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

Thursday, March 4, 1999

Russian Federation

Politics

Kremlin Denies Rumors Of Gov't Shake-up

· Russian President Boris YELTSIN's chief-of-staff Nikolai BORDYUZHA today attempted to quash rumors of a government reshuffle and differences between YELTSIN and Prime Minister Yevgeny PRIMAKOV. Sources close to the Kremlin said that the two exchanged heated words before YELTSIN was admitted back to the hospital and PRIMAKOV left for vacation in Sochi. Rumors spread that YELTSIN was furious over allegations in the Nezavisimaya Gazeta of ministerial corruption and increasing coverage on whether PRIMAKOV will run for president in 2000. Several experts even predict that YELTSIN may fire PRIMAKOV as a move to bolster his own power. BORDYUZHA stressed that the President had issued no instructions concerning the alleged purge of the government of "the persons with an indicated political affiliation" and added that he had no information about any planned reshuffle of the government. Rumors that PRIMAKOV does not suit the administration of the President are "not quite true, to put it mildly," he said. BORDYUZHA expressed concern over the number of negative publications about government activity.

YELTSIN's press secretary Dmitry YAKUSHKIN denied media reports alleging that YELTSIN demanded that representatives of the Communists be removed from the government or else PRIMAKOV himself will have to go. Novosti agency and Argumenty i fakty reported that YELTSIN had given PRIMAKOV ten days to think things over. YAKUSHKIN said speculations of this sort are designed "to aggravate the situation" and "are hampering the government's normal work."

Berezovsky Fights Back After Gov't Raids

· Russian business tycoon and Commonwealth of Independent States (CIS) Executive Secretary Boris BEREZOVSKY, before leaving on a tour of six CIS capitals, launched a series of allegations against the government at a press conference in Moscow earlier this week. He said that Federal Security Service (FSB) officers has tried to extort money from him and plotted to kill him. He claimed that two of Russian President Boris YELTSIN's closest former aids had been responsible for the murder of Vladislav LIISTYEV, the popular television anchorman and businessman killed in 1995. Nezavisimaya Gazeta, which BEREZOVSKY controls, published allegations of ministerial corruption in the government led by Yevgeny PRIMAKOV. As Intercon reported in February, the clash between BEREZOVSKY and PRIMAKOV, echoing the struggle between business\capitalism and politics\communism, was played out in the business arena, when Tax police and FSB officers on the instruction of the chief prosecutors office raided car distributor LogoVaz, oil company Sibneft, Russia's international airline Aeroflot, and public television stations ORT. Each of these companies have financial connections to BEREZOVSKY. He denies this, saying he transferred his shares to independent managers when he entered the government and states that he is not involved in the day-to-day management of these businesses, the Financial Times reported. The Russian State Duma has enacted a motion calling on CIS leaders to remove BEREZOVSKY

Today's News Highlights

Russia

GKO-OFZ Deadline Extended

Onako Against Gov't Merger

European Republics

41 Coal Mining Managers Fired

Rus-Estonian Border Talks

South Caucasus & Central Asia

Shevardnadze Visits Japan

Gerogia-Turkey Sign Protocol

Turkey To Offer Incentives?

KazMinCo Increases Stake

Politics-Economics-Business

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Thursday

March 4, 1999

Intercon's Daily

as secretary. This would strip him of diplomatic immunity, leaving him vulnerable to prosecution. One Kremlin official commenting on the building feud said, "I think that BEREZOVSKY has been the victim of his own success. He is accustomed to winning his battles with the government and even changing prime ministers. But this time he is confronting a really heavyweight sparring partner. My advice to BEREZOVSKY is to stop because you will lose anyway."

Economy

Ruble = 22.93/$1.00 (NY rate)

Ruble = 23.01/$1.00 (CB rate)

Ruble = 25.00/1 euro (CB rate)

Western Banks' Deadline Extended

· Russian Prime Minister Yevgeny PRIMAKOV on Wednesday signed a resolution extending the restructuring of frozen Treasury bills and short-term bonds (GKO and OFZ) until April 30, 1999. This decision followed a request by the remaining 17 member Western Banks for the extension and new details of terms for the exchange. The Finance Ministry's spokesman Oleg ZHUKOV said banks wishing to exchange their GKOs and OFZs for new securities will be allowed to file their applications until April 15th. The earlier deadline for restructuring was March 15th and for applications March 5th. The strength of the Western Bank negotiating committee was compromised after its lead representative Deutsche Bank and Chase Manhattan Bank accepted the meager exchange terms offered by Russia. These terms gave the banks only 2.5 percent of the face value of their investments before the August crisis. Russian investors have already exchanged over 75 percent of the total amount of frozen GKOs and OFZs they can swap. Residents are allowed to exchange 107 billion rubles worth of securities.

Zadornov Urges Further Rus-IMF Negotiations

· Finance Minister Mikhail ZADORNOV stressed that Russia may run out of hard currency reserves needed to pay foreign debts if negotiations between Russia and the International Monetary Fund (IMF) fail to reach an accord. Russia needs foreign loans to pay off about $17.5 billion in foreign debts due this year. He defended Russia's actions with regard to the economic and financial crisis in August, 1998. He said, "we have preserved the macro-economic situ

ation, while reducing wage arrears." He pointed out that the government has accepted IMF advice to delay further cuts in value added tax and excise duties to strengthen public finances. ZADORNOV mentioned that tax collections are improving. However Deputy Tax Minister Sergei SHULGIN last week stated that although February collections will be above the target of 155 billion rubles ($658 million), it will be lower than last December's collection of 20 billion rubles ($11.8 billion). ZADORNOV said that the government is targeting a primary budget surplus of more than 2 percent of the gross domestic product this year, compared with a 1.5 percent primary budget deficit in 1998, the Financial Times reported. He noted Russia would try to satisfy IMF objectives, but says it would be counter-productive for Russia to make promises it cannot keep. First Deputy Prime Minister Yuri MASLYUKOV and ZADORNOV on Friday will go to Sochi where Prime Minister Yevgeny PRIMAKOV is on vacation to discuss Russia's relations with IMF. Russian President Boris YELTSIN's chief-of-staff Nikolai BORDYUZHA said that the President may take a more active role in negotiations with the IMF, if there are no new loans soon. IMF's chief representative in Moscow Martin GILMAN said that an IMF mission is ready to return to Russia at any time, if Russia can present a proposal that, "will lead to the rapid conclusion of an agreement."

Business

Onako Against Merging Into State Oil Firm

· The Head of Russian oil firm Onako Rem KHRAMOV said that the company does not see any benefit for itself in joining a new national oil holding company, which the government plans to create. The government proposal is to merge Rosneft, Russian-Belarus Slavneft, and Onako. KHRAMOV stated that Onako produced 8 million tons of crude per year (160,000 barrels per day), of which around 60 percent was refined locally in the Orenburg region. A further 30 percent is exported. KHRAMOV asks, "Is it worth incorporating Onako into the national oil company for the sake of the remaining 10 percent of production?" While Onako is opposed to the government's plans and a merger with Yukos, the oil company is interested in closer cooperation with natural gas monopoly Gazprom. It is also considering ties with oil companies in Kazakhstan, particularly the Aktobemunaigaz company.

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Thursday

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Intercon's Daily

Gazprom, Gasunie Consider Joint Sales

· Russian gas monopoly Gazprom and Dutch gas company Gasunie plan to develop further cooperation and are considering selling spot gas jointly on the British market. Gazprom director Yuri KOMAROV pointed out that later this year Gazprom will complete construction of the first phase of Yamal-Europe pipeline. At that point there will be a new direct link for Russian gas to Britain through Germany, Belgium and the Anglo-Belgian Interconnector pipeline. He said that the pipeline will have the capacity for large volumes of gas. KOMAROV said, "In its turn, Gasunie has great flexibility through its storage facilities, which will allow it to use our summer deliveries to supply gas at peak demand periods to Britain." Gazprom and Gasunie have already signed an agreement for Gazprom to supply 4 billion cubic meters per year to the Netherlands starting in 2001. Gasunie is 50 percent owned by the Dutch state. Royal/Dutch Shell and Esso each own 25 percent.

try Lyudvig CHIZHOV, includes chairman of the Legislative Assembly of the Leningrad region Vitaly KLIMOV, representatives of the Russian Foreign Ministry, the Federal Border Service of Russia, the Defense Ministry and heads of administrations of Russia's territories bordering on Estonia. The Estonian delegation, headed by Foreign Minister Raul MALK, is represented by Ambassador of Estonia to Russia Mart HELME, high-ranking officials from the Foreign Ministry, and other Estonia's departments. During this round of talks the sides plan to finally agree on drafts of the Treaties between Russia and Estonia on the state border and the delimitation of water area in the Narva Bay and the Bay of Finland, and give experts' assessment of maps attached to these treaties.

South Caucasus & Central Asia

Georgian-Japanese Relations Strengthen

· Georgian President Eduard SHEVARDNADZE arrived in Japan today for a five-day official visit, accompanied by Foreign Minister Irakly MENAGARISHVILI and other ministers in his Cabinet. He is expected to be received by Japanese Foreign Minister Masahiko KOMURA, Prime Minister Keizo OBUCHI, and later by Emperor AKIHITO. According to the Japanese Foreign Ministry bilateral documents on economic cooperation between Japan and Georgia are to be signed today. Press Secretary of the Japanese Foreign Ministry Sadaaki MOMATA said, "the Japanese government wholeheartedly welcomes the visit and hopes that it will contribute to the further promotion of the friendly relations between Japan and Georgia." SHEVARDNADZE visited Japan three times as foreign minister of the USSR under Mikhail GORBACHEV's leadership. According to some reports, SHEVARDNADZE had expressed readiness to mediate between Moscow and Tokyo on territorial problems, if he was not re-elected to the post of Georgian President.

OBUCHI told SHEVARDNADZE that Japan will grant Georgia 670 million yen to help boost food production and proceed with economic reforms. Approximately 370 million yen will purchase farm equipment and 300 million yen will import goods necessary to proceed with structural adjustment programs. SHEVARDNADZE is scheduled to stop over in Tashkent, Uzbekistan on his return from Japan.

European Republics

Ukrainian Coal Mining Managers Fired

· Ukrainian Deputy Coal Industry Minister Volodymyr NOVIKOV on Wednesday said that at least 41 coal industry executives have been fired on corruption charges. He cited such offenses as embezzlement of state property and mishandling of budget funds. He added that some senior executives have used miners to build private houses and have sent their children to colleges or health resorts at the expense of the coal industry. Deputy Prosecutor-General Olha HOLINKO said the reported corruption cases constitute "less than one-tenth of the iceberg of abuses" in the coal industry, RFE\RL Newsline reported. Head of the Independent Miners' Union Mikhail VOLYNETS said that the current anti-corruption campaign was prompted by the approaching presidential elections.

Russia-Estonia Discuss Border Dispute

· A new round of Russian-Estonian talks on the delimitation of the state border and the water area between Russia and Estonia began today at government headquarters of the Leningrad region and will conclude on Saturday. The Russian delegation, headed by chairman of the commission for delimitation of the state border between Russia and Estonia, Ambassador at Large of the Russian Foreign Minis

When you need to know it as it happens

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Thursday

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Intercon's Daily

Georgia, Turkey Sign Defense Protocol

· Georgia's Deputy Defense Minister Grigory KATAMADZE and Chief of the Logistics Department of the General staff of the Turkish Armed Forces Dursun BAKI today signed a protocol in Tbilisi on Defense cooperation for a term of five years. KATAMADZE pointed out that the protocol envisages the appropriation of a $5.5 million grant allocated by the Turkish government last year to promote development of the Georgian Armed Forces. These fund will be used for the reconstruction of educational centers of the Georgian Defense Ministry in Gori and Kodzhori, a sports complex and a shooting range of the Georgian Military Academy and for the construction of a hotel of the Georgian Defense Ministry in Tbilisi. Turkey intends to create consultative and coordinating groups consisting of Turkish military experts who will arrive in Georgia to develop new programs of cooperation between the two countries in the military field, in training Georgian officers, and supplies of medical equipment and transport vehicles. KATAMADZE said, "The Georgian Defense Ministry is pinning great hopes on the development of military cooperation with Turkey." Intercon sources note that Turkey has a new Defense Minister and because of uncertainty in the government there will be no dramatic steps taken. In the near future, Turkish military officer will begin construction of the specified projects in Georgia.

Turkey Urged To Offer Pipeline Incentives

· Testifying before a US Senate Foreign Relations Committee hearing, White House advisor Richard MORNINGSTAR said that the US favored Caspian export pipeline could be economically viable, if Turkey offers the right incentives. These could include right-of-way financing and linking construction to higher oil prices. He said Turkey also should offer to be responsible for any cost overruns on the pipeline, estimated to cost about $2.4 billion. MORNINGSTAR said, "If Turkey can find a way to make sure construction costs and transit tariffs don't exceed the specified levels, it would be a good deal for the oil companies, even at today's low oil prices." The US

has lobbied strongly for Caspian Sea oil producers to finance a main export route from Baku to Ceyhan. US oil company Conoco Inc. welcomed the proposals saying that a cap on production costs or a guaranteed tariff of around $2.50 per barrel of oil would, "be between modestly and incredibly helpful." Conoco also proposed developing pipelines in smaller, multiple phases...because gas markets tend to develop gradually. Azerbaijan International Operating Co. (AIOC), the BP Amoco led consortium developing Azerbaijan's largest oil field, will provide key financing for the pipeline. The Baku-Ceyhan route's position was boosted this week when BP Amoco acknowledged that the Bosporus Straits can't safely handle future export volumes expected from the Caspian region. Turkey has long claimed that tanker traffic through the strait is increasingly an environmental hazard and that a pipeline is preferred. Commercial negotiations on the Baku-Supsa-Ceyhan route resumed in Ankara this week.

KazMinCo Increases Stake In Tasbulat Oil Corp.

· KazMinCo Wednesday announced that it has increased its holdings in the Tasbulat Oil Corporation (Tasbulat) from 40 percent to 51 percent. The additional 11 percent has been acquired under an agreement whereby KazMinCo could earn an increased stake in Tasbulat by financing technical work undertaken on the Tasbulat, Aktas and Turkmenoy oil fields in western Kazakhstan. KazMinCo will continue to earn further equity in Tasbulat by working to provide funding. Tasbulat's reserve base is 72 million barrels of proven recoverable oil and 65 million barrels of possible recoverable reserves. The reserves of the Aktas and Turkmenoy fields were approved by the State Committee for Reserves of Kazakhstan in January 1999. Tasbulat is in an area of existing oilfield infrastructure including pipelines and asphalt roads. KazMinCo is actively seeking a partner to develop the fields. The company notes that it is in a secure financial position and will withstand the current poor market conditions. Vancouver-based KazMinCo is listed on The Toronto Stock Exchange.

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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