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Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Thursday, December 24, 1998

Russian Federation


US-Rus Sign Humanitarian Aid Documents

· The US Charge d'Affaires ad interim John TEFT and Russian Deputy Prime Minister Gennady KULIK on Wednesday signed a package of documents for the delivery of American humanitarian aid to Russia. The US in the next few months will deliver to Russia 3.1 million tons of food products, including 1.5 million tons of wheat which will be donated to Russia. TEFT noted that those food products were intended for the poor sections of the population and Russia's regions which experience a sharp deficit of foodstuffs. The distribution of humanitarian aid among Russian regions will be conducted under strict control exercised by a special state commission. Under the agreement, the US has granted a $600 million credit for purchasing food products from the US, including but not limited to, 500,000 tons of soya beans and oil-seed meal, 200,000 tons of wheat, and 120,000 tons of meat and milk powder. TEFT said that over 50 percent of 3.1 million tons of food products will be delivered to the Russian population free of charge, and partly will be sold on the Russian domestic market at market prices. Funds raised from the sale of food will be contributed to the Pension Fund.


Ruble = 20.01/$1.00 (NY rate)

Ruble = 19.87/$1.00 (CB rate)

Duma Passes 1999 Draft Budget, First Reading

· The Russian State Duma today passed the 1999 draft budget in its first reading in a vote of 303 to 65, exceeding the necessary 226 votes. President Boris YELTSIN Tuesday urged deputies to adopt the government's budget, the toughest since the collapse of communism, in order to pull the nation out

of its economic crisis. YELTSIN's support of a strict budget and the easy passage of the budget may be a new turning point for the government, which failed to quickly develop and implement anti-crisis measures after the previous government defaulted on loans and devalued the ruble. The budget had to be completely rewritten after the collapse in August. The budget forecasts a cut in the budget deficit from 5.44 percent of gross domestic product this year to 2.53 percent in 1999. Annual inflation is expected to be no more than 30 percent, if the ruble is kept at an exchange rate of 21.5 rubles to the dollar. The budget accounts for $29 billion in spending and only $24 billion in revenues. Most of the Duma's political parties supported the budget plans in principle and it was expected that the PRIMAKOV's government budget would easily pass this year. Yabloko, the fourth largest party represented in the Duma, was the only faction which came out against passing the draft budget in the first reading. The party believes that the budget is unrealistic. Finance Minister Mikhail ZADORNOV admits that the budget assumes Russia will be granted $7.2 billion in foreign loans. The budget sets aside $9.5 billion to pay off Russia's foreign debt, which will total $17.5 billion in 1999. The budget also aims to reduce Russia's internal debt from 756 billion rubles in 1999 to 632 billion rubles by January 1, 2000. ZADORNOV said, "The main problem is to tackle the problem of state debt in 1999. Otherwise we cannot exist as a state. We cannot borrow on the domestic market in the same volumes as we did in the last four or five years."

Today's News Highlights


FAA Approves Ilyushin IL-103

ORT New Bankruptcy Case

European Republics

Belarus-Rus Union Summit

Lith Abolishes Death Penalty

Ukraine-Turkmen Gas Deal

South Caucasus & Central Asia

Tevzadze For Treaty Review

Armenia Recives $65M Grant




December 24, 1998

Intercon's Daily

Meeting with the President before attending Duma debates, Prime Minister Yevgeny PRIMAKOV threatened to resign if Duma failed to approve the budget. He warned, "If the budget isn't approved, we will not stay on our posts." He noted that the strictness of the budget is essential for getting new loans from the International Monetary Fund and other international lenders. PRIMAKOV noted that he is willing to compromise on some measures, but will not increase government spending; the Communist Party wants an increase in military spending due to the recent attacks on Iraq.

New Tax Laws Effective March, 1999

· Russian Finance Minister Mikhail ZADORNOV told the Russian State Duma Budget and Finance Committee when the 1999 federal budget was being discussed that the current tax legislation will remain valid in January-February 1999. Effective March, 1999, the new Russian tax legislation will be operating in full. ZADORNOV noted with satisfaction that the new tax legislation was mostly backed by the State Duma at the last plenary meeting on December 18th. The laws plan for sharing tax and custom incomes between federal and regional budgets, full tax collection in Bashkiria and Tatarstan, and overall improvement of the collection of the main taxes in Russia. Tax laws ensure against loses of incomes on value-added tax and tax on profit with partial compensation for the abrogation of tax benefits. The 1999 draft federal budget envisages revenues of 473.8 billion rubles.

RFFI To Establish Restructuring Credit Org.

· The Russian Federal Property Fund (RFFI) has been appointed as the founder of the Agency for Restructuring of Credit Organizations, a non-banking open joint-stock company decreed by the Russian government. The agency's authorized capital of ten billion rubles is in government securities issued by the Finance Ministry. The agency has been set up for restructuring credit banks, keeping them functional and restoring the trust and confidence of corporate lenders and private depositors in banks. The founder Russian Federal Property Fund has formed the agency's board of directors made up of representatives of the government and the Central Bank. Central Bank Chairman Viktor GERASH-CHENKO has been appointed as chairman of the board of directors and Alexander TURBANOV as general director of the agency.

Car production Falls 13 Percent

· According to information released by the State Statistics Committee, car production in Russia fell 13 percent in the period of January to November 1998, as compared to the same period in 1997. Passenger car production reduced by 14.9 percent, truck production declined by 3.7 percent, while bus production fell by 2.8 percent. Car production in Tatarstan slumped 30.5 percent over the first eleven months of the year. The slump registered in the Ulyanovsk region totaled 21.6 percent, in the Samara region reached 19 percent.


UES To Export Electricity

· Russia's Unified Energy Systems (UES) chairman of the board Anatoly CHUBAIS on Tuesday announced that in 1999 the company is restructuring its marketing system to include relations with major consumers and exporters, and to sell electricity at foreign markets. He said the joint-stock company is going to use the advantages of the Chinese, Japanese and West European energy markets. The program of electricity export for 1999, to specify the volumes of sales, will be endorsed at the next meeting of the company's board. CHUBAIS said that the minimum world price of one kilowatt-hour of electricity is now two cents, or 42 kopecks at the current exchange rate, while the basic tariff of UES is 24 kopecks per kilowatt-hour. The company is also considering providing thermal power stations in the Kamchatka peninsula and in Russia's Far East with gas fuel which would be made from gas extracted at nearby fields. This would make it possible to cut production costs of electricity in the Kamchatka peninsula and the Far East by 33.4 percent to 50 percent and to avoid fuel shortages in these regions.

US FAA Approves IL-103 Certification

· The safety and certification agreement signed earlier this year between Russia and the US has paved the way for the US to certify the Ilyushin IL-103. The US Federal Aviation Administration (FAA) approved its first Russian-designed plane, the Ilyushin IL-103. The certification was the culmination of a, "shadow certification" program conducted by the US agency, its Russian counterparts, and the Ilyushin Aviation Complex. The two seater Ilyushin IL-103 is powered by a single 210 HP Teledyne Continental Motors IO-360ES engine.

When you need to know it as it happens




December 24, 1998

Intercon's Daily

Meanwhile, Russian military helicopters MI-8T received an honorary award from a local magazine for the helicopters manufactured in Ulan Ude and Kazan. The Mexican Airforce noted that the helicopter are capable of, "performing extremely well in extreme conditions." The aircraft were used to lift aid and evacuate military and civilians when Oaxaca and Guerrero were hit by the tornado Paulina.

S. Korean Shipyard Builds Three Tankers

· The shipyard of South Korea port of Pussan has completed building three tankers with deadweights of 45,000 tons each for Russia. The final ship sailed to Onsan to be immediately loaded with oil products. The tanker will go with the oil cargo to ports of Japan and Singapore. The Primorye Shipping Company in August and October picked up the two other commissioned tankers from South Korea. The Primorye Shipping Company is Russia's youngest trade fleet. The company's press secretary Irina SOSNINA said the company over the past five years had 13 new modern ships built with loans from European banks and employs over 2,000 sailors.

ORT Enters Another Bankruptcy Lawsuit

· The major Russian ORT television channel faces a new bankruptcy lawsuit filed on Monday, just days after the previous one was dropped. This time the lawsuit was filed for debts by the "First sight love" program filmed by the International quiz club association What, Where and When. ORT, once the Soviet's biggest channel 1 network, is now a privatized company in which the state owns 51 percent of stock. ORT is widely rumored to be influenced by media tycoon and shareholder Boris BEREZOVSKY. Last week, the Arbitration court dropped a lawsuit of the Moscow bankruptcy commission against ORT after the Federal bankruptcy commission interfered. However, ORT president Igor SHABDURASULOV admitted that the decision, "did not eliminate the [debt] problems faced by the company." He added that much would depend on how the government interacts with the ORT.

YELTSIN. The two leaders will focus on the framework of the Belarus-Russia Union. The chief of the Belarus president's office Mikhail MYASNIKOVICH arrived in the Russian capital on Wednesday to prepare for his president's visit. He noted that it is planned for the presidents to sign a Joint Political Declaration on the development of the Union in the Kremlin on Friday. The declaration should outline plans for the future development of the Union.

Meanwhile, Russia's delegation led by Federal Border Service Director Konstantin TOTSKY is attending a board meeting of the Russia-Belarus Border Committee in Minsk. The meeting will summarize results of the committee's work and of cooperation of Russian and Belarus border services in 1998 and set goals for 1999. The Belarus delegation is led by border troop commander Lieutenant-General Alexander PAVLOVSKY.

Lith. Parliament Abolishes Death Penalty

· The Lithuanian parliament on Tuesday abolished the death penalty. The legislative initiative was not supported by some deputies of the parliament, specifically Stasis BUSKIAVICIUS and Rimantas SMIATON offered a nation-wide referendum instead of assuming such responsibility. The parliament did not agree to their arguments and abolished the death penalty, cutting the number of European states using the punishment. The capital punishment will be replaced by life imprisonment for very serious crimes. Another act of the parliament changed the death penalty of nine convicts to a life-time imprisonment. Public reaction to the abolition is mixed in the face of growing crimes in the Baltic country. According to local polls 70 percent to 80 percent of the public find it premature. The abolition was initiated by President Valdas ADAMKUS after the Constitutional Court ruled the death sentence is unconstitutional.

Ukraine-Turkmen Negotiate Gas Deals

· Following negotiations between Ukrainian President Leonid KUCHMA and Turkmen Saparmurat NIYAZOV in Ashgabat, head of Ukraine's state oil and gas company Igor BAKAI and chairman of the state trade corporation Turkmenneftegaz Berdymurad REDZHEPOV signed an agreement for the export of Turkmen gas to Ukraine. Turkmenistan will supply Ukraine with 20 billion cubic meters of gas in 1999. The deal, worth $720 million, will be paid 40

European Republics

Lukashenko-Yeltsin To Continue Summit

· Belarus President Alexander Lukashenko is expected to arrive in Moscow Friday to continue his summit meeting with Russian President Boris

When you need to know it as it happens




December 24, 1998

Intercon's Daily

percent in hard currency and 60 percent in goods and services. KUCHMA said he is pleased with the agreement, noting that in his New Year's address to Ukrainians he will be able to say that everyone will have electricity and heating. "Ukraine may count on Turkmen gas supplies in the next 350 years," NIYAZOV told KUCHMA. He said that the explored resources of gas in Turkmenistan are estimated at 23 trillion cubic meters. BAKAI said that the success of the agreement will depend on Russian gas monopoly Gazprom; he will meet with Gazprom officials on Friday. All Turkmen exports to Ukraine must pass through Gazprom's pipelines. Talks between Turkmenistan and Gazprom broke down in March, 1997, over gas transportation costs. According to the World Bank and the IMF, Russia has lost $750 million and Turkmenistan $1.8 billion, since gas supplies to Ukraine were terminated. NIYAZOV said total exports in 1999 will reach 31 billion cubic meters, including 11 billion cubic meters through a new pipeline link to Iran.

South Caucasus & Central Asia

Tevzadze Calls For New Treaty With Russia

· Georgian Defense Minister David TEVZADZE today has called for a new treaty on the Russian military bases. He said, "The legal vacuum concerning the Russian military bases in Georgia will remain until a new contemporary treaty on the development of Georgian-Russian military cooperation is worked out and signed." He noted that the bilateral military treaty signed several years ago does not in reality work. In his first trip to Moscow as Defense Minister, TEVZADZE asked the Russians to explain the purpose of Russian military bases in Georgia. During that visit it was agreed that Russia's general staff would respond to this request to define the military justification for Russian bases on Georgian territory. If no justifications could be found, the treaties would be reviewed. Since no military justifications have been brought forward by the Russian side, TEVZADZE is calling for a reevaluation of their justifications. Growing sentiment in Georgia is that

the Russian bases are more a threat to Georgia than a source of security. One recent unconfirmed allegation is that the desecration of a Jewish cemetery in Tblisi, while Parliamentary speaker Zurab ZHVANIA was visiting Israel, was undertaken by Russian soldiers stationed in Tblisi.

TEVZADZE confirmed that Georgia's Defense Ministry decided to purchase tanks from the Czech Republic. He did not specify the number and type of the tanks to be purchased, however, reports appeared in the Georgian press saying that it will be T-55 tanks. TEVZADZE noted that the decision to purchase armaments in Eastern Europe was a result of their low cost.

IMF Approves $65M Loan To Armenia

· The IWorld Bank Tuesday announced the approval of the third annual loan for Armenia under the Enhanced Structural Adjustment Facility (ESAF), totaling about $65 million. The loan, which has been increased by $15 million, will be used to support the government's economic program for 1999. The loan is available in two equal semiannual installments of about $29 million, the first of which is made available at the end of December. The major objectives of Armenia' development strategy are to address the spill-over effects of the Russian economic and financial crisis, while trying to move forward in consolidating the gains achieved in stabilization and deepening structural reform. The program is designed to achieve an annual GDP growth of 5.5 percent in 1998 and 4.0 percent in 1999. The World Bank predicts inflation will be in the single-digits for both years and a decline in the account deficit from 24 percent of GDP in 1998 to 22 percent next year. "Armenia's medium term prospects underscore the need to act decisively to restore conditions for sustained high growth, higher domestic savings, and a stronger official international reserve position."

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.

When you need to know it as it happens