16 car transit train from Iran was inspected at Osh, Kyrgyzstan. The cargo was deained among shipments of humanitarian aid. TURGANBAYEV did not disclose the amount of weapons and what kind the shipment included.

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

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