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, February 18, 1999

European Commission president Jacques SANTER, German Foreign Minister Joschka FISCHER, and Hans VAN DEN BROEK, in charge of foreign relations in the European Commission. SCHROEDER, who holds the rotating EU chairmanship on his arrival said, "Our arrival is also a political sign, which demonstrates that we seek to develop Russia-EU relations in all directions." He said the aim of the summit is very simple: "we know that Russia is EU's most important partner, and we have worked out a common strategy towards Russia." The EU and Russia will discuss Russia's anti-crisis program, banking sector reform, the condition of trade and economic contacts, and investment. The summit will address international matters involving the EU and Russia, with a focus on Russia-EU relations along the lines of the effective partnership and cooperation agreement. The EU hopes discussions will help overcome obstacles which have blocked food aid deliveries. The EU food aid package first delayed by concerns over import duties and corruption received a second set back when Russian officials complained about the quality of the grain and other products to be delivered. In addition to food aid, Russia will be seeking financial assistance. Germany has followed the West's lead by stressing the need for economic reforms as a condition for addition aid. Deputy director of the Carnegie Moscow Center Dmitry TRENIN said, "It's sad, but Russia's foreign policy has been reduced to a large extent to begging for money. Russia is no longer a pole [of influence]," the Financial Times reported.

Russian Federation

Politics

Document On Impeachment Presented To Duma

· The impeachment committee of the Russian State Duma today presented it findings to the Duma's managing council, recommending the impeachment of Russian President Boris YELTSIN. The council has decided to send the document to all political groups with representatives in the Duma. YELTSIN faces five charges, each to be voted on individually. None are likely to receive the support of 300 out of 450 deputies needed for passage. Communist lawmaker Viktor ILYUKHIN who represents the prosecution in the commission said that the Duma may vote on impeachment in mid March. He believes that the Liberal Democratic Party (LDPR) will not support impeachment regardless of the situation. The Our Home Is Russia faction and part of the liberal Yabloko faction may also vote against. Aleksei MITROFANOV of the LDPR said his party is requesting details on the investigation into the undeclared war on Chechnya and the use of force to crackdown hard-liner deputies in October 1993. The three other charges are: accusations of destroying the Soviet Union in 1991, ruining Russia's armed forces, and genocide against the Russian people due to economic hardships. If any charge is passed, it will be reviewed by the Constitutional Court, the Supreme Court, and the Federation Council. YELTSIN's aide Oleg SYSUEV said that the presidential administration is prepared to take part in any discussion of the findings.

EU-Russia Summit To Boost Ties

· The European Union (EU)-Russia summit opened today in the Kremlin, with the Russian side represented by President Boris YELTSIN, Prime Minister Yevgeny PRIMAKOV, Deputy Prime Minister Vladimir BULGAK and Foreign Minister Igor IVANOV and the EU by German Chancellor Gerhard SCHROEDER,

Today's News Highlights

Russia

Iran-Russia To Boost Trade

Lucent-SviazStroy-1 Form JV

Gazprom Plans Continue

European Republics

Belarus Denies Arms Sales

Foreign Investment Rises In Kiev

South Caucasus & Central Asia

Russia Defense Arms Build-up

New Armenian Banknotes

Five Suspects In Uzbek Bombing

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Thursday

February 18, 1999

Intercon's Daily

Economy

Ruble = 22.87/$1.00 (NY rate)

Ruble = 22.92/$1.00 (CB rate)

Ruble = 25.81/1 euro (CB rate)

Federation Council Approves 1999 Budget

· The Russian Federation Council on Wednesday approved the 1999 federal budget by an overwhelming vote of 130 to 18 with three abstentions. The budget sets expenditure at 575.4 billion rubles (about $25 billion) and revenue at 473.7 billion rubles (about $20.1 billion). The gross domestic product (GDP) is projected at 4 trillion rubles ($1743.9 billion) and inflation at 30 percent. Deficit is set at 101.4 billion rubles ($4.39 billion), or 2.54 percent of GDP. The budget, which has already cleared the State Duma and will enter into force after President Boris YELTSIN signs it into law. Approval of the tough budget was seen as support for Prime Minister Yevgeny PRIMAKOV, who admitted that the budget has its faults. He said, "You have paved the way to intensive work in the economy...We've aspired to make this budget socially oriented as well as realistic." The International Monetary Fund (IMF) and other western lending institutions have criticized the budget as overly optimistic. Loans from the IMF and World Bank are contingent on an agreement between the IMF and the Russian government. The IMF has said it will not provide any loans unless the Russian government overcomes internal resistance and goes ahead with free-market reforms. Former first deputy chief of the central Bank Sergei ALEXASHENKO said that the new budget is likely to implode by midsummer if no IMF money arrives. The 1999 budget assumes new IMF loans, although none have been promised. He also predicts that foreign creditors will start seizing Russian assets abroad.

Iran-Russia To Boost Trade

· Participants in the Iranians-Russian round-table discussion on Wednesday agreed that Iranian-Russian trade and economic cooperation remains behind their political relations. Head of the Russian Foreign Ministry Asia Department Alexander ALEXEYEV said that the trade turnover between the two countries reached $516 million in 1998. The round-table participants stressed the need to strengthen trade and economic cooperation in 1999, which will facilitate the implementation of political resolutions of the two countries aimed at expanding

Russian-Iranian interaction. The round-table conference is being attended by diplomats, political experts and businessmen, with the Russian delegation led by Vitaly NAUMKIN, head of the Russian center for strategic and international research.

Meanwhile in Moscow, Russian Deputy Foreign Minister Georgy MAMEDOV received Iranian Ambassador to Russia Mehdi SAFARI today to review results of the consultations on the level of deputy foreign ministers and to prepare a visit of Russian Foreign Minister Igor IVANOV to Iran.

Business

Lucent-SviazStroy-1 From Joint Venture

· Lucent Technologies and SviazStroy-1, in a Lucent press release, today announced the formation of a joint venture company to manufacture fiber optic cable to meet the growing demand for network operators in Russia and other members of the Commonwealth of Independent States (CIS). The new company based in Voronezh, named Lucent Technologies SviazStroy-1 Fiber Optic Cable Company, will initially employ 60 people. Lucent will be the majority owner in the joint venture with a 51 percent share and SviazStroy-1, the largest construction company implementing orders of Rostelekom and regional PTT in Russia, will own 49 percent. General Director of SviazStroy-1 Anatoly ROGOZIN said, "Modern communications network have created a growing demand for high-quality fiber optic cables. Lucent's technology and manufacturing experience will ensure our joint venture produces the industry's most advanced fiber optic cable at a competitive price. SviazStroy-1, in cooperation with Lucent Technologies, will provide construction and turn-key projects for sophisticated communications and information systems deployment." The governor of Voronezh said, "USA investment into the Russian economy will deliver technologies that will serve as a foundation for our economic growth. The establishment of this venture will contribute to everyone by adding new jobs to the area and transferring advanced management and production experience to our factories. We are optimistic that other high-tech manufacturing ventures will follow as a result." Lucent Technologies, with investments of up to $30 million in Russia in recent years, has more than 400 employees at nine locations in Russia, CIS in manufacturing, sales, and service operations in the cities

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of Moscow, St. Petersburg, Irkutsk, Ekaterinburg, Kiev, Almaty, and Voronezh. President of Network Products Group for Lucent Technologies Bill SPIVEY said, "This is a vital, growing market for us, and we believe our new partner SviazStroy-1, will be a key to our success with this venture...Today's announcement is a further indication of Lucent's commitment to the Russian marketplace—and our plans to be a major force in this part of the world."

Gazprom's Pipeline Plans Continue

· Russian Gazprom gas monopoly's chairman Rem VYAKHIREV said that the gas company is expected to receive in August-September the first installment of a $1.3 billion Italian loan for the construction of the gas pipeline from Russia to Turkey. The 400-kilometer-long pipeline will go across the Black Sea bottom has a total price tag of $1.7 billion. A memorandum of understanding on a joint participation in the prospect was signed in Moscow early in February between Gazprom and the Italian gas and oil company ENI. The pipeline's capacity is about 16 billion cubic meters per year. Yuri GORYAINOV, a member of the Gazprom board of governors said that construction is scheduled to begin in the third quarter of 1999. Signatories of the contract for construction to be signed in late March or early April will be Gazprom and the French construction company Bouygues as key parties, and Italian companies ENI, SNAM and Saipem, GORYAINOV said. Gazprom is also considering plans to build the second line of the Yamal-Western Europe gas network. GORYAINOV said that Gazprom is not planning any cuts and on the contrary intends to boost building work. He believes that the European direction, "can be strengthened by other projects aimed at supplying Russian fuel to European markets." The construction of the first line of the gas main, valued at about $1.5 billion, is to completed in the autumn of 1999. Work to build the second line is expected to begin immediately after that.

contract for any delivery of weapons to Iraq." He said his country supports Arab nations in the Middle East peace process and Minsk finds the Western policy of double standards unacceptable. Certain events are shaped by the hegemonic aspirations of the United States, LUKASHENKO said.

Foreign Investment In Ukraine Rises

· According to a report released by the Ukrainian State Statistics Committee on Saturday, Ukraine attracted $920 million in foreign investment in 1998. This is an increase of 21.5 percent up from 1997 figures. Ukraine has drawn a total of $2.78 billion of foreign investment since it declared independence from the former Soviet Union in 1991. The US is the biggest investor in Ukraine, with an investment of $510 million, followed by Holland and Germany, with $260 million and $230 million respectively.

South Caucasus & Central Asia

Russian Military Defends Weapons To Armenia

· The Chief of Staff of The Russian Air Force Colonel General Anatoly KORNUKOV is meeting with Armenian Defense Minister Vazgen SARKISYAN and will inspect the Armenian section of the Commonwealth of Independent States united anti-aircraft system. He will also meet with Russian military personnel deployed in Armenia. Five MiG-29 fighter jets, S-300v anti-aircraft complexes and a radar stations will be deployed at the Russian military base in Armenia. During KORNUKOV's previous visit December 15 to 16, 1998, five MiG-29s were flown into Armenia. Russian arms deliveries to Armenia are not new. In April, 1997, the Russian Defense Committee chairman ROKHLIN told the Russian State Duma that deliveries of weapons and military material violating the CFE Treaty totaled $1 billion. The Russian Colonel General said that the decision to deliver these weapons is in accordance with a plan to modernize the Russian military base in Armenia. He said, "the base currently has an obsolete air-defense missile system, which does not meet the requirements of contemporary conditions." Onshchaya Gazeta claimed that the deployment of the S-300 systems and additional MiG-29 aircraft is intended to protect Russia's Armenian base from a possible attack by NATO missiles and fighter aircraft stations at the Incirlik base in eastern Turkey. If correct, this will only further aggravate tensions in the region especially with Turkey.

European Republics

Belarus Denies Arm Sales To Iraq

· Belarussian President Alexander LUKASHENKO Wednesday denied allegations that his country provided weapons to Iraq against UN sanctions. LUKASHENKO said he is personally in charge of the country's arms trade but has not, "signed a single

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According to an Azerbaijan Foreign Ministry statement on January 29th, "Azerbaijan considers the military cooperation between Russian and Armenian and the Russian military presence in Armenia as a threat to its security, particularly since the Russian military base is being used to strengthen the military means of the Armenian armed forces and since the military personnel of that base is being used in the context of an armed aggression waged by the Republic of Armenia against the Azerbaijan Republic. Azerbaijan believes that the strengthening of Russia's military presence in Armenia may have unforeseeable consequences for the region and beyond." However, KORNUKOV said that the military build-up, "is in favor of the states bordering Armenia, rather than Armenia itself." As Russian continues to escalate the arms build-up in the region, neighboring countries fear more instability rather than security.

Azeri-Turkey Denounce Arms Proliferation

· Turkey and Azerbaijan called for the further development of bilateral relations and the soonest settlement of the Nagorno-Karabakh conflict which poses a threat to peace and stability in the Caucasian region. Azeri Foreign Minister Tofik ZULFUGAROV met with his Turkish counter part Ismail CEM in Ankara on Wednesday. CEM said, "We are anxious about the recent arms proliferation in the Caucasus. We don't want the region to become a maneuvering zone for larger countries. The Caucasus belongs to the Caucasian countries, and it should remain like that." Both ministers said that the build-up of military arms in Armenia gives a negative impact on the situation in the region. They said that Turkey supported Azerbaijan's willingness to develop relations with NATO and its plans to join the Council of Europe.

Armenia To Introduce New Banknotes

· Armenia will put into circulation new 1,000 and 20,000 dram Banknotes on March 1st. Head of the Central Bank's department of emission operations and money reserves Gavork TUMANYAN on Monday said that the 1,000 dram Banknotes will bear the portrait of poet Yegishe CHARENTS (1897-1937)

and the 20,000 dram Banknotes will have the picture of painter Martirosyan SARYAN (1880-1972). He explained the introduction of new Banknotes by the fact that the old ones have already worn out and by the need to augment the Central Bank's reserves. Old 1,000-dram Banknotes will remain in circulation along with the new ones until February 2004. TUMANYAN stressed that the introduction of new Banknotes will not devalue the dram. He said that the Central Bank has enough 10, 25 and 200 dram Banknotes and there is no need to replace them. However, the bank is printing new 500 and 5,000-dram Banknotes, which will be put into circulation by the end of the year. All new Banknotes have security features and are printed by the British company De La Rue. One US dollars can buy 540 drams.

Bombing Suspects Arrested In Uzbekistan

· The Uzbek Interior Ministry has arrested at least five suspects accused of organizing the series of bombs that went off in Tashkent on Tuesday damaging government buildings in the city's Independence Square. The bombings killed 13 people and injured 128 others. Uzbek Interior Minister Zakir ALMATOV said there were six bombings in various parts of the city from 10:52 a.m. to 12:00 p.m. local time. The explosives had been planted in cars. Uzbek President Islam KARIMOV and condemned the bombings, calling them an attack on his life. No group has claimed responsibility for the attack. The list of possible aggressors include the Islamic extremist sect the Wahabis, organized crime, and forces within Afghanistan, Tajikistan, and Russia.

Executive Secretary of the Commonwealth of Independent States (CIS), Boris BEREZOVSKY, believes the blasts could hardly have been related to the mafia. "I believe it is political struggle in Uzbekistan that is manifested in this way. Uzbekistan that until recently could be regarded as one of the most stable countries has also been affected by painful processes involved in the formation of new states in the post-Soviet expanse." BEREZOVSKY is "confident that the situation in Uzbekistan will stabilize."

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