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, October 2, 1998

excise taxes and taxes on exports, including the imposition of excise tax on the export of fuel of 10 Ecu per ton. PRIMAKOV noted that Russia is still counting on the International Monetary Fund (IMF) to issue the tranche worth $4.3 billion it had promised for September. "If we receive the ...$4.3 billion IMF tranche, we shall manage to exit the crisis with the least losses," PRIMAKOV said. He added that without the disbursement of further IMF funds, Russia will have to introduce "unpopular measures" to salvage the Russian economy.

Maskhadov Dismisses Chechen Government

· Chechen President Aslan MASKHADOV dismissed his entire government Thursday, strongly criticizing some ministers, but not disclosing a reason for the mass firing. The dismissal order applies also to the heads of all agencies, organizations and republican boards. Ministers will remain at their posts until a new cabinet is formed sometime next week. MASKHADOV said that none of the deputy prime ministers will be chosen as prime minister, and the offices of first deputy prime ministers have been abolished. He praised the Road Transport Minister Nuzhden DAAYEV and the Food and Agriculture Minister Lom-Ali ALSULTANOV for their good performance; but sharply criticized the construction and economic ministries and the oil ministry. MASKHADOV has been the Chechen president since January 17, 1997, after the Russian Federation and the break-away republic signed an agreement on peaceful settlement of the Chechen issue in

Russian Federation

Politics

"There is No [Economic] Plan"

· After meeting with his Cabinet to discuss proposals aimed at attending Russia's economic crisis, Russian Prime Minister Yevgeny PRIMAKOV said, "I want to repeat once more—there is no program. It is yet to be worked out. All this talk about the government being ready with draconian laws...is just worthless nonsense." The Cabinet considered six different economic proposals, including First Deputy Prime Minister Yuri MASLYUKOV. The plan calls for strengthening finance through more budget revenue, mutual settlements between companies, state debt rescheduling and the restoration of investor confidence in the country. The prime minister noted tax incentives for producers and the scaling down of shadow economy. He said it was necessary to "control prices of natural monopolies products" in order not to allow standard of living to plunge. In his view, these measures will keep market prices from rising. He also called for a system of state guarantees for population's deposits. According to the prime minister, the government's anti-crisis plan also includes measures to strengthen state system. He stressed that, "closer control will be established over bank activities." Finance Minister Mikhail ZADORNOV opposed almost every point of the crisis plan proposed by MASLYUKOV. ZADORNOV is against trade measures and tax rates as well as permitting the Central Bank to set the ruble rate.

The Cabinet adopted a special budget for the fourth quarter, with spending of 167.19 billion rubles ($10.42 billion) and revenues of just 70 billion rubles. The new budget has already been sent to the Russian State Duma. Kommersant Daily reported that the budget deficit would be covered by internal borrowings of 80 billion rubbles, an increase of alcohol

Today's News Highlights

Russia

IMF Outlines Steps For Russia

US Steel Files Dumping Casse

Gazprom-Shell Joint Venture

European Republics

S&P Rates Lithuanian Currency

Ford Production In Belarus Halts

Latvian Elections/ Referendum

South Caucasus & Central Asia

OSCE Meets In Tblisi

Kazakh Econ. Protection System

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October 2, 1998

Intercon's Daily

August, 1996. Calls for his resignation have been voiced by his opponents Salman RADUYEV and Shamil BASAYEV. As Intercon reported on Wednesday, BASAYEV said that MASKHADOV is, "unable to rule the country." However, Governor of Krasnoyarsk and former field commander Alexander LEBED said, "MASKHADOV is a reasonable man and without him Chechnya would turn mad."

Economy

Ruble = 15.99/$1.00 (NY rate)

Ruble = 15.9923/$1.00 (CB rate)

May Jun Jul Aug Sep Oct

IMF Outlines Steps For Russia

· IMF managing director Michel CAMDESSUS on Thursday said Russia still lacks the clear economic strategy for overcoming its economic crisis and outlined the main tasks facing the Russian government. Russia needs, "a government having a clear strategy, a clear vision of what is needed; at this stage we do not yet have that," CAMDESSUS said. The next task, according to him, is to re-establish a good relationship with creditors and return their trust. He also said Russia must find effective ways for bringing enough money into state coffers. Without that, the state can not fulfill its commitments, including the payment of salaries and pensions. He also expressed confidence that Russia needs an effective plan for continuing structural reforms, particularly restructuring the banking sector. The managing director said he was confident in Russia to create an economic program and strategy in the conditions of a global financial crisis, but their practical implemen

tation left much to be desired. CAMDESSUS said, "Borrowing to fund government reform is a recipe for disaster. What is needed is a government with a clear strategy for going ahead and we don't see it yet." CAMDESSUS urged Russian Prime Minster Yevgeny PRIMAKOV to avoid any measures which would spark inflation, redouble efforts to collect taxes and exercise better control over the country's banks. The IMF and the World Bank promised to provide to Russia $22.6 billion as a package of financial aid in this summer. However, the IMF indefinitely postponed disbursing the second installment of $4.3 billion after political turmoil forced a change in government. Finance Minister Mikhail ZADORNOV and Central Bank chief Viktor GERASHCHENKO will attend the regular session of the governing bodies of the IMF and World Bank.

Russia Asks EBRD For Advice

· The Central Bank has asked the European Bank for Reconstruction and Development (EBRD) to provide expert advice on the restructuring of the Russian banking sector. President of the EBRD Horst KOHLER said that an international task force will be developed to assist in rebuilding the payment system and the restructuring of banks. KOHLER and a team of senior EBRD officials visited Moscow last week for talks with Prime Minister Yevgeny PRIMAKOV and Central Bank chairman Viktor GERASHCHENKO. The EBRD believes that time is of the essence in order to reduce the risk of remaining bank assets being stripped out of the most troubled banks. KOHLER said that GERASHCHENKO hinted that Russia would have to restructure its sovereign debt during the fourth quarter because its foreign exchange reserves will be insufficient to cover foreign debt obligations, the Financial Times reported.

US Steel Files Anti-Dumping Case

· The US steel industry said it has filed a dumping charge against imports of hot-rolled carbon steel products from Russia, Japan and Brazil. Hot-rolled carbon steel products are used in automobiles and construction materials. In the petition filed with the US International Trade Commission (ITC) and the Commerce Department on Wednesday, 12 major steelmakers, including Bethlehem Steel Corp., said the three countries, "have dumped millions of tons of unfairly traded steel in the US market." The ITC will investigate whether the imports materially or threat

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ened injury to the US industry, while the Commerce Department will determine whether the imports were sold at prices below the fair market value. If the department issues a preliminary ruling upholding the charge, countervailing duties will be imposed on the imports. US Steel Group President Paul WILHELM said, "As I look at this industry today, we are in an absolute crisis." Steel company executive predict that as many as 100,000 steel jobs or about half the industry could be jeopardized if dumping continues.

Business

Irkutsk Gas Field Development To Begin

· The implementation of the biggest international project on developing a gas-field in the Irkutsk region may begin in January 1999, despite the financial crisis in Russia. Experts of Russia, South Korea, Japan, China and Mongolia have agreed to prepare by the end of 1998 a basic agreement on the development of the gas-field providing specific terms of making technical and economic substantiation. A memorandum on mutual understanding and an agreement on deliveries of the product have been already signed. One of the project's variants envisages laying of a pipe-line through Mongolia and China to South Korea, and then to Japan.

Gazprom-Shell To Form Joint Venture

· Deputy Chairman of the Russian gas giant Gazprom Board Pyotr RODIONOV announced that Gazprom and its strategic partner Royal/Dutch Shell intend to establish a company for the implementation of joint projects. RODIONOV said, "It will be called a company for development." The main function of the new company in which Gazprom and Shell will have equal shares, will be an analysis, preparation and the implementation of all joint projects. The next meeting of the head of Gazprom with the Shell management will be held later this month, at which they will discuss further steps on the way of bilateral cooperation.

RODIONOV also said that since January 1998, Gazprom received in the form of different payments only 50.6 percent of the financial resources which were expected to come for natural gas deliveries to Russian consumers. Cash payments accounted on an average for only 17 percent of payments. Gazprom has paid 72 percent of taxes to the budget. Russian consumers paid for gas about 30 billion

rubles. It is expected that before the end of 1998 this sum will increase up to 45 billion rubles. RODIONOV said the company does not expect the payment figure to rise in 1998. The financial position of Gazprom, he noted, may deteriorate in the event the government resolution providing for tax payments on a shipment basis comes into force.

European Republics

S&P Rates Lithuania As Stable

· Standard & Poor's (S&P) today affirmed its BBB minus foreign currency and its BBB plus local currency long-term issuer credit ratings on Lithuania. S&P also affirmed its A-3 foreign currency and its A-2 local currency short-term issuer credit ratings. S&P determined Lithuania's outlook as stable. The decision took into account that Lithuania's exports to Russia might decline. S&P believes the negative affects of the Russian economic crisis will be controllable and short-lived. Lithuania is commitment to market-based economic reforms, including the recent successful privatizations of a number of large industrial and infrastructure companies, which has significantly increased the inflow of foreign direct investment and improved Lithuania's liquidity position. This Baltic nation reduced the general government fiscal deficit to 1.7 percent of gross domestic product (GDP) in 1997 and is estimated to be 2.7 percent of GDP this year. The higher local currency rating reflects the government's success in deficit reduction and monetary management, whereby the credibility engendered by the currency board has led to sharply lower inflation estimated at 6.5 percent in 1998. A growing Treasury bill market also supports the local currency rating and underpins the ongoing development of the still narrow capital markets,.

Ford Halts Production In Belarus

· Ford Motor Co. has halted production at its assembly plant in Belarus because of Russia's economic crisis. The Ford Union US-Belarus joint venture said production of Ford Escorts and Ford Transits, which are sold mainly in Russia, has been temporarily halted because the Russian financial crisis had brought bank transfer payments to a standstill. Ford assembles approximately 6,000 cars and vans at the Belarus facility, exporting an estimated 80 percent to for sale in Russia. Earlier,

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General Motors announced it was halting assembly of its Jeep models in Yelabuga in central Russia, because of the economic situation in Russia. The Russian financial crisis has halted bank transactions throughout Russia and is affecting payments to suppliers in all former Soviet republics.

Latvian Elections and Citizen Referendum

· Latvian citizens will go to the polls Saturday to elect representatives to their 100-seat parliament and simultaneously a referendum on a new citizen law. Parliament seats are distributed through a proportional representation system. Parties need to pass a minimum five percent vote threshold in order to gain representation in the parliament. According to opinion polls, of the 21 parties competing in the elections, the likely winner of the elections will be the right-of center People's party led by former prime minister Andris SKELE. There are 1.32 million citizens who are eligible to vote.

However, 45 percent of Latvian residents can not vote because they are ethnic Russians and therefore are not citizens. The referendum, which has been largely in the forefront of these elections, asks Latvian voters if they want to approve measures that would lower the obstacles for ethnic Russians seeking citizenship. Most of the Russians, left over from the collapse of the Soviet Union's attempt to Russify Soviet lands, are not optimistic. One woman named Lena said, "We Russians have long understood that we're not really wanted here. But this referendum will drive that message home." This Spring the parliament passed amendments eliminating the windows system and granting citizenship to all children born in Latvia since independence. The window system put the oldest ethnic Russians at the end of the naturalization line, having them wait until 2003 to apply. The Latvian nationalists have pushed the issue to a referendum. Among the nationalists is Prime Minister Guntars KRASTS. He believes the current laws are more than reasonable and that granting citizenship to children who may not speak

Latvian is going too far. "With these amendments, our citizenship laws would be some of the most liberal in the world and certainly the most liberal in Europe."

South Caucasus & Central Asia

OSCE Parliament Meeting In Georgia

· The Parliamentary Assembly of the Organization for Security and Cooperation in Europe (OSCE) will hold a meeting of its bureau and a workshop on conflict settlement and democratic development in the Caucasus from October 3rd to the 8th in Tblisi. The wider-format meeting and the workshop will be attended by parliamentary delegations from 23 countries: Armenia, Austria, Azerbaijan, Canada, Croatia, the Czech Republic, Denmark, Finland, France, Germany, Italy, Lithuania, Poland, Portugal, Romania, Russia, Slovakia, Switzerland, Tajikistan, Turkey, Ukraine, Great Britain and the United States. The participants will be addressed by Georgian President Eduard SHEVARDNADZE, parliament speaker Zurab ZHVANIA, Deputy Foreign Minister Giga BURDULI, head of the OSCE Parliamentary Assembly Helle DEIGN.

Kazakhstan's Economic Protection System

· Kazakh President Nursultan NAZARBAYEV announced Wednesday that his government would establish an economic protection system to shield the country from the external financial turbulence. In a State of the Union Message, NAZARBAYEV said the system would aim to avoid external disturbance and ensure economic stability. The government would set up an economic policy committee to study the domestic and world economic situations, especially in southeast Asia and Russia. NAZARBAYEV said he had also asked Kazakhstan's Central Bank to float the national currency and carry out strict inspections of banks and enterprises. He added that Kazakhstan faced three pressing tasks: to peacefully negotiate the financial crisis in southeast Asia and Russia, to guarantee economic recovery and growth, and to continue economic reform to improve living standards.

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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