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

Friday, May 21, 1999

Russian Federation

Politics

Stepashin Calls For More Defense Spending

· Described as the "rosy cheeked hawk," for his youth and active role in the Chechen War, Prime Minister Sergei STEPASHIN, the former Interior Minister, call for an increase in Defense spending. Earlier at his confirmation hearing, STEPASHIN refuted comparisons to the Chilean military dictator Avgusto PINOCHET. He said, " I am no PINOCHET. My name is STEPASHIN." Chairing his first government session on Thursday, he said that defense spending must be planned at 3.5 percent of gross domestic product (GDP) in the 2000 budget plan, up from the current 2.8 percent. He pointed out that, "The events in Yugoslavia show that the level of our defense is such that no one would speak to us." He said he would insist on the implementation of Russian President Boris YELTSIN's decree that increases defense spending to 3.5 percent of GDP. STEPASHIN asked acting Finance Minister Mikhail ZADORNOV, "to take into consideration this position in drafting the 2000 budget." ZADORNOV, however, said YELTSIN had signed the decree "in a somewhat different situation. It should be realized that 3.5 percent of GDP constitutes 35 percent of the budget expenditure." He warned that rising military expenditure would mean reduction in spending in other items, including the social sphere.

The Russian president's advisor Yevgeny SHAPOSHNIKOV said a new military industry ministry could be formed for governing the Russian defense sector. He said the military industrial sector works ineffectively and uses five to ten-year-old developments of weapons and the military hardware. However, he said that Russian scientists and engineers are carrying out intensive research in creating weapons that are not inferior to Western.

The new ministry is necessary for improving the efficiency of the military industrial sector, SHAPOSHNIKOV said.

Yeltsin Orders Study Of NATO's Space Power

· President Boris YELTSIN instructed Russia's experts to study NATO's use of space-based technology being used in its war against Yugoslavia. It is unclear what type of weapons YELTSIN was referring to. A Kremlin statement said, "The competent Russian bodies have been authorized to conduct an analysis of space technology used in NATO's armed operations in Yugoslavia." The agencies in question are to "make proposals concerning ways to upgrade the programs of developing and operating similar domestic weapons," it said. The order is seen as largely symbolic, since Russia's space and weapons industry is struggling with severe shortages of funds.

Following that order, YELTSIN left for the Black Sea resort of Sochi for a an unscheduled holiday, expected to last two weeks. YELTSIN has appeared alert at recent meetings, and the Kremlin has dismissed reports by several Western news agencies earlier this week that YELTSIN was suffering from bronchitis after he missed a meeting with visiting Spanish Prime Minister Jose Maria AZNAR. YELTSIN is due to meet South Korean President KIM Dae-Jung, who will visit Russia on May 27th to 29th, but it was unclear whether KIM would fly to Sochi to meet YELTSIN, or if the Russian President would briefly return to Moscow for the meeting.

Today's News Highlights

Russia

Russia Plans to Cut Oil Exports

Steel Talks Begin In London

Transport Airplane Consortium

European Republics

Latvian Gov't Survives No Vote

IMF Backs Debt Restructuring

South Caucasus & Central Asia

Georgia-France On Abkhazia

Aliyev Visits Turkey

UzTexaco Begins Production

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Economy

Ruble = 24.7/$1.00 (NY rate)

Ruble = 24.65/$1.00 (CB rate)

Ruble = 26.09/1 euro (CB rate)

Dec Jan Feb Mar Apr May

ARCO Submits Restructuring Plan To IMF, WB

· The leadership of the Agency for Restructuring of Credit Organizations (ARCO) has submitted to the International Monetary Fund (IMF) and the World Bank mission the tentative projects on restructuring two of Russia's major banks, AvtoVAZbank and Investbank. Alexander VOZNESENSKY, ARCO's public relations manager, said the projects were submitted at the meeting with the mission's top managers, attended by Michael FUCHS, the mission's leader, Laos BOKROS, head of the World Bank delegation, and William ALEXANDER, representative of the IMF. According to VOZNESENSKY, the meeting also discussed ARCO's current activities. He stressed that ARCO was the first Russian organization to meet the IMF and World Bank mission, which indicates the importance of reforms in the Russian banking system in the current situation. ARCO informed the IMF and World Bank representatives that the Russian government had submitted to the State Duma the bill, "Concerning the Restructuring of Credit Organizations" as part of the package of top-priority bills, VOZNESENSKY said.

Russia Plans To Cut Oil Exports

· Acting Fuel and Energy Minister Sergei GENERALOV on Tuesday said that the ministry plans to cut the oil exports in the second quarter of this year in fulfillment of the Russian commitments to

the Organization of Petroleum Exporting Countries (OPEC). Russia has joined the OPEC decision to cut oil exports and pledged to reduce its oil exports by 100 million barrels a day compared to the 1998 level. The supply in the remaining two months of the second quarter may reach 1.2 million tons of oil. The swelling of Russian exports have knocked back a rally that hoisted prices up from below $10 as OPEC and non-OPEC producers, including Russia, implemented March's 2.1 million barrels per day (bpd) supply cut deal. Crude exports from Russia and the former Soviet republics (FSU) rose 300,000 barrels per day in April to 4 million barrels daily, according to London's Energy Market Consultants. It added that, "It looks increasingly likely that FSU net oil exports could rise to new highs this summer, possibly to as much as 4.5 million bpd."

Steel Losses Could Total $1 Billion In 1999

· Head of the International Union of Metallurgists Serafim KOLPAKOV told a meeting in the Russian State Duma on Tuesday that Russian steel makers will lose up to $1 billion this year due to restrictions on supplies to the US and other countries which have started anti-dumping procedures against the Russians. The meeting focused on the legislative regulation and the activity of metallurgical enterprises. KOLPAKOV said the losses will reach $500 million in the first quarter of 1999. The anti-dumping procedures against Russian steel producers are one of the most painful problem of metallurgy, he said. KOLPAKOV believes the Russian President and the Cabinet have not taken sufficient measures to change the situation. In his opinion, "our President shall have a firmer stand than he has now" due to the firm stand of the US at the anti-dumping negotiations.

Russia and the US on Wednesday started talks for a long-term steel accord in London. No details on the talks which are being held by Russian Deputy Trade Minister Roald PISKOPPEL and US Deputy Secretary of Trade Robert LARUSSA have been disclosed. They are working to negotiate a final formula for the treaty initialed in Rome in February 1999. Washington has insisted that Russian steel exports be restricted by more than 70 percent and selling prices on steel be increased. If Moscow resists, the US will continue the anti-dumping process targeted at Russian steel exporters and introduce fines on steel imported in 1998 and 1999. The decision on

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whether to introduce fines or not could be taken on July 12th, according to plans of the Congress.

Business

Rus-Ukraine Form Airplane Consortium

· On Tuesday, Russia and Ukraine signed an agreement forming the Transport Airplane consortium to produce Antonov AN-70 cargo place. Both government will hold 13 percent interest in the new entity, with the remainder of shares to be distributed among consortium participants. The agreement also amends the terms of a previous agreement under which Russia and the Ukraine jointly developed the An-70 for military transport. The An-70 is still awaiting full certification as a civilian cargo aircraft. Two plants, the Aviakor in Russia and Aviant in Ukraine, will work together to build the plane. Two jet engine makers and a number of other enterprises that produce aviation equipment will join the consortium. The AN-70 is capable of carrying 35 tons of cargo for distances up to 3,800 kilometers at a cruising speed of 750 kilometers per hour, Reuters reported.

Vnukovo Airlines Appoints Director-General

· The Vnukovo Airlines Board of Directors on Tuesday replaced Tatevos SURINOV with Vladimir RUBTSOV as director-general of the Vnukovo Airlines. RUBTSOV said, "Vnukovo Airlines is Russia's oldest air company. It holds first place as regards the volumes of domestic air carriages, and we shall do our best to make it hold a worthy place among all the Russian air carriers." He noted that he could give more substantial explanations on the priorities and the strategy of his company in a week or two. RUBTSOV was vice-president of Intourist before his new appointment. In 1980, he was commercial director of the Soviet Aeroflot office in Madrid. After that, he was on the staff of the External Economic Relations Department of the USSR Ministry for Civil Aviation. He also at one time held the post of commercial director of the Alak Air Company.

Lithuania's acting Foreign Minister Algirdas SAUDARGAS greeted participants in the conference, pointing out that the two-day forum is one of major activities of the Council of the Baltic Sea States, in which Lithuania holds the presidency. Reports at the conference on Friday are to be delivered by representatives of Kaliningrad Region, Poland, Lithuania, the European Union, and the World Bank. The conference is being also attended by the Ambassadors of the United States and Britain in Vilnius, officials of the Foreign ministries and foreign trade organizations of Belarus, Ukraine, Latvia, Estonia, Poland, and Germany.

Latvian Gov't Survives No Confidence Vote

· The Cabinet of Vilis KRISTOPANS has survived a vote of no confidence submitted by the People's Party in a vote of 24 to 66 with 14 abstentions, RFE\RL Newsline reported. Parliamentary deputies also approved Ingrida UDRE of the New Party as economics minister. She replaces co-party member Ainars SLESERS, who was ousted from the post last week. Four new state ministers for health, higher education, forestry, and municipal issues, have been appointed, bringing the total composition of the Cabinet to 1 ministers and six state ministers.

Uzbek-Ukraine Discuss Economic Cooperation

· Uzbek Prime Minister Utkir SULTANOV arrived in Kiev Thursday for a two-day official visit. SULTANOV and his Ukrainian counterpart Valery PUSTOVOITENKO will discuss a draft program for economic cooperation between Ukraine and Uzbekistan for the period from 1999 to 2008. The document was expected to be discussed at the third session of the joint Ukrainian-Uzbek commission for all- round cooperation headed by SULTANOV and PUSTOVOITENKO. The sides are also expected to review bilateral cooperation between subjects of their national economies, and to sign several inter-branch agreements.

IMF Backs Ukraine's Debt Restructuring

· The International Monetary Fund (IMF) has expressed support for the Ukrainian plan to restructure $155 million worth of bonds issued through ING Baring on a "voluntary" basis. Ukraine's Finance Minister is offering to pay creditors 20 percent of their bonds due on June 9th in cash, with the remaining 80 percent to be issues new three-year international

European Republics

Baltic, Kaliningrad Investment Conf. Opens

· An international conference aimed at encouraging foreign investments in the economies of the three ex-Soviet Baltic states and Kaliningrad Region of Russia opened in the Lithuanian city of Kaunas today.

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bonds. The IMF could back this plan by making disbursements of its money conditional on the "voluntary" restructuring of privately held bonds, the Financial Times reported. Outgoing US Treasury Secretary Robert RUBIN said, "It has been the IMF view...that if they work out their IMF difficulties and actually get disbursements under a program that those disbursements and the existing reserves ought not be used to pay private creditors...That raises the question of whether they can afford to buy the necessary foreign exchange or if they will work out some arrangement with their private creditors."

Meanwhile, the Ukrainian parliament on Thursday adopted a controversial law in a vote of 237 to 37, allowing the legislature and government to intervene in the Central Bank's activities and influence its decision. President Leonid KUCHMA is likely to veto the law. He has called the law an "inadmissible" attempt by the parliament to impose controls on the Central Bank. Under the law, the Central Bank would be governed by a 14-member board, with seven members appointed by the parliament and seven by the president. It also gives the president the right to ask the parliament to fire the chief banker, if the chairman and the Central Bank do not abide by policies drafted by the advisory board. Central Bank chairman Viktor YUSHCHENKO said that the law would deprive the Bank of its independence and is likely, "to threaten Ukraine's economic interests."

South Caucasus & Central Asia

Georgia-France Discuss Abkhazia, Kosovo

· Georgian Foreign Minister Irakly MENAGARISHVILI on Thursday said the settlement of the conflicts in Abkhazia and South Ossetia, "depends to a greater degree on the development in those parts of the international community which are involved in this process." He held talks with his French colleague Hubert VEDRINE in Paris and called for France's more active role in the Caucasus. VEDRINE noted that the talks touched upon France's possible contribution to efforts aimed at finding a solution to the region's problems, as well as upon relations be

tween Caucasian states. The two ministers also discussed the situation in Kosovo, and MENAGARISHVILI noted that Georgia's and France's stances on the Balkan problem "completely coincide." They exchanged ratification documents related to the Treaty of Friendship between Georgia and France and signed an agreement on cooperation in the area of archive services.

Aliyev Visits Turkey On Return Trip

· Azeri President Geidar ALIYEV arrived in Turkey before returning home from a medical treatment in the US. ALIYEV is satisfied with the good work of the Azeri power institutions in his absence and the public-political stability in the South Caucasus republic. That is a proof of "our ability to bring order to the country and to achieve the unity of people which can be ruined by none," the President said. On Saturday, the Azeri president will be awarded the annual Ataturk peace prize. He is due to return home in time for Azeri independence day on May 28th.

UzTexaco Begins Motor Oil Production

· The joint venture between Uzbekistan and US oil company Texaco has begun commercial production of motor oil at Uzbekistan's Fergana oil refinery. UzTexaco sales manager Ravshan SHARAFUT-DINOV said, "The joint venture UzTexaco has begun production of motor oils to international standards." In 1998, UzTexaco produced a test volume of 570 tons of motor lubricants and plans to increase production in 1999 to 7,000 tons. The joint venture hopes to increase production to the capacity of 50,000 tons a year within two to three years. Of the amount, 30 percent is expected to be exported. Texaco holds a 50.1 percent stake in the venture with the remaining 49.9 percent held by Uzbeftepere-rabotka. Texaco has invested $6.3 million in the project so far. Uzbek President Islam KARIMOV has called for more foreign participation in the nation's ongoing privatization process. He called foreign participation as vital at this current stage of reform. Privatization revenues in the first quarter were down 20 percent compared to the same period in 1998.

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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