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

Thursday, October 22, 1998

Russian Federation

Politics

Russian-Grecian Ties Strengthen

· Russian Prime Minister Yevgeny PRIMAKOV today is meeting with Greek Foreign Minister Theodoros PANGALOS. PRIMAKOV said, "We are very much satisfied with relations between our countries, our relations in the economic sphere are developing well, and in the political one we have common views on many issues." PANGALOS will also meet with his Russian counterpart Igor IVANOV to discuss a wide range of questions pertaining to bilateral relations and international problems, including the situation in the Balkans and in the Eastern part of the Mediterranean. According to the Russian foreign minister spokesman Vladimir RAKHMANIN, a number of documents have been prepared for signing on cooperation between the foreign ministries of Russia and Greece in the archival field and in the sphere of consular relations. Greek Foreign Ministry officials also said PANGALOS would discuss the latest developments in Kosovo. Greece believes that Russia's more active participation in all international forums has a decisive importance for world peace and stability.

The two sides will also concentrate on plans for Greece and Cyprus to purchase a host of Russian rockets. The arms deals have frustrated Turkey, which claims it will use force to block deployment of the Russian rockets on Cyprus. It is known that a Greek military delegation is already working in Moscow to familiarize itself with the technical novelties offered for sale to other countries by Russia's leading arms exporter Rosvooruzheniye. Athens declared that it plans to conclude a $500 million contract with Russia for the delivery of TOR-M1 defense systems, an unprecedented plan for a NATO member country. Bilateral trade and economic turnover

between the two countries, excluding the armaments contracts, amounts to nearly $1 billion.

Economy

Ruble = 16.83/$1.00 (NY rate)

Ruble = 16.76/$1.00 (CB rate)

Government To Impose Export Duty

· Finance Minister Mikhail ZADORNOV today said that the government intends to decide on a re-introduction of export duties not only on oil but also on a number of other export commodities. He said that a committee had been established on Tuesday to draft a proposal on export duties by the end of the week. ZADORNOV said he wants to impose an export duty of $6.50 to $7.00 per ton of crude oil. He said, "We believe that the sum...will seriously increase budget revenues, but will not undermine the oil industry....Oil companies are profitable even at the [current] exchange rate of 17 to 18 rubles per dollar, while at the rate expected in three months, their profits will be equal to $13 to $17 per ton." He added that if there was a surplus in the budget, it could be used to further develop the oil sector. Representatives from 12 major oil companies have stated in the past that if the draft budget is introduced, the industry will use all means at its disposal to force ZADORNOV from office.

IMF To Negotiate On Printing Rubles

· The International Monetary Fund (IMF) has begun negotiations with top Finance and Economic Ministers

Today's News Highlights

Russia

S. Korea Invests $420M In FSU

BMWs To Be Made In Russia?

European Republics

Estonian Expelled From Russia

Adamkus In US; IMF In Vilnius

Ukraine-Chase Agree On Loan

South Caucasus & Central Asia

Five Detained In Georgia

Exemptions To Section 907

Drive For Baku-Ceyhan Route

Politics-Economics-Business

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Thursday

October 22, 1998

Intercon's Daily

and the State Tax Service on a $22.6 billion bailout package that was frozen in mid-August. Russia has received only $4.8 billion of the loan. The government is counting on receiving more funds to pay their bills for the rest of the year. The IMF insists on reviewing the government's plan to pull itself out of the crisis, finding signs that its policies are being implemented, and a reviewing the budgets for the fourth quarter and next year before releasing additional money. Finance Minister Mikhail ZADORNOV believes the IMF will release more money this year, but not the full $4.3 billion that was held back in September. "As long as the IMF gives its approval to the government's program, we have understanding with out creditors, and this is a very important factor for Russia," ZADORNOV said. He believes that Russia can get "substantial investments." He stressed that "strategic investors who put their money in Russia's oil and building sectors re waiting for certainty." The IMF and Russian officials are to discuss structural reforms of the country's banking system, social sphere, and monopolies in natural resources. ZADORNOV said that the government will not print more than 20 billion rubles ($1.16 billion) in the fourth quarter. The IMF believes it is inevitable that the Russian Central Bank will have to print "a certain amount" of rubles, but it will try to keep it to a minimum. On Tuesday, Prime Minister Yevgeny PRIMAKOV said that any boost to the money supply would be backed by an increase in gold and foreign currency reserves. Today, the IMF mission is meeting with First Deputy Prime Minister Yuri MASLYUKOV.

Gerashchenko Participates In Moscow-Invest

· Russian Central Bank Chairman Viktor GERASHCHENKO said today that the banking and finance restructuring program, "will be a tough one, since there is no money." GERASHCHENKO is in London participating in the first international forum of Moscow-Invest 1998. He agreed to participate when he was still head of a large Moscow commercial bank. Since GERASHCHENKO became Chairman, his schedule for this trip has changed considerably. He will meet with head of the Bank of England Eddy GEORGE and attend the second round of talks with western holders of Russian Treasury bills and federal loan bonds led by Deputy Finance Minister Mikhail KASYANOV. The Central Bank's promptness to fix the ruble rate and take concrete measures

to reform the banking system depends on the results of these talks. London banking circles believe that GERASHCHENKO's consultations can, "significantly influence" the negotiations between Russia and Western commercial banks on rescheduling the Treasury bill debt.

Business

South Korea Invests $420M In FSU

· According to South Korea's Ministry of Finance and Economy, direct investment in the former Soviet republics by South Korea's top five largest conglomerates is expected to total $420 million. Hyundai, Samsung, Daewoo, LG and SK have invested $52 million in Russia, $106 million in Kazakhstan, $109 million in Uzbekistan and $153 million in Ukraine as of the end of June. Daewoo is the largest investor in the region with $379 million, which accounts for nearly 90 percent of total investment by the five companies, followed by Hyundai with $29 million, Samsung with $7.8 million, LG with $3.9 million and SK with $255,000. Daewoo, more active in the region than other South Korean business groups, is expected to suffer severe setbacks, if Russia's financial crisis persists.

BMWs To Be Assembled In Russia

· Germany's car-making giant BMW is planning to launch an assembly line in Russia, most likely in its Baltic enclave of Kaliningrad. A BMW company official today said, "The concern is seriously interested in appearing on the Russian market and has plans to begin the assembly of various models of cars, meant for the Russian market, in late 1999."

Third Millennium Russia Fund

· John T. CONNOR, Jr. announced last week the establishment of a new no-load mutual fund, Third Millennium Russia Fund, which will invest in the equities of Russian companies. His new book, "How To get Rich In Russia," was also released last week. CONNOR said he is confident about the future of Russia. "Long-term, Russia's natural and human resources and the Russian people's strong desire for success will again make investing in Russian companies attractive." He said that the Third Millennium Russia Fund may have one of the lowest price/earning ratios of any mutual fund. Low price/earning ratios tend to suggest the share price may be cheap compared with a fund's earnings. CONNOR said,

When you need to know it as it happens

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"When we see more stability in the Russian currency, the ruble, and when the program of the new Government of Prime Minister Yevgeny PRIMAKOV comes into better focus, these securities are almost certain to se renewed investor interest." The Fund's Marketing Director Jonas FERRIS explained the fund's low $1,000 minimum investment as, "an aggressive, volatile sector fund, the average investor should not have too much exposure to this market."

COHEN, Secretary of Commerce William DALEY, and various members of the Senators and House of Representatives. ADMAKUS gave a speech on European security at Washington's Center for Strategic and International Studies.

Meanwhile, a mission of International Monetary Fund (IMF) officials has arrived in Vilnius, Lithuania today for a two-week evaluation visit. An IMF spokeswoman said, "The IMF mission will collect data and speak with officials to assess current conditions in Lithuania." The mission will meet with top economic policy advisors, including the Prime Minister, deputy ministers and the chief of the Central Bank.

Chase and Ukraine Reschedule Loan

· Chase Manhattan Bank and Ukraine have reached an agreement over the rescheduling of a $109 million fiduciary loan which matures this week. Ukrainian Finance Minister Igor MITYUKOV said, "We are converting one obligation into longer maturity." He said a joint statement would be forthcoming. "For Ukraine it was of utmost importance to conduct these talks in a spirit of not discriminating against investors and on the basis of freedom to participate in the restructuring of this debt." It has been reported that holders of the existing Chase bonds wanted 30 percent in cash, rolling over 70 percent into the two-year bonds. Deputy Finance Minister Sergei MAKATSARIYA said that, "by the end of this year all of our debt restructuring with sovereign credits are fully covered." The results of these talks were crucial for Ukraine to maintain a minimum level of foreign currency reserves in line with an International Monetary Fund (IMF) agreement for a $2.2 billion loan.

South Caucasus & Central Asia

Georgia Detains Five In Connection With Revolt

· Georgian police have apprehended five people in various areas of Samegrelo in Western Georgia on suspicion of being involved in organizing and participating in the anti-government revolt on Monday. The mutiny was led by Akaky ELIAVA, who escaped into the mountains with approximately 15 to 20 supporters. Law enforcement agencies have mounted a search for them. There are both civilian and military persons among the detainees, whose names have not been disclosed because of the ongoing investigation. The suspects were detained as a result of

European Republics

Estonian Citizen Expelled For Spying

· The Russian Federal Security Service (FSB) has expelled an Estonian, Ville SONN, for espionage activities involving surveillance of a military facility. According to an FSB statement, "a citizen of Estonia engaged in visual reconnaissance was detained on the territory of a military facility in the Pskov region. During an investigation conducted by state security agencies it was established that the Estonian citizen was in Russia on an assignment given by Estonian secret services, collecting information of a military and political character." The statement adds that it was determined that since there was "insignificant damage caused by his activities and his voluntary confession, and guided by the intention to maintain good-neighborly relations with Estonia," the FSB has decided not to launch criminal charges against the man. The Estonian has been expelled without the right to return to Russia.

Earlier this week both Russian and Estonian Foreign Ministries called for the development of Russian-Estonian relations. Estonian Prime Minister Mart SIIMANN said improving relations with Russia is one of the goals of Estonia's foreign policy. Russian Foreign Ministry senior spokesman Vladimir RAKHMANIN on Tuesday said, "We expect that this interaction with the new leadership of the Estonian foreign ministry and the first statement by Raul MJALKA allow one to hope for this will be helpful to consolidation of these shifts into a steady tendency."

Lithuanian President Returns To The US

· Lithuanian President Valdas ADAMKUS began his working visit to Washington, DC on Wednesday. The Lithuanian Embassy said ADAMKUS will meet US President Bill CLINTON, Secretary of State Madeleine ALBRIGHT, Defense Secretary William

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joint operations by the Georgia's Interior, State Security Ministries and the Prosecutor's Office.

Exemptions To Section 907 Adopted

· On Wednesday, the US Congress approved various exemptions to Section 907 of the Freedom Support Act. Azeri Ambassador to the US Hafiz PASHAYEV said the congressional actions represent a significant victory. Congress allowed assistance to Azerbaijan for the following purposes: democracy assistance, humanitarian aid, NUNN-LUGAR provisions to prevent the spread of weapons of mass destruction, and programs of the Trade and Development Agency (TDA), Foreign Commercial Service, Overseas Private Investment Corporation (OPIC) and Export-Import Bank. Congress eliminated House language restricting reconstruction assistance to countries that agreed to "direct or proximity negotiations without preconditions" and language direction assistance solely to Nagorno-Karabakh. President of the Caspian Business Group Dick D'AMATO said in a press release, "We are encouraged that the language circumventing the international diplomatic process known as the Minsk Group has been dropped. And while there is no substitute for the elimination of Section 907, which prohibits direct assistance to Azerbaijan, the exceptions adopted by Congress preserve and extend existing exemption." PASHAYEV said according to the Azerbaijan Newsletter, "While we will never be satisfied until Section 907 is completely eliminated, we are pleased with the expanded list of exceptions and the elimination of adverse House language."

Final Push Before Caspian Route Decision

· US officials have launched a two pronged strategy to persuade Caspian nations and oil companies to build the main pipeline to export Caspian oil along the Baku-Ceyhan route. This is the route preferred by the CLINTON administration, but its high cost estimated between $2 billion and $4 billion and length of 1,075 miles raises questions of its economic viability. This week US Commerce Department energy official Jan KALICKI is lobbying the

governments of Azerbaijan, Kazakhstan, and Turkmenistan. Meanwhile, US National Security Adviser Sandy BERGER is meeting today with senior officials of the 12 oil companies, which make up the Azerbaijan International Operating Company (AIOC). British Petroleum (BP) and Amoco Corp., soon to merge, hold the largest shares in AIOC, which also includes Azeri state-owned Socar and Turkish TPAO. AIOC must decide between three routes: the Baku-Ceyhan route favored by the US, Azerbaijan, and Turkey, Baku to Supsa favored by Georgia, and Baku to Novorossiisk favored by Russia. Chairman of Socar Natik ALIYEV said, "Russia sent its offer very late. As their offer did not answer all of our questions, we are not seriously considering the Russian route. We are concentrating on the Turkish and Georgian options." Washington wants to avoid the main pipeline going to Novorossiisk for fear of Russian domination over energy exports from the Caspian Sea and possible southern routes through Iran. Whichever nation controls the pipeline will have enormous influence over oil producers in Kazakhstan and Azerbaijan. A decision which has been expected by the end of the month may be made on October 29th, when Azerbaijan, Turkey, and Georgia are to sign a political declaration on the construction of the Baku-Ceyhan pipeline in celebration of Turkey's 75th anniversary. According to the Journal of Commerce this agreement would mean little unless the oil companies agree to put their cash on the line. Industry analysts speculate that a decision may be put off until November or indefinitely.

Meanwhile, the second Caspian Infrastructure exhibition opened in Baku on Tuesday to displays systems of the electricity and water supply and purification, telecommunications, machine-building, the industrial and civil construction, transport and investment and financial services. The conference coincides with Investment Options in Azerbaijan to discuss the Azeri economic situation, conditions for foreign investors, investment possibilities of transport and communications, the social infrastructure, the electricity production and the agrarian sector.

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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