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

Monday, March 1, 1999

Russian Federation

Politics

Yeltsin Hospitalized, Primakov On Vacation

· Russian President Boris YELTSIN was hospitalized on Saturday in connection with a stomach ulcer; he is said to be in stable condition. Chief of the presidential medical center Sergei MIRONOV emphasized, "There is no danger of course to the president's life." He also pointed out that if things were serious Prime Minister Yevgeny PRIMAKOV would not have started his 10-day vacation in the Black Sea resort city of Sochi. YELTSIN first checked into the Central Clinical Hospital with an acute bleeding ulcer in January. Experts' later confirmed that there was no need for surgery. On January 30th, the President moved from the hospital to the Barvikha sanatorium. Kremlin spokesman Dmitry YAKUSHKIN said the President was expected to spend several days in the hospital. YAKUSHKIN said YELTSIN is suffering from an ailment, "that tends to recur and need additional treatment." Today, he said YELTSIN's ulcer could have worsened following several days of intense talks with visiting German Chancellor Gerhard SCHROEDER, Chinese Prime Minister ZHU Rongji and a separate meeting with four presidents of former Soviet republics at a mini-summit of the Commonwealth of Independent States on Friday. YELTSIN, who has suffered from exhaustion, anemia and nervous tension, was reportedly warn out after the last round of talks. Last week, YAKUSHKIN announced that the president had fully recovered and was planning a busy schedule, but the report was met with widespread skepticism.

Berezovsky Admits Differences With Primakov

· Commonwealth of Independent States' Executive Secretary and oil-media tycoon BORIS BEREZOVSKY has denied that he and Prime Minister Yevgeny PRIMAKOV are at war over power and

influence. He said, "There is an opinion about a serious clash between PRIMAKOV and myself, but I only have ideological differences with the Cabinet." He believes the government abandoned liberal reforms that had been pursued by its predecessors. BEREZOVSKY said, "They live in a system of axioms and quotes which were used to describe the previous century. But the world has changed." The government's main drawback was a, "lack of understanding of liberal values. They are unable to find a way out of the situation that confronts the country." BEREZOVSKY stated that he does not want the current government to resign. He stressed that Russia is in a deep crisis and that, "we have little time to drastically change the situation...the path of the government is dangerous." He pointed out that the government is fighting for power in the State Duma, among regional leaders in the Federation Council, among the presidential administration, in the secret services, and in the media. Newspapers reported on this so-called clash between BEREZOVSKY and PRIMAKOV after businesses linked to BEREZOVSKY's investments were raided by government forces.

Economy

Deutsche Bank Accepts Russian Debt Deal

· A group of western banks, which own Russian GKO state short-term bonds and Russian Financial Ministry officials opened a meeting in London today to discuss Deutsche Bank's readiness to accept the

Today's News Highlights

Russia

WB Grants Loans To Russia

Defense Plants Makes Cars

Rosvoor. Releases Contracts

European Republics

Baltic Military College Opens

Ukraine Foreign Debts

South Caucasus & Central Asia

Georgia-Turkey Joint Statement

Uzbek Cuts Kyrgyz Gas

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Moscow-proposed restructuring formula. The Western Banks and Russia have been negotiating terms over $15 billion in frozen treasury debt (GKO and OFZ) since August 17th. Deutsche Bank, which is one of the biggest holders of Russian GKOs, on Friday stirred things up when it announced it would agree tender a portion of its own and clients' bonds. Deutsche Bank's acceptance undercut a request by western bankers, which are unsatisfied by Russia's terms, for an extension of the exchange deadline to April 30th. The other 17 banks negotiating with the Russian Finance Ministry oppose Moscow's terms of restructuring its arrears on GKO treasury bills and OFZ loan bonds. These banks have complained that Russia has not provided enough details on how to repatriate proceeds, a range of opportunities to invest them within the country, and time to evaluate the final terms if and when they are released. Another bank of the 19 member committee, Chase Manhattan Bank said it had submitted bonds from its own account for conversion into new longer-term securities. The remaining 17 committee members are splitting on how to make demands in the aftermath of Deutsche Bank's move. Deutsche Bank was the lead representative for the committee. Credit Suisse Group's Credit Suisse First Boston has demanded to see final terms before they will refuse or accept the deal. Under the preliminary deal, foreigners would get a mix of new securities: 70 percent in interest-bearing bonds with maturities from three to five years, 20 percent in non-coupon bonds that can be traded for tax debts or shares in Russian banks, and 10 percent in cash rubles and short-term bills. These terms would give foreigners only 2.5 percent of the face value before Russia's devaluation of the ruble in August. The Russian Finance Ministry said that new details will be ready today.

Ruble = 22.86/$1.00 (NY rate)

Ruble = 22.89/$1.00 (CB rate)

Ruble = 25.17/1 euro (CB rate)

WB Grants Social, Coal, and Road Loans

· The Russian government and the World Bank Friday signed the agreement on terms and program of the granting of the third tranche of the loan for the social welfare system restructuring, the second coal loan, and a credit of $400 million for road repair and maintenance. Russia will be granted $250 million to consolidate the state pension system, work out

systems of social welfare for the poor, and for relief to the unemployed. The funds will actually be granted if the World Bank's Board of Governors, which is to meet in March, endorses amendments to the terms of granting the loan, agreed upon during the latest negotiations. The coal loan expected to be finalized in March could total $400 million. Export-Import Bank of Japan has also promised to grant Russia $400 million for the same purpose. It was decided that the loan will be granted in six tranches: two privatization tranches $100 million each, and four social tranches $50 million each. The sum of $315 million has been allocated for federal expenses on roads, while $35 million, in the framework of regional expenses, is allocated to the Khabarovsk territory and $20 million to the Krasnoyarsk territory. The decision of purpose-oriented use of the remaining sum of $30 million will be taken later. The federal authorities will be responsible for the repair of most important highways in Siberia and the Far East: Tyumen-Omsk, Tyumen-Tobolsk, border of the Krasnoyarsk territory-Irkutsk, and the 190-kilometer stretch of Moscow-Minsk highway and other sections. The loan will be repaid by Russia in 17 years.

World Bank will grant Russia a number of installments on loans only if Russia reaches agreement with the IMF on Russian debt rescheduling and refinancing. First Deputy Prime Minister Yuri MASLYUKOV said, "there are indications that the talks with the IMF will end favorably," although "some matters require extra discussion." Vice President of the World Bank for Europe and Central Asia Johannes LINN said allocation of the economic structuring loan will also require arrangements between the Russian government and the IMF. LINN said, "We all know that Russia's economic future depends largely on the strength of the Government's efforts to implement far-reaching and often politically difficult reforms. We are pledged to continue our support, commensurate with those efforts."

Russian Prime Minister Yevgeny PRIMAKOV early on Saturday met with LINN. In thanking LINN, PRIMAKOV said, "The main thing is that the contacts between Russia and the World Bank are continuing...also important to us is the attitude which Bank president James WOLFENSOHN, who does much for us to be understood in the West." PRIMAKOV and LINN agreed about importance of Russia's

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projects funded by the World Bank's loans, especially in the social sector and in the real economy.

Business

Siberian Defense Plants Convert To Cars

· Siberian military factories in the city of Omsk are mastering the production of Svyatogor-Pickup cars, a new cross-country full-wheel drive vehicle designed by the Moskvich Car Works in the Russian capital. The agreement on the implementation of the project was signed in Omsk, by the Moskvich Director General Ruben ASATRYAN and the authorities of the Omsk region. The first 500 vehicles with the carrying capacity of 800 kilograms each will be assembled at the lead factory of the project, the Baranov plant, by the year 2000. Omsk factories will not be limited only to the assembly of the cars. ASATRYAN said that his plant will supply the engines and the steering gear, while the rest will be produced by Omsk companies. The agreement is a new step in the development of cooperation between Moskvich and Omsk, which began last year with the production of units for the new Moskvich models, after Moscow Mayor Yuri LUZHKOV visited Omsk. It was noted that the popular cars Svyatogor, Count Vladimir, Yuri Dolgoruky, and Kalita are equipped with units produced in Omsk. Omsk regional Governor Leonid POLEZHAYEV said the new agreement, along with the SibVPKNeftegas program for producing import-replacing equipment for oil and gas industry, and the production of Volvo buses, will largely define the prospects for the conversion of Omsk military and industrial complex in the 21st century.

Rosvooruzheniye Releases Small Contracts

· The Russian state-owned arms exporting company Rosvooruzheniye on Wednesday at a meeting of Moscow's defense factory directors announced that it is going to leave small contracts to licensed companies in the defense sector. Rosvooruzheniye's director Grigory RAPOTA, a former KGB head of the American directorate, said, "There will not be any resistance to this on the part of Rosvooruzheniye, only assistance. Such contracts are often carried out more effectively at the level of specific enterprises." He said he would not oppose competition between enterprises involved in military-technical cooperation. Russia last year sold a $2 billion worth of arms and the military hardware. Forty percent of the proceeds went to the federal budget. Sales contracts

worth less than $500,000 accounted for 70 to 80 percent of all deals. About half of contracts were in the range of up to $300,000, RAPOTA said. He believes that US economic sanctions against Russian organizations are aimed at limiting Russia's opportunities in arms trade. According to RAPOTA, the arms trade has been always closely linked with politics. On the one hand, politicians lobby for the benefit of the companies trading in arms of their country's production, on the other hand, they are impeding the expansion of the market by foreign competitors. "Should there come any notification about Rosvooruzheniye violating the rules in the sphere of arms trade, we will subject the case to a most thorough examination," RAPOTA stated.

Rosvooruzheniye and Russia's Savings Bank Sberbank on Friday concluded an agreement on cooperation in investment, whereby they agreed to develop long-term partnership to back enterprises of Russia's defense industry complex. The financing of export contracts and projects of defense-industry enterprises will be one of the main trends of joint work. The agreement will enable leading Russian armaments exporters to amass resources needed for the maintenance of production and technology at the level where their products can be put on the international market and be competitive.

European Republics

Estonian Baltic Military College Opens

· The Estonian city of Tartu on Thursday hosted the opening ceremony of a joint Baltic Military College. This higher military educational establishment will train commanding and staff personnel for the armed forces of Estonia, Latvia and Lithuania. The decision to establish the College was taken at the summit of the Defense Ministers of the Baltic Countries and Europe in 1997. The College was planned, developed, and financed by 12 countries: Finland, Sweden, Norway, Denmark, Germany, the Netherlands, Belgium, the UK, France, Switzerland, Poland and the US. Brigadier General Michael H. KLEMMESEN is appointed head of the College. The opening ceremony was attended by President of Estonia Lennard MERI, representatives of the defense ministries of the participating countries, heads of diplomatic missions accredited in Tallinn, and military attaches. British Secretary of Defense George

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ROBERTSON also attended the opening and discussed with officials Estonian-British military cooperation and interaction of three Baltic republics as well as NATO membership.

Ukrainian Foreign Debt and Inflows

· Ukraine is to pay $655 million on account of its foreign debt between January and March of 1999. Gold and currency reserves of the National Bank of Ukraine totaled $685 million early in 1999. In January Ukraine's foreign debt payments were to amount to $196 million, and in February to $147 million. In March, Ukraine is to pay $312 million. The Finance ministry reports, that in January Ukraine paid only $100 million. The Finance Ministry said Ukraine's foreign debt amounted to $11.5 billion early in 1999, a rise of 20 percent compared to 1998 figures. The loans of international financial institutions account for $4.8 billion, and loans of the CIS member states for $2.35 billion. The Board of Directors of the International Monetary Fund (IMF) will meet in March to discuss possibly granting the next installment of an extended $2.2 billion credit to Ukraine. The crediting was suspended in November 1998. In the opinion of Roman SPEK, head of the National Agency for Reconstruction and European Integration, Ukraine is expected to receive in March two tranches of the IMF credit amounting to $158 million. Ukraine will also receive a World Bank credit of $200 million and an European Union's credit for the support of the balance of payments of some $56 million.

Russia Returns $9.4M To Ukrainians

· Russia's Bank for Foreign Economic Affairs returned as of January 1, 1999, $9.4 million from frozen accounts to the Ukrainian State Export-Import Bank. The bank has received 8,800 applications for a total of $9.6 million. Under the Ukrainian-Russian inter-governmental agreement signed in August 1997, deposited money is paid off only to low- income Ukrainians. The total amount paid on one account will not exceed the $3,500. As of January 1, 1991, the then Bank for Economic Affairs of the USSR had $20.2 million on frozen accounts of Ukrainians.

South Caucasus & Central Asia

Georgia, Turkey Support Baku-Ceyhan Route

· Georgian President Eduard SHEVARDNADZE and Turkish President Suleyman DEMIREL signed a joint statement on further promotion of bilateral cooperation Friday. They noted its importance for ensuring stability and peace in the Caucasus region. The Presidents underscored the need to settle all regional conflicts, including the Abkhazian problem, by peaceful means and with respect for sovereignty and territorial integrity. They pledged to jointly combat terrorism and decided to open a new passageway across the border between the two countries. SHEVARDNADZE and DEMIREL called for the implementation of the projects to transport Caspian oil and gas to the world markets, to build a railway line between Tbilisi and Kars, to revive the Great Silk Road, to lay an optical fiber line along the bottom of the Black Sea between the Turkish town of Riza and the Georgian city of Batumi. The Presidents hope to attract investors to the Baku to Ceyhan pipeline project. SHEVARDNADZE said, "Theoretically it is not excluded that the Baku-Supsa route will be considered in taking a decision on the transit of the Caspian main oil. DEMIREL and us basically agreed that the two projects and the two routes shall not be rivals but supplement each other."

Uzbek Cuts Gas Supplies to Kyrgyzstan

· Uzbekistan has cut by three times natural gas supplies to Kyrgyzstan starting from Thursday over outstanding debts. Kyrgyzstan owes approximately $3.3 million but has paid $1.7 million to Uzbekistan for the gas it has already supplied, said Abdimazhit MAMATISAYEV, a CEO from the Kyrgyzgaz stock company. "A delegation of our energy experts has left for Tashkent to hold negotiations on resuming gas deliveries and on settling the payment problem," he said. Head of the Bishkek gas administration Elmuraz DZHUZENOV said all water heating facilities in the residential sector have been switched off. "Gas will be delivered only to the Bishkek Thermal and Electric Power Station," he said.

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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