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

Thursday, May 13, 1999

Russian Federation

Politics

Duma Impeachment Hearings Begin

· Today, approximately 500 people protested outside the parliament waving red Soviet flags and posters saying "Down with YELTSIN" and "YELTSIN resign," and sharing jeers with a significantly fewer pro-Kremlin demonstrators across the street. Meanwhile, inside the Russian State Duma, Chairman of the Duma Committee for Security Viktor ILYUKHIN and Head of the Special Duma Impeachment Commission Vadim FILIMONOV delivered a report on behalf of the deputies, opening impeachment hearings against Russian President Boris YELTSIN. The President has been charged with instigating the 1991 Soviet collapse, improperly using force against hard-line lawmakers in 1993, launching the botched war in Chechnya, ruining the Russian military, and impoverishing Russian citizens with harsh market reforms. The impeachment debate is to last three days with a vote on all the charges on Saturday. Presidential representative to the Duma Alexander KOTENKOV outlined the Kremlin's defense saying the opposition was basing its case on newspaper articles rather than solid legal arguments. However, many politicians believe that the Chechen War charge has the greatest chance of winning the 300 votes necessary for impeachment. It is supported by the Communist and Yabloko parties and has the strongest legal argument. Our Home is Russia faction member Vladimir RYZHKOV said, "Impeachment has become more real," because of YELTSIN's dismissal of prime minister Yevgeny PRIMAKOV. YELTSIN has thrown Russia into a real political crisis in which the rules have been tailor made in support of the President. If any of the five charges passes, the impeachment process will continue to the pro-YELTSIN Supreme Court and Constitutional Court and then on to the Federation Council for a final vote.

Unexpectedly, former Prime Minister Viktor CHERNOMYRDIN suggested that the Duma be dissolved. He commented that the Duma had outlived its usefulness. His suggestion was supported by Governor AYATSKOV of the Seratov region and other influential regional governors as well as Liberal Party leader Vladimir ZHIRINOVSKY. Presidential spokesman YAKUSHKIN said the President does not want to dissolve the Duma and doesn't support CHER-NOMYRDIN's idea. Secretary of the Security Council and head of Federal Security Service (FSB) Vladimir PUTIN said the Duma vote for impeachment could pass only on the Chechen point. He said the Duma would then reject STEPASHIN as new prime minister three times. This would then give the President the right to dissolve Duma. However, because the impeachment process will not be completed by then, YELTSIN will not dissolve Duma, but simply appoint STEPASHIN as prime minister by decree, creating a duality of powers ignoring the Duma. Gregory GRUSHKO, managing director Aton Capital Group said, "There may be some kind of plot but...its is very hard to see where it leads right now. It is possible that the wily President has developed this scheme to weaken the Duma and divide his main opposition party, the Communists. Ian BREMER from the Eurasia Group believes this latest political crisis could lead to a shake-up within the Communists Party in which Gennady ZYUGANOV could be removed as leader of the party and replaced by Duma speaker Gennady SELEZ-NYOV.

Today's News Highlights

Russia

Market Reform Policies Return

Rus-Japan Pipeline Plans

European Republics

Kuchma Seeks Re-election

Paksas Accepts Premiership

Lith. To Get $220M WB Loan

South Caucasus & Central Asia

Georgian Pipeline At Capacity

CPC Starts Construction

Morningstar In Turkmenistan

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Economy

Ruble = 23.99/$1.00 (NY rate)

Ruble = 24.69/$1.00 (CB rate)

Ruble = 26.3/1 euro (CB rate)

Stocks and Bonds Plunge on Sacking News

· The key Russian Trading System index (RTS) closed down 15.72 or 16.2 percent at 81.39. The stock market crashed 18 percent, recording volume of $17 million, triple the average trading volume on the stock exchange. Morning trading had been temporarily suspended after a more than 10 percent drop. Domestic investors had anticipated the fall of Prime Minister Yevgeny PRIMAKOV, but foreign investors caught off guard were scrambling. Blue chip stocks were hit across the board with energy stocks receiving the strongest blow. The Financial Times reports that LUKoil closed off $1.40 or 17.9 percent at $7.80. Surgutneftegaz dropped 3 cents or 20.4 percent to 13 cents. Unified Energy System fell 1 cent or 19.9 percent to 4 cents. Russia's international bond prices fell 20 percent to 36 percent of their face value. Russia's activities had little effect on emerging markets, showing the extent to which Russia has become isolated in international capital markets. The ruble traded lower against the dollar, falling to 24.6 while the Russian Central Bank fixed the exchange rate at 23.99 rubles to the US dollar on Wednesday. Moscow currency exchanges were offering rates above 25 rubles to the dollar, but there were no lines of Muscovites ready to buy the currency at that rate. The ruble had been rising steadily for weeks on expectations that the International Monetary Fund (IMF) would soon disburse a key loan to Russia. Fitch IBCA warned that, "Today's [Wednesday's] events will inevitably delay the disbursement of new moneys from the IMF and World Bank that are critical if the Russian government is to avoid default on its post-Soviet external debt." This would also mean that serious Paris Club negotiations on restructuring the Soviet-era debt will be postponed.

Moody's, S&P Not To Revise Credit Ratings

· The US rating agencies Moody's and Standard & Poor's (S&P) said on Wednesday that they are not going to revise the credit rating of Russia downward because of President Boris YELTSIN's firing of the government. The very decision to dismiss the government makes no grounds for further decreasing

Russia's already low ratings, Conrad REUSS, director of sovereign ratings department of S&P stated. Russia's Eurobonds are at present rated at CCC-, and the recently restructured government bonds at a somewhat higher CCC.

New Economic Plans, New-Old Policy Makers

· Acting prime minister Sergei STEPASHIN and Russian State Duma speaker Gennady SELEZNYOV met this morning to discuss the prospect of the package of economic bills worked out by the government and coordinated with the International Monetary Fund (IMF) being adopted. Further offending Duma deputies that will vote on confirming him as prime minister on May 19th, STEPASHIN pledged to promote market reforms. "The government has really done a lot to stabilize the economic and political situation. We have only one goal today: to advance clear and tough market reforms," STEPASHIN said. With a background in intelligence and security and not economic policy, it seems likely that STEPASHIN will look toward the liberal reformers for support. STEPASHIN is also meeting with acting Finance Minister and pro-market reformer Mikhail ZADORNOV, who is expected to remain in the government along with acting deputy prime ministers Valentina MATVIYENKO and Vladimir BULGAK, Foreign Minister Igor IVANOV, and Defense Minister Igor SERGEYEV. First Deputy Prime Minister Yuri MASLYUKOV has already said he will not serve in the new government. A list of familiar names is being proposed for new economic policy makers. Former finance minister and owner of a major Moscow-based brokerage Boris FYODOROV or Railways Minister Nikolai AKSENENKO could replace MASLYUKOV and former prime minister Sergei KIRIYENKO could return to the Cabinet in charge of economic policy. Other possible appointments include Head of UES Anatoly CHUBAIS, acting first deputy finance minister Viktor KHRISTENKO, former fuel and energy minister Boris NEMTSOV, and Yabloko leader Girgory YAVLINSKY. STEPASHIN's appointment and his choice of Cabinet members will be scrutinized by an already furious Duma.

Business

Japan-Russia Pipeline Plans Forming

· A quasi-governmental natural resource exploration company, Japan Petroleum Exploration Co, and Itochu Corp. and Marubeni Corp. today said they are

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prepared to begin a feasibility study on a project to build a pipeline to carry natural gas from the Far Eastern Russian island of Sakhalin to Japan. The project involves US Exxon Corp's exploration of Sakhalin I Project. The pipeline would be 1,300 kilometers long running from the northernmost area of Sakhalin, across the narrow strait between Sakhalin and Japan's main northern island of Hokkaido, and then to pass down Hokkaido's Sea of Japan coastline. From this point two possible routes are being considered. If the project is realized, it would bolster Rus-Japanese economic ties and lead Japan to consume more natural gas than present levels. The three firms established Japan Sakhalin Pipeline FS Co. on April 28th, with capital at 480 million yen. The joint venture signed an agreement with Exxon Japan Pipeline Ltd., the Japan unit of Exxon, to form a consortium to conduct the feasibility study. The three-year study will commence in late June.

candidacy if becomes clear he would not be backed by the parliament. He noted that the next Cabinet will face tough choices to pull the country out of the economic crisis brought on by Russia. PAKSAS is a member of Conservative Party. He is a professional pilot and a graduate from the Leningrad Civil Aviation Academy. He was elected Vilnius mayor in 1997 and is well liked throughout the country and within his party. Parliamentary speaker Vytautas LANDS-BERGIS said he "fully backs" PAKSAS and 20 deputies from the Conservative Party said they pledged not to obstruct PAKSAS' nomination.

Lithuania To Receive WB Loan of $220M

· The World Bank announced on Tuesday that it will provide a total of $220 million in loans to Lithuania under a three-year assistance program to support the economic development. The World Bank's board discussed Tuesday the Country Assistance Strategy for Lithuania for mid-1999 to mid-2002, which covers the following three main areas: human development, macro-financial stability, and accession to the European Union (EU). According to a Bank statement, "The Bank Group will support Lithuania through policy advice and dialogue, economic and sector work, and selected lending operations." It said that Lithuania's development is characterized by a stable political system, solid economic growth, low inflation, and reasonable progress on structural reforms. But the World Bank cautioned that while most longer-term economic fundamentals remain sound, the crisis in Russia has fundamentally altered the country's short-term path. It added, "Maintaining sustainable growth and managing the resulting increase in macro-economic risks will require a near-term policy response combining a fiscal adjustment with systematic structural reforms to limit quasi-fiscal deficits in key sectors...These measures will also help Lithuania meet its over-arching medium-term goal of EU membership, as well as laying the foundation for a more rapid convergence of living standards toward EU levels and for sustained reductions in poverty."

South Caucasus & Central Asia

Georgia-Azeri Pipeline Reaches Capacity

· The Georgian-Azeri pipeline carrying Caspian oil, just put into operation in April, is now pumping at full capacity. Spokeswoman for the $11 billion Azer

European Republics

Kuchma To Seek Re-election

· Ukrainian President Leonid KUCHMA today announced that he will seek a second term in presidential elections in October. He said, "I simply do not have the moral right to leave in the middle of the road everything that has been done in the last five years in Ukraine. A change of political leader in Ukraine is a change of political course and I do not have the right to allow that." Reuters reports that several centrist parties have declared that they will back KUCHMA in the election. Political issues KUCHMA must overcome include wage and pension arrears and other serious economic problems.

Adamkus Presents Paksas As Premier

· Vilnius Mayor Rolandas PAKSAS has accepted Lithuanian President Valdas ADAMKUS' offer to become prime minister replacing Gediminas VAGNORIUS, who resigned on May 3rd. Today, ADAMKUS signed a presidential decree regarding this and presented his candidate for prime minister to the parliament. He encouraged the parliament to confirm PAKSAS. The President said PAKSAS would bring a refreshing change to the country's political scene. The parliament has 15 days to approve PAKSAS, who will then have another 15 days to submit his Cabinet and government program for a final vote. PAKSAS said he would withdraw his

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baijan International Operating Company (AIOC) Tamam BAYATLY said, "We have achieved full throughput capacity on the western route ahead of the June schedule and are now pumping 115,000 barrels per day (bpd). The BP Amoco led consortium has commissioned the last of six pumping stations earlier this month and completed construction on the 830 kilometer line. The pipeline, pumping oil from Azerbaijan through Georgia to the Black Sea, is crucial for AIOC oil exports and lowers its reliance on the less efficient route through Russia. Shutdowns on this northern route last month forced AIOC to halve its output twice when the group ran out of storage space at its Sangachal terminal. The pipeline and its facilities include six brand new pumping stations, two pressure reduction stations, two new terminals and 775 kilometers of new pipes. Industry experts have predicted that the pipeline could pump up to 250,000 barrels per day if more pumping stations and extra storage facilities at the terminals were added to the project.

CPC Starts Work On New Terminal

· The Caspian Pipeline Consortium (CPC) on Wednesday celebrated a major milestone as construction began on the marine terminal for the 1,580 kilometer (990-mile) crude oil pipeline from Western Kazakhstan to the Russian port of Novorossiisk. According to a Chevron press release, participants in the groundbreaking ceremony in Novorossiisk laying the cornerstone of a new terminal, included Russian Deputy Fuel and Energy Minister Victor KALYUZHNY, Kazakhstan Deputy Prime Minister Khasymzhumart TOKAYEV, His excellency Humed Al RUMHI of Oman, Director of Chevron Corp. and president of Chevron Overseas Petroleum Inc.(COPI) Richard MATZKE, and managing director of COPI's Eurasia Business Unit Nick ZANA. The pipeline, costing $2.2 billion, is expected to be completed in the Summer of 2001 with an initial export capacity of 560.000 barrels per day (bpd). The pipeline's capacity will ultimately reach 1.5 million bpd. The pipeline will export oil from the

Tengiz oil field, in which Chevron is a majority partner with 45 percent interest. MATZKE said, "The CPC groundbreaking is a historic event for the region and a winner for all involved. We congratulate our numerous friends, colleagues, and supporters in Russia and Kazakhstan on this outstanding occasion." ZANA said, "CPC reached this milestone because of one critical factor—its strong team spirit. CPC is a model project to other foreign investors in the former Soviet Union." The Kazakh oil revenues account for 30 to 40 percent of total export revenues. Head of state oil company Kazakhoil Nurlan KAPPAROV said, "Black gold is the hope of our politicians, economists and financiers." Members of the CPC are: Russia (24 percent), Kazakhstan (19 percent), Oman (7 percent), Chevron Caspian Pipeline, LUKarco (12.5 percent), Rosneft-Shell Caspian Venture Ltd. (7.5 percent), Agip International (2 percent), BG Overseas Holding Ltd. (2 percent), Kazakhstan Pipeline Ventures (1.75 percent), and Oryx Caspian Pipeline (1.75 percent).

Morningstar-Niyazov Consider Caspian Status

· US presidential energy policy advisor Richard MORNINGSTAR today is meeting with Turkmen President Saparmurat NIYAZOV in Ashgabat to discuss the delimitation of the Caspian Sea. MORNINGSTAR's visit is related to the promotion of a gas pipeline connecting Turkmenistan, Azerbaijan, Georgia, and Turkey, favored by the US administration. MORNINGSTAR has been instrumental in the approval of two grants issued to Turkmenistan by the US Agency for Trade and Development, a total of over $2 million for preparing the project and paying for consultative services. He attended the signing in February of an accord appointing the US company PSG as the leader of a consortium to construct the gas pipeline. NIYAZOV has often pointed out that the debate between Azerbaijan and Turkmenistan over Caspian Sea mineral deposits Kaverochkin and Imeni 26 Bakinskikh Komissarov that are called Azeri and Chirag in Azerbaijan has delayed progress on this pipeline. He has requested an independent expert analysis of the issue.

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

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