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Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Wednesday, December 16, 1998

Russian Federation


Russia Leaking Nuclear Knowledge To Iran

· According to US intelligence reports, in addition to building the $800 million Bushehr nuclear power plant in Iran, at least two Russian nuclear research institutes are negotiating a 40-megawatt heavy-water research reactor with an uranium conversion facility to Iran. American officials believe these are the building blocks for manufacturing highly enriched uranium for nuclear bombs. The CLINTON administration has warned Russian not to transfer sensitive nuclear weapons information to Iran. President Bill CLINTON has decided to impose sanctions against two Russian nuclear suppliers involved with the transfer of nuclear weapons technology to Iran's bomb-making program, Scientific Research and Design Institute of Power Technology (NIKIET) and Mendeleyev University of Chemical technology. The sanctions, which would ban any US government-funded project with the two institutes and prohibit all export and import activity with the US, could be imposed this week. NIKIET, formerly headed by Atomic Energy Minister Yevgeny ADAMOV, designs nuclear reactors and makes equipment used in nuclear fuel production. Mendeleyev University trains nuclear engineers. In meetings last week between Undersecretary of State Strobe TALBOTT and Prime Minister Yevgeny PRIMAKOV, the US stressed that it could no longer do business with institutes supplying Iran with dual use technology. TALBOTT also expressed dissatisfaction that the Russian did not take any action against Glavkosmos and Grafit, which had been sanctioned by the US for selling nuclear missile technology to India and Iran respectively. Both institutes continue to sell missile materials to Iran. The US has supplied more than $400 million in cash and services for nuclear security and employment programs for nuclear scientists in Rus

sia. The CLINTON Administration has halted aid to institutes believed to be involved in nuclear technology transfers with Iran. However, the termination of aid could lead to further trade operations and a deluge of Russian scientists to Iran seeking compensation for their knowledge and skills. The transfer of sensitive know-how related to heavy water production technology, nuclear-grade graphite production technology, and research reactor designs are ominous signs, Gary MILHOLLIN director of the Wisconsin Project on Nuclear Arms Control said. "What this shows is that Iran is definitely interested in making the bomb and Russians are definitely interested in helping them," The Washington Times reported.

Duma Approves Money Emission

· The Russian State Duma today in a vote of 329 to zero gave its final approval for the printing of 25.2 billion rubles to cover the government's fourth quarter deficit and tighten currency controls to slow the fall of the ruble. The bill allows the Central Bank to use $3 billion of its foreign-exchange reserves for the government's foreign-debt payments in the fourth quarter. The bill will be passed on for the Federation Council's approval and to be signed in to law by President Boris YELTSIN.

The Duma Committee on Budget, Taxes, Finances and Banks approved most of the governmental tax bills on Tuesday and will send them on to the full Duma for review. A total of 12 bills were approved, three bills were rejected and four bills were left for a joint discussion

Today's News Highlights


Primakov Outlines Nine Priorities

RJR Announces Downsizing

European Republics

Black Sea Military Experts Meet

Gazprom-Ukraine Sign Gas Deal

South Caucasus & Central Asia

Pipeline Negotiations Continue

Russia Increases Kazakh Oil

IMF Releases $217M To Kazakh

Rus-Kyrgyz Trade Could Double




December 16, 1998

Intercon's Daily

with other committees. The approved documents, to be submitted to the Duma for the first reading, include bills on the value added tax (VAT), the tax on revenues of enterprises and organizations, the excise, the income tax of individuals, the property tax of individuals, and the unified tax on imputed income from some activities. The VAT is planned to be lowered to 15 percent. In 2000, a unified VAT of 10 percent will be introduced. The tax on revenues of enterprises and organizations will be cut from 35 percent to 30 percent. A total of 3 percent of the income tax of individuals will be paid to the federal budget and up to 9 percent will be paid to budgets of Russian regions and territories. The size of the minimum taxable income of individuals will be raised. The property tax of individuals will be changed as well. A tax will be introduced on unfinished construction. Excises will be raised. The tax on alcohol will increase to 25 percent, and the tax on beer and tobacco will increase to 40 percent. Two bills, giving the currency control rights to the State Tax Service, were approved by the committee.


Ruble = 20.26/$1.00 (NY rate)

Ruble = 20.62/$1.00 (CB rate)

Rus-WB Hold Talks On 1999 Loans

· Economics Minister Andrei SHAPOVALYANTS today said that Russia is hoping for a $3.4 billion loan, investment projects included, from the World Bank by in 1999. SHAPOVALYANTS and First Deputy Prime Minister Yuri MASLYUKOV earlier met with head of the World Bank mission in Russia Michael CARTER. Out of the $3.4 billion, investment projects will account for $1.7 billion, SHAPOVALYANTS said, adding the entire package provides for financing regional budgets and social programs. He noted that by the end of the month the government and Central Bank will issue a new statement concerning structural reform. The World Bank will review the document and consider extending a loan package in the first quarter of 1999.

Primakov's Nine Priorities For Econ. Stability

· Speaking at a meeting of the Consultative Council for Foreign Investments in Russia on Monday, Prime Minister Yevgeny PRIMAKOV named key areas in which his government will seek to bring about macro-economic stability in the country, create a favorable

investment climate and restore investors' confidence in Russia. PRIMAKOV identified the following nine priority areas. First, he said the government needs to shift the monetary policy from quantitative restrictions on money supply to the management of interest rates and international reserves. Second, the crisis of non-payments and normalizing the system of settlements in the economy needs to be resolved. Third, overdue debts of companies in the real sector need to be restructured. Fourth, the tax burden on manufacturers should be reduced. Fifth, tax reform should enhance the investment aspect. Sixth, the state should establish and control a development bank in order to accumulate assets from external and internal sources for crediting businesses in the economy irrespective of the form of ownership. Seventh, the bank should develop a budget with competitive placement of state investments and provision of state guarantees. Eighth, the government should implement an active industrial policy to support exporters. Finally, the high technological industries should receive support for manufacturing highly-processed products and increase cooperation with foreign companies. PRIMAKOV said, "the main task facing the government in 1999, is to get out of the financial and economic crisis and achieve economic stabilization."


RJR Nabisco Downsizes In Russia

· US RJR Nabisco Corporation announced that it plans to downsize, cutting 2,900 jobs in Russia and other former Soviet republics. RJR stated that almost every second worker in the former Soviet Union is performing a job that is redundant. The corporation cites that its downsizing is a result of the judicial crackdown on tobacco launched by the government of almost all the states in the US. The tobacco industry is forced to pay a huge sum of $206 billion in compensation for treatment of smoking-related diseases. This is a striking example of how the crackdown of tobacco consumption in the US can have a significant affect on the company's jobs abroad. RJR Nabisco also pointed out that its business abroad particularly in the former Soviet republics has not been good for some time, due to deteriorating economic conditions. Tobacco smokers in these countries instead of buying more expensive western cigarettes have returned to local tobacco

When you need to know it as it happens




December 16, 1998

Intercon's Daily

brands which are cheaper, according to The New York Times. The international corporation admits that it had neither prospects nor resources in order to effectively cooperate on such an international scale, The Wall Street Journal said with reference to analytic of the Salomon Smith Barney company Martin FELDMAN. Since the beginning of 1992 the RJR Nabisco had invested over $400 million in the post-Soviet region.

Golovkov Appointed Head of Rosgosstrakh

· Russian Deputy chairman of the State Duma Committee for Budget, Taxes, Banks and Finances Alexei GOLOVKOV was appointed director general of the Russian State Insurance Company, Rosgosstrakh. Rosgosstrakh was set up in 1921 and has been one of Russia's biggest insurance companies. It has 80 branch organizations and 2,500 offices all over Russia. Its charter capital totals 128.5 million rubles and is planned to increase to 200 million to 230 million rubles. Over the first nine months of this year, the company collected 1.5 billion rubles in various insurance payments and paid 658.6 million rubles.

Samsung-Russia Considers Television JV

· Russian Deputy Prime Minister Vladimir BULGAK said that the leadership of South Korean Samsung Electronics Company is still considering plans to establish in Russia a joint venture to manufacture television communication equipment. Despite the economic situation both in Russia and South Korea, Samsung has not ruled this out as a possibility. BULGAK on Tuesday met with a delegation from Samsung led by its chairman Jin Kyi KANG. During the talks the sides discussed the prospects for work on the Russian market and the possibilities for manufacturing television communication equipment, as well as joint work with Russian producers of electronic equipment. BULGAK and KANG also discussed cooperation with Svyazinvest.

Soros Admits Svyazinvest Worst Mistake

· The famous financier and philanthropist, George SOROS, admits in his new book that a deal involving the acquisition of a stake in Russia's communications company Svyazinvest was the worst investment mistake over his entire professional career. SOROS said he did not regret any of his efforts to help Russia advance toward an open society, but as

an investor, however, he admits the Svyazinvest transaction was an error. He says that he was influenced by the young reformer Boris NEMSTOV, then a member of the Russian government. The results of the tender to sell a 25 percent stake in Svyazinvest, which comprises 86 regional telephone companies, were announced in July 1997. The winner, a Cypriot Company Mustcom Ltd., bid $1.9 billion, which was 60 percent up from the reserve price. The Cypriot Company represented interests of a consortium which incorporates ICFI Cyprus (MFK-Unexim group), Renaissance International Ltd. (Renaissance-capital group), Deutsche Morgan Grenfell, Morgan Stanley and Quantum of US billionaire George SOROS.

European Republics

Black Sea Military Experts Meet

· Military navy experts from Black Sea countries are meeting in Constanta port of eastern Romania to focus on the setting up of a Black Sea navy co-operation group. According to a press release by the General Staff of the Romanian Military Navy, the meeting will review on search and rescue missions at large, humanitarian aid, mine-clearing operations, sea environmental protection, and a program of navy exchanges and visits. Expected to attend the meeting are experts from Ukraine, Russian, Georgia, Turkey, Bulgaria and Romania. The creation of the navy group is part of an effort by Black Sea countries to boost friendly relations and mutual trust in order to strengthen peace and build up an environment of stability and regional co-operation.

Gazprom-Ukraine Sign 1999 Gas Deal

· Russia's gas monopoly Gazprom and Ukraine's national gas and oil company Naftogaz Ukrainy have signed an agreement for the export of 55 billion cubic meters of gas to Ukraine in 1999, including 30 billion cubic meters as payment for the transit of Russian gas through Ukraine. The Russian company will also sell to Ukrainian traders 25 billion cubic meters of gas on terms of 50 percent advance payment in the hard currency. According to Naftogaz Ukrainy's press service, the Russian gas exports might not cover Ukraine's 1999 demand, which is estimated to be 80 billion cubic meters, with the national gas output totaling only a 18 billion cubic meters.

When you need to know it as it happens




December 16, 1998

Intercon's Daily

Meanwhile, Naftogaz Ukrainy has resumed talks with Turkmenistan on exporting 20 billion cubic meters of gas to Ukraine in 1999. President Leonid KUCHMA is scheduled to hold negotiations with Turkmen President Saparmurat NIYAZOV on Turkmen gas exports December 23rd. In March of 1998, Turkmenistan stopped its gas exports to Ukraine, turning down its proposal of food exports against part of the gas debt. Turkmenistan also urged for the Ukrainian government's guarantees of timely payments in the convertible currency for the imported gas, with the debt for earlier deliveries amounting to over $600 million.

South Caucasus & Central Asia

Pipeline Negotiations To Continue In January

· The Azerbaijan International Operating Company (AIOC), and the governments of Azerbaijan and Turkey have been negotiating on the main export pipeline route since December 8th. A senior Turkish energy official on Tuesday said that the talks in Ankara are making significant progress in finalizing the Baku-Ceyhan option as the main export route. Turkish under secretary of energy Yurdakul YIGITGUDEN said, "The parties involved have agreed on several commercial matters," but he did not elaborate. He did note that, "participants agreed to consult with their legal experts and reach a consensus." The fifth round of talks will be held in Ankara in early January, 1999.

Russia Increases Kazakh Oil Throughput

· Kazakh Minister of Energy, Industry and Trade Asygat ZABAGIN said Friday that Russia has decided to permit Kazakhstan to export an additional 1.5 million tons of oil a year through Russian oil pipelines to countries outside the Commonwealth of Independent States. Russia's Fuel and Energy Ministry made the offer last week, when Kazakh Foreign Minister Kaymomart TAKAYEV was in Washington meeting with oil and gas companies. Thirty percent of Kazakhstan's budget is based on sales of oil and

gas. Kazakhstan depends on Russian pipelines for its oil exports. In a bid to protect its own interests, Russia before had only permitted Kazakhstan to transit 7.5 million tons of oil a year through its pipelines.

IMF Approves Release Of $217M To Kazakhstan

· The International Monetary Fund (IMF) Tuesday announced it has approved the release of a $217 million payment from its three-year loan to Kazakhstan. This is the first time Kazakhstan has drawn on the $430 million loan, which was approved in July 1996. Kazakhstan said that it will use the funds to bolster gold and foreign currency reserves, which have decreased by $600 million in the past few months. IMF Deputy Managing Director Shigemitsu SUGISAKI said that the Kazakh authorities have, "responded appropriately and forcefully to difficult external circumstances by deepening their adjustment efforts." Kazakhstan on Monday passed its 1999 budget, which foresees a deficit of 3.1 percent of the gross domestic product.

Volsky Ends Visit To Bishkek

· Ending his two-day visit to Kyrgyzstan on Monday, Arkady VOLSKY president of the Russian Union of Industrialists and Entrepreneurs said that it is possible to double Russian-Kyrgyz trade turnover by resuming the export of Kyrgyz rare-earth elements to Russia and regulating transportation and energy tariffs. He said this will have, "an instantaneous effect" on bilateral trade. VOLSKY favors barter trade and using clearing schemes for mutual settlement instead of hard currency. He noted, "We have lately worked out with Ukraine and Belarus a system of settlements based on a barter unit and begun barter cooperation, in which settlements will also be made through clearing." Kyrgyz First Deputy Prime Minister Boris SILAYEV said his government is willing to accept barter agreements. Russian and Kyrgyz industrialists will gather in Bishkek for a conference in the first quarter of 1999 to work out concrete bilateral projects.

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

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