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, February 12, 1999

Russian Federation

Politics

Gov't Prepares For Russia-EU Summit

· Vice-Prime Minister Vladimir BULGAK opened the first meeting of the government commission on cooperation with the European Union (EU) Wednesday saying that, "The development of relations with the European Union is one of Russia's key foreign policy and foreign economic priorities." The meeting was called in preparation for talks between Russian President Boris YELTSIN, Prime Minister Yevgeny PRIMAKOV, German Chancellor Gerhard SCHROEDER and EU Commission chairman Jacques SANTER. BULGAK stressed that, "We have to make sure that we act first and do not wait, as we have been doing so far, for proposals and ideas from the European Union." The commission also discussed the implementation of the agreement on partnership and cooperation with the EU, which entered into force a year ago. He noted that, "we must not allow even the slightest infringement of the interests of our country and our people. EU countries, which sometimes act very energetically, have the same approach towards their relations with Russia." In addition, Russia plans to host a round-table with Russian and EU entrepreneurs in May.

Economy

Dubinin Admits Reserves Transferred Offshore

· In a letter to Russian President Boris YELTSIN, former Central Bank chairman from 1994 to 1998, Sergei DUBININ admitted that Central Bank hard currency reserves were transferred to an obscure offshore fund management company Financial Management Ltd. (Fimaco) in Jersey in the Channel Islands, but he denied any wrongdoing. He said that Fimaco was set up in 1990, and was controlled by the Paris-based Banque Commerciale pour l'Europe du

Nord (Eurobank). The Banque Commerciale is in turn controlled by the Russian Central Bank (78 percent) with minority stakes held by Centrosoyuz, Promstrozhbank, GVPO Novoexport, Yukos, Rosneft, and Almazy Rossii Sakha, the Financial Times reported. However, Fimaco's principal shareholder was listed on incorporation documents as Ogier Nominees Ltd. The purpose of the corporation was to, "undertake the business of a financial institution or bank." In 1993, the Central Bank asked Fimaco to manage part of its foreign currency reserves in order to conceal funds from seizure by foreign creditors, particularly Swiss company Noga. DUBININ claims that the Central Bank withdrew all its funds in 1997. He said, "We are convinced that Fimaco was an essential measure for the defense of the economic security of the country." Russia's finance minister in 1993, Boris FYODOROV said that when he asked how the Central bank was managing the country's reserves he ran into, "a wall of silence." He added, "In reality, as I understand, friends were given a chance to make money...When billions of dollars are pumped through some company without risk, when someone gets a certain commission, it turns out to be quite a big one in the long run. This is tens of millions of dollars," The Washington Post reported.

The International Monetary Fund (IMF) and Russia's General Prosecutor's Office have launch-ed investigations into the Bank's actions. The IMF believes that the transferred assets were re

Today's News Highlights

Russia

G-7 To Review Russian Crisis

Tupolev Makes Maiden Flight

European Republics

UBR Executive Meeting

Odessa Refinery Stake For Sale

Ukrnafta Profits In 1998

Latvia Joins WTO

South Caucasus & Central Asia

Georgia Cuts Chevron Oil Tariffs

Armenian Bodyguards Arrested

Politics-Economics-Business

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Friday

February 12, 1999

Intercon's Daily

corded in official Central Bank reserve statistics, and are now questioning the reliability of other information previously provided by the Central Bank. Former General Prosecutor Yuri SKURATOV had been investigating the Bank and warned the Russian parliament about irregularities in the Bank's transactions. SKURATOV believes that as much as $50 billion in foreign currency reserves had been transferred between 1993 and 1997. DUBININ said that the highest sum ever held in Fimaco was $1.4 billion in 1994. He believes that SKURATOV's investigation and move to reveal evidence to the public is a political campaign to destabilize the Central Bank and threaten its independence. DUBININ even suggest that it may be necessary to conceal reserves again, The Wall Street Journal reported. In France, creditors have sued Eurobank for Russian debt. Lehman Brothers Holding in 1997 obtained a British court injunction freezing assets of Uneximbank, Inkombank, and SBS Agro. Russia is close to concluding talks with treasury and bond holders and it is just beginning talks to restructure its Soviet-era debt with the Paris and London Clubs. One Finance Ministry official said that Russia will try to persuade foreign lenders to write off half its estimated $103 billion Soviet debt. The Central Bank scandal comes at a time when Russia is in deep financial turmoil, the President's health continues to fail, the Prime Minister has launched a campaign against corruption and big businesses, parliamentary elections are scheduled for the Fall, and common Russian citizens are suffering. The confirmation of hard currency transfers raises several questions: How can citizens have confidence in their banking institutions? What is left to keep them from sending billions of dollars out of the country, if the Central Bank appears to be doing the same thing? How much was in this fund? Who are these friends that were given the opportunity to make money off of Russia? How much money was made? Comment: This scandal shows how deeply corruption has integrated itself into the new Russian society, even the government's independent bank is corrupt. The Bank was using state funds to enrich certain individuals not for the good of the nation. It may also prove to be an attempt by Yevgeny PRIMAKOV to change the line of power and take back the bank under the government's wing as his offensive against private institutions widens. It appears that this scandal will affect the political spectrum fully, from the DUBININ, a free-market reformer,

to Central Bank Chairman Viktor GERASHCHENKO, backed by PRIMAKOV's allies in the Communist Party. Another set of questions arise with the 1990 date of incorporation for Fimaco. Was Fimaco originally organized for intelligence purposes by Eurobank in Paris? And if so could some of the proceeds from Central Bank proceeds or fees levied on the account been used for intelligence purposes? The fact that DUBININ defended the decision to establish Fimaco and transfer Central Bank funds to it on economic security grounds as well as accused the Prosecutor's Office of jeopardizing Russia's security interests by disclosing this information, makes one wonder if there may be more to this story than skimming from the public troth for only private gain.

Ruble = 22.79/$1.00 (NY rate)

Ruble = 22.89/$1.00 (CB rate)

Ruble = 25.73/1 euro (CB rate)

Sep Oct Nov Dec Jan Feb

G-7 Considers Russian Crisis

· Later this month in Japan, the Group of Seven (G-7) top finance officials will meet Russian representatives to help Moscow resolve its foreign debt issue. This decision was made after a request from Germany, which will host the gathering in Bonn on Feb. 20 of the G-7 finance ministers and central bank governors. The official said the G-7 and Russian delegates will get together on the sidelines of the G-7 session. The G-7 does not expect to make particular headway over long-delayed resumption of International Monetary Fund (IMF) loans or rescheduling Russia's external debt. Russia effectively defaulted on the debt last August. Its total foreign debt, excluding interest, is some $145 billion. This year's pay

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ments totals $17.5 billion, but only $9.5 billion is budgeted.

In an interview published in Izvestia, President of the International Chamber of Commerce (ICC) Adnan KASSAR believes that it is more important for Russia to win, "investors' confidence in its State institutions, in its judiciousness, in its political stability and integrity," than to receive an infusion of funds from outside sources. He said, "a country usually wins investors' confidence gradually by strengthening good indicators in politics and economics. Only when Russia wins confidence, it will be able to count on an influx of the "right" kind of investments—not just short-term speculative money, but long-term direct capital investments by large transitional corporations which will be convinced that by investing their capital in Russia's future, they do not run a risk." KASSAR said that the ICC wants to share knowledge on, "legal instruments, ways to protect intellectual property, techniques to fight extortion and bribery, the creation of effective taxing mechanisms, businesslike advice on how to improve the customs regulations, and experience in settling commercial disputes through arbitration."

Business

Tupolev-334 Makes Maiden Flight

· The 100-seat Russian airliner, the Tupolev-334, which is the same class as Boeing's 717 model and European Airbus' A-319, made its maiden flight from an airfield in Moscow's suburbs. Russian aviation officials hope the new jet will quickly pass certification and enter mass production, replacing hundreds of ancient, fuel-thirsty Russian models on short-haul domestic routes. The Tu-334 will replace 30-year-old Tu-134 aircraft, which were banned from international flights because they fail to meet strict noise and pollution regulations, but are still in service in Russia for lack of alternative aircraft to replace them. The new jet is seen as a breakthrough by Russian aircraft designers, with Western-standard interiors and fuel consumption half that of the Tu-134. The jet will have a range of 2,000 kilometers (1,200 miles) with a full payload of 100 passengers and cargo. It will be manufactured at several plants in Russia and Ukraine. Iran and China have shown an interest in purchasing the jet, and talks have been held with Iranian companies on possible production of the Tu-334 in Iran to

supplement Iran Air's Dutch-made Fokker F-100s. Fokker has gone out of business, and Iran is unable to buy new Western aircraft because of US-imposed trade restrictions against the country. Tupolev expects to sell the Tu-334 for between $15 million and $19 million each, depending on the modification.

European Republics

Belarus-Russia Union Gets Boost

· Russian Prime Minister Yevgeny PRIMAKOV and his Belarus counterpart Sergei LING today co-chaired the meeting of the Executive Committee of the Union of Belarus and Russia (UBR) in Moscow. PRIMAKOV said, "the striving for the unification of Russia and Belarus must be backed up economically. There can be no highly effective economic cooperation as long as there no common conditions for the operation of economic entities in the two countries." He stressed that, "When we speak about creating equal conditions for economic entities, we must discard time-serving and narrow sectoral interests and regard problems from statesmanly positions." He encouraged boosting bilateral trade. PRIMAKOV said that, "the Russia-Belarus unified state must be formed stage-by-stage." He reminded participants that the steps of integration are outlined in the Declaration signed by Boris YELTSIN and Alexander LUKASHENKO on December 25, 1998, on Further Unification of Russia and Belarus. PRIMAKOV reiterated his support for the introduction of a common currency.

Ukraine To Sell Odessa Oil Refinery Stake

· Ukrainian State Property Fund on Wednesday announced plans to auction two stakes of 25.95 percent in the company which owns and operates the Odessa Oil Refinery on March 12th. The Fund has set the price for each stake in the company at 13.634 million gryvnias ($3.978 million). Terms for the winner include an investment of at least $600,000 to upgrade the plant and the repay 50 percent of its outstanding debts. The winner would be required to supply at least 1.2 million tons of crude annually for the next five years. The company reported losses of 1.33 million gryvnais in 1998, compared to profits of 12.25 million gryvnias in 1997. In 1998, the Odessa Oil Refinery processed 1.990 million tons of oil in 1998 and produced 294,400 tons of gasoline and 549,600 tons of diesel fuel.

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Ukrnafta Reports Profits For 1998

· Ukraine's major oil and gas company Ukrnafta on Thursday reported pre-tax profits of 506 million gryvnias ($147.65 million) for 1998 an increase from 418 million gryvnias. The final financial data from Ukrnafta, which accounts for about 85 percent of all oil produced in Ukraine, are expected in March. Ukrnafta produced 2.99 million tons of crude oil and gas condensate in 1998, compared to 3.02 million tons in 1997. The state holds a 61.23 percent stake in the company, while workers have 8.6 percent and financial firms hold 30.17 percent. Ukrnafta shares are listed on the PFTS over-the-counter electronic trading system, which accounts for one-third of Ukraine's fledging capital market. Ukrnafta plans to issue level-one American Depository Receipts (ADRs) and has already started a Regulation S Global Depository Receipt (GDRs) program through the Bank of New York.

Meanwhile, Ukrainian President Leonid KUCHMA signed a decree firing Energy Minister Alexsei SHEBERSTOV for "serious faults in his work." The President also noted that SHEBERSTOV was responsible for continued power cuts to rural areas.

Latvia Joins World Trade Organization

· Latvia on Wednesday became the 134th member of the World Trade Organization (WTO), the Geneva- based WTO announced. Thirty countries and regions, including China, Russia and Latvia's neighbors Estonia and Lithuania, are currently negotiating their membership in the organization.

South Caucasus & Central Asia

Georgia Cuts Chevron Oil Transit Tariff

· Chevron Georgia's general director David KHURODZE said that Georgia had agreed to cut its oil transport fee from $7.75 to $5 per ton. It is Georgia's hope that this will clear the way for a planned doubling of Chevron exports from its Tengiz project in Kazakhstan through Azerbaijan and Georgia. Chevron has expressed an interest in increasing

annual shipments of oil from 2.5 million tons in 1998 to 4 million tons (80,000 barrels per day) in 2002. The crude oil is being delivered to world markets from the Georgian Black Sea port of Batumi. Chevron had said that export through Azerbaijan and Georgia was not profitable at $7.75 per ton. Azerbaijan agreed in January to lower its tariffs if Georgia would do the same. Chevron is also working on increasing its exports through a project to renovate an existing pipeline which links the Georgian city of Khashuri with Batumi.

Armenian Bodyguards Arrested

· A spokesman for the Armenian Prosecutor General's office said that the two bodyguards of the late General Artsun MARKARYAN were arrested. They have denied the charge and claim he may have committed suicide after he dismissed them Monday evening. On Tuesday MARKARYAN, Armenia's Deputy Interior Minister and National Security Minister, was found dead on the side of a highway leading to Yerevan. The bullets that killed MARKARYAN were fired from his own Smith-Wesson pistol, which was found near the body. The RFE\RL Newsline reported that President Robert KOCHARYAN said that, "there is a real hope," that the murder will be solved swiftly, as the circumstances are "apparently simpler," than those surrounding the murders of two other senior officials in recent months.

Criminal activities involving Armenians appears to be occurring outside the country as well. On February 3rd, Federal Security Service (FSB) personnel arrested and Armenian in Tver on the suspicion of espionage. Karmen TUNAN was said to be in possession of an automatic pistol with a silencer and an identification card from the Armenian Interior and National Security Ministry.

The Daily Report on Russia

and Former Soviet Union

will not be published February 15th

in observance of President's Day

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

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