DAILY REPORT ON RUSSIA

AND THE FORMER SOVIET REPUBLICS

INTERCON INTERNATIONAL USA, INC., 725 15th STREET, N.W., SUITE 903,

WASHINGTON, D.C. 20005 -- 202-347-2624 -- FAX 202-347-4631

Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Thursday, February 25, 1999

Russian Federation

Politics

Russian-Chinese Relations For 21st Century

· Russian President Boris YELTSIN and Chinese Premier ZHU Rongji discussed long-term strategic cooperation, aimed at the 21st century, in the Kremlin today. Chief of the foreign policy division of the Russian president's office Sergei PRIKHODKO said that YELTSIN and ZHU examined progress and implementation of earlier signed agreements. Prime Minister Yevgeny PRIMAKOV and ZHU later today are expected to review fuel and energy cooperation agreements. The Unified Energy Systems or Russia, (UES), and China's State Energy Corporation are going to sign a framework cooperation agreement which in particular calls for larger electricity exports to China. In an extension of the agreement, Russians propose building up soon electricity exports from the Russian Far Eastern Amur energy system to an annual 400 million kilowatt-hour. Experts forecast that exports of surplus electricity from eastern Siberian electric stations could increase to five billion kilowatt-hour. In the long term, electricity could be exported from Bureiskaya and Boguchanskaya electric stations, now under construction. Experts estimate that starting from 2003 or 2005, up to five billion kilowatt-hour of the output from these stations could be diverted to China. Deputy Fuel and Energy Minister Yelena TELEGINA today said that a schedule of measures for the implementation of the project for building a gas pipeline from the Kovytkino gas field to the People's Republic of China will be drawn up by a Russian-Chinese working group in March. An agreement for this a feasibility study of the building of a pipeline and the project will formally be signed today. After the study and gas reserves are confirmed, the route of the gas pipeline will be outlined.

Economy

Ruble = 22.82/$1.00 (NY rate)

Ruble = 22.84/$1.00 (CB rate)

Ruble = 25.17/1 euro (CB rate)

Economic Ministry Reports To The Cabinet

· The Russian government today held a special Cabinet session on investment in the real sector of the economy. Economics Minister Andrei SHAPOVALYUANTS reported on the investment situation and said that additional federal budget revenue this year can reach eight to nine billion rubles (about $400 million). According to the minister, in keeping with the law on the federal budget, one half of this additional revenue will go to pay state debts and the other half will fund planned spending under budget articles. He also said that Russia should attract up to 10 percent of the world market investments, a rise from its current one percent. He said the market annually accounts for $350 billion of investments. SHAPOVALYUANTS presented a Ministry package of measures to stimulate investment activities in Russia, since the economic devastation of August, 1998. He stressed in his report that those measures would make it possible "to ward off the threat of a collapse of the investment activities in the country, which is quite real now." These measures include an item on the need to provide insurance and guarantee support for investment process. For this purpose, it is planned to set up a Russian state agency to insure and guarantee credit investment risks. A

Today's News Highlights

Russia

Tax And Inflation Figures

Moringstar Meets Russian Cos.

European Republics

Baltic Economies Slow Down

South Caucasus & Central Asia

Georgia To Build Independence

Georgia-Japan Relations

Calls For End Of NK Conflict

Exxon Joins Azeri Project

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February 25, 1999

Intercon's Daily

measure to step up the use of assets held by enterprises was introduced.

First Deputy Prime Minister Yuri MASLYUKOV was even more optimistic about economic prospects and said the Economic Ministry's estimates were an understatement. He said that extra funds would either pay the country's external debts or to develop the economy's real sector. As concerns the writing of a budget before 2000, MASLYUKOV declined to specify the future budget's main parameters but noted that a governmental commission was actively working and "has already worked out a pattern and methods of work on the budget." He also predicted that Russian industrial output will increase by 1 percent to 1.5 percent in 1999 and by 4 percent to 6 percent annually in the following years. MASLYUKOV expressed confidence that the International Monetary Fund (IMF) will provide Russia with new loans, but did not specify an amount or a date of payment. However, he pointed out that Russia's economy will be hurt by this week's agreement requiring Russia to cut its steel shipments to the US by 70 percent in response to anti-dumping complaints.

Meanwhile testifying before the US House Banking Committee, Chairman of the Federal Reserve, Alan GREENSPAN said that Russia would not be helped or hurt by Fed actions in the coming months. He said, "It's not conceivable to me that anything we, the Federal Reserve, could do in either raising or lowering interest rates would have any material effect on the Russian financial system. He noted that Russia's problems are "so extreme" that they are beyond being affected by a quarter-point or half-point change in American interest rates or a world wide change in rates, The New York Times reported.

Tax Collection And Inflation Figures

· Deputy Tax Minister Sergei SHULGIN said Russia is expected to collect 16 billion rubles ($702 million) in tax in February, over the 15 billion rubles ($658 million) planned for the month. The February tax-collection rate will be lower than the 27 billion rubles ($11.8 billion) last December and the 20 billion rubles ($877 million) last January. SHULGIN said that tax figures are always lower in the beginning of a year. According to the State Statistics Committee, inflation in Russia in February will be 3.5 percent to 3.8 percent. The committee's report released on Wednesday indicates that consumer prices grew by 2.9

percent between February 1st and 22nd, including by 0.9 percent between February 16th and 22nd.

Business

Bridgestone Expansion Plans Until 2003

· Bridgestone launched operations at a wholly owned subsidiary in Moscow in January to sell wholesale tires for passenger cars, trucks and buses. Using this subsidiary as the axis of a larger network, the company plans to develop a chain of 200 links in the major cities of Russia by 2003. Within 1999, two directly operated stores will be opened in Moscow. The company will then seek independent tire retailers to join the network. Bridgestone expects net sales to reach 10 billion yen by 2003. Bridgestone is the first foreign tire-maker to initiate the development of a full-scale network in Russia, where the market is approximately 80 percent ruled by domestic makers. Bridgestone believes that passenger car production in Russia by 2003 could reach 1.3 million units, up 500,000 units from today's total.

Morningstar Meets With Russian Cos.

· Special adviser to the US President and to the Secretary of State on Caspian energy resources Richard MORNINGSTAR said that talks in Moscow today with LUKoil president Vagit ALEKPEROV, Central Fuel Company chief Yuri SHAFRANIK, and Gazprom executives, "helped to get a better understanding of each other's points of view." He said that theses talks, held "in an unofficial atmosphere," focused on the Caspian area, means to complete the geological survey of the oil and gas deposits on the Caspian shelf, and new transportation systems, specifically the possibility of implementing a project concerning a new oil pipeline Baku-Ceyhan. MORNINGSTAR said he also had a, "frank and very constructive discussion with Gazprom executives on the situation on European and Middle East gas markets and on the gas market in Turkey. We also touched upon the role of Turkmenistan-produced gas markets of CIS countries, Turkey, and Europe."

Novosibirsk Aviation May Sell Planes

· The Novosibirsk Aviation Company is holding negotiations with the Indian Defense Ministry on selling An-38-100 aircraft, the company's deputy general director Nikolai KUSHNIRENKO said last Friday. Two show flights of the An-38 in India drew interest from the local military. India may buy from six

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to ten aircraft, but the final order will be set at the next round of negotiations in March. KUSHNIRENKO said the company may soon receive an international certificate for the An-38 because of foreign civilian clients interested in the plane. The Russian certificate on the plane was given in April 1997. Exports of the An-38 will give the company circulating assets for a batch production of the aircraft which is so far delayed by scarce finances of Russian potential clients. Depending on accessories, the plane costs from $4.2 to $4.9 million. The Novosibirsk Aviation company has sold three An-38 aircraft to the Vostok Air Company servicing the Khabarovsk territory. Another five aircraft were ordered by an air company run by the Alrosa diamond company of Russia. Two of the planes are being assembled in Novosibirsk and the client will receive them later this year. The production date for the remaining three aircraft has not been set and will depend on the timely payments, KUSHNIRENKO noted. A number of Russian governors have shown interest in the aircraft which is adapted to remote areas and capable to take off after running for only 380 to 400 meters.

mately 11.5 percent of Latvia's imports were from Russia. Latvia's GDP fell 7.6 percent in the first quarter to 1.9 percent in the third quarter in 1998. Lithuania, of all the Baltic States, remains the most dependent on Russia, with Russia accounting for 18.6 percent of exports and 21.1 percent of imports from January to October, 1998. Lithuania's GDP fell from 4.7 percent to 3.2 percent from the first to the third quarter in 1998, the RFE\RL Newsline reported.

South Caucasus & Central Asia

Georgia To Withdraw From Moscow's Influence

· Georgian President Eduard SHEVARDNADZE in an interview with Japanese newspaper Sankei Shimbun published today expressed skepticism about remaining within the Commonwealth of Independent States (CIS) Collective Security Treaty. The Georgian President, wary of the security document said, "We shall decide what we are going to do about the treaty, and on this basis we shall consider a possibility of withdrawal from CIS." He intends to hold serious talks with Uzbek President Islam KARIMOV on the withdrawal from the treaty and from CIS in general. In the opinion of SHEVARDNADZE, the CIS Collective Security Treaty cannot reach the targets set before it, and in the future Georgia will seek membership in NATO. He said that Georgia is creating its own border guard troops to replace the Russian border guard troops deployed in Georgia. "In the future, Russian military bases on the territory of our country will be eliminated, and we shall withdraw from under Moscow's influence," the Georgian President stressed. He said that power is centralized within the CIS in a way that is reminiscent of the former Soviet Union.

Russian State Duma Speaker Gennady SELEZNYOV sharply criticized SHEVARDNADZE's statement concerning the CIS collective security treaty and Georgia's possible withdrawal from the Commonwealth. According to SELEZNYOV, the Georgian president must have spoken "in a fit of temper." He believes the statement is an expression of the hurt feelings after Russia refused to extradite former head of Georgia's state security service Igor GIORGADZE. SELEZNYOV said, "to build all accusations against the CIS because a man considered to be a state criminal has not been extradited to Georgia is not worthy of a President." Comment:

European Republics

Baltic Economic Slow Down

· The economic growth rate in the Baltic State is predicted to slow down to 1.4 percent this year from 2.8 percent in 1998, according to the latest report released by a Swedish bank. Russia's economy will be the worst among the 10 nations surrounding the Baltic Sea, including Norway, with its growth rate estimated at minus 9 percent compared with minus 4.6 percent last year. The decline of the Russian economy will make the economic growth of Estonia, Latvia and Lithuania drop by nearly 1 percent to 2.5 percent to around 2 percent to 3 percent, since they have close economic ties with Russia. However the Baltic States are less vulnerable than other former Soviet republics because their dependence on Russia is lower. In Estonia, Russia accounted for 13.4 percent of exports and 10.8 percent of imports from January to November, 1998, down from 18.8 percent and 14.4 percent respectively in all of 1997. Estonia's gross domestic product (GDP) fell from 9.3 percent in the first quarter of 1998 to 1.8 percent in the third quarter. In Latvia, from January to November, 1998, exports to Russia fell 52 percent from 1997 figures, while total exports rose by 8.5 percent. Approxi

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Russia's criticism of Georgia's extradition request against a man who allegedly attempted to kill the head of state and continues to threaten not only SHEVARDNADZE's life, but the stability of democratic Georgia illustrates the uselessness of the CIS Collective Security Treaty. His statements also implies that Russian at the very least knew where GIORGADZE was and refused to extradite him.

Georgia-Japan To Improve Bilateral Relations

· Georgian President Eduard SHEVARDNADZE granted an interview to several Japanese news agencies in preparation for his first official visit as President to Japan on March 4th. SHEVARDNADZE told Kyodo News that he expects the two nations to sign a statement defining the principles of their bilateral relationship. He will meet with Prime Minister Keizo OBUCHI and Emperor AKIHITO. SHEVARDNADZE expressed expectations for Japanese enterprises to participate in projects related to oil pipelines which will connect oil fields in the Caspian Sea off the shores of Azerbaijan and the Black Sea via Georgia. He reiterated his support for the construction of a Mediterranean Sea route for the pipelines that would connect Azerbaijan, Georgia and Turkey. He predicted that the route will be decided by September or October, while acknowledging that there is strong opposition to its construction among the Western enterprises participating in the project to develop oil resources. Azerbaijan International Operating Company (AIOC) president David WOODWARD said that the Baku-Ceyhan route may be delayed until investors can be found to finance its construction. SHEVARDNADZE pointed out that the project to revive the ancient Silk Road connecting Europe and Asia via Georgia will promote tourism in the region, as well as for transporting oil and natural gas resources. He will be accompanied by his wife, Nanuli, Foreign Minister Irakli MENAGARISHVILI, Fuel and Energy Minister Teimuraz GIORGADZE, Transport Minister Merab ADEISHVILI and Health Minister Avtandil JORBENADZE. On his way back from Japan, SHEVARDNADZE will meet Uzbek President Islam KARIMOV in Tashkent.

Aliyev Calls For End To NK Conflict

· Azerbaijan President Geidar ALIYEV on Wednesday sent a message to the presidents of Russia, the US, and France, as part of the Minsk Organization for Security and Cooperation in Europe (OSCE) group on Nagorno-Karabakh, expressing concern about the dragged out talks to settle the Nagorno-Karabakh conflict. The report says that the Azerbaijan leader seriously criticized the latest settlement proposals by the Minsk group, which was based on the common state concept. ALIYEV believes that this concept "contradicts the OSCE principles and has no analogues in world practice." The Azerbaijan President stated that these proposals had harmed the peace-making process. ALIYEV called on the presidents of Russia, the US, and France to display more will and to galvanize the efforts to settle the conflict quickly and fairly on the basis of the well-known Lisbon principles, which were backed by the OSCE nations.

Exxon Joins Azeri Consortium

· US oil giant Exxon has been awarded a previously unallocated 15 percent stake in the BP Amoco led international oil consortium drilling in the Caspian Sea off the coast of Azerbaijan. Exxon joins consortium members BP Amoco (15 percent), Norway's Statoil (15 percent), Turkish Petroleum TPAO (10 percent), Canada's Alberta Energy (5 percent), and Azerbaijan's Socar oil company (40 percent) in developing the Araz-Alov-Sharg concession south of Baku. Government relations manager for Exxon Azerbaijan Operating Company Fred MARSHALL on Monday said, "I can confirm that Exxon signed the agreement today for the Alov block." Socar estimates reserves in the block at about 300 million tons of oil and 400 billion cubic meters of gas. If reserves prove to be commercially viable, total investment in the project could be as much as $10 billion. In an Exxon press release, president of Exxon South Caspian Ltd. Terry KOONCE said, "This structure...is coupled with significant investment risk and technological challenges." Exxon said the acquisition was part of long-term development plans in Azerbaijan.

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

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