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

Monday, November 16, 1998

Gennady ZYUGANOV, ex-general Alexander LEBED and liberal opposition Yabloko Party chief Grigory YAVLINSKY. A Germany government official said, "We want to diversify the relationship, which, in the past, was very focused [on YELTSIN]." SCHROEDER noted that he intends to continue relations where his predecessor Helmut KOHL left off. YELTSIN and former chancellor KOHL enriched relations, by holding meetings in informal settings and calling each other by their first names. However, it already appears that this summit will focus more on monitoring YELTSIN's health and the shift in power from YELTSIN to PRIMAKOV, rather than on key issues and the assessment of the new Chancellor. Germany is Russia's largest trading partner and foreign lender with debt exposure of more than 75 billion marks 9$44.35 billion) including 30.5 billion marks owed to commercial banks.

Yeltsin Flexes Weak Muscle: Hires And Fires

· Despite lingering questions surrounding his health and physical capabilities, Russian President Boris YELTSIN in his characteristic way attempted to show his authority by making appointments and removing officers, while blaming them for his shortcomings. On Saturday, YELTSIN appointed Prime Minister Yevgeny PRIMAKOV to head the Russia-US economic and technological cooperation commission, a post which had been held by former prime minister Sergei KIRI-YENKO. Today, the President appointed Leonid DRACHEVSKY as deputy foreign minister. Since 1995, DRACHEVSKY

Russian Federation

Politics

Schroeder Expands Ties Beyond Yeltsin

· Germany's new Chancellor Gerhard SCHROEDER has arrived in Moscow for two-days of official talks, through which Germany hopes to expand its ties with Russia in light of a post YELTSIN-era. Ahead of his visit, SCHROEDER said, "Germany, together with its partners among leading industrialized countries and the European Union, favors Russian participation in political and economic structures in Europe. Russia's role in the world's economy should be enhanced. Russia is a great European power the participation of which is necessary for settlement of international conflicts," he said. Germany wants to see Russia powerful, economically prosperous, with predictable foreign policy and actively participating in building the common future, SCHROEDER noted. Today, Russian Prime Minister Yevgeny PRIMAKOV and SCHROEDER held one-on-one talks on a range of bilateral and international issues. SCHROEDER said that during the talks, "we noted great similarity of interests of Germany and Russia, first of all, regarding the need to ensure security and stability in Europe, in South-East Europe, particularly, and all over the world." PRIMAKOV said that relations with Germany are of priority importance to Russia. Simultaneously to these talks, Russian First Deputy Prime Minister Vadim GUSTOV met with a number of government officials accompanying SCHROEDER.

During his two days visit, SCHROEDER will have talks with President Boris YELTSIN, depending on the condition of his health, and Foreign Minister Igor IVANOV on ways of overcoming Russia's economic crisis. The new Chancellor will also meet with a wide range of Russian politicians and businessmen, including Chairman of the Russian Communist Party,

Today's News Highlights

Russia

Economy To Shrink 9% In 1999

Gazprom On Asian Pipeline

European Republics

Ukraine To Destroy Bombers

Unibanka Bleeds Red

South Caucasus & Central Asia

Georgian Finance Min. Resigns

Citizens Union Win Elections

Tajik Passes 1999 Budget

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has been at the head of the department on Commonwealth of Independent States (CIS) affairs of the Russian Foreign Ministry.

On Saturday, YELTSIN fired Colonel General Valery MIRONOV from his post as chief military adviser to PRIMAKOV. He was also removed from the military. There has been no other official information regarding the motivations for his removal, although he is suspected of being involved in illegal military sales.

Lebed Says Nuclear Forces Must Remain

· Retired General Alexander LEBED on Sunday said that Russian armed forces cannot fight a large-scale war with conventional weapons, emphasizing that it is vital for Russia to maintain its nuclear forces at all costs. This presidential hopeful said that arms cuts have robbed the forces of their combat capability. Since the collapse of the Soviet Union, Russia's military has fallen into disrepair. There is little money to fix equipment, train soldiers or modernize aging technology. LEBED said, "The only thing for which Russia is respected in the world and which makes us worthy partners in any talks is our strategic rocket forces. And this must be preserved." LEBED has criticized the government's neglect of the military. He said that Russia must maintain its nuclear stockpiles, if it cannot modernize other weapons.

Economy

Ruble = 16.41/$1.00 (NY rate)

Ruble = 16.8/$1.00 (CB rate)

Russian Releases Anti-Crisis Program

· The Russian government and Central Bank on Sunday released an official version of its anti-crisis program. As stated before, the plan calls for stronger state control of key industries and "controlled" printing of rubles to meet debts. The release of the document coincides with the ending of a 90-day moratorium on Russia's foreign debts. Prime Minister Yevgeny PRIMAKOV said he aims to continue pursuing market reforms, but with more of a social safety net and more active government intervention. The government pledged to ensure full payment of salaries and pensions; it is not clear where Russia will find the money. Deputy Prime Minister Valentina MATVIYENIO said in mid-October that the government owed 70.5 billion rubles ($4.4 billion) to its citizens. The government also promised to cut taxes,

attract foreign investment, pay its workers on time and hold down inflation. The government plans to introduce laws to encourage direct foreign investment in the economy.The anti-crisis plan calls for greater tax collection, while at the same time lowering taxes. The ruble will continue to float.

Economy To Shrink 9 Percent In 1999

· The Russian government on Friday said that its economy could shrink as much as 9 percent in 1999. The Finance Ministry predicts a 3 percent drop in the gross domestic product. The Russian economy showed signs of recovery and growth late last year and then suffered a hard blow as shock waves from the Asian crisis which caused Russia to devalue the ruble and default on domestic debt. The economy is expected to contract by 5 percent this year. The optimistic three percent drop assumes that the government will meet all of its revenue targets, receive foreign loans, and contain inflation at a 30 percent rate. The pessimistic view assumes that the cash-strapped government would be forced to print $19.3 billion in rubles to pay off back wages and other debt, pushing inflation to soaring heights of around 130 percent. The State Statistics Committee today released a report showing that consumer prices grew 0.9 percent in the first ten days of November.

Duma Awaits Draft Budget

· The Russian State Duma has not received a draft 1999 federal budget. chairman of the Duma budget committee Alexander ZHUKOV today said that the Duma must receive it no later than December 1st. He noted that even at that late date it will be difficult to pass it with such little time. ZHUKOV also said he believed the draft budget will be "very, very tough" as a result of the economic crisis facing the country. After the government submits a draft budget, it is first considered in Duma's committees, and then presented to the full session in four readings. After the Russia State Duma's approval, the document is passed to the Federation Council and then must be signed by the president.

The International Monetary Fund (IMF) and the World Bank have both requested to review Russia's 1999 draft budget before considering the release of installments from a $22.6 billion loan provided to Russia in July. On Friday, World Bank President James WOLFENSOHN met with First Deputy Prime Minister Yuri MALSYUKOV, Prime Minister Yevgeny

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PRIMAKOV, Economics Minister Andrei SHAPOVALYANTS, Fuel And Energy Minister Sergei GENERALOV and State Tax Service chief Georgy BOOS and other top officials. The Russian government described the measures it plans to take to improve the economic situation in Russia. WOLFENSOHN told the officials that the Bank was ready to cooperate with Russia, if the government sticks to the promises it made when aid was granted. The two sides agreed to establish expert groups to supervise World Bank programs in Russia.

Business

Gazprom Considers Asian Pipeline

· Russian gas giant Gazprom's chairman Rem VYAKHIREV said that Gazprom is considering a plan to lay a $15 billion pipeline from its western Siberian fields to China. The 56 inch (142 centimeter) trunk line would extend more than 3,750 miles (6,000 kilometer) and open enormous markets in east Asia. VYAKHIREV said, "So far we are talking about one large pipeline. If we started working on it today, the actual supply to Shanghai, China would be in about 2003 or 2004." He noted that, "the distance from some of the Asian gas markets to the Russian gas fields are in some cases closer than to Europe," Reuters reported. He said that plans are still on the drawing board and would require foreign financing. The Russian economic and financial crisis impeded Gazprom's bid to borrow money on capital markets because Russia's rating has been downgraded. VYAKHIREV said that Gazprom has been looking for more strategic partners to help develop the company and build new pipelines. Gazprom has also been promoting its exports as a way to earn hard currency revenues. Sales domestically continue, despite the failure of customers to pay for gas. Arrears by Russian regions to Gazprom total more than 100 billion rubles ($6.5 billion).

of Indiana viewed the destruction with two other Senators. LUGAR stressed the importance of the program saying, "These are not symbolic, these are actual bombers that are going to be destroyed. Our position has always been to work with peaceful states for reduction of weapons of mass destruction. I am categoric we're moving to a safer world." Head of the US program of the strategic armaments liquidation John CONNELL said that the US has allocated over 8 million dollars to eliminate Ukrainian strategic bombers. Ukraine inherited 19 strategic bombers for the Tu-160 variety and 25 Tu-95 aircraft from the Soviet Union; their destruction is the last phase of the program to lessen the military threat in Ukraine. All the aircraft and the 1,068 winged missiles are to be destroyed by July 30, 2001.

Lithuanians-Belarus Pledge Cooperation

· Lithuanian President Valdas ADAMKUS and Belarus President Alexander LUKASHENKO on Thursday pledged to further develop economic ties. At a meeting in Medininkai, the two leaders said they would work to enhance regional cooperation based on free market principles. Belarus promised to repay mounting debts to Lithuania for its electricity imports. Belarus is Lithuania's largest foreign energy client , importing almost 90 percent of the Baltic nation's electricity exports. Lithuania sold 4.76 billion kilowatt hours of electric energy to Belarus in the first nine months. Belarus Belenergo firm and intermediary Baltic Schem own Lithuania at least $65.5 million. Lithuania may limit exports to Belarus, if it does not improvements payments. A signed joint statement said that both countries will cooperate in developing border infrastructure and controls to liberalize cargo transit, while increasing cooperation to fight the passage of illegal aliens to Lithuania.

Unibanka Bleeds Red

· Latvia's Second largest bank, Unibanka on Friday became the latest casualty of Russia's financial crisis, as its books ran into the red. Unibanka released 10-month figures showing a net loss of 4.99 million lats ($8.58 million) following a nine month net profit of 1.7 million lats. This is a decline from the period of January to October, 1997, when the bank had a net profit of 6.15 million lats. Reuters reported that the Bank said provisions for the 10 months increased by 12.425 million lats while administrative costs totaled 8.356 million lats, causing the loss despite only a minor decrease in its operating income

European Republics

Ukraine To Destroy Strategic Bombers

· Ukraine plans to destroy a Tupolev Tu-160 "Blackjack" aircraft today as part of 44 Ukrainian strategic heavy bombers to be destroyed at an air base in Priluki. The liquidation of the aircraft is possible in part because of US assistance under the NUNN-LUGAR program. US Senator Richard LUGAR

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to 17.296 million lats from 17.45 for the first ten months of 1997. Hansabank markets broker Girts OZOLS said, "A five million lat loss certainly isn't a positive piece of news, but at the same time the market had quite expected to see the Russian crisis hit the bank's bottom line."

South Caucasus & Central Asia

Georgian Finance Minister Resigns

· Georgian President Eduard SHEVARDNADZE on Saturday accepted the resignation of the Finance Minister Mikhail CHKUASELI. The youngest Cabinet member's departure comes at a time when Georgia's debts are mounting; public wage debts total $9 million and pension arrears at $35 million. He has been criticized by the opposition and his own party, the Citizens Union. At a meeting of the government's Commission for Financial Stabilization, State Minister Vazha LORDKIPANIDZE blamed this year's budget failures on CHKUASELI. From January to October, the government collected only 76 percent of the budget revenues, resulting in a short fall of more than 160 million laris ($120 million). SHEVARDNADZE also criticized CHKUASELI saying, "To get out of this [financial] situation, we must first of all improve the work of the tax and customs services. We should declare a big war on those who don't pay taxes." The chairman of the parliament's Committee on Economic Policy and Reforms David ONOPRISHVILI's name has been put forward to replace CHKUASELI.

Georgian Holds First Local Elections

· On Sunday, Georgia held the first post-Soviet local elections. These elections are viewed as a barometer of the political alignment in the country. Central Election Commission chairman Dzhumber LOMINADZE said that 33 percent of the eligible 2.9 million voters participated. More than 150,000 candidates and 13 parties and blocs were competing for district and city seats throughout Georgia. Approximately 50 Georgian and foreign observers, including representatives from the Organization for Security and Cooperation in Europe mission in Georgia moni

tored the polls. The Citizens Union party won a clear majority in a majority of districts. Also, the Citizens Union party appear to have dropped to second place in only four districts. In the remaining districtsCitizens Union finished first but not with a clear majority. They will be forced to form coalitions with other parties. In Tblisi, the Citizens Union party won 40 percent of the seats. Seven other political parties reached the 5 percent threshold. The second highest number of seats was surprisingly won by Labor party. This populist party promised many things, ie. free education for all, et., but without a clear economic program. The Socialist party, Revival party, People's party, and National Democratic party achieved the 5 percent threshold for seats in various districts. The Citizens Union received a clear majority only in the Port of Poti. All other major cities will require coalitions. In an interview with Intercon, Citizens Union Party leader Zurab ZHVANIA expressed satisfaction with election results given the difficult economic situation. He found the results positive and encouraging. Comment: Once again, the people of Georgia have indicated their commitment to the reform process even while experiences economic hardships. While voter turnout was not high, the vote signifies the population's consensus is that reforms should continue.

Tajik Parliament Passes 1999 Budget

· The Tajik Parliament on Friday passed its budget for 1999, which includes a rise in the budget deficit to 4.8 percent of gross domestic product (GDP) from 1998's 3.7 percent deficit. Head of the parliament Economics and Budget Committee Safar SAFAROV foresees budget revenues of 202.2 billion Tajik rubles compared to 160 billion in 1998 budget. Spending is planned to increase to 256.2 billion rubles from 160 billion rubles. Finance Minister Anvarsho MUZAFFAROV said the rise in revenues is from an increase in value-added, profit, and property taxes. The spending increase is due to a rise in capital construction projects. In 1999, the GDP will rise to 1.12 trillion rubles from 847 billion rubles planned for 1998.

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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