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 28, 1998

Russian Federation

Politics

Austrian Visit Called "Very Satisfactory"

· Russian Prime Minister Yevgeny PRIMAKOV said that he, "was very satisfied," by talks with Austrian Chancellor Viktor KLIMA, Austrian President Thomas KLESTIL, head of European Commission Jacques SANTER and European Union (EU) Commissioner Hans VAN DEN BROEK. In a joint statement, Russia and the EU said, "We recognized that a credible and sustainable economic policy program is essential to address pressing social needs, meet existing financial obligations, and restore confidence in the markets and stability of the currency." The two sides underlined the importance of promoting free trade and the need for progress in Russia's membership negotiations for the World Trade Organization. The EU's 15 leaders pledged to coordinate economic policies to cope with the financial crisis in Russia and elsewhere. The Europeans have made clear that Russia must stick to reforms if it wants international help to overcome the crisis. KLIMA said he hoped a second installment of a $22.6 billion International Monetary Fund loan package can be disbursed as soon as Russia submits an economic reform program. PRIMAKOV said, "The Russian government is doing its best to build a socially-oriented market economy. We do not plant to follow the `monetarism without the population' principle." The two sides signed an agreement on cultural cooperation and a memorandum on Austria's participation in a program to train Russian specialists. Austrian and Russian businessmen signed agreements Tuesday, which will bring $600 million worth of investments in the real economic sector.

A Vice President For Russia?

· Russian President Boris YELTSIN's Deputy Chief of Staff Oleg SYSUYEV said the President has

turned over Russia's day-to-day affairs to Prime Minister Yevgeny PRIMAKOV, but the President will serve out his term. SYSUYEV said, "The President's main work will become reexamining the constitution. The government [of PRIMAKOV] is now fully responsible for the economy." He added in an interview published in Sevodnaya News that, "the most important task for the President is to turn over stable power to his successor." The appointment of PRIMAKOV doused political inflammation, after YELTSIN tried to ram-rod the re-appointment of former prime minister Viktor CHERNOMYRDIN through the Russian State Duma. Since YELTSIN has fallen ill again, CHERNOMYRDIN and leader of Out Home Is Russia Alexander SHOKHIN have called for a change to the constitution and the appointment of a vice president to serve out the President's term without early elections. Under the existing constitution, the prime minister would assume the powers of the president, if YELTSIN becomes incapacitated. PRIMAKOV would be required to call elections within three months. Such a statement from CHERNOMYRDIN a loyal ally to the President, who was once hand picked to succeed YELTSIN, is a sign that Russia's political elite is preparing for a post-YELTSIN era. Moscow Mayor Yuri LUZHKOV has already launched a Presidential campaign, in all but name. The Journal Of Commerce reported that since YELTSIN's longest surviving officer until last June, Sergei SHAKHARI, has been appointed legal adviser to the prime minister, PRIMAKOV may be aiming to launch a campaign of his own. SHAKHARI was

Today's News Highlights

Russia

GKO London Talks To Resume

Russia Seeks WTO Membership

European Republics

Ukraine Cancels Telecom Sale

Crackdown On Black Market

South Caucasus & Central Asia

Rus Defends Giorgadze Search

Aliyev Appoints More Ministers

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fired because he suggested that YELTSIN not run for a third term and that LUZHKOV would be a better candidate. His new role on PRIMAKOV's team means that SHAKHARI believes that PRIMAKOV is the best candidate. Comment: Clearly, with YELTSIN increasingly on the sidelines or resting in the hospital, PRIMAKOV's public stature is growing. This month PRIMAKOV said he would not be Prime Minister, if he was considering a run for the presidency. Is it possible that Prime Minister PRIMAKOV would prefer a title change to Vice President or President?

Economy

Ruble = 16.67/$1.00 (NY rate)

Ruble = 16.7/$1.00 (CB rate)

GKO Talks Resume In London Thursday

· Western bankers led by Deustche Bank and the Russian government will resume talks in London Thursday over billions of dollars in domestic debt frozen since the debt moratorium of August 17th. Foreigners hold about $11 billion in treasury bills (GKOs). The two sides remain far apart and the possibility of settlement remains bleak. The Russian government wants to settle both frozen bonds and forward currency contracts, which many investors bought to hedge against a devaluation of the ruble. Russia has offered foreign investors a 17-year dollar-denominated domestic bond. However, foreign banks want a cash up front payment on a portion of their ruble denominated debt, estimated to be $6 billion. Moscow insists that its cash-starved banks are unable to repay billions of dollars. Deputy Finance Minister Mikhail KASYANOV said, "The nation's banks don't have funds which would suffice even for partial payments on the forward deals." Some bankers say that if Russia does not honor their forward contracts, foreign creditors have threatened a barrage of lawsuits against Russian banks and seizure of Russian financial institutions' overseas assets. A Deustche Bank representative met with Russian Central Bank chairman Viktor GERASHCHENKO in Moscow to lobby for a senior Central Bank official to attend the talks in London.

Meanwhile, German KUZNETSOV, head of Gokhran, the state reserve for precious metals and stones, said his organization would sell gold-backed bonds to the Central Bank, ostensibly to finance increased gold production. The government said the gold-

backed securities will be used to cover its budget deficit. The Central Bank will print money to buy Gokhran bonds, backed by 50 tons of gold. Economists warn that the issue and printing more rubles will lead to high inflation. The government predicts it will print 20 billion rubles ($1.18 billion) before year's end. If the Central Bank prints enough money to cover the entire deficit, it could swell Russia's money supply by 40 percent, according to data reported in The Journal Of Commerce.

Russian Still Seeking WTO Membership

· Russian Trade Minister Georgy GABUNIA on Monday met with World Trade Organization (WTO) Director General Renato RUGGIERO, chairman of the working group handling Russia's application William ROSSIER, and ambassadors of Russia's trade partner countries in Geneva. GABUNIA noted that despite the financial and economic crisis, Russia is still interested in becoming a member of the WTO. The visit was aimed at coordinating scheduled talks. GABUNIA said, "October consultations at the WTO had been planned to be held simultaneously with a series of effective bilateral talks, which was not to happen for certain reason. That is why it was important that we should meet and agree what to do next." He noted that, "The process of negotiations will not slow down, and will follow its schedule with the next meeting of the working group to be held in December." That meeting is scheduled for December 16th and 17th.

Russia Increases Oil Exports For Cash

· Russia, desperate for cash to pay off huge foreign debts, is increasing oil exports. Fuel and Energy Minister Sergei GENERALOV said that oil exports, "This year will in fact be a record high," adding that the reason, "is clear lack of any other sources of cash." Oil exports is Russia's top foreign currency earner. GENERALOV gave no exact figures, but Russian news agencies said exports would reach about 810 million barrels this year. Chairman of Vneshekonombank Andrei KOSTIN said Russia will have to pay about $3 billion toward its foreign debt this year and some $18 billion next year. The Russian government is abandoning pledges to cut sales to reduce the oil surplus on world markets. Russia promised the Organization of Petroleum Exporting Countries to cut oil exports, because surplus oil on world markets has kept prices low. But the country

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has shown no signs of doing so. Russia exported 437.4 million barrels of crude in the first six months of 1998, up 10 percent from the same period last year. GENERALOV said exports for the second half will be slightly lower, but overall, Russia's oil exports will reach a new record.

Meanwhile, GENERALOV said that Russia is prepared to build a pipeline bypassing Chechnya, if Azerbaijan endorses the route toward Russia as the main route for pumping Caspian oil. He said the government is ready to construct the pipeline without Azeri investment, although he did not mention where funds would come from. Prime-Tass reported that land has been marked in a preliminary way and the contractor has been appointed.

Business

Gazprom Sale To Be Announced Next Week

· Russian Fuel and Energy Minister Sergei GENERALOV said that the government will next week announce the sale of up to 5 percent of Russia's gas giant Gazprom, the country's largest company. He said the government is considering a sale of a stake between 2.5 percent and 5 percent of its shares to Ruhrgas, the German utility and Gazprom's biggest export customer. The sale of a full 5 percent or a split of smaller parts is one of Russia's hopes to raise funds to reduce the budget deficit for the fourth quarter. Western bankers are skeptical that Russia can put together a sale in such short of time. James HENDERSON, an oil analyst at MFK Renaissance said, "I just hope they have a pre-arranged bidder so that the auction does not result in a fiasco," the Financial Times reported. The government which holds 40 percent of Gazprom could get up to $1.2 billion for a 5 percent stake. Gazprom chairman Rem VYAKHIREV said he was against the sale of Gazprom stakes at such depressed prices. He has been seeking an agreement with the government to ensure that the government's auction of Gazprom shares does not conflict with a Gazprom auction of its shares. Gazprom wants to sell up to 7 percent of the shares its controls to foreign investors. Gazprom has mentioned Italy's Eni and Royal/Dutch Shell as potential buyers. A western banker said no strategic buyer would be prepared to pay $1.2 billion for the government shares unless it was given access to Gazprom assets.

Pharmaceutical Exhibition In Moscow

· The fifth international exhibition Pharmacy 1998 opened in Moscow on Tuesday. Organized by the Moscow City government, the exhibition is attended by 309 pharmaceutical companies, including 55 foreign. Last year, Moscow budgeted 2 billion rubles for medicines, while the overall Russian pharmaceutical budget is 16 billion rubles. The exhibition coincides with a lecture series and scientific conference on the use of new medicines in advanced treatment methods and problems of domestic pharmaceutical producers.

Russia's Air Agency Struggles

· Chief executive officer of Russia's civil aviation's Chief Air Services Agency (GAVS) Rafil SHAIKHUTDINOV said plans to pay off 50 percent of its debts to air companies. SHAIKHUTDINOV, who was appointed on August 17th, said he was put in charge of sorting out, within two months, the agency's financial activity and draft proposals for restoring it to solvency. He said that GAVS has restarted daily settlements with air companies at an efficient rate. Money transfers for ticket sales are now completed within two to three days rather than two months. SHAIKHUTDINOV said GAVS' program is to expand the ticket sales network, booking services, management of resources and other vital functions. Earlier this month GAVS submitted to a meeting of the Committee of Air Carriers an anti-crisis strategy for the agency. The Committee approved the anti-crisis plan and recommended to air companies not to file suits against the agency.

European Republics

Ukraine Cancels 30 Percent Telecom Sale

· Ukrainian State Property Fund chief Alexander BONDAR said that Ukraine is not considering a sale of a 30 percent stake of state telecommunications giant Ukrtelekom. On Tuesday, he said there is "no way" the sale will take place this year. BONDAR also said that an earlier government forecast that the sale would generate between $2.5 billion and $3 billion in revenue is incorrect. "It will be considerably less."

Ukraine Prepares Black Market Crackdown

· Ukrainian Deputy Economics Minister Mykhailo CHECHETOV on Monday said the government is prepared to launch an experiment to give tax exemp

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tions to businesses that lessen their number of barter deals. This is apart of a move to crack down on Ukraine's black market, which is estimated to represent 41.6 percent of the economy. Businesses with increasing barter deals will be penalized by additional taxes. Ukrainian companies have resorted to barter deals instead of using gryvnias from their bank accounts to avoid tax. The government is loosing billions in tax revenues for the budget because of its shadow economy.

South Caucasus & Central Asia

Georgia Calls For Extradition Of Giorgadze

· At the meeting of the Commonwealth of Independent States (CIS) Prosecutors-General meeting in Tblisi, Russian Prosecutor General Yuri SKURATOV defended Russia's search for the former head of Georgian Security Service Igor GIORGADZE. He said, "Our consciousness is clear...All the information on hiding places of GIORGADZE, received from the Georgian side, is thoroughly verified by the Russian Prosecutor General's office." The Georgian Prosecutor General's office announced the search for GIORGADZE on suspicion for his involvement in organizing an assassination attempt on Georgian President Eduard SHEVARDNADZE on August 29, 1995. GIORGADZE left Georgia in September of 1995. SKURATOV noted that his office has done everything necessary in the search for GIORGADZE. SKURATOV said that, "the finding of Igor GIORGADZE is only a matter of time."

Earlier this year, US Senator Sam BROWNBACK, in a speech to the Asia Society, said that GIORGADZE, "remains under Russia's care despite repeated demands from Georgia that he be extradited. The Russians claim that they cannot locate him, however, even we here in the Congress could direct them to some of the places which Mr. GIORGADZE often visits in Moscow, among them places such as the gym belonging to the Ministry of Defense of the Russian Federation." Intercon sources have identified additional locations where GIORGADZE can

frequently be found: the Mimino restaurant on Lenningrad Highway, meeting with the Vladimir MIRONOV the President of MoscowParis Bank, which is located near the Church of Jesus Christ the Saviour, the supermarket Unikor on Ossennyi Boulevard, and meeting with the former head of the Spetnaz Group Alpha of the Federal Security Service Michael GOLOVANOV at his security company office also named Alpha. Georgian authorities expressed dissatisfaction with the effectiveness and pace of the search for GIORGADZE or other criminals. It is estimated that more than 11 people are on the wanted list in Georgia as participants in the attack on the motorcade of SHEVARDNADZE on February 9, 1998. Russia in the past has extradited other criminals on Georgia's most wanted list including Georgia's former finance minister, in the government of late president Zviad GAMSAKHURDIA, Guram ABSANDZE and Nemo BURCHALADZE. ABSANDZE was charged with involvement in an attempted coup of January 24, 1992, embezzling approximately $2 million worth of state property; charges of treason and armed robbery of private and state property were added after his escape.

Senator BROWNBACK sponsored a Senate resolution which passed earlier this year calling for the US to take all efforts necessary to encourage Russia to extradite GIORGADZE on the Interpol warrant. GIORGADZE continues to speak out openly, most recently in Pravda, calling for the overthrow of the Georgian government.

Aliyev Appoints More Cabinet Members

· Azeri President Geidar ALIYEV announced late Tuesday the re-appointment of Ramil USUBOV Interior Minister and Rashid ABBASOV as National Security Minister. These ministers join Foreign Minister Tofik ZULFUGAROV, Defense Minister Lieutenant General Safar ABIYEV, and Prime Minister Artur RASIZADZE in the Azeri Cabinet, which has 12 remaining vacancies. The post are also open for first deputy prime minister, five deputy prime ministers and the heads of 19 state committees.

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

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