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, February 1, 1999

Russian Federation

Politics

Russia's Power Play Reaches Media, Davos

· Prime Minister Yevgeny PRIMAKOV's proposal last week to the Russian State Duma, to drop the impeachment hearing on President Boris YELTSIN and limit presidential powers in exchange for non dissolution of the Duma before 2000 elections, has sparked allegations that PRIMAKOV has strong power ambitions. On the regular Saturday news broadcast on Channel One, owned in part by the government and business tycoon Boris BEREZOVSKY, newscaster DORENKO used a statement by Moscow Mayor Yuri LUZHKOV which calls PRIMAKOV's proposal letter, "strange and hasty," to launch an attack against PRIMAKOV. DORENKO described PRIMAKOV's proposal as an indication of his aims to oust the president in a legal coup d'etate. He stated that PRIMAKOV has been conspiring behind YELTSIN's back to take over the power ministries. DORENKO accused the Prime Minister of concentrating on gaining power, instead of directing his efforts toward the failing economy. In addition, DORENKO said that PRIMAKOV has been trying to gag the media and is trying to get rid of honest and truthful journalists, referring to recent KGB appointments by PRIMAKOV. DORENKO said that, while PRIMAKOV claims he does not listen or read media reports calling them all lies, he —himself is lying because he does monitor the media and then cracks down on unfavorable stations. The newscaster said that PRIMAKOV is interested in returning Russia's free media to the old Soviet style, where the media serves the leaders not Russia's citizens. In contrasts to PRIMAKOV's hard stance on the media, DORNEKO noted that YELTSIN has recently stated he will use his Constitutional powers to protect the media. It appears that this newscast may have been

approved by YELTSIN and BEREZOVSKY to show the Prime Minister in a bad light.

At the World Economic Forum in Davos, Switzerland, BEREZOVSKY expressed disappointment in PRIMAKOV's address and his actions as a politician. "He seems more eager to promote himself than to promote stability in Russia. This is very dangerous," he said of PRIMAKOV. BEREZOVSKY added, "Leading politicians are bad because the minute they want to be president, all they think is `I want to be president.' They stop thinking about how to make Russia a normal country. I Thought PRIMAKOV put Russia first. But I was mistaken. Now, I Think he is a person who wants to be president and then to think about Russia." Channel One approach PRIMAKOV for a response to these statements; he said he would never speak with the station and then gave an interview to Channel Four. In that interview, PRIMAKOV said that BEREZOVSKY better mind his own affairs and that it was none of his business. He said, "the hullabaloo raised in media...is an attempt to drive a wedge between the government and parliament...To think that I want to consolidate my positions in order to run in the presidential race is ludicrous." Comment: Again, it appears that when President YELTSIN is recovering in the hospital or retreating to recuperate in the country, those parties interested in ruling Russia pine away strategies to gain power. This scenario has been played out before with the government of the Viktor CHERNOMYRDIN and the result may be the same. In typical YELTSIN

Today's News Highlights

Russia

Budget Passes Third Reading

Primakov Econ. Plan At Davos

Novorossiisk Pipeline Leaks

Commerzbank Eurasia Opens

European Republics

Belarus Opposition Holds Rally

South Caucasus & Central Asia

IMF Approves Georgian Budget

Rus. Troops To Leave Georgia?

Azeri Statement on Rus-Armenia

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form, after his return to the Kremlin he may reshuffle the government in an attempt to show what little strength he may posses and initiate a series of new policies. In fact, on Saturday YELTSIN signed a decree making cuts in his own administrative apparatuses. The presidential press service reported the decree abolishes one deputy chief of staff from the presidential administration and four advisers, as well as reducing his administrative staff by 20 percent. It remains unclear if PRIMAKOV and his Cabinet will be next. In another twist, today PRIMAKOV, Russian Orthodox Church Patriarch Alexy II, and presidential chief of staff and Secretary of the Security Council Nikolai BORDYUZHA were shown on television toasting the President on his 68th birthday at the sanitarium in Barvikha with what appeared to be champagne. One expert remarked with controversy swirling about, it is interesting that a KGB-related troika surrounds the President on his birthday.

Duma Passes Budget In Third Reading

· The Russian State Duma on Friday passed in the third reading the draft 1999 federal budget in a vote of 298 to 48 with five abstentions. The Duma commissioned its budget and finance committee to work up the budget with heed for amendments and criticism and submit it to the Duma for the fourth reading due on February 4th. The fourth reading debate will approve the revenue pattern, federal programs to be funded by the budget and the federal investment program for 1999. Duma Speaker Gennady SELEZNYOV said he was, "satisfied with how discussion of the draft budget 1999 went." He said budget debate was very difficult and, "there were very many amendments and certainly many dissatisfied deputies whose amendments were not backed up." As for the overridden amendment to the budget's section on state governance funding, SELEZNYOV said, "if the president does not sign the country's budget only because the upkeep of [the presidential] apparatus, of his department is cut back, this will not be understood by society." The Duma voted a 40 percent cutback in spending on the presidential administration and a three percent lower spending on itself.

Economy

Ruble = 22.6/$1.00 (NY rate)

Ruble = 22.77/$1.00 (CB rate)

Ruble = 25.86/1 euro (CB rate)

Primakov Meets With IMF's Fischer

· Prime Minister Yevgeny Primakov on Sunday morning in Davos, Switzerland held negotiations with IMF First Deputy Managing Director Stanley FISCHER. PRIMAKOV said that he was satisfied with their meetings and FISCHER's understanding of Russia's situation and the government's policy. He noted that the lack of an agreement with the International Monetary Fund, "blocks all other possibilities for us," referring to the dependence of a positive outcome on further international lending from the World Bank and other lenders, as well as debt negotiations with the London and Paris Clubs. PRIMAKOV today, "plans to signs a memorandum and send to Mr. CAMDESSUS an answer to the questions we have received." FISCHER declined to comment on a question how much time will be needed to reach a decision. He said that the IMF will examine the state of affairs with the budget, banking, etc. Central Bank Chairman Viktor GERA-SHCHENKO, who attended these negotiations said FISCHER's, "involvement and understanding of our problems is very important." He noted that the IMF is interested in restructuring the banking system. For more reforms to be taken in this area, "it is also necessary for the Federation Council to approve the Bill on Bankruptcy of Banking Institutions, which would considerably simplify the process of civilized work on banks which cannot now fulfill, in fact, their functions."

PRIMAKOV also held a meeting with US Vice President Albert GORE on Friday, which focused on the Russian government's economic policy. The talk was described as was very productive. GORE and PRIMAKOV addressed preparations for a next meeting of the PRIMAKOV-GORE commission to be held in March.

Primakov Outline Economic Plans

· Russian Prime Minister Yevgeny PRIMAKOV addressed the World Economic Forum in Davos, with a speech titled "Reforming the Reforms," he outlined Russia's economic policy. He said, "Our task is to prevent social upheavals, ensure stability in society and improve living standards through sustainable economic growth, and, in the future, to create a socially-oriented market economy." He said that direct foreign investments are critical to the completion of structural reform, modernization of

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enterprises and the creation of new jobs. First, these measures include steps to mobilize state investment resources set aside in a special section of the federal budget for 1999. Second, the government will implement measures to encourage direct foreign investments in the real sector of the economy. The Russian State Duma is expected to approve the law on foreign investments, which will guarantees favorable treatment for foreign investors and compensations in the event of nationalization, as well as contains the government's obligations not to change the rules of the game for foreign investors until they break even. The government also plans to create the state Agency for Investment Guarantees. PRIMAKOV also proposed measures to move investments to regions which have a high degree of autonomy. The government will also offer full support to the Consultative Council for Foreign Investments in Russia, which comprises 26 major foreign companies, firms and banks which make large-scale investments in Russia. PRIMAKOV hopes these measures will attract $3.5 billion to $4.0 billion in direct foreign investments in Russia in 1999.

Business

Novorossiisk Pipeline Oil Leaks

· The Russian pipeline which pumps oil to the Back Sea port of Novorossiisk sprung a leak in southern Russia outside Tikhoretsk, spilling thousands of gallons of oil. Repair workers were summoned on Saturday and the pipeline's hole, worn out by deterioration, was mended on Sunday. The territorial center for civil defense and emergency situations stated that the hole was made by thieves and not by overuse of the pipeline. Cleanup workers are still collecting the spilled oil. The pipeline is operated by Transneft.

Commerzbank Eurasia Opens In Moscow

· Germany's Commerzbank today opened a new Russian subsidiary in Moscow; the new unit's name is Commerzbank Eurasia. This is the first western financial crisis to make a long-term financial investment in Russia since the crisis in August. Managing director of Commerzbank Eurasia Juergen FRENSCHKOWSKI said, "Our bank is among those that have weighed and estimated the risks of beginning operation in Russia, but we aren't afraid of the risks." He added that Russia represents an impor

tant long-term strategic market. Commerzbank Eurasia will work exclusively with corporate clients, focusing initially on German and other international companies. FRENSCHKOWSKI said payments and settlements, export financing, and treasury operation will comprise the bulk of the bank's activities.

European Republics

Rally In Minsk Concludes Opposition Congress

· Approximately 3,000 members of the Belarus opposition organized a march and rally in Minsk on Saturday. The crowd chanted "Down with the president." The rally followed a two-day congress of democratic forces outside of the capital of representatives from trade unions, cultural organizations, opposition parties, and human rights groups. The congress adopted a decision to create a coordinating and consultative council of Belarus' democratic forces. They stressed that opposition to Belarus President Alexander LUKASHENKO's power should be the basis of such integration needed for protecting the country's sovereignty and returning it to the path of democratic development. The congress called on the world community to develop relations with Belarus' democratic forces which aims to normalize of relations with all countries on the basis of respect for sovereignty and mutual cooperation.

The opposition has declared that it will hold early presidential elections in July. LUKASHENKO rejects calls for an election this year, Some officials say that those organizing the election are breaking the law. Acting head of the main opposition group, the Belarus Popular Front, Lyavon BORSHCHEUSKY said, "we are in the process of transforming from an opposition to a national liberation movement, because in a country where there is no law, there cannot be any opposition.

South Caucasus & Central Asia

IMF And Georgia Agree On 1999 Budget

· The International Monetary Fund (IMF) resident representative Hunter MONROE on Thursday announced that the IMF delegation has agreed with the framework of Georgia's 1999 budget, which involves a cut in spending. However, the receipt of a delayed $37 million IMF installment depends on an improvement in tax revenues. The loan installment is part of

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a three-year, $240 million package under an Enhanced Structural Adjustment Facility (ESAF). Tax collection in Georgia in 1998 only amounted to nine percent of gross domestic product (GDP). MONROE said, "We agreed on a new budget that would not have excessive growth of money supply, a budget where expenditures are based on taxation and not on printing the lari currency." In December, the Central Bank, acting on IMF advice, was forced to drop currency supports and float the lari. MONROE said that the IMF wants to Georgia stable and independent, but that this is linked to tax collections.

Adzimba, Abashidze Support Rus. Border Troops

· Director of Russia's Federal Border Service (FPS) Colonel-General Konstantin TOTSKY said that Russian border guards are prepared to turnover stretches of external borders of member-countries of the Commonwealth of Independent States (CIS) to frontier forces of these countries. He noted that stretches of the Georgian-Turkish border were being placed under the protection of Georgian border guards under intergovernmental agreement since November 1998. TOTSKY pointed out that implementation of Russian-Georgian arrangements are connected with the stance of the Adjarian and Abkhazian leaders who flatly object to Russian border guards withdrawal. ADZIMBA, head of the Abkhaz separatist was interviewed by Moscow Television said that Abkhazia will retain Russian border guards and does not want to see their removal. His statements were echoed by Aslan ABASHIDZE, chairman of Adjarian government, who also indicated he does not support the removal of Russian boarder guards from the Adjarian-Turkish border. There have long been allegations of smuggling of weapons and narcotics at this border checkpoint. Another claim is that fee collected at the border crossing have supposedly been split between the Russian border commander and ABASHIDZE himself, without any contribution to the Georgian central government. These statements indication of the strange alliance between the independent leader of Adjaria and the Abkhaz leader who both continue to insist upon

Russian involvement and by implication protection. Clearly, the Georgian government should expect challenges by ABASHIDZE, especially when the agreed upon withdraw of Russian forces approaches this May. ABASHIDZE and his political party, Revival, have been active in galvanizing opposition parties to the SHEVARDNADZE government. In particular, in the recent local elections the Revival Party actively put coalitions together to prevent the Civic Union Party from controlling the local governments in Georgia's largest cities.

Azerbaijan Concerned Over Military Build Up

· The Azerbaijan Foreign Ministry released a statement on Friday stating, "Azerbaijan considers Russian-Armenian military cooperation as a threat to its security because Russian military bases are being used by the Armenian army and because military personnel of the bases participated in Armenia's aggression against the Republic of Azerbaijan." According to the statement, "The build up of the Russian military presence in Armenia can cause unpredictable consequences in the region and outside it," Baku is worried not only by Russian military shipments but also by the use of its military base in Armenia, thereby boosting the fighting capability of the latter's armed forces, it said. Military shipments include heavy armored equipment and SKAD missiles in February, 1997, and recent deployment of MiG-29 fighter jets and S-300 missiles. The Ministry said it is especially disappointed because arms shipments became more intensive after signing the cease-fire agreement between Armenia and Azerbaijan on May 12, 1994. It said certain forces in Russia, which wield much clout with the authorities, are keeping the flow of Russian weapons to Armenia alive and hampering efforts aimed at a peace settlement in Nagorno Karabakh. It said that Russian military leadership clearly intends to change the strategic balance in the region to Armenia's benefit and threaten Azerbaijan. The Foreign Ministry said, "Azerbaijan leadership is forced to consider appropriate measures to protect the country's security, secure its independence and sovereignty."

Paul M. Joyal, President, Editor in Chief Clifton F. von Kann, Publisher Jennifer M. Rhodes, Principal Editor

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