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

Thursday, November 12, 1998

Russian Federation

Politics

Japan's Obuchi Make Historic Visit To Kremlin

· The Japanese side "is fully satisfied" with the results of the first Rus-Japanese summit meeting to be held in the Kremlin in 25 years. Russian President Boris YELTSIN and Japanese Prime Minister Keizo OBUCHI confirmed their intention to continue work on a peace treaty between the two countries. "The two parties agreed to set up, within the framework of the joint commission which is drafting the treaty, a subcommission to deal with questions relating to territorial demarcation and joint economic activity on the South Kurile islands," Russian Foreign Minister Igor IVANOV said. Responding to the Tokyo initiative for the solution of the territorial dispute over the South Kurile islands, YELTSIN handed over to OBUCHI Russia's counter-proposals for the territorial demarcation. During an informal summit with YELTSIN in April in Japan, then Japanese Prime Minister Ryutaro HASHIMOTO made a proposal that allowing Russia to keep administrative rights over the disputed islands temporarily, while drawing a demarcation line, effectively recognizing Japan's sovereignty over the islands. The Russian counterproposal reportedly features joint economic activities on the islands, for which Russia would give part of its administrative rights to Japan while maintaining its sovereignty and territorial integrity. IVANOV noted that said an agreement was reached to produce, "a procedure of visiting the islands by the Japanese citizens who resided there in the past." Japan said that the proposal will be thoroughly studied.

In the narrow and extended format of talks, Japan and Russia discussed, "the entire range of bilateral relations and pressing international issues." Japan proposed ways of boosting trade and economic relations, humanitarian cooperation, and youth ex

changes. On Friday, OBUCHI is scheduled to hold talks with Russian Prime Minister Yevgeny PRIMAKOV and Governor of the Sakhalin region Igor FARKHUTDINOV, who is a member of the Russian delegation to the joint Russian-Japanese commission which is drafting a peace treaty. The sides will sign a declaration at the end of the summit that calls for fully normalizing relations between the two countries based on the 1993 Tokyo Declaration.

Germany's Foreign Min. Holds Economic Talks

· Germany's new Foreign Minister Joschka FISCHER held talks with Prime Minister Yevgeny PRIMAKOV and Foreign Minister Igor IVANOV to discuss Russia's plans to pull itself out of the economic crisis. FISCHER's visit paves the way of the first visit of Germany's new Chancellor Gerhard SCHROEDER. FISCHER said that Germany is ready to help Russia out of its crisis provided that Russia could restore investor confidence. After talks with PRIMAKOV, FISCHER said, "We determined that Russia needs to restore confidence in order for credit to return and Russia should strive to make progress on its budget and ease the conditions for foreign investors." World Bank President James WOLFENSOHN is scheduled to arrive for of economic talks today.

Canada's Axworthy Meets With Counterpart

· Canadian Foreign Minister Lloyd AXWORTHY and Russian counterpart Igor IVANOV discussed bilateral relations and international is

Today's News Highlights

Russia

10 Hostages Freed In Chechnya

GKO-OFZ Negotiation Details

Industrial Conf. In St.Petersburg

European Republics

Lith. Penalized By EU Demands

Ukrainian Debt Totals $15 Billion

South Caucasus & Central Asia

US-Georgia Sign Military Coop.

Total Sterngthens Baku Relations

Kazakh To Sell Metal Plants

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sues during their talks in Moscow on Wednesday. They agreed to set up a working group to look at transportation, trade, environment, and cultural issues in northern areas. After the talks, AXWORTHY noted that the meeting in Moscow will contribute to better understanding by Russia and Canada of questions relating to, "the activity of the UN, the Group of Eight, different aspects of European security, economic development and Nordic cooperation." In 1999 and 2000, Canada will be the UN Security Council's nonpermanent member, which will add to Ottawa's weight in the world arena. Russian Deputy Prime Minister Gennady KULIK has been invited to Canada to discuss economic issues.

Funding For Chemical Weapons Destruction?

· Russian President Boris YELTSIN issued a decree to Prime Minister Yevgeny PRIMAKOV to set aside budget funds to destroy Russia's 44, 000 tons of deteriorating chemical weapons. Russia agreed to destroy these weapons when it ratified the international Chemical Weapons Convention in 1997. The estimated cost of destroying the weapons is $5.7 billion. The US has provided Russia with $200 million to assist in this process. Russia is now seeking to attract private funding to help destroy its stockpile of chemical weapons. If Russia cannot find adequate funding, it may shift to a less environmentally safe method of burning the chemical weapons to comply with the obligation. Russia stopped producing chemical weapons in 1987. Next week, US Senator Richard LUGAR (IN) will lead a congressional delegation to review Russian projects funded by the NUNN-LUGAR Cooperative Threat Reduction Program for eliminating the former Soviet Union's weapons of mass destruction.

On Wednesday, chief of the international security agency of the Russian Security Council Nikolai USPENSKY said that Russia is introducing legislation for more stringent measures to control the export of technology which may be used to manufacture weapons of mass destruction to the Russian State Duma. He noted that in January the government passed a decree on a comprehensive system of export controls in Russia and in the Spring YELTSIN instructed the secretary of the Security Council to organize work for nonproliferation of weapons of mass destruction and delivery vehicles and for the introduction of export control measures. USPENSKY hopes the law will be adopted this year.

Hostages Released In Chechnya

· A plane with eight Russian citizens and two Ukrainians released from Chechen captivity, landed in Moscow this morning. These include five servicemen and five civilians. They were released with the help of Russian Deputy Interior Minister Vladimir RUSHAILO and CIS Executive Secretary Boris BEREZOVSKY. Three out of five servicemen are regular army soldiers and two are from the Interior Ministry troops. The names of the army soldiers are: Private Nikolay TESELKIN, who served in Makhachkala, Yusif KIRIMOV, who served in Nevinnomyssk, Stavropol Territory, and Private Dmitry KULIKOV, who served in Vladikavkaz. According to the information of the Russian Defense Ministry, some 400 Russian soldiers are still kept in captivity in Chechnya.

Economy

Ruble = 15.58/$1.00 (NY rate)

Ruble = 15.93/$1.00 (CB rate)

GKOs And OFZs Negotiation Details

· Russian Deputy Finance Minister Mikhail KASYANOV has revealed more details of the key restructuring of frozen domestic debt agreed to last week in negotiations with foreign investors. Creditors agreed on a framework for restructuring the GKOs (treasury bills) and longer dated bonds known as OFZs, with maturities that end in 1999. Both sides agreed that foreign investors will receive ruble-denominated securities and the forward foreign exchange contracts would be dealt with separately from GKOs. The Finance Ministry said it proposed offering investors a 10 percent up front cash payments; 20 percent of the value of the debt in zero-coupon bonds; and 70 percent in four-year to five-year bonds which would carry a coupon of 30 percent. The 30 percent coupon is expected to be paid in the first two years after issuance and the size of the coupon will depend on the Russian budget. KASYANOV said he would like the cash repayment portion of the debt deal to be divided into four tranches, one this year and three in 1999. He also noted that payment on the interest-bearing bonds will take place once a year and will be indexed to inflation. "It will reflect the expected rate of inflation to compensate for the annual depreciation of the ruble. Of course, the government has set itself the task of reducing inflation therefore the coupon will fall

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with time." KASYANOV said that it will take another 10 days to work out final details of the new bond. Foreign investors still question at what exchange rate will they be able to convert their new ruble securities and the cash payment to dollars, as well as what convertibility restrictions apply to new bonds and whether they can be traded.

Japan's Loan Contingent On IMF Requirements

· Japan has promised to provide Russia with an emergency loan worth $800 million. Japan plans to distribute the fund by the end of the year as part of $1.5 billion in untied loans allocated for Russia by the Export-Import Bank of Japan. Japanese Prime Minister Keizo OBUCHI offered the money to Russian Prime Minister Yevgeny PRIMAKOV by telephone last Friday. However, on Tuesday, Japanese Foreign Minister Masahiko KOMURA said that Russia's compliance with reform conditions set by the International Monetary Fund (IMF) was a condition for receiving the loan. These conditions may be used in negotiations with Russia over the territorial dispute of the Kuril Islands, for which both nations hope to reach a peace treaty by 2000. Japan hopes the emergency loan will lead to progress in talks between Moscow and the IMF, which has frozen loans to the country out of concern that Russia may return to a controlled economy. OBUCHI plans to announce during his visit a technical aid package worth $100 million. The aid would be provided to support Russian industry and train specialists. Japan will also decide whether to donate medications worth $10 million for Russia's health care system.

Business

Primakov Suggests Nationalization Of Rosneft

· Russian Prime Minister Yevgeny PRIMAKOV today declared that he is in favor of transferring the possession of part of Rosneft company shares to the State, thereby settling its debt in the payment of taxes to the budget. Speaking at a government meeting during the discussion of a bailiffship service, PRIMAKOV said, "As far as Rosneft is concerned, it is a question of a joint-stock company, not State property. But then Rosneft is a big defaulter in the payment of taxes. Therefore, why capitalize part of the company's shares and transfer their possession to the State?" The Prime Minister urged law enforcement agencies, "to uphold the interests of the State

and our budget more strongly." Meanwhile, a Moscow arbitration court has canceled the sale of 9.5 percent of Purneftegaz. Purneftegaz is the main production unit of Rosneft.

Rus Industrial Conference In St. Petersburg

· An international exhibition and congress Russian Industrialist 1998 is to be held in St. Petersburg from November 16th to 20th under the motto "The Development of Industry is the Basis of the Revival of Russia." The opening ceremony is expected to be attended by Russian First Deputy Prime Minister Yuri MASLYUKOV, State Duma Speaker Gennady SELEZNYOV, Chairman of the Russian Union of Industrialists and Entrepreneurs Arkady VOLSKY, and by a number of Russian Cabinet ministers, according to an official in the Organizing Committee of the forum. Four displays will be opened at the LenExpo exhibition center under the name "An Active Industry means that Russia is Very Much Alive." At the same time, the 6th mining and geological forum on the subject "The Natural Resources of CIS Countries" is to take place at the Mikhailov Manege to include international conferences and exhibitions of the NeftegazExpo CIS, Trans-Interport (ports and the transportation of mineral raw materials), Aquaterra (the use and conservation of water).

European Republics

Lith. Feels EU Membership Talks Are Unfair

· Lithuania feels as though it is being penalized by the European Union (EU) for operating Ignalina nuclear power plant. A dispute is building because the EU is demanding a timetable for the closing of the plan ahead of talks to join the EU. President of the European parliament Jose Maria GIL-ROBLES explained that, "The European Union is not asking that Ignalina is closed before the beginning of negotiations. But a precise calendar to close the plant, and clear engagement by Lithuanian authorities that they are going to keep to that calendar, would be necessary to begin negotiations," the Financial Times reported. Ignalina nuclear power plant generates more than 80 percent of Lithuania's electricity. Lithuania's Prime Minister Gediminas VAGNORIUS charged that the country's bid to join the EU is being unfairly up held. He was particularly irritated by the fact that Estonia is included in negotiations and that Latvia was told it may join membership talks in 1999.

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Ukraine's Debt Totals $15 billion

· Ukrainian Finance Minister Igor MITYUKOV on Tuesday announced to the Ukrainian Supreme Soviet that on October 1st, Ukraine's debt was $15 billion or 48.4 percent of the nation's gross domestic product. Of the debt, 73.4 percent account for the foreign debt, which totals $10.9 billion. Approximately, $2.4 billion is debt owed to Commonwealth of Independent States and $4.6 billion. MITYUKOV said the Foreign debt grew by $1.4 billion or 14.1 percent, since January due to borrowing to finance budget deficit and to provide guarantees for export contracts. The remaining 26.6 percent of the total debt is domestic. MITYUKOV said he believes that a debt crisis in Ukraine is "unlikely."

South Caucasus & Central Asia

Georgia-US Military Cooperation Signed

· Chief of General Staff of the Georgian Armed Forces major-General Dzhoni PIRTSKHALAISHVILI and a US Pentagon representative Colonel Alan STOLBERG on Tuesday signed in Tblisi a Georgian-US military cooperation program for 1999. The program provides for 30 joint arrangements, including exercises of various arms of services. The American forces will help modernize Georgian training facilities for holding an international exercise in the framework of the NATO Partnership for Peace program in Georgia for 2001. STOLBERG, who head the delegation of the US armed forces command in Europe, also met with Georgian Defense Minister Lieutenant-General David TEVZADZE.

France's Total In Baku

· A delegation of the leading French oil company, Total, arrived in Baku to strengthen its cooperation with Azerbaijan, the Azerbaijan Newsletter reported. The delegation, including Total's president and former UN Secretary-General Xavier PEREZ DE CUELLAR was received by Azeri President Geidar ALIYEV. Total is a participant in two oil consortia operation in Azerbaijan's sector of the Caspian Sea.

Armenia-Russia Formalize Treaty

· Russian State Secretary, Deputy Foreign Minister Vassily SREDIN and Armenian Foreign Minister Vartan OSKANYAN have exchanged ratification instruments of the Treaty of friendship, cooperation and mutual assistance in Yerevan. Russian Foreign Ministry spokesman Vladimir RAKHMANIN said the Treaty contains obligations of each side to work closely in protecting the sovereignty and territorial integrity, while ensuring security in Russia and Armenia. The spokesman stressed that the treaty is not directed against any third country or group of countries. The treaty's term is for 25 years with automatic extensions for each subsequent ten-year period. The treaty provides for necessary military mutual assistance, envisaged in article 51 of the UN Charter for collective defense. The treaty also calls for a deepening of economic integration between the two countries. Comment: The ratification of this military treaty will no doubt upset the government of Azerbaijan and raise questions as to how Russia can be a neutral arbitor of the Nagorno-Karabakh conflict. It will also raise questions in neighboring states including Turkey as to the real purpose behind Russia's military presence in the South Caucasus.

Kazakhstan Opens Tender On Four Metal Plants

· Kazakhstan's Finance Ministry announced Wednesday it has opened a tender to international and domestic brokerages and investment companies for government-owned shares in four major metal plants. Kazakhstanskaya Pravda published the officials statement. It said bids will be accepted until December 10th for 16 percent of aluminum firm Aluminy Kazakhstana, 16 percent of chrome firm Kazkhrom, 29.7 percent of zinc firm Kaztsink, and 24.5 percent of iron mining group Sokolovsko-Sarbaiskoe. No date for the announcement of results was given. The tender is part of the government's program of selling shares in blue chip companies, which had been suspended due to the affects of the Asian and Russian financial crisis. Finance Minister Sauat MYNBAYEV said last week that the country hopes to receive 45 billion tenge from privatization.

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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