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

Wednesday, October 21, 1998

Russian Federation

Politics

Yeltsin Orders Inspection of Nuclear Facilities

· Russian President Boris YELTSIN has ordered an inspection of troops at a number of nuclear facilities, including Chepetsky Mechanical Plant near Glazov, known as ChMz. The President, according to The Washington Times, called for these inspections after several violent shootings, which appear to be a reaction from soldiers to poor living conditions, troop hazing, and delayed wages. At the Mayak Facility on September 20th, one sergeant went on a shooting spree, killing two of his comrades and wounding another before escaping. Mayak is expected to play a main role in a joint US-Russian agreement to neutralize 50 metric tons of plutonium by mixing it with other material or using it as fuel in the energy sector. US Intelligence officials said that the details of the inspection are not known. One official said the review of military at vital nuclear plants raises new concerns over Russia's ability to secure its nuclear arsenal and related material sites. He added, "If these troops can't be trusted, things are in really bad shape." In a Central Intelligence Agency (CIA) report to the US Senate Intelligence Committee the CIA stated, "declining morale and discipline in the military, as well as economic conditions, raise our concerns about the potential for warhead theft...Russian nuclear weapons useable fissile material plutonium and highly enriched uranium are more vulnerable to theft than nuclear weapons."

Defense Minister in India, Vietnam, China

· Russian Defense Minister Igor SERGEYEV on Tuesday made a stopover in New Delhi en route to Vietnam and China, meeting with Indian counterpart Ajit KUMAR and military leaders of the Indian Republic. The sides discussed the present-day state of Russian-Indian defense and military cooperation, as

well as prospects for its development. A long-term Russian-Indian cooperation program in military relations through the year 2010 is being drafted. SERGEYEV and his high-ranking military delegation met with Vietnam's Communist Party General Secretary Le Kha PHIEU and Vietnamese counterpart Pham Van TRA. SERGEYEV stressed the, "similarities between Russia and Vietnam and the two sides' resolve to further develop their time-honored friendship and cooperation." PHIEU noted that the two nations need to increase bilateral cooperation in economic, commercial, national defense, scientific, cultural and social domains. Today, SERGEYEV visited the Cam Ranh Base run by Russia in southern Vietnam. Moscow and Hanoi concluded an agreement on the use of this military facility by the Russian Navy in 1981, effect until the year 2004. From Vietnam, SERGEYEV will fly to China for an official visit which will focus on perspectives to expand bilateral military ties. He will hold negotiations with his Chinese counterpart CHI Haotian and is expected to meet with China's Chairman JIANG Zemin. The Russian minister will speak on the fundamentals of the Russian military doctrine at China's National Defense Academy. Moscow and Beijing view their military ties as an important element of the bilateral relations. In 1991 through 1997, Beijing spent up to $6 billion to purchase Russian weaponry.

Economy

Russian Union of Industrialists and Entrepreneurs Opens

· The Russian Union of Industrialists and Entrepreneurs (RUIE) opened its 9th congress at

Today's News Highlights

Russia

Tyumen Oil Gets $105M Loan

Republic Has $190M In Losses

Italian Business In Russia

European Republics

Ukrainian Economic Figures

Latvian Pres. Tours Europe

South Caucasus & Central Asia

Georgian Rebellion Over

Turkey, Turkmen Sign Gas Deal

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Moscow's Hall of Columns on Tuesday. The congress will discuss the report by the union's president Arkady VOLSKY on Russia's economic situation and proposed changes to reform policies and an anti-crisis program the RUIE drafted on the basis of regional proposals. Russian Prime Minister Yevgeny PRIMAKOV said that privatization should stimulate industrial growth, investments, creation of new jobs and production of new, competitive products. He noted, privatization must by no means be carried out in the interests of a narrow group of people. He said, "The theory that the market will resolve everything on its own has not justified itself...before real market relations establish themselves in the country, the state must assume regulatory functions, ensure order in the country." PRIMAKOV said his government would support domestic producers through its fiscal, tax and social policies, rather than offering more credits. "By merely pumping money [into the industrial sector], we will never achieve economic growth." VOLSKY voiced support for the PRIMAKOV Cabinet. He noted particularly the government's measures to enhance the state role in the economy, to concentrate efforts on the main directions of development and insurance of rights. Measures suggested by VOLSKY's economic report include the deferment of payments of foreign debts for 5 to 10 years, the emission of the so-called "industrial money," to be used only for payments, for metal, gas and electricity, as well as introducing the payment of rent for the use of natural resources. VOLSKY believes, "Persistent joint work with the cabinet to revive national production is the only way out. Russia is and will remain an industrial country." VOLSKY said in the Hero of the Day program on Tuesday, "We are the richest country of the world. We have 3 percent of the population and 35 percent of all reserves of the plant and over a half of mineral resources. It is important where to use the money, so that it is not embezzled again. Unfortunately, that is so far one of the main sources, and I have too little supporters in that question."

Russian President Boris YELTSIN and VOLSKY discussed preparations for a meeting of Russian and Ukrainian industrialists opening in Kharkov in late October. The two sides, are expected to discuss joint programs in aircraft-building, fuel industry, and atomic power engineering. The RUIE was founded in December 1991 as a non-governmental organization,

the legal successor to the USSR scientific and industrial union in Russia. The Union's founders were enterprises of different forms of ownership, research organizations, commercial structures and public associations. The RUIE brings together more than 2,700 industrial enterprises and associations, research centers, banks, joint enterprises and public organizations.

Ruble = 16.93/$1.00 (NY rate)

Ruble = 16.93/$1.00 (CB rate)

Russia To Issue More Money To Cover Deficit

· Finance Minister Mikhail ZADORNOV predicts that revenue for the fourth quarter of 65 billion to 75 billion rubles will meet only half of the planned expenditures of 130 billion rubles. He said that the government expects to print no more than 20 billion rubles ($1.2 billion) to finance the deficit. It is also counting on international aid to fill the remainder of the gap. CentreInvest Group's director of sales Dan RAPPAPORT said, "In our opinion, printing money is inevitable...The question is how much and how fast." The investment bank estimates that the government will have to increase the monetary base by as much as 50 percent to met its obligations. First Deputy Prime Minister Yuri MASLYUKOV said, "The only possible way out of the economic crisis is to rely on natural monopolies, our natural resources and the foundation of our economy." He added, "Natural monopolies existed, exist, and should exist in the future as they are the base on which we can build our economy." MASLYUKOV said that prices for products of natural monopolies, "must be strictly controlled by the state." He encouraged lawmakers to approve tax reform. He stressed the need to reduce sharply the tax pressure on commodity producers and enlarge the tax base and improve a mechanism of tax collection. Deputy Finance Minister Oleg VYUGIN agreed that tax reform should be a government priority. He said the fiscal burden is likely to be eased in 1999, when the tax code is expected to be adopted. He cited proposals to scale down the value added tax to ten percent and the profit tax to 30 percent from the current 35 percent.

Business

Tyumen Oil Receives $105M Loan

· Tyumen Oil has received a $105 million loan from Westdeutsche Landesbank (WestLB) to assist

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the company in continuing exports of oil. WestLB did not disclose the terms of the loan or its dispersal, but Tyumen representatives said it is getting the loan at the same rate prior to Russia's financial crisis. German banks have been among the largest lenders to Russia. Tyumen Oil seems to have survived the Russian economic turmoil by adjusting its operations to meet changing market conditions, The Wall Street Journal reported. The oil company noted that it has not delayed a single loan payment despite Moscow's moratorium on payments of foreign debt held by Russian companies.

Republic Announces $190 M Russian Loss

· The US commercial bank Republic New York Tuesday announced losses of $92.7 million during the third quarter, which were almost entirely based on a $190.7 million loss on Russian investment securities, the Financial Times reported. In August on the onset of the financial crisis, Republic said that its losses would be greater than first estimated. The banks said it decided to write down all its Russian securities to net realizable value. These included a $110 million charge against Russian Treasury Bills (GKOs) Its remaining exposure at the end of September reached $63.4 million, which had been reduced by a payments of $59.7 million. Republic's third quarter losses followed a profit of $112.8 million in the same period in 1997. Earlier this year, Republic's assets totaled $54.7 billion.

Italians Interested in Russian Business

· Italian Ambassador to Russia Emmanuele SCAMMACCA toured Russia's Maritime territory, leading a delegation of Italian businessmen eager for Italian firms to work in Russia. SCAMMACCA on Monday held talks with Speaker of the Duma of the Maritime Territory Sergei DUDNIK and summed up Italian firms' activity in Nizny Novgorod, Saratov, St.Petersburg, the Oryol, Krasnoyarsk and Tyumen regions. SCAMMACCA believes that Italy can move cargo between Italy and Vladivostok by sea faster than transporting goods from Italy to Moscow. The most promising cooperations are in wood-working, processing of seafood, participation of Italian firms in various building projects of the Maritime territory.

September the nation's gross domestic product (GDP) fell 5 percent. This fall has offset the steady increase of the index in the first eight months. Economic growth in the first nine months of this year suffered a 0.5 percent drop against the same period in 1997. The industrial production in September descended by 0.3 percent. The grain yield for the whole year is expected to be 28 million tons, a 7.5 million-ton decrease compared with last year. The foreign trade volume plunged by more than $1 billion in the first eight months of this year compared with 10 the same period in 1997. Trade deficit reached $1.47 billion. The Ukrainian Economics Ministry Saturday predicted that Ukraine's inflation will be 7.5 percent in the forth quarter of 1998. The Labor and Social Policy Ministry said the minimum salary is expected to go up to 65 gryvnias ($18) from the current level of 55 gryvnias ($15), and 160 million gryvnias ($44 million) must be taken from the budget for that purpose in one month. The September inflation data appear to be controversial as statistic authorities total it at 3.8 percent, while the Economy Ministry insists on 4.8 percent.

Latvian President On European Tour

· Latvian President Guntis ULMANIS is on a four-day tour of Belgium, Germany, and France, which he began on Monday. ULMANIS is to meet with President of the European Commission Jacques SANTER and Commissioner for Foreign Affairs Hans VAN DEN BROEK, and UNESCO Director-General Federico MAYOR in Paris. In Brussels, ULMANIS met with NATO Secretary-General Javier SOLANA in a session of the Permanent Joint Council and expressed Latvian hopes to join NATO. The President said that the NATO Council expressed satisfaction with Latvia's intention to reduce military expenses to 2 percent of the gross domestic product (GDP), adding that the results of the recent referendum on the amendments to the law on citizenship opens up ways to Latvia to the West. The NATO secretary-general's deputy Sergio BALANZINO said that the Alliance has not begun discussing the second wave of the expansion to the East. He added that Latvia is a candidate to NATO and has all possibilities of joining this organization.

South Caucasus & Central Asia

Rebellion Over, Eliava Charged With Treason

· Georgian President Eduard SHEVARDNADZE

European Republics

Ukrainian Economic Indicators

· Ukraine's State Statistics Committee said that in

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announced to the nation on Georgian television that there is no need to declare a state of emergency because the mutiny by Georgian army units in Senaki is over. Eighty percent of the troops have agreed to return to the base after being thwarted by Georgian Troops outside of Kutaisi. Georgian Authorities were aware of threats of a rebellion ahead of time and Defense Minister David TEVZADZE was able to replace guards with loyal soldiers at major military facilities. Security around major government buildings in Tblisi was enhanced during the one-day mutiny crisis.

The rebellion was ill planned and not prepared, in fact soldiers guns were not even loaded with bullets. Authorities have since discovered that the majority of troops which participated in the rebellion were told they were going on maneuvers. Georgian Border Guard troops blocked the road to the Port of Poti, which was the main target of the rebel troops. They were diverted to Kutaisi where they were met with artillery from Georgian Defense Troops. Georgian officials identified the problem, prepared plans to quash the rebellion, and acted in an efficient and coordinated way to stabilize the situation with minimal loss of life. This type of quick response highlights the ability of the Georgian Security Ministry, Defense Ministry and Border Guard troops to protect the nation. SHEVARDNADZE said, "The worst thing that could have happened is that Georgia could have lost the trust of the international community. That was the goal of the mutineers. Fortunately, this adventure is over and Georgia has shown it can defend its democratic triumphs."

Closed hearings were held today between the Security and Defense Committees of the Georgian parliament investigating the performance of Georgian government forces during this incident. Open hearings will begin next week. Akaky ELIAVA and 15 to 20 of his supporters, who escaped into the mountains, have been accused of high treason, which could carry a life sentence. The chairman of the Abkhaz parliament in exile Tamaz NADAREISHVILI said that

ELIAVA is a member of an elite Abkhaz security unit. ELIAVA has said that if SHEVARDNADZE remains president it will be impossible to restore Georgia's territorial integrity. The President named former Georgian deputy parliament speaker Nemo BURCHULADZE as a co-instigator of the revolt. Other leading Georgian politicians accused United Communist Party of Georgia chairman and retire General Panteleimon GIORGADZE, BURCHULADZE, and a member of the Coordinating Council of Abkhaz Political Organizations Boris KAKUBAVA of supporting the rebellion. SHEVARDNADZE said the mutiny incident was intended to thwart both the ongoing democratization process and plans for the transportation via Georgia of Azerbaijan's Caspian oil. He noted, "I have received lots of letters from big oil companies who say they are ready to continue cooperation with Georgia. The Azerbaijan International Oil Company (AIOC) resumed work on the Baku-Supsa pipeline. Construction was delayed on Monday when news of the Georgian rebellion broke. In a conversation between US President Bill CLINTON and Georgian officials today, CLINTON expressed the sentiment that not only was Georgia building a democracy, but had learned to defend it.

Turkmen, Turkey To Sign Gas Deal

· Turkey is expected next week to confirm plans to purchase 16 billion cubic meters of Turkmen gas annually. An official from Turkmenistan's Oil and Gas Ministry said, "On October 29th, during celebrations of the 75th anniversary of the Turkish Republic, Turkish President Suleyman DEMIREL and Turkmenistan's Saparmurat NIYAZOV will sign a relevant agreement in Ankara." Turkmenistan is expecting Turkey to ensure transits of Turkmen gas to European markets. Royal/Dutch Shell is working on a feasibility study for a $4 billion natural gas pipeline linking Turkmen deposits with Turkey, possibly via Iran. The Turkish route is vital for Turkmenistan, a gas-rich nation of 4.5 million people, because its economy has been hit severely by the halt of gas exports to Ukraine through Russia.

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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