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

Wednesday, February 17, 1999

Primakov Calls For Approval Of Budget

· Addressing the Federation Council on Wednesday, Prime Minister Yevgeny PRIMAKOV called on the upper house to approve the 1999 federal budget. He said, "the 1999 budget is really tough, it is not suitable for many, but it is necessary." PRIMAKOV assured governors that all issues, connected with budget funding of regions, can be settled after the adoption of the 1999 budget including monthly meetings with the leadership of the Finance Ministry. "Our main task now is to approve the budget so that it comes into force. I also asked the President to take a decision on the budget at the earliest." He pointed out that without an approved budget, it is difficult for the government to ensure funding and administration of economic sector. It is also stalling negotiations with the International Monetary Fund, the Paris and London Club and other Western banks. Deputy Prime Minister Valentina MATVIYENKO told the Council that the proposed budget is, "balanced according to the present-day economic situation and according to our possibilities." She said that the government is simultaneously working on boosting the revenue section, looking for additional sources.

Economy

Russia, Western Banks Negotiations To Begin

· Russia and Western banks will begin negotiating in London on February 18th on parameters of Moscow's restructured payments on the overdue Treasury bills and bonds. The talks will be attended

Russian Federation

Politics

Hahn Describes EU-Russia Summit Agenda

· Head of the Russian office of the European Commission Ottokar HAHN said that the European Union (EU) and Russian summit, which opens on February 18th, will focus on the political and economic situation in Russia. The sides will discuss the anti-crisis program of the Russian government, reforming of the banking system, conditions for the development of trade and economic relations and investments. The Russian State Statistic Committee estimates that one fifth of Russia's economy operates in the shadows, concealing or under-reporting their income to avoid taxes. The second package of issues deals with the situation in the EU and prospects for the development of EU-Russia relations. The European delegation will submit to the Russian side new strategies for relations with Russia, which have been developed by the European Commission. The sides will also discuss EU expansion and influence of the euro on the Russian economy. The third package includes international issues, influencing the interests of the EU and Russia, including questions of European security, as well as relations in the framework of the Organization for Security and Cooperation in Europe, drafting of a European Security Charter, the Kosovo situation, etc, Itar-Tass reported. The topic of relations between Russia and the EU in the framework of the operating Partnership and Cooperation Agreement will also be examined separately. The summit will be attended by German Chancellor Gerhard SCHROEDER, holding the rotating presidency in the EU, German Foreign Minister Joschka FISCHER and European Commission president Jacques SANTER who will be accompanied by Hans VAN DEN BROEK, responsible for foreign affairs in the European Commission.

Today's News Highlights

Russia

Who Will Lead IMF Loan Talks?

Murdoch Seeks Media Stakes

European Republics

Rus-Ukraine Treaty Approved

Naftogaz Ukrainy Signs Contract

South Caucasus & Central Asia

Georgian State Of The Union

Cigarettes-Deficit Study

Guseinov Snetenced To Life

Chevron Plans Oil Investments

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Wednesday

February 17, 1999

Intercon's Daily

by a delegation of the Russian Ministry of Finance led by Deputy Minister Mikhail KASYANOV and representatives of 19 banks six of which are members of the banks' committee led by Deutsche Bank. The sides will also consider using ruble capitals of Western investors to be received in payment for the T-bills for buying both Treasury bills of the Russian Vnesheconombank and shares of the leading industrial companies of that country. A preliminary coordination of the T-bill debt restructuring had been prepared by the Finance Ministry and the West in November 1998, when Moscow offered to pay 10 percent of the debt in cash and issue new long-term Treasury bills in payment for the remaining 90 percent of the debt. In the opinion of the Western side, in that case only 3 percent to 5 percent of the capitals invested in the T-bills will be returned. That is approximately $200 million. One more problem in the talks is the time of "freezing" part of the T-bill proceeds on special accounts in Russia and the repatriation of the capital. The Finance Ministry fears that investors, permitted to buy shares with "the restructured rubles," will immediately start selling them and take the money out of the country.

Ruble = 23.11/$1.00 (NY rate)

Ruble = 22.87/$1.00 (CB rate)

Ruble = 25.68/1 euro (CB rate)

Who Will Lead IMF Loan Talks?

· Confusion has been developing in the Central Bank, Finance Ministry, and Russian government as to who is responsible for negotiating loan talks with the International Monetary Fund (IMF). On Tuesday spokesmen for the Russian government said they did not know who will represent Russia at a Bonn meeting of Group of Seven finance ministers beginning on Friday. When asked who is in charge of IMF talks, First Deputy Prime Minister Yuri MASLYUKOV said, "it is [Finance Minister Mikhail] ZADORNOV and myself, but I don't know who's the main one." ZADORNOV was not available for comment, but Deputy Prime Minister Valentina MATVIENKO said, "Yuri MASLYUKOV will lead the talks. On the expert level the finance minister has been asked to take a more active role, but that does not mean that ZADORNOV obtained any special functions. They will work together more actively." Others said that the government was considering naming former prime minister Viktor CHERNOMYRDIN as presidential

envoy to international financial institutions, REF\RL Newsline reported. MATVIENKO said, "The issue of naming Viktor CHERNOMYRDIN hasn't been discussed by the government." Nezavisimaya Gazeta reported that ZADORNOV has prepared the most recent package of documents sent to the IMF because the, "careless and sometimes inappropriate words about the political motives of the negotiations" spoken by MASLYUKOV.

Business

Murdoch Eyes Russian Media Outlets

· Media giant Rupert MURDOCH's interest in Russian media outlets has sparked rumors and new legislation. Local reports earlier stated that MURDOCH and business tycoon Boris BEREZOVSKY were holding talks to launch a joint project, if they purchased 101.7FM from SBSAgro Bank and renamed the new station Nashe Radio, the RFE\RL Newsline reported. MURDOCH was also involved in negotiations with BEREZOVSKY to acquire a 20 percent stake in ORT. This interest prompted Deputy Prime Minister Valentina MATVIENKO to ruled out the sale a stake in Russian Public Television (ORT) to an international entity or foreigner. MURDOCH has now expressed interest in purchasing shares in TV-6, one of Russia's most politically independent channels. The TV channel is owned by Eduard SAGALAEV (37.5 percent), BEREZOVSKY (37.5 percent), LUKoil (15 percent), and the Moscow Science and Technology Committee (10 percent). Kommersant-Daily newspaper predicts that Moscow Science and Technology Committee's head Vladimir YEVTUSHENKO will oppose the sale.

Sidanko Head Resigns, Firm Faces Bankruptcy

· Financier and head of MFK Renaissance financial group, Boris JORDAN on Thursday resigned as chairman of Russian oil company Sidanko, which is facing bankruptcy proceedings. Spokesman for MFK Modest KOLEROV said, "The decision was motivated by the possibility of conflict of interest between Sidanko's creditors and shareholders if the bankruptcy proceedings start as one of MFK Renaissance's funds is a shareholder and creditor." JORDAN's term at Sidanko has only been two months; he was appointed chairman on December 7, 1998. His replacement is expected to be nominated at a board meeting to be held this week. Sidanko's

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President Boris VOLKOV also resigned and Dmitry MASLOV, formerly executive vice president, was nominated as acting president. Sidanko, in which BP Amoco owns a 10 percent stake, will enter into court hearings on March 2nd. BP Amoco is hoping that an external advisor will be appointed to guide Sidanko through the crisis. Deputy head of the Fuel and Energy Ministry's department of foreign and economic relations Alexander MISIULIN said that the government has not yet decided whether to accept Sidanko's offer to give the state its troubled Angarsk Refinery in settlement of tax arrears.

Gazprom signed a contract Thursday for the transport of 166 billion cubic meters of Russian gas to third countries across Ukrainian territory in 1999. According to Naftogaz Ukrainy President Igor BAKAI, the 1998 agreement stipulated the transit transportation of 114 cubic meters of Russian gas, but actually the deliveries added up to 120 billions. In payment for transmit services, Gazprom had delivered to Ukraine 31.9 billion cubic meters of gas in 1998. Since Gazprom had repeatedly blamed Ukraine lately of unlawfully drawing Russian gas for its needs from the transmit pipelines, it was decided to install gas meters on the transit pipelines at places where they cross the Ukrainian border.

South Caucasus & Central Asia

Georgian State Of The Union Address

· Georgian President Eduard SHEVARDNADZE on Wednesday presented his State of the Union address to the Georgian parliament, touching on both economic and political issues. He said, "The annual inflation level in Georgia this year will be kept at 10 percent." He said that the exchange rate of the lari would be between 2 to 2.5 lari to the dollar and that gross domestic product (GDP) would amount to about 8.5 billion lari. SHEVARDNADZE pointed out that these figures had been agreed upon with the International Monetary Fund (IMF) and been used when developing the budget. He told parliament members that, "It is necessary to reduce spending and the budget deficit and bring these indicators fully into line with the parameters agreed with the International Monetary Fund." Forecasted revenues will total 1.3 billion lari and the deficit has been set at 399 million lari. The President noted that 114 million lari of the deficit will be covered by domestic resources and an issuance of treasury bills worth 12 million lari. He ruled out printing money to fill budget gaps. The Georgian government and the IMF entered into an agreement on this budget. However, the Georgian parliament's figures are $77 million off the budget's targeted figures. Georgia has until this Friday to reach an agreement between the government or Friday. Otherwise the IMF will withdraw funding support for Georgia. In turn, the World Bank would also withdraw its financial loans. SHEVARDNADZE said that poor tax collection was the main reason behind the 1998 budget crisis. Georgian tax collection reached only 9 percent of GDP. While the

European Republics

Rus-Ukraine Treaty Passed, But Amended

· The Russian Federation Council Wednesday ratified the Treaty of Friendship, Cooperation and Partnership with Ukraine by a vote of 106 to 25 with 17 abstentions. It was amended by Prime Minister Yevgeny PRIMAKOV that the treaty will go into effect after Ukrainian parliament ratifies three agreements on the Black Sea Fleet. The treaty, signed by Russian President Boris YELTSIN and Ukrainian President Leonid KUCHMA on March 31, 1997, was ratified by Russia's State Duma on December 25, 1998, by a vote of 243 to 20 with four abstentions. The Federation Council debated the treaty on January 27th, but concerns over the future of the Crimean peninsula and the Black Sea port of Sevastopol forced speaker Yegor STROYEV to postpone the ratification until Wednesday. The three accords, signed by the Ukrainian and Russian Prime Ministers on May 28, 1997, set the terms for basing Russian ships in Ukraine's Sevastopol port for 20 years. Under the accords, Russia would pay Ukraine $100 million. The Ukrainian parliament approved the treaty without mentioning the Black Sea Fleet accords on January 14, 1998. In his brief speech the Russian Prime Minister said, "we do not like some things in our relations with Ukraine, but the problem at issue now is whether we shall enhance differences or remove them, whether we shall aim at rapprochement or drift apart." He added, "The ratification of the treaty with Ukraine is important in order to remove obstacles between us."

Ukraine-Russia Sign Gas Contract

· The Kiev-based Naftogaz Ukrainy national joint-stock company and the Russian gas monopoly

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President's economic plans were met with skepticism, his ideas for political changes were met with hostility from opposition parties. SHEVARDNADZE proposed amending the Georgian Constitution to provide for the re-introduction of a prime minister position. This post was abolished in 1995. The President believes that a prime minister would have more authority and control within the executive branch and lead to greater efficiency in government. He stressed that this change would not diminish the principle of "strong president—strong parliament."

Illegal Cigarettes Imports Cost Georgia $

· A study published by The Caucasian IRIS Center on the subject of Cigarettes and Deficit in Georgia shows the volume of unregistered cigarette import caused significant damage to the Georgian fiscal budget. Unregistered cigarettes imports to Georgia in 1997 exceeded the volume of registered one by five times. The wholesale prices form imported cigarettes were considerably undercut. The average price for a pack of imported cigarettes in Georgia is $0.004, while on the world market it is $0.22. In 1998 trade deficit in this sphere was $93 million. The amount of uncollected excise tax for realized cigarettes in 1998 was no less than 115 million lari or 41 percent of Georgia's fiscal deficit in 1997. The excise tax in 1997 was 11 tetri and in 1998 was 25 tetri. Taking into account these figures, collected taxes in 1997 could have been 62 million lari and in 1998 142 million lari. However, in 1997 only 28 million lari in taxes were collected and in a period of nine months in 1998 only 20 million lari.

Guseinov Sentenced To Life For Coup Attempt

· Azerbaijan's former prime minister Suret GUSEINOV on Monday was sentenced to life in prison for his alleged role in a plot to overthrow the government and assassinate President Geidar ALIYEV. GUSEINOV broke into hysterical laughter as the Supreme Court announced its verdict, finding the 40-year-old man guilty of high treason, with 30 counts cited in the sentencing, the United Press International reported. The court's ruling, which

follows a seven-month trial, is considered final and can't be appealed. GUSEINOV led a military uprising in 1993, and forces loyal to him seized control of western Azerbaijan and marched on the capital Baku from his power base in Gyandzha. The then-president Abulfaz ELCHIBEY fled to Russia and ALIYEV, who was speaker of parliament, became president. GUSEINOV was awarded the position of prime minister, until he fell out with ALIYEV. After failing to unseat ALIYEV from the presidency, he left Azerbaijan. Following Azeri requests, Russian police arrested GUSEINOV in Moscow in 1996 and extradited him to Baku to stand trial. The court accused GUSEINOV of plotting two coup attempts in 1995 and 1996, as well as planning an assassination of ALIYEV. He was also charged with gun running, drug smuggling, leading an armed mutiny and betrayal of his country. The only charge GUSEINOV pleaded guilty to was illegal possession of a weapon.

Chevron Pledges Investment For Kazakhstan

· The President of Chevron Overseas Petroleum Inc. Nick ZANA told the chairman of Kazakhstan's lower house of parliament Marat OSPANOV on Friday that his company will continue its investment plans in Kazakhstan's oil sector, RFE\RL Newsline reported. Chevron invested $550 million in the TengizChevrOil joint-stock company in 1998. This year Chevron plans to invest $450 million, despite falling world oil prices. TengizChevrOil produced 8.5 million tons of oil in 1998 and is expected to produce 9 million tons this year. However, Chevron has temporarily closed a transport route from the Tengiz project in Kazakhstan through Azerbaijan to Georgia. Chevron had expressed an interest in increasing annual shipments of oil from 2.5 million tons in 1998 to 4 million tons by 2002. Georgia on Friday agreed to lower its oil transportation tariff from $7.75 per ton to $5 per ton to make it competitive during the drop of world oil prices. In January, Azerbaijan agreed that it too would lower tariffs if Georgia would do the same. So far, Azerbaijan has failed to reciprocate. This failure has lead to the temporary closing of this gas transportation route.

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

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