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

Friday, March 12, 1999

Russian Federation

Politics

Skuratov Returns To Work?

· Yuri SKURATOV, despite resigning from his post as prosecutor general on February 1st supposedly for health reasons, returned to his office on Tuesday and chaired a meeting with his deputies. He said he was working according to his "normal regime." Russian President Boris YELTSIN had accepted his resignation last month, but the Federation Council insists it has the final say about removing the public prosecutor from office. It postponed consider

ation of the issue until March 17th. On that day, SKURATOV will appear before the Federation Council to explain his decision. His resignation followed a letter he sent to the government on the Central Bank's transfers of hard currency to offshore bank Fimaco and his investigations into the business interests of oil-media tycoon Boris BEREZOVSKY. The Kremlin is protesting SKURATOV's return to work. Deputy director of the Center for Political Technologies Boris MAKARENKO said, "The President seems to be less and less in control even of his own spheres of competence. But it is interesting that SKURATOV's health has improved at a time when BEREZOVSKY has been sent packing," the Financial Times reported. His return also coincides with Prime Minister Yevgeny PRIMAKOV's early return from his vacation in Sochi.

Meanwhile, YELTSIN, who is undergoing medical treatment at the Central Clinical Hospital, is meeting with Chairman of the Federation Council Yegor STROYEV. YELTSIN intends to hold more meetings with Russian leading politicians. On Wednesday evening, YELTSIN met Yabloko faction leader Grigory YAVLINSKY, fueling rumors of another major government reshuffle.

Russia-China Oppose US Development Of TMD

· Both Russia and China oppose Washing-ton's plan for the development of a Theater Missile Defense (TMD) system to protect US troops and allies in Asia, including Taiwan. Chinese Foreign Ministry spokes

Russia Says NATO Expansion Is Dangerous

· The Russian Foreign Ministry released a statement today calling the expansion of the North Atlantic Treaty Organization (NATO) to include Poland, Hungary and the Czech Republic, dangerous. "The expansion will not promote confidence and stability in international relations; instead, it may result in new divisions. We do not welcome the kind of development that does not serve the interests of the European people." According to the Russian Defense Ministry, with the addition of three new members, the military strength of the European grouping of the NATO land forces is increasing by almost 13 divisions, and the NATO responsibility zone is moving between 650 and 750 kilometers to the East. As a constructive alternative to NATO expansion, the statement said Russia is trying to develop a European security system which would protect the interests of all countries, members and non-members of military and political alliances, and is calling on others to join this work. "A reliable system of European security and stability should be built on all-European fundamentals, with faithful observance of international law and the use of the potential of the OSCE," to resolve challenges of the 21st century. "In the wake of NATO's expansion, the updating of the Conventional Forces in Europe Treaty is especially important."

Today's News Highlights

Russia

Calls For New Banking System

EBRD Declares Net Loss

GM-AvtoVAZ Sign Intent Memo.

Sibneft-Dart Row Resolved

European Republics

Ukraine-Belarus Summit

South Caucasus & Central Asia

Georgia Revises 1999 Budget

Azeri Oil Reaches Supsa

Three Co. Reduce Turkmen Oil

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man ZHU Bangzao said that Russia and China have held consultations on the multi-million-dollar scheme, which "could have an impact on security interests of many countries." ZHU said, "TMD is related to global and regional security and stability. So, China and many other countries, including Russia, are seriously concerned over the issue." The US has proposed the defense system due to a perceived missile threat from North Korea and other rogue nations. Russia stresses that it is worried that the US plan to build a limited missile shield will mean revising the 1972 Anti-Ballistic missile (ABM) treaty. Moscow feels that this treaty is the cornerstone of nuclear stability. The US has responded that they do not intend to pull out of its ABM commitments. China opposes the TMD because the protection would cover Taiwan, which Beijing regards as a rebel province. China said it will react strongly against any attempt to install a TMD system in Taiwan. A US Pentagon report said China was building a major force of ballistic and cruise missiles near its coasts and could present an overwhelming military threat to Taiwan in five years. Last week during a visit to Beijing, US Secretary of State Madeleine ALBRIGHT said that China should not worry, "about a decision that has not been made to deploy defense technologies that do not yet exist. China should focus its energies on the real source of the problem: the proliferation of missiles," Reuters reported. It also criticized US-Japan research into developing a TMD system, which would use satellite guidance to destroy incoming missile attacks. Russia believes that the US has over emphasized the threat from rogue states. It prefers to stress the importance of the ABM treaty, rather than the impact of the TMD.

Economy

Primakov Calls For New Banking System

· Russian Prime Minister Yevgeny PRIMAKOV on Thursday issued an instruction approving a plan to set up the Russian bank of development. The proposal came from the Russian Economics Ministry and was coordinated with the Finance Ministry, the State Property Ministry and the Russian Federal Property Fund. The bank's authorized stock will total 375 million rubles. The Federal Property Fund was instructed to act as the bank's founder, and together with the Economics Ministry develop and approve within ten days the founding documents. The fund was ordered to fix the amount of shares to be floated,

which would allow the bank's authorized stock to reach up to four billion rubles, and retain, in case of additional stock issues, the state's share of 75 percent plus one share. The instruction approved the line up of 11 government representatives in the observer council of the Russian bank of development, including First Deputy Prime Minister Yuri MASLYUKOV, as well as the lineup of the bank's five-strong revision commission. The bank is to begin operations shortly, and the state's share is expected to reach up to three billion rubles in 1999. PRIMAKOV stressed that the newly-created agency on restructuring the banking system and the Bank of Russia will, "pay attention to raising several big, system-forming banks." He said that Russia is creating a new banking system instead of restoring the system as it had existed before the August 17, 1998 collapse. He said the new system must involve, "the surviving regional banks and branches of the remaining system-forming banks. The banking system must get engaged in work with industry, agriculture, the real sector of the economy, instead of short-term speculative deals."

EBRD Declares Net Loss Of 261.2 Million Ecus

· For the first time in six years the European Bank for Reconstruction and Development (EBRD) declared a net loss of 261.2 million ecus ($283 million) due to the crisis in Russia. The EBRD was forced to make heavy provisions against its exposure in Russia, particularly in the baking sector. This accounts

Ruble = 23/$1.00 (NY rate)

Ruble = 23.12/$1.00 (CB rate)

Ruble = 25.46/1 euro (CB rate)

Oct Nov Dec Jan Feb Mar

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for 31 percent of its total 1.5 billion ecus of disbursed loans and equity investments in Russia. The EBRD more than tripled its provisions from 177.7 million ecus in 1997 to 553.1 million in 1998 ecus. Russia accounted for 57.7 percent of new provisions or 319 million ecus. By December, 1998, Russia accounted for 26 percent of the bank's total disbursed outstanding loans an equity investments of 5.7 billion ecus, the Financial Times. The EBRD vice president for finance, Steven KAEMPFER said, "The EBRD will not withdraw from Russia or from any other country in the region, even in these challenging economic circumstances. We are here for the long term." KAEMPFER said the EBRD keeps sticking to the strategy of long-term projects on the transition of Eastern Europe and the Commonwealth of Independent States to the market economy. As a result of the Russian crisis, the EBRD had to substantially cut the scale of its new lending. New commitments in Russia in 1998 totaled 545 million ecus. KAEMPFER said that this figure is likely to be halved this year to 250 million ecus or 23 percent of the bank's total new loans, compared with 40 percent in more advanced countries and 37 percent in Easter European countries and other former Soviet republics. The EBRD has completely written off some of its previous equity investments, including Tokobank. The EBRD has even launched a court case against Kamaz to recover loans which are more than a year past due.

Business

GM-AvtoVAZ Sign Memo Of Intent For JV

· The US General Motors (GM) and the Russian AvtoVAZ car giants on Thursday signed a memo of intent to set up a joint venture which will produce Opel Astra cars in the city of Togliatti on the Volga where the Russian car-maker is based. Both companies are conducting a feasibility study for the project. Financial details have not been finalized. Spokesman for General Motors' Russia and Commonwealth of Independent States (CIS) division Dmitry SHULGA said that if necessary companies and government approvals can be reached quickly, production may be launched this year. The existing capacities will allow the joint venture produce 5,000 cars a year. Once a new production shop is operational, the annual turnout will rise to 35,000 to 120,000 cars. The new assembly shop will cost some $200 million, according to General Motors

Deputy President David HERMAN. The US company believes that the Opel-Astra-T-3000 model is the most suitable for Russia as it sells well in Europe despite tough competition from Volkswagen. The new car is aimed to sell on the Russian and CIS markets, but the producers are also eyeing Central Europe, the Middle East and South-East Asia. It is planned that the first cars will be assembled in Togliatti from German accessories coming from the Opel plant owned by General Motors. SHULGA pointed out that General Motors is seeking Russian suppliers and technicians. AvtoVAZ, employing 10,000 engineers, builds the country's notoriously unreliable Lada cars and is beginning to produce the VAZ 110, a new generation of minicars.

Sibneft-Dart Row Settled With Appointments

· Russian oil company Sibneft and the Dart Group, a minority shareholder in the company, have settled a long public dispute. Following the agreement, Dart Capital Ltd., controlled by major investor in Russia Kenneth DART, will acquire a stake in Sibneft equal to just under five percent of the company. President of Dart Management Inc., another Dart company, Michael HUNTER has been appointed to the Sibneft board as a non-executive director. The row had been over Sibneft's plan to consolidate Noyabrskneftegaz, its main production unit, into a single integrated company. Sibneft's plan includes a share swap of eight Sibneft shares for each Noyabrsk ordinary share, and four Sibneft shares for each Noyabrsk preference share. DART had resisted this offer, saying the terms discriminate against minority shareholders. He plans to accept the terms of the swap before it closes on March 16th. HUNTER said, "We would not be taking a minority position in Sibneft unless we were convinced that Sibneft was committed to following internationally recognized principles of sound corporate governance."

European Republics

Ukraine-Belarus Meet On Economic Relations

· The Ukrainian-Belarussian commercial and economic relations will be the main theme of negotiations between Ukrainian President Leonid KUCHMA and Belarus President Alexander LUKASHENKO in summit talks which begin today in Kiev. The negotiations of the official delegations of the two countries will be held at the same time as a tête-à-tête meeting.

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It is believed the heads of state will not overlook the eastward expansion of NATO today, specifically its being joined by their Western neighbors Hungary, the Czech Republic and Poland. The Ukrainian and Belarus Presidents will then meet informally in Zalesye out-of-town residence. They are expected to analyze the implementation of bilateral arrangements that were reached when KUCHMA was on an official visit in Minsk in December. LUKASHENKO is expected to propose measures to step up inter-regional cooperation. The heads of state will touch upon the problem of reforming the Commonwealth of Independent States (CIS) and its structures, and will state their views on prospects of the Commonwealth. Trade turnover between the two states fell 17 percent last year to $1.129 billion, Belarus' Deputy Foreign Minister Valentin VELICHKO said. The sides are expected to sign several joint documents, including an agreement on ensuring the rights of national minorities as well as on simplifying the procedure of granting citizenship. VELICHKO also stressed that two states are specifying their positions in the issues of industrial cooperation, regional ties, which are expected to boost mutual trade volumes. It is not ruled out that LUKASHENKO and KUCHMA will discuss Ukraine's debt to Belarus, which has accumulated after the collapse of the Soviet Union and totals $170 million to $200 million, according to different estimates.

South Caucasus & Central Asia

Georgia Adjusts Draft 1999 Budget Spending

· Head of Georgia's parliamentary financial and budget committee Zaza SIORIDZE today said, "All of the changes to the budget for 1999 which parliament made, together with the Finance Ministry, meet IMF [International Monetary Fund] demand." The parliament adopted the 1999 draft budget in the first reading on March 4th and will discuss the document beginning Monday. He said that a final version could be adopted by the end of next week. Georgia has adjusted its budget in hopes of unlocking a delayed $37 million installment blocked last year due to poor

tax collections. The budget calls for spending of 1.225 billion lari ($540 million), down 68 million lari from an earlier draft and a deficit of 369.4 million lari. The IMF had called for 100 million lari in spending cuts. The IMF's permanent representative to Georgia Hunter MONROE said there is still cause for concern that funds will not be released because of continued low tax collection in the first two months of 1999. Opposition deputies have attacked the draft budget as "shameful," saying that far too much is still being spent on state bureaucracy.

Azeri Caspian Oil Reaches Supsa

· The first Azerbaijan off-shore Caspian oil to be exported via the western export pipeline via Georgia reached Supsa on Thursday, three months after it was pumped into the pipeline at Baku. The 812 kilometer pipeline has a throughput capacity of 5 million metric tons annually. The Caucasus Press reported that Georgian Deputy Foreign Minister Valery CHECHELASHVILI said that disagreements over financing are delaying a decision on construction of the so-called Main Export Pipeline from Baku to the Turkish terminal at Ceyhan. CHECHELASHVILI added that the precise route of that pipeline through Georgia has not yet been decided and that it may run from Baku to Supsa and from there to Ceyhan.

Three Oil Co. Reduce Operations In Turkmen

· Three leading western oil companies announced plans to considerably reduce their volume of operations at oil deposits in Turkmenistan. They are also revising their mid-term strategy in the region. According to information from the London's International Oil Exchange, the US Mobil, the British Monument Oil and the Irish Dragon Oil plan to reduce the volume of work at Turkmen deposits by 50 percent because of high extraction and transportation costs for the oil coming from the eastern coast of the Caspian sea. It was also reported that Mobil and Monument Oil want Turkmenistan to revise the terms of development of the Garashyzlyk oil deposit and provide an easier tax regime. Dragon Oil also plans to have the Cheleken deposit development terms changed.

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

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