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

Thursday, December 17, 1998

Russian Federation

Politics

Swiss President Visits Moscow

· After meeting with the visiting Swiss President Flavio COTTI, Russian Prime Minister Yevgeny PRIMAKOV on Wednesday said that Russia is interested in seeing more Swiss investments flowing into its economy and will create the most favorable conditions for foreign investments. PRIMAKOV said, "Our government will do everything possible to provide the necessary guarantees and conditions for the inflow of investments to Russia." Russia is interested in direct investments in industry, agriculture, and the banking system. At the meeting PRIMAKOV and COTTI discussed international issues and signed a joint statement on further development of cooperation in the fields of economy, environmental protection, trade, investments and humanitarian aid. According to Russian statistics Switzerland was Russia's second largest foreign investor in 1997, after the US. A delegation of Swiss businessmen accompanied COTTI to St. Petersburg and Moscow. COTTI also met with Russian President Boris YELTSIN and speaker of the Federation Council, Yegor STROYEV. The sides expressed confidence that strengthening European security should be achieved by means of building up the OSCE potential and signing of the Charter of European Security. YELTSIN earlier today met with PRIMAKOV, presidential chief of staff and Security Council Secretary Nikolai BORDYUZHA, and General Staff Chief Anatoly KVASHNIN.

Moscow Bans RNE Movement

· The Moscow government Tuesday adopted a resolution banning a congress of the Russian National Unity movement (RNE), planned to be held in Moscow on December 19th. Moscow Mayor Yuri LUZHKOV said that, such gatherings should not be

allowed to be held in Moscow now or in the future. The Moscow government stressed that it has received numerous letters from Muscovites, protesting against the congress of the Russian National Unity and urged the government to ban it. Russian National Unity has not been registered on a national level. RNE has the reputation of an extremist organization, where members typically wear black uniforms with swastikas. LUZHKOV has asked the Moscow prosecutor's office to open criminal case against Alexander BARKASHOV, leader of RNE. On Russian television Wednesday, BARKASHOV challenged LUZHKOV's ban. He said in a bragging threatening way who is this LUZHKOV. I will bring 100,000 men to Moscow and then we will see.

Economy

Ruble = 20.26/$1.00 (NY rate)

Ruble = 20.62/$1.00 (CB rate)

Russia's Unfair Offer and Provocative Move

· A Russian delegation led by Deputy Finance Minister Mikhail KASYANOV and first deputy governor of the Russia Central Bank Andrei KOZLOV will meet with the delegation of 18 major Western private investment structures by the authorized bank committee led by German Deutsche Bank to finalize the terms of restructuring Russia's $40 billion domestic debt in treasury bills (GKOs) and loan bonds (OFZs). The negotiations will focus on technical and mechanical matters of repatriation of funds received by

Today's News Highlights

Russia

Yavlinsky Speaks In Washington

October Railway Head Fired

Gazprom Bidding Period Ends

European Republics

Lith.For Ban On Dealth Penalty

Rus-Belarus Union Leaders Meet

South Caucasus & Central Asia

Socar Signs Oil Agreement

Armenia To Get $20M From Rus

Tajik To Receive $19M In Aid

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investors in the process of rescheduling. Negotiations fell apart in November over these terms, which the Western banks determined to be unfair and unacceptable. The Russian Finance Ministry announced on Wednesday that it will exchange overdue bonds for new longer-term paper from December 15, 1998 to March 15, 1999, and that secondary trading in the new bonds will begin on January 15, 1999. Foreign credit holders will receive 10 percent of the discounted value of their holdings in cash in three separate installments. They will get a further 20 percent in three-year zero-coupon bonds, which can be used only to pay taxes to the federal budget or buy stakes in Russia's failing banks, and 70 percent in four-year and five-year securities with interest of 30 percent in the first year, but decreasing to 10 percent in the last year, The Wall Street Journal reported. It is still undecided when and how much of their money foreign investors will be able to take out of Russia. Investors want to be able to quickly convert both their 10 percent cash portion and their coupon payments into dollars. Russian Finance Minister Mikhail ZADORNOV said that details of the rescheduling are still open for modification as well as the range of investment opportunities within Russia for holders of new securities. He aggravated foreign investors last month by saying that a basic agreement had been reached. Western banks are entering the talks steaming, after being provoked by the Russian government's decision to begin restructuring before any final agreement and all technical matters have been worked out. Negotiations have been ongoing since Russia's financial collapse in August and no end appears to be in sight.

Sberbank Issues Money To SBS-Agro Clients

· According to deputy director of the Central Bank's bank rehabilitation department Valery MIRO-SHNIKOV, Russia's state-run savings bank Sberbank today has started payments to depositors of SBS-Agro bank. He announced this at the meeting of chairmen of bank members of the Association of Industrial and Construction Banks of Russia. MIROSHNIKOV noted that Sberbank will start payments to clients of Kuzbassprombank in February or early March and to depositors of Rossiisky Kredit in the middle of March. He said about 24 percent of depositors have been moving their savings from commercial banks to Sberbank, with 60 percent of deposits being made in rubles. He said the license

on Inkombank had been withdrawn, but the Central Bank's board of directors decided to complete the transfer of Inkombank's liabilities to Sberbank.

Yavlinsky Calls For A Clear Vision

· Speaking at a Center for Strategic & International Studies seminar in Washington, former prime minister Grigory YAVLINSKY called on Russia to develop a clear vision in order to create a new society based on not just economics and politics, but freedom and protection of human rights. Russia should be linked with the rest of the world through security and economic relationships with the West. YAVLINSKY believes this should occur over the next 20 to 25 years. He pointed out that in the past seven years the Russian government did nothing to create a civil society with a sound judicial system, rule of law, respect for parliament and a real free press. Russia must change the Constitution in order to create a system of checks and balances of power. He said there should be no more secret decrees to prevent the initiation of war without consent as occurred with the Chechen War. YAVLINSKY believes that the regional governments must not be allowed to violate the Constitution or federal laws. The government should exist to protect human rights. He calls for a smaller not larger government to do this, because with a smaller government there is less room for corruption. YAVLINSKY went on to describe seven steps which should be implemented to pull Russia out of its moral, economic, and financial crisis. First, the government should adopt a simple tax code. Enterprises must be taxed no more than 20 percent, agricultural industries 15 percent, and individuals 10 percent. Indirect taxation should also be increased, by including taxes within bills for electricity and property. The second step is follow through with bankruptcy proceedings on inefficient and debtor enterprises. The third step is comprehensive land reform; people should have ownership of their property. The fourth step is for Russia to reform the banking system. YAVLINSKY stressed that it is important for Russia to have normal banks, which will credit deposits and then loan money to enterprises, thereby putting the money back in the economy, rather than having corrupt banks deposit their credits in Cyprus. The fifth step is to implement profit sharing laws and protections for the individual and minority share holders. This was urged by US competitors and YAVLINSKY, and US Vice President Albert

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GORE during the CHERNOMYRDIN government, but it never happened. The sixth step is to restructure both internal and external debt. Russia inherited about $96 billion in Soviet debt, much of it from loans to developing countries that defaulted. Sovietdebt payments are part of the $17.5 billion in foreign debt due to creditors in 1999. This obligation, however will not be met. YAVLINSKY feels that the Soviet debt should be nullified since the people did not have a voice in their government under Soviet rule. The eighth step is to enact a strong policy of control over Russia's natural resources. YAVLINSKY said that all the money needed in Russia to achieve a legitimate budget can be found in the old Soviet natural resource monopolies, which are controlled and benefiting only 10,000 families. Approximately 70 percent of the Soviet budget was supported by these natural resources. He is not calling for a nationalization of natural resource industries, but a strong policy and mechanism to control them. YAVLINSKY points out that it is critical for the people to have confidence in the government and financial institutions. He believes that if these steps are implemented after three years, Russia will have low inflation and be able to achieve a social contract with the Russian people.

Business

US Exim, IFC Support Tyumen Oil Projects

· A Tyumen Oil Company delegation headed by the company's vice president Iosif BAKALEINIKOV won $600 million in support from the US Export-Import bank and the International Financial Corporation (IFC), a member of the World Bank group, for reconstruction and development projects. The two projects for reconstruction of the Ryazan oil plant and stabilization of oil production at the Samotlor field were approved several years ago, when the borrowers for the projects were the Nizhnevartovsk oil and gas company and the Ryazan plant. The enterprises are now members of the Tyumen Oil Company which wants to complete the projects. US Eximbank experts believe the implementation of the projects will begin before next June. The bank cannot account for more than 85 percent of investments in such deals, therefore the rest will be provided by the IFC. The total cost of contracts will amount to about $588 million. US Eximbank and IFC representatives praised the projects and business

qualities of the company's leadership. Both banks expressed their interest in continuing relations with Russia. US Eximbank president James HARMON said it is necessary to keep business ties with all the partners. He is planning to visit Russia in 1999.

October Railway Head Fired

· In an effort to pull in Russia's privatization reigns, Prime Minister Yevgeny PRIMAKOV has ordered the dismissal of Anatoly ZAITSEV, one of Russia's most powerful rail executives. ZAITSEV is head of the October Railroad, which stretches north and northwest of Moscow and links Moscow and St. Petersburg. October is the most important of Russia's 19 regional rail divisions. ZAITSEV was formerly head of the Railways Ministry and was then supported by Anatoly CHUBAIS. In that position, ZAITSEV was mandated to begin the privatization of the state-owned rail system. Since ZAITSEV's appointed to October, the railroad has been involved in controversial and costly programs. These include a speculative terminal, hotel and business complex in St. Petersburg, new port for Ust-Luga, and the High Speed Transit project, Vysokoskorostnye Magistrali, which was canceled a few weeks ago, The Journal of Commerce reported. PRIMAKOV's move appears to be part of an attempt to restore central management control over Russia's regional railroads. ZAITSEV's replacement is Alexander KUZNETSOV.

Government Closes Gazprom Bidding

· The Russian Federal Property Fund (RFFI) stopped accepting bids Wednesday for 2.5 percent of the government's Gazprom shares. The starting price of the package consisting of 591.8 million shares with a face value of 0.01 rubles has been set at $651 million. Payments will have to be made in rubles at the exchange rate set by the Central Bank on the day of payment. There are no restrictions on the participation of foreigners or affiliated persons in the auction. However, foreign investors who buy the shares will be prohibited from reselling the shares for five years or issuing derivative securities backed by these shares. According to a Gazprom press release, the auction is valid because there are at least two bidders. It is believed that both bidders are foreign companies. Germany's Ruhrgas is considered to be among the likely bidders, but company officials declined to comment. Finance Minister Mikhail ZADORNOV said the if the Gazprom sale is successful, monetary emission may be reduced.

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European Republics

Adamkus Proposes Ban To Death Penalty

· Lithuanian President Valdas ADAMKUS has proposed that the parliament debate legislation that will ban the death penalty and institute life-long imprisonment for such criminals instead. He calls for changes to the penal code and a law, "On Replacement of the Death Penalty with Life-long Imprisonment for Persons Sentenced to Death But Not Executed." Last week, the Constitutional Court ruled that capital punishment contradicts the basic law. ADAMKUS says the bill takes this into account.

Rus-Belarus Union Leaders Meet

· Belarussian President Alexander LUKASHENKO, on a working visit to Moscow, called for a pooled financial infrastructure of the Rus-Belarus Union. He said, "Today it is necessary that our states create conditions attractive for investment in the real sector of the economy." He added that the financial infrastructure of Belarus' small and open economy can and should be integrated with Russia's, "with sensible control of the state over financial flows." LUKASHENKO boasted about his nation's economy saying that virtually all of its industrial enterprises had been kept afloat, jobs are available, and workers are being paid. LUKASHENKO expressed the need for trade turnover between Belarus and Russia to be restored. He cited low demands and funds not available for payment as problems reducing bilateral trade levels. LUKASHENKO also proposed the introduction of a common currency for the union. He praised the government of Prime Minister Yevgeny PRIMAKOV and criticized Russia's previous reformist government and policies. LUKASHENKO and President Boris YELTSIN discussed a wide range of economic and political matters. Both leaders agreed to hold another meeting with a broader attendance in Belarus by the end of December. LUKASHENKO is also expected to meet with Central Bank chief Viktor GERASHCHENKO, Moscow Mayor Yuri LUZHKOV, and Interior Minister Sergei STEPASHIN. The Belarus President intends to tour the operation

of the Moscow-based ZIL autoworks and hold a series of meetings with journalists.

South Caucasus & Central Asia

Socar Signs Oil Deal With US, Saudi Cos.

· Wednesday Socar, the Azerbaijan state oil company, US Frontiera Resources and Saudi Arabia's Delta Hess signed an agreement to explore potentially rich oil fields in the Caspian Sea's Kyursangi and Karabakhly oil fields. These fields could contain up to 100 million tons of oil, the Associated Press reported. Socar controls 50 percent of the project, with Frontiera Resources holding 30 percent and Delta Hess 20 percent.

Armenia To Receive $20.57M Loan From Russia

· The Russian Finance Ministry announced that under a intergovernmental agreement Russia will extend a long-term $20.57 million loan to Armenia. The agreement was signed on Wednesday by Russian First Deputy Finance Minister Andrei KUDRIN and Armenian Ambassador to Russia Gagik SHAKHBAZYAN. The funds will be used to ensure the safe operation of the Armenian nuclear power plant. Armenia will purchase nuclear and organic fuel and equipment from Russian producers over a two year period. In addition, Russian specialists will help improve the safety of the Armenian nuclear power plant. Armenia will repay the loan between 2003 and 2008 in equal quarterly portions.

Tajik To Receive $19M International Aid

· Out of the $200 million package approved by the top executives of the World Bank, International Monetary Fund, Asian Development Bank, European Union, and several donors including the US, Canada, Switzerland, and the Netherlands, for former Soviet republics which have been hit hard by Russia's economic and financial crisis, Tajikistan will receive $19 million. The decision was made in Washington on Wednesday and funds will be released in 1999. Other recipients of the $200 million package include Armenia, Azerbaijan, Kyrgyzstan.

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

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