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

Friday, December 11, 1998

Russian Federation

Politics

Democratic Coalition Hold Founding Session

· The founding session of the center-right democratic coalition, held at the Moscow President Hotel, was attended by first deputy head of the presidential administration Oleg SYSYUEV, former prime minister Sergei KIRIYENKO, former deputy prime ministers Boris NEMTSOV and Anatoly CHUBAIS, leader of the Democratic Choice of Russia Yegor GAIDAR, leader of the Social Democracy Party Alexander YAKOVLEV, head of the Forward Russia movement Boris FYODOROV, head of the Congress of intelligentsia Sergei FILATOV, Tula region governor Vladimir PLATOV, chairman of the Moscow city Duma Vladimir PLATONOV, the mayors of Tver, Togliatti, Tambov and Abakan, representatives of Kuzbass working committees as well as scientists and artists. Avoiding the question of leadership for the new alliance, YAKOVLEV, former adviser to Mikhail GORBACHEV, gave the opening address. The session approved a political statement calling for the uniting of democratic parties as a single block in order to win at the December 1999 polls. Coalition initiators say they will go to the polls seeking the approval of the bills vitally important for resolving Russia's pressing problems: to do away with poverty and lawlessness, revive production and agriculture, stabilize the ruble, ensure economic growth, and combat crime and fascism. They formulated a legislative program which they are prepared to work toward. The coalition calls on Russian citizens "who are capable to think soberly, not to yield to panic" and not to blame others for their faults." Yabloko and Our Home is Russia said their parties would never join the center-right coalition.

Yeltsin Returns To Work In The Kremlin

· Today, Russian President Boris YELTSIN re

turned to work at the Kremlin, since checking into the hospital on November 22nd. He met with Nikolai BORDYUZHA, who replaces the dismissed Valentin YAMSHEV as presidential chief of staff. The two discussed ways to improve the Kremlin's efficiency. YELTSIN also met with Vladislav SHERSTYUK, director of the Federal Agency for Government Communications and Information (FAPSI). Presidential press secretary Dmitry YAKUSHKIN said that the doctors are satisfied with YELTSIN's health and said treatment for pneumonia in the hospital was no longer needed. Kremlin aide Oleg SYSUYEV made it clear that YELTSIN wants to assert his authority. With such low popularity ratings and power slipping toward Prime Minister Yevgeny PRIMAKOV, critics wonder if this is possible.

Economy

GKO Restructuring Terms Agreed To Or Not ?

· Short-term debt negotiations between the Russian government and a committee representing 19 banks from US, Europe, and Japan suffered a severe set back Thursday when the Western banks said that the restructuring deal offered by Moscow was unacceptable. A statement issued by Credit Suisse First of Boston, chair of the committee, said Russia would, "aggravate its financial isolation if it unilaterally imposes restructuring terms on foreign investors." It said that contrary to Russian reports and statements by Finance Minister Mikhail ZA-DORNOV no agreement on terms has been reached and no

Today's News Highlights

Russia

Stuggle For Control Of KrAZ

GAZ-Fiat Assembly Postponed

European Republics

Lith. Pases Comm. Criminal Bill

Kiev-Minsk Sing Econ. Agmt.

South Caucasus & Central Asia

Georgia Calls For Refugee Help

Shell Shelves Iranian Pipeline

Uzbek Cuts-off Tajik Gas Exports

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December 11, 1998

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"definite terms" have been presented. The Financial Times reports that the banks, representing 90 percent of non-resident holdings of domestic debt (GKOs/OFZs), are not satisfied with the overall deal worth less than 4 cents on the dollar and the limited uses to which blocked rubles can be put within Russia. The securities were valued at up to $40 billion before the economic collapse. Russia says it plans to exchange the defaulted bonds for new securities between December 15th and January, 1999. The committee said that, "Based on the information available, foreign investors are unlikely to accept the terms of the debt restructure on a consensual basis." Russia's revised budget for 1999 depends on a settlement with foreign investors. ZADORNOV after finalizing the budget with the Cabinet said that only $9.5 billion out of $17.5 billion in foreign debt service due next year will be paid. ZADORNOV noted that terms for the restructuring were being finalized.

Ruble = 20.08/$1.00 (NY rate)

Ruble = 20.1/$1.00 (CB rate)

Jul Aug Sep Oct Nov Dec

US Aid To Pay Pensions

· Russian Deputy Prime Minister Valentina MATVIYENKO said during her meeting with a delegation of US congressmen in the Kremlin on Saturday that about 11 billion rubles expected to be received from US humanitarian aid sales in Russia will be channeled to pay back pensions. The delegates are members of the Duma-Congress group that was set up to insure coordination of legislative activities of the US Congress and Russian parliament. According to MATVIYENKO, pensions arrears total approximately 30 billion rubles. Aid will be also

sent to hospitals, orphanages, social insurance organizations and the regions which are short of finances to purchase food and medicines, MATVIYENKO said.

Russian Banks Lost 100B Rubles

· The Russian banking sector has lost 100 billion rubles ($5.5 billion) since the beginning of the economic and financial crisis in August. Central Bank Chairman Viktor GERASHCHENKO on Tuesday said the amount of bank capital had dropped more than 30 percent from August to October. GERASHCHENKO also said that the bank's asset shortage at the start of October amounted to 22.3 billion rubles ($1.3 billion), or 38.5 percent of the total assets. He noted that Russian banks lost about a third of their deposits from August to October as clients' confidence in the banking system wavered.

Business

Struggle For Control Of KrAZ

· A 700,000 metric ton sale of alumina by Aluminum Company of America (Alcoa) to Krasnoyarsk Aluminum Works (KrAZ) may be the first move in a planned take over of KrAZ by Trans World Group. Trans World Group, led by Lev CHERNOY, signed the deal with Alcoa. The sale is reducing the profitability of KrAZ and cutting its costs, making it vulnerable for a takeover. CHERNOY has also put pressure on KrAZ chairman Anatoly BYKOV by buying shares in the KrAZ from Rossiisky Kredit Bank, a Moscow bank severely hurt by the financial crisis. Vice President of Sibirsky Aluminy Group German TKACHENKO complains that, "Trans World Group was making big profits but not investing," the money back in Russia, The Journal Of Commerce reported. This underlines one of the most unfortunate trends negatively affecting the post Soviet economy. Huge profits have not been re-invested in Russia's industrial infrastructure. Both CHERNOY and BYKOV have been accused of unsavory business practices and links to organized crime groups. KrAZ, with an annual cash flow of almost $900 million, is an attractive target for take over and to organized crime groups, which seek to siphon money off the top. Their business competition and contribution to political elections represents a trend in Russia, whereby big business wields its influence over an entire region by controlling purse strings and political strings. Last April, Trans World Group and KrAZ

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backed former military field commander Alexander LEBED in his bid for Governor of Krasnoyarsk. He won the election and has stated his interest to run in the 2000 presidential elections. LEBED is motivated to consolidate KrAZ under a single management structure, which would then help finance his campaign. But as he seeks to win their financial support as a presidential candidate, LEBED as Governor is pressuring them to pay their taxes and follow legal business rules. BYKOV recently on Russian television said that supporting LEBED was, "the biggest mistake of my life." It appears that while BYKOV is being attacked on both fronts: by the tax collector and his competitor Trans World Group.

GAZ-Fiat Assembly Launch Postponed

· Speaking at the presentation of the new model of the Sobol minibus, Russian car company GAZ president Nikolai PUGIN said that the trial assembly of Fiats scheduled for late 1998 has been postponed until March, 1999 due to the economic crisis. Approximately 30,000 Fiats, with price tags varying from $12,000 to $17,000, will be produced by the Nizhny Novgorod Motors joint venture, initiated by GAZ and foreign investors. Under the business plan worked out by GAZ and Fiat specialists, after the plant reaches the designed output, annual tax revenues to budgets of all levels will exceed $200 million. First Deputy Economics Minister Andrei SVINARENKO hailed GAZ as the most advanced Russian car plant. He said the government welcomed its strategy aimed at creating assembly productions abroad. At present, the plant assembles cars in Ukraine, Kazakhstan and Moldova. Similar productions in Kyrgyzstan, Belarus and South-Eastern Asia are under consideration.

Vympelkom-Telenor Partnership

· Russian company Vympelkom and the Norwegian state telecommunications company Telenor have signed an agreement on strategic partnership. Under the agreement, Telenor will acquire a blocking interest in Vympelkom's 25 percent plus one voting share for $160 million and become the largest foreign co-owner of the company which is known in Russia as Bee Line. Russian First Deputy Prime Minister Yuri MASLYUKOV at a reception after the signing ceremony said, "the Russian government attaches great significance to the cooperation between the two countries and believes that Russia and Norway

have good prospects for cooperation not only in the field of telecommunications, but also in the field of non-ferrous metallurgy and in the oil sector."

European Republics

Lith. Bans Communists From Top Posts

· On Thursday in a vote of 68 to zero with no abstentions, the Lithuanian parliament passed a declaration drafted by the Speaker of the parliament Vytautas LANDSBERGIS describing communists and former structures of the "communist occupation regimes" as "criminal." The declaration expresses the determination to "legally and politically" weight the suitability of "former active political collaborators of the occupation regime in Lithuania" to hold senior state posts. Earlier this week, LANDSBERGIS registered a bill he drafted, barring from service in top echelons of power for five years former members of the Central Committee of the Lithuanian Communist Party, from secretaries of the Central Committee down to instructors. This applies to service in the presidential administration, parliament, Cabinet, Foreign and Defense Ministries, and the education system. The bill may affect many legislators in the parliament, as well as former-president Algirdas BRAZAUSKAS, who was first secretary of the Central Committee of the Lithuanian Communist Party before the party withdrew from the CPSU, former speaker of the parliament Ceslovas JURSENAS, currently a leader of the opposition in parliament, and other prominent Lithuanian politicians. President Valdas ADAMKUS, vetoing other similar measures, said that Lithuanians must start abandoning resentments brewed in their troubled past.

Kiev-Minsk Sign Economic Agreement

· Ukrainian President Leonid KUCHMA and Belarus President Alexander LUKASHENKO today signed a full scale treaty on economic cooperation between their two nations through 2007, in Minsk, which pledges to scrap double taxation. LUKASHENKO and the Ukrainian President discussed mechanisms to implement the economic treaty. The agreements concluded at Minsk, Gomel, and Kiev were not fully implemented. As a result, commercial and economic turnover between the two countries dropped by 18 percent this year and its balance is not in Belarus' favor. The leaders also touched on the

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economic and financial crisis in Russia. KUCHMA said, "We agreed on 99.9 percent [of the issues]...Only one issue is left unresolved—debts. We agreed to meet in February." Ukraine's unspecified debt to Belarus was accumulated before the collapse of the Soviet Union and total $170 million. KUCHMA is scheduled to meet with Prime Minister Sergei LING and a delegation of Belarus businessmen. The Ukrainian leader will visit the border city of Brest on Saturday to see how the Brest Free Economic Zone is functioning.

South Caucasus & Central Asia

Georgia Calls For Refugee Protection

· Georgian President Eduard SHEVARDNADZE on Thursday called on international bodies to take a tougher stance on the protection of refugees from the breakaway region of Abkhazia. On the 50th anniversary of the adoption by the UN of the Universal Declaration of Human Rights, SHEVARDNADZE said that what is going on in Abkhazia is, "considerable ethnic cleansing and the genocide of the population." He added that this, "has been under way for several years, afflicting both Georgians and non-Georgians, even Abkhazians who refuse to exercise terror towards Georgians....One cannot limitlessly feed hopes in people who have been banished from Abkhazia, because despair usually brings about explosion, and a war starting in Georgia can first engulf the Caucasus and then the rest of the world. To prevent this, SHEVARDNADZE called on international organizations to help solve this problem following the Yugoslavian policy. Approximately 50,000 ethnic Georgians were displaced from the bordering Gali district in May. The Georgian leader suggested that UN Secretary-General Kofi ANNAN raise the issue of protecting the rights of the banished not only in Georgia but also on a world scale.

Shell Shelves Iranian Pipeline

· In a victory for the US and its favored Turkmen-Turkey Caspian Sea pipeline route, Royal/Dutch Shell has quietly put its plans to develop a line from

Turkmenistan to Turkey through Iran on the shelf. Speaking at the conference organized by Cambridge Energy Research Associates and the US-Russia Business Council, Gavin GRAHAM, Shell's business development manager for the Commonwealth of Independent States presented a map showing prospective pipeline routes with the Iranian link shown as a dotted line. When asked about this, GRAHAM said, "Today, categorically, we have no interest in any Iranian route," The Journal Of Commerce reported. He indicated Shell's support for the Turkmenistan-Turkey line across the Caspian Sea. GRAHAM said that Shell's decision was not based on US sanctions against foreign companies investing more than $20 million in Iranian petroleum projects, but rather was due to Iran's go-it-alone stance. Iran appears focused on using its own gas rather than supplies from Turkmenistan. The shelving of this project by the world's second largest gas company has spurred Turkmenistan to actively promote the US preferred route. Before, Turkmenistan had said that it would supply gas through either route. An adviser to Turkmen President Saparmurat NIYAZOV said that the Caspian Sea line could be running before the Iranian project in 2001 or 2002. Houston-based Enron Corp. has finished the first draft of a feasibility study to be released in January. The first phase of the project will supply 15 billion cubic meters of gas annually and cost $2.67 billion.

Uzbek Suspends Gas Exports To Tajikistan

· The president of the state-owned company Tajikkommunservis, Aziz INOYATOV said that he was informed by Uzbekstransgaz gas provider that gas deliveries have been stopped because of emergency repair work at one of stretches of the gas mainline in Uzbekistan. The Uzbek gas sector assured INOYATOV that deliveries would resume immediately following the completion of repairs. Uzbekistan delivered to Tajikistan 584,455 cubic meters of natural gas, worth $33 million, over the nine months of this year. Under an agreement, Tajikistan pays for gas by shipments of Uzbek cargoes on the Leninabad stretch of the Tajik railroad.

Paul M. Joyal, President, Editor in Chief Clifton F. von Kann, Publisher Jennifer M. Rhodes, Principal Editor

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