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

Wednesday, October 14, 1998


Russian Federation

Politics

Questions of Impeachment Continue

· Russian President Boris YELTSIN ignoring doctors' orders returned to work at the Kremlin today, meeting with Prime Minister Yevgeny PRIMAKOV, Defense Minister Igor SERGEYEV, and Foreign Minister Igor IVANOV. Since the nationwide protests last week and YELTSIN's embarrassing foreign trip to Kazakhstan and Uzbekistan, Russian media, past and future politicians, and citizens continue to call for the removal of their President and question his ability to rule. Communist leader Gennady ZYUGANOV said, "YELTSIN is unable to work more than two three hours a day." He said YELTSIN is all but disable. Comments like these from the opposition is nothing new, but as Nezavisimaya Gazeta declared the issue of YELTSIN's resignation has become a key question of Russian political life. The paper wrote that, "the taboo has been lifted." Speaking in St. Louis former Soviet President Mikhail GORBACHEV said the first step to end Russia's crisis is to call for early presidential elections. He said, "His [YELTSIN's] time is up. I think he understands this. I believe it would be best for everyone. I don't know how much time YELTSIN will continue, but his time is up." Krasnoyarsk Governor Alexander LEBED warned that, "The high and mighty silence of the Russian authorities after the protest action on October 7th could lead to a revolt by the people. Instead of protest actions, we could get something much worse." PRIMAKOV rallied behind the president saying, "early presidential elections could result in a situation which would not help to stabilize society. On the contrary, it would lead to divisions and whip up political passions. It would create a situation in which it would be hard to work to overcome the difficult situation we are in." President of Tatarstan Mintimer SHAIMIYEV agrees with PRIMAKOV and called on

Russian State Duma deputies to call off the impeachment initiative. "The President should serve out his term granted to him. Now, the State Duma should, above all, attend to settlement of economic problems."

Supporters of the impeachment process have accused YELTSIN of launching the botched war in Chechnya, ruining Russia's economy and military, and sending in troops and tanks against hard-liners in the former Russian parliament in October 1993. The impeachment campaign began long before the economic crisis hit Russia. It is likely to fail, because the Russian Constitution gives YELTSIN the upper hand in dealing with parliament. An impeachment motion requires a two-thirds majority vote in the Duma. Besides the technical legal hurdles, the impeachment process hit a snag on Monday when the parliamentary commission failed to agree that YELTSIN could be held responsible for the war dead in Chechnya. Chairman of the commission Vadim FILIMONOV said, "All members of the commission agreed that the President had exceeded his powers, but as to the accusation of the killings of people in Chechnya, that question was not supported." Many deputies remain angry over the Chechen war and the issue, if included, would probably earn more support in parliament than the other charges. In an effort to win more supporters the Communist Party has called for a new nationwide protest and for the Duma to speed up the impeachment commissions decision on whether to start formal procedures.

Today's News Highlights

Russia

GKO Negotiations In London

Imports Decline in September

Gazprom To Get Italian Loan

European Republics

S&P Rates Etsonian Currency

South Caucasus & Central Asia

Chevron Opens Tblisi Office

Azeri, US Support Baku-Ceyhan

France-Uzbek Joint Venture

Iran-Turkmen Oil Deals Signed

Politics-Economics-Business

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Wednesday

October 14, 1998

Intercon's Daily

Economy

Ruble = 15.05/$1.00 (NY rate)

Ruble = 13/$1.00 (CB rate)

GKO Restructuring Negotiations In London

· The Russian government and representatives of Western banks today in London opened critical talks on the repayment of Russia's debts. The two-day talks will hammer out details of a restructuring package of $40 billion in Treasury bills or GKOs and OFZ bonds. Western Banks represented are Lehman Brothers, Merill Lynch, Credit Suisse First Boston, Chase Manhattan and Deutsche Bank, which chairs the group. Lehman Brothers and Deutsche Bank have already launched suits against Russian banks over bad deals. The Russian delegation will be led by Deputy Finance Minister Mikhail KASYANOV. Banking sources said the meeting will touch on the July plan of issuance of an $8 billion worth of Russia's Eurobonds. Political turmoil and red tape in Moscow has cause the government to delay finding an acceptable solution for both domestic and foreign investors. The sides enter the talks after a favorable statements from Prime Minister Yevgeny PRIMAKOV and Central Bank chairman Viktor GERASHCHENKO that Russia will come up with better GKO restructuring terms that will allow further negotiation on debts.

Over A Month; Still No Economic Plan

· Russia's Finance Minister Mikhail ZADORNOV admitted that the nation's economic crisis is so complex that if may take many more months for the government to develop a economic rescue plan. He said the government was finding it difficult to put together a comprehensive program to deal with the situation. He said, "I think it would be rather difficult today to put together a comprehensive, integral all-inclusive program in that the situation is changing very rapidly and then it is too complex to try and put it into one document." ZADORNOV predicts that a medium-term program could be reached in 1999. Comment: At this point, almost two months since the devaluation of the ruble, any economic plan would be better than none, since each day Russia puts off conquering its problem, the need for financial assistance increases. Prime Minister Yevgeny PRIMAKOV still has not unveiled a detail plan to revive the economy. The Financial Times reported that Andrei PIONTKOVSK, director of the Strategic Studies Center, said the only person visibly in charge

of the economy at present was Central bank Chairman Viktor GERASHCHENKO. "At least GERASHCHENKO is printing money; he is doing something. PRIMAKOV on the other hand, has reached the level of economic incompetence. After two months in power, he has no coherent economic program."

Imports Decline In September

· The Russian State Customs Committee released figures last week showing that in September Russia's imports dropped by 45.4 percent. Imports declined through the reduction as compared with August of the purchases of food products and cuts in imports of chemicals, machinery, clothing and footwear. Delivery of medicines to Russia from foreign countries dropped by 71.5 percent, meat 60 percent, dairy products 84.9 percent, sugar about 87.5 percent, while imports of alcohol and tobacco dropped almost by half. Meanwhile, Russia's import from former Soviet republics decreased by 44.1 percent in September. Illegal imports of contraband goods increased by 80 percent from January to September, compared with the same period in 1997. Russia depends on imports for nearly 80 percent of its consumer goods. Last week, Russian Prime Minister Yevgeny PRIMAKOV requested humanitarian aid when he met with President of the European Commission Jacques SANTER. European Union officials are considering the request, taking into account Russian producers who hope to build up their own production since devaluation has made imports more expensive.

Business

Mars Inc. Halts Production

· US candy maker Mars Inc. has temporarily suspended production at a factory in Stupino, near Moscow due to Russia's economic crisis. Monday, candy officials in Stupino declined to make any comment or predict when production would restart. The factory, with an annual capacity of 50,000 metric tons of candy, sent its employees home on indefinite leave. In September, other Western candy maker suspended their production because of lack of demand provoked by the financial crisis. On Monday Reuters reported, however, Cadbury Confectionery, a subsidiary of Cadbury Schweppes Plc in Russia said it had already restarted production last week at its Chudovo factory in northwestern Russia.

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Wednesday

October 14, 1998

Intercon's Daily

Russia May have To Import Oil?

· President of the Yukos Oil Company Mikhail KHODORKOVSKY on Thursday appeared on NTV Television stating that in 1999, Russia may have to import oil because oil output will be significantly reduced in 1999. "In August alone the oil companies lost half a million of tons of oil, because the government decided to disconnect them from the export pipeline. This amount of oil would be enough for UES Russia to heat our flats for a month," KHODORKOVSKY said. According to him, wholesale prices of petrol were reduced almost by half in Russia. Consumers of oil products did not notice it, however, because all the profits went to trade companies on the stage of marketing.

KHODORKOVSKY noted that a possible increase in taxes against the oil sector would not necessarily mean additions to the budget's revenue. "If more taxes are imposed, this does not yet mean that they will be paid." He believes that system of taxation should be changed. "We have suggested to the government on many occasions that the tax pressure should be transferred from producers to the trade sector. Impose taxes on their super-profits and give a chance to Russian producers to develop production," KHODORKOVSKY said.

Gazprom To Receive $2 Billion Italian Loan

· A group of unidentified Italian banks plan to lend Russia's gas giant Gazprom up to $2 billion to finance the first gas pipeline running under the Black Sea to Turkey. Today, Gazprom's deputy head Pytor RODIONOV said that Gazprom has already signed an agreement, "offered for a sufficiently long period and at a sufficiently attractive rate." The loan will be guaranteed by export credit agencies and backed by revenues from gas supplies to Italy. He added that insurance will be provided by Italian state agency SACE and Gazprom is also seeking guarantees from Germany's Hermes and the Eximbank of Japan. RODIONOV said the loan would be used to purchase equipment for the project in Italy, Japan and other West European countries and to finance the construction of an underwater pipeline by Italy's Saipem. RODIONOV noted that a second pipeline parallel to the first would require involvement of a strategic partner which Gazprom was in the process of choosing among big Western companies.

European Republics

S&P Rates Estonia's Currency

· Standard & Poor's (S&P) Tuesday affirmed its BBB+ foreign currency and A- local currency sovereign credit ratings on Estonia. In addition, S&P affirmed its A2 short-term foreign and local currency ratings on the republic. The outlook on the long-term debt ratings is stable. According to an S&P press release, the rating reflects Estonia's progress with market-based economic reforms, its broad support for continued prudent fiscal and monetary management supporting economic growth and leading to European Union membership, low government debt burden estimated at 10 percent of gross domestic product (GDP), low external debt burden estimated at just over 20 percent of exports at the end of 1998. The ratings are constrained by Estonia's weak international liquidity, the challenge of reducing the high current account deficit estimated at 16 percent of exports in 1998, risk that pressure will dampen investor confidence in the still-fragile financial sector, and privatization initiative in restructuring utilities and infrastructure of companies. The stable outlook reflects the aim of lawmakers to tackle economic policy including, curbing the high current account deficit and ensuring that the financial sector, which has grown increasingly dependent on short-term external borrowing, adapts to a lower growth environment.

South Caucasus & Central Asia

Chevron Opens Tblisi Office

· Georgian President Eduard SHEVARDNADZE, Georgian International Oil Corporation (GIOC) President Gia CHANTURIA and Chevron Director Richard MATZKE presided over the opening ceremony of the Chevron Tblisi office. Chevron announced on Tuesday that the company plans to broaden its activities in Georgia. The Tblisi office will monitor transportation activities and evaluate potential downstream opportunities. Chevron and GIOC also celebrated the introduction of Chevron brand lubricant products, which will be distributed nationally through service stations, retail dealers and to industrial plants by GIOC Trading. MATZKE, who is also president of Chevron Overseas Petroleum Inc., said "International partnerships, such as the one with Georgia and its national oil companies, are critical to

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developing and expanding Chevron's upstream and downstream businesses...We're pleased with the strong working relationships we've established with the Georgian government and companies, and we expect to see continued growth that will bring benefits for the Georgian economy and Chevron." The entry of Chevron products into the Georgian market will make available the full range of quality Chevron oils and greases for use in passenger cars, trucks, agriculture and industry. Chevron already distributes branded lubricants in other countries of the former Soviet Union, and plans further growth throughout Central Asia and Eastern Europe. The office opening and the lubricant products' launch increase Chevron's business presence in Georgia.

Azeri, US Support Baku-Ceyhan Route

· Azerbaijan's President Geidar ALIYEV and the US CLINTON administration continue to support the Baku-Ceyhan pipeline route for the transportation of Caspian oil to European markets. The New York Times and a Turkish newspaper printed articles which said that the multi-billion dollar proposal, backed by Azerbaijan and the US government for geopolitical and economic reasons was in peril. ALIYEV noted, "The New York Times does not at all represent the official position of the US administration, and I do not believe that the [American government] would retreat from its decision."

US State Department spokesman James RUBIN said the CLINTON administration prefers the Baku-Ceyhan route. "We remain committed...to making the Baku-Ceyhan and the east-west corridor a reality." The US supports this route because it would foster closer relations between Azerbaijan, Georgia, Turkey, and the West and it would not pass through either Russia or Iran, which have proposed alternative routes of their own. Oil companies for the US and other nations are to decide how to transport Caspian oil, and there is concern that the route through Ceyhan will be too expensive. It is estimated to cost $4 billion. The Azeri government will ultimately have the final say on where to build the pipeline which is

to carry crude from Caspian Sea oil projects, including the $8 billion British Petroleum (BP) led Azerbaijan International operating Company (AIOC). President ALIYEV hopes that a decision on the Baku-Ceyhan project will taken before the end of this month. However, many industry specialists predict that the only decision at the end of the month will be to postpone the final decision to a later date.

France-Uzbek Joint Uranium Venture

· Uzbekistan's Navoiy Mining and Metallurgical Plant (NGMK) and France's state-owned nuclear fuel producer Cogema plan to set up a joint uranium producing venture. NGMK General Director Nikolai KUCHERSKY said, `We have carried out investigative work and got promising results." He said the companies will begin joint uranium production at the Sugraly deposit some 450 kilometers west of the Uzbek capital Tashkent. The deposit has proven reserves of 38,000 tons of uranium. NGMK is Uzbekistan's only producer of nuclear fuel and exports its entire output. Uzbekistan only produced 1,900 tons of uranium in 1997 and plans to increase production to 3,500 tons by 2000. NGMK estimates Uzbekistan's total proven uranium reserves at a total of 80,000 tons and probable reserves at 178,000 tons, Reuters reported.

Iran-Turkmenistan Sign Two Oil Deals

· A spokesman for the Turkmen President's directorate in charge of hydrocarbon resources announced on Saturday that two deal on exporting Turkmen oil to Iran have been signed, RFE\RL Newsline reported. French company Total will conduct a feasibility study for a Kazakh-Turkmen-Iran pipeline that would bring oil from Kazakhstan's Tengiz and Novy Uzen fields throughout western Turkmen oil fields to Tehran and the Harg oil terminal. The other deal, which provides for delivering Turkmen oil to Iran via the Caspian Sea, was signed by Malaysia's Petronas and Britain's Monument Oil and Gas. Both deals foresee the exchange of Turkmen crude for Iranian refined oil.


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

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