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 29, 1998

MASLYUKOV and Deputy Minister of Finance Oleg VYUGIN presented the government's program called Measures to be Taken by the Government and the Central Bank of the Russian Federation to Stabilize the Social and Economic Situation in the Country to the International Monetary Fund (IMF) mission led by Deputy Head of the IMF's Second European Department Jorge MARQUEZ-RUARTE. The mission said it will study the program and requested that the government prepare its 1999 draft budget before the mission returns for more negotiations on November 15th. The IMF put on hold disbursing individual installments fro a $22.6 billion loan package in late August, after Moscow defaulted on its treasury debt and devalue the ruble. The government received no assurances of a release of a new installment. VYUGIN said, "The IMF insists that the budget for the fourth quarter be made very rigorous." He added that, "They [IMF] realized that the situation in Russia is very difficult, but not hopeless." MASLYUKOV said that, "The talks were very difficult. There were a lot of critical remarks from the IMF." Senior IMF representative in Moscow Martin GILMAN said the talks focused on three key issues: securing financing for the 1999 budget, restoring the solvency of the banking system, and meeting Russian obligations to foreign investors.

Prime Minister Yevgeny PRIMAKOV commented on the plan saying that the Russian government has, "resolutely opted" to take more control over the economy. The plan calls for tighter currency

Russian Federation

Politics

Primakov, Chechen, N. Ossetian Leaders Meet

· Russian Prime Minister Yevgeny PRIMAKOV is meeting today with Chechen President Aslan MASKHADOV to discuss the situation in the North Caucasus and the coordination of police efforts to combat crime in the region. They will focus on joint efforts by law-enforcement bodies to tackle kidnappings and other serious crimes in Chechnya. MASKHADOV arrived in North Ossetia only with his technical assistants and advisors.

PRIMAKOV also held meetings at the North Ossetian University in Vladikavkaz with North Ossetian President Alexander DZESOKHOV, members of government and parliament, scientists, cultural personalities, directors of industrial enterprises and leading economists of the republic. The meeting was attended by Russian Interior Minister Sergei STEPASHIN, Russian Minister for Nationalities Ramazan ABDULATIPOV, as well as Deputy Chairman of the Federation Council and President of Kabardino-Balkaria Valery KOKOV. PRIMAKOV discussed the socio-economic development of the Northern Caucasus, specifically of North Ossetia. He specifically mentioned the need for building and ensuring normal work of border check points and customs offices on the Georgian-Military Highway and the Transcaucasian Highway, the main transport routes of the Caucasus.

Economy

Ruble = 16.33/$1.00 (NY rate)

Ruble = 16.33 /$1.00 (CB rate)

Government Presents Anti-Crisis Plan To IMF

· Russian First Deputy Prime Minister Yuri

Today's News Highlights

Russia

Inkombank License Revoked

Rus Request Food Aid

Wheeling-Pitt Steel Lawsuit

European Republics

Estonia-Rus Border Agreement

US-Ukraine on Foreign Policies

Ukraine Sells Gas On Exchange

South Caucasus & Central Asia

Ankara Declaration Signed

Uz-Daewoo Invests For 2000

Politics-Economics-Business

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Thursday

October 29, 1998

Intercon's Daily

controls, price controls on medicines and some basic foods, a food reserve to help the country through the winter and indexing wages and pensions to compensate Russians for rising inflation. It tackles the tax system, lowering some income, property and profit tax rates, but tightening the rules in hopes of collection more taxes. The Central Bank will oversee a restructuring of the banking system and will close many insolvent banks. The measures also sets obligatory sale of foreign currency revenues at 75 percent and creates, "incentives for purchasing gold to replenish state reserves." The government is scheduled to discuss and approve the final plan Saturday, but MASLYUKOV said they would welcome the IMF's comments before then.

CB Revokes Inkombank's License

· Russia's Central Bank today revoked the banking license of Inkombank, one of the nation's largest bank. The decision came just two days after the bank's head Vladimir VINOGRADOV resigned. A Central Bank statement said that Inkombank had been bankrupted by the sharp collapse of the ruble. Inkombank has about 10,000 corporate and private shareholders including Russian gas giant Gazprom, several metallurgical enterprises, oil exporter Nafta Moskava and the European Bank for Reconstruction and Development (EBRD). Inkombank's domestic debt totaled 8 billion rubles ($489.9 million). Reuters reported that before the crisis, Inkombank held 20 percent of the funds of Russia's chemical and petrochemical firms, 17 percent of the funds of transport and food companies and 15 percent of the money of communications industry firms. It also serviced 8 percent of Russia's foreign trade.

A plan to rescue the bank is in the works. Head of the Russian Union of Industrialist and Entrepreneurs Arkady VOLSKY on Wednesday said his union was ready to rescue Inkombank, if it wins control of the bank. Inkombank's Supervisory Council head Vladimir GROSHEV said the union would get shares belonging to Inkombank's management, including those of former president VINOGRADOV. He added that after the bank changed management, it would choose a restructuring plan and new owners.

Business

Russia Asks For Food Aid

· US Agriculture Secretary Dan GLICKMAN on Tuesday said that he has received a request from

Russia for significant food aid, including quantities of meat, rice and grains. US Department of Agriculture general sales manager Chris GOLDTHWAIT and two State Department officials have been sent to Moscow to discuss an aid package. GLICKMAN said that until the US team returns from Russia, it would be premature to discuss the size of the food package. The US has confirmed that Russia will face a food shortage due to a poor harvest and the ruble devaluation, which has increased the cost of imported foods. In 1997, Russia imported about one-third of its food. Before August, Russia had been the largest export market for US poultry and other meat.

Last week, US Trade Representative Charlene BARSHEFSKY said the US will work with the European Union on providing a comprehensive food aid package for Russia. Her comments may come as a result of strong lobbying in Washington. US non profit organizations set up in Russia under the GORE-CHERNOMYRDIN Commission have come under pressure of Russian Tax police demanding taxes on revenues earned. These organizations were given food to sell in Russia to earn money, which could be used to help entrepreneurs there. The Russian Tax police is now demanding taxes on profits earned and funneled to other Russian start-up businesses. The non-profit organizations well connected in Washington appear to be lobbying Congress to block Food Aid to Russia until their funds are released.

Wheeling-Pitt Steel Sues 15 Rus-Japanese Cos.

· US Wheeling-Pittsburgh Steel Corp. Tuesday in Ohio filed a lawsuit against 15 Russian and Japanese traders and steel companies seeking a ban on the commerce of hot rolled steel to its clients at dumping prices. Wheeling-Pittsburgh Steel issued a statement saying that steel sales at prices below production costs inflict damage to the corporation's business. The Russian companies include Severstal, Magnitogorsk Steel Plant, and Novolipetsk Steel Plant, while the Japanese companies are Mitsui and Co., Marubeni America Corp., Itochu International Inc., Nippon Steel Corp. and NKK Corp. Chairman of Wheeling-Pittsburgh Steel Paul BUCHA in a statement said, "We are not opposed to all imported steel, but we are strongly opposed to that portion of steel imports that is being sold below the cost of production, or dumped. The

When you need to know it as it happens

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suit alleges the companies are, "attempting to shift the financial impact of their depressed economies to Wheeling-Pittsburgh Steel and other domestic steel producers by selling their hold-rolled steel to customers in Ohio and elsewhere at a price which is below their cost of delivering such steel to customers." The suit is part of a massive offensive of US steel producers against foreign exporters. In late September, US majors in the steel industry and trade unions started anti-dumping probes into Japan, Russia and Brazil. American industrialists said the proportion of hot rolled steel products from dishonest competitors has grown in the US market to 28 percent compared with 4.3 percent in 1995. The House of Representatives on October 16th passed a resolution calling on the CLINTON administration to ban for one year steel imports from ten countries, including Russia, that allegedly trade their products at dumping prices.

GORBULIN said the two sides will review a wide range of international issues and Ukraine an Washington's position on them. During SESTANOVICH's visit, he will participate in the fourth meeting of the foreign policy committee of the Ukrainian-US Interstate Commission. Today, SESTANOVICH, Ukrainian Deputy Prime Minister Sergei TIGIPKO, and Polish Deputy Foreign Minister Przemislaw GRUDZINSKI signed a trilateral statement on cooperation in reforming macro-economic policy and bodies of local self government, and developing small business.

Ukraine Sells Gas On Exchange

· Ukrainian state oil and gas company Naftohas Ukrainy on Wednesday held the country's first commercial gas auction, in attempt to solve Ukraine's natural gas supply debt. Deputy Economics Minister and auction committee chairman Anatoly VRUBLEVSKY said, "We expect to sell natural gas only on exchanges, like in the rest of the world, in the future." He said that nine million cubic meters of natural gas produced in Ukraine were sold for delivery by the end of the year, out of the total of 500 million cubic meters on the block. "The price averaged $36.86 per 1,000 cubic meters of natural gas," he added, compared with the starting price between $36.25 to $36.75 per 1,000 cubic meters VRUBLEVSKY estimated that the final price of the gas, including taxes and transport, will be about $58 to $59 per 1,000 cubic meters for the factories that bought the gas. Ukrainian industrial consumers buy imported natural gas from traders at around $80 per 1,000 cubic meters.

South Caucasus & Central Asia

Caspian Countries Sign Oil Declaration

· On the occasion of the 75th anniversary of the Republic of Turkey, Turkey and four Caspian countries today in Ankara signed a declaration on the transportation of Caspian and Central Asian petroleum to the Western markets through Eastern-Western corridor. Turkish President Suleyman DEMIREL, Azerbaijan President Geidar ALIYEV, Georgian President Eduard SHEVARDNADZE, Kazakhstan President Nursultan NAZARBAYEV, Uzbekistan President Islam KERIMOV and US Energy Secretary Bill RICHARDSON as observer signed the Ankara Declaration in the parliament. The statement said, "The

European Republics

Estonia-Russia Border Accord Prepared

· Estonian Minister of Foreign Affairs Raul MELK today declared that, the agreement on the border with Russia has been completed and no disputable questions remained. He said, however, that a large amount of technical work remained to be done, such as the printing and verification of maps. Because of this, he said the exact date of the signing of the agreement is difficult to predict. The Estonian minister stressed that his country was interested in maintaining normal relations with its neighbor Russia. MELK noted that the current crisis in Russia has adversely affected the Estonian economy and restraining its growth rate. He said the shrinking of the Russian market for Estonian manufacturers made his Baltic country look for new markets in West and Central Europe and in remote regions.

US-Ukraine Discuss Foreign Policies

· Special adviser to the US Secretary of State for the Newly Independent States Stephen SESTANOVICH, National Security and Defense Council secretary Vladimir GORBULIN, Foreign Minister Boris TARASYUK and the head of the foreign policy department of the presidential administration Vladimir OGRYZKO will meet to discuss foreign policies carried out by Kiev and Washington and prospects for expanding bilateral relations.

When you need to know it as it happens

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presidents, on the eve of a decision to be taken concerning the main Azerbaijan export pipeline, have strongly confirmed the accomplishment of their determination in realizing the Caspian-Mediterranean [Baku-Tblisi-Ceyhan] project as the main export pipeline project." It added that the presidents, "also stress the importance of this line to be open equally to the producers and transporters located on both sides of the Caspian Sea as well as the throughput to be assured for that line." DEMIREL, pointing out the historical significance, said that by signing the declaration, these nations were committing themselves to the 1,730 kilometer Baku-Tblisi-Ceyhan oil pipeline as the main pipeline. He said that Ankara Declaration clarifies their mutual resolution and will to transport energy resources to the world market by more than one pipeline. Turkish Foreign Minister Ismail CEM said that, "this great declaration forms the political framework of the economic development which closely interests our country for the future. The concerned countries made a moral commitment here. The country who fails to abide by this commitment will be under a serious responsibility." RICHARDSON noted that, "Now the issue is not whether Baku-Ceyhan is going to happen, because its is going to happen. The issue is how."

DEMIREL described the route as, "the most environmentally sound, economically rational project for the export of Caspian oil." Turkey's main argument against other routes is the heavy oil tanker traffic through the Bosporus Strait. CEM said on Wednesday that, "if the mistake of choosing a project that will carry Caspian oil to Western markets through the [Bosporus] Straits is made, Turkey will prioritize non-Caspian energy sources and producers for its energy investments and imports." US Presidential special adviser on Caspian Energy Richard MORNINGSTAR said he backed Turkey's insistence that the alternatives to Baku-Ceyhan—routes to the Black Sea port Novorossiisk in Russia and Georgia's Supsa—were unacceptable due to the threat extra tanker traffic would pose to Turkey's

Bosporus Strait. The Azerbaijan International Operating Company (AIOC), a consortium of 12 private and state companies led by British Petroleum-Amoco are expected to announce their decision on which should be the main export route on November 12th.

Russia Foreign Minister Igor IVANOV participated in the celebration of the 75th anniversary of the Turkish republic. IVANOV is due to meet Turkish President DEMIREL, Prime Minister Mesut YILMAZ, parliament chairman Hikmet CETIN, and Foreign Minister CEM to discuss the status and prospects for the development of Russian-Turkish relations. IVANOV is the first Russian foreign minister to visit Turkey in the post Soviet era.

Uz-Daewoo Creates New Engine, Models

· The joint venture between Uzbekistan's Uzavtosanoat and South Korean conglomerate Daewoo Corp. are firming up plans for projects in the year 2000. Uz-Daewoo Auto plans to invest $94 million in launching a new model car in 2000. The venture's director of strategic planning Zhakhongir MAVLANI today said Uz-Daewoo will add the class B, small engines Matiz model to its product range. It will also modernize class C sedan Nexia model. The venture plans to produce 80,000 Matiz cars and 100,000 upgraded Nexia vehicles a year at the plant. The Matiz model will compete with Ukrainian Tavriya model in the Commonwealth of Independent States (CIS). The joint venture is the largest in Uzbekistan, having built a $650 million plant in 1996 with the capacity to produce 200,000 vehicles a year. In 1997, the Tashkent plant produced 65,000 vehicles, of which 14,000 were exported to the CIS.

MAVLANI also said that Uz-Daewoo will build a $250 million car engine plant in Tashkent by 2000. "A decision has been made that Daewoo will grant its full assistance to Uzbekistan in building a car engine plant. The new plant will produce 260,000 engines a year for Uz-Daewoo Auto plant as well as other Daewoo plants in the CIS. Daewoo has so far invested an estimated $1.4 billion in Uzbekistan.

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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