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

Thursday, January 28, 1999

Russian Federation

Politics

Budget To Face Third Reading Friday

· The Russian State Duma Committee on Budget, Taxes, Banks and Finances has urged deputies to approve the 1999 draft budget at its third reading, scheduled for Friday. The committee reviewed more than 3,000 amendments proposed by lawmakers. The only amendments permitted are aimed at redistributing the planned expenditures and revenues within individual budget chapters. Leader of the State Duma party of Our Home is Russia (NDR) Vladimir RYZHKOV has expressed confidence that the draft budget will pass in its third reading. RYZHKOV said the budgetary committee finalized work on all amendments without exception last night and that a meeting of the three-sided commission of the State Duma, the Federation Council and the government will meet later today. Governors from the Federation Council want assurances that there will be an equal sharing of funds between the federal government and the regional administrations. They have threatened to veto the budget because of unfair allocations. The governors are also concerned about the heavy spending on social services. If the budget is approved in the third and fourth readings, it will be passed to the Federation Council and President Boris YELTSIN for final approval.

Economy

Ruble = 22.67/$1.00 (NY rate)

Ruble = 22.77/$1.00 (CB rate)

Ruble = 26.06/1 euro (CB rate)

IMF-Government Meeting Delayed

· The International Monetary Fund (IMF) meeting with Russian government representative First Deputy Prime Minister Yuri MASLYUKOV was delayed to

day, due to an illness. MASLYUKOV's press secretary Anton SURIKOV said that MASLYUKOV is not feeling well, but he would be back later in the day for the meeting. The meeting is expected to discuss preliminary results of the work of the mission whose members already held several meetings at Russian ministries and departments, as well as with staff members of the Russian government's office. MASLYUKOV, former head of the Soviet planning agency Gosplan, is responsible for the government's economic policies. In the mean time, IMF delegation leader Jorge MARQUEZ-RUARTE will continue meetings with Russian Economics Minister Andrei SHA-POVALYANTS, Deputy Finance Minister Oleg VYUGIN, Deputy Finance Minister Mikhail KASYANOV and Central Bank First Deputy Chairman Tatyana PARAMONOVA and other officials. The IMF has been reviewing Russia's economic reforms and budgetary policies since January 20th and will complete its by February 6th.

World Economic Forum Opens In Davos

· Over 1,000 heads of top companies, 300 politicians, 40 state and government leaders, 300 scientists and artists and 200 mass media chiefs are attending the annual World Economic Forum in Davos which opened today. The conference's theme is Responsible Globality: Managing the Impact of Globalization. Talks will focus on the Asian and Russian financial crises, the shocks in Brazil, the European integration and new markets. The debates will be attended by Russian Prime Minister Yevgeny

Today's News Highlights

Russia

Gazprom-Oracle Sign Agmt.

Sirocco Promotes Rus Planes

European Republics

Ukrainian-Canadian Sign Agmts

Ruhrgas Buys Eesti Gaas Stake

South Caucasus & Central Asia

Russian Troops Withdraw

IMF Grants $136M To Azerbaijan

Kazakh Exposes Double Agent

Turkmen-Pakistan Pipline Talks

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January 28, 1999

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PRIMAKOV, US Vice President Albert GORE, Azeri President Geidar ALIYEV Armenian President Robert KOCHARYAN, Kazakh President Nursultan NAZARBAYEV, Kyrgyz President Askar AKAYEV, and Ukrainian President Leonid KUCHMA, as well as UN Secretary General Kofi ANNAN, President of the European Commission Jacques SANTER, and German Chancellor Gerhardt SCHROEDER. PRIMAKOV is expected to address the forum on Saturday. Director of the forum David MORISSON said, "Taking into account the current political and economic situation in Russia, participants are sure to have questions about the country's leaders, about measures that are being taken to overcome the financial shocks that occurred last August, about conditions for entrepreneurial activity. Those who have business in Russia would like to know what is to happen within three or four months. We expect that Russia's participation will be one of the key events of the forthcoming annual meeting."

Business

Gazprom-Oracle Sign Y2K Agreement

· Russian gas monopoly Gazprom and American corporation Oracle, one of the leading corporations worldwide for capitalization and profit, on Wednesday signed a general partnership agreement. The deal, signed by the companies' vice presidents, Valery REMIZOV and Hans JARNIK, envisions acquisition by Gazprom of the corporation's software, its maintenance for the year 2000, as well as development of a training center for Russian specialists. The deal allows Gazprom and its subsidiaries to computerize their business process. It has been arranged in the framework of Gazprom's software re-adjustment for the year 2000.

Meanwhile, Gazprom board member Yuri KOMAROV on Tuesday said that Gazprom is still considering participating in the Nordic gas grid project, if it is economically viable. The Nordic governments are studying a project to build a natural gas pipeline from Russia across Finland and Sweden to western Europe. The pipeline offers Gazprom an alternative route to the Ukraine-base pipeline for its resources to reach European markets.

Sirocco Promotes Russian Planes

· Egypt's leasing company Sirocco Aerospace International is actively promoting Russian planes in

the market. Sirocco's representative to Moscow Mustafa MANDUH said that Sirocco is expected to deliver to the Egyptian carrier Cairo Air a third Tu-204-120 airliner manufactured at Ulyanovsk's aircraft factory Aviastar this week. A delegation of the Egyptian civil aviation ministry and of Cairo Air is visiting the factory to accept the new plane. MANDUH said Sirocco Aerospace International plans to provide Cairo Air with 30 planes Tu-204-120 to serve charter flights on 5,000-7,000 kilometer routes from three Egyptian cities to Europe and Asia. One Tu-204-120 plane costs $30 million to $35 million, compared to $50 million for a similar Western-made plane. Tu-204-120 has avionics of US companies Honeywell and Allied Signal and turbojet engines RB-211-535e4, a product of Britain's Rolls-Royce, which plans to invest $450 million in the engine project. Sirocco Aerospace International plans to sell 200 Russian-made planes and has invested $100 million in the manufacture program.

European Republics

IFC Finances Lithuanian TV Plant

· The International Finance Corporation (IFC) and AB Ekranas signed an agreement on Wednesday to provide $15 million in loans to modernize Ekranas' production facility in Pancvczys, Lithuania. The IFC investment consists of a $12.8 million senior loan and a $2.2 million convertible loan. Ekranas manufactures color picture tubes (CPTs) and glass components for CPTs. It is the only TV tube factory in the Baltic States and the Former Soviet Union, which remains in operation. The IFC is financing this project along with Vilniaus Bankas, the company's main Lithuanian banking partner, which will also participate in financing with a $10 million loan. Ekranas will finance the balance of the $39.5 million project cost from internal resources. IFC director for Central and Southern European Operations Harold ROSEN said that Ekranas is an impressive example of a company which has benefited from direct foreign investment and was able to re-orient its operations from former Soviet to the international markets.

Ruhrgas Acquires Eesti Gas Stake

· The Germany gas company Ruhrgas has acquired an additional 11.38 percent stake in Eesti Gaas. Ruhrgas is now the largest shareholder in Estonia's main gas distribution company, with a total

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of 32.08 percent of shares. Russian gas monopoly Gazprom was set to buy the 11.38 percent stake originally, but due to Russia's financial crisis Gazprom was forced to revise its plans.

Ukraine To Sign Ottawa Convention

· Ukraine and Canada are set to discuss the Ottawa Convention and Ukraine's plans to sign the anti-personnel mines before the document enters into force during Canadian Prime Minister Jean CHRETIEN's two-day visit which began Wednesday. Deputy Foreign Minister Vladimir KHANDOGIY said that, "Ukraine is late to sign the convention because of the lack of technical and financial abilities." He did not give the precise number of anti- personnel mine liable for destruction in Ukraine or the sum necessary for that purpose, but said, "the stock of mines was very large and the fulfillment of the convention would impose serious commitments on Ukraine." A total of 133 states had signed the Ottawa Convention of 1997 by December 1998, with exception to Ukraine, China, Russia and the US.

Ukraine is also hoping that CHRETIEN's visit and his delegation of 140 businessmen representing different industries will help attract Canadian private capital to Ukraine's cash-starved economy. Prime Minister Valery PUSTOVOITENKO said, "We expect significant and profound improvement in our economic relations with Canada. We expect a rise in Canadian investment in Ukraine." He added that the government has created, "necessary conditions" for foreign investors, including establishing several free economic zones in the country. Trade between the two countries in 1998 totaled $64 million, a 50 percent increase from 1997. The two sides signed seven agreements, including cooperation on environmental protection, education, agriculture, and the food industry.

German Firms To Join Rus-Ukraine An-70 Plane

· Seven German firms, including BMW-Rolls Royce, Fairchild Dornie, have agreed to join the Russian-Ukrainian project to build a military cargo plane based on the An-70. The new plane is adjusted to NATO standards and can carry cargoes up to 35 tons for a distance of 3,800 kilometers at a speed of 750 kilometers per hour. The consortium has worked out a technical proposal concerning the joint cargo plant for participation in a tender held by European countries, Ukraine and Russia. The proposal has

been sent to the defense ministries of Russia, Ukraine, Germany, France, Italy and Spain, which have filed their official applications. The Medium Transport Aircraft consortium (MTA) said the German firms want to modernize the AN-70 to be in line with European air force requirements and then launch the production of its parts and equipment.

South Caucasus & Central Asia

Russian Border Troops Pull Out Of Georgia

· Russia today has pulled out a border guard unit from Georgia which had controlled a highland stretch on the Georgian-Turkish border. The Akhaltsikhe unit from the formation Georgia had operated under an expired bilateral agreement between Moscow and Tbilisi. Russia handed over to Georgia all outpost structures in the area and technical and communications equipment, according to the press service of the North Caucasian regional border service. Russia also withdrew its warships which had guarded the Georgian sea border, passing the responsibility for border protection to Georgian coast guards. The US has taken an active role in training Georgian border troops and coast guard soldiers. Germany recently donated a vessel to Georgia along with uniforms and other equipment. The US, Turkey, Greece, and Ukraine have also donated vessels to the new coast guard.

IMF To Grant $136 Million To Azerbaijan

· The International Monetary Fund (IMF) has decided to grant loans to Azerbaijan totaling $136 million for 1999. According to an IMF statement the credited were agreed upon at a meeting of its board of directors on Tuesday in Washington. The credits include $79 million from a Compensatory Financing facility to help Azerbaijan will loss of earnings due to low world crude prices. A further $33 million comes from an Enhanced Structural Adjustment Facility and $24 million from an Extended Fund Facility. These funds will be used to support Azerbaijan's economic and financial programs. The IMF said "Program implementation during 1998 was affected adversely by two external shocks—the sharp fall in oil prices and the financial crisis in Russia—that have worsened the fiscal and balance of payments positions." The Fund noted that these loans are designed specifically for, "assisting eligible [IMF] members that are undertaking economic reform programs to

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strengthen their balance of payments and improve their growth prospects." Following a survey of Azerbaijan's economy, the IMF highly appraised its developments. According to the Fund, an increment in gross domestic product in the republic over the first three quarters of 1998 was 8 percent. Inflation rate was reduced to a very low level. The IMF said, "Azerbaijan faces the considerable challenge of focusing on essential structural reforms, despite more immediate macro-economic pressures. With signs that non-oil related growth is slowing, rapid progress in structural reforms is vital to ensure that growth will be broadly based."

Azerbaijan Concerned On Capital Flight

· Azeri presidential adviser Vakhid AKHUNDOV on Monday said that billions of US dollars are being smuggled out of Azerbaijan by local businessmen. He said Azeri businessmen are believed to have taken $4 billion to $5 billion out of Azerbaijan and invested it in Turkey. He said, "Using the state's liberal foreign exchange policy, people take their dollars out of Azerbaijan illegally preferring to conduct their business elsewhere. The situation is impossible to control because there are plenty of ways to get the hard currency out of the country," The Journal of Commerce reported.

Kazakhstan Exposes As A Double Agent

· According to Kazakh National Security Committee's Kenzhebulat BEKNAZAROV, The National Security Committee (KNB) of the Kazakhstan has exposed a former KGB general in retirement as a foreign intelligence agent. The Kazakh counterintelligence service accuses the general of offering his services to a foreign secret service, while on a long foreign business trip. BEKNAZAROV said he was not authorized to release the Kazakh citizen's name, until the investigation is concluded. To maintain communications with such a valuable agent, the foreign intelligence set up several firms in the city of Almaty, where officers of the foreign secret service were planted. The suspect is said to have passed secret information about Kazakh power structures and economic

activity to foreign secret services. The suspect's client was interested in relations between Kazakhstan and Russia. Reports note that Kazakhstan is sensitive about attempts to disrupt ties with Moscow, which President NAZARBAYEV has forged since the collapse of the Soviet Union. Russia is Kazakhstan's dominant trading partner.

Pakistan, Turkmen Renew Pipeline Talks

· Pakistan and Turkmenistan demonstrated Tuesday their resolution to implement an ambitious gas pipeline project linking the two countries despite the withdrawal of a US company Unocal, which had a 46 percent in the consortium. Unocal withdrew in December because of the instability in Afghanistan. Visiting Turkmen Foreign Minister Boris SHIKHMURADOV reiterated his government's firm commitment to the project during a meeting with Pakistan's Minister of Petroleum and Natural Resources Nisar Ali KHAN. The Turkmen government is, "resolved to take all necessary steps to facilitate and reinvigorate the project." SHIKHMURADOV added, "Companies may come and go but the national interest is decisive. We will definitely like to see this project implemented." An agreement was reached to hold a trilateral discussion on the proposed Turkmen gas export pipeline via Afghanistan to Pakistan, but no date has been set. The 1,440 kilometer (900 miles) $1.9 billion pipeline would offer Turkmenistan another opportunity to export oil to world markets.

Pakistan's Foreign Minister Sartaj AZIZ, Prime Minister Nawaz SHARIF and SHIKHMURADOV discussed the feasibility of a "Six Plus Two" meeting in Uzbekistan to achieve a peaceful settlement of the Afghan conflict. The "Six Plus Two" would comprise Afghanistan, Pakistan, Iran, Tajikistan, Uzbekistan and Turkmenistan (all neighboring countries of Afghanistan), as well as the United States and Russia. The Pakistan Foreign Office spokesman said that the two foreign ministers felt that durable peace and stability in Afghanistan would open new opportunities of development and commercial cooperation between their countries.

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: $950.00 per year. A discount is

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