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, April 1, 1999

"The time is ripe for CIS reform and increased efficiency of its working bodies." The CIS Summit will also consider the dismissal of Executive Secretary Boris BEREZOVSKY. Acting CIS Secretary Mikhail KOROTECHNYA will attend Friday's session.

Yeltsin Calls For G-8 Meeting On Kosovo

· Russian President Boris YELTSIN today instructed Foreign Minister Igor IVANOV to urgently call a meeting to be attended by foreign ministers of the Group of Eight major industrialized nations in a bid to find a political solution to the Kosovo conflict. In a televised statement YELTSIN said, "The situation threatens to degenerate into a big calamity, and not just in Europe." He added, "Every wasted day leads to new losses and new tragedies. We must act immediately." YELTSIN's comments came against the backdrop of NATO airstrikes. Russian Defense Minister Igor SERGEYEV announced Wednesday Russia is sending one warship into the Mediterranean Sea to monitor the situation around Yugoslavia and shadow US warships. Six other ships have been set on reserve and Turkey has granted their transit into the sea. However, SERGEYEV again stated that Russia will not get involved militarily in the Kosovo conflict. IVANOV said the fighting could affect Albania, Macedonia, Bulgaria, and Hungry and even threaten to the Bosnia-Herzegovina agreement. Of the G-8 six of its members are NATO members; the others are Russia and Japan. Russian Deputy Foreign Minister Georgy MAMEDOV expressed hope to Japanese Ambassador to Russia TOGO that Ja

Russian Federation

Politics

CIS Foreign Minister Prepare For Summit

· The Foreign Ministers' Council (FMC) of the Commonwealth of Independent States (CIS), at its meeting which opened today in Moscow, is considering a package of CIS renewal documents which have been prepared by a Special Interstate Forum (SIF) on a CIS reform. A draft Declaration by the Heads of State on basic orientations for CIS development is high on the agenda. The Declaration spells out a strategy for cooperation in the long term and maps out ways and means to turn the CIS into an effective mechanism for mutually beneficial, equitable interstate cooperation. The Ministers are also to consider new Foreign Ministers Council regulations aimed at enhancing its role. The CIS Foreign ministers are planning to discuss further moves to settle the Abkhazia-Georgia conflict. "The situation that has developed as a result of NATO's military action against Yugoslavia will be naturally in the forefront among topical problems of international politics," the Russian Foreign Ministry said. This meeting and a council of prime ministers is held in preparation for the CIS summit scheduled for Friday. The Prime Minister's Council of the CIS tonight will consider amendments to the establishment of a Free Trade Zones Agreement as well as reviewing the financial situation in Russia and other CIS countries and measures to stabilize the financial markets. The CIS Defense Ministers Council is to introduce a draft decision to allocate appropriations for the establishment and development of a unified air defense system of CIS countries in 1999. Intercon sources report that Georgia will formally announce its withdrawal from the CIS Collective Security agreement at that time. Russia's CIS Minister Boris PASTUKHOV has called for the working bodies of the Commonwealth of Independent States for be more efficient.

Today's News Highlights

Russia

Gov't To Restructure Banks

Yukos To Be Investigated

Aeroflot Losses Due To NATO

European Republics

Kiev To Sell Zaporizhoblenergo

South Caucasus & Central Asia

Azeri Accuses Iran Of Sabotage

AIOC Production Continues

Kazak Air To Expand Routes

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pan will help the end to NATO airstrikes .

Economy

Ruble = 24.2/$1.00 (NY rate)

Ruble = 24.29/$1.00 (CB rate)

Ruble = 26.161 euro (CB rate)

Industrial Output Rises, New Program

· First Vice-Prime Minister Yuri MASLYUKOV said industrial output in Russia grew in March by 8 percent from February's figures. He predicted that the crisis in industry and agriculture would end this year. He explained his optimism by the fact that the amount of contracts in the processing industry grew by 3.5 times in February compared to January. MASLYUKOV said that 2 percent growth of the gross domestic product (GDP) in 1999 is quite possible. However, "By the year 2010 GDP has to grow by 4 to 6 percent a year for normal development. Otherwise, Russia will never be able to get off the ground." This concept was approved in a draft program for social and economic development in 1999-2002. Economy Minister Andrei SHAPOVALYANTS said the draft will be submitted to the government in the next few days. Before its submission, it will be amended to take into account President Boris YELTSIN's message to the parliament and coordination with the documents prepared by Russia and the World Bank for structural reforms. The key goal of the program is to reform the Russian economy, to ensure a dynamic growth to raise the standard of living, modernize production, enhance competition, and ensure the country's integrity and security.

Primakov Calls For Restructuring Of Banks

· Prime Minister Yevgeny PRIMAKOV at a government meeting this morning called for the restructuring of Russia's banking system. He said, "Restructuring of Russia's banking system is one of the main issues of our economic policy at this stage...[it] is linked to finding a way out of the crisis and is directly related to the development of the real sector of the economy and the drafting of plans for economic development." Central Bank Chairman Viktor GERASHCHENKO and Alexander TURBANOV presented reports on the status of the country's banks and measures which could be implemented to strengthen the banking system.

GERASHCHENKO's report showed that of Russia's

1,473 commercial banks, 70 percent are financially stable. The report defined as stable the banks having no major liquidity problems or capital shortfalls, and are able to operate without state support. The stable banks account for 30 percent of total assets and private deposits. The report said 441 banks are significantly short of liquid funds, and are behind schedule in repaying to their clients and unable to overcome their difficulties unassisted. The Central Bank said 339 banks should not be given state support, as costs would exceed the potential effect of their rescue. The report cited 149 banks that show signs of bankruptcy. The report said 44 problem banks, including 18 majors, should be eligible for state support because of their social and economic importance. GERASHCHENKO said the governmental Agency for Restructuring of Credit Organizations will have, "to decide individually on each of the 18 largest banks who will survive and who will not." These banks hold about 50 percent of assets and 45 percent of private savings. According to the report restructuring the regional banks requires a total of five billion rubles. The Central Bank proposed that 79 banks in 55 regions be given a status of core banks for future regional banking systems. The details of TURBANOV's report have not been released to the public.

Fuel and Energy Ministry Cuts Oil Exports

· Fuel and Energy Minister Sergei GENERALOV said that despite growing world prices, Russia is not planning to expand oil-exporting. GENERALOV said that domestic problems were the main reasons for this decision. For example the government is already preparing for a better winter supplies than in 1998. Effective today, Russia is reducing its export of crude oil by 100,000 barrels per day and redirecting the supply to Russian oil processing plants to increase their work load. As a result, the production of lubricants for the needs of farmers during the spring-time fieldwork in 1999 is expected to grow as well as the procurement of fuel for the 1999-2000 autumn and winter period. The ministry also expects that the increase production capabilities will provide additional raw materials for Russian petro-chemical enterprises. The Ministry believes that cutbacks in the export of crude oil are a support for petroleum-producing and exporting countries' efforts aimed at stabilizing the situation on the world petroleum market and promoting a rise in oil prices.

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Business

Federal Securities Investigates Yukos

· Head of Russia's Federal Securities Commission, the stock market watchdog, Dimitry VASILYEV on Wednesday launched a full-scale investigation into allegations that oil giant Yukos violated minority shareholder rights, the Financial Times reported. VASILYEV said he received a complaint from minority shareholders of Yukos' three subsidiaries Samaraneftegaz, Yuganskneftegaz, and Tomskneft. He said, "We will investigate all the facts of the case and if necessary take measures not to allow violations of shareholder rights." Yukos planned a series of issues by the three subsidiaries which would seriously dilute minority shareholders interest and transfer most of the group's value to offshore funds. Daiwa, the Japanese bank which owns 14 percent of Yukos' equity, said, "We are concerned that the assets being transferred to these offshore companies may be irretrievably lost from Yukos and the production subsidiaries." Yukos claims that its recapitalization plan is designed to simplify its complicated ownership structure. VASILYEV said that he would take action to block the issues if they were proven to be illegal. This dispute is viewed as a critical test of Russia's corporate governance system, which has struggled with scandals.

Aeroflot Loses $300,000 Due To War

· Russia's major airline Aeroflot said its direct losses from the Yugoslav crisis have reached about $300,000. The company's press service on Wednesday said that the main cause of losses is delays in European flights. Between March 23rd to 29th, 14 flights were delayed, including from Rome, Milan, Lisbon, Madrid and Skopje, Macedonia. Overall delays amounted to almost 45 hours. Losses were also caused by the cancellation of flights to Belgrade and temporary termination of service to Skopje and Zagreb, Croatia. Aeroflot continues to offer flights from Moscow to Ljubljana, Slovenia, and back.

percent of shares will be sold at a commercial tender and 15 percent to be sold in April for special privatization certificates. The state will retain 25 percent of the company while 17.18 percent of shares have already been sold to employees and a further 4.89 percent has already been sold for special privatization certificates. The government suspended all privatization of regional distribution companies last year amid divisions over goals and methods. The Fund received special orders from Prime Minister Valery PUTOVOITENKO for this privatization sale.

Russia, Ukraine, Belarus To Cooperate

· Russia's state-owned arms exporting company Rosvooruzheniye's director general Grigory RAPOTA said that despite increasing competition and a conflict in interests between arms exporters of Russia, Ukraine and Belarus, Rosvooruzheniye will cooperate with Ukraine and Belarus in updating Soviet weaponry. He said his company, recognizing the right of the sovereign Commonwealth of Independent States to trade in arms, has chosen a strategy of reciprocally beneficial cooperation to avoid dumping situations in the market and modernization projects. Rosvooruzheniye has reached agreements with Ukraine's Ukrspetsekport and Belarus' Beltekheksport, Belvneshspetstekhnika, and Belvneshpromservis.

South Caucasus & Central Asia

Azerbaijan Accuses Russia, Iran Of Subversion

· Azeri National Security Advisor Namik ABBASOV has accused Russia and Iran not only of implementing joint economic and political sanctions against Azerbaijan, but also of conducting coordinated intelligence activities in that country. ABBASOV said that over the past five years, his ministry has identified and neutralized 13 Iranian intelligence operatives, one of whom was an employee at the Iranian embassy in Baku. An example of what Azerbaijan sees as subversion are threatening statements from Mahir JAVADOV, leader of the OMON-Azerbaijan Party who had been operating in Iran about a month and a half ago. He said that he and his party will return to Baku and avenge their fallen brothers, who lost their lives in the Omon coup, particularly his own brother. JAVADOV also claimed that they would have the last word. These statements imply that another coup attempt could be in the works. ABBASOV

European Republics

Ukraine To Sell 53 Percent Of Zaporizhoblenergo

· Ukraine's State Property Fund announced the sale of 52.93 percent of the state regional electricity distribution company Zaporizhoblenergo by the end of 1999. According to the terms, a stake of 37.93

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also accused Russian intelligence of involvement in alleged coup attempts in Azerbaijan in 1993, 1995, and 1996. These acts together are an attempt to destabilize Azerbaijan and disrupt the Caucasus region. ABBASOV made these claims at a ceremony marking the 80th anniversary of Azerbaijan's security bodies. Iran on Tuesday denied that it is involved in "acts of sabotage" in Azerbaijan. Iran said that ABBASOV's accusations are an attempt to undermine relations between Russia and Iran.

AIOC Output Unaffected By Pipeline Shutdown

· A spokesman for Azerbaijan International Operating Company (AIOC) said that its oil production at the offshore Azeri Chirag oilfield has not been affected by the shutdown of the Baku-Grozny-Novorossiisk pipeline due to the non-payment by Russia for security guards. Approximately 100,000 barrels a day of crude oil from Chirag are transported through the pipeline. He confirmed that there is enough storage space at the Sangachal oil terminal on Azerbaijan's Caspian coast to continue production at the field without interruption. The AIOC is developing three oilfields offshore at a cost of about $10 billion. The AIOC international consortium is made up of BP Amoco, Norway's Statoil, Turkey's TPAO, US Amerada Hess, Unocal Corp., Exxon Corp., Pennzoil, Ramco, Russia's LUKoil, Japan's Itochu, and Azerbaijan's state oil company Socar. The spokesman pointed out that a month ago, AIOC began transporting its oil through a second pipeline, which runs from Baku to Georgia's Black Sea coast of Supsa. It will load the first tanker next week.

Georgian Foreign Minister Irakly MENAGARISHVILI said on Wednesday at a news conference in Kiev that, "The first taker with Caspian oil is due to leave Supsa oil terminal on April 17th and should be unloaded in the Ukrainian port of Odessa from April 19th to 20th." He invited Ukrainian President Leonid KUCHMA to participate in the opening ceremonies for Supsa as well as a ferry terminal at the port of Poti. The new Supsa terminal and the Baku-Supsa pipeline are able to carry 12 million to 15 million tons of

Caspian oil per year. Ukraine, which depends largely on Russia for oil supplies, is encouraged by the alternative of Azeri oil that will be transported via Odessa to Brody on the Polish border through a new pipeline. The pipeline is expected to be completed in about two years. A new terminal near Odessa is scheduled to be completed at the same time. Ukraine, as cash-strapped nation, is looking forward to earning revenues from transit fees.

Kazakhs Airlines Aims To Expand

· Kazakhstan's national airline Air Kazakhstan is aiming to increase it share of passenger and profits on the international market. Transport Minister Serik BURKITBAEV said that Air Kazakhstan accounts for 30 percent of all passengers flying internationally from Kazakhstan, but the carrier earned just 5 percent to 7 percent of the money spent on those flights. He said the main reason for the disparity is that the airlines operated, "uncomfortable planes on what are far from the most profitable destination." He noted that, "With the appearance of new aircraft this year, we want to boost our [income] to 15 percent of market's total." Last month, BURKITBAEV said the government had pledged to issue a guarantee of $200 million toward buying Air Kazakhstan at least four Boeing Co. or Airbus Industrie aircraft. According to government figures major international carriers earn $800 million annually on flights between Europe and Kazakhstan, while Air Kazakhstan earns just $100 to $200 million.

Kazakh President To Attend NATO Celebration

· Kazakh President Nursultan NAZARBAYEV will attend the NATO anniversary celebration in Washington this April. According to NAZARBAYEV's press secretary, NAZARBAYEV will meet with US and European Union leaders, as well as with representatives from the Western business circles.

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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