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

Tuesday, November 10, 1998

its military might to preserve Russia's superpower standing in spite of its economic crisis. Russia's military has been staging exercises at Cold War levels. A Russian newspaper noted after exercises on October 6th and 8th that, "Russian long-range aircraft are again in a state of full combat readiness as was the case in the hottest years of the Cold War." Over the past three months, Russia has held similar exercises jointly in Armenia and Kazakhstan. PRIMAKOV believes that the Russian state will be strong in the future, but until then it is necessary to appear strong and remain a world superpower. However, it is not clear how Russia can afford to stage such high level exercises. It seems that Russia may squander its resources for military shows, rather than increase the standard of living of its citizens, who are struggling to survive the Winter.

Maslyukov Encourages Start-II Ratification

· Russian First Deputy Prime Minister Yuri MASLYUKOV urged the Russian State Duma to speedup the ratification of the START-II disarmament treaty signed with the US in 1993. Many deputies in the Communist-dominated Duma oppose the measure. MASLYUKOV's call was clearly aimed at improving the government's case for negotiating more Western credits. START-II, already passed by the US Senate, slashes both countries' deployed nuclear warheads by up to two thirds to no more than 3,5000 each by 2007. The Duma has stalled ratification because of fears over US plans for missile defense systems, the expansion of NATO, and the cost of

Russian Federation

Politics

US Requests Documents On POWs

· Earlier this year, Secretary of State Madeline ALBRIGHT appealed to Russian Prime Minister Yevgeny PRIMAKOV, a former KGB chairman, for the release of a KGB document suggesting captured Americans from the Korean War, Vietnam War, and other Cold War conflicts were taken to the Soviet Union in the late 1960s for "intelligence-gathering purposes," The Washington Times reported. US President Bill CLINTON may discuss this issue with PRIMAKOV at the APEC Summit in Malaysia. The Pentagon discovered these papers in January. Russia denies that these plans were ever carried out and refuses to turn over the documents claiming they are classified. The documents were first mentioned in the published memoir of Russian historian General Dmitri VOLKOGONOV who described them as "sensational." He stated he uncovered the material while working as co-chairman of the joint US-Russian commission of 1992 to resolve prisoner of war and missing in action (POW-MIA) issues from the Korean War, Vietnam War, and the Cold War. The document outlining the program to exploit Americans was signed by Vladimir SEMICHASTNY, head of the KGB secret political police from 1961 to 1967. VOLKOGONOV searched for traces of the intelligence operations, but none were found. In his memoir, "Study of Time" VOLKOGONOV wrote, "History, especially Soviet History, is full of secrets, and very often evil. With the exception of this incident, I can say that I have done something in order to raise the mysterious curtain from them."

Comment: While the iron curtain has dropped and new studies are discovering horrific crimes of the Soviet-era, PRIMAKOV may be hanging a new veil over Russia. PRIMAKOV's goal appears to be to use

Today's News Highlights

Russia

LUKoil Committed To Volumes

Gazprom Links With Regions

European Republics

Lat. President Hopes For Gov't

Ukraine Fin Min To Sell T-Bills

South Caucasus & Central Asia

Georgia-Azeri Sign Agreements

Kazakhoil Controls Kaztransoil

Rubles In High Demand?

UNESCO In Uzbekistan

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scrapping unwanted missiles. President Boris YELTSIN and US President Bill CLINTON agreed to open negotiations on START-III, only after START-II comes into force.

EU Offers Food And Humanitarian Aid

· Russian Deputy Prime Minister Gennady KULIK today said, "The European Commission and a Russian delegation have reached a preliminary understanding on granting food aid to Russia by the EU." The European Union (EU) has lined up a food aid package worth 400 million ecu ($476 million). The EU has also offered Russia's northern regions humanitarian aid at approximately 10 million to 12 million ecu. Under the Commission's proposal, 1 million tons of wheat, 50,000 tons of rice, 150,000 tons of beef and 100,000 tons of pork will be provided to Russia free. Transportation funding is also included in the package. The money raised from food sales will go into a fund to be used by Russia for social purposes. The Commission insists on controls to ensure that the food will be sold at local market prices and not re-exported. European Commissioner Hans VAN DEN BROEK expressed hope that the Russian side would be satisfied with such conditions. KULIK specified that a concrete date of signing an agreement on food supplies to Russia from EU countries would be announced later. The European Commissions proposal was prepared ahead of a request for food aid from Russia which is expected in the next several days.

Economy

Ruble = 15.01/$1.00 (NY rate)

Ruble = 15.56/$1.00 (CB rate)

Anti-Crisis Plan Presented To Duma

· State Duma Speaker Gennady SELEZNYOV said after closed-door hearings today in the Russian State Duma that the deputies and Prime Minister Yevgeny PRIMAKOV had agreed to work together to finalize the anti-crisis plan. "We have agreed that the potential of the government and the State Duma would be set in motion to give the final touches to the government's plan for anti-crisis measures," SELEZNYOV said. He stressed PRIMAKOV had taken part in the hearings together with some other members of the Cabinet of Ministers. PRIMAKOV said, "we spoke about the economic program and specific measures to stabilize the situation;" he

appeared satisfied with the hearings. First Deputy Prime Minister Yuri MASLYUKOV said, "we will have a schedule of what has to be done, be it presidential decrees, government resolutions or amendments and draft laws to be approved by parliament," and added that the government will work with the Duma to ensure a swift approval. He stressed that the state role in the economy will increase and the program will push a "socially oriented" market economy. Chairman of the State Duma Budgetary Committee Alexander ZHUKOV said, "It is very difficult to judge its [anti-crisis plan] feasibility until the government submits a budget and until it submits financial calculations to the program." According to Oleg MOROZOV leader of the parliamentary group Russian Regions, the Duma discussed two plans the optimistic plan, which would be put into effect if Russia' receives the regular International Monetary Fund installment of $4 billion, and the pessimistic way, if the installment is not granted. MOROZOV said, "The pessimistic way includes greater emission, a greater economic depression and greater losses of the gross domestic product," noting that both ways the government will restrict emission to below inflationary levels.

Summers Says Russia Must Help Itself

· Speaking to a chemical industry group in Washington on Monday, US Deputy Treasury Secretary Lawrence SUMMERS said that Russian reformers had lost the race against the forces of oligarchy and crony capitalism and "retrograde" members of the legislature. He noted that while the US will continue to help with food aid, "ultimately, Russia will make her own destiny." SUMMERS said the reforms fell apart because of a drop in oil prices, Asia's financial crisis, President Boris YELTSIN's poor health, and the government's failure to reform the banking system and improve tax collections. "The new government of Prime Minister PRIMAKOV will have to make its way as it deals with the problems which that failure has wrought." He added that, "while we can do an enormous amount with the support that we and the rest of the international community provide...We cannot want change more than the country itself does." SUMMERS comments echo those made by Deputy Secretary of State Strobe TALBOTT, who spoke on Friday at Stanford. He said it is still, "too early to proclaim Russian democratization irreversible" since, "the longer the economic meltdown continues," the harder it will be

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for Russia to sustain the institutions and habits required for "political normalcy," RFE\RL Newsline reported. TALBOTT noted that "economic decline carries with it the danger of political drift, turmoil and even crack-up." He predicted that the US and Russia, "may be in for heightened tensions over security and diplomatic issues."

Business

LUKoil Committed To Fulfilling Volumes

· LUKoil President Vagit ALEKPEROV, on Friday at celebrations on the occasion of the 40th anniversary of the Perm Oil Refinery, the biggest in Russia, stated that the Russian oil company LUKoil will continue to meet its international commitments in full volume. He said this decision was reached on August 18th after the government announced a moratorium on the payment of debts and since then it has not changed. ALEKPEROV noted that, "A default situation that may emerge on November 17th, when the period of deferment for payments on Russia's international commitments expires, is not going to affect the company directly." The raising of the international credit rating of LUKoil last Thursday showed the stability of the company and confirmed the fact that the Western financial institutions have confidence in it. ALEKPEROV said that LUKoil continued to regard outside borrowings as an indispensable instrument for keeping the production process on a proper level. According to his information, a total amount of outside borrowings will be $340 million in the current year. The figure will be a little smaller in 1999 somewhere between $200 million and $250 million. According to estimates of LUKoil experts, Russian oil output will be reduced in 1999 to the level of 280 to 285 million tons, and the figure for 2000 will be 270 to 275 million tons.

Gazprom Forge Link With Regional Leaders

· Gazprom board member Viktor ILYUSHIN said on Thursday that Gazprom believes its future is linked to the development of the Russian market. The Russian gas giant is forging a strong relationship with regional leaders. Some 30 governors and other leaders of Russia will get together in Novy Urengoi this week to discuss prospects of the development of the Russian gas industry. Chairman of the Federation Council Yegor STROYEV and Deputy Prime Minister Vadim GUSTOV were also invited to

participate in the talks. According to ILYUSHIN, the Gazprom senior executives have planned such discussions with leaders of the Russian regions directly in the main gas-producing area. "This will give them a possibility to see for themselves the accomplishments and problems of the gas industry," he added. Late November, the company will present an exhibition of Gazprom's activities for these participants.

European Republics

Latvian Pres. Hopes For New Government

· Latvian President Guntis ULMANIS last week nominated Vilis KRISHTOPANS as prime minister, charging the former transport minister with forming a Cabinet. ULMANIS is hopeful that a new government will be in place before the end of the month, making it nearly two months after a general election. The President on the state radio station said KRISHTOPANS, "is trying intensively to form an agreement with parties...I hope that just after November 18th, he will come with his proposal and a Cabinet could be confirmed in the second half of November." KRISHTOPANS, a member of the centrist Latvian Way has been negotiating through a political stalemate with former Prime Minister Andris SHKELE's People's Party, which earned 24 parliament's seats out of 100. Latvia's Way received 21 percent, Fatherland and Freedom 17 percent, and the New Party 8 percent.

Ukrainian Parliament Drafts Alternative Budget

· The Ukrainian parliament budget committee chairwoman Yulia TIMOSHENKO announced on Monday that the committee was drafting its own 1999 budget as an alternative to the government's plan. She said the actual budget deficit is 180 billion gryvnias, while the consolidated budget revenues total only 32 billion gryvnias. Revenues from the value-added tax set are 9.19 billion gryvnias. "When we analyzed how the value-added tax works, we came to the conclusion that it is negative, that is it works not for the budget but at its expense." She stressed that this tax, "destroys all manufacturers in Ukraine." TIMOSHENKO noted that the draft budget submitted by the government, "has nothing to do with the reality." The government plans to increase budget revenues in 1999 by imposing a VAT on energy carriers, which will mean that power, gas, and coal will cost 20 percent more. Deputies believe that

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enterprises will not be able to bear this expense. TIMOSHENKO notes that Ukraine will need 8 billion gryvnias ($2.3 billion) to service its domestic debt in 1999, while the government's budget leaves only 2.9 billion gryvnias to service the debt. The budget committee's draft calls for abolishing the value-added tax, the profit tax and five more taxes in 1999 and replacing them with a single sales tax to be levied on manufacturers and trade and intermediary companies. This will earn the budget 10 billion gryvnias.

Ukraine's Finance Min. To Sell OVDPs

· Ukraine's Finance Ministry on Thursday said it plans to raise 500 million gryvnias ($146 million) by the end of the year from sales of Treasury bills. According to a ministry statement, "At the moment, taking into account the results of the OVDP (treasury bill) conversion and negotiations with creditors, the Finance Ministry forecasts that funds attracted by issuing bonds over the period remaining to the end of the year will not be more than 500 million gryvnias. On November 2nd, The Ukrainian government ordered domestic borrowing raised to 15.345 billion gryvnias in 1998 from the 11.471 billion gryvnias approved in April.

South Caucasus & Central Asia

Georgia-Azerbaijan Sign Agreements

· As part of Georgian State Minister Vazha LORDKIPANIDZE's visit to Baku, Azerbaijan and Georgia on Monday signed two intergovernmental agreements on cooperation in fighting economic and financial violations and cooperation in the field of tourism. LORDKIPANIDZE and Azeri President Geidar ALIYEV stressed that cooperation between the two countries is expanding and becoming one of the key factors of peace and stability in the Caucasus. LORDKIPANIDZE also met with Azeri Prime Minister Artur RASIZADE to discuss ways to boost economic cooperation in all areas and the completion of the oil pipeline from Baku to Supsa. The pipeline is expected to start delivering Azeri oil to the West in 1999.

Kazakhoil Gains Control Of Kaztransoil

· The Kazakhstan government has given control and ownership of the state pipeline company Kaztransoil to the national oil company Kazakhoil, Reuters reported. The spokesman for Kazakhoil president Nurlan KAPPAROV said, "The government today has passed an order transferring the ownership of 100 percent of the shares of Kaztransoil to Kazakhoil."

Ruble Demand Growing In Kazakhstan

· Demand for Russian rubles is growing in Kazakhstan, including banking operations and the cash currency market. Last week, the ruble's value on the Almaty Stock Exchange increased 15 percent. The average ruble exchange rate now is quoted at 5.10 to 5.30 Kazakh tenge per ruble. The total volume of the deals over the past seven days was 1.65 million rubles, which is the largest figure since the beginning of the crisis in Russia. Rubles can be purchased at exchange rate of 4.5 Kazakh tenge per ruble. The ruble can then be sold for a rate of 18 to 20 percent higher, than the purchasing price. Local observers explain the dramatic growth of the interest in the Russian currency by the overcoming of the government crisis in Russia and the beginning of restoration of normal production and economic relations between the two countries. Russia accounts for 30 percent of Kazakh exports, made up mostly of products of the mining industry, coal and grain.

UNESCO Meets In Uzbekistan

· All permanent members of the 58-strong Executive Council of UNESCO met in the capital of Uzbekistan on Friday to attend a final meeting of the 155th session of the UNESCO Council. UNESCO Director General Federico MAYOR made a statement on a special project offered by this organization to preserve the Aral Sea which has been drying up. A Declaration on world culture was adopted. The UN has declared the year 2000 as World Culture Year. Uzbek President Islam KARIMOV addressed participants at the opening ceremony.

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

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