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

Wednesday, May 26, 1999

Russian Federation

Politics

Cabinet 80 Percent Complete

· Russian President Boris YELTSIN and Prime Minister Sergei STEPASHIN have virtually completed forming the new government. STEPASHIN claims that the Cabinet is 80 percent complete, with the heads of the ministries for anti-monopoly policy and support of entrepreneurial activities, health, railways, and economics still vacant. In the first serious talks between YELTSIN and his new prime minister, it appears that the President has set limitations on STEPASHIN's independence. STEPASHIN had proposed appointing Duma Budget Committee chairman Alexander ZHUKOV as first deputy in charge of economic and financial issues with Mikhail ZADORNOV retaining his post as Finance Minister. Apparently, a compromise was reach in which ZADORNOV was promoted to the first deputy position, his deputy Mikhail KASYANOV moved in as his replacement, and ZHUKOV left in the Duma. Former Railways Minister Nikolai AKSYONENKO was appointed first deputy prime minister with a broad portfolio to oversee all current affairs of the Cabinet. STEPASHIN said AKSYONENKO will be his number 2 man. The Cabinet will have two deputy prime ministers: for social issues, Valentina MATVIYENKO, and for agriculture and food, Vladimir SHCHERBAK. Viktor KALYUZHNY replaces Sergei GENERALOV as Fuel and Energy Minister, while Alexander POCHINOK replaces Georgy BOOS as Tax Minister. Mikhail FRADKOV was appointed Trade Minister, Vyacheslav MIKHAILOV minister for federal affairs and nationalities, Leonid DRACHEVSKY minister for CIS affairs, Ramazan ABDULATIPOV minister of the Russian at large. Vladimir Rushailo was appointed Interior Minister, Sergei SHOIGU as Emergency Minister. Andrei CHERNENKO was appointed head of the government's apparatus. Remaining in

their positions are: Atomic Energy Minister Yevgeny ADAMOV, State Property Minister Farit GAZIZULLIN, Science and Technologies Minister Mikhail KIRPICHNIKOV, Education Minister Vladimir FILIPPOV, Cultural Minister Vladimir YEGOROV, Transport Minister Sergei FRANK, Labor Minister Sergei KALASHNIKOV, and Natural Resources Minister Viktor ORLOV. STEPASHIN announced that he will appoint a deputy prime minister for defense, but did not specify if it would outrank Defense Minister General Igor SERGEYEV.

Crime In The Liberal Democratic Party

· Liberal Democratic Party of Russia (LDPR) leader Vladimir ZHIRINOVSKY is a tax evader. The Tax and Duties Ministry said Monday that ZHIRINOVSKY owes $164,000 in back taxes. The Ministry added that ZHIRINOVSKY should be paying taxes on, "large assets such as apartments, houses, and other buildings" that are being used by branches of his party around Russia. ZHIRINOVSKY denied the charges of tax fraud and says the houses belong to his party and not him personally.

The leader of the local branch of the LDPR, Igor CHYORNYI, has been detained in Irkutsk, in Eastern Siberia, on kidnapping charges. A spokesman for the regional Eastern Siberian Organized Crime Department said on Wednesday that CHYORNYI had already served 10 years in prison on three charges in the early 1980s. This time, the criminal proceedings have been initiated under Article 126 on suspicion of "illegally

Today's News Highlights

Russia

Ruhrgas Buys Gazprom Stake

Nafta-Moscow Stake Bought

European Republics

Belarus Reduces Gas Debt

Estonian Budget Surplus

South Caucasus & Central Asia

White House On Terrorist Group

NATO-Azeri Talks On Security

Turkey-Turkmen On Pipeline

US-Uzbek Sign Six Agreements

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depriving" a local businessman of his freedom.

Economy

Ruble = 24.6/$1.00 (NY rate)

Ruble = 24.5/$1.00 (CB rate)

Ruble = 25.95/1 euro (CB rate)

Russia Request London Debt Roll Over

· Russian Finance Minister Mikhail KASYANOV held negotiations with the London Club of commercial bank creditors on Tuesday looming payments on Soviet-era debt due on June 2nd and the financial difficulties in Russia. According to a Russian statement, "As a result of these [financial] constraints, VEB [Vnesheconombank] requested its London Club creditors to roll over for a six-month period on sums due on June 2, 1999, under its London Club Restructuring Agreement (PRINs) and interest notes (IANs)." The roll over amount is made up of $350 million cash due on PRINs, about $200 million due on IANs, and about $350 million in new IANs to be paid to PRINs holders under a December agreement. Over $26 billion in IANs and PRINs are outstanding. Russia has already defaulted on $22.4 billion in PRINs owed to the London Club. Fitch IBCA pointed out that, "The 1999 budget makes no allowance for payments on Soviet-era external debt." Bankers said earlier that the London Club cannot make a unilateral decision on a deferment. The two sides agreed that a economic sub-committee would travel to Moscow for the next meeting scheduled in June or July. KASYANOV said, "we shall continue to move ahead, striving to finalize a new rescheduling of the debt by the end of the year."

Russia also hopes to restructure $38 billion owed to the Paris Club of sovereign creditors, pending a new agreement with the International Monetary Fund. The Paris Club said that the burden of debt restructuring should be shared. Fitch IBCA said, "The Paris Club would be very unhappy if the Russians made payments to the London Club, while missing payments to the Paris Club," the Financial Times reported.

Russia To Receive US Grains

· The second batch of the US food aid to Russia, slightly more than 600,000 tons of grain, will be supplied in approximately two-four weeks. The first batch, 200,000 tons of grain, was supplied via the

ports of the Russian Far East, Novorossiisk and St. Petersburg. Russia will receive 3.1 tons of food, including 1.7 million tons of wheat, 100,000 tons of rice, 30,000 tons of milk powder, 500,000 tons of corn, 120,000 tons of beef, 50,000 tons of pork, 200,000 tons of soya beans and other foods. A total of 100,000 tons of the food aid will be distributed under control of non-governmental, religious and volunteer organizations. The supplied food was distributed with due account of the plan.

The Russian State Committee for Statistics released a report today showing that total grain reserves of the Russian agricultural and procurement and processing enterprises amounted to 12.813 million tons on May 1, 1999. This is a 52.5 percent decrease from the May 1, 1998 figure. The reserves of agricultural enterprises stood at 8.687 million tons, and those of procurement and processing enterprises at 4.135 million tons. This makes 54 and 38 percent, respectively, of the May 1, 1998 figure.

Gold, Currency Reserves And Inflation Figures

· The Russian Central Bank said that Russia's gold and foreign currency reserves decreased by $300 million, or 2.6 percent, from $11.6 to $11.3 billion, over the period from May 7th to May 14th, 1999. The reserves reduced by 7.4 percent from the beginning of this year when the gold and foreign currency reserves amounted to $12.2 million. Monetary gold is priced at $300 for one troy ounce. Inflation in Russia on May 1st to 17th was 1.4 percent, including 1 percent between May 12th and 17th, according to the State Statistics Committee. On Wednesday, a report showed that the average daily price growth rate dropped to 0.08 percent in May compared to 0.1 percent in April, when monthly inflation was 3 percent. The Russian budget's wage debt has decreased 6.8 percent in April, to make 63.108 billion rubles. Of this figure, the State Statistics Committee stated that 24.2 percent are wage debts related to under-funding of budgets of all levels that are short a total of 15.3 billion rubles. The federal budget accounts for 19.6 percent of the total under-funding and regional budgets for 80.4 percent.

Business

UES 1998 Export Results

· The Unified Energy Systems of Russia (UES) company exported $302 million worth of electricity,

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including $30 million worth of electricity to the former Soviet republics, in 1998, the company Board's First Deputy Chairman Alexei KUDRIN said on Tuesday when presenting the annual report. The report will be delivered at a general meeting of the company in a month. The after-tax profit of the Unified Energy Systems of Russia amounted to 1.6 billion rubles last year. As compared to 1997 it dropped mostly because of the fourfold devaluation of the ruble, KUDRIN stressed. The company leadership pins hopes for the 1999 finances on the increase of monetary payments for the electricity supplies to 35 percent (the 1998 increase was from 19 to 21 percent), larger exporters abroad and a tougher stand in settlements with the CIS member-countries. In their opinion, the stopped exports to Ukraine and smaller exports to Kazakhstan will cut the amount of supplied electricity and bring in more payments.

In addition, UES is expected to transfer 4.6 billion rubles to the federal budget. The entire amount of its tax payments is estimated at 15 billion rubles. Tax payments by the company's subsidiary enterprises have increased by 20 percent over the past two months. KUDRIN said UES aims for a 100 percent payment of current allocations to the pension fund. UES plans to allocate 5.5 billion rubles to the fund this year.

Ruhrgas Buys Another 1.5 Percent In Gazprom

· Germany's largest gas company Ruhrgas has purchased another 1.5 percent of the shares of Russia's gas giant, Gazprom. Financial information on the purchase was not available. The purchase price of the share was determined against the price of the foreign listed ADRs. "The purchase of a share in the company has become the biggest investment ever made in Russia by a German enterprise," a company official stressed. "Ruhrgas is the first foreign gas company to become a direct owner of a joint-stock company's securities," he added. In December 1998, Ruhrgas purchased from the Russian state 2.5 percent of Gazprom shares for $660 million. Then, Gazprom's subsidiary foreign trade enterprise Gazexport and Ruhrgas set up the Gerosgas joint company. Essen came into possession of 0.5 percent of its Russian partner's securities through Gerosgas. Ruhrgas, which handles 19 billion cubic meters of the 31 billion cubic meters Gazprom supplies to the German market, is trying to strengthen

ties with Gazprom, since Germany's gas demand is expected to rise from 21 percent to 25 percent in the next decade, the Financial Times reported.

US Ex-Im Bank Approves $196M Loan

· The Board of the US Governmental Export-Import Bank on Monday approved a revised $196.7 million loan to the Tyumen Oil Company, Russia's sixth largest oil producer, as the first part of an agreed $500 million loan package. This is the largest package extended to a Russian company since the financial crisis in August, 1998. The first loan will assist in the reconstruction of the Ryazan Oil Refinery, with an annual throughput of 11 million tons per year. The funds are expected to be disbursed in the next two or three months. Under the US laws, the Congress must be informed about deals of such a scale. The projects are open for debates within 30 days after the notification, and only then the deals are legalized and contracts are signed. The ABB concern is the American contractor in the reconstruction of the Ryazan Oil Refinery. According to some reports, it will give $80 million to $85 million worth of additional credits to the Russian partner. The second part of the loan will be spent on the renovation of the Samotlor oil field, with an estimated 1 billion barrels of reserves. Tyumen's chief executive Simon KUKES said the deal represents renewed Western confidence in Russia and his company.

Transneft Purchases Nafta-Moscow Stake

· The Transneft oil transporting company on Tuesday purchased a 25 percent stake in the Nafta-Moscow oil exporter on results of negotiations between Transneft, Surgutneftegaz and Nafta-Moscow. The Russian oil exporter experienced financial difficulties since the August, 1998 crisis, when about $250 million of company funds were lost in the banks. The company offered Transneft to become its strategic investor with the coordination with Surgutneftegaz, the leading share-holder of Nafta-Moscow.

European Republics

UES To Sign Agreement With Baltic, Belarus

· Chairman of the Board of Unified Energy Systems (UES) Anatoly CHUBAIS is expected to sign in Vilnius today an agreement on the UES parallel work with the power systems of Lithuania, Latvia, Estonia,

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and Belarus. Yuri KUCHEROV, director of the UES development department said the agreement would enable Kaliningrad Region to maintain its independence energy-wise, Itar-Tass reported. The UES delegation intends to suggest that Lithuania take part in the construction of a Kaliningrad thermo-electric power station Tets-2. This offer is particularly appealing for Lithuania, since by the year 2004 the Ignalina nuclear power station must be closed down under an arrangement with the European Bank for Reconstruction and Development. Lithuania will be able not only to receive electricity from the Kaliningrad Tets-2 station but also, jointly with UES, to export it to Poland. KUCHEROV emphasized that the agreement on parallel work is economically beneficial for all the three Baltic States.

Belarus Reduces Russian Gas Debt

· Belarus' debt to Russian for gas has sharply reduced to $250 million, according to Beltransgaz, a transit company. Minsk is paying its Gazprom gas bills regularly, and the debt was cut largely to last year's agreement on equal conditions of economic management between the two companies. Belarus is receiving gas at $30 for 1,000 cubic meter, which is close to Russian domestic prices. Ukraine pays 33 percent more and Lithuania 60 percent more for Russian fuel. Belarus received 5.2 billion cubic meters of Russian gas in the first months of 1999. It will get 16 billion cubic meters in 1999, while its requirements are higher by 500 million cubic meters.

Estonia To Have Small Budget Surplus

· Estonian Finance Minister Simm KALLAS reported to the International Monetary Fund (IMF) that Estonia is planning to have a state budget with a surplus equivalent to 0.5 percent of GDP in 2000. Head of the IMF delegation John ODLING-SMEE welcomed the Estonian Cabinet's "conservative approach" to the 2000 budget and the "austerity measures" contained in this year's negative supplementary budget. ODLING-SMEE warned that the report on the Estonian economy to be submitted shortly to the Fund's board of directors will be more critical than in previous years. RFE\RL Newsline reported that the IMF argued that Estonia's 1999 budget should be cut by 2.3 billion kroons 9$156.5 million), rather than the 1 billion kroons reduction foreseen by the negative supplementary budget.

South Caucasus & Central Asia

Georgian Terrorist Investigation Continues

· Interior and Security Ministry officials are continuing investigations into the plans of a terrorist group to assassinate Georgian President Eduard SHEVARDNADZE and top officials as well as seize power and invite Russian military forces into Georgia to maintain order. Interior Minister Kakha TARGAMADZE said that a total of 12 people have been arrested, including former Security Ministry officials. Security Minister Vakhtang KUT-ATELADZE declined to comment on allegations that some Russian servicemen based in Georgia were involved in the conspiracy. As Intercon reported on Tuesday, links have been discovered between the terrorist group and high level Russian government officials. Police have secured evidence of contacts between the conspirators and former security minister Igor GIORGADZE. Also arrested in this attempt is the brother of GIORGADZE's deputy PAPUASHILI, who himself was arrested in the 1995 assassination attempt.

White House Statement On Georgian Arrests

· "The Georgian government has announced the arrest of several individuals who were engaged in plotting, `serious crimes against the state.' Those detained allegedly conspired to carry out one or more assassinations and to overthrow the Georgian government. Georgia's democratic institutions have once again shown their ability to overcome such challenges. The United States is watching these developments with great concern, and condemns any efforts to change the democratically-elected government by unconstitutional means.

In the years since its gained independence, Georgia has established a clear record as a leader in democratic development and economic reform. The people of Georgia chose their President, Eduard SHEVARDNADZE, through the democratic process. President SHEVARDNADZE has won the respect of the international community for his efforts to strengthen the security and prosperity of his country. Under his leadership, Georgia has contributed to greater security and stability in the Caucasus region.

The United States expresses its support for the

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democratically-elected Government of Georgia and calls on all nations to do the same."

NATO To Discuss Azeri Security Problems

· Representatives of NATO's main committees, led by Ambassador Klaus-Peter KLEIBER, NATO Assistant Secretary-General, are meeting with Prime Minister Artur RASIZADE and other officials today to discuss Azerbaijan's security problems. RASIZADE chairs the governmental commission on cooperation with NATO. On May 27th and 28th in a broader format at Baku's Europe Hotel, the sides will discuss European security matters and the role of NATO in this process, as well as mechanisms for cooperation between the Alliance and other countries on the continent, including Azerbaijan. The Foreign Ministry press representative said the meeting is equal in status to an international conference which is held annually within the framework of the Euro-Atlantic Partnership Council.

Turkey-Turkmen Cement Pipeline Project

· Turkey and Turkmenistan on Friday signed an agreement for the beginning of construction on the 2,000-kilometer-long Turkmen natural gas pipeline connecting the coastal city of Turkmenbasi and connect to the Azeri capital of Baku with a 300-kilometer length of pipeline running under the Caspian Sea. From Baku the pipeline will continue to Tbilisi and Turkey's eastern province of Erzurum. Azerbaijan and Georgia must allow the pipeline on their territory. Under the agreement, Turkmenistan is expected to export its natural gas to Turkey and Europe through the Caspian Sea in the year 2002 when the pipeline is completed. After the pipeline is put into initial operation, 5 billion cubic meters of natural gas will flow to Turkey annually. However, the pipeline has the capacity of 30 billion cubic meters per year. At full capacity, Turkey plans to use 16 billion cubic meters of the natural gas for its own use and to export the remaining 14 billion cubic to central and southern Europe. Meanwhile, Turkmenistan on Friday stopped gas deliveries to Ukraine because of Kiev's $900 million debt. Ukraine's debt

for Turkmen gas supplied in 1999 has reached $318 million, which plus the sum of debt restructured back in 1994 totals $900 million, Turkmen President NIYAZOV said.

US-Uzbek Plan For Defense Cooperation

· A joint Uzbekistan and US commission met in Tashkent Tuesday and decided that the two sides plan to develop cooperation in defense more vigorously. Uzbekistan and the US noted that spheres of cooperation, "include programs in military training, peacekeeping exercises, maneuvers under conditions of emergency situations as well as exchange of specialists." Uzbek Foreign Minister Abdulaziz KAMILOV and Special Adviser for the Secretary of State for the New Independent States Stephen SESTANOVICH signed six documents as a result of talks, which include a joint statement on steps to combat terrorism, a memorandum on mutual understanding in consular affairs, and a diplomatic note on the civil aviation agreement. A plan of bilateral defense cooperation for 1999-2000 was signed at the Tashkent meeting. The sides also signed the Nukus agreement which will promote Uzbekistan's reception of US assistance in liquidating former Soviet chemical production facilities. This agreement also seeks to prevent any chemical weapons technology in Uzbekistan from being smuggled abroad. Tashkent and Washington decided to continue joint efforts for regional cooperation to ensure security of borders so as, "to control proliferation of mass destruction weapons, drugs, weapons, and terrorism." SESTANOVICH also announced that the US will provide Uzbekistan with $32.2 million in economic aid to promote market reforms. The US delegation suggested that Uzbekistan could attract more foreign investment if it lifted exchange restrictions on its currency. Uzbekistan at the end of the meeting pledged to make its currency, the sum, freely convertible next year. The US also urged Uzbekistan to ensure the necessary conditions for long-term economic cooperation by bringing its commercial sector in line with the existing international standards and join the World Trade Organization.

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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