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

Tuesday, January 12, 1999

Russian Federation

Politics

Maslyukov Holds Meetings With Daewoo

· Russian First Deputy Prime Minister Yuri MASLYUKOV in South Korea met with the leadership of the South Korean Daewoo Corporation on Sunday to discuss investments policies. MASLYUKOV's press secretary Anton SURIKOV said that the, "parties mainly discussed an issue connected with the government's support for South Korean investments projects in Russia." MASLYUKOV highly appraised the activities of the Daewoo Corporation and confirmed the interest of the Russian government in the development of relations with business representatives from South Korea. The chairman of the Daewoo Corporation also expressed his interest in business cooperations with Russia. The Daewoo Corporation has been involved with the Russian market since 1993, implementing a number of investments projects mostly in the field of operations at the Krasnoyarsk aluminum plant, the assembly of electronic devices, retail trade and participating in the development of a number of natural gas deposits. Daewoo is also implementing with the other companies a large-scale project on the assembly of cars in the city of Rostov-on-don and in projects carried out at the Taganrog shipbuilding yard. The volume of trade export of the Daewoo Corporation to Russia amounts to $250 million annually and import from Russia $70 million.

France's Foreign Min. Prepares For Summit

· Russian Foreign Minister Igor IVANOV today is holding talks with his French counterpart Hubert VEDRINE, who is on an official visit to Moscow in preparation for President Boris YELTSIN's visit to France on January 28th to 29th. IVANOV pointed out that Russia was pleased to be starting the New Year with joint international activities. IVANOV and

VEDRINE are expected to sign a Customs Protocol to the Russian-French Agreement of Cooperation in the sphere of research and use of space explorations for peace. Prime Minister Yevgeny PRIMAKOV and VEDRINE earlier discussed Russian-French bilateral cooperation and expressed readiness in further trade and economic partnerships. The sides also reviewed pressing issues of international politics, including the situation around Iraq and Kosovo and European security. PRIMAKOV briefed VEDRINE on the measures taken by the government to stabilize the social and economic situation in Russia. He stressed the need for the Russian State Duma to approve the 1999 budget and for the International Monetary Fund to appropriate credits to Russia. PRIMAKOV said that he fully agrees with VEDRINE's recommendations on increasing, "social orientation in the development of the Russian economy, as well as the use which state interference brings to the process of transition to a market economy." In an interview with the newspaper Izvestia on Sunday, VEDRINE stressed that personal relationships between the presidents of Russia and France play an important role in the development of relations between the two countries. VEDRINE also is scheduled to meet with Chairman of the Russian State Duma Gennady SELEZNYOV and First Deputy Prime Minister Yuri MASLYUKOV.

Economy

Ruble Continues To Depreciate

· Russia's battered ruble continued to plunge against the dollar today, losing almost 3 percent to reach a new low

Today's News Highlights

Russia

Central Bank's Kozlov Resigns

Five Russian Banks Insolvent

Svyazinvest Sell Off By July

European Republics

OSCE Commissioner In Latvia

South Caucasus & Central Asia

Zhvania Speaks At NDI

Kissinger For Baku-Ceyhan

Kazakh Elections Protested

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exchange rate of 23.06 ruble to the dollar. The ruble has lost over 10 percent of its value against the dollar in only three trading sessions so far this year, falling below a government-projected exchange rate of 21.5 rubles to the dollar for all of 1999. The Russian currency has been falling steadily against the dollar since the financial meltdown last August, but a critical shortage of foreign currency in Central Bank reserves combined with continuing emission of unsupported rubles into the economy have pushed the rate to record lows in the past few weeks, the United Press International reported. The government had calculated its 1999 budget with a projected average annual exchange rate of 21.5 rubles, which has been criticized as unrealistic. Today, First Deputy Prime Minister Yuri MASLYUKOV optimistically said, "The fall in the ruble-dollar exchange rate will soon slow." However, with the predicted exchange rate becoming a distant memory and the cash crunch preventing significant Central Bank intervention to support the ruble, money players expect a continuing slide with no support in sight. Alexei ZABOTKINE, a fixed income analyst at United Financial Group said, "Everyone is buying dollars in Russia because no one believes in the currency or the government. He added that the outlook for the ruble is weak as confidence in the country remains low and prospects for a rise in oil prices are slim to none.

Ruble = 23.06/$1.00 (NY rate)

Ruble = 23.06/$1.00 (CB rate)

Ruble = 25.95|6.905/1 euro (CB rate)

CB Deputy Chairman Resigns

· Andrei KOZLOV, first deputy chairman of the Russian Central Bank and key senior banking specialist, tendered his resignation and will vacate the post on January 25th. He recently was an active negotiator between Russia and its Western creditors. KOZLOV's future appointment is unknown, although the Moscow Times reported that KOZLOV is interested in starting his own new commercial bank. KOZLOV first sent in his resignation in September, 1998. At that point his resignation was accepted, but later newly-appointed Central Bank Chairman Viktor GERASHCHENKO invited him to the post of first deputy governor responsible for banking supervision. Margaret JACOBS, banking analyst for United Financial Group in Moscow said, "It's bad news for the market because the Central

Bank already has too few competent regulators, and KOZLOV was one of them," The Wall Street Journal reported. The Central Bank is in great need of qualified specialists, especially at a time when about half of Russia's 1,500 banks are insolvent.

Five Large Banks Declared Insolvent

· Five of Russia's ten largest banks, rated as of assets on October 1, 1998, have been declared effectively insolvent. These banks include Inkombank, SBS-Agro, Uneximbank, Rossiyskiy Kredit, and Menatep, which were hit hardest by Russia's economic and financial crises. These banks are no longer capable of meeting their commitments to clients and creditors. Before the August crisis, many Russian banks had been known to have risky activities in highly speculative investments, including government treasury bills that yielded extremely high interest rates. Interfax news agency reported that of the five major banks remaining solvent, two are primarily state-owned and one is owned by Russia's largest monopoly, the gas giant Gazprom. Only one of the solvent banks, the International Industrial Bank, is owned by Russian private interests.

Finance Min. Denies Default On Foreign Debt

· The Russian Finance Ministry on Saturday denied media reports that it has defaulted on some of its foreign debts and allowed creditors to seize its accounts or property abroad. The denial came after reports in Moskovskaya Pravda and Moskovsky Komsomolets that the Russian government had reached an agreement with foreign creditors that the debts would be paid in such a way. According to a Ministry statement, "Russia has taken a series of civilized steps to solve this difficult debt problem. There is no question of any declaration of default that could be accompanied by arresting accounts and property of the Russian Federation abroad." Russia faces $17.5 billion in foreign debt payments that fall due next year, but the government has earmarked only $9.5 billion for foreign debt servicing and wants to reschedule the remainder with creditors. The statement adds that, "There can be no question of any declaration of default and the accompanying steps of seizing accounts and property of the Russian Federation abroad. Such interpretations are a pure invention from the beginning to the end." Russia has missed a payment on Soviet-era debt to the London Club of commercial creditors but argues it

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should not be considered in default because 70 percent of the lender have agreed to restructure borrowings. The London Club requires 95 percent of the lenders to be in agreement.

Western banks said they are not going to aggravate the problem of Russia's servicing of its foreign debt. A senior executive of the British headquarters of the international bank ING Barings on Tuesday said that Western banks do not regard as default the December delay of Russian payments to the London Club. The next deadline for payments is January 19th. The ING Barings executive said that it will not announce a technical default at that time either. He said, "In the present situation no one is looking for extreme ways, and the West will agree to another restructuring of the USSR debts, although it will take several years." In his opinion, the freezing of the accounts of the Moscow People's Bank, in which the Russian government owns 90 percent of assets, and the arrest of Russian property abroad would be the worst of all possible ways for progress of the situation.

Business

Russia To Sell Svyazinvest Stake By July

· The Russian State Property Ministry is planning a commercial bidding for a 25 percent minus two shares stake in the telecommunications company Svyazinvest to take place in the first half of 1999. The sale would cut the government's stake to just over 50 percent. Svyazinvest's director Nail ISMAILOV said Monday that the bidding will be on investment terms with expected revenues of 14 billion rubles or $600 million. The date of the bidding will be announced by the end of the current quarter, ISMAILOV said. He said that Svyazinvest is indifferent to whether a foreign or Russian company wins, but added that they prefer Russian ownership. ISMAILOV said that Svyazinvest has proposed a euro-bond issue as an alternative if the government fails to find a buyer for the equity stake. Svyazinvest owns controlling stakes in 88 regional telecommunications companies, as well as a 38 percent stake and 51 percent voting rights in Rostelecom, the long-distance and international carrier. First Deputy State Property Minister Alexander BRAVERMAN said that the government is planning to sell the minority stake in Svyazinvest this year, along with portions of its holdings in six other companies, including a 2.5 percent stake in gas

monopoly Gazprom and 9 percent stake in oil giant LUKoil. The government is aiming to put its privatization program back in line. It was racked with controversy after the sale of 25 percent plus one stake in Svyazinvest in August, 1997, to the Mustcom Group of investors.

European Republics

OSCE High Commissioner Visits Latvia

· The Organization for Security and Cooperation in Europe (OSCE) High Commissioner for National Minority Affairs, Max VAN DER STOEL, arrived in Latvia Sunday for a three day visit, during which he will review preparations for the draft law on the state language. The Language Bill gives rise to protests from non-Letts. The parliament's commissions have kept intact the Bill provision for the right of the State to regulate the use of the Lettish language in the private sector. The High Commissioner believes it runs counter to international conventions. He also is interested in the approved Education Law, which envisages a transition of instruction in Russian-language schools to the Lettish language. VAN DER STOEL will meet with the Premier, the Speaker of the parliament, the Minister of Foreign Affairs, parliamentary commissions, and the Head of the Naturalization Department. The Naturalization Department does not so far grants citizenship to the children of non-citizens, who were born during the years of independence, although they are entitled to these rights from January 1st. The Department awaits government-elaborated rules determining a respective procedure.

South Caucasus & Central Asia

Zhvania Speaks At NDI In Washington

· Georgia's chairman of the parliament Zurab ZHVANIA on Monday in a speech at the National Democratic Institute pointed out that the Georgian government must take full responsibility for its failure to collect taxes at acceptable level. He said that steps are being taken to address situation. ZHVANIA noted that 82 tax inspectors were removed from their position on Monday. In addition, the Georgian Prosecutor General has number of significant cases on taxes and corruption that are coming to the point of legal action. If an enterprise delinquent in its taxes fails to enter into an agreement with the tax authori

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ties on a schedule of payments, their assets will be seized. ZHVANIA also pointed out that in local elections his Civic Union Party received over 100,000 more votes than in its previous election. While coalitions between left and right parties have made gains, he expects even better results in the next election given steps the government will take this coming year.

Georgian Finance Minister David ONOPRISHVILI is also on an official visit to Washington. During his visit, ONOPRISHVILI will brief World Bank, International Monetary Fund officials, members of Congress and the CLINTON administration as Georgia's new Finance Minister on measures Georgia is taking to address its economic situation. Highlights of his talks will include recent economic developments. Georgia's Finance Ministry is focusing on increasing customs revenues and improving its efficiency in line with international standards, with the help of a private internationally recognized firm for the period June 1999 to 2001. Excise stamps on cigarettes and alcohol will be available for sale and become required at the wholesale level by February 1st and the retail level by March 1st. Georgia is aiming to broaden its tax base by abolishing numerous tax exemptions and introducing increases of VAT taxes on wheat, brad, flour, and a 60 percent excise duty on all petroleum products. The State Tax Department is also being restructured to include taxpayers accounting for at least 50 percent of total revenues. Expansion of the treasury system in the Finance Ministry is also being considered to cover all central government revenues and expenditure accounts, as well as computerization of the central treasury.

Kisinger Support Baku-Ceyhan Pipeline Route

· After meeting with Azeri President Geidar ALIYEV in Baku on Friday, former US Secretary of State Henry KISSINGER said that he supports the US administration's policy on Azerbaijan and its plans to promote bilateral relations. He voiced support for the Baku-Ceyhan pipeline project proposed by Turkey as the main route for the transportation of Caspian

oil to world markets. KISSINGER pointed out that the oil companies are dragging their feet and are slow to make a decision. KISSINGER believes that the political considerations should take precedence over the costs. The project's is estimated cost is $2.5 billion to $3.7 billion.

Kazakhstan Elections Protested By Abdildin

· As expected, incumbent Nursultan NAZARBAYEV won Sunday's presidential election in Kazakhstan. Despite reports from the Central Election Commission and other observers that there were no serious violations at polling stations, Serikbolsyn ABDILDIN, who earned the second most votes at 13 percent, declared that the elections results were falsified. He said, "It is difficult to give an overall figure, but our observers confirm that we won no fewer votes than NAZARBAYEV." The Communist Party said there had been many cases of multiple voting and false counting, and that the turnout was grossly exaggerated. According to a party statement, "Who could believe that nine out of 10 people found their polling stations and voted, given the existing level of political activity and the rudimentary state of infrastructure in Kazakhstan." The Central Election Commission has dismissed ABDILDIN's allegations saying that he can not substantiate his statements.

In addition, State Customs Committee Chairman and candidate Gany KASYMOV said that he plans to appeal the elections results to Kazakhstan's Constitutional Court. Judy THOMPSON of the Organization for Security and Cooperation in Europe (OSCE) said that the organization retains its position adopted before the election. She said, "the electoral process was far from the standards which [Kazakhstan] promised to follow as an OSCE member...the mandate of the mission does not include recognition of the latest elections. US State Department spokesman James RUBIN said, "The US government concurs with the OSCE...that the overall electoral process in Kazakhstan fell far short of international standards for open, free and fair elections." He said that this, "casts a shadow on our bilateral relations."

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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