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

Wednesday, March 31, 1999

Russian Federation

Politics

Changes To FSB Leadership?

· Director of the Federal Security Service (FSB) Vladimir PUTIN, who was appointed Secretary of the Russian Security Council on Monday, quashed rumors that former secretary of the Security Council Nikolai BORDYUZHA would be appointed as head of the FSB. PUTIN said, "No change in FSB leadership is planned for the time being." He confirmed that he met with BORDYUZHA on Tuesday. Asked whether BORDYUZHA had been offered the post of the FSB Director, PUTIN said that BORDYUZHA, "had not told him anything about it." PUTIN has been linked to Anatoly CHUBIAS and BORDYUZHA to Prime Minister Yevgeny PRIMAKOV. If correct it is unlikely that BORDYUZHA will be appointed FSB chief. PUTIN declared that no changes in the FSB head structures would be made and that all measures earlier outlined by BORDYUZHA would be implemented. PUTIN said he is now in charge of a temporary interdepartmental commission set up at the Security Council to check the authenticity of information concerning wrongdoing by Prosecutor General Yuri SKURATOV.

Economy

IMF Mission To Hammer Out Loan Details

· Deputy Finance Minister Oleg VIYUGIN today said that plans have been made for an International Monetary Fund (IMF) mission to arrive in Moscow on April 7th. Russian Prime Minister Yevgeny PRIMAKOV and the IMF Managing Director Michel CAMDESSUS on Monday agreed on the main principles of new lending. The IMF mission and top level government representatives will coordinate a number of issues including a banking policy and new tax measures, as well as the amount of total lending. Neither side revealed the size of the loan. Russia

pledged a set of economic reform measures in July last year in exchange for the IMF-brokered aid package, but the reform framework collapsed in mid-August after the government devalued the ruble, prompting the IMF to stop lending to the country. Russia, which has received $4.8 billion from the package, needs additional funds to repay $4.5 billion in debts to the IMF falling due by the end of this year.

US Treasury Secretary Robert RUBIN said Tuesday the US will carefully study the latest agreement between Russia and the IMF. RUBIN said he is concerned about how the resumed lending will be used by Russia. The US and the IMF are concerned over reports that pervious credits had been channeled through Fimaco, an offshore company based in Britain's Channel Islands. US House Majority Leader Dick ARMY of Texas said in a letter to RUBIN, "It is quite possible that much of the $4.8 billion the IMF provided to Russia last year was lost in such illegal arrangements...A substantial amount of the American taxpayer money to the IMF may now be financing the lavish lifestyles of Russian oligarchs. A research fellow at the Hudson Institute said, "To pour more money into that machine only means that they [the Russians] have more to waste." He described Fimaco reports as "absolutely hair-raising, but absolutely typical." The IMF is waiting for a report from Price Water-house Coopers, which is auditing Fimaco's financial records.

Russian Asks For Forgiveness Of 75 Percent Debt

· Russian First Deputy Prime Minister in charge

Today's News Highlights

Russia

Tatenergo To Be Privatized?

TNK To Revamp Industry

European Republics

Estonia Predicts Budget Gap

Bank Licenses Not Revoked

South Caucasus & Central Asia

Georgian-Uzbek Defense Coop.

Ban on Azeri Aid To Be Lifted?

Baku-Novorosiisk Line Stopped

Turkmen Gas Shipments Halted

Politics-Economics-Business

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Wednesday

March 31, 1999

Intercon's Daily

of the economy Yuri MASLYUKOV said today that, when it opens formal talks with sovereign and commercial creditors, it will ask them to write off 75 percent of its $100 billion Soviet-era debt. He said, "we are not in a position fully to pay the debts of the Soviet Union. We would like them to forgive 75 percent of the debt of the Soviet Union." The US has been considering the idea of partial forgiveness, but Germany opposes this. The German government owns about half of the $60 billion of sovereign debt run up by the Soviet Union. A straight forgiveness of such a high percentage of the debt seems unlikely. MASLYUKOV said, "I think the figure might not be 75 percent—it might be a little less." He added, "But all the economists of the IMF [International Monetary Fund], the World Bank, and the experts of the Paris Club understand we cannot [pay all the Soviet debt] no matter what they may want of us. To me, this is completely understandable," the Financial Times reported. Approval of a new lending program from the IMF, would permit restructuring talks with both the Paris and London Clubs of creditors. To achieve a positive vote from the IMF board of directors, Russia must raise 10 billion rubles ($370 million) of additional revenues, defer its value-added tax cuts, propose five new tax laws, and five legislative amendments to the Russian State Duma. Creditor clubs tend to write-off debts of countries which implement market reforms successfully, but Russia's President Boris YELTSIN in his state of the union address even admitted that Russia is stuck between a planned-command economy and a market economy.

Meanwhile, Finance Ministry's senior official Oleg BUKLEMISHEV said that Russia today paid 117.2 million Deutsche Marks in redemption on the first coupon of its seven-year mark-denominated Eurobonds. The total Eurobond issue is 1.25 billion marks is due on March 31, 2005. The first coupon rate is an annual 9.375 percent.

Ruble = 24.18/$1.00 (NY rate)

Ruble = 24.16/$1.00 (CB rate)

Ruble = 25.92/1 euro (CB rate)

Business

Tatenergo To Be Partially Privatized

· Ownership of the monopolistic power producer and distributor in Tatarstan, Tatenergo, could be

transferred to companies and employees before the end of the Summer. Chairman of United Energy Systems (UES) Anatoly CHUBAIS last week agreed to offer 1 and 2 percent of the shares of his company for 10 percent of Tatenergo. Later, UES would swap its 10 percent stake in Tatenergo for a 25 percent plus one share in Tatarstan's high voltage electricity transmission operator and the Nizhnekamsk hydro-electric generation plant, the Financial Times reported. Russia's gas monopoly Gazprom is prepared to write off Tatenergo's debts in exchange for a 10 percent stake in the company, while managers and staff would receive about 20 percent of the shares. The state, to initially retain 60 percent, will assume money owed to Tatenergo from truck manufacturer Kamaz. Advisers hope that an investor will take a 25 percent stake, while a 5 percent stake would be offered on the RTS stock exchange. United Financial Group analyst Allison GRAHAM doubts whether the privatization will go ahead or if it will prove attractive for investors. She said, "Investors are looking for liquidity and disclosure, but Tatenergo has neither. Although Tatenergo produced 20.8 billion kilowatt hours of electricity in 1998, it reported losses of 127 million rubles ($4.8 million).

Tyumen Oil Co. Plans To Revamp Industry

· Tyumen Oil Company's (TNK) president Simon KUKES has been developing plans to revamp its main oilfield and refinery as well as make a serious bid for domestic retail business. He is also considering acquiring rival oil companies, which are struggling to make ends meet due to the financial crisis and low oil prices. However, all of KUKES' plans hinge on TNK securing a $640 million loan from the US Export-Import Bank. Negotiations between TNK and the bank are underway. KUKES expects that the US Export-Import Bank will grant funds in April. TNK is a credible borrower not only because it is Russia's fifth largest oil producer and owner of Russia's biggest oil field— Samotlor, but because KUKES has the reputation of being an astute manager. TNK is also seeking production-sharing status for Samotlor to make it more attractive for lenders. Gaining production sharing status guarantees projects favorable and stable investment conditions, including tax breaks. Today, a federal committee is meeting to finalize an agreement, which must be approved by TNK and the Russian government. The state holds a 49 percent stake in TNK.

When you need to know it as it happens

Politics-Economics-Business

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Wednesday

March 31, 1999

Intercon's Daily

Gazprom-BASF Conclude Agreements

· Russia's gas monopoly Gazprom and major German chemical concern BASF Wintershall today concluded expansion talks for the exploration, extraction, and development of oil and natural gas fields in the Timan-Petschora region and western Siberia. Gazprom chief Rem VYAKHIREV and BASF chief Jurgen STROUBE signed an economic agreement on strategic partnership between the two companies. The agreement allows BASF to tap into one third of the world's total known natural gas reserves. BASF and Gazprom supply 12 percent of the German natural gas market. The two companies plan to increase that share to 15 percent over the next two years, nine years ahead of schedule. One Gazprom representative said that the new millennium demands that the leading world oil and gas companies pool their efforts.

budget. According to a report release by the bank of Estonia, in order to ensure reduce the account deficit, budget expenditures need to be cut during 1999 through supplementary budgets.

Ukrainian Patriot Killed in Traffic Accident

· Leader of Popular Rukh, the third largest party in the Ukrainian Parliament, Vyacheslav CHORNOVIL died in a car accident, when his Toyota car collided with a Kamaz truck. CHORNOVIL's assistant Y. PAVLOV, who was driving, was killed in the accident and press secretary of the party Dmitry PONAMARCHUK was taken to a regional hospital with serious injuries. President Leonid KUCHMA's representative in parliament Roman BEZSMERTNYI said, "CHORNOVIL was one of the heroes of the national movement, the struggle for Ukrainian independence." In 1991, CHORNOVIL ran for president, winning 23 percent of the vote, but finishing second to KUCHMA. An investigation into the causes of the accident continues, despite the fact that Interior Minister Yuri KRAVCHENKO believes the accident was not an assassination scheme. Inter Television reminded viewers that two years ago Deputy Chief of a special unit of the Ukrainian Security Service Lieutenant-Colonel LISNYAKOVSKY was killed under similar circumstances.

Ukrainian Banks Licenses No To Be Revoked

· Ukraine's Central Bank said that it will not withdraw licenses from 24 commercial banks that have failed to meet the minimum requirement of one million euros ($1.07 million) of charter capital. Deputy chairman Alexander KIREYEV said the bank would not act on a parliamentary resolution requiring bank licenses to be revoked if charter capital did not meet requirements at annual March 31st checks. KIREYEV said that the Central Bank will submit new capital requirements to parliament. He said the Central Bank could not afford to allow the closure of the banks, which had lent 100 million gryvnias ($25 million) and held 50 million gryvnias in deposits. Central Bank figures show total bank deposits at the end of 1998 were 8.2 billion gryvnias. Ukraine's banking system lost almost one-third of its charter capital value last Fall when the gryvnia fell to more than three gryvnias to the dollar from around two in the space of a few weeks. The Central Bank showed that charter capital for 180 commercial banks totaled 544 million euros on February 1, 1999.

European Republics

Belarus Changes Customs Rules

· Head of the Customs Control Arrangements Directorate of the State Customs Committee of Belarus Valery YAROSHEVSKY on Monday announced that the rules for the transportation of commodities across the customs border are to be changed. In accordance with a Cabinet resolution to this effect, all restrictions on cars imports are lifted. A provision has been made to enable a citizen without going abroad to authorize another person to buy a car for them and be entitled to a preferential customs formalities procedure. The resolution also envisages a change of the rules for the movement of a number of other commodities across the customs border of Belarus. A person will be able to carry duty-free personal belongings worth up to $1,000, five jewelry articles, 3 leather or natural fur articles, one audio-visual set, and farm products weighing up to 200 kg. Foreign-exchange cash amounting to more than $500 should be declared.

Estonian Fin Min Predicts Budget Gap

· Estonian Finance Minister Siim KALLAS predicts that budget expenditures will outpace revenues this year by 1 billion kroons ($71 million). He noted that the setback would be temporary and that money in the country's stabilization reserve would not be used to bridge the gap. Prime Minister Mart LAAR has said that the Cabinet's most urgent task would be to submit to the parliament a negative supplementary

When you need to know it as it happens

Politics-Economics-Business

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Wednesday

March 31, 1999

Intercon's Daily

South Caucasus & Central Asia

Georgia-Uzbek Defense Ministers Meet

· Georgian Defense Minister David TEVZADZE met with his Uzbek counterpart Hikmatulla TURSUNOV in Tbilisi on Tuesday. The two ministers signed a protocol on expanding defense cooperation. They also discussed the possibility of Uzbekistan participating in the peacekeeping battalion to be formed by GUAM (Georgian, Ukraine, Azerbaijan, and Moldova). A decision on this has been left to other high level Uzbek officials. During his three-day visit, TURSUNOV toured the Tbilisi aircraft works, which manufactures SU-25 jets. When Georgian President Eduard SHEVARDNADZE's visited Uzbekistan earlier this month, he was told that Uzbekistan is interested in purchasing some aircraft.

Waiver Compromise For Section 907 Possible

· After failling in years past to repeal Section 907, the Senate Foreign Relations Committee last week may have discovered a loop-hole which would allow US President Bill CLINTON the authority to lift an aid restriction for Azerbaijan. In 1992, Congress reacted to the Nagorno-Karabakh conflict between Azerbaijan and Armenia by adopting Section 907 of the Freedom Support Act which bars aid to Azerbaijan. The bans does not cover the Export-Import Bank or other trade support agencies. Last year, a Silk Road bill sponsored by Senator Sam BROWNBACK, that included a 907 repeal, failed before it reached the floor. The US oil industry and the CLINTON Administration consider Azerbaijan crucial to pipeline plans through the Caucasus to the West. The Administration wants to repeal Section 907, but would prefer that Congress take responsibility for reversing its stance. In a hearing on March 23rd a bill titled "Silk Road Strategy Act" co-sponsored by BROWNBACK and Senator Christopher DODD, voted out of committee, gave CLINTON a waiver to lift the aid restriction, requiring the President to certify that the ban, "would not be in the national interest of the United

States." The bill passed, despite objections from Senators Paul SARBANES, Robert TORRICELLI, and Barbara BOXER. TORRICELLI indicated his openness on the matter. The State Department said, "We find it helpful. We're supporting it, but we're still pushing for a full repeal." Azeri Ambassador to Washington Hafiz PASHAYEV told The Journal Of Commerce, "It will look like they are getting an authorization from Congress...Definitely, I would like more. But in our situation, any move in the right direction is satisfactory."

Baku-Novorossiisk Pipeline Shut Down

· The pumping of Azeri oil through the Baku-Grozny-Novorossiisk has been halted. According to Russian Transneft oil company this stoppage is due to technical reasons. However, Chechen presidential press secretary Mairbek VACHAGAEV said that Chechnya stopped pumping the oil through the Chechen sector of the export pipeline because Russia had failed to pay for security personnel to guard the pipeline. He said that Moscow owes a total of 100 million rubles ($4.13 million) for the past six months. A spokesman for Azerbaijan state oil company Socar said that oil production will not be affected, since the Baku-Supsa pipeline is already in operation.

Turkmen To Suspend Gas Shipments

· Ukrainian Prime Minister Valery PUS-TOVOITENKO said that Kiev has asked Turkmenistan to suspend gas shipments beginning next month because it cannot afford them. In December, Ukraine and Turkmenistan signed a $720 million deal for deliveries this year of 20 billion cubic meters of natural gas. PUSTOVOITENKO said that Kiev owes Turkmenistan approximately $100 million for gas already received. Ukraine is also reported to owe Russia's Gazprom $1.4 billion for gas supplies, RFE\RL Newsline reported.

The Daily Report on Russia and FSU

will not be published on Friday April 2nd

in observance of Good Friday and Easter Sunday

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

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