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

Monday, April 19, 1999

Russian Federation

Politics

How Long Will Primakov Last?

· Russian Prime Minister Yevgeny PRIMAKOV, once considered the great compromise politician, is coming under attack across the political spectrum, raising doubts that the fragile balance of power is nearing a collapse. PRIMAKOV this past week has tried to reassert his power. April 9th on national television, he stated the accomplishments of his government to try and justify his position. On April 16th, PRIMAKOV threatened to sack members of his government, who failed to implement effective policies. Even PRIMAKOV acknowledges that the end may be near. He noted that none of the decisions of a March conference on agriculture had been fulfilled. He said, "If all decisions...are not fulfilled in due time, we will take on a government reshuffle." Despite PRIMAKOV's efforts, Russian State Duma vice speaker Sergei BABURIN said that he disapproved of the government's reaction to NATO airstrikes against Yugoslavia. In an interview BABURIN said, "I do not exclude that as a result of this petition will be launched in the State Duma demanding the resignation of the government." Yabloko party leader Grigory YAVLINSKY criticized the governments lack of economic reforms. He said, "He [PRIMAKOV] is probably not a communist and not a democrat but a Soviet bureaucrat of the highest standard." Former finance minister Boris FEYDOROV said, "He is an inept prime minister, who doesn't understand economics...And he is surrounded by a bunch of Communists who are stealing like crazy." President Boris YELTSIN has also fueled speculation that PRIMAKOV is on his way out of the government by appointing former prime minister Viktor CHERNOMYRDIN as the presidential envoy to the Yugoslav conflict. PRIMAKOV had earlier started a Russian initiative, which failed to reach a suitable peace

resolution. YELTSIN today in the Kremlin met with top Cabinet members including Defense Minister Igor SERGEYEV as well as CHERNOMYRDIN.

Two Hostages Freed From Chechnya

· Two hostages held in Chechnya were freed and arrived in Pyatigorsk Friday with assistance of the public organization Peacekeeping Mission in North Caucasus, based in the city. The organization was set up about two years ago by Krasnoyarsk Governor Alexander LEBED. One of the hostages, Vladimir CHERNETS from Buryatia was taken hostage and driven to Chechnya seven years ago when he served in a military unit based in the city of Krasnodar. When he came out from the territory of the unit to buy cigarettes, armed men attacked and pulled him into a car. The other hostage, Vladimir NEKHOROSHKOV was abducted and held in captivity for five years. Gunmen kidnapped him when he visited his sister in Grozny. The freed men said they had been held in Chechen mountainous areas. Officials of the Peacekeeping Mission noted that CHERNETS and NEKHOROSHKOV were freed without any ransom, but with LEBED's personal intercession.

Economy

Key Issues For Russia: Capital Flight

· The capital flight from Russia has undermined the small benefits of Russia's decision last August to devalue the ruble. Companies are sending their profits to offshore accounts and exporters ship out nonreplenishable

Today's News Highlights

Russia

Individual Cash Flight Total $10B

LUKoil Secures $150M Loan

European Republics

IMF Mission To Ukraine April 26

Eesti Telekom Finish Changes

South Caucasus & Central Asia

Baku-Supsa Pipeline Opens

Azeri Leaders Without Guards

$42.5 Million For Azeri Network

Ex-Deputy Fin. Min. Arrested

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resources like natural gas, oil, and metals, of which very little return in the form of investment. Strategic banker for Troika Dialog James FENKER said capital flight, "is absolutely key to Russia, because why should foreign money come in, if Russian money won't stay. There's that golden rule: If the insider is selling, maybe you should be too." If Russia secures new loans from the International Monetary Fund (IMF) in the amount of $4.8 billion, it will only be enough to cover just three months of capital flight at its present level. IMF chief representative in Moscow Martin GILMAN said that the IMF would only support a program that could persuade Russians to keep money in Russia and in rubles. While the Prosecutor General's office is tracking down Swiss bank accounts belonging to senior officials, Prime Minister Yevgeny PRIMAKOV has promised amnesty and numbered bank accounts for flight capital that returned to the country. The government has imposed a series of restrictive measures, including one which forbids individuals to take more than $5,000 out of the country. Exports also are required to repatriate their foreign revenues within three months instead of six months and sell at least half for rubles on the Moscow currency exchange. Even though these measures are in place, According to Jamison FIRESTONE, a lawyer specializing in offshore structures, said there are still plenty of legal ways to get money out of the country, The Wall Street Journal reported. However, economists agree that the most effective way to keep money in Russia, is to create an attractive investment climate with stable currency and predictable laws.

Individual Cash Flight From Russia Totals $10B

· Capital flight from Russia of private individuals totaled $10.6 billion in cash last year. In most cases, the sums exported by one person at a time exceeded $5,000. Deputy Finance Minister Sergei IGNATYEV cited these figures when addressing a meeting of the Russian State Duma Budget Committee on Thursday. IGNATYEV said customs agents had even reported several cases where people were taking out of Russia more than $1.5 million per trip. The committee convened to discuss the government-proposed amendments to the law on currency control, which ban citizens from expatriating more than $5,000 at a time. He said the sums are not taken out for private spending and instead are used in an unsanctioned expatriation of either legal or illegal

revenue. "The government does not want Russia to have more dollars. It is a false objective. We wish to limit the export of capital used for funding shadow economy operations or illegal imports," he stated. Non-residents in Russia are allowed to export hard currency in the amount equal to the sum they brought in, transferred or wired to Russia. The government measures do not apply to credit cards, bank transfers or travelers' checks.

Russian Assets Abroad Total $4 Billion

· Russian State Property Minister Farit GAZIZULLIN on Wednesday said Russia has nearly $2.7 billion worth of property abroad in fixed assets. He estimates the worth of its 2,638 facilities at $2.667 million. They occupy the space of 2 million square meters and are located in 120 states, GAZIZULLIN said. The ministry has 122 shares in foreign companies, which formally belong to state agencies and firms, with the worth of $1.376 million. The major owners are the Foreign Ministry (1,451 facilities), the Russian President's Business Management Directorate (715), Roszarubezhtsentr (77) and the RIA Vesti news agency (63), the State Property Minister said. Most assets are not used for commercial purposes. Russia hopes to reduce yearly budget spending on their management by $20 million and, later, start to use the property in order to receive at least $200 million of yearly returns. GAZIZULLIN said that the ministry will make the final assessment by July 1999. A special government commission will be appointed to reform the system of management of the state property.

Business

LUKoil Secures $150 Million Loan

· Russia's largest oil company, LUKoil, has secured a $150 million loan under an agreement signed today with Russia's largest commercial bank, Sberbank. Andrei KAZMIN, the bank's president, said, "Sberbank concludes this kind of agreement extremely rarely...We will cooperate further with LUKoil on terms which are not only competitive but actually favorable compared with terms offered by western banks." The credit is to be paid after three years and will be used to increase oil production and refining. LUKoil president Vagit ALEKPEROV said the loan would be secured by a combination of sources, including income from crude oil exports. He

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noted that, "This is LUKoil's first experience in large-scale borrowing from Russian banks." He added, "We need this credit for major projects in Russia, for example in the north Caspian where we will start towing a platform to an offshore drilling site by May 10, and where we will start drilling the first well in the Russian sector of the Caspian Sea," Reuters reported today.

Sidanko Investigated For Premed. Bankruptcy

· Russia's Prosecutor General's office has launched an investigating into the whether Russia's sixth largest crude oil produce, Sidanko, was deliberately made bankrupt. A spokeswoman for the office noted that no personal accusations had been made so far and that the investigation will be carried out by the Moscow regional department of the Interior Ministry. Under Russia's criminal code, person found guilty of inflicting premeditated bankruptcy may face penalties ranging from a 4,000 ruble ($160) fine to up to six years in jail. A Sidanko spokesman declined to comment on the accusations, stating that the company has not received any official notification from the Prosecutor General's office. All debts unpaid by a company undergoing bankruptcy proceedings are frozen pending the court's decision. In January, the Moscow regional arbitration court started bankruptcy proceedings against Sidanko, after one of its creditors sued the company, Reuters reported.

Gazprom To Reschedule Moldova's Debt?

· Deputy Chairman of Russia's gas giant Gazprom Alexander PUSHKIN met with General Director of the Moldgas company Mikhail LESNIK in Kishniev to discuss the rescheduling of Moldova's debt. The debt totals $600 million. The Dniester Region accounts for more than a half of the amount because it makes settlements with Russian gas suppliers separately. LESNIK said, "Moldova, which experiences the severest economic crisis, is interested in repaying part of the debt resultant of providing Gazprom with a regular batch of state bonds worth $90 million. Kishniev also hopes to reduce the debt resultant of transferring a controlling interest in a Moldovagaz joint venture, which is being created, to Russian gas suppliers. The project to establish the joint venture was approved by the local parliament. A half of the shares in the joint venture is expected to belong to Gazprom and the other is to be shared

by Moldova and the Dniester Region. On Thursday, Gazprom reduced the supply of gas to Moldova and warned that it would terminate supply if repayment accords are not complied with. Since January, the government of the republic has increased tariffs on heating and electric power produced by gas-fired stations several-fold. The result is that the cost of public utilities exceeded the average wage .Moldova annually consumes approximately 3,000 million cubic meters of Russian gas. The Dniester Region, where the power station supplying electricity to Moldova is located, accounts for about 40 percent of the deliveries.

European Republics

Eesti Telekom Restructuring Complete

· The restructuring of Eesti Telekom has been completed following the company's acquisition of all shares in its subsidiaries Eesti Telefon and Eesti Mobiiltelefon. The company's share capital now totals some 1.37 billion kroons ($95.8 million). Following the tender for shares in Eesti Telekom earlier this year, the state has a 27.28 percent stake in the company, while private investors own 23.72 percent, Baltic Tele 25.5 percent, and Sweden's Telia and Findland's Sonera Holding 11.75 percent each, RFE\RL Newsline reported.

IMF Mission To Monitor Ukrainian Reforms

· An Ukrainian Central Bank official said that an International Monetary Fund (IMF) mission will arrive in Ukraine on April 26th and stay until May 6th to monitor progress on agreed fiscal and economic reform targets under the Fund's $2.2 billion loan. Head of the bank's monetary emission department Natalya HREBENYK said, "This will be a big mission, the second review of the Extended Fund Facility." The IMF suspended disbursement after the last review in November due to insufficient progress, and only last month released the third, $153 million tranche of the loan. It has paid a total $485 million under the facility, money which Ukraine needs if it is to have any chance of meeting a total $1.17 billion in external debt payments this year. Central Bank official HREBENYK added that Ukraine will pay all its external payments through foreign borrowings, without using Central Bank reserves, referring to possible IMF and World Bank loans.

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South Caucasus & Central Asia

Baku-Supsa Pipeline Opens On Saturday

· Presidents of regional nations, media representatives, government representatives, and heads of oil companies gathered in Supsa to celebrate the opening of an 830 kilometer pipeline from Baku to Azerbaijan through Georgia to Supsa. The pipeline opens the way for Caspian riches to reach western markets and increased the power and independence of the Caspian nations. Georgian President Eduard SHEVARDNADZE said, "Georgia doesn't view the project merely from the point of view of its economic benefits. It is even more important as a brilliant example of wide regional cooperation," the Financial Times reported. He added that the pipeline is a turning point in the revival of the ancient Silk Road trading route connecting Asia to Europe. Georgia will earn $7 million and Azerbaijan $10 million a year in oil transit tariffs from the pipeline. The pipeline will export a total of 5 million metric tons of crude a year. Completion of the Baku-Supsa pipeline gives the Azerbaijan International Operating Consortium (AIOC) an alternative to its northern pipeline route to Russia. By late May AIOC, the main producer in the western Caspian, will be pumping enough crude to fill the Baku-Supsa pipeline's capacity. Both Georgia and Azerbaijan as well as the US are pushing for a second bigger pipeline from Baku via Georgia to Turkey's Ceyhan port. Turkey and Azerbaijan have agreed to draft construction plans within three months. Due to low oil prices and the predicted cost of $2.4 billion to $3.7 billion for the pipeline, several oil companies believe that the pipeline is not commercially viable. US Advisor to the President and Secretary of State Richard MORNINGSTAR said, "With the incentives Turkey is offering, there is no reason why it can't become a reality."

Azeri Party Leaders Lose Their Bodyguards

· Azeri Interior Minister Ramil USUBOV has issued a ruling that leaders of Azeri political parties may no longer be accompanied by bodyguard. The

ruling follows an incident on April 9th, in which a police official reportedly rammed the car of National Independence Party of Azeri chairman Etibar MAMEDOV, RFE\RL Newsline reported.

US Firms Invest $42.5 Million In Azeri Network

· US companies Metromedia International Telecommunications and Omni Communications have invested $42.5 million to develop a wireless telephone network in Azerbaijan. Communications Minister Nadyr AKHMEDOV said they, "have allotted $42.5 million for the creation of an automatic telephone station, which will support a wireless service in Azerbaijan." He said the communications Ministry and the two US companies have formed a joint venture Caspian-American Telecom (CATEL) to manage the new telephone station. The joint venture has already fitted the station with new equipment capable of handling 15,000 new numbers and that CATEL would be able to service 300,000 customers at the new station by 2001. "We also expect another $15 million in American investment in another telecommunications project in the near future," AKHMEDOV said. He pointed out that by 2004 Azerbaijan's telecommunications system should be able to cover the communications demand in the nation at an international level." In 1998, foreign investment in the telecom sector was $40.5 million.

Kazakh Ex-Deputy Finance Min. Arrested

· The tax police arrested Zhomat MUKASHEV, ex-deputy finance minister of Kazakhstan, in Astana on Wednesday. The former senior official is accused of the abuse of office, as a result of which the state budget lost $1 million. According to the tax police information, in March 1997 MUKASHEV, then deputy finance minister, helped the Finconcort Limited Corporation of Switzerland to get back 60 million tenge (according to the exchange rate of that time, it amounted to about $1 million), which were allegedly paid as VAT. The operation for the withdrawal of the money from the state budget was carried out with active assistance of MUKASHEV. The tax police are trying to receive compensation for the loss.

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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