DAILY REPORT ON RUSSIA

AND THE FORMER SOVIET REPUBLICS

INTERCON INTERNATIONAL USA, INC., 725 15th STREET, N.W., SUITE 903,

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Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Monday, January 25, 1999


Russian Federation

Politics

Albright Smooths Over Russia-US Tensions

· US Secretary of State Madeleine ALBRIGHT is visiting Russia with an ambitious number of bilateral and international issues to be discussed with her counterpart Russian Foreign Minister Igor IVANOV. These issues include arms control, Iraq, Kosovo and the ailing Russian economy. The CLINTON administration hopes that the two-day talks will help smooth over relations with Russia which have been described as tense. Washington's ties with Moscow cooled following the US-led airstrikes on Iraq, sanctions against three Russian institutes for alleged cooperation with Iran in nuclear and missile weapons programs, and NATO threats of force over Kosovo. US calls for revising the 1972 Anti-Ballistic Missile treaty further soured the ties. ALBRIGHT said, "I do not see this as some kind of critical point in our relations, given that we have as much contacts as we do, all of which is mostly in a problem solving mode." Albright is also scheduled to meet with Prime Minister Yevgeny PRIMAKOV, speaker of the Russian State Duma Gennady SELEZNYOV. The possibility of a face-to-face talk between ALBRIGHT and Russian President Boris YELTSIN is still being considered. The alternative of a telephone conversation is more likely. ALBRIGHT today broke typical US protocol and met with possible presidential candidates, such as Moscow Mayor Yuri LUZHKOV, Liberal leader Girgory YAVLINSKY, and Krasnoyarsk Governor Alexander LEBED before meeting with the YELTSIN administration. The shift in this policy shows that the US is already in a post-YELTSIN mind set. In her meeting with LUZHKOV, which is described as a blunt meeting, the Mayor complained that, "the Unites States had moved forward without taking Russia's concerns completely into account," on Iraq and Kosovo. He called this, "a dangerous and

negative trend." The next high level talks between the US and Russia will be held on January 29th in Davos Switzerland. In connection with the World Economic Conference, PRIMAKOV and US Vice President Albert GORE will meet privately. The Russian delegation includes Governor of the Novgorod region Mikhail PRUSAK, Tax and Duties Minister Georgy BOOS, Fuel and Energy Minister Sergei GENERALOV and Central Bank Chairman Viktor GERASHCHENKO.

Russian Needs $1.5B For 2000 Problem

· Russian Prime Minister Yevgeny PRIMAKOV on Friday set up a government commission to find solutions to the Year 2000 computer problem (Y2K), appointing Deputy Prime Minister Vladimir BULGAK as its head. Russian leaders have largely ignored the Y2K problem, making these efforts possibly too, little too late. The commission will coordinate the efforts of executive bodies at all levels, the Central Bank and various institutions to prevent computer failures from undermining the operation of vital components of the country's infrastructure, economy, defense and security. It will include representatives of the ministries of defense, nuclear power, finance, and fuel and energy. Russia's critical computer systems, including those that control nuclear weapons and power plants, could be destabilized as computers which read the last two digits mistake 1900 for 2000. About 60 percent of computer networks at government offices require the replacement of software, and 15 percent require hardware replacement. It is estimated that fix

Today's News Highlights

Russia

New Trade Predictions

Secret Decree On PGMs

European Republics

Estonia Telcom Shares For Sale

South Caucasus & Central Asia

Georgia, Ukraine, Azeri Meet

New Arms Race In Caucasus

IMF Reviews Kazakh Economy

Balgimbayev Confirmed As PM

Politics-Economics-Business

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Monday

January 25, 1999

Intercon's Daily

ing the problem will cost $500 million for military computers and more than $1 billion nationwide. However, the ministries and offices will have to find the money themselves to tackle the problem, as there is no funding earmarked in the budget.

Russia's Defense Ministry disputed remarks made by Defense Minister Igor SERGEYEV, that Russia's nuclear missile systems were bug-free because the used "special computer technology." The ministry admitted that the Y2K problem poses a threat to its nuclear arsenal. A spokesman said, "There is a problem and we are working on it." The spokesman could not confirm reports that a group of Pentagon experts would be in Russia between February 10th and 12th to advise on the situation. US experts say that the Y2K bug could blank out command computers and panic officers into suspecting an enemy strike, causing a unintended nuclear launch. Chairman of the Russian State Committee for Communications and Information Alexander KRUPNOV participating in the Russian-American investment conference said, "Time is running out. All ministries and departments are to carry out work and draft reports in the first quarter. Preliminary results should be summed up in the first six months of the current year." Russia's Atomic Energy Ministry said that all nuclear sites are being checked, and all tests and adjustments to protect the sites against the millennium computer problem will be completed by August.

Economy

Ruble = 22.75/$1.00 (NY rate)

Ruble = 22.95/$1.00 (CB rate)

Ruble = 26.62/1 euro (CB rate)

Gabunia Predicts Trade Figures

· Russian Trade Minister Georgy GABUNIA at an economic conference in Geneva today said that the ministry is planning to maintain a favorable foreign trade balance of $26 billion to $28 billion in the next three years. Russia's favorable balance was $28 billion dollars in 1998. Russia's raw-material exporters lost about $10 billion in 1998 because of falling prices throughout the world. The prices of Russians exports fell on average by 13 percent. The price of oil decreased in price by 32 percent, gas by 18 percent, nitric fertilizer by 37 percent, copper by 21 percent, and timber by 27 percent. According to GABUNIA, Russia's foreign trade will annually grow by 3 percent to 4 percent, and its 1999 foreign trade

turnover is expected to reach $119 billion, which is a 5 percent increase against 1998. The country's exports will stand at $73 billion and its imports at $45 billion. Despite its current economic hardship, Russia's integration with the international economy is one of Moscow's top priorities. GABUNIA said, "we highly value the support the international community is giving our country's market transformations." He stressed that the ministry will work on developing a foreign-trade policy which includes improving the structure of its exports, protecting home producers in a, "reasonably open economy," and creating favorable conditions for Russian goods, including through membership of the World Trade Organization.

Secret Decree On PGM Causes Infighting

· Earlier this month, President Boris YELTSIN signed a decree authorizing exports of platinum group metals. However, infighting among Russian government officials will delay exports of platinum and palladium for another month or more. This will have a big impact on price for buyers of the metals in the US and Japan. It has been reported by The Journal of Commerce that the decree set export levels at about 20 metric tons of platinum and 100 metric tons of palladium. This figure can only be regarded as an approximate, because Russia typically increases its volume over its initial volumes. In 1997, Russian deliveries of platinum totaled 900,000 ounces, more than 27 percent than the initial quota provided (1998 totals are not yet available). The increase was due to a Kremlin secret approval for Norilsk Nickel to sell additional quantities. The dismissal of key ministers has eliminated Norilsk Nickel's advantage. YELTSIN's decree failed to settle what share Norilsk Nickel will be allowed to export and how the remaining exports will be divided amongst mine output, state stockpile, and large volume of palladium held by the Russian Central Bank. The Finance Ministry is lobbying for sales of the Gokhran's stockpile over Norilsk Nickel shipments and that revenues flow directly into the federal budget. Government ministries must now decide on the share-out of the metal totals, before exportation of metals can begin.

Business

Transneft To Participate In Iranian Tender

· President of Russia's Transneft joint-stock company Dmitry SAVELYEV at a press conference

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Monday

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Intercon's Daily

Friday said that the company intends to take part in a tender to reconstruct the pipeline system in Iran. SAVELYEV said Transneft is planning to hold talks on the subject with the Iranian Minister of Oil and Gas. He also noted that Transneft's profits had fallen victim to Russia's economic and financial crises. SAVELYEV said net profit, "did not grow but was slightly lower...There is inflation to a certain extent, our tariffs have remained at the same level, so its not difficult to work out what this represents for...profits." Gazprom earlier this week reported a deteriorating profits, reporting a loss.

over the disputed Nagorno-Karabakh. ABIYEV denounced Russian shipments of MiG-29 fighter jets and SA-300 anti-aircraft systems to Armenia territory. Russia has said the weapons are for the military bases it maintains in Armenia. Georgia, Azerbaijan, and Ukraine signed a statement to coordinate their actions with NATO and the UN on holding joint maneuvers. UN special envoy Liviu BOTA met with Abkhaz representative Vladisla ARDZINBA in Sukhumi on Saturday to discuss Abkhaz's proposal to allow ethnic Georgians to return to Gali beginning March 1st. Georgia does not support the proposal without guarantees of protection and security. A delegation representing Georgia will participate in a session of the UN Security Council to discuss the Abkhaz conflict on January 31st in New York. The delegation will seek to persuade the Security Council to adopt a resolution condemning the conduct by the Abkhaz against the Georgians during the 1992-1993 war as genocide. It urge the Council to replace the CIS peacekeeping force by a multilateral, impartial UN force. Moldovan Defense Minister Valery PASSAD, who was scheduled to attend the talks as part of GUAM (Georgia, Ukraine, Azerbaijan, Moldova), but cancelled at the last minute.

New Arms Race In The Caucasus?

· In reaction to statements by Russian Ambassador to Armenia concerning planned SA-300 missile deployment and from the Russian Deputy Defense Minister concerning deliveries of MiG-29 fighters during his recent trip to Armenia, Azerbaijan's State Adviser on Foreign Policy Vafa GULUZADE last week remarked that Azerbaijan would welcome US and Turkey establishing military bases in Azerbaijan. He said, that a base would serve US strategic interests in the Caucasus and counter Russian influence in the region. Azerbaijan has long objected to the Russian-Armenian military cooperation and their mutual defense treaty. This is provoking a heated reaction and threatens to initiate a new arms race in the Caucasus. Iran and Russia have raised deep concern over the possibility of a US military base in Azerbaijan. Chief of Iran's joint military staff Hassan FIROUZABADI said negotiations are underway for establishing a US base, which he believes could result in the most undesirable consequences. On Friday, the Russian Foreign Ministry issued a statement condemning claims by Azeri politicians that Russia plays a destabilizing role in the Cauca

European Republics

Estonian Gov't Sells Telecom Stake

· Today, the Estonian government begins selling a 24 percent stake in the country's telecommunications operator. The sale of Estonian Telecom is predicted to raise $227 million based on a price range of Ek 67/85 per share set this weekend. It is by far the largest initial public offering from the Baltic states, and bolsters Estonia's lead over Lithuania and Latvia in the battle for foreign investment, the Financial Times reported. Estonia Telecom will also be the region's biggest public company and will be listed on the London Stock Exchange and in Tallinn. International investors in the company will be offered global depository receipts priced at $14.88 to $18.89 each. The IPO offering is being lead by Nomura and ABN Amro Rothschild. Union Bank of Estonia is selling shares to local investors. According to the Times, the listing coincides with a restructuring advised by Rothschild, which will leave its two strategic shareholders, Telia of Sweden and Sonera of Finland, with a combined stake of 49 percent. The state will retain its 27.28 percent.

South Caucasus & Central Asia

Georgia, Azeri And Ukraine Pledge Military Coop.

· Georgian Defense Minister David TEVZADZE, Azeri Defense Minister Safar ABIYEV and Ukraine's Defense Minister Alexander KUZMUK on Friday pledge closer military cooperation and discussed the possibility of a joint peacekeeping force. The force could be used to guarantee the security of oil export pipelines from Azerbaijan through Georgia. It could also be used to deal with separatist conflicts. ABIYEV criticized Russia for alleged military support to Armenia. Azerbaijan and Armenia have been in conflict

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Politics-Economics-Business

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Monday

January 25, 1999

Intercon's Daily

sus. A US base in Azerbaijan is necessary to counter Russia's presence in the region. However, Azeri Ambassador to Teheran Abbasali HASANOV denied reports in the Turkish press, saying the rumors were groundless. GULIZADE on Saturday underlined the need for the military presence of US, Turkish or NATO forces in his country. Azerbaijan's security is at stake because there are forces in Russia seeking to revive the former Soviet Union, GULIZADE said. He also pointed out that Russia is equipping Armenia with modern weaponry and Turkey should not remain silent in this connection. Turkey opposed Russia's deploying the SA-300 air defense unit in Cyprus, which would extend into Turkish airspace. These same high-tech armaments are being deployed to the Russian base in Armenia, which can also extend into Turkish airspace. The introduction of advanced weapon systems are instigating counter measures, escalating area tensions, and threatening a new arms race in the Caucasus.

IMF Mission Reviews Kazakh Economy

· An International Monetary Fund (IMF) mission arrived in Kazakhstan Friday for its regular quarterly review of Kazakhstan's economy. Fund experts will meet with the Central Bank, Finance Ministry, Labor and Social Protection Ministry, Energy, Industry, and Trade Ministries, as well as various government representatives during its two week visit. The IMF approved a $217 million payment from its loan to Kazakhstan in December, which is half of and Extended Fund Facility (EFF). The remained of the EFF could be disbursed by Spring. Kazakhstan's re-elected President Nursultan NAZARBAYEV believes that 1999 will be a "crisis year." The combination of the Asian, Russian economic crisis and low oil and commodity prices cutting revenues by a third has made it difficult for Kazakhstan to make ends meet. The government has been forced to reconsider its 1999 budget already passed by parliament to take into account lower commodity prices on the gross domestic product (GDP). The budget had aimed for a deficit of 3 percent of GDP. Exports have dropped

as they are too expensive for customers. Foreign investment in the oil industry has significantly fallen. Revenues from privatization and tax collection are not expected to meet targeted amounts. Tax revenues represent 11.5 percent of GDP. Clutching his "five keys" to a strong independent state, NAZARBAYEV has a tough road of reforms and belt tightening ahead of him.

Balgimbayev Confirmed As Prime Minister

· Kazakhstan's parliament on Thursday approved Nursultan BALGIMBAYEV as the country's Prime Minister in a vote of 102 for with one abstention. BALGIMBAYEV had been nominated by President Nursultan NAZARBAYEV who began his second term in office on January 20th. BALGIMBAYEV succeeded Akezhan KAZHEGELDIN in October 1997. NAZARBAYEV had reportedly indicated his wish to have BALGIMBAYEV and other major cabinet members re-appointed prior to the vote. He urged the lawmakers to make little government changes, considering the strain on the economy. BALGIMBAYEV, built up his career in the oil business and has remained influential in the sector ever since. Kazakhstan is pinning its hopes for economic revival on revitalizing its oil industry with the big capital inflows. BALGIMBAYEV has adopted a more cautious approach to the privatization of resources-based industries than his predecessor KAZHEGELDIN. He told the national parliament that the government would work to develop domestic production which was to replace imports. Direct investments and easy-term credits will be a priority for Kazakhstan. BALGIMBAYEV promised to construct airports, roads, to promote foreign investments into the chemical, petrochemical, light and machine-building industries. Meanwhile on Saturday, US Ambassador to Kazakhstan, Richard JOHNS, presented his credentials to NAZARBAYEV. The Ambassador also presented NAZARBAYEV a letter from US President Bill CLINTON, which assures US cooperation with Kazakhstan. The Congress confirmed JOHNS as US Ambassador to Kazakhstan last October.


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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