DAILY REPORT ON RUSSIA

AND THE FORMER SOVIET REPUBLICS

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Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Friday, June 11, 1999

eration Council, Interfax reported. The suggestion is being widely interpreted by analysts as LUZHKOV's attempt to mend a fraying relationship with the Kremlin. As a senator, YELTSIN would be immune from criminal prosecution. On Thursday, however, LUZHKOV declared that the presidential administration had been given orders to find compromising materials about him and the work of the Moscow city government. He said that the administration, despite its public professions of impartiality toward him, has in fact declared him "Enemy No. 1." Head of the presidential administration Alexander VOLOSHIN denied any such orders and said that while the administration dislikes the idea of moving up Moscow mayoral elections, it will not oppose such a move as long as "everything is done lawfully." This decision guarantees Moscow Mayor Yuri LUZHKOV the possibility to remain the Moscow city mayor if he is defeated at the presidential elections, Duma Speaker Gennady SELEZNYOV noted.

Economy

Soros Scales Back Aid To Russia

· American financier-philanthropist George SOROS on Thursday said he was cutting back his aid to Russia because of the government's failure to improve the economy. Ending a four-day visit to Russia, SOROS said, "because of the capacity of the [Soros] foundation and the magnitude of the problem Russia faces because of the economic and political crisis, I had to increase my financial support, I would say,

Russian Federation

Politics

Stepashin-Maskhadov Meet, Hostages Released

· Russian Prime Minister Sergei STEPASHIN arrived in the republic of Ingushetia today to attend a meeting of the Council of the association North Caucasus. STEPASHIN is scheduled to have talks with Ingushetia's President Ruslan AUSHEV and Chechen President Aslan MASKHADOV ahead of the Council's meeting. Arriving in Vladikavkaz, STEPASHIN said that, "a meeting between Boris YELTSIN and Chechen President Aslan MASKHADOV will take place by all means." He said the President's meeting, "will be structured on the basis of the results of my meetings and consultations with MASKHADOV." He stressed that the YELTSIN-MASKHADOV meeting must be held in a way that would produce, "serious results and serious documents will be signed, including of political character."

Coinciding with today's talks, five military men and two civilian hostages were released from Chechnya without any preliminary conditions and taken to Pyatigorsk in southern Russia. Former general and Krasnoyarsk governor Alexander LEBED is being credited with negotiating their release. The mission set up by LEBED has secured the release of 65 hostages from Chechnya.

Mayoral Elections Moved Forward

· A majority in Moscow's legislative assembly on Wednesday voiced its approval to move mayoral elections from June 2000 to December 1999. A formal vote on the matter will take place today. Sevodnya newspaper suggested that former prime minister Sergei KIRIYENKO will challenge Moscow Mayor Yuri LUZHKOV in that election. On Tuesday, LUZHKOV proposed that all retiring Russian presidents be given permanent membership in the Fed

Today's News Highlights

Russia

Tyumen Oil Co. To Get Grant

Flights To Libya Resume

European Republics

Gazprom Cuts Price For Belarus

ETA Accounts To Be Seized

South Caucasus & Central Asia

Turkey-Georgia Military Grant

Azeri To Cooperate With NATO

Uzbek Cancels Copper Tender

Kazakh To Fight Corruption

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June 11, 1999

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beyond my financial capacity," the Associated Press reported. Specifically, he will scale back his aid to Russian scientific and educational projects. SOROS pointed out that the government has failed to keep its promise to match his contributions. He is Russia's largest private donor, with more than $350 million given to charitable projects in the past decade. Analysts fear that foreign investors will follow SOROS' lead to the extreme, totally abandoning and isolating Russia financially. SOROS said, "I think that really everything will depend on the clarification of the political situation, and it is my hope that perhaps out of the election some clarity will emerge." Parliamentary elections are set for December, 1999 and presidential elections in the summer of 1999.

Defense Spending To Reach Two Percent

· The Russian government will allocate 110.88 billion rubles, or 2.17 percent of its GDP, for defense spending in the draft federal 2000 budget. Defense spending is the second largest article of expenditure in the Russian budget. It is followed by "law-enforcement activities and state security affairs," for which the government allocated 68.74 billion rubles, or 1.35 percent of the GDP. The government is planning to provide 60.33 billion rubles, or 1.18 percent of GDP, for financial assistance to the regions. It will spend 40.09 billion rubles on financing and credits to industry, the energy industry and construction, 29.71 billion rubles on education, 24.02 billion rubles on state and local self-government, 22.61 billion rubles for transportation, roads, and information science, 22.33 billion rubles for health protection, and 14.41 billion rubles for fundamental research. Other expenditures, including expenses for emergency situations, will total 20 billion rubles.

Gov't Predicts Fall In Tax Collections

· Finance Minister Mikhail KASYANOV said the Russian government predicts that it will not be able to keep tax collection at the April level. On Wednesday, he said that there has been a drop in industrial production because different industries went through a period of growth at different times. April level of revenues reached 12.5 percent of the gross domestic product (GDP). KASYANOV also noted that the International Monetary Fund (IMF) may delay a decision on loans to Russia until in September or October of this year. At the same time, he expressed the hope that the Russian State Duma will adopt the law on the tax on gas stations and other controversial

laws on June 16th, which will facilitate the provision of IMF loans.

Meanwhile, the Russian Federal Tax Police Service is preparing a large-scale operation to expose a number of major oil companies that dodge taxes, the service's chief Vyacheslav SOLTAGANOV said today. He said tax police are aware of several schemes of tax evasion and are poised to reveal one of such "classic" schemes during its operation. SOL-TAGANOV said tax police expect the crackdown to fetch an estimated $500 million to the federal budget. He said 14 oil companies evade taxes.

Ruble = 24.29/$1.00 (NY rate)

Ruble = 24.27/$1.00 (CB rate)

Ruble = 25.48/1 euro (CB rate)

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Business

Tyumen Oil Co. To Receive US Credit

· The US Export and Import Bank in 12 days will decided on whether to grant a credit of $300 million to the Tyumen Oil Company. President and CEO Simon KUKES in New York on Thursday said these funds will be spent on the development of Russia's biggest Samotlor oil deposit. He added that the new loan will ensure oil extraction at Samotlor for the next 25 years with stable oil output of 350,000 barrels a day. He said the Tyumen Oil Company intends to purchase smaller oil companies to bring oil output to 500,000 barrels a day. Negotiations with three companies are ongoing. KUKES said new mergers are expected in the Russian petroleum industry as oil

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companies intend to cut production costs. Several weeks ago, the Eximbank already provided guarantees for $197.6 million to modernize the Ryazan oil refinery owned by the Tyumen Oil Company.

New Director Appointed For Vnukovo Airlines

· Vladislav FILEV, Director General of the Sibir Airlines, has been elected as the new Director General of Vnukovo Airlines Company. On Tuesday, the new director was presented to the staff of the Vnukovo Airlines and began his work in the new post. Plans of a merger of the two companies prompted by growing competitiveness on the market of air transportations are expected to be announced soon. Furthermore, both companies are committed to giving preference to the use of domestic aircraft, such as planes TU-154 or Il-86 and medium-range passenger planes TU-204 of a new generation. The alliance formed by the two companies is expected to upgrade services offered to passengers and enable to more effectively use Russian-made aircraft. Vnukovo Airlines is the oldest airline company in Russia. It ranks first on domestic routes in the volume of passenger transportation estimated at 1.6 million passengers a year. Sibir Airlines is one of Russia's leading airlines companies which is mostly engaged in passenger transportation. The company transports around 600,000 passengers a year. The merger would create the largest technical maintenance bases in Russia, which will enable it to service different kinds of aircraft.

Aeroflot Resumes Flights To Libya

· Russian Aeroflot Airlines Company resumed flights to Libya on Thursday, following the lifting of sanctions against Tripoli. Russia suspended airline service to Libya as part of UN sanctions against Libya in connection with the bombing of a Pan Am airliner over Scotland in 1988. Russia dropped the sanctions after two Libyan suspects in the case were turned over for trial. The Aeroflot flight will be performed by the TU-154 passenger plane once a week on Thursday. The duration of the flight is four hours 50 minutes. Aeroflot performs flights to Libya on the basis of an international agreement signed in 1974. Aeroflot expert have estimated the Libyan market of air transportations as rather perspective and intends to take maximum advantage of favorable conditions to expand its cooperation with Libya.

European Republics

Gazprom Reduces Prices For Belarus

· Russian gas monopoly Gazprom reduced its rated from $50 to $30 per 1000 cubic meters of gas for Belarus. Only Russian consumers pay a lower price of approximately $13. Ukraine buys Gazprom gas for $50, Lithuania for $73. Gazprom is interested in gas transit via-Belarus. Belarus charges $3.5 per 1000 cubic meters of gas, which is half as low as gas-transit tariffs in Poland, Ukraine and Baltic states. Apparently, the closer the Yamal-Europe gas pipeline gets to completion, the more Gazprom is interested in cooperating with Belarus. After the pipeline is completed, the company will increase its gas exports by 36 billion cubic meters.

Estonian Court Seizes News Agency Accounts

· The Tallinn city court on Thursday ruled to seize the accounts of the Estonian Telegraph Agency (ETA), the only state-owned news agency in the country. The agency is subject to bankruptcy procedures initiated by the local companies, Houses And Flats and Jakarta Groups. This January, they signed a tentative agreement with ETA envisaging the purchase of the Tallinn Press House from the agency for 16 million Estonian crowns (more than $1 million). Itar-Tass reported that a week earlier, ETA managers had already sold the Tallinn Press House to the Esma Auto company, a Mazda car dealer, which had an office in the house. The United Bank of Estonia, to which ETA owed about four million crowns, also participated in the deal. ETA has been working at a loss over the past few years, and hoped to improve its financial performance by selling the Tallinn Press House. This abortive deal, however, is likely to further aggravate the situation as, under Estonian law, ETA can be fined for several million crowns.

South Caucasus & Central Asia

Turkey-Georgia Sign Military Grant

· The head of the main financial department of the General Staff of the Turkish Armed Forces, Major-General Serafetddin ELCI and Georgian Deputy Defense Minister Grigol KATAMADZE on Monday signed an agreement on a military grant and a protocol for financial aid between the Georgian Defense Ministry and the General Staff of the Turkish Armed Forces. Under this agreement, Turkey

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has provided $1.7 million to support the Georgian army modernization in 1999. ELCI said the money will be used in particular to upgrade the communications systems of the Georgian Defense Ministry and the Border Guard Department. Turkish and Georgian military experts are expected to meet shortly to discuss concrete areas where the Georgian Defence Ministry needs assistance. In 1998, Turkey decided to provide $5.5 million to support military schools in Gori, Eastern Georgia, and in Kodzhori, not far from Tbilisi, as well as to build naval facilities in Poti. KATAMADZE said Turkey also intends to assist Georgia in preparing the first multinational exercise under the Partnership for Peace program to be held in Georgia in 2001.

Azerbaijan To Cooperate With NATO

· Azeri Defense Minister Safar ABIYEV on Tuesday said that Azerbaijan supports all the steps taken by NATO within the framework of the Partnership For Peace program. He stated this at the opening of a conference on multinational peacekeeping exercise code-named Cooperative Determination-99. Representatives of various structures of the NATO command, of seven NATO member countries and 13 participants in the Partnership For Peace program, including Azerbaijan, Georgia, Kyrgyzstan, Moldova, Ukraine and Uzbekistan, are taking part in the conference, which will last until Friday. ABIYEV stressed that Baku was going to actively cooperate with NATO within the framework of the individual bilateral cooperation program code-named Azerbaijan-NATO.

New Armenian Government Being Formed

· As widely anticipated, the new Armenian parliament elected former Communist Party First Secretary Karen DEMIRCHYAN as speaker at its first session on Thursday. Defense Minister Vazgen SARKSYAN has been appointed Prime Minister by President Robert KOCHARYAN. DEMIRCHYAN and SARKSYAN head the Miasnutytun alliance, which won some 65 seats in the parliament. The new Armenian parliament, elected on May 30, comprises

129 deputies. 73 of them were elected in one-mandate districts, another 56 on party tickets. They represent six political parties and groups which received more than 5 percent of votes. The Unity coalition, formed by the Republican and the Popular parties, has the majority of seats. Prime Minister Armen DARBINYAN has already sent a letter of resignation to the President. However, the President has not yet signed a decree dissolving the government and it continues to work. Addressing deputies, KOCHARYAN said there can be "no alternative" to political and economic reform. He added that he expects "close cooperation" between the legislature and the executive. DEMIRCHYAN said he will strive to "increase substantially" the role of the parliament in policy-making, and he called for "greater transparency" in the work of the government.

Uzbekistan Cancels Copper Plant Sale

· Deputy head of the Uzbekistan State Privatization Committee Abdulla ABDUKADYROV announced today that the tender to sell a 46.5 percent stake in its giant Almalyk copper producer had been cancelled. The tender was expected to bring in $478 million in revenues. He said that low metals prices on international markets had caused a drop in interest among foreign investors.

Kazakhstan Pledges Crackdown On Corruption

· Kazakh Prosecutor General Yuri KHITRIN pledged to step up the fight against corruption. He said, "A large amount of corruption cases go undetected. If we do not take urgent measures, then corruption, firmly rooted in the corridors of power, will led to the breaking up of the basic functions of government." The said that thousand of cases had been brought against those suspected of corruption during the last year and a half, although only a fraction had been convicted. KHITRIN cited cases where companies and property sold at a huge discount to their true value, budgetary money transfers into official's private accounts, and tax dodging. US Ambassador Richard JONES said corruption reduced the tax base and discouraged investment.

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

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