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

Friday, December 4, 1998

Russian Federation

Politics

Government Approves Stabilization Plans

· The Russian government Thursday approved an action plan to stabilize the social and economic situation in the country. Economics Minister Andrei SHAPOVALYANTS said the plan sets out, "urgent measures to stabilize the situation...so as to ensure, starting from May, economic growth by the end of 1999." By working out the plan, the government, "created a mechanism to help buffer negative processes taking place in the financial sphere, which includes a reduction in the population's income and in tax collections," he said. SHAPOVALYANTS indicated that the plan includes three main sections that deal with establishing normal living conditions for the population, prerequisites for stabilizing the economy, as well as measures to restore and develop the real estate sector. The program will subsidize key industries, pay off wage and pension arrears, restructure the banking system, and tighten currency controls. He noted that the government is giving top priority for investment support to export industries, including defense. Other priority industries include, light, consumer goods, metallurgy, machinery, commercial space launches, and agricultural product processing. The 1999 draft budget provides for 60 billion rubles ($3.19 billion) investment in projects expected to recoup funding in two years. The government has been considering 33 draft laws, 29 regulations, and 10 presidential decrees. Prime Minister Yevgeny PRIMAKOV told the Cabinet to clarify the government's plan. He said, "without such a concrete action plan, containing concrete tasks and time frames, the government's steps will look merely like intentions." According to SHAPOVALYANTS, the plan, in its final form, will be made public on Saturday. Today PRIMAKOV addressed the Moscow session of the World Economic Forum on social and eco

nomic stability. He stressed that all transformations should be socially oriented. PRIMAKOV stated again that the Russian government would neither start nationalization, nor would cancel the results of privatization, nor would introduce the fixed ruble exchange rate, nor would ban dollar circulation in the country, nor would stop imports.

Kiriyenko Admits It's Russia Fault

· Former Prime Minister Sergei KIRIYENKO speaking today, at a seminar organized by the Eurasia Group, the US-Russia Business Council and EurasiaForum in Washington, admitted that Russia is to blame for its own economic and financial problems. He said that Russia has not consistently had seven years of reforms. He described that Russia went back and forth between policies of the left and right and has a weak government that is unable to solve the nation's economic problems. He said, "these mistakes are our own mistakes." KIRIYENKO said that Russia and others overestimated the affects of macro-economic policies and that the lack of a proper market infrastructure and the right mindset, produced today's result. He noted that it will take a generation to change the attitudes of the Russian population. However, KIRIYENKO pointed out that a recent government poll showed that 61 percent of Russians are self-reliant and not dependent on the government. He said that the government of Prime Minister Yevgeny PRIMAKOV's realizes that the return to socialistic policies won't work. He said that political stability in Russia has been obtained by not

Today's News Highlights

Russia

EU Food Aid To Russia

IMF Recomendations

European Republics

Ex-PM Arrested In Switzerland

South Caucasus & Central Asia

Jewish Cemetary Denacrated

OSCE On Kazakh Elections

Turkmen Oil Output To Rise

Commentary

Society-Government At War

Politics-Economics-Business

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Friday

December 4, 1998

Intercon's Daily

forming an economic policy, but the time for taking economic action is fast approaching. KIRIYENKO described two paths the current government can take. One option is to adopt tight budgetary policies and negotiate with the International Monetary Fund (IMF) for more loans. The other option is to print rubles causing hyper-inflation. He says that the decision will be based on positive reaction from the international community and internal politics. KIRIYENKO calls on the Russian government to present transparent policies and clear lines as to who is in charge. He says that until Russia's economic activities are transparent, individual investors, and international lending institutions are not going to be interested in bailing out Russia. He urges the IMF, World Bank, and World Trade Organization to open their doors and continue negotiations.

Rus-EU Sign Memorandum Of Understanding

· Russia and the European Union (EU) reached a memorandum of understanding concerning food supplies to Russia in Moscow on Wednesday. Under the document, food products are to be delivered in small batches throughout the first six months of 1999, and contracts are to be granted on a competition basis. The document contains a list of Russian regions that are to be supplied with food, as well as the quantity and the range of products to be supplied. For the most part, the program encompasses Russia's central regions. The memorandum bans any re-export operations with the food delivered, and furnishes the EU with a right to suspend deliveries if Russia does not observe the agreed terms. Both the EU and Russia will set up agencies to monitor the deliveries. The agencies will also make sure that the revenues from the market sales of such food products are used on social-oriented purposes, and not pocketed. Russia has also reached agreements with Brussels and the US to deliver meat and grain products. Deputy Prime Minister Gennady KULIK responsible for Russia's food programs said the government hold a "closed tender" this week to determine which companies will import and distribute the commodities. It is expected that KULIK will select three Soviet-era commodity trade organizations: Roskhleborpodukt to manage grain delivers, Prodintorg and Rosmyasamoltorg to receive, store, and distribute the meat. His assistant Yevgeny SOSNIN said that nothing has been decided yet and more information will soon be released. The public

has launched accusations that KULIK and the government's failure to make the food aid program transparent will lead to wide spread corruption and massive theft. One American exporter told The Journal Of Commerce that stealing is likely to take place through dummy traders, who receive meat from the distribution organizations on credit, sell it for cash, and then go bankrupt or disappear before repayments are due.

Economy

Ruble = 18.83/$1.00 (NY rate)

Ruble = 19.57/$1.00 (CB rate)

Jul Aug Sep Oct Nov

IMF Recommendations: Considered Or Ignored

· This week International Monetary Fund (IMF) chief Michel CAMDESSUS met with Prime Minister Yevgeny PRIMAKOV and other top government officials to review Russia's economic and financial situation. The IMF refused to release an installment on a frozen $22.6 billion loan, until Russia draws up and implements a realistic economic program. Russian news agency today have printed IMF recommendations to Russia. CAMDESSUS recommends that Russia develop a budget for a three percent primary surplus and a three percent overall deficit in 1999. The IMF suggests that Russia maintain its current level of taxes in the short term and lower rates in the medium term. The Fund encourages Russia to boost tax collection, eliminate mutual debt cancellation practices, and actively enforce bankruptcy rules on unprofitable companies. The Russian government should not print money to alleviate the banking system. The IMF also recommends raising export

When you need to know it as it happens

Politics-Economics-Business

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duties, since exporters have made significant gains from the ruble devaluation. One government source says the Russian program, "seriously differs from the given recommendations." The idea of maintaining tax levels contradicts government plans to cut the value-added tax and profit tax.

that this act, for which no one has claimed responsibility, will not affect Georgians' traditionally good relations with the nation's Jewish minority. Georgia's chief rabbi Ariel LEVIN agreed saying, "Nobody will be able to cast a pall over good and fraternal relations between Georgians and Jews, which have existed for more than 26 centuries now." However, LEVIN noted that this act was carried out by someone, "with provocative goals." During the Cold War, this type of act was a covert technique used by the KGB against the host country to stir up panic and fear. One particular example, was the defilement of a Jewish cemetery in West Germany. Because of the destruction in Tblisi's cemetery along with other acts against the Georgian government, it can not be ruled out that this is strategy is being employed again.

OSCE Says Kazakh Should Call Off Elections

· The Organization for Security and Cooperation in Europe (OSCE) is urging the government of Kazakhstan to call off early presidential elections scheduled for January 10th, citing the baring of two opposition candidates. Furthermore, the OSCE said that it would not recognize the results if an election takes place. In a statement the OSCE said, "The government of Kazakhstan should postpone the election to allow for adequate preparations to ensure a democratic election." Kazakhstan President Nursultan NAZARBAYEV, who has led the nation since Soviet times, brought forward the elections in October to January, 1999 instead of 2000. Opposition candidates claim that the short time frame will give them little time to launch a serious campaign. Because of this and the barring of NAZARBAYEV's most serious rival Akezhan KAZHEGELDIN, the incumbent President is virtually assured victory. The OSCE noted that, "Of particular concern is the refusal to register two candidates because of minor administrative convictions, raising serious doubts whether a fairly contested election is possible," referring to KAZHEGELDIN and Asylbek AMANTAI. Press Secretary Asylbek BISENBAYEV said, "There is a normal process going on here resulting from the decision by parliament. There is a constitution and laws in Kazakhstan, and several candidates representing different movements, from communists to liberals, have been registered," Reuters reported.

Turkmen Oil Production On The Rise

· Turkmenistan's Ministry for the Oil and Gas

European Republics

Lazarenko Arrested For Money Laundering?

· Ukrainian former prime minister, leader of the Gromada party, and parliament member Pavel LAZARENKO was arrested while crossing the French-Swiss border near the city of Basel. It is possible that his arrest is connected with money laundering in Switzerland. Investigator Laurent CASPER-ANCERMETT had LAZARENKO transferred to Geneva for questioning. Ukrainian law enforcement have repeatedly contacted Swiss authorities on the suspicion that $20 million to $40 million in state funds were illegally transferred to Switzerland during LAZARENKO's term between May 1996 and July 1997. CASPER-ANCERMETT ordered several accounts in a number of banks to be frozen. Until recently the main purpose of the investigation was to find out whether or not the law was violated by Swiss bankers. Under the law, they are obliged to find out before accepting the money of their client, whether the money came to him by honest ways and not through corruption or other illegal activities. LAZARENKO's lawyer Paul GALLY-HART said that his client, "is a successful businessman, and this is all to be said about it. Charges, brought against him, are aimed at discrediting him in public opinion and at reducing his chances to become Ukrainian president in the autumn of 1999." If charges are officially brought against him, the Swiss will be in a paradoxical situation, in which Switzerland will institute legal proceedings against a foreign politician, who is not prosecuted in his home country.

South Caucasus & Central Asia

Georgian Pres. Denounces Acts Against Jews

· Georgian President Eduard SHEVARDNADZE condemned the desecration by vandals of some 50 gravestones in a Tblisi Jewish Cemetery as "barbaric and inexplicable." He has ordered police to tighten security at the cemetery and urged a quick and thorough investigation. The President is hopeful

Politics-Economics-Business

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When you need to know it as it happens

Friday

December 4, 1998

Intercon's Daily

Industry and Mineral Resources on Tuesday said that Turkmen's oil output this year is expected to exceed 5 million tons, breaking a record over the past seven years. The oil output of Turkmenneft's state oil company in January to November 1998, averaged about 17,500 tons each day. Before the end of the year, the overall output is expected to be 5.5 million tons. Taking into account the production volume of foreign companies, a total of 6.5 million tons of oil will be produced in Turkmen this year. According to the Ministry, the production volume in the past two years has been rising by about 20 percent annually. In the first part of this decade, production volume fell to a little more than 4 million tons each year. In the opinion of Deputy Prime Minister Batyr SARJAYEV, who is in charge of the oil and gas sector, the country's oil output will grow to 50 million tons in 2010. Turkmenistan's oil reserves, including the Caspian offshore fields, are estimated at 12 billion tons.

The collusion of unscrupulous private interests with corrupt government officials in criminal activity robs nations of their wealth and the opportunity for its people to prosper and hope in the future. Slogans are bandied about to explain away this cruel reality. "The oligarchs in Russia today are no different than the robber barons were at the turn of the Century in American." This is not the case.

Russia is not alone in this predicament. President Shevardnadze, faces with a budgetary crisis of enormous magnitude, and is being forced to float the Georgian currency in order to obtain IMF support. This will further impoverish millions of Georgians as exchanges rates have jumped from 1.32 lari to the dollar last month to 1.73 today. The Georgian people will pay dearly for the tax evasion and endemic corruption which are the primary reasons for this budget crisis. Georgia reportedly is facing tax shortfalls of over $150 million. Only by implementing transparency in government and imprisoning those who abuse the public trust, can a social contract be achieved and prosperity be built.

Yes their are technical issues of tax, civil and commercial codes etc. which can be improved in Russia, Georgia and all the former states of the Soviet Union, but the fundamental issues require the implementation at the micro level the rule of law. This rule of law will protect the interests of the people and the state through just enforcement. Today, it is all too common to find business and government elite's conspiring to enrich themselves at the expense of the rest. This is neither the market economy nor democracy. It is criminal and corrupt practices which rob the population of its opportunity and predictability needed for significant investment. Corruption is the force multiplier which is fueling the hemorrhage of tax revenue from the government coffers and the issue of first magnitude which must be faced decisively. Macro-economic policy alone has done nothing to settle this war between society and the state. A new approach is demanded and it begins with the leadership of the countries of the FSU themselves.

COMMENTARY: Society-Government At War

The collapse of the communism brought a euphoria to much of the population of the former Soviet Union and the world. Its rapid collapse also unleashed another cold war which is still being fought today. A war which allows the few to defraud the people and the government preventing the establishment of a working social contract. The rapid collapse of the Soviet empire was a product of many factors. The failed economic policies, the lack of moral legitimacy, in short, the collapse of a working and sustainable social contract between government and people form the framework for the societal conflict. In the years which have followed the disillusionment of the Soviet Union lingering factors of this is war persist.

Russia's economic and political turmoil is the logical conclusion of the failure to create a social contract among the people and the state. Until the government can reestablish the trust of the people and serve its citizens honestly, the prospects for prosperity and progress remain dim. This lack of social contract breeds an insidious debilitating disease.

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

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