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

Friday, November 13, 1998

Russian Federation

Politics

Primakov-Obuchi End Summit Talks

· Today, Russian Prime Minister Yevgeny PRIMAKOV and Japanese Prime Minister Keizo OBUCHI exchanged copies of the Moscow Declaration signed by OBUCHI and President Boris YELTSIN summing up the results of the Summit meeting Thursday and pledging to sign a peace treaty by 2000. The Moscow Declaration also calls for annual summits between the top leadership and to continue the practice of informal meetings. PRIMAKOV and OBUCHI discussed wide-ranging cooperation programs and global issues. Russia and Japan have agreed to cooperate in prohibiting and limiting weapons of mass destruction. Both nations will continue a dialogue on control over exports and interact in ensuring effective implementation of the Chemical Weapons Convention and the banning of biological weapons. Japanese Ambassador to Russia Takehiro TOGO and Victor Danilov DANILYAN signed a memorandum to expand and strengthen joint activities to protect the environment in the two countries and in Northeast Asia. The five-point memorandum outlines activities to protect the ozone layer, clean up marine pollution and conserve bio-diversity. PRIMAKOV and OBUCHI adopted a detailed concept of the establishment of a Rus-Japanese investment company (RJIC) to promote direct investments in Russia from Japanese enterprises, with the support of the both governments aggregating $50 million. PRIMAKOV described the visit of OBUCHI to Moscow as, "of great importance, as it shows that our two countries will go to meet each other half-way, and the progress is irreversible."

YELTSIN in his talks with OBUCHI has proposed that a peace treaty, to be signed by 2000, will include drawing a demarcation line to resolve a dispute over

Russian-held Kuril islands. YELTSIN unexpectedly skipped an honorary dinner banquet last night, raising questions of his health. Thursday was his first day back to the Kremlin following a rest at a Black Sea resort.

Vlasov Released From Kidnappers

· The Russian Interior Ministry welcomed home Presidential envoy to Chechnya Valentin VLASOV, who arrived in Moscow this morning after more than 6 months in captivity. Interior Minister Sergei STEPASHIN stressed that no ransom had been paid to the kidnappers, but did not release details on whether force was used. The multistage operation to free the hostage involved the Northern Caucasus regional administration for combating organized crime, and special units of Ingushetia's Interior Ministry. VLASOV was abducted on May 1, 1998, on the highway from Rostov to Baku, not far from Assinovskaya settlement. His car was stopped by armed men in camouflage uniform. The kidnappers had demanded $7 million for VLASOV. Over the past several weeks, more than a dozen of hostages held in Chechnya have been freed through negotiations.

Russia To Join APEC Forum In Malaysia

· Russian Foreign Minister Igor IVANOV and Trade Minister Gregory GABUNIA left for Kuala-Lumpur late Thursday to attend the APEC forum; Prime Minister Yevgeny PRIMAKOV will represent Russia instead of President Boris YELTSIN. Russia, Peru and Vietnam, which have been participating in APEC

Today's News Highlights

Russia

Kurd Rebel Arrested In Rome

Debt Moratorium Ends Saturday

720 Banks May Close

European Republics

Ukraine To Buy Russian Gas

South Caucasus & Central Asia

Regional Georgian Elections

Turkey Lacks Energy Strategy

Turkmen Estimates Oil Output

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meetings as member-designates, will be formally admitted to APEC on Saturday. IVANOV said, "Russia's forthcoming accession to the Asia-Pacific Economic Cooperation (APEC) inter-governmental forum, which is the locomotive of the economic integration of Pacific Rim countries, quite naturally and fully meets our strategic interests." An interdepartmental commission for APEC affairs was established in Russia in August, 1996 for purposes of studying trade and investments regimes and coordinating activities of ministries and departments in cooperation with countries of the Asian-Pacific region. A government commission for issues of participation in APEC has been created which is headed by Economics Minister Andrei SHAPOVALYANTS. Experts believe that Russia's accession to the APEC will promote Russia's economic development due to its active involvement in integration processes and will boost economic contacts, which will lead to growth of Russian exports to countries of the region.

Kurdish Rebel Leader Arrested In Rome

· Acting on two international arrest warrants, Italian police arrested Kurdish Workers' Party (PKK) leader Abdullah OCALAN as he got off a plane from Russia at Rome's Airport Thursday night. According to reports, OCALAN was taken to the hospital for treatment. Following arrest, the Kurdish rebel applied for political asylum in Italy. Italy has 40 days to consider his request. Earlier this month, he applied for asylum in Russia. OCALAN's PKK has been fighting a 14-year-old separatist war for autonomy in southeastern Turkey, which has claimed over 37,000 lives in conflicts since August 1984.

Economy

Second Restructuring Of Soviet Debt?

· A senior Finance Ministry official said the Russia plans to request a second restructuring of about $70 billion of Soviet-era debt. Deputy Finance Minister Mikhail KASYANOV said, "It is clear that Russia will ask the creditors of the former USSR to give [the government] further breathing space on debt payments." Russia inherited about $96 billion in Soviet debt, much of it from loans to developing countries that defaulted. Soviet-debt payments are part of the $17.5 billion in foreign debt due to creditors in 1999. According to The Wall Street Journal, the Paris Club of government creditors accounts for about $38 billion, with Germany accounting for more than half,

followed by the US. The London Club of commercial creditors is owed $30 billion. Under a 1996 restructuring agreement, Russia was granted a grace period through 2002, during which it only has to make debt service payments. Russia has even defaulted on those payments. Both clubs said they will meet with officials next week to discuss restructuring.

Ruble = 15.93/$1.00 (NY rate)

Ruble = 16.41/$1.00 (CB rate)

Jun Jul Aug Sept Oct Nov

Debt Moratorium To Expire On Saturday

· Russia's foreign debt moratorium instituted on August 17th with the devastating devaluation of the ruble is due to expire on November 14th. The lifting of the moratorium is likely to trigger a wave of lawsuits by western banks. Central Bank chairman Viktor GERASHCHENKO said he expects foreign banks to freeze overseas assets of Russian commercial banks that are not able to fulfill their currency forward contracts. Western banks took out the forward contracts to hedge their ruble-denominated Treasury bill holdings. Russian banks may be able to only honor $1 billion to $2 billion of the $6 billion of foreign exchange contracts they signed with western banks. During negotiations with western bankers last week, Deputy Finance Minister Mikhail KASYANOV, "urged foreign partners to abstain from legal moves against Russian banks." Angry foreign banks tracking down overseas assets may find that Russian banks used the 90-day foreign debt moratorium as a shield while it stripped their banks of the remaining assets. The Financial Times quoted one Moscow lawyer as saying, "Nobody knows what is left."

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720 Russian Banks May Close

· Russian banks already strained by the financial crisis may be stretched to the limit after the 90-day foreign debt moratorium is lifted on Saturday. First deputy chairman of the Central Bank Andrei KOZLOV said that the government may have to close 720 out of the 1,500 private banks because it does not have the $8.9 billion (141 billion rubles) needed to bail them out. He said it is essential to find $2.5 billion (40 billion rubles) to support the most important savings and regional banks to preserve the integrity of the banking system. Finance Minister Mikhail ZADORNOV said the ministry is rendering assistance to many Russian banks, which have undergone restructuring. He said, "We are doing all we can for minimizing losses of Russian banks." The Central Bank has already handed out $929 million (14.8 billion rubles) to banks this year and plan to lend a further $1.57 billion (25 billion rubles) in 1999. Of the amount already released, 9 billion rubles has been spent to bail out Sberbank. To qualify for the Central Bank's credits, commercial banks must meet the Central Bank's reserve requirements, not have payment arrears to the Central Bank, and agree on a jointly drafted restructuring program. Some of Russia's biggest commercial banks, such as Tokobank and Inkombank, have already collapsed amid huge losses.

Uneximbank Pledges To Meet Foreign Debt

· One of Russia's largest banks, Uneximbank on Thursday pledged to honor its foreign debts, when the moratorium on foreign debt expires on November 14th. First deputy chairman of the bank Vladimir RYSKIN said, "We want the bank to survive and to continue its work." He declined to provide details about the total amount of the bank's debts or when it will be able to repay them in full. RYSKIN pointed out that the bank is reviewing its financial position with the help of Deloitte & Touche. Uneximbank offered a large number of currency forward contracts which weighed down its finances after the government depreciated the ruble on August 17th. RYSKIN said the bank hopes to work with creditors to come to an agreement on terms for fulfilling its obligations.

Sberbank Never To Go Bust

· Russia's Central Bank chairman Viktor GERASHCHENKO on Thursday said that Sberbank savings bank, "will never go bust, it cannot be allowed to go bust." On The Hero of the Day

television program on NTV, GERASHCHENKO said that the best way for Russian citizens who feel uncomfortable keeping their money at home is to set up a savings account with Sberbank. He emphasized that as the bank accumulates 80 percent of the population's deposits and, "the Central Bank can not let it go bankrupt." He noted that the Central Bank would do everything possible to avoid sharp fluctuations in the ruble exchange rate.

Business

Russia To Build Northern Ports

· Since being appointed Deputy Prime Minister, Vadim GUSTOV, formerly governor of the Leningrad region, has been pushing the government to build new oil export facilities near St. Petersburg. As the world's third largest oil producer, Russia has been exporting the bulk of its crude oil through Black Sea ports into the Mediterranean market. In the north, Russia only choice to export its crude or crude products to Europe is to transit it through the Baltic states. Spokesman for Energy Minister Sergei GENERALOV, Oleg RUMYANTSEV said, "Now exports are carried out through the Baltic republics and its would be better if they went through out own ports." The government has worked out plans for three ports to be built. Surguteneftegaz Oil Company received an extra export allocation in 1996 and 1997 to raise capital to build a products terminal at Batareinaya Bay in the gulf of Finland. GUSTOV this week said the government will make a decision within three weeks on starting a project to create a new Baltic pipeline system, to deliver crude to a new terminal in the Gulf of Finland. Although GUSTOV is advocating for northern ports, the problem with all projects in Russia is financing. Analysts doubt that any progress will be made in the short-term. Salomon Smith Barney Georgi BEDNEISHVILI said, "With this kind of market and with Russian government and corporate rates falling like crazy, I don't really see them in a position to raise fund."

European Republics

Ukraine To Purchase Russian Gas

· Ukrainian First Deputy Prime Minister Anatoly GOLUBCHENKO on Tuesday said Ukraine plans to purchase 6 billion cubic meters of gas from Russian in the autumn-winter period. He noted that in 1999, Ukraine will received 34 billion cubic meters of gas

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from Russia as compensation for the transit of gas via Ukraine to European markets. Ukraine's gas needs total 46 billion cubic meters.

South Caucasus & Central Asia

Reg. Elections Test Shevardnadze's Popularity

· Georgia will hold its first ever regional and municipal elections on Sunday. These elections will be a major test of Georgian President Eduard SHEVARDNADZE's popularity and the policies of his ruling Citizens Union party. Georgian citizens may use their vote to protest the government's inability to pay meager state wages and pensions and graft. Political analysts say a low turn out for the Citizens Union party would be a signal of disenchantment with its policies. More than 150,000 candidates from 13 parties and blocs are competing for mayoral positions and council seats across the nation. No elections will be held in South Ossetia and Abkhazia, where separatists government have broken free from the central government. This election will reveal the political alignment in Georgia.

Turkey's Lacks Cohesive Energy Policy

· Turkey appears lacking of a clear energy strategy. While its leaders have been "wined and dined" by both the US and Iran, it appears that Turkey is choosing two routes which are counter to each other. Earlier this week, Turkey surprised US officials by announcing the ground breaking of a 623 mile pipeline connecting Ankara with Erzurum as part of a Turkish-Iranian $20 billion agreement for Tehran to sell up to 140 billion cubic feet of gas to Ankara. This amount could increase to 350 billion cubic feet over the course of the 23-year pact. Turkish Prime Minister Mesut YILMAZ attended the opening ceremony. A Turkish Embassy spokesman in Washington Namik TAN said that Turkey will not shy away from an Iranian route. "It may be that it [gas] comes from Iran or trans-Caspian. Whichever comes first, since we are in dire need, we will go with it." The US has encouraged Turkey to choose the trans-Caspian pipeline route in order to avoid Iran's territory.

In fact, Turkish President Sulyeman DEMIREL in Turkmenistan said that the trans-Caspian pipeline was a priority for his country. "The main route for Turkmen gas is through the Caspian...Of course, other routes could be found, but the route via the Caspian is the shortest and gives the quickest financial return." Today, DEMIREL and Turkmen President Saparmurat NIYAZOV pledged to build the trans-Caspian pipeline as part of a 30-year deal where by Turkey will buy 16 billion cubic meters of gas per year, initially. This duplicitous policy follows Washington's call for multiple pipelines, but the US has pushed east-west routes rather than north-south ones through Russia and Iran. Director of Turkish studies at the Center for Strategic and International Studies Bulent ALIRIZA said that this break with the US strategy is due to the lack of coordination within Ankara's bureaucracy, The Journal of Commerce reported. "The real problem in Turkey is that there is a lack of an integral energy policy," he said. Comment: As Turkey begins construction for a link to the Iranian pipeline and within the same week exercises its commitment to the trans-Caspian route, it appears that Turkey's pipeline strategy is to bet the field, make agreements with everyone, and wait for the oil and wealth to flow in. It is clear that Turkey's move undermines US policy of isolating Iran.

Turkmen Crude Oil Output Estimates

· Turkmen President Saparmurat NIYAZOV said that Turkmen crude oil output is rising to 30 million to 40 million tons or 600,000 to 800,000 barrels per day by 2005. "Turkmenistan's crude output this year will be equal to seven million tons (about 140,000 barrels per day) and it will increase to nine million tons next year and to 30 million to 40 million tons in 2005," Reuters reported. Turkmenistan plans to export its crude to Turkey via the Caspian Sea, to the Persian Gulf through Iran, and to Pakistan via Afghanistan. The Turkmenstatprognoz statistics agency said that Turkmenistan has produced 4.1 million tons of crude oil and condensate from January to September this year.

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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