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 2, 1999

Russian Federation

Politics

Duma Offers Political Truce Document

· The Russian State Duma today offered the executive branch its own version of the political truce accord which corresponds to the Kremlin-proposed one in most items, but adds a proposal to form a majority government in future. That is likely to irritate the Kremlin since it would limit the President in his powers to appoint the key ministers. Leader of the Our Home is Russia (NDR) in the State Duma Nikolai RYZHKOV fears the Kremlin will reject the proposal. "There will be categorical objections against the NDR-proposed item about the formation of the government in future which is supported by the majority in parliament," he said. The other items of the Duma-proposed draft resemble those offered by the Kremlin including: amendments to the Constitution will be introduced in an agreed manner; executive can not dismiss the government, without agreement of both chambers; government to draft anti-crisis program and parliament to approve it; all parties agree to honestly and lawfully conduct the coming elections; parties to issue amendment to criminal code regarding political extremism; and Russian regions and local self-government bodies pledge "not to rock the boat," not to destabilize the situation in the sphere of the single economic and political space. The Duma version, Communist leader Gennady ZYUGANOV said the truce document, "does not include the main issue connected with the presidential authority which cannot ensure law and run the country." It is necessary, "to redistribute presidential powers in favor of a strong government controlled by the legislature," ZYUGANOV stressed. The reaction of the executive branch is unknown.

Church Of Scientology Raided

· Units of Moscow's municipal police, Federal

Security Service (FSB), and Tax Police forces on Thursday and Friday carrying automatic weapons and bulletproof vests raided at least two offices of the Los Angeles-based Church of Scientology in Moscow for inspection beginning at 9 am and lasting over 12 hours. The Church described the raids in a statement as an attack on freedom of religion and "unconstitutional harassment of members of a peaceful religion." The statement continues that, "Actions by the state to repress religious freedom do not allow Russia to move forward. On the contrary, Russia is moving backward to totalitarianism." Rev. Herber JENTZSCH, president of Scientology International, sent a letter to Russian Ambassador Yuri USHAKOV protesting the raid. A 1997 Russian law, condemned by the Vatican and several Christian denominations in the US, calls for mandatory registration of all religious groups and organizations, with clauses restricting registration to those organizations present in Russia for 15 years, effectively limiting the activities to "main religions." The Russian Orthodox Church has been very active in efforts to limit the expansion of other religious movements into Russia. Moscow Prosecutors are trying a case to ban the Jehovah's Witnesses group. The ranking police officer on the raid said the inspection was covering everything form tax records to weapons. He said, "Any organization can be inspected, any factory, any enterprise. Public organizations are in a special situation. Many don't pay taxes and get around customs. We're conducting a comprehensive inspection. There is no repression going on here."

Today's News Highlights

Russia

New Accusations Against CB

Dunkin Donuts Closes In Russia

European Republics

Estonian Parliament Elections

LE Continues Belarus Electricity

Kiev Destroys SS-19 Missiles

South Caucasus & Central Asia

IMF Extends Georgian Program

BSBTD To Open In June

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Economy

Ruble = 22.89/$1.00 (NY rate)

Ruble = 22.89/$1.00 (CB rate)

Ruble = 24.92/1 euro (CB rate)

New Accusations Against CB

· Duma deputy Nikolai GONCHAR has accused the Central Bank of using its currency reserves to buy state securities through its foreign subsidiaries. He charged that FIMACO invested $143 million in Russian government treasury bills in 1996, when interest rates were sky high. The investment earned a return of $38.9 million. Former prosecutor general Yuri SKURATOV before resigning revealed that the Central Bank from 1993 to 1997 shipped hard currency reserves to a small obscure Financial Management Company (FIMACO). He alleges that a total of $50 billion passed through the account. Central Bank officials insist there was never more than $.14 billion and the FIMACO received only $1.7 million for managing the money. GONCHAR accuses top officials of siphoning off investment profits from the off shore account. He said, "Russia created a system under which the thigh-ranking financial elite of the country received personal income by making the country indebted." Central Bank's deputy chairman Oleg MOZHAISKOV stressed that there was no wrongdoing and that all the money was returned, "with interest and to the last kopeck." No figure according to this has been released. Even GONCHAR said he can find no information showing the profit was returned to government coffers, and believes it was stolen. The Bank claims that funds were placed in FIMACO's offshore account to avoid seizure if Russia defaulted on debts. GONCHAR adds that, "The Central Bank issued a special regulation that allowed it not to show these amounts on its balance sheets. They were recorded on special accounts." Chairman of the Auditing Chamber Khachim KARMOKOV said no major violations had been exposed, but stressed that his chamber had not checked the export of capital and its further use. If the accusations are confirmed, it is likely that the outcome will jeopardize the International Monetary Fund's disbursement of new loans

Deutsche Bank Removed From Committee

· The 19-member Western banking committee holding Russian debt in Treasury Bills and short-term bonds voted late Monday to remove Deutsche

Bank as lead representative of the committee. It also voted to abolish the of co-chairpersons, held by six Western banks. The vote was taken after Deutsche Bank and Chase Manhattan Bank on Friday accepted in principle the T-bill restructuring scheme offered by the Russian government and Finance Ministry. Banks must decide by Friday whether to accept the restructuring terms. The two influential banks' actions created a split in the committee and dramatically weakened the positions of those which tried to exert pressure on the Russian side, in order to secure for themselves more advantageous terms of the debt payment. The Committee had issued a request for an extension of time until April 30th, which has been undermined by Deutsche Bank and Chase Manhattan Bank's acceptance. Foreign holders could increase the threat of legal action under international law over the $15 billion GKO debt. Most banks remain skeptical over legal action. However, the Financial Times reports that there are strong grounds for arguing that Russia's measures to suspend trading in GKOs and the moratorium on some foreign currency operations amount to expropriation. This is because investors were deprived of the use and control of their investments. If this is true, Russia would be liable under the treaties to pay compensation. Investors would insist that compensation be paid in dollars not rubles according to the value of securities before August 17, 1998.

Economics Minister Briefs Japan On Situation

· Russian Economics Minister Andrei SHAPOVALYANTS declared in Tokyo that Russia might be released from part of former Soviet debts Russia had inherited, citing talks being conducted with the International Monetary Fund (IMF), the Paris and London Clubs. He pointed out that talks are being held to avoid default, "in a civilized way." SHAPOVALYANTS specified that at issue was the problem of writing off part of the Soviet debt, rather than Russia's debts created after disintegration of the former Soviet Union. SHAPOVALYANTS declined to specify the exact sum of Russia's foreign debt, saying that it was, "above $120 billion." He added that since August 17, 1998 approximately 400 Russian banks had been stripped of licenses, and "the process is not over yet." The Economics Minister noted that a legislative basis had been created for settlement of this problem and that in future the emphasis would be made on formation of a regional

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network of banks, upgrading the status of these banks and enhancing their role in Russia's economy. SHAPOVALYANTS said that despite the economic crisis, Russia expects growth in the last half of 1999, in fuel industry, including oil production, oil processing and the gas industry, as well as ferrous metallurgy, the chemical and petrochemical industries, engineering and metal-working, the light and food industries and agriculture. The volume of industrial production in 1999 is expected to amount to 98 percent on the previous year. During his Tokyo visit, SHAPOVALYANTS will also meet Japanese Minister of Foreign Trade and Industry Kaoru YOSANO, the leadership of the Japanese-Russian committee on economic cooperation and of the Export-Import Bank, as well as Japanese Prime Minister Keizo OBUCHI and Foreign Minister Masahiko KOMURA.

Business

Dunkin Donuts Pulls Out Of Russia

· The "time to make the donuts" in Russia has run out. Dunkin Donuts has become the latest casualty of the Russian financial crisis, closing all four outlets in Moscow and pulling out of the market. Owners Allied Domecq, which opened the first outlet in Moscow in 1996, say the company's global corporate strategy calls for the handover of the chain to franchise operators and expansion through franchisees. But all plans were scrapped by the severe economic crisis that hit the country last August, causing a substantial drop in business and casting doubt over future profits. Spokeswoman Nicki LEE says the company decided to close the chain and pull out, finding no franchisees to do business with. Allied Domecq's other business in Russia, Baskin-Robbins Ice Cream, is doing well, with a well-established network of franchise outlets. The departure of Dunkin Donuts from Russia follows the pullout of Pizza Hut and Kentucky Fried Chicken, which closed their outlets in Moscow over the New Year, leaving McDonald's as the last western fast food operator with a major operation in Russia.

Russia To Build Five New Power Stations

· Chief engineer of the Izhorskiye Zavody Company Vadim PETROV Monday said that Russia plans to build five new power units for nuclear stations over the next few years. These will be stand-by facilities of operating units at nuclear power plants. This St.

Petersburg engineering enterprise will be engaged in manufacturing reactors and reactor equipment for new units. According to the chief engineer, the company will build one unit VVER-640 for the Leningrad nuclear power station, two VVER blocks for the Kola nuclear plant, and two VVER-1000 units for the Novo-Voronezhskaya nuclear station. PETROV emphasized that a contract with the Rosenergoatom agency was already signed to build stand-by facilities for the Leningrad nuclear plant. It is probable that Izhorskiye Zavody Company will manufacture reactors with a capacity of 400 mW for a floating Pivek station which is being designed on the Chukchi Peninsula. Izhorskiye Zavody Company is the only Russian firm which has the technical capacity and equipment to fill such orders. The company has been involved in building a reactor for the Bushehr power plant in Iran and two reactors for the Lianyungang power plant in China.

European Republics

Estonia Prepares For Parliamentary Elections

· Estonia's parliament closed its final session on February 25th. According to the Constitution, the state authority will be in the hands of the government until the convocation of a new parliament. The general elections, in which more than 1,900 candidates will be running for 101 seats in Estonia's one-chamber parliament, are scheduled for March 7th. The interests of the Russian-speaking population will be represented by the United Popular Party and the Russian Party of Estonia which had six seats in the outgoing legislative assembly. As concerns election returns forecasts, public opinion polls say the most likely winner will be the Centrist Party.

Lith. Not To Cut Belarus Electricity

· Lithuania's State Defense Council on Monday said it will recommend to the government to continue electricity deliveries to Belarus despite mounting debts owed by Belarus. Belarus owes state-run utility Lithuanian Energy (LE) some 374.5 million litas ($93.6 million). Belarus claims that it plans to repay the debt by early summer. It is Lithuania's largest foreign energy client, taking almost 90 percent of its energy exports. Prime Minister Gediminas VAGNORIUS noted, "This decision of the security council was made taking into consideration not only

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economic, but also political consequences." Lithuania needs to export at least 5.5 billion KwH per year to keep electricity prices stable on the domestic front.

Meanwhile, LE is negotiation with Western banks to refinance some of it 556 million litas ($139 million) debt to financial institutions. LE deputy director general Arnoldas LINKEVICHIUS said that firm must repay 341 million litas of its debt in 1999. In 1998, LE signed a five-year $375 million global medium-term program to be led by Merrill Lynch and said it may borrow up to $110 million in the first three quarters of the year. LE owes Ignalina nuclear power plant 374 million litas as of February 26th, compared with 294 million litas at the end of 1998. Lithuanian clients owed LE around 50 million litas at the end of January.

Ukraine Destroys SS-19 Missiles

· On Friday, Ukraine destroyed the last of its 111 SS-19 missiles under a US-financed disarmament program. The ceremony was held at a Soviet-era factory in the southeastern city of Dnepropetrovsk. US and Ukrainian officials presided over the missiles' destruction. Ukraine inherited 130 SS-19 missiles, 46 SS-24 missiles and 44 strategic bombers from the Soviet Union. It later sold 19 SS-19 missiles to Russia, according to Ukrainian officials. Under a Cooperative Threat Reduction program, the US financed the former Soviet republic to complete the process of destroying the missiles and silos, which once held nuclear warheads. The process of pulling Ukraine's SS-24 missiles from their silos and destroying the silos has already begun. Officials on both sides however say extracting the solid fuel used in SS-24s is a more challenging process than draining the SS-19s' liquid fuel.

South Caucasus & Central Asia

IMF Extends Georgian Program, Still No Loan

· The International Monetary Fund (IMF) on Monday extended the program under which a loan may be offered to Georgia, but said that poor tax collection is still holding up the disbursal of funds.

Georgia is hoping for a further $37 million under an Enhanced Structural Adjustment Facility (ESAF). IMF representative in Georgia Hunter MONROE said, "Georgia's ESAF arrangement which expired on February 26th was extended, but for the next disbursement from the IMF to take place Georgia needs to show a positive tax collection record for several months." Another condition for disbursement is the passage of the 1999 budget through parliament. Georgian President Eduard SHEVARDNADZE hailed the IMF extension. He said, "Thanks to measures which have been take in Georgia recently the program of international financial support for Georgia from the IMF and other financial organizations will be resumed." He said that planned tax collection for January and February had been met. Tax collection in Georgia was 9 percent of the Gross Domestic Product (GDP) in 1998.

Black Sea Bank To Open In June

· The Black Sea Bank of Trade and Development Bank (BSBTD) with headquarters in Salonika, Greece, will be unveiled in June. The inauguration date has been set by the bank's board of directors at its Friday meeting. The BSBTD directors approved the bank's emblem and set their next meeting for April 4th to 5th, to be held in Kiev. The board of directors discussed the bank's financial policies, rules for the funding of projects and commercial ventures, operation management in hazard zones and investment policies. The Black Sea Bank of Trade and Development was founded under an accord signed in 1994 by 11 state members of the Black Sea Economic Cooperation forum. The bank's authorized capital is an equivalent of $1.375 billion. Up to 50 percent of contributions to BSBTD authorized capital can be made in national currencies. The founding accord allows participation of international financial institutions in the BSBTD. Russia, Greece and Turkey have the largest shares in authorized capital, 16.5 percent each. Bulgaria, Romania and Ukraine are capitalized at 13.5 percent each. Capital shares of Azerbaijan, Armenia, Georgia, Moldova and Albania are 2 percent of each.

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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