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 7, 1999

Russian Federation

Politics

Yeltsin-Primakov Differences Fuel Suspicions

· The gap between Russian President Boris YELTSIN and Prime Minister Yevgeny PRIMAKOV widened this week on Russia's approach to the Yugoslav conflict and the lack of economic reforms. In addition to their differing opinions, at a round table meeting in the Kremlin this week, YELTSIN interrupted PRIMAKOV's presentation to question him in a reprimanding way. He also instructed First Deputy Prime Minister and Interior Minister Sergei STEPASHIN to sit closer to him, next to PRIMAKOV, indicating his rising role in the Cabinet. These events fuel speculation that a PRIMAKOV's future in the government is at stake. Presidential first deputy chief of staff Oleg SYSUYEV in an interview with Kommersant Daily published on Thursday hit the point home when he said, "No prime minister is indispensable including Yevgeny Maximovich [PRIMAKOV]." Communist Party leader Gennady ZYUGANOV said, "The collapse of the government would signal the complete crash of the financial economic system of the country. Moscow Mayor Yuri LUZHKOV said that a resignation of Russian Prime Minister Yevgeny PRIMAKOV would be, "a totally wrong move not only with regard to the premier himself but with regard to all Russia." The Mayor added that PRIMAKOV, "drastically cut spending of state money by oligarchs" during his work as Prime Minister. In his words, constant reshuffling in the upper echelon of power, "is similar to a brush fire." It entails loss of tempo and quality of administration, he noted. Deputy director of the Center for Political Technologies Boris MAKARENKO believes that YELTSIN will sack PRIMAKOV and the Cabinet, if the Duma wages war on him ahead of the impeachment debate. He said, "The President is clearly trying to scare his opponents on the eve of the impeachment vote. But he

also understands how suicidal it would be for him to undertake radical measures before the vote," the Financial Times reported.

Gustov To Run For Leningrad Governor

· Russian former first deputy prime minister Vadim GUSTOV announced on Thursday his candidacy for the governorship of the Leningrad region. He was dismissed from his government post in April and was replaced as first deputy prime minister by Interior Minister Sergei STEPASHIN. GUSTOV quit the post of governor in autumn 1998, when he was appointed as first deputy prime minister. During his work in the government, GUSTOV retained a seat in the Federation Council. He represented the Leningrad region in the Federation Council as only the elected heads of the legislative and executive powers in Russia's regions having the right to vote in the upper house. The incumbent head of the region, Valery SERDYUKOV, has remained acting governor. The regional electoral commission said they had not received an application from GUSTOV, but he still has time before the deadline to submit it. The Leningrad regional committee of the Communist Party, which supported GUSTOV when he was first elected in autumn 1996, is expected to back him in the gubernatorial bid again.

Economy

Ruble Rallies Against The Dollar

· The Central Bank today announced that the ruble rallied against the dollar by 2.8 percent in April, but others warn that the

Today's News Highlights

Russia

Tax Bills To Be Submitted

LUKoil Begins New Development

European Republics

Ukraine's Inflation Statistics

Belarus-Italy Sign Agreements

South Caucasus & Central Asia

GUUAM Influence Expanding

Economic Crime Statistics

Narodny Bank To Be Privatized?

Niyazov To Turn Over Powers

Politics-Economics-Business

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Friday

May 7, 1999

Intercon's Daily

boost will be short-lived. A Bank statement said that Russia's macro-economics had positive trends in the first quarter of 1999, low inflation, a stable ruble, and production revival in many branches of the real economy. The Central Bank held a tender in April to sell $50 million, of money earned from transactions with GKOs and OFZs, to non-residents. It also pointed out that March was the first month in 1999 to register an increase of 2.7 percent in the purchase of foreign currency by individuals. Russians spent 11.5 percent of their incomes to buy foreign currency in March, which was a 3.9 percent increase against February. Meanwhile, Prime-Tass reported that the ruble's positive trend has been caused by low business activities of commercial banks between the May Day and the Victory Day and will not last for long. The ruble on Thursday averaged 1.3 percent higher against the US dollar in the System of Electronic Lots Trading on the MICEX at 24.1069 per one dollar. Observers also point out that the loan agreement reached between Russia and the International Monetary Fund (IMF) had a relatively small influence on the ruble's position against the dollar. Traders forecast the ruble's upwards trend will end next week, taking into account the huge ruble reserves accumulated by banks.

Ruble = 24.07/$1.00 (NY rate)

Ruble = 24.04/$1.00 (CB rate)

Ruble = 25.96/1 euro (CB rate)

Dec Jan Feb Mar Apr May

New Tax Policies To Be Submitted To Duma

· The Russian government is expected today to submit a package of tax raising bills to the Russian State Duma. The Finance Ministry on Thursday said the amendments would provide for raising sales tax rates on gasoline, increasing excise duties on liquors, and tax rates on motorcars with the engine volume over 2500 cubic centimeters. Head of the financial department at the Russian government Alexander POCHINOK on Thursday said that the government would rather introduce imputed tax on petrol stations than raise the excise rates on gasoline. The government has accepted the proposals advanced by the Russian Tax Ministry, though a possibility of raising excise rates on gasoline had been stipulated in the joint memorandum of the government and the Central Bank. The other documents to be submitted include a bill, allowing the Central Bank to issue short-term bonds, and a bill on restructuring credit organizations. Later in May, the Tax Ministry is expected to submit other bills to improve taxation regimes for the Central Bank, commercial banks and insurance companies with the purpose of reducing their tax arrears and broadening the tax base through the development of the financial and investment market. POCHINOK also said that Russia will tax the owners of expensive foreign luxury cars with engine volume exceeding 2,500 cubic centimeters. "It is a socially just and justified tax, existing in many countries." The lump sum duty, to be paid once a year, will not apply to domestic vehicles, except the ZIL cars. Tax rate will range between 1.2 to 1.8 rubles per one cubic centimeter. The annual duty for a Mercedes-600 car has been set at 10,800 rubles, he said.

Business

LUKoil To Develop Caspian Oil

· Russia's largest oil company, LUKoil, on Thursday launched a sea rig in Astrakhan to start developing oil fields in the northern part of the Caspian Sea. According to a company press release, LUKoil has already signed contracts totaling $120 million to develop the Severny oil-bearing field. Its estimated reserves stand at 300 million tons. LUKoil experts believe that the new project will yield about $25 billion of state oil revenues. The oil produced is expected to be transported through the channels of the Caspian pipeline consortium, which are preparing the Russian leg.

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European Republics

Meri Calls For The OSCE Mission To Close

· Estonian President Lennart MERI today called for the Organization for Security and Cooperation in Europe (OSCE) mission in Tallinn to be closed and converted into a youth science center affiliated to the University of Tartu. For seven years, the OSCE mission has been monitoring the situation with the rights of the Russian-speaking minority in Estonia. Its unflattering reports, resulting in OSCE recommendations to the Estonian government, have been a nothing but trouble for Estonian authorities. Today, MERI was scheduled to meet OSCE High Commissioner for Ethnic Minorities Max VAN DER STOEL. The OSCE has been critical of new Estonian legislation requiring legislators, and those involved in commerce and consumer services to have working knowledge of the Estonian language.

Ukrainian Inflation Statistics

· Ukraine's State Statistic Committee released a report showing that the monthly inflation rate reached 2.3 percent in April, a rise of 1 percent in March and February. The increase was the result of a government resolution increasing the price of electricity and gas, in compliance with International Monetary Fund (IMF) requirements. Ukraine's planned inflation rate in 1999, is 19 percent, but many analysts see this figure as overly optimistic arguing that the government is likely to print money to pay off wage and pension arrears before presidential elections on October 31st, RFE\RL Newsline reported.

Italy-Belarus Sign Cooperation Agreement

· A Belarus delegation, visiting Rome, concluded its visit with the signing of an agreement on multi-sectoral cooperation between Belarus and Italy. The agreement provides for the participation of leading Italian firms and companies in a reconstruction of Belarus enterprises in the food and processing industries, as well as in metalworking, machinery building, and electronics. Special attention was devoted to specific matters concerning cooperation at the local level. The Belarus also signed an agreement on scientific cooperation between Parma University, one of Europe's oldest, and a number of Belarus institutions of higher learning. An Italian economic delegation will reciprocate the visit this June in Minsk.

South Caucasus & Central Asia

As GUUAM Expands, Moscow Influence Wanes

· GUUAM (Georgia, Ukraine, Uzbekistan, Azerbaijan, Moldova), a newly expanded non-military alliance, is gaining strength and international influence as the Yugoslav Conflict plays out between NATO countries, Belgrade, and Russia. Moscow's attempts to rebuild its economic and military sphere of influence by winning over several former Soviet states to accept its Kosovo peace plan failed and has been seen as a weakening factor. Russia's pan-Slavic, Orthodox battle cries were lost on Azerbaijan and Uzbekistan, both predominately Muslim. In fact, Russia was forced to back down from its strong anti-NATO stance when Muslim leaders from the republics of Tatarstan and Bashkortostan threatened to send volunteers to fight with Kosovars. Andrei PIONTKOVSKY, director of the Strategic Studies Center in Moscow said, "[By] supporting [Yugoslav President Slobodan] MILOSEVIC, Russia would be in opposition not only to the west, but to the Muslim world, and could even provoke a dismantling of the Russian Federation," as well as alienating its counterparts in the Commonwealth of Independent States (CIS) Collective Security Pact, the Financial Times reported. Georgia, Azerbaijan, and Uzbekistan pulled out of this pact early this Spring, while Ukraine and Moldova were never members. Several GUUAM states have openly or tacitly stated support for NATO bombings and even some have revealed their own interest in joining the western alliance. However, GUUAM's main aim is not military. It is to develop the area's rich oil and gas deposits to the exclusion of Russia. This was partially realized last month with the opening of the Baku-Supsa pipeline through Azerbaijan to Georgia's Black Sea Coast. Experts point out that Turkey, Britain, and the US are aligning with GUUAM and have proved far more capable than Russia to invest and trade in the region. GUUAM is also gaining strength because the alliance is formed on share interests, unlike the CIS which Russia forced on its neighbor after the collapse of the Soviet Union. Cooperation among GUUAM nations is expanding, specifically in the military sphere. To coincide with the inauguration of the Baku-Supsa pipeline, Georgia, Azerbaijan and Ukraine held training exercises in the region. This was the first time that multi-national exercises were held in the region without Russian troops. It is also important to point

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out a GUUAM's diplomatic initiative undertaken by Georgia Defense Minister David TEVZADZE, who organized a meeting of Armenia and Azerbaijan Defense Ministers for the first time in Georgia.

Georgian Economic Crime Statistics

· Georgian President Eduard SHEVARDNADZE announced at a government session on Thursday that over 1,000 indictments for corruption and economic crimes have been issued in Georgia since the start of the year. According to the President, about 400 police, tax and customs officers had been sacked for different violations. Georgian Interior Minister Kakha TARGAMADZE told the session that SHEVARDNADZE had instructed the law-enforcement bodies to step up struggle against corruption, smuggling, illegal trade, concealment of income and other economic crimes. The Minister pointed out that the first quarter of the year revealed 258 administrative violations in the sphere of currency transactions, including 14 facts of bribe-taking, 20 cases of smuggling, 94 facts of state property misappropriation, 14 cases of income concealing, 42 facts of forgery. The disclosure of the crimes yielded almost 9.5 million laris (about $4.5 million), and $771,000 which were transferred to the state budget. TARGAMADZE stressed that since the start of the year, about $2 million in forged dollar bills had been seized in Georgia, and criminal proceedings had been instituted against 12 people for transactions of deliberately forged money.

Colonel Arutyunyan Killed In Traffic Accident

· Colonel Gurgen ARUTYUNYAN, counselor of the Armenian Interior and National Security Minister, has been killed in a traffic accident near Yerevan. In 1994, Arutyunyan was head of the Foreign Intelligence Department of this ministry. The Interior and National Security Ministry reported that the accident occurred late on Tuesday on the Yerevan-Sevan highway 32 kilometers off Yerevan. In the dark, the car with Colonel ARUTYUNYAN at the wheel collided with a Zil truck loaded with potatoes. ARUTYUNYAN's father-in-law was also killed in the

accident. ARUTYUNYAN had served in state security bodies since 1968; first, in government liaison troops and later in the counter-intelligence and intelligence service. In 1984, he headed a special task group of troops in Afghanistan and participated in planning and carrying out military operations.

Kazakhstan To Privatize Narodny Bank

· Kazkah Finance Minister Uraz DZHANDOSOV on Wednesday said that Kazakhstan is aiming to sell a majority stake in its largest bank, Narodny Bank, in 1999 or 2000. He said, "We need to sell a controlling stake through an open tender and to a private investor. I see nothing wrong if that investor is a foreign investor." Narodny Bank, also known as Halyk or the National Savings Bank, is the successor to the Soviet-era Sberbank. It dominates the personal savings sector in Kazakhstan. The government owns an 80 percent stake, with 10 percent owned by investor and the remaining 10 percent by depositors. DZHANDOSOV pointed out that merger talks between Halyk and Kazkommertsbank are continuing.

Meanwhile, TuranAlem Bank in Kazakhstan signed a contract with US-based IFS International to upgrade the TPII system with the latest modern TPII equipment. The new system will enhance security and monitoring.

Turkmen President To Yield Powers

· Turkmenistan's President Saparmurat NIYAZOV reiterated to the parliament that he will turnover some of his powers to parliament. A special commission, chaired by NIYAZOV, will formulate the necessary constitutional amendments, which must be endorse by the People's Council at its next meeting in December. The President also issued a decree on opening more embassies abroad, specifically in Azerbaijan, Armenia, Kazakhstan, Kyrgyzstan, Moldova, and Tajikistan. Turkmenistan earlier decided to introduce visa requirements for visitors from most Commonwealth of Independent States (CIS), RFE\RL Newsline reported.

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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