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

Monday, March 29, 1999

Russian Federation

Politics

Primakov's Resignation Already Decided?

· Argumenty I Fakty on March 23rd published an article pointing out the inner struggles for power within the Kremlin and a possible time-line for events. Over a week ago, President Boris YELTSIN fired presidential chief of staff and secretary of the Security Council Nikolai BORDYUZHA for failures in connection with the resignation of Prosecutor-General Yuri SKURATOV, scandals linked to the sacking of Commonwealth of Independent States (CIS) executive secretary Boris BEREZOVSKY, and because he has been viewed as a "PRIMAKOV man." This implies that Prime Minister Yevgeny PRIMAKOV is the main target of YELTSIN's ax. But when will PRIMAKOV's power be cut off? The newspaper believes that it could occur before April 15th, the beginning of the Russian State Duma's impeachment vote. It speculates that if PRIMAKOV is removed, YELTSIN will propose former prime minister Viktor CEHRNOMYRDIN as acting prime minister. After his candidacy is rejected three times, the Duma will be dissolved and therefore unable to vote on the impeachment of President YELTSIN. "If, by 15th April PRIMAKOV, is not sacked and the Duma is not dissolved, one will have to wait for three months, until 15th June." This is the deadline for the impeachment and the prime minister cannot be replaced during the impeachment vote. It is believed that PRIMAKOV was to be fired in the beginning of March, to be replaced by Federation Council speaker Yegor STROYEV. But as the month draws to a close, there are more reasons to fire him than ever before. These include: failure to present an economic strategy, improve relations with Chechnya, prevent terrorist acts in the North Caucasus, to reach agreement with the International Monetary Fund (IMF) on full funding, and poor handling of the mass media. However,

the newspaper notes out that CHERNOMYRDIN's return to government may be prevented by PRIMAKOV supporters, whose newest members are said to include YELTSIN's wife, his oldest daughter Yelena, and her husband head of Aeroflot Valeri OKULOV.

US Embassy Attacked In Moscow

· Russian Interior Minister Sergei STEPASHIN has issued an order to boost security at diplomatic missions, following an attack on the US embassy in Moscow on Sunday. Police and gunmen exchanged shots after a man dressed in camouflage and masked attempted to fire a grenade launcher (RPG), which was captured on video footage shown by NTV television. The attackers escaped in a white jeep that was later found abandoned. NTV and Itar-Tass reported that the three men had been detained, but deputy Interior Minister Valery FYODOROV told Ekho Moskvy radio station that he could not confirm this. The US embassy has been the target of anti-NATO protest, since the bombing of Yugoslavia began on Wednesday. Russian authorities have denounced the attack. The Russian Foreign Ministry said that, "competent institutions were taking measures to find and punish the culprits and enhance the security measures near the embassy." President Boris YELTSIN who labeled the incidents as, "an anti-national act undermining state-to-state relations."

Putin Appointed New Security Secretary

· Russian President Boris YELT-SIN today appointed Vladimir

Today's News Highlights

Russia

Gov't To Limit Currency Exports

UES To Export Electricity

Aeroflot On Summer Schedule

European Republics

IMF Resumes Lending To Kiev

South Caucasus & Central Asia

Shevardnadze On Int'l Relations

CFSB To Be Project Manager

Rus-Armen Discuss NK Conflict

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PUTIN as secretary of the country's Security Council. Putin will also keep his post as head of the Federal Security Service (FSB). Former secretary of the Security Council Nikolai BORDYUZHA was fired by YELTSIN earlier this month for mismanaging an attempt to force Russia's prosecutor general Yuri SKURATOV out of his job. PUTIN became a Soviet KGB agent after he graduated from Leningrad University in 1975. He was promoted to the leadership of the FSB last June. PUTIN met with YELTSIN on Thursday and presented a report on the investigation of the Vladikavkaz explosion and the work of the FSB. The FSB director told the President about the success of the FSB's joint operation with the special services of Kyrgyzstan and Kazakhstan to suppress contraband. PUTIN also reported on measures used to struggle against the unlawful uses of radio-electronic and technical equipment. PUTIN is widely believed to be linked to former deputy prime minister Anatoli CHUBAIS, who is chairman of Russia's United Energy System (UES).

Meanwhile, Russian presidential spokesman Dmitry YAKUSHKIN said the question of who will become Commonwealth of Independent States (CIS) executive secretary will be decided at the CIS summit slated for April 2nd. He stressed that "the President of Russia does not believe that the CIS is falling apart," adding that the summit will focus on progress in CIS reform since the last meeting of CIS leaders.

Economy

Ruble = 24.19/$1.00 (NY rate)

Ruble = 24.2/$1.00 (CB rate)

Ruble = 26.02/1 euro (CB rate)

Russia-IMF Millimeters Apart On Issues

· Russian officials are optimistic about the outcome of this weekend's talks with International Monetary Fund (IMF) Managing Director Michel CAMDESSUS. Russia has been hoping the IMF will resume lending of a financial bailout package for Russia. They would like to receive a loan of $8 billion, but believe the amount is likely to be $4.5 billion. Today, CAMDESSUS met with Russian Prime Minister Yevgeny PRIMAKOV and held a telephone conversation with President Boris YELTSIN. PRIMAKOV said, "You now see in full the picture of our political life. Not only through [Finance Minister] Mikhail ZADORNOV, [Tax Minister] Georgy BOOS and

Central Bank chairman Viktor GERASHCHENKO, you have had the possibility to contact the entire leadership of the country." CAMDESSUS also met with speaker of the State Duma, Communist Gennady SELEZNYOV and Communist leader Gennady ZYUGANOV, who accused the Fund of "twisting the government's arms" by "setting totally unrealistic conditions" for the release of the loan. He said that the IMF should either reach a loan agreement or, "be prepared for a military or criminal government in the future." But CAMDESSUS earlier in the visit stressed that, "Russia, possessing huge resources, can fully use, in the near future, advantages, offered by the market economy."

Russian finance ministers have often warned that without financial support from the IMF, Russia will either have to default or run the risk of printing money, which could lead to hyperinflation. Russia's currency reserves have dwindled to just $11.3 billion, leaving Russia with the impossible task of paying off $17.5 billion in foreign debt that falls due this year. IMF loans to Russia have been frozen ever since the Russian economy was hit by last year's August financial crisis. The IMF has called on the government to implement an austere budget for 1999. Their demands include postponing tax cuts, levying higher export taxes on Russia's oligarchs, and reforming Russia's state-run energy monopolies. ZADORNOV noted that positions of the IMF and Russia have come closer considerably, including in the tax sphere. According to his data, the Russian federal budget will receive over 32 billion rubles in revenues in March, while only 25 billion rubles were collected in February. ZADORNOV noted that the government will submit a bill to the State Duma providing for introduction of a lower rate on the value-added tax beginning January 1, 2000 rather than July 1, 1999. Russia's chief negotiator with the IMF, Yuri MASLYUKOV, said Sunday that just "millimeters" of disagreement remained between Russia and the Fund. While Moscow may believe that an agreement for a loan decision may be reach today, Washington feels that those who think loans are imminent are far from the mark.

Gov't Plans To Limit Currency Exports

· The Russian government today submitted to the Russian State Duma an amendment to the Federal law which would limit the amount of cash that indi

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viduals can take out of Russia to $5,000. Nonresidents would be allowed, if the laws are passed, to take out of Russia sums that are not in excess of those they moved into it. First Deputy Finance Minister Sergei IGNATYEV said that the government, "does not plan to introduce limitations on operations with credit cards, travelers' checks, and banking transactions." He also said that according to the State Customs Committee, $10.6 billion in cash were exported from Russia in 1998, $3.7 billion of which were exported by people who were taking more than $10,000 at a time. He stressed these facts indicate that the money could have been used for either commercial transactions or illegal activities. Prime Minister Yevgeny PRIMAKOV said, "It is time to put a block" on the illegal outflow of capital from Russia, "and we will do it." The government session considered several amendments to the current Russian legislation on currency regulations and exchange control, on banks and the banking activities, and to the Criminal Code, which are aimed at preventing the illegal outflow of capital from Russia. The Duma's finance and credit regulation department chief Alexander POCHINOK also noted that the Central Bank is going to restrict correspondent contacts of Russian banks with foreign banks in offshore zones, if the Duma passes the bill on currency export limits. He said Russian banks have 6,600 offshore accounts, of which 90 percent are on Nauru island in the Pacific. The banks put a monthly $10 billion through this state, POCHINOK said.

Business

UES To Sell Germany Companies Electricity

· German energy companies Bayernwerk and Wiener Verbund are negotiating with Russia's Unified Energy Systems (UES) to buy electricity from Russia at a rate of 600,000 kilowatts each. This is approximately the capacity of one nuclear power plant. Bayernwerk, which is a subsidiary of German corporation Viag, is ready to pay the UES 1.5 pfennigs per kilowatt of electricity. Bayernwerk chief Otto MAJEWSKI holds that despite the Balkan crisis the project can be implemented. Viag corporation already made it plain to the federal government that the import of electricity from Russia affords the company an excellent opportunity to avoid the growing political pressure" on German energy companies connected with the government plans to discontinue the use of nuclear power plants.

Aeroflot Considers Flights To Jerusalem

· Following Israeli Prime Minister Benjamin NETANYAHU's visit to Moscow, Russian state-owned Aeroflot Airlines is considering operating charter flights to the controversial Jerusalem airport, if it does not get permission to land at Israel's Tel Aviv international airport. Jerusalem's small airport serves both domestic and UN flights, but Israel's attempts to turn it into an international airport have failed because foreign governments do not allow direct flights to the controversial destination. Aeroflot's Deputy General Director for Commerce Nikolai LEBEDEV met with Israeli Transport Minister Shaul YAHALOM and other Israeli officials to discuss the matter. YAHALOM said that if Russian authorities approved the Aeroflot flights, his ministry would authorize flights into Jerusalem as well. LEBEDEV pointed out that an Israeli-Russian air agreement provides that each country designate only one carrier for that route. Russian Transaero has been designated for the Russia-Israeli route. Aeroflot's representative noted that the main discussion is the Tel Aviv Airport because Jerusalem's runways are too short for regular services. He said, "It is possible to discuss Jerusalem only from point of view of charter flights."

Aeroflot To Switch To Summer Schedule

· The Russian national airline Aeroflot switched to the summer timetable on March 28th. The airline will offer flights to 150 cities in 79 countries around the world. On April 2nd, the airline will commission a new route from St.Petersburg to San Francisco. The route will be serviced by a Boeing with business class and economy cabins for $756 and up. An Aeroflot spokesman also said that on May 28th the airline will begin additional flights from Moscow to New York via St. Petersburg aboard the Boeing-767. One more flight, to be dispatched on Tuesdays, will connect St.Petersburg and Tokyo beginning April 6th. Aeroflot performs 600 flights a week, including 20 flights from St.Petersburg. Prospective cooperation with the city's Pulkovo airport will help increase the number of flights from St.Petersburg to various cities in Russia, the CIS and other countries.

European Republics

IMF Resumes Lending To Ukraine

· The International Monetary Fund (IMF) on Friday approved a recommendation to resume its stalled

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$2.2 billion lending program to Ukraine. The recommendations was based on results from the annual review of Ukraine's economy. The Fund in the next few days will hand over the second installment of $153 million. The IMF loan was frozen in November due to Ukraine's failure to implement reforms. Deputy prime minister Sergei TYHYPKO said that the memorandum agreed to with the IMF aims for an economic growth of 3 percent to 5 percent this year, after a 1.7 percent decline in 1998. Inflation is predicted to fall to 8 percent to 10 percent, from 20 percent in 1998.

South Caucasus & Central Asia

Georgian Pres. On Balkan Crisis

· Georgian President Eduard SHEVARDNADZE today said that NATO's military operation against Yugoslavia must not affect the international relations. Speaking on national radio, SHEVARDNADZE said, "No matter how the Balkan events will develop, they must not influence the international situation, nor should they cause a rise in tension between states, between great powers, and ruin the atmosphere of confidence and respect, which has become established since the end on the cold war. I believe that the main cause of the Balkan events should be sought in the imperfection of the system of international security. Unfortunately, the UN Security Council has been unable to work out and implement the mechanics of peace enforcement, including in Kosovo, whose foundations had been laid by the founders of the UN and the writers of its Charter." The President believes that if the common trend persists, there will be devastating consequences world-wide. Chief of the public relations department of the Georgian Foreign Ministry Avtandil NAPETVARIDZE on Friday said that the international situation can be remedied by respect for the demands of the international community by all the sides concerned, specifically the Contact Group for the settlement of the Kosovo conflict. The Foreign Minister believes tensions in the region can be overcome, if this requirement is met.

Swiss-US Bank To Manage Caspian Gas Project

· The Swiss-US investment bank Credit Swiss First Boston has been appointed chief financial manager of the development project of Turkmenistan's natural gas deposits in the Caspian Sea, according to the press service of the project's general contractor PSG Company. The extracted gas will be pumped over to Turkmenistan and Turkey through a new pipeline that will run along the bottom of the Caspian Sea and through Azerbaijan and Georgia. In May, Turkmenistan and Turkey are expected to sign an agreement in Ankara on the volume of gas supplies.

Armenia, Russia Discuss N-K Settlement

· Russian Deputy Foreign Minister Leonid DRACHEVSKY and deputy Russian co-chairman of the OSCE Minsk Conference on Nagorno-Karabakh, Nikolai GRIBKOV, met Armenian Foreign Minister Vartan OSKANYAN in Yerevan on Saturday to discuss the Nagorno-Karabakh settlement and ways to resume the peace talks. DRACHEVSKY briefed GRIBKOV and OSKANYAN on the results of his trip to Baku and outlined the main points of Russian President Boris YELTSIN's message to Azeri President Geidar ALIYEV. He stressed the importance of the OSCE mediator mission and confirmed the fundamental position of the co-chairmen to find a comprehensive solution acceptable to all warring sides. DRACHEVSKY said that the co-chairmen are ready to discuss new proposals and initiatives of the parties and facilitate their implementation. OSKANYAN reiterated Armenia's position and its readiness to resume the talks on the basis of the latest proposals of the co-chairmen for a "common state," which was accepted by Armenia and Nagorno-Karabakh, but rejected by Azerbaijan. The sides also discussed issues related to the upcoming meetings of the Commonwealth of Independent States heads of state and foreign ministers to be held in Moscow in early April and expressed their opinions on documents to be presented at these meetings. They agreed to hold consultations between the Russian and Armenian foreign ministries more often.

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

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