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

Monday, December 21, 1998

Russian Federation

Politics

Russian-Indian Relations Strengthen

· Russian Prime Minister Yevgeny PRIMAKOV arrived in India on Sunday saying that strategic ties between Russia, China, and India will help them, "pursue joint aspirations for establishing peace and security in the world." He is the first head of government from the permanent members of the UN Security Council to visit India since it conducted nuclear tests in May. India and Russia have since renewed a decade-old deal to build the region's first big nuclear power station in the southern Indian state of Tamil Nadu. The two Cold War allies have finalized a new 10-year defense cooperation deal for the next millennium. Russia continues to be India's biggest supplier of defense equipment and more than 50 percent of its military hardware is of Soviet or Russian origin. Cooperation in the military sphere could bring Russia over $10 billion. Seven key agreements were signed today, including an extradition treaty, mutual legal assistance, development of trade, economic, industrial, financial, science and technology cooperation. PRIMAKOV met with Indian Prime Minister Atal Behari VAJPAYEE to discuss bilateral issues and the air strikes on Iraq. The two sides discussed ways to boost their plummeting bilateral trade, which fell to $1.79 billion in 1997 from $5.5 billion in 1991. Both hope to increase mutual trade turn over to $3 billion to $3.5 billion by the year 2000 and to $5 billion a year by 2005. The Russian-Indian negotiations will discuss the fate of the Admiral Gorshkov aircraft-carrying cruiser which Russia intends to hand over to the Indian side. It is planned that India will overhaul this ship with assistance from Russian specialists and by using the potential of the Russian military-industrial complex. The combat ship has displacement of over 40,000 tons. It costs Russia yearly $25 million for its upkeep. That is why

it was decided to hand it over to India on condition that it pays $500 to $650 million for works on its upgrading and air technique. It is expected that India will buy from Russia Su-33 and MiG-29K planes which will be based on the cruiser. These planes participated in the Air India-98 air show and attracted close attention of Indian military circles and specialists. Admiral Gorshkov is the last of the four aircraft-carrying cruisers in the Russian Navy. Three other ships have been sold as metal scrap.

PRIMAKOV is accompanied by a Russian government delegation, which includes, Economics Minister Andrei SHAPOVALYANTS, Trade Minister Georgy GABUNIA, Justice Minister Pavel KRASHENIN-NIKOV, as well as Saratov Region Governor Dmitry AYATSKOV, and Arkhangelsk Region administration chief Anatoly YEFREMOV. Later in the day, PRIMAKOV is scheduled to meet with Indian President Kocheril Raman NARAYANAN, Vice President Krishna KANT, and Ganti Mohan Chandra BALAYOGI, Speaker of the House of the People.

St. Petersburg Run-off Elections

· St. Petersburg held its second round of elections for the city's legislative assembly on Sunday, with most incumbents retaining their positions. A total of 1,483 polling stations in 44 constituencies of the city opened at eight o'clock in the morning. Deputies in the remaining six constituencies were already elected in the first round, held on December 6th. Some 15,000 workers at precinct, constituency and city

Today's News Highlights

Russia

Fatherland Elects Leader

Duma Comm. Studies Budget

Ruhrgas Wins Gazprom Tender

European Republics

Unemployment Rises In Ukraine

CB Lowers Discount Rate

South Caucasus & Central Asia

Abkhaz-Georgian Talks Continue

US To Help Georgian Military

EU To Fund Optical-Fiber

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Intercon's Daily

election commissions were engaged in the election process. About 5,000 policemen ensured protection of public law and order at polling stations. The City Election Commission plans to make public results of the runoff today. According to preliminary information, the Yabloko movement won eight seats and Yuri BOLDYREV Bloc earned 15 seats. The Communist Party won five seats, while the Soglasie bloc won only one seat. There were 14 independent candidates elected. Turnout was 10 percent lower than the first round of voting of 40.56 percent. President of the Merkator independent analytical group Dmitry ORESHKIN said that over half of members of the previous Legislative Assembly were re-elected and about 70 percent were on the so-called Petersburg List blessed by city governor Vladimir YAKOVLEV.

Luzhkov Elected Leader of Fatherland Party

· Moscow Mayor Yuri LUZHKOV was elected leader of the Fatherland Movement, a new political party in Russia, at the founding congress of the movement on Saturday. The movement was formally registered by the Justice Ministry meeting a midnight deadline that will qualify the party to run in parliamentary election in December, 1999. Features of a social democratic society are respect for national cultures, traditions of all constituent peoples, for freedom of individuals and human rights and territorial integrity, he said. LUZHKOV called for the strengthening of armed forces and an updated defense industry. LUZHKOV told delegates, "The international community needs a strong Russia as a great power that respects itself and other powers. We need a modern army, a reliable nuclear deterrence system...Russia must be a great military and naval power." The party's principles are of social democracy, which envisages democratic freedoms, including honest elections and a multifaceted market economy, he noted. He called for further integration of the CIS, citing the need to boost the integration with Belarus. LUZHKOV said one of key goals of Fatherland is revision of privatization results. He said he does not call for another redistribution of property but for recovery by the state of objects that had been unlawfully privatized or ineffectively used. He called for revisions of credit, customs and tariff policies. The new movement has been joined by many of federal-level politicians, including former Security Council chief Andrei KOKOSHIN and former presidential press secretary Sergei YASTRZHEMBSKY.

LUZHKOV hopes to unite centrist forces, win stable footing in the parliamentary elections, and launch his presidential bid for the elections in 2000 earning wide support for his movement outside Moscow, which is one of his biggest weaknesses.

Economy

Ruble = 20.75/$1.00 (NY rate)

Ruble = 20.9/$1.00 (CB rate)

Duma Commission Considers Budget

· A special commission at Russia's State Duma, comprising representatives from all Duma factions, on Saturday began scrutinizing the 1999 draft budget submitted by the government. Apart from the lawmakers, officials from a number of ministries and department will participate in the commission meeting, which will work until December 23rd. Chairman of the Duma committee on budget, finance and banks Alexander ZHUKOV said that on Christmas Eve, the draft will be officially submitted for consideration by the parliament. The draft budget plans for 30 percent inflation in 1999 and an average ruble rate of 21.5 rubles to the dollar. These macro-economic parameters may be difficult for Russia to meet. ZHUKOV stressed that the draft budget contains a number of serious proposals to specify the tax base and tax distribution. He pointed out that commission members agreed with the government's position that calls for minimizing inflation in 1999, "preventing by all means the ruble's collapse and trying to keep it within the limits proposed by the government." ZHUKOV noted that the Duma commission on the budget has approved its main parameters and advised the Duma to adopt it in the first reading on December 24th. "Of course, it will take some time to consider these amendments, but the State Duma has a chance to consider them and perhaps adopt the final decision on the budget by New Year's."

Business

Ruhrgas Wins Gazprom Tender

· On Saturday, the Russian Federal Property Fund announced that German gas company Ruhrgas had won the tender for a 2.5 percent stake in the Russian gas company Gazprom. The starting price was $651 million, but Ruhrgas placed a bid of $660 million. The second highest bidder was Interoil France Ltd. with

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an offer of $651.5 million. The bidding improve Gazprom's investment attractiveness. The formal deal is expected to be signed today. Russian Federal Property Fund Igor SHUVALOV said, "part of this money will hopefully be aimed at paying off part of debt to public-sector workers and other categories." According to a Gazprom press release, the winning by Ruhrgas of 2.5 percent of stocks of the government's 40 percent stake in Gazprom provides the Russian gas company with a real strategic partner." The Russian president's decree of November 2nd ordered the sell-off of a total of 5 percent of the government's stake for replenishing the federal budget. The government has not announced when it will sell the additional 2.5 percent. The government will retain its remaining 37.5 percent stake in Gazprom and control of the gas monopoly.

Ruhrgas plans to purchase an addition 1.5 percent of Gazprom shares in the first quarter of 1999. Officials said that the shares would be purchased on the local market, which is normally off limits to foreigners and where shares trade at a big discount. A joint venture will be formed by Ruhrgas and Gazexport foreign trade enterprises, with Gazprom holding 51 percent and Ruhrgas the remaining 49 percent. Gazprom plans to boost its deliveries to Ruhrgas by 25 percent by 2003. Spokesman for Ruhrgas Klaus WALTER, expressing satisfaction with winning the tender, said the deal, "is an important component of further expansion of relations between the two enterprises." Ruhrgas is Gazprom's biggest client. In 1998, Gazprom delivered 19 billion cubic meters of gas to Ruhrgas. Chairman of the Ruhrgas board Friedrich SPAETH said, "We consider the investment proof of our confidence and certainty in the viability of the Russian gas industry, the reliability of the deliveries of Russian natural gas and also the viability of the economy as a whole."

percent in the Ivano-Frankovsk region. While the average competition rate for one job in Ukraine is 27 people, in Ivano-Frankovsk 302 people compete for one job. The lowest unemployment rate is in Kiev, 0.7 percent, in Sevastopol and Odessa, 1.0 and 0.8 percent, respectively.

Ukraine's CB Lowers Discount Rate

· The Central Bank of Ukraine on Friday lowered its discount rate from 82 percent to 60 percent. The bank also asked all the commercial banks to fix their loan rates in line with the new discount rate. However, it maintained its mortgage rate at 92 percent. Earlier this month, Central Bank President Viktor YUSHCHENKO announced that the Central Bank was likely to cut its discount rate further once the 1999 state budget cleared the parliament. The parliament is expected to hold the second reading of the 1999 draft budget. He also said that the Ukrainian economy is showing stabilization signs following the Russian financial and economic crisis. Today, the Ukrainian Prime Minister said the Central Bank may lower its refinancing rate to 40 percent by the beginning of 1999 and to 17 percent by the year-end.

South Caucasus & Central Asia

Georgia-Abkhaz Peace Talks To Resume In Gali

· Georgian State Minister Vazha LORDKIPANIDZE and ABKHAZ representative Sergei BAGAPSH agreed during the peace talks in Geneva to continue negotiations on December 22nd in Gali. They will discuss the implementation of already signed agreements. While both sides are posturing themselves in response to alleged build-up of armed forces, both ministers called for a halt to resumption of hostilities. UN Secretary-General Kofi ANNAN's special envoy for Georgia Livu BOTA, officials from Russia, Germany, France, Britain, the US, and the Organization for Security and Cooperation in Europe (OSCE) participated in the talks. Intercon sources report that the OSCE plans to take a more active role in the peace process. The organization plans to host talks, investigate crimes in the region, and work to repatriate Gali with ethnic Georgians providing that their security is guaranteed. According to OSCE Draft Decision No.1 On Georgia, obtained by Intercon, the OSCE stresses that there, "is an immediate need to increase efforts on all sides to promote the activities related to political negotiations on the definition

European Republics

Ukraine's Unemployment Rises

· The Ukrainian State Statistical board today released a report showing that the unemployment rate in Ukraine rose 50 percent over the past year. It states that 3.5 percent of the able-bodied population were registered as unemployed. Almost two-thirds of this number are women. The unemployment rate is the highest in Western Ukraine, reaching 6.8

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of the political status of this region and facilitation of the process of the return of refugees." The organization strongly condemned the violent acts in Georgia in May and June 1998 and the terrorist activities there in. The organization declared its readiness to, "participate in the implementation of a final and comprehensive settlement, including assistance to a local administration of the Gali District, particularly with regard to a joint mechanism of investigation of criminal cases in the zone of conflict and law enforcement body." The OSCE said that it is ready to form liaisons with international donors and institutions which are already active in Georgia. Comment: The OSCE appears to be ready to undertake a more active role in promoting the peace process in Georgia, especially in Abkhazia. This clearly reflect the growing realization that other international organizations, specifically the UN, have failed and are in fact continuing the stalemate by their inaction. The lack of process by the UN follows a decision for inaction and to distance it from the complicated security problems in the region. The Russian representative Lev MIRONOV noted the proposed meeting between Georgian President Eduard SHEVARDNADZE and Abkhaz President Vladislav ARDZINBA, originally scheduled for November, was not discussed. SHEVARDNADZE said he remains committed to resolving the Abkhaz conflict peacefully. He noted that he has obtained information which shows that the terrorist who attacked him in February, 1998 were trained in Chechnya and are now hiding out in Gali. SHEVARDNADZE said that, "rendering any support to terrorists is unacceptable for the Georgian authorities." This underlies the fact that the unresolved Abkhazian conflict continues to be a direct threat to SHEVARDNADZE and his government. Concern remains high that a provocation by ultra Russian nationalist forces could occur during the Christmas holiday.

Georgia-US Tighten Defense Cooperation

· Georgia and the US signed an agreement to tighten bilateral defense cooperation in 1999. Georgian Defense Minister David TEVZADZE described

the agreement as very specific and called his seven-day visit to Washington "fruitful." The delegation he led met with senior officials of the White House and Pentagon. US Defense Secretary William COHEN promised that the US would continue helping Georgia improving its armed forces. COHEN said that the US government has interests in Georgia's democratic process and the stability in the Caucasus.

EU To Finance Optical-Fiber Channel

· Following the close of an Armenia-European Union (EU) joint commission in Yerevan, the EU announced it will finance the laying of an optical-fiber communications channel along Caucasian railways under the TRASEC program, which provides for the creation of a transport corridor from Europe to Asia via the Caucasus. Under the program for technical assistance to CIS countries (TACIS), the European Commission is to grant 15 million ecu for the project. A project to restore railway traffic between Armenia and Azerbaijan via Nakhichevan has been drawn up. The agreement will give an impetus to closer trade cooperation between Armenia and EU, as well as political dialogue on the development of democracy and human rights matters.

US Exim-OPIC To Fund Turkmen Pipeline

· US presidential adviser on Caspian Sea energy Richard MORNINGSTAR in Ashgabat said that the US Export-Import Bank and the Overseas Private Investment Corporation are prepared to provide funding for the Trans-Caspian gas pipeline and insure it against "political risk." MORNINGSTAR noted that several US companies have presented proposals for the project. He said that much depends on an environment of mutual trust. He said the US is ready to act as a mediator between Turkmenistan and Azerbaijan to resolve their disputes over sectors of the Caspian Sea.

The Daily Report on Russia and

the Former Soviet Republics

will not be published Dec.25th to Jan.1, 1999

for Intercon's annual Winter break.

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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Daily Report on Russia is for the exclusive use of the subscriber only. Reproduction and/or distribution is not permitted without the expressed written consent of Intercon. Daily Report on Russia Ó copyright 1998, Intercon International, USA.

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