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 7, 1998

Russian Federation

Politics

Primakov Piles The On Promises

· In his first televised national address, Russian Prime Minister Yevgeny PRIMAKOV on Tuesday said that emergency measures to stabilize the situation are being developed. He continued to promise Russians reforms and a new economic program within several weeks. PRIMAKOV outlined some measures of the government's economic plan. His Cabinet is committed to boosting production and providing tax relief. PRIMAKOV said priority would be given to restarting the banking system, reforming taxes to stimulate production, and untangling the debt mess that is killing enterprises. He said that the government must differentiate between commercial banks which should continue to operate and those to liquidate. He said that some insolvent banks will be helped, but all will not be nationalized. PRIMAKOV called on the Customs Committee to unfreeze the arrested equipment worth over $1 billion from enterprises, which had been held for non-payment of customs dues and VAT. He said, "We will carry on the course of privatization. But not for the sake of making rich some individuals or groups of people." PRIMAKOV mentioned strict controls over the distribution and production of vodka. The government promised to pay all the debts to veterans and help regions with the payment of salaries to teachers, physicians and cultural workers, "down to the last kopeck." He also guaranteed that there will be enough food supplies for the winter, especially since Russia has reached agreements with Ukraine and Belarus to pay off their energy debts in food. PRIMAKOV concluded by saying, "a way out of the crisis in Russia is tranquillity and accord, stability and discipline, the observation of the constitution and laws, the priority of interests of society as against

personal interests. Let us all together solve the vitally important tasks of our motherland. I understand that many people, planning to take part in rallies tomorrow, have grounds for the dissatisfaction, but I want to call on everyone not to rock our common boat in today's turbulent seas." Today, thousands of Russians in a nation wide protest called for the resignation of President Boris YELTSIN and early elections for the Russian State Duma. Many citizens took to the streets despite PRIMAKOV's promises, saying that promises are not enough and action is needed.

Cabinet Communists Earn More Powers

· Russian Prime Minister Yevgeny PRIMAKOV has granted broader powers to the Communists within his Cabinet. He authorized First Deputy Prime Minister Yuri MASLYUKOV top take over his duties in his absence. In MASLYUKOV's absences, his duties will be assumed by Deputy Prime Minister Vadim GUSTOV. In a move which hints that the Kremlin is not looking to replace Alexander SHOKHIN, who joined the government for a short time in charge of finance, PRIMAKOV gave MASLYUKOV the responsibility for negotiations with key western financial organizations. Since joining the Cabinet, MASLYUKOV, the last chairman of the Soviet central planning agency Gosplan, has proposed solving Russia's economic problems with Soviet-style measures. Finance Minister Mikhail ZADORNOV continues to oppose MAS-LYUKOV's proposals. "We should clearly understand, that any attempt to solve wage and pension debts by

Today's News Highlights

Russia

Russia To Pay Debt Servicing

Inflation And Tax Estimates

Gazprom Chief On The Future

Gazprom-Iranian Oil Relations

European Republics

Ukraine PM Visits US

South Caucasus & Central Asia

Kazakh To Cut Budget Spending

Kazakh Defense and Oil

Politics-Economics-Business

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Wednesday

October 7, 1998

Intercon's Daily

cranking up money-printing presses will lead to sharp rise in prices," ZADORNOV said. He predicts monthly inflation at 20 to 30 percent per month. PRIMAKOV retains personal control over the Finance and Judicial Ministries, the Stare Customs Committee, the State Tax Service, and the Federal Tax Police Service.

FSB Faces Restructuring, Again

· Russian President Boris YELTSIN on Tuesday issued a new decree for the restructuring of the Russian Federal Security Service (FSB). The security service will consist of a chairman, two first deputy directors, six deputy directors heading departments and two deputy directors serving as the chiefs of the Moscow and St. Petersburg branches. Chairman Vladimir PUTIN will form a 17-member board. PUTIN said YELTSIN's decree will, "significantly boost the status" of the security service chiefs in Russia's two largest cities. General Nikolai PATRUSHEV, who was recently appointed chief of the presidential department controlling regional officials, has returned to the security service in the post of deputy director in charge of economic crimes. The combination of servicing divisions allowed for a reduction of personnel and the funds released would strengthen the operational units, PUTIN said.

Economy

Ruble = 15.8/$1.00 (NY rate)

Ruble = 15.8/$1.00 (CB rate)

Russia Able To Pay $3.2 Billion Debt Servicing

· Russian Finance Minister Mikhail ZADORNOV Tuesday said that Russia has the resources to service all remaining foreign debt due this year. He said, "A total of $9 billion in foreign debt payments was due this year and only $3.2 billion is still outstanding. Russia can pay that $3.2 billion by the end of the year." This he says is because gold and currency reserves in the Central Bank total $12.5 billion. ZADORNOV said that by the end of October the government will implement new financial instruments. He said, "We are now working on a...package of proposals to introduce quick changes into the tax sector in order to boost revenues," in the fourth quarter. He noted that the government is prepared to offer mutual debt cancellation with a number of enterprises, particularly the energy sector. ZADORNOV predicts that the exchange rate will

reach 20 to 30 rubles to the dollar by the end of the year. Financiers also proceeded from the premise that the emission to the banking sector will be carried out through restructuring GKO treasury bills. Russian Prime Minister Yevgeny PRIMAKOV and his new Cabinet has been criticized for not developing an economic program. Russia today said that its new economic program is dependent on the release of funds from the International Monetary Fund (IMF) and the World Bank; negotiations are being held this week. However, the IMF says that future credits are dependent on the implementation of market reforms and fiscal measures.

Inflation Estimates And Tax Expectations

· The State Statistics Committee announced that inflation in Russia reached 38.4 percent in September. The August inflation was 3.7 percent, instead of 15 percent as previously officially reported. Prices of industrial commodities increased by 54.3 percent in September, while food prices went up by 39.5 percent and tariffs on services became 3.4 percent higher. Back in August, non-food prices raised by 7.1 percent, food prices by 2.4 percent and tariffs by 1.2 percent. The rise of prices and tariffs was the highest in Moscow. September inflation reached 51.3 percent in the Russian capital. Food prices increased by 58.8 percent, non-food prices by 75.9 percent and tariffs by 7.6 percent. An average Russian cost of 25 basic foodstuffs enlarged by 22.6 percent in September and amounted to 303.9 rubles per month by late September.

Russian Tax Minister Georgy BOOS said that the Russian State Tax Service has collected 9.3 billion rubles in taxes in September, which is two billion rubles less than in August. BOOS said September's tax situation was unacceptable. He cited measures in store to build up tax revenues of the budget. The State Tax Service is going to restore October tax returns to the July and August levels, BOOS said, adding that the October target was 11 billion rubles, with over 13 billion ruble sought as a maximum. He said only 70 percent of all payments employ the cash this hinders payments from the federal budget.

The Russian State Tax Service plans to close all foreign currency accounts and accept taxes in rubles only starting January 1, 1999. BOOS said the permission to pay taxes in a foreign currency was

When you need to know it as it happens

Politics-Economics-Business

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Wednesday

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temporary and caused by bank problems. The Service received $400 million to $600 million worth of taxes in September.

Business

Lukoil Pres. Predicts Fewer Oil Companies

· LUKoil president Vagit ASLEKPEROV predicts that only a few Russian oil companies will survive a consolidation of the industry in 1999. He said, "Oil companies will enlarge worldwide. If we want to be competitors, if we want to be an oil power, then we have to create not 10 or 15, but two to three true international oil companies." He does not believe in so-called mergers, such as the attempted Yukos-Sibneft merger, preferring instead buy-outs or takeovers instead. ASLEKPEROV hopes that LUKoil will remain a leader in the industry. A forecast for even lower world oil prices places more pressure on oil produces already hit hard by Russia's financial crisis. LUKoil is implementing measures based on these predictions, including a 17 to 18 percent reduction in production costs.

Shell To Invest $30 Million In New Stations

· Deputy general director Sergey SAZHENKOVE of Shell AZS, a unit of Royal/Dutch Shell, said the company has committed to invest $30 million on 25 new gas stations in St. Petersburg. He said, "We opened out first station in early September and expect to open a second outlet by the end of October." The remaining stations will be built over the next two to three years. They will be open 24 hours, offer gasoline and diesel fuels from local refineries and unleaded gasoline from Finland, and sell convenience food at the station. SAZHENKOVE said that the 25 new stations will create about 500 jobs in St. Petersburg, the Dow Jones Newsline reported. European oil companies have been investing significantly in northwest Russia in the belief that long-term growth will be robust. Finnish oil and chemical group Neste Oy is construction an oil product import terminal in St. Petersburg and state-owned Norwegian oil company Statoil AS is planning to build 10 gasoline stations in the Murmansk region.

Vyakhirev On Gazprom's Future

· The seventh annual international conference on the Russian and Commonwealth of Independent States (CIS) natural gas industry opened in Moscow on Tuesday, organized by Russian gas giant Gaz

prom and the Royal Institute of International Relations. The conference will hear a number of reports dealing with a variety of aspects in the operations of the natural gas industry in Russia and other CIS countries, including investments, financial and production spheres. Chairman of the Gazprom Board of Directors Rem VYAKHIREV addressed participants outlining the future of Gazprom. He said that Gazprom is trimming its investment program by two-thirds because of depressed fuel prices in the world and Russia's crisis. The company plans to concentrate on five or six major projects, citing the construction of the Yamal-Europe and Russia-Turkey gas pipelines, the latter to run over the Black Sea bottom. He said the natural gas accounts for about 50 percent of all fuel in Russia, a proportion greater than in industrially developed nations. The company hopes to raise the figure to 57 percent within years. VYAKHIREV said gas consumption in Russia would rise by an estimated 30-35 percent by 2010, to 337 billion cubic meters.

VYAKHIREV expressed his confidence in the new government. "The first steps of the new Russian government, led by Yevgeny PRIMAKOV, make us hope that it will manage to stabilize the situation and lay the foundation of an economic growth, relying, in the first place, on the production sector and on the support for domestic producers," he said. Meanwhile, former chief of Russia's Central Bank Sergei DUBININ on Monday took office as vice chairman of the board of the Gazprom. He will be in charge of issues related to banks and securities.

Gazprom-Iranian Gas Cooperation

· Russian gas giant Gazprom's chairman Rem VYAKHIREV on Tuesday announced that Gazprom is working with the gas industry of Iran to increase cooperation. He said that the South Pars project in Iran is proceeding according to schedule and Gazprom coordinates actions with its main partner in the project, the France's Total. Gazprom is conducting negotiations with the Iran on developing the fourth and fifth sets in the framework of the project. The two sides are also considering a chain of underground gas storages and deliveries of Russian equipment for the Iranian oil and gas industry. The project for setting up a joint drilling company has virtually been completed. VYAKHIREV also said Gazprom is interested in developing a number of gas deposits on Iran's shelf and in inland Iran.

When you need to know it as it happens

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Wednesday

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European Republics

Ukraine Premier Visits US

· The Ukrainian Prime Minister Valery PUSTOVOITENKO is on a four-day visit to the US, during which he will take part in the International Monetary Fund (IMF) and World Bank meetings. PUSTOVOITENKO is expected to hold talks with US Vice President Albert GORE, US Defense, Deputy Secretary of State Strobe TALBOTT, Secretary of Energy Bill RICHARDSON and First Deputy Secretary of Finance Lawrence SUMMERS, American congressmen, as well as ethnic Ukrainian politicians and business executives. The prime minister is also scheduled to meet with the heads of the Austrian, German, French, Japanese, Armenian, Belarus, Georgian, Moldova and Azeri delegations. PUSTOVOITENKO is expected to have talks with the President of the European Bank for Reconstruction and Development as well as heads of international financial institutions and leading US companies. He is also to deliver at the US national press club the speech titled Ukraine on the path of market reforms, as well as meet journalists from the Washington Post newspaper.

South Caucasus & Central Asia

Kazakhstan To Cut Budget Spending

· Kazakhstan Central Bank chairman Kadyrzhran DAMITOV said that his nation plans to cut budget spending by year's end due to the fall in oil prices, but it will not press international lenders for more money. "Because of the fall of oil prices, we start this summer to take certain measures which will allow us to cut budget spending significantly by the end of the year." He did not specify how such cuts will be made, but said that social sector spending will not be affected. Kazakhstan may use earlier loans which it has not spent, totaling around $400 million, to fill the gap. DAMITOV said that Kazakhstan has been influenced by the financial crisis in Russia. He said, "Some international clients of our banks, some portfolio investors tried to pull out their money, but the scale

is not so great as in Russia." He did not release figures on the outflow of foreign capital. The Central Bank said that gold and currency reserves were reduced in August and September by about $100 million. At the end of September, reserves stood at $2 billion.

Today, the European Bank for Reconstruction and Development (EBRD) praised Kazakhstan's reforms. The Bank said its would invest up to $700 million in Kazakhstan in the coming years. EBRD representative in Kazakhstan said, "We like the reform program here, we think that the management of the economy has been prudent and well done."

Kazakh-China Defense Mins., Oil Pipeline

· Kazakh Defense Minister Mukhtar ALTYNBAYEV and Chinese counterpart CHI Haotian met Monday in the capital of China's Xinjiang Uygur Autonomous Region. They discussed putting into practice agreements reached during President JIANG Zemin's July visit to Kazakhstan on reinforcing long-term good-neighborly relations oriented to the 21st century and developing cooperation between the Chinese and Kazakh armed forces. ALTYNBAYEV said his nation supports Chinese reunification. CHI expressed hope for the new century since the two nations have close political, economic, science, technological, and cultural relations. ALTYNBAYEV said that the informal meeting shows the sound cooperative relations between the two armed forces and the two countries, and expressed the hope that they will be further strengthened. Both ministers said relations between their armed forces promotes peace and stability in the region and the world.

Meanwhile at the sixth International Kazakhstan Oil and Gas Conference, head of Kazakhstan's state oil company Nurlan KAPPAROV said there are no delays on the construction of the 3,000 kilometer pipeline linking oil fields in Kazakhstan to western China. The pipeline to China, with a planned capacity to transport 20 million tons, is scheduled to be built by 2005. Kazakhstan plans to produce 28 million tons of crude in 1998.

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

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