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

Tuesday, March 16, 1999

Russian Federation

Politics

Impeachment Vote Date Set

· Russian State Duma speaker Gennady SELEZNYOV said that the Duma will vote on April 15th on the impeachment of President Boris YELTSIN. The Duma impeachment commission has charged YELTSIN with instigating the 1991 Soviet Union collapse, improperly using force against hard-line lawmakers in 1993, launching the botched 1994-1996 war in Chechnya, bringing the Russian military to ruin, and waging genocide against the Russian people by pursuing economic policies which impoverished the country. Communist Party leader Gennady ZYUGANOV expressed confidence that at least some of the five impeachment counts will receive a two-thirds majority in the Duma. He predicted that debate would last less than a week. Most politicians believe that the impeachment vote will not receive the necessary two-thirds majority. If the motion does clear that hurdle, it must then win approval in the Federation Council and pass through the Constitutional and Supreme Court. All of those institution are considered more friendly to YELTSIN than the Duma.

Controversy Surrounds Skuratov

· Yuri SKURATOV, former prosecutor general, on Wednesday will attend the Federation Council's meeting to explain his reason for resigning and present the work from the Prosecutor General's Office, which one source described as, "important evidence on some cases of interest to society." The prosecutor unexpectedly resigned last month for "health reasons" and President Boris YELTSIN accepted the resignation. However, according to the Constitution, it is the Federation Council which approves and dismisses the prosecutor general. Conflicting reports in the Russian media show that

there is more to SKURATOV's resignation than has been released. Moskovsky Komsomolets reported that presidential administrative head Nikolai BORDYUZHA blackmailed SKURATOV into tendering his resignation with a videotape of SKURATOV's "sexual exploits" But, Novye Izvestiya alleged that head of the Kremlin's facilities directorate Pavel BORODIN forced SKURATOV out because he had uncovered BORODIN's shady deals with Mabetex, a Swiss construction company contracted to do some work in the Kremlin. YELTSIN met in the Central Clinic Hospital today, "with one of the possible candidates to the post of the prosecutor general," according to a Kremlin source. It is likely that YELTSIN will offer three candidates for the post, among them head of the Kremlin Main Controlling Department Yevgeny LISOV, Deputy Prosecutor General Mikhail KATYSHEV, and Director of the Moscow Juridical Academy Oleg KUTAFIN.

On Saturday, Prime Minister Yevgeny PRIMAKOV signed a decree sacking State Customs Chief Valery DRAGONOV. According to Sevodnya, DRAGONOV was offered up as a distraction from corruption accusations lodged against other Cabinet officials. Russian Minister of Railways Nikolai AKSENENKO today announced that Gennady FADEYEV has been appointed chief of the Moscow Railway.

Economy

CSFB Proposes Partnership Approach

· Credit Suisse First Boston (CSFB), the largest holder of defaulted Russian treasury bills—about 40 percent,

Today's News Highlights

Russia

Ikea To Change Strategy

Dead Deputy Still Votes

European Republics

Tajik-Belarus Def. Mins. Meet

Ukraine Raises Energy Rates

South Caucasus & Central Asia

Chanturia's Statements Untrue

Turkey Player Or Pawn?

Kazakh Grounds Cargo Plane

Tajik Privatizes Cotton Cos.

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on Monday proposed a new approach to restructuring the Russian government's domestic debt. Managing director Andrew IPLENDANZ said, "From our discussions with the Russians, it is clear that they are interested and keen to pursue this type of approach." Breaking ranks with other western banks such as Deutsche Bank and Chase Manhattan Bank which accepted Russian terms giving five cents on the dollar for investments, CSFB has proposed setting up the Nikitsky Recovery Fund to be used as an investment vehicle into the Russian economy. The fund, based on a partnership approach, would hold defaulted Russian ruble securities at face value and swap them for investments in project financing and in companies in Russia. The fund will be launched only when it has at least 40 billion rubles. CSFB has pledged to put its own holdings of Treasury bills and short-term bonds (GKOs and OFZs) in the Fund. The fund will open Wednesday and close March 31st.

The Swiss branch of Credit Suisse was fully in accord with the proposal coming from the Russian Finance Ministry, while the US First Boston was waiting for more specific details of the Russian terms. Shareholders were advised at the beginning of March to refrain from selling their T-bills in the hope for a more favorable exchange scheme. Russia's short-term debt to the West totals almost $16 billion. The Finance Ministry has proposed paying off 10 percent of the debt amount in cash, exchanging 20 percent of the amount for three-year no-interest bonds and 70 percent for five-year coupon bonds. According to some sources, the Finance Ministry is planning to offer to the creditors new securities, such as notes to pay denominated in foreign currency from a number of Russian companies.

Ruble = 23.26/$1.00 (NY rate)

Ruble = 23.26/$1.00 (CB rate)

Restrictive Export Measures Forces Big Losses

· Russian Trade Minister Georgy GABUNIA last Wednesday announced that the overall direct damage caused by restrictive measures applied to Russian commodity exports is estimated at about $1.5 billion per year. He said only immediate counteraction to foreign protectionism, in particular, with regard to steel and chemical products, may prevent further increase in Russia's annual foreign currency loss to $3 billion. He said these measures inhibit Russia's ability to pull itself out of economic devas

tation. GABUNIA said a considerable part (53) of restrictions relates to anti-dumping measures. Because Russia is not a member of the World Trade Organization (WTO), many trade disputes cannot be resolved using the organization's settlement process. Therefore trade disputes between Russia and other nations are subject to national laws of its trading partners, which discriminate against non WTO member countries. Among the countries favoring restrictive measures against Russian exports the minister named the US, Mexico, Brazil, Turkey, India, South Korea, Hungary, Poland and the European Union countries.

Business

Ikea To Change Strategy Due To Import Tariffs

· The world's largest furniture retailer, Swedish company Ikea, on Friday said that Russia's customs and import duties are jeopardizing its plans to develop as many as eight superstores in Russia. Ikea, which is building a $127 million retail park outside of Moscow, warned that "prohibitive' duties on imported furniture has forced the company to reconsider its expansion strategy. Ikea's Russian manager Lennart DAHLGREN said that, "if the government does not agree to make concessions it would make the whole Ikea concept impossible in Russia." Ikea aims to undercut other furniture retailers by more than 20 percent. In Russia, its products will face a duty equivalent to 20 to 30 percent of the retail price. Ikea representative and Russian government officials had been discussing the issue for two and a half months. A decision is expected in the beginning of April. "If we fail, Ikea prices in Russia will be much higher than anywhere else in Europe. That would mean that our customer target group would be restricted to the rich," the Financial Times reported.

Lukoil Under Bid By Rivals For Petrol Shares

· Russian oil company LUKoil has been under bid by two of its former rivals the Bulgarian-Austrian international consortium and the Yukos Petroleum company for the controlling shares of the Bulgarian Petrol state company. According to LUKoil lawyers, their client was ready to pay $61 million and invest $147.35 million in the development of the Petrol infrastructure within five years. The consortium and Yukos Petroleum offer a more moderate investment sum of $60 million. Results of the tender will be released this week to the Bulgarian Privatization

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Agency's Supervisory Council. Many are speculating that the Agency may annul the tender results and announce new bargaining for the possible involvement of LUKoil. There are also assumptions that Yukos Petroleum may share the controlling parcel with Rosneft if there is a victory in the tender.

Chairman of LUKoil company Vagit ALEKPEROV told the Federation Council on Monday that Russian banks should be encouraged to invest in Russia's economy rather than funds from abroad. He specifically named Vneshekomombank, Vneshtorgbank, and Sberbank. However, these banks have so far been unwilling to invest their capitals in Russia, ALEKPEROV said. He also called for a change in Russia's tax laws. He said the profitability of the oil industry is only 4 percent, and the imposition of exports duties is causing a sharp production slump. ALEKPEROV said transportation expenses now, "nearly reach the price of the product itself."

Tuesday Tid-Bit

Presumed Dead, Duma Deputy Still Voting

· Since disappearing from his home in Krasnodar Krai on December 2, 1996 and presumed to be dead by his relatives, Russian State Duma deputy and member of the Popular Rule Party Yuri POLYAKOV has been recorded as voting on at least three occasions. He is still technically employed as a Duma deputy, RFE\RL Newsline reported. Head of the Duma's House Rules Dmitiry KRASNIKOV asserts that it is not only legally permissible for other deputies to vote on absent members' behalf, but it is also necessary to keep legislation moving because of deputies' frequent absences.

KHAIRULLAYEV said that Tajikistan is interested in receiving military training and acquiring information on air defense systems. CHUMAKOV will also meet with Tajik President Emomali RAKHMONOV and tour an army unit in the south of Tajikistan.

Ukraine Raises Energy Rates, Cuts Off Debtors

· Ukraine's National Commission for Electricity Regulation ordered that beginning April 1st, the prices of electricity and gas will be increased by 20 percent and 25 percent receptively. The Ukrainian Trade union Federation said about 70 percent of Ukraine's population will not be able to pay the new rates on a regular basis. In addition, Kiev has cut off electricity supplies to 60 of its largest enterprises, which have not paid their debts for earlier deliveries. Ukrainian Energy Minister Ivan PLACHKOV reported to the Cabinet that some of these businesses were steel plants. Deputy Economics Minister Viktor KALNYK predicted that tariffs for utility payments, including rent, heat, and water supplies will be increased by 25 to 30 percent.

South Caucasus & Central Asia

Russian Interior Minister Visits Georgia

· A Russian Interior Ministry delegation led by Interior Minister Sergei STEPASHIN arrived in Tbilisi late this evening. On Wednesday, STEPASHIN will conduct talks with his Georgian counterpart Kakhi TARGAMADZE and then will be received by President Eduard SHEVARDNADZE. Both Interior Ministers will take part in the joint meeting of interior ministry leadership of the two countries. They will discuss questions of coordinating their activities in combating organized crime.

Turkey To Pay Excess Pipeline Costs?

· RFE\RL Newsline today incorrectly reported that Georgian International Oil Company President Gia CHANTURIA said the Turkish government and international oil companies operating in Azerbaijan have reached an agreement on the financing of the so-called Main Export Pipeline for Azerbaijan's Caspian oil. The report added that the Turkish government will meet additional expenses if the cost of construction exceeds the estimated $2.5 billion; USAID will contribute toward the construction of a new oil refinery at Supsa; and that Japan's Itochu will provide equipment for the new refinery. In an exclusive

European Republics

Belarus-Tajik Defense Ministers Meet

· Belarus Defense Minister Alexander CHUMAKOV met his Tajik counterpart Sherali KHAIRULLAYEV in Dushanbe to discuss bilateral military and technical cooperation and interaction in the Commonwealth of Independent States (CIS). CHUMAKOV on Monday said that this cooperation has to be raised to a higher level. Both ministers noted that earlier bilateral agreements need revising. The Belarus minister said that his country could help modernize Tajikistan's military hardware, particularly armored vehicles and aircraft.

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Intercon interview with CHANTURIA, he refuted these statements as untrue. He said that negotiations are still underway, but no decisions have been made. He said that USAID has not pledged any money for the pipeline or refinery. CHANTURIA said that the Trade and Development Agency had spent $750,000 to do a feasibility study. Two routes through Georgia are under discussion: from Baku via the Georgian Black Sea terminal at Supsa to the Turkish terminal at Ceyhan and from Baku via the west Georgian town of Zestafoni to Ceyhan.

Pipelines: Is Turkey A Player Or Pawn?

· Because Turkey's domestic demands for energy supplies are expected to grow five times between now and 2020, it has been actively signing pre-agreements to purchase natural gas and oil supplies from several different countries. Turkish estimates show that natural gas consumption will rise from 9.9 billion cubic meters in 1998 to 82 billion cubic meters by 2010-2015. In addition to signing contract for energy supplies from Russian gas monopoly Gazprom, 10 billion cubic meters of gas from Turkmenistan through Iranian routes, and more recently with Turkmenistan for 16 billion cubic meters of gas, Turkey has been signing deals for new pipelines. Construction of a 623 mile pipeline beginning November, 1998 between Erzurum, Iran to Ankara, Turkey to be completed in 2001. Turkey agreed to buy 105 billion cubic feet of gas per year from Iran. Turkey has said that its top priority for its energy policy is its support for the Turkmen-Turkey gas pipeline and the Baku-Supsa-Ceyhan oil pipeline. The Turkish government said it is promoting these two lines because of its increasing energy demands and geo-political reasons. Turkey appears to be following the US led to lessen the former Soviet republics' dependence on Russian oil and gas export routes, by building new ones that connect to Western markets.

But, Turkish policy is far from consistent. Turkey is also entertaining proposals for a pipeline connecting Turkey and Iran as well as support for the Russian

Blue Stream pipeline to be built and financed by Gazprom and Italy's ENI. Gas Strategies consultant Jonathan STERN said that the significance of the Blue Stream is that Russia will be able to, "lock up Turkey's two main base load areas of Istanbul and Ankara." Other suppliers would be forced to share the remaining market. US Ambassador to Turkey Mark PARRIS argues that Turkey's plan to support several projects simultaneously could lead to none being built at all, the Financial Times reported. The question remains where will these competing projects obtain the billions required to build them? Limited resources of time and gas consumers indicate that all three pipelines are not possible. Pipeline politics begins a new struggle for world capital. Is Turkey being used as a pawn in Russia's strategic plans to deny viable alternative pipelines capital drawing these funds instead to its technically difficult "Blue Dream" project.

Kazakhstan Grounds Plane For Explosive Cargo

· On Monday, Kazakhstan police grounded a Russian cargo plane flying from Britain to Kyrgyzstan for carrying 10 tons of undocumented explosives. Kazakhstan police spokesman Yan GIRIN said that the An-12 plane was prevented from leaving after landing for refueling in Uralsk. He refused to say who owned the plane, what it was supposed to be carrying, or how many people were on board, the Associated Press reported. It is not clear whether the plane had made any other stops between Britain and Uralsk. Kyrgyzstan, borders Tajikistan and is not far from Afghanistan, both plagued by violent conflicts.

Tajik Sells 22 Cotton Production Companies

· Seven applicants won an open international tender for the privatization of 22 cotton-producing companies in Tajikistan on Saturday. The tender commission received bids from 10 applicants, but only seven participated in the tender. The other three dropped out because of a failure to make the down payment of 5 percent of the starting price. There was no competition at the tender. The sale of the enterprises earned the budget $17.86 million.

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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