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, January 21, 1999

Russian Federation

Politics

US Pledges Aid To Russia

· US President Bill CLINTON in his State of the Union Address said that US must expand its work with Russia and other ex-USSR republics to safeguard nuclear materials and technologies. Experts estimated that some $4.2 billion over the next five years will be spent on helping Russia reduce its nuclear arsenal, destroying nuclear warheads and nuclear materials. CLINTON said the START-II Treaty and the frameworks agreed upon for the START-III treaty can lead to the cutting of nuclear arsenals by 80 percent as compared with the peak indexes of the Cold War Era. START-II Treaty, already ratified by the US Congress, has not been approved by the Russian State Duma. Russian First Deputy Prime Minister Yuri MASLYUKOV's spokesman, Anton SURIKOV said, "The government will urge the deputies to ratify this agreement so talks on START III may begin as soon as possible." MASLYUKOV said that Russia welcomes the US pledge to increase financial aid for the elimination of nuclear warheads and for the insurance of the safety of nuclear materials. Russian military officials say many of the country's nuclear weapons are nearing the end of their service life and will have to be dismantled in any case. US Senator Richard LUGAR of Indiana said, "I am pleased to learn of the Administration's attempt to coordinate and substantially increase the international response to the Russia proliferation threat. This is the number one national security threat facing out nation and our allies, and together we must work to address this threat." LUGAR pointed out that the NUNN-LUGAR Program has dismantled 4,838 warheads that were on strategic systems aimed at the US. He said, "I am pleased to see that the Administration has recognized the importance of these programs."

US-Russia To Renegotiate ABM Treaty

· The CLINTON Administration has sent a request to Russian President Boris YELTSIN to consider amending a 1972 Anti-Ballistic Missile, which limits the number, type and placement of missiles, to include permission to build a limited national system of missile defenses. The White House and Department of Defense have concluded that the threat of a strike from rogue nations like North Korea, Iran, and Iraq justifies the building of a limited number of ground-based interceptor missiles that can shoot down incoming missiles. US President Bill CLINTON has urged YELTSIN and other leaders not to view the development as a threat to the strategic balance of power. China has criticized US plans to boost spending on antimissile systems, saying it could fuel regional and global instability. Secretary of Defense William COHEN confirmed that the CLINTON Administration has plans to pledge $6.6 billion over the next six years to build a network of radars and interceptor missiles, The New York Times reported. The Pentagon will conduct four tests on the system before June. COHEN added that the US has not ruled out withdrawing for the treaty completely, if an agreement cannot be reached. Pulling out of the treaty could have diplomatic repercussions and may be viewed as a lack of commitment by the US.

State Property Minister Resigns

· Russian State Property Minister Farit GAZIZULIN resigned Wednesday for health reasons, according to the government Information De

Today's News Highlights

Russia

London Club To Hold Debt Talks

Gazprom To Attract Investors

European Republics

Estonian Ministries Merge

Belarus Cabinet Changes Roles

South Caucasus & Central Asia

IMF Mission Reviews Georgia

Zhvania On Econ. Developments

Pangaea To Modernize Banks

Uzbek Sugar Tender Results

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Intercon's Daily

partment. He suffered a heart attack and has not fully recovered. Prime Minister Yevgeny PRIMAKOV has appointed GAZIZULIN's deputy, Alexander BRAVERMAN, as the acting minister. BRAVERMAN, an economist by training, joined the ministry in 1992. He led an expert team on marketing and then became chief adviser to the Committee chairman. In 1996, he was elected chairman of the agency's consultative council and became a member of the Committee's top decision-making body. BRAVERMAN was named first deputy Committee chairman in 1997.

Economy

Ruble = 22.39/$1.00 (NY rate)

Ruble = 22.73/$1.00 (CB rate)

London Club Agrees To Hold Debt Talks

· The London club of creditors has made a final decision not to declare default against Russia on $23 billion of Soviet-era debts. In December, Vneshekonombank, Russia's main foreign debt paying agent, failed to meet a payment on a $362 million cash interest payment due on its foreign debt principal notes. The bank said it could make the payment in new notes not in cash. A top-ranking official from one of the western banks, said an absolute majority of overdue obligations' holders voted in favor of a new round of negotiations on restructuring the debt. Talks with the Russian Deputy Finance Minister Mikhail KASYANOV are due to begin as early as next week in London. Director of the international rating agency Fitch IBCA David REALY said that part of the Russian debt to the London Club could be written off. Russia was scheduled to make $17.5 billion in foreign debt payments this year, but has only budgeted $9.5 billion, The Wall Street Journal reported. Many economists doubt that Russia can even pay the earmarked amount because the 1999 budget is base on optimistic assumptions. These include an exchange rate of 20 rubles to dollar and loans from international lending institutions totaling $5 billion. In addition, Russia is seeking to reschedule its $40 billion Soviet-era debt with the Paris Club.

IMF Begins Monitoring Russia's Economy

· Monitoring of the Russian economy and talks on restructuring Russia's debts by an International Monetary Fund (IMF) mission began today in Moscow and will last through February 6th. Head of the mission, deputy director of the Second European

Department of the IMF George Marquez RUARTE is scheduled to arrive on January 25th. IMF experts will study the 1999 budget, its revenues and expenses, as well as tax receipts. IMF experts will meet with chiefs of the Central Bank, Finance Ministry, Economics Ministry and Ministry for Taxes and Collections, and other federal agencies to discuss refinancing Russia's external indebtedness and prospects for future cooperation. According to IMF information, the total volume of Russia's obligations to the IMF as of one year ago was $16.8 billion. The Russian government is seeking a installment of $5 billion for restructuring of its debt to the IMF. Future loans from the World Bank are dependent on how successful IMF talks are. Director of the IMF Stanley FISCHER, in an a address transmitted electronically to the Harvard American-Russian investment symposium, said that Russia should not expect to receive any IMF funds as long as it has an unrealistic budget. First Deputy Prime Minister Yuri MASLYUKOV pointed out that in talks with FISCHER in Washington last week there were four difference: reduction in the value-added tax from 20 percent to 15 percent, reduction of high export duties on duties on petroleum, non-ferrous metals, increasing budget revenues by reducing or wiping out social benefits, and shifting budget relations between the federal bodies and regions in favor of central bodies. MASLYUKOV said, "The point of the matter is not whether our budget is realistic, whether it is good or bad to live within one's means, but how to bring closer the positions on specific matters without paralyzing all activity in our area." He noted that the government may have to revise some of the parameters of the 1999 budget. Russian Finance Minister Mikhail ZADORNOV said that Russia will try to meet the IMF halfway, but will still adopt a feasible program. The Russian Finance Ministry also emphasized that a further contraction of expenditure is absolutely inadmissible and may be conducive to a shortage of funds for social needs. Data on monitoring the Russian economy will be submitted to the Board of Governors of the IMF in order for a decision on granting another tranche. The IMF in September froze installments of a $22.6 billion loan package.

Business

Gazprom Woos Foreign Investors

· Russian gas monopoly Gazprom in London this

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week presented foreign investors with an independent audit of reserves following international accounting standards in a bid to maintain Western interest in the company. Gazprom officials said the gas company will continue plans to invest $3 billion to $4 billion a year to link Gazprom with western gas markets. Deputy chairman Sergei DUBININ said, "In spite of the difficulties facing the Russian economy we are not without optimism, and I think that optimism is well founded." Officials said that Gazprom will concentrate on the Yamal-Europe project linking Russia's network to Poland as well as the Blue Stream pipeline across the Black Sea to Turkey. They are also holding negotiations with major Western companies on project financing.

Meanwhile, the Russian State Duma has passed an amendment to a key bill on gas supplies restricting foreign share holdings in the Gazprom from 25 percent minus one share to 20 percent and increasing the state's holding from 25 plus one share to 35 percent. President Boris YELTSIN's representative to the Duma Alexander KOTENKOV said that the amendment contradicts the whole concept of the bill. Last July, YELTSIN signed a decree allowing foreign share holding in Gazprom to increase from 9 percent to 14 percent and reducing the state's holding from 40.87 percent to 35 percent. The government plans to auction another 2.5 percent share in Gazprom this year. In December, Germany's Ruhrgas won the tender of 2.5 percent stake for $660 million. Ruhrgas has expressed an interest in increasing its holding to 4 percent. Gazprom produces about 54 percent of the world annual gas output and has gas reserves totaling 33.4 trillion cubic meters, representing 22 percent of total estimated world reserves.

Belarus Deputies Change Responsibilities

· The Belarus government has adopted a resolution redistributing the responsibilities between Prime Minister Sergei LING and his deputies. LING is in charge of defense and domestic and foreign policies as well as budget and financing. First Deputy Prime Minister Vasil DALHALYOU will oversee economic reform, foreign trade, and integration with Russia. Deputy Prime Minister Uladizmir ZAMYATALIN is responsible for social and cultural issues, science and technology. Deputy Prime Minister Leonid KOZIK is in charge of taxation, state property, privatization. Deputy Prime Minister Valery KOKARAU will oversee industrial development and the fuel and energy complex. Deputy Prime Minister Henadz NAVITSKI is in charge of housing, communications, and investments. Deputy Prime Minister Alexander PAPKOU is responsible for the agro-industrial sector and food supplies, the RFE\RL Newsline reported.

South Caucasus & Central Asia

IMF Reviews Georgia's Budgets

· An International Monetary Fund (IMF) mission is in Tblisi on a ten-day visit studying Georgia's budget performance for December 1998, the entire past year, and the 1999 budget. According to the Georgian Economics Ministry, the IMF mission will participate in developing basic parameters for the 1999 budget and review Georgia's monetary policy and credit-lending operations in the Georgian economy. After reviewing Georgia's economic welfare, the mission may recommend to allocate an installment to Georgia from a $37 million IMF loan. Aide to Georgian President Eduard SHEVARDNADZE, Temur BASILIA said, "The mission will decide on whether to disburse the tranche after examining the 1999 budget parameters and scrutinizing the Enhanced Structural Adjustment Facility program's implementation." The parameters will be discussed with the government before debate in parliament in February.

Zhvania On Georgian Developments

· Georgia's Chairman of the parliament Zurab ZHVANIA on Wednesday spoke at the Central Asian Institute on Georgia's economic developments in the South Caucasus and Georgia's role in the Eurasian corridor. He said that Georgia is in a unique geo-political position to foster positive relations in the region. Georgia, Armenia, and Azerbaijan represent

European Republics

Estonian Ministries To Merge

· The Estonian Cabinet on Tuesday approved amendments to the law on government which foresee the merging of the Ministry of Roads and Communications with the Ministry of Economics by the end of 1999. The new ministry will perform all the functions of both ministries starting in 2000. The merger will save one-third of the combined administrative costs of the two entities, RFE\RL Newsline reported. Parliament will review the amendment in February.

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the gateway for Central Asian raw materials and resources and Caspian oil to reach western markets. He said that Georgian President Eduard SHEVARDNADZE has taken a personal role in the main architecture redeveloping the old silk road, which ZHVANIA called, "the road to freedom," citing Kansas Senator Sam BROWNBACK. He noted that Georgia has overcome many obstacles and is still a model in transition. In spite of civil wars in Abkhazia and South Ossetia, economic collapse, the deterioration of all industries, and a severe social crisis following the collapse of the Soviet Union, Georgia has been able to build an open market and a civil society. With a new Constitution in 1995, viable democratic institutions, and a diverse political spectrum has been created. Georgian reforms have placed this nation as one of the most advanced former Soviet republics. The nation has held its first democratic local elections outside of Tblisi, developed legislative laws, formed a new Judiciary system, and adopted civil, tax, and customs codes. Georgia has adopted 500 new laws including laws which guarantee foreign investor rights and approved private land ownership even for foreigners.

ZHVANIA noted that Georgia has taken an active role in promoting a main export pipeline that aims to benefit all and isolate no one. He said that negotiations for the transportation of Caspian Oil has become fierce, "beyond civilized competition." He stressed that these resources can allow nations to play out their roles peacefully and that no one should be isolated from this peaceful prospect. In particular, he noted that Georgia believes its responsibility is to assist Armenia in finding a significant place in the transport and energy framework. Of the three main routes under consideration by the Azeri government and the Azerbaijan International Oil Consortium (AIOC), ZHVANIA said that Georgia supports the Baku-Ceyhan option because Turkey needs to be fully engaged in the process. ZHVANIA said that it is dangerous for Russian politicians, especially in the Duma, to think that transportation infrastructure

through Georgia or Turkey destroys their own plans for economic development. SHEVARDNADZE agrees with ZHVANIA that the region should use its economic advantages to promote cooperation to build for a peaceful, secure future, rather than promote division and unnecessary conflict.

Pangaea Partners Work On Baku Banking

· Wisconsin-based Pangaea Partners Ltd. has signed a contract with the European Bank for Reconstruction (EBRD) for a team of banking experts to work with Arkobank of Baku to strengthen its banking operations. The contract is in force for the next three years. Pangaea hopes to help modernize the bank's credit, treasury, management information systems and accounting procedures. The EBRD has extended a line of credit to Arkobank for on-lending to Azeri companies. Arkobank is a small institution linked to local oil-related companies. This is the fourth project Pangaea has entered into in Baku. Pangaea is a nine year-old investment banking and consulting firm with offices in Britain, Turkey, Zambia, South Africa, and Bangladesh, The Journal of Commerce reported.

UK, Swiss Firms Win Uzbek Sugar Tender

· London-based sugar trade house ED & F Man and a Swiss-based trading firm Granica will each supply Uzbekistan with 20,000 tons of refined sugar during the first half of 1999. The Uzbekistan Ministry of Foreign Economic Relations announced the results of the tender, but declined to providing the prices involved. The remaining portion of the 76,000 ton white sugar tender was awarded to 12 Uzbek firms, which will supply 3,000 tons each. Uzbekistan consumes an estimated 600,000 tons of sugar annually, mostly imported. The Central Asian nation has plans to increase output of sugar beet in order to process sugar in it newly completed sugar plant, constructed by a Turkish consortium. Deleplanque, a French company, plans to build three more small sugar refineries with a total capacity of 24,000 tons of white sugar per year, Reuters reported.

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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