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

Friday, January 29, 1999

Russian Federation

Politics

Primakov Holds Mtgs. Aside Economic Forum

· Russian Prime Minister Yevgeny PRIMAKOV left for the Swiss city of Davos today to participate in the World Economic Forum. During his stay in Davos, he will hold a number of meetings with the heads of state who will participate in the forum, as well as leaders of a number of international financial organizations, including First Deputy Managing Director of the International Monetary Fund Stanley FISCHER. According to PRIMAKOV's spokeswoman Tatyana ARISTRAKHOVA, the Prime Minister will have meetings with US Vice President Albert GORE, Kyrgyz President Askar AKAYEV, Armenian President Robert KOCHARYAN and Ukrainian President Leonid KUCHMA. GORE and PRIMAKOV will discuss a range of issues on the US-Russian agenda, including the Russian economy, non-proliferation concerns, and the situations in Iraq and Kosovo. They will also make preparations for the 11th meeting of the US-Russian Commission on Economic and Technological Cooperation, to be held in Washington this Spring. This will mark the second meeting between GORE and PRIMAKOV. The two also met in Kuala Lumpur last November at the annual meeting of APEC (Asia-Pacific Economic Cooperation). On Saturday, PRIMAKOV will meet with Egyptian President Hosni MUBARAK, UN Secretary-General Kofi ANNAN, Swiss President Ruth DREIFUSS and Swiss Foreign Minister Flavio COTTI. PRIMAKOV is also scheduled to speak report on the Russian financial-economic situation and the Cabinet's vision of ways to overcome the crisis at a plenary meeting of the Forum. The Prime Minister will be accompanied by Central Bank Governor Viktor GERASHCHENKO, Fuel and Energy Minister Sergei GENERALOV and head of the State Tax Service Georgy BOOS.

Economy

MICEX Begins Trading New Treasurys

· The Moscow Interbank Currency Exchange (MICEX) began trading new treasury bills and bonds to replace debt the government defaulted on in August. On it first day of issuance, almost $4 million in the new debt was traded, or less than 1 percent of the 170 billion rubles ($7.5 billion) issued to domestic investors the night before, The Wall Street Journal reported. Daily trading levels during the height of the Russian treasury debt market a year ago were in the billions of dollars. Russia is still wrangling with foreign investors over how to replace the defaulted debt, and few of those investors are willing to re-enter the Russian market. New investors and international lenders are waiting for the outcome of the International Monetary Fund's (IMF) economic review and negotiations with the Russian government. The IMF is calling on Russia to cut spending, raise tax revenues, and target the budget surplus to 3 percent to 4 percent of the gross domestic product. The US and IMF have called Russia's 1999 budget unrealistic and inconsistent with the basic laws of economics. Today, the Russian State Duma is reviewing the 1999 draft budget in its third reading.

Rus-US Hold Steel Talks In Paris

· Chief executive of Russia's largest steel producer, Severstal, Alexei MOR-DASHOV confirmed that Russia's Ministry of Trade and the US Department of Commerce are holding negotiations in Paris.

Today's News Highlights

Russia

Unexim May Default Eurobonds

BHP Withdraws From Oil Project

European Republics

IFC-Uhispank Financing

Visa's New Clearing System

South Caucasus & Central Asia

Shevardnadze Statement To UN

UN Extends UNOMIG Mission

IMF, EU Grant Aid To Kyrgyz

ECO Calls For More Trade

Politics-Economics-Business

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Friday

January 29, 1999

Intercon's Daily

Russian trade negotiators Deputy Trade Minister Roald PISKOPPEL and steel expert Alexei RUZHIN met in two earlier rounds with US Commerce officials Robert LARUSSA and Joseph PETRINI. MORDASHOV said, "We hope there will be a positive outcome." The US is proposing an agreement to limit Russian exports of hot-rolled coil to 500,000 metric tons a year to set a minimum price of $305 per ton, and to declare a moratorium on all new steel trading for one year from the agreement. Russia has condemned the price proposal, since hot-rolled steel imports are price at US ports between 30 percent and 50 percent below this figure, The Journal of Commerce reported. The Russian steel exports to the US dropped by 79 percent in December 1998. According to the US preliminary monitoring, the steel exports amounted to 135,777 tons in December as compared to 658,363 tons in November 1998.

Ruble = 22.77/$1.00 (NY rate)

Ruble = 22.6/$1.00 (CB rate)

Ruble = 25.79/1 euro (CB rate)

Aug Sep Oct Nov Dec Jan

Uneximbank May Default On Eurobonds

· Russia's Uneximbank on Thursday said that it is unable to pay interest on a $50 million international bond. Once the third-largest bank in Russia, Uneximbank is due to make a $12 million interest payment on February 1st for its $250 million Eurobond due August 2000. The bank has formally requested to creditors a restructure of all outstanding debt. Uneximbank's total foreign debt obligations are estimated to be around $525 million, including the $300 million of international bonds. Reuters

reports that in a note sent to creditors Thursday by paying agent Citibank London, Uneximbank said it was not able to make a semi-annual interest payment due January 27th on a $50 million three-year floating-rate note (FRN) issued by its Dutch subsidiary Unexim International Finance BV. The bank has a 14-day grade period to make the coupon payment. The FRN was placed by Merrill Lynch in January 1997. Like Uneximbank, Rossiisky Kredit and SBS-Agro have outstanding dollar eurobonds. One London banker pessimistically said, "None of the Russian banks are going to pay their debts. Most are collapsing and even the stronger ones have hidden any seizable assets away by now."

Business

BHP Withdraws From Off-shore Oil Project

· The Australian industrial conglomerate, BHP Petroleum has announced that it is withdrawing from the Prirazlomnoye off-shore oil development consortium. BHP had tried for five years to launch the project with Russian gas monopoly Gazprom and Rosshelf. The Australian company said that the estimated $1.5 billion cost to develop the remote field could not be justified, "when judged against completing projects within the BHP portfolio," Financial Times reported. BHP declined to say how much it had spent over the five years, but four wells were drilled. The field is believed to contain about 400 million barrels of recoverable oil. Gazprom and Rosshelf are interested in continuing the project, possibly with the backing of a western investor. BHP will convert its 50 percent working interest in Prirazlomnoye to a 5 percent fully paid, free carried interest. This will allow BHP to claim 5 percent of production, if the field is developed.

Russia Increase Arms Export Companies

· Russia has increased the number of companies licensed to export weapons from three to 21. Prior to the decision Rosvooruzhenie, Rossiiskie Tekhnologii, and Promexport were the only companies with such a license. The newly entitled companies are MAPO MIG, MAPO, Aviaexport, Metrovagonmash, Izhmash, KB Priborostroyenia, Rosvertol, Ufa Engine-building Plant, Hydromash, Antei, Kurganmashzavod, Progress, the Murom Machine- building Plant, NPO Mashinostroyenia, Rubin, Gaz, Zvezda, and Tulamashzavod.

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January 29, 1999

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European Republics

IFC Provides Financing To Estonian Bank

· The International Finance Corporation (IFC) on Thursday agreed to a financing package to help the Estonian bank Eesti Uhispank (Estonian Union Bank), the second largest bank in the Baltic States, respond to the growing demand for housing finance in Estonia. The IFC will help the bank provide affordable, residential mortgages to individual home buyers. According to an IFC press release, the eight-year loan of $19.196 million and an option to acquire an equity of up to $19.196 million in Uhispank are part of IFC's effort to promote the availability of affordable housing finances to individual home buyers. Director of IFC's Central and Southern Europe Department Harold ROSEN said that loan will help bolster development in Estonia's banking sector. President of Uhispank Ain HANSCHMIDT said the bank is delighted by IFC's decision to grant the loan because IFC is a careful and selective investor. Uhispank said it hopes to cooperate with the IFC in financing other projects in the Baltics.

Ukraine-Visa Launch New Clearing System

· Credit card payment corporation Visa International and Ukraine's Central Bank launched on Wednesday a new nationwide system for authorization, clearing and settlement of domestic and international card transactions in Ukraine. President and chief executive officer for Central and Eastern Europe, Middle East and Africa said, "It is the first time that Visa participates with the central bank of the country and commercial banks in defining the project for the country," Reuters reported. Central Bank chairman Viktor YUSHCHENKO said the new system will provide better conditions for a more active use of plastic cards in Ukraine and will substantially reduce the volatile supply of cash in the economy. In Ukraine, cash accounts for 44 percent of the money supply. Only 17 commercial banks out of the nations 179 are members of Visa International. The Central Bank estimates that more than 70,000 international and domestic plastic cards of several international brands have been issued in Ukraine.

South Caucasus & Central Asia

COE Votes On Georgian Membership

· The Council of Europe's parliamentary assembly on Wednesday voted unanimously with no amend

ments to admit Georgia to full membership within three to six months. This makes Georgia the Council's 41st member and the first nation from the South Caucasus to join. The decision is conditional on the implementation of judicial reform, a tougher crackdown on corruption, and progress in repatriating to Georgia the Meskhetians. Within two year, Georgia must set out a legal framework to guarantee autonomy to Abkhazia and South Ossetia. Georgia must also ratify European conventions on human rights, torture, and the protection of minorities and regional languages. Foreign Minister Irakly MENGARISHVILI added that in 1999 Georgia will also make necessary preparations for accession to the World Trade Organization (WTO). He said, "Georgia's accession to the WTO will be an important step on the way to Georgia's integration into the world economy." A decision on this membership is expected to be decided in the second half of 1999.

Shevardnadze Statement To Security Council

· Georgian President Eduard SHEVARDNADZE submitted a formal statement to the UN Security Council. Georgia thanked the UN for it efforts to restore peace to the nation. He said that UN efforts are "truly invaluable" to the settlement of the Abkhaz Conflict. SHEVARDNADZE's statement said, "there is no end in the offing to the suffering of the hundred of thousands of refugees and displaced persons, whose physical and moral conditions are unspeakable. This ongoing problem negatively affects the country's political and economic situation." He added, "It is clear that the separatist regime is carrying out a well planned obstruction of every peace initiative. Attacks from territory under their control against the villages on the left bank of the Inguri river have become intensive and the measures taken to stop them are skillfully used to justify the obstruction of the quadripartite working meetings." He urged the UN to put more pressure on the Abkhaz separatists into a settlement, noting that every initiative so far has fallen, "into oblivion." The Georgian President called on the UN to declare the violence last May in Gali as ethnic cleansing. He noted that false propaganda has been circulated among the Abkhaz to discredit the Georgian government and kindle ethnic hatred. The statement pointed out that the separatists have created insurmountable obstacles which have prevented the signing of peace documents. Georgia has been pushing for the return of the refugees, but only

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Intercon's Daily

if solid security conditions are guaranteed. "The stabilization of the situation is clearly in the best interest of all good will countries and the strengthening of the role of the international community in this process can undoubtedly play a decisive role." SHEVARDNADZE called on the Security Council to strengthen the United Nations Observer Mission in Georgia (UNOMIG) with legal components to define the direction of investigative activities. Georgia said that, "The elimination of this hotbed in the Caucasus, together with complex peace efforts requires the consideration of the use of force." Foreign Minister Irakly MENGARISHVILI, making the statement on behalf of SHEVARDNADZE, added, "The systematic and outright obstruction of the peace process by the Abkhaz side raises a question: how long shall the Georgian side, the refugees, and the international community wait for the "kindness" of the Abkhaz side to start the constructive dialogue? Or can we remain content with the status-quo in the region, maintained at the expense of fruitless negotiations?"

UN Extends UNOMIGs Presence In Georgia

· The United Nations Security Council appears to have heard Georgian President Eduard SHEVARDNADZE message and acted on it, by extending the United Nations Observer Mission in Georgia (UNOMIG) for a further period of six months until July 31, 1999. The Security Council expressed its concern at the failure of the Georgian and Abkhaz sides to conclude agreements on security and the non-use of force, the return of refugees and displaced persons, and economic reconstruction. In an unanimously adopted resolution the Council urged the sides to resume bilateral negotiations. The resolution said it is necessary for all parties, "to achieve an early and comprehensive political settlement, which includes a settlement on the political status of Abkhazia within the state of Georgia." The Council strongly demanded that both sides observe the Moscow Agreement of 14 May 1994 on a Cease-fire and Separation of Forces and all their obligations to refrain from the use of force and to resolve disputed issues by peaceful means only. The Council con

demned the activities by armed groups, including the continued laying of mines, which endanger the civilian population, impede the work of the humanitarian organizations, and seriously delay the normalization of the situation in the Gali region.

IMF, EU Grants Further Aid To Kyrgyzstan

· The International Monetary Fund (IMF) in talks with Kyrgyz President Askar AKAYEV earlier this week agreed to increase aid to Bishkek from $15 million to $28 million to cushion the impact of Russia's financial crisis. The IMF delegation assured Prime Minister Jumabek IBRAIMOV that the Fund will disburse all previously planned loans to Kyrgyz this year. The Prime Minister also met with a European Commission representative on Tuesday, who confirmed that the European Union will grant Kyrgyzstan 1 million euros ($1.156 million) in 1999, to reform the nation's health services, RFE\RL Newsline reported.

ECO Calls For More Trade Relations

· The Secretary General of the Economic Cooperation Organization (ECO) Onder OZAR Sunday called for member states to enhance their commercial exchanges. Speaking at the general assembly of the ECO chamber, OZAR said that trade volume among ECO members stood at only $153 billion in 1996, 80 percent of which was among Iran, Turkey and Pakistan. Founded in 1964, the ECO has 10 members, namely Afghanistan, Iran, Azerbaijan, Pakistan, Turkey, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan. OZAR expressed the hope that the next ECO chamber meeting will take measures to ease up trade laws and regulations, reduce customs tariffs among members and will focus on sharing information and facilitating investments, transit of goods and the issuance of visas. Chairman of Iran's Chamber of Commerce, Industries and Mines Alinaqi KHAMOUSHI said that in some cases, member states have imposed discriminatory tariffs on goods of other members. He added that Iran favored expanding ties among the ECO members because such ties will lead to better political 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: $950.00 per year. A discount is

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