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Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Tuesday, November 3, 1998

Russian Federation


Yeltsin Continues To Work In Sochi

· Russian President Boris YELTSIN has continued to work while resting at the sanitarium in the Black Sea resort of Sochi. Today, he met with Defense Minister Igor SERGEYEV to discuss international matters, including the Iraq and Kosovo situations. SERGEYEV briefed YELTSIN on his tour of India, Vietnam, and China. The two also were to discuss the progress of the army's reform, funding, and demoralization of forces. A Defense Ministry spokesman said that the Finance Ministry still owes the army over 34 billion rubles in appropriations. The debt on salaries and benefits for the military total over 9 billion rubles. The army has only received 13 percent of budget-projected appropriations to its housing program. Interfax news agency said YELTSIN and SERGEYEV discussed the state of Russia's strategic nuclear forces in the 21st century and the timetable for introducing a new intercontinental ballistic missile, the Topol-M, which is classified by NATO as the SS-27. First Deputy Prime Minister Yuri MASLYUKOV said Russia should aim to introduce 30 to 40 Topol-M missiles each year until 2000. He added that the failure to do so would seriously compromise Russia's status as one of the world's five official nuclear powers.

Yavlinsky Submits Letter On Corruption

· Russian liberal lawmaker Grigory YAVLINSKY and three lawmakers from his Yabloko party, Sergei MITROKHIN, Yuri SHCHEKOCHIKHIN, and Anatoli KUZNETSOV, on Monday submitted to Prime Minister Yevgeny PRIMAKOV a letter questioning the business connections or efforts to lobby for businesses of first deputy prime ministers Yuri MASLYUKOV and Vadim GUSTOV, deputy prime ministers Gennady KULIK and Valentina

MATVIYENKO and other senior officials. YAVLINSKY stopped short of directly accusing the officials of corruption. YAVLINSKY specifically questions whether MASLYUKOV steered government money or favors to businesses in which he or his relatives held an interest. It also calls into consideration whether GUSTOV has funneled favors to businesses which financed his campaign for governor in the Leningrad region. Prosecutor General Yuri SKURATOV ordered a preliminary investigation on possible libel charges against YAVLINSKY for his accusations last week that the Russian Cabinet is just as corrupt as its predecessors. The letter stated that the facts must be gathered by police, while lawmakers could only indicate potential lines of inquiry. YAVLINSKY, who was the first to propose PRIMAKOV for the post of prime minister, did not accuse PRIMAKOV of corruption and still believes he is the right choice for the job. YAVLINSKY said that, "corruption is an absolutely rotting element of all power bodies, and probably most of all in the Russian government." MASLYUKOV called YAVLINSKY charges baseless and shallow and an attempt to split up the government so free-market advocates can reassert their power.


Ruble = 15.82/$1.00 (NY rate)

Ruble = 16/$1.00 (CB rate)

Emission Limited to 12 Billion Rubles

· First Deputy Prime Minister Yuri MASLYUKOV

Today's News Highlights


Gov't Revises Taxes Downward

Yeltsin Montiored On Internet

007 Movie On Caspian

European Republics

Kiev Denouced Territory Claims

IMF Assesses Belarus Economy

South Caucasus & Central Asia

US Grants Georgia $15M Aid

US, Turkey Pipeline Incentives

Kazakh To Sell Borly Coal Stake




November 3, 1998

Intercon's Daily

said that this year's emission will be no more than 12 billion rubles. He noted that the estimate was computed by Russian financiers and the International Monetary Fund's (IMF) representatives. Last week, statements by Russian officials predicted that the IMF would tolerate printing of up to 20 billion rubles. MASLYUKOV added that size of the emission in 1999, would depend on whether Russia gets regular tranches of Western loans. "The emission has its limit, a very small one, so as not to provoke price growth," he said, adding that "we may go into only a limited emission." The reduction of emission demonstrates the IMF's influence on the government and its willingness to meet their qualifications. Russia hopes this change will help its chances of receiving a $4.3 billion loan installment. The estimation of the IMF also suggests that the Fund attempted to determine how much inflationary ruble printing has already taken place. Finance Minister Mikhail ZADORNOV said, "The amount of money printed was minimal," admitting that it was used to pay state workers and the army in October. Last week, the Russian Central Bank said that cash in circulation had risen by 3.2 percent in August, although total M2 monetary supply, which includes bank and time deposits, was down 4.6 percent, The Journal Of Commerce reported. The Central Bank declared 158.7 billion rubles in the monetary base as of August 31. The figure rises steadily to 185.9 billion rubles on October 19th, an increase of over 17 percent. The monetary base then reduced to 184.8 billion rubles on October 26th. As much as 27 billion rubles could have been slipped into the system. Director of the Russian and Eurasian program at the Center for Strategic and International Studies in Washington Keith BUSH said, "They've admitted to printing some, but they've been very coy about how much."

Gov't To Revise Downward Taxes

· First Deputy Prime Minister Yuri MASLYUKOV said during his visit to the telecommunications company Vympelkom on Monday, that the Russian government plans to revise downward the value added tax and the profit tax, and solve problems with social taxes. "It is planned to decrease the value added tax by up to 15 percent, the profit tax by five percent, as well as to resolve problems with social taxes." He added that there is the need for, "introducing a more powerful tax administration, an increase in the activity of the tax service and tax police, which

will yield a positive result in tax collection." MASLYUKOV praised the performance of the new Tax Service chief, Georgy BOOS. BOOS announced today that Russia's tax collections rose in October. Cash receipts in October reached 12.2 billion rubles, as compared with 9.3 billion in September. BOOS said, "We are slightly below our original target, but we are at the same level as in July." MASLYUKOV said, "the tax burden of the Russian producer needs to be reduced." The Russian Tax Service has had difficulty collection taxes in cash, especially from enterprises which have no cash. It has been allowing some companies to settle part of their taxes by barter.


Arbitration Ct Postpones Purneftegaz Hearings

· Moscow's Arbitration Court on Monday postponed hearings on the lawsuits filed by the oil company Rosneft. Rosneft seeks to return 10.5 million of its shares from other owners. Consideration of two lawsuits filed by Rosneft and two lawsuits lodged by the Russian Federal Property Fund until November 25th and two more RFFI lawsuits until November 26th. In September, a 38 percent stake in the oil and gas company Purneftegaz was sold to PAKK-Invest, Feniks, MAK-Tsentr and EvroCibNeft. On October 14th, Russian President Boris YELTSIN ordered Prime Minister Yevgeny PRIMAKOV to take measures to return Purneftegaz to Rosneft in two weeks. Rosneft and the RFFI filed corresponding lawsuits with the Moscow Arbitration Court contesting the deal.

Rosneft Pulls Out of Sakhalin-1 Project

· Sakhalin regional governor Igor FARKHUTDINOV Monday said that the Russian oil company Rosneft has quits the major gas and oil project Sakhalin-1. "Rosneft now is trying to sell its 49 percent stake because it has found itself unable to finance the project." The Rosneft board of directors made the decision to sell off a 49 percent stake in Rosneft-Sakhalin Company on October 1. Rosneft-Sakhalin is an operator of Rosneft in Sakhalin-1 project and a nominal holder of a 17 percent stake in the project. First Deputy Fuel and Energy Minister Valery GARIPOV said selling off Rosneft's stake in the project is inadmissible and that the supervisory board in charge of Sakhalin projects would oppose the sell-off. GARIPOV said Russia would also urge that Sakhalin-1 project be focused primarily on oil

When you need to know it as it happens




November 3, 1998

Intercon's Daily

extraction and not of gas which the US company Exxon sees as the most promising line of operations. Parties in the international consortium Sakhalin-1 are Russia's Rosneft-Sakhalin Company, with the 17 percent stake, and Sakahlinmorneftegaz, with 23 percent, Japan's Sakhalin Oil and Gas Development Ltd, or Sodeco, and the US' Exxon Neftegaz Ltd, a subsidiary of Exxon Corp. Sodeco and Exxon are the project's operators, each with a 30 percent stake. Sakhalin-1 is a project of development of Sakhalin offshore oil and gas fields Chaivo, Odoptu and Arkutun-Dagi. Their total oil store is estimated at 290 million metric tons, of gas 425 billion cubic meters and of gas condensate 33 billion cubic meters. The total investment in the project is expected to be $15 billion.

Tuesday Tid-Bit

Yeltsin's Health Monitored On Internet

· Russian President Boris YELTSIN's health is being monitored by virtual physicians over the Internet. On a special web-site devoted to the Russian President's failing health, Internet surfers can prescribe a recovery program. Prescription suggestions have included nearly 1 million grams of vodka, more than 12,000 sessions with former White House intern Monica LEWINSKY, 12,000 trips to Russian saunas, laughing gas, aerobics sessions, a chat with US President Bill CLINTON, and a grant of $20 billion loan from the International Monetary Fund (IMF). After a virtual doctor prescribes a medicine or remedy, a picture YELTSIN shows the president turning a nauseous shade of green, if it is the wrong medicine. If the doctors give him the right prescription, another picture shows YELTSIN looking healthy and smiling. One British virtual doctor wrote, "Get real Russia and get rid of Boris. His false promises of instant democracy and Levis for all have led Russia to the brink of economic ruin."

LDPR To Finance Bill And Monica Movie

· The Liberal Democratic Party of Russia (LPDR) is planning to finance a film about US President Bill CLINTON and former intern Monica LEWINSKY. The film directed by Alexander SOROKIN, said the film will feature CLINTON, "as a victim in this story." According to SOROKIN, the screenplay will be based on Kenneth STARR's report. Already $2 million has been secured for the film, and if LEWINSKY agrees to star in the film, the budget will be raised to $10

million, with LEWINSKY's contract worth $5 million. LDPR leader Vladimir ZHIRNOVSKY will probably make a cameo appearance in the film.

007 Movie Focuses On Caspian Pipeline Issue

· Britain's Eon Productions will be making a new James BOND film, which will highlight the controversy surrounding the Caspian Sea oil. Pierce BROSNAN, who portrays James BOND known as 007, will be filming scenes in Azerbaijan, England and Turkey. Filming will officially begin in January, 1999. In the new film, BOND will back the Turkish supported Baku-Ceyhan oil pipeline, one of several routes being considered to transport Caspian oil to Western markets.

European Republics

Ukraine Condemns Territorial Claims

· The Ukrainian Foreign Ministry released a statement protesting what it called "territorial claims on Ukraine" made by the Russian State Duma and Moscow's Mayor Yuri LUZHKOV. It said, "Ukraine decisively rejects any claims on the territorial unity of the state, in consideration of the fact that they do not contribute to creating an atmosphere of trust and mutual understanding between Ukraine and the Russian Federation." Duma deputies, while discussing a Russian-Ukrainian agreement on early warning systems for missile attacks and space-monitoring system, made claims over Ukraine's Crimea and Sevastopol. Head of the committee on Commonwealth of Independent States affairs in the Duma Georgy TIKHONOV said during the debate that, "According to all domestic and international documents, Sevastopol was never given to Ukraine." Sevastopol, located on the Crimea peninsula, is home to the rusting Black Sea Fleet. LUZHKOV has been one of the loudest politicians saying that the transfer of Sevastopol was illegal. He said, "When I speak about Sevastopol, I do not consider it as a foreign policy statement. My attitude toward Sevastopol and this issue is based on the understanding that this is a Russian city and Crimea is Russian land." The Crimea was transferred from Russian to Ukraine within the Soviet Union by Ukrainian-born Soviet leader Nikita KHRUSHCHEV in 1954.

IMF Mission Evaluates Belarus

· An International Monetary Fund (IMF) Mission arrived in Minsk to assess the possibility of extending

When you need to know it as it happens




November 3, 1998

Intercon's Daily

a loan under a facility to help countries deal with external shocks. A Fund spokesman said, "The goal of the mission is to assess the current economic situation in Belarus and the possibility of offering a credit from the Compensatory and Contingency Financing Facility," the Financial Times reported. In order to receive funds, Belarus must demonstrate that its economic problems were caused by Russia's financial problems rather than by domestic policies. The mission will meet with Belarus President Alexander LUKASHENKO, Prime Minister Sergei LING, Central Bank chairman Pytor PROKOPOVICH, Economics Minister Vladimir SHIMOV, and Finance Minister Nikolai KORBUT. The IMF froze its loan program to Belarus in January 1996. Its representatives left the country in July of this year, when Fund officials warned the government of economic collapse. In September, Belarus blamed the Fund's, "old textbook recipes" for problems afflicting many emerging market. However, it is now asking the IMF for money to help cope with slumping exports to Russia. The IMF said it will not unfreeze loans until Belarus makes substantial market reforms.

South Caucasus & Central Asia

US Grants $15M For Georgian Refugees

· Georgian President Eduard SHEVARDNADZE on Monday said that the US government has offered $15 million to help refugees returning to the breakaway region of Abkhazia after its war with Georgia. He said that the aid will go toward helping Abkhazians restore their demolished and burned-out homes. SHEVARDNADZE learned of the US funds during a meeting with US Secretary of State for the Newly Independent States Stephen SESTANOVICH, Deputy undersecretary of Defense WARNER, and Defense Department official Jeff STAR in Tblisi.

Incentives v. Costs On Baku-Ceyhan Route

· US CLINTON administration's representative for the Caspian Sea policy, Richard MORNINGSTAR, believes that the consortium oil companies will ultimately agree to build the Baku-Ceyhan pipeline, but

could not comment on the timing construction. He said that while the US was prepared to make the project more commercially attractive by offering certain, "incentives", there were no plans to underwrite the pipeline with direct funding, even though the project is in the US' strategic interest. The international consortium, which will make the final decision on the route for the main export pipeline, says that the Baku-Ceyhan route is too costly at $4 billion, given current oil prices and estimated export volumes. MORNINGSTAR declined to quantify US incentives, involving the Overseas Private Investment Corporation (OPIC) which provides direct project financing up to $200 million per project and political risk insurance to $200 million per project; the Export Import Bank which finances US exports and the Trade and Development Administration, which funds feasibility studies and technical support. Congress has urged OPIC to go beyond its policy limits with the Caspian project if warranted. Turkey has also offered incentives including tax holidays, financing and reduced tariffs. The hope is that the US and Turkish incentives will outweigh the costs and the international oil consortium will back the Baku-Ceyhan route.

Kazakhstan President on CIS Restructuring

· The Finance Minister today announced that Kazakhstan will auction a 60 percent stake in the 98 percent state-owned Borly Coal producer on December 4th. Chief expert at the ministry's state property and privatization department Serik MAKHMETOV said that the starting price has been set at 470.5 million tenge ($5.73 million). The government tried in June to sell the company at an investment tender. However, the tender did not take place due to lack of bidders. After the sell-off, the Government will retain a 38 percent stake in Borly Coal. Two percent of the company is owned by the workers. In 1997, Borly produced 3.7 million tons of coal, an 8.7 percent growth compared to 1996. While the company owes 93.2 million tenge, its debts totaled 1.4 billion tenge at the start of this year. Borly Coal has been managed by South Korea's Samsung.

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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When you need to know it as it happens