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 26, 1999


Russian Federation

Politics

The Weak Center Is Crumbling Russia

· A weak economy, lack of reforms, conflicts between the government and parliament, poor tax collection, a deteriorating military, and an ill president are all contributing to the crumbling of Russia as a federation. Political and economic analysts believe Russia is drifting toward a "failed state" and not breaking into pieces as the former Soviet Union did. They predict that Russia is headed toward a dysfunctional cohesion. This scenario may allow even more corruption and lawlessness, weapons proliferation, health hazards and environmental pollution. A "failed state" will also endanger factories which control production of missile parts, chemical and biological warfare laboratories, and the massive piracy of intellectual property. The lack of a strong central authority and effective government has caused Prime Minister Yevgeny PRIMAKOV to propose changes to the Constitution. He specifically outlined a plan for the President to appoint regional governors. "At present governors are chosen directly by the people and it is impossible to exert influence over a governor." He added that the chain in command over the country is, "not a solid line" but rather a "vertical broken line—broken." The Washington Post points out that a political vacuum at the top—the president ill, his prime minister struggling to hold together an unwieldy coalition cabinet—has left Russia rudderless and thrust problems on often unprepared regional bosses. Thomas E GRAHAM, former State Department diplomat and now a senior associate of Carnegie Endowment for International Peace said, "For the first extended period in modern Russian history, the center is neither feared nor respected." He added that, "The President demonstrates such an obvious inability to control things that it raises doubts about the expediency of the institu

tion of the presidency in its present form...Mere bursts of activity do not count." Political scientist at Columbia University Steven SOLNICK noted that Russia is fraught with power struggles among financial clans, regions, and giant monopoly companies. He said, "These are intertwined in ways that make it difficult to establish a clear flow of power." In response to those who doubt President Boris YELTSIN's health, his doctors said that the President has fully recovered from his bleeding ulcer. YELTSIN said, "My position is that I will work until the 2000 elections. The position of the government chief is that he will work as prime minister until the elections for a new president." The question remains on how this tug between center and region will be played out in connection with power struggles in the parliament, government and between the Mafia and big businesses.

Democratic Russia Elects Rybakov

· Yuly RYBAKOV, a human rights campaigner, Duma deputy, and former member of the board of Russia's Democratic Choice, was elected by the Democratic Russia Party's conference which was held in Moscow on February 21st to 22nd, to replace Galina STAROVOITOVA, a prominent democrat Duma member who was assassinated in November. The conference also decided that Democratic Russia will join the coalition Right Cause. Democratic Russia issued a policy statement which announced its, "opposition to the government of Communist trust headed by [Prime Minister Yev-geny]

Today's News Highlights

Russia

Credit Suisse FB Losses

Tyumen To Receive $640M Loan

Rosbank Opens In Beijing

European Republics

Ukrainian Economic Slow Down

South Caucasus & Central Asia

Shevardnadze In Turkey

Menagarishvili In Sukhumi

Five Leaders Meet In Kremlin

Uzbek, Turkey, Japan Textile JV

Politics-Economics-Business

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Friday

February 26, 1999

Intercon's Daily

PRIMAKOV." The party's statement said the "party of power, obeying to pressure of national-Communists and its own immediate interests is leading the country to complete impoverishment, collapse, into another historic blind alley." RYBAKOV said the key task of the Right Cause is to forge a coalition and a large pro-democracy faction in the Duma. The conference of Democratic Russia posthumously elected STAROVOITOVA as its honorary chairman and founded a STAROVOITOVA prize for contributions to the human rights cause. STAROVOITOVA's murder has not been solved.

Meanwhile, the St. Petersburg Prosecutor's Office has charged deputy of the city legislature Yuri SHUTOV in connection with several high-profile murders over the past few years, Interfax reported Monday. He is accused of organizing a group that committed the brutal murders of entrepreneur Dmitry FILIPOV, deputy chairman of the city consumer market committee Yevgeny AGARYOV, and the head of a legal firm, Igor DUBOVIK. He has been charged with plotting the murder of Vyuacheslav SHEVCHENKO, a deputy of the State Duma. SHUTOV served as aide to Duma Deputy Speaker Sergei BABURIN. He was also an adviser to former St. Petersburg Mayor Anatoly SOBCHAK and authored the book entitled "Dog's Heart."

Economy

Ruble = 22.84/$1.00 (NY rate)

Ruble = 22.86/$1.00 (CB rate)

Ruble = 25.11/1 euro (CB rate)

Sep Oct Nov Dec Jan Feb


Credit Suisse FB Losses Due To Russia

· The Credit Suisse First Boston unit of Credit Suisse Group is expected to show a small after-tax loss for 1998 due to exposure to Russia's bond market, when report results are released in March. Before the Russian economic crisis in August, Credit Suisse First Boston earned $754 million before minority interests in the first half of 1998. Last August, the securities firm was left with exposures topping $2 billion. Its share of Russia's government bond market reached 35 percent at some times. In 1997, Russia accounted for 8.5 percent of the securities firm revenues, The Wall Street Journal reported. Bank analyst Hans KAUFMAN at Bank Julius Baer said, "The involvement was too big, it's now quite clear." Lehman Brothers Ian MCEWEN said Credit Suisse First Boston's, "claim that Russia is a unique circumstance isn't quite right. It's actually fairly symptomatic of the way the company is willing to run itself. They do have this tendency to take a robust attitude to risk." Credit Suisse First Boston is in the process of reducing its exposure to fixed-income and derivatives market, boosting its presence in equities research and investment banking. Other Wall Street firms took less devastating hits in the second half of 1998. Goldman Sachs' pre-tax profits declined only 3.1 percent to $2.92 billion. Citigroup's Salomon Smith Barney unit profits fell 72 percent to $408 million. Lehman Brothers Holdings profits increased 14 percent to $736 million.

Rus-China Economic Relations

· The visit of Chinese Premier ZHU Rongji to Moscow has focused on boosting Russia and China's economic relations. According to the Chinese customs service, trade turnover totaled $5.48 billion in 1998, or 10.5 percent down on the previous year. The Asian and Russian economic crisis contributed to the decline in trade. Both sides pledged to push their annual trade about $20 billion by 2000. Chinese exports to Russia mostly consists of clothing, footwear, meat, fruit and dried fruit, domestic appliances and machinery. The Chinese side opened 1,200 enterprises in Russia, and China's total investment is $100 million. These investments embrace the sphere of commerce, microelectronics, telecommunications and assembly production facilities. The Beto-Huawei factory, producing advanced automatic telephone exchanges in Ufa, is a major Russian-Chinese joint venture over the past few years.

When you need to know it as it happens

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China registered over 900 Russian companies, and Russian investments total $150 million. They represent the motor industry, agricultural engineering and the chemical industry. Chinese experts, optimistically estimating prospects for trade growth, despite some difficulties on the market. Shuttle trade between the two nations exits between the Primorye territory and neighboring northern Heilongjiang and Jilin provinces of China. The largest Chinese market is in Ussuriisk, Primorye territory, with close to 1,000 Chinese working in the wholesale market. Documents are also expected to be signed on the purchase/sale of retail space for two Chinese supermarkets in Moscow. China's first business center in Russia is expected to be built on Leninsky Prospect.

Business

Tyumen To Receive $640M Loan

· Russia's Tyumen Oil Co. (TNK) is confident that it will reach an agreement with the US Export-Import Bank on a $640 million syndicate Loan by April. The Dow Jones Newsline reported that Chase Manhattan Bank is advising TNK in its efforts to secure the loan. Under a preliminary agreement, the Exim Bank will provide 85 percent of the loan in the form of services and US equipment and the TNK must raise the remaining 15 percent on its own. TNK president Simon KUKES said that the oil company is negotiation the loan with a number of foreign investors. He said that one potential investor could be the International Finance Corp., the World Bank affiliate.

Rosbank Opens Office In Beijing

· While most Russia banks are still struggling to meet depositor and creditor demands, the Russian commercial bank Rosbank is expanding. On Thursday, Rosbank opened an office in Beijing. This is first time the bank has opened an office outside Russia. This bank will provide financial services including settlements, credit, and expediting foreign-trade contracts, to the trading industry between China and Russia. Three Russia banks have offices in Beijing, including the Russian Credit Bank and Russia State Foreign Trade Bank.

the country's economic situation. Compared with those in 1997, Ukraine's gross domestic product (GDP), industrial output and agricultural output dropped by 1.7 percent, 1.5 percent and 8.3 percent respectively in 1998. In the same year, the country experienced an 8.3 percent contraction in Ukraine's agricultural output. In addition, inflation surged to 20 percent, twice as high as that in 1997. The country's foreign trade volume last year was $32.5 billion, down 13.2 percent from a year earlier. Its exports totaled $16.4 billion and imports $16. 1 billion, down 13.2 percent and 13.1 percent respectively. Its imports and exports with Commonwealth of Independent States (CIS) countries slumped by 19.6 percent and 26.5 percent respectively. Ukraine's actual budget is no higher than $8 billion. In addition to economic devastation, Ukraine is coping with severe political gridlock.

Ukrainian President Leonid KUCHMA has been unable to raise living standards and uproot endemic official corruption. He has failed to reform the economy and privatize major state industries. Because of the Russian crisis, Ukraine's recession may last two additional years longer than the three years already endured. The government has deferred some pensions and salaries to workers at state-owned industries. The average Ukrainian earns only $40 a month, compared with its western neighbors which make as much as eight times more. The economy remains lashed to its Russian past. Approximately 60 percent of Ukrainian companies have business ties with Russian companies. Ukraine's Communist dominated legislature has blocked the most crucial reforms, including overhauling the tax system, land reforms, and privatization programs. Some of the leftists favor joining an emerging alliance between Russia and Belarus. Ukraine's best opportunity is to be assimilated into the European market, in terms of trade and business ties. But the prospect for this remains blocked by the political clash of the old and new forces, each with opposite orientations.

South Caucasus & Central Asia

Georgian-Turkish Discuss Bilateral Projects

· Today, Georgian President Eduard SHEVARDNADZE is scheduled to have meetings in Ankara with Turkish President Suleyman DEMIREL, Prime Minister Bulent ECEVIT and Foreign Minister Ismail

European Republics

Ukrainian Economic Slow Down

· The Ukrainian National Statistics Committee reported Ukraine witnessed a drastic slip in 1998 major production indicators, adding to the gravity of

When you need to know it as it happens

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Intercon's Daily

CEM to discuss topical problems of the development of Georgian-Turkish relations, regional problems and cooperation of the two countries in international organizations. Implementation of transport communications projects, deepening of cooperation between the two countries in agriculture, defense, border protection will also be discussed during the visit. During the visit, Georgian and Turkish officials will discuss Turkey's participation in the rebuilding of the Batumi Airport, the building of a railway connecting Kars (East Turkey) and Akhalkalaki (South Georgia). SHEVARDNADZE will also take part in a meeting of the Georgian-Turkish business council, which will be held in Istanbul. He is accompanied by Georgian Foreign Minister Irakly MENAGARISHVILI, Defense Minister David TEVZADZE, the ministers of transport, energy, communication and agriculture, as well as senior officials from other ministries and institutions. Chairman of the Supreme Soviet of the Adjaria Autonomous Republic Aslan ABASHIDZE left Batumi for Ankara, where he will join the others.

Menagarishvili Meets Abkhaz Representative

· Georgian Foreign Minister Irakly MENAGARISHVILI arrived in Sukhumi on Wednesday and met with Abkhazian representative Vladislav ARDZINBA and members of the commission for the social and economic rehabilitation of the Gali district and safe return of refugees. The Abkhazian chairman of the commission Konstantin OZGAN briefed MENAGARISHVILI on the measures taken by the commission to rehabilitate the district and ensure the safe return of refugees. He said police posts will be set up in all settlements where refugees will be returning to employ part of them. MENAGARISHVILI noted that, "the existing disagreements are not unresolvable." He believes that mutually acceptable solutions are impossible without a compromise by both sides, stressing that the repatriation process must be coordinated with Georgia and Abkhazia.

Five Nations Meet In Moscow

· Russian President Boris YELTSIN addressed presidents of four CIS republics—Belarus' Alex

ander LUKASHENKO, Kazakhstan's Nursultan NAZARBAYEV, Kyrgyzstan's Askar AKAYEV, and Tajikistan's Emomali RAKHMONOV—in the Kremlin today. He said, "there is no alternative to integration and to the development of our cooperation." Tajikistan finally joined the Customs Union. Russian Prime Minister Yevgeny PRIMAKOV said today's treaty, "will allow to pool the potential of our countries for solving economic and social tasks for the good of our peoples." YELTSIN said that, "despite financial and economic difficulties it has been possible to ensure that mutual trade did not shrink." The CIS Customs Union also discussed Kyrgyzstan's membership in the World Trade Organization (WTO) and the influence it will have on production of goods in Russia and Kazakhstan. Kyrgyzstan, the only WTO member among the CIS republics, has not coordinated its entrance with the Customs Union. NAZARBAYEV said, "If Kyrgyzstan imports goods as a WTO member, such goods whose prices are lower than those in Russia and Kazakhstan, will fill the markets [of the two states]; it will result in company shutdowns in our countries." NAZARBAYEV agreed with AKAYEV that the customs union had failed to create a single economic space within the CIS, specifying the August crisis fallout. He is convinced that the CIS partner states should use a single economic space to protect themselves, helping each other with tariffs, and with food credits or technical resources. He called for more agreements to be signed before the year 2002 to boost the integration.

Uzbek, Turkey, Japan Textile Venture

· Uzbekistan, Turkey, and Japan are forming a joint venture to complete the construction and later operate Chinaz Textile Factory near Tashkent. Uzbekistan will own 49 percent in the joint venture, while Turkey's Bursel will own 47.6 percent and Japan's Mitsubishi Corp. with 3.4 percent. Capital for the joint venture will total $15.6 million. Japan's Eximbank is expected to give around $45 million in credits to help finance the project. The factory will be designed to produce 5,300 tons of cotton yarn and 2,5000 tons of linen per year.


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

Daily Report on Russia is published Monday-Friday (excluding holidays), by Intercon International, USA. Subscription price for Washington, D.C. Metro area: $950.00 per year. A discount is

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