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

Tuesday, November 17, 1998

Russian Federation

Politics

Germany To Act As Russia's Advocate

· German Chancellor Gerhard SCHROEDER ended his visit to Moscow by holding talks with Speaker of the Russian State Duma Gennady SELEZNYOV, Federation Council Yegor STROYEV, Foreign Minister Igor IVANOV and President Boris YELTSIN. SCHROEDER wants to broaden Germany's relations with Russia. He said that the foreign policy of Germany remains the same. He recommended that there will be more state meetings and that, "only the style of the German-Russian relations will change." SCHROEDER also favored more intensive business contacts

The frail Russian leader described to SCHROEDER the efforts taken by the Russian government to stabilize the socioeconomic and financial situation in the country. SCHROEDER said that Germany would act as Moscow's "advocate" in the West. The International Monetary Fund (IMF) has criticized the latest government plan as being too vague. He said, "We can give advice, but no more than that." Germany wants to help make Russia's anti-crisis plan internationally acceptable. "We believe the economic program developed by the Russian government is a good start to make progress within the framework of the World Bank and the International Monetary Fund," SCHROEDER said. Germany however, arrived with 1.7 tons of medicine for Russia. YELTSIN and SCHROEDER agreed to increase the frequency of consultations.

Primakov-Gore Talks On The Sidelines Of APEC

· Russian Prime Minister Yevgeny PRIMAKOV and US Vice President Albert GORE held talks in Kuala Lumpur on the sidelines of the Asia-Pacific Economic Cooperation (APEC). PRIMAKOV ex

plained to GORE Russia's economic plan in hopes of securing the US support for the release of credits from the International Monetary Fund (IMF). The US and the IMF want guarantees that market reforms will not be abandoned and that the funds will be put to good use, not squandered. PRIMAKOV gave no new details on the plan, which tightens state controls and tones down liberal reforms. The two leaders agreed that US Deputy Treasury Secretary Lawrence SUMMERS will visit Moscow to take a closer look at the government's economic measures. GORE raised concerns of US steel producers who accuse Russia of dumping steel on the US market. An anti-dumping case has already been filed with the Department of Commerce on September 30th. The US has proposed limiting Russian hot-rolled coil shipments to 60 percent of the 1997 volume, while Russia has offered to limit their shipments equal to the 1997 level. Russian negotiators Deputy Trade Minister Roald PISKOPPEL and head of the ministry's trade disputes section Alexi RUZHIN returned to Russia to consult with Russian steel makers and the Russian Association of Metal Exporters.

PRIMAKOV is also scheduled to meet with Chinese President JIANG Zemin who is to arrive in Moscow for a Rus-Chinese summit November 22nd to 25th. During his stay in Kuala Lumpur, PRIMAKOV will also to meet with the leaders of Malaysia, Canada, Vietnam, and Peru. Russia's delegation to the APEC meeting also includes Economics Minister Andrei SHA-POVALYANTS as well as gover

Today's News Highlights

Russia

Telecom. In National Security

Cyberspace Spies

Auto Production Declines

European Republics

Foreign Invest In Ukraine $2.6B

Belarus Eases Exchange Rate

South Caucasus & Central Asia

Adamia Refutes Rebels' Claim

Armenian PM For Reshuffle

Kazakh Candidate Outlines Plan

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nors of Maritime and Khabarovsk territories Yevgeny NAZDRATENKO and Viktor ISHAYEV. The oil company Yukos, telecommunications company Rostelekom, and Mezhpromabnk will represent Russia at the session of the Business Consultative Council to be held as part of APEC in Kuala Lumpur. Yukos chairman of the board Mikhail KHODORKOVSKY said, "we are interested in working on the Asian market both from the point of view of joint projects and from the point of view of attracting investments from that region into Russia." Russia became a full member of APEC in a ceremony on Saturday attended by Foreign Minister Igor IVANOV and Trade Minister Georgy GABUNIA. IVANOV said, "We firmly believe that economic growth of any state in the 21st century is impossible without active access to external markets, without participation in the multilateral system of international trade, finance and investment."

Economy

Ruble = 16.8/$1.00 (NY rate)

Ruble = 18.65/$1.00 (CB rate)

Banks Brace Themselves Against Lawsuits

· Many of Russia's largest banks are desperately working with foreign creditors to restructure their obligations, following the lifting of the 90-day foreign debt moratorium, in an attempt to avoid lawsuits. Menatep Bank and Rossiisky Kredit confirmed that they are in talks with Western lenders over the terms of their debts. Uneximbank, Inkombank, and SBS-Agro have set up creditor committees to settle their obligations. Alfa-Capital analyst Natalya ORLOVA said that bank is bracing itself for a very serious crisis. She estimates that volume of ruble/dollar forward currency contracts at $6 billion. She said that the top 20 banks owed about $1 billion in syndicate credits to foreigners. Several suits have been launched against Russian commercial banks in order to sell their property as compensation for the losses. Lehman Brothers and the Deutsche Bank several weeks ago have seized the foreign accounts held in London by Uneximbank, Inkombank, and SBS-Agro. However, many western banks face a dilemma: whether to file bankruptcy lawsuits against Russian banks at international courts or try to reschedule their debts to reduce their losses. Financial analysts say debts estimated at more than $6 billion may deal a fatal blow to half of Russia's 1,500

commercial banks. Weaker banks may be forced to go bankrupt or pay off Western creditors before paying out Russian accounts. Finance Minister Mikhail ZADORNOV still hopes foreign creditors will not take measures against debtors.

Russia Considers Tax On Gas, Oil, Metals, Grains

· Deputy head of the department of Foreign Trade Regulations Andrei KUSHNIRENKO said that Russia is considering imposing export duties on gas, oil, ferrous and non ferrous metals, and grains to raise money for the government. On Friday, a government committee on customs and imports will meet to draft legislation which is expected to include a 10 percent export duty on gas and oil and a levy of 5 percent on exports of heavy machinery. KUSHNIRENKO said he hopes Prime Minister Yevgeny PRIMAKOV will sign off on the legislation within two weeks. He noted that the Finance Ministry has recommended tax levels to be based on the surplus and profits that are made from each product. The committee will also draft legislation to lift special import duties of 75 percent on raw sugar and 45 percent on white sugar, leaving normal duties of 1 percent and 25 percent respectively. These measures could be in place as early as December 5th or 10th.

Business

Telecom. In National Security Conference Opens

· An International conference on Telecommunication In National Security opened Monday at the Commonwealth of Independent States' (CIS) Inter-Parliamentary Assembly (IPA) building in St. Petersburg. IPA Council Secretary General Mikhail KROTOV said the IPA should adopt laws on cross-border television and radio broadcasting, international satellite information exchanges, electronic digital signature, cross-border telecommunications, scientific and technological information, and personal data protection. Speaking at the opening ceremony, Chairman of the State Committee for Communications Alexander KRUPNOV said that the number of telephone lines in Russia will increase from 19.47 telephone lines per 100 people to 40 telephone lines to meet the requirements existing in other industrialized nations. He noted that the number of telephone users will double, which will force authorities to commission about 3.5 million to 4 million new telephone lines annually. Cellular and paging communication services have been launched

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in 73 regions in Russia, serving already over 1 million users. KRUPNOV said that his committee planned to attract $830 million in the communications sector in investments, but due to the financial crisis, it had to realistically slash its goal to $400 million. Russia's leading telecommunications companies Svyazinvest and Rostelekom have restructured their $1 billion debts to foreign creditors for equipment supplies. KRUPNOV said that his committee held talks with 10 major suppliers of telecommunications equipment to Russia last week, including Siemens, Alcatel, Lucent Technologies and others. All of them maintain their commitment to the Russian market. "They will not withdraw from the Russian market and are ready to wait for the crisis to be settled," he said.

New Focus For Rus. Agents: Cyber Espionage

· While Russia's modern telecommunications technology may be reaching more Russians than ever, Russian spies are already one step ahead, monitoring security through cyberspace. Former London KGB station chief Oleg GORIEVSKY says that nearly half of the agents in Britain were involved in cyber espionage, acquiring computer-stored intelligence, breakthrough in software, and details from financial and commercial databases. He said that Russian security service has been developing high tech capabilities for more than 20 years and in the early 1980s routinely read encoded messages from over 65 countries, including Italy and France. GORIEVSKY said, "They will certainly now be reading all the traffic coming and going from the Baltic states, Ukraine and most other former Soviet republics. These are small and poor countries, they can't use sophisticated codes which are hard to crack," the Financial Times reported.

Automobile Production Declines

· Russia's automobile production declined in the first nine months of this year by 13 percent, compared to the same period in 1997, The Journal of Commerce reported. Earlier this year, Russian officials predicted a rise in consumer demand, domestic output and foreign auto sales in 1998. Figures released by the State Statistics Committee show several different scenarios for Russia's leading auto manufacturers. Production at the Kamaz Plant, the Russian truck-builder, was down by 39 percent. Avto-Vaz, the manufacturer of the Lada, was forced to cut output by 18 percent, compared with the

January-September period in 1997. Thanks to Kremlin orders placed by former Deputy Prime Minister Boris NEMTSOV, production of the Volga sedan by Gaz was kept at a steady pace. Moscow-based compact producer Moskvich, which is supported by Moscow Mayor Yuri LUZHKOV, increased its output by an amazing 62 percent. However, its production last year was almost zero. Some foreign producers have been hurt by this decline, while others see it as an opportunity. Ford Motor Company have suspended plans to open another assembly plant in Vsevolzhsk, Leningrad region. Ford stated it will not go ahead with the new venture until the government clarifies the import duty concessions. Toyota plans to create an assembly line for Toyota kits and parts in Chelyabinsk region. Bavarian Motor Works (BMW) also has plans to assemble automobiles in Russia in 1999, but has not decided where in Russia.

Benefits For Media Approved

· Russian President Boris YELTSIN Monday extended benefits for the media until January 1, 2002 by signing into federal law an amendment and supplements to separate Russian laws on taxes. Under the law on the state support for the media and book printing in Russia, the sales of products of the mass media, books, as well as editorial, publishing and printing activity, and services for the transportation of products of the media and printed matter are exempt from value-added tax. No tax will be levied on profits received by editorial offices of the mass media, publishers, news agencies and television and radio broadcasting companies. These benefits do not apply to the media, books and periodicals of advertising and pornographic materials.

European Republics

Foreign Investment In Ukraine $2.6 Billion

· Since gaining independence from the Soviet Union in 1991, direct foreign investment in Ukraine has reached $2.618 billion by October 1st, 1998. According to Ukraine's State Statistics Committee, in January that figure only totaled $2.054 billion. In the first nine months, foreigners invested a total of $705.2 million and repatriated another $131.8 million. The US is the leading investor, with a total of $481 million. The US is followed by the Netherlands which invested $258.8 million, Germany with $216.8 million, and Britain with $185.2 million. The food

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industry absorbed $559.3 million of investment, while trade received $413.6 million and machine-building and metal-processing $344.1 million.

Belarus Eases Exchange Rate Controls

· The Belarus Central Bank has allowed commercial banks to trade in foreign currency using exchange rates that are up to 50 percent higher than the official rate, RFE/RL Newsline reported. The exchange rate at commercial banks immediately fell to the maximum allowed under the new regulation of 99,000 rubles to the dollar. The new rate, however, is far below the street exchange rate of 170,000 rubles to the dollar, which is widely considered the most accurate indicator of the Belarus currency's value. A Central Bank spokesman said that the new regulation is the, "next step toward liberalization of the currency market and the introduction of a single exchange rate."

South Caucasus & Central Asia

Georgian Refutes Rebel's Statements

· Georgian chairman of the parliamentary Defense and Security Committee Revaz ADAMIA refuted the statement of rebel colonel Akaky ELIAVA, who during an interview with Georgian Television claimed that forces from Armenia and Azerbaijan were sent to suppress the mutiny in Senaki. ADAMIA said, "Representatives from the leadership of Armenia and Azerbaijan expressed their concern over the armed anti-government actions in western Georgia, but they never provided any troops to suppress the revolt." Azeri President Geidar ALIYEV and Armenian President Robert KOCHARYAN expressed their support for Georgian President Eduard SHEVARDNADZE during the revolt. ELIAVA's rebellion failed when government troops clashed with the rebels outside Kutaisi. ELIAVA and a few supporters escaped into the mountains of western Georgia.

SHEVARDNADZE said that the upcoming visit of KOCHARYAN to Tblisi on November 20th, "will become another accomplishment in the development of cooperation between the two fraternal na

tions." He described the Georgian-Armenian dialogue as, "continuous and rather effective."

Armenian PM Suggests Gov't Reshuffle

· Denying rumors that he will resign, Armenian Prime Minister Armen DARBINYAN announced that he has recommended a government reshuffle to President Robert KOCHARYAN. He has requested that the ministers of trade and industry, energy, health care, and the environment be replaced. DARBINYAN believes the new appointments will make the government more efficient. DARBINYAN had said the government's plan of action was based on the pre-election planks of President KOCHARYAN. The government is drafting a plan which is to create new jobs through internal saving and foreign investment, with a social security system in place. The government proclaimed a "from stability to economic growth" concept to guide its program. The program predicts a 6 percent higher annual gross domestic product and a lower end-year inflation rate. DARBINYAN said that annual inflation will not exceed 3 percent.

Kazakh Presidential Candidate Outline Plans

· On Monday, former Customs Committee chairman Ganiy QAYMOV outlined his proposals if elected president of Kazakhstan. His first priority will be the economy. He hopes to develop the smaller towns and pay wage and pension arrears. When speaking with reporters, QAYMOV's command of the Kazakh language was poor, raising questions as to how he passed the mandatory proficiency examination. The Central Electoral Commission rejected another potential presidential candidate from registering, Mels ELUSIZOV head of the Kazakh Green party. The reason was because he served a three-day prison sentence for attending a meeting of an unregistered organization. He condemned the presidential elections as undemocratic. On Friday, the commission also refused registration for Asylbek AMANTAI, leader of the Oton public movement for serving a sentence related to violating regulations for convening meetings. Additionally, former prime minister Akezhan KAZHEGELDIN cannot register on the same grounds.

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