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

Wednesday, June 16, 1999

prices of their output, effective as of June 1st. Prices in the second half of this year will be raised by no more than half of the industrial prices inflation rate in the first half of 1999. First Deputy Prime Minister Nikolai AKSYONENKO, speaking at the signing ceremony, expressed confidence that the move will make it possible, "to rule out an unfounded bounce of prices." He also rejected the opinion that through this agreement the state intervenes in relations between producers and users. "The agreement is a new step towards stabilization in the real sector of the economy," AKSYONENKO said. Kommersant Daily noted that the agreement was needed to persuade the State Duma to pass a package of IMF proposed bills, including a bill taxing petrol stations that the leftist Duma may only pass if it has guarantees of price stability.

West-99 Military Drills Practice Defense Tactics

· Russian Defense Minister Igor SERGEYEV will direct a wide-scale, week-long military drills next week to practice defense tactics against a hypothetical attack from the West. The drill, code named West-99, will place virtually all units in western Russia on high alert and involve the armed forces of neighboring Belarus. The Defense Ministry declined today to link the maneuvers, which will last from Monday to Saturday, with the situation in the Balkans. It also claimed that the drill is not a response to Norway's decision to host NATO-led exercises in Finnmark, Barents Peace-99 exercise. In the exercise, a hypothetical multinational peace

Russian Federation

Politics

Caspian Pipeline Shut Down Indefinitely

· Russia's Transneft oil company will indefinitely shut down the Baku-Novorossiisk pipeline carrying Caspian oil to the Black Sea, following an explosion Monday. The blast blew a hole in the pipeline and set leaking oil on fire in the republic of Daghestan. Transneft officials believe the cause of the blast was a bomb and cite evidence of a crater at the site. The pipeline has been frequently shut down this year and is often tampered with by attackers from Chechnya and people attempting to steal oil. Transneft had threatened to halt transportation of crude through the pipeline unless the Chechen government took effective measures to prevent thieves tapping into it and siphoning off. It is estimated that 120,000 tons of oil have been stolen this year. Chechen Internal Affairs minister Aidomir ABALAYEV said that the Chechen pass is being protected by a new battalion. He claimed that oil had been stolen because the previous guards actively cooperated with the criminals. The volume of Azeri oil transported through this route from January through April totaled 1.37 million tons. In May oil transportation declined, with only 73,300 tons of oil transported. The Azeri government had hoped that by the end of May at least 1.44 million tons of oil would have been transported. It is one of the two pipelines stretching from the Caspian to the Black Sea; the other is the Baku-Supsa pipeline.

Russian Companies Impose Price Controls

· More than 50 executives of major Russian companies and agencies, including the Railways Ministry, the Unified Energy Systems of Russia (UES), the gas monopoly Gazprom, and leading Russian oil companies signed an agreement to cooperate in stabilizing the economic situation. They agreed not to increase, until the end of this year, the

Today's News Highlights

Russia

Metal Sector To Be Restructured

Liggett-Ducat Opens Factory

European Republics

Ukraine To Sell LiNOS Stake

Estonia Budget Linked To Motion

South Caucasus & Central Asia

Armen-Azeri Cease-Fire Broken

New Armenian Cabinet Formed

WB To Grant Tajik $15 Million

Kazakh Halts Gas Supplies

Politics-Economics-Business

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June 16, 1999

Intercon's Daily

keeping operation is launched in a hostile environment after an ethnic conflict in two imaginary states creates a tide of refugees and a humanitarian crisis. Norwegian, US, British and German forces, as well as units from the Netherlands, Denmark, Poland, and neutral Sweden and Finland, are taking part in the operation, which encompasses the army, navy and air force.

Economy

Ruble = 24.25/$1.00 (NY rate)

Ruble = 24.23/$1.00 (CB rate)

Ruble = 25.25/1 euro (CB rate)

Camdessus Consults Stepashin On Economy

· International Monetary Fund (IMF) Managing Director Michel CAMDESSUS today said the IMF would continue supporting the Russian government's efforts to stabilize the domestic economy. He is optimistic about the future of the Russian economy and said his recent consultations with top Russian officials confirmed these feelings. CAMDESSUS is in St. Petersburg for meetings with Russian Prime Minister Sergei STEPASHIN, Balkans envoy Viktor CHERNOMYRDIN, Federation Council Speaker Yegor STROYEV, and to address the annual International Economic Forum. On Tuesday, STEPASHIN and Managing Director held preliminary talks during a night cruise along the Neva River. STEPASHIN said the talks had been "absolutely constructive."

In late April, the IMF and Russia reached a tentative agreement in Washington on $4.5 billion in new loans to Russia to be disbursed over the next 18 months. This loan will only cover the amount of debt payments Russia owes to the IMF for 1999. Prior to any aid disbursement, the Russian Duma has to approve 30 bills and amendments for economic reforms. STEPASHIN has said that concrete results will come, "after all our obligations are met and difficulties overcome." He said the Russian State Duma could pass the necessary bills "without political or parliamentary shocks." He predicted that if the package of bills is passed, Russia could receive IMF lending as soon as July, after the meeting of the IMF Board of Governors. STEPASHIN also said the government was ready to provide the IMF with all relevant data from the State Committee for Statistics and other agencies concerned about the way the Cabinet's economic program is being implemented.

Third Int'l Economic Forum Opens

· Addressing the third International Economic Forum in St. Petersburg, Russian Prime Minister Sergei STEPASHIN said that Russia must overcome two economic problems: the large foreign debt and the decline in national production. He said, "the foreign debt problem must be resolved so as not to ruin the domestic economic potential....A solution is visualized in enhancing the control of the democratic state over economic processes." This control he described must be strict, permanent, and accompanied by economic reforms. He said that both large enterprises and small businesses are of importance to the government. STEPASHIN noted that antimonopoly regulation "assumes special importance," since Russia is still heavily monopolized. He called for a more transparent and open economy and an end to corruption. STEPASHIN said that economic security must be based on confidence between the state and business. He said the government is planning to meet its obligations to pay pensions, wages, allowances. "The crisis cannot be overcome unless the confidence of citizens if regained," the STEPASHIN said.

Speaker of the Federation Council Yegor STROYEV pointed out that Managing Director of the International Monetary Fund (IMF), Michel CAMDESSUS' attendance at the forum emphasizes the importance of the, "constructive and non-politicized forum aimed at promoting economic cooperation in CIS countries and their integration into the world economic space." STROYEV met with CAMDESSUS to discuss IMF's cooperation with Russia and the role of the regions. CAMDESSUS emphasized that stabilization efforts should manifest themselves both at both government and regional levels.

Gold And Monetary Reserves Unchanged

· Russia's gold and monetary reserves have remained unchanged from May 28th until June 4th and totaled $12 billion. A report from the public relations department of the Central Bank showed that in May, Russia's gold and monetary reserves have gone up by 6.9 percent and totaled $11.97 billion by June 1st. However, Russia's gold and monetary reserves have declined by 2.34 percent over the first five months of 1999, from $12.22 billion reported in January, 1999 to $11.94 billion reported on June 1st. During this period, monetary reserves have gone up

When you need to know it as it happens

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by 2.9 percent, while the gold stock was 11.74 percent down from $4.42 billion to $3.90 billion.

The Russian Finance Ministry predicted that the ruble will trade on average at 32 rubles per US dollar in 2000, while the annual inflation next year will be at 18 percent to 22 percent and down to 8 percent to 10 percent by 2002. The ruble exchange rate for this year is expected to be 26 rubles per US dollar on average. The report states, "the implementation of the measures to enhance control over the outflow of hard currency abroad, as well as the decrease in the volume of imports as a result of the past ruble devaluation will allow to reach a solvency balance without decreasing the gold reserves of the Central Bank and ensure the predicted ruble exchange rate."

Business

Russia To Restructure Metal Sector

· Russian Deputy Minister of the Economics Ministry Vladimir EVSUKOV announced that Russia is working on plans to restructure the metals industry towards producing processed products instead of exporting raw materials. He said, "The program is now being prepared for 2005 and in September it will be proposed to the government." He noted that domestic demand for goods needed to be stimulated and economic conditions improved for investors in sectors such as the car and aviation industries, which consume huge amounts of metal. In 2005, the government is aiming to develop value-added industries like rolled products by 40 to 45 percent. "We are going to move away from raw materials and move into processed products which have added value." EVSUKOV said that plant revenues for the first quarter from the metallurgical sector were 55 billion rubles, enabling the government to make investments in plants and pay workers. He also stressed the importance of reversing the trend of barter or quasi-cash payments. He said that 50 percent of all transactions are conducted in barter payments.

Liggett-Ducat Almost Doubles Cigarette Output

· Tuesday Moscow Mayor Yuri LUZHKOV and Bennet LEBOW of the Brooke Group's Liggett cigarette division opened a $90 million plant for Brooke's Russian tobacco business, Liggett-Ducat. The factory almost doubles the group's cigarette capacity to 35 billion units per year, making it second to RJ Reynolds International in the Russian market. The

cigarettes produced will be of the higher margin American blend, rather than the more pungent domestic blend, but the cigarettes will continue under the Russian brandname. The new factory will also allow cigarettes to be produced without having to pay the 115 percent duties imposed on imported tobacco. The Financial Times reported that Brooke bought Ducat from Moscow in 1991 for $700,000, and has since invested $30 million to $40 million and absorbed five years of losses. Last year, profits reached $13.2 million or 30 percent of Brooke's total profit. Liggett-Ducat was able to adjust to the financial crisis in Russia by off-setting the damage with increased production from 17 billion to 20 billion cigarettes. Liggett-Ducat produces relatively cheap cigarettes such as Prima and Papirossi, with three new brands to be launched soon. Liggett-Ducat sells about three-quarters of its cigarettes in and around Moscow, but is expanding operations to include St. Petersburg.

European Republics

Ukraine To Sell Shares In LiNOS To Russia

· Ukraine is planning to sell a controlling stake in LiNOS plant, a major oil refinery in Lysychansk, eastern Ukraine to Russia. The Ukrainian government currently owns 67.41 percent of the shares in LiNOS. Ukraine does not have enough money to keep the refinery afloat, while Russia's ownership is expected to guarantee a steady oil supply to LiNOS and to provide revenues for the Ukrainian budget.

Estonian Budget Linked To Confidence Motion

· The Estonian government on Tuesday decided to attach a confidence motion to the controversial 1 billion kroon ($67 million) negative supplementary budget. The government, supported by a majority of the parliament, is not at risk of losing the motion. This procedure allows the bill to be voted on without amendments, RFE\RL Newsline reported. The government recently introduced amendments to change parliamentary rules to allow the linkage. The opposition launched over 500 amendments to the budget in order to obstruct its passage. They have already introduced 33 amendments to the parliamentary rule change. The Tuesday session of parliament, which began to debate the budget and the plethora of amendments, declared a halt in proceedings for the government to plan the confidence motion.

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South Caucasus & Central Asia

Armenian-Azeri Cease-fire Broken

· On Monday, a 300-strong Armenian army unit made three attempts to capture the Azeri Ter-ter district. According to an Azeri Defense Ministry statement, "The Azerbaijani Army responded promptly and decisively, causing the hostile forces to retreat. As a result of a four and a half hour confrontation, four Azerbaijani soldiers were wounded and two killed within their own defense lines." It added that, "full responsibility for the confrontation lies with the Republic of Armenia." Head of the Defense Ministry press service Colonel Ramiz MELIKOV noted that this was the first time since the cease-fire of 1994 that Armenia had used such a massive force. MELIKOV said the attack demonstrated that "Armenian military leaders still dream of capturing Ter-ter and Yevlakh," which would enable them to isolate Gyanja, the second city in Azerbaijan. Both sides accuse the other of starting the provocation. Armenia currently occupies 20 percent of Azerbaijan's territory. US State Department spokesman James RUBIN called on all sides in the Nagorno-Karabakh conflict to heed the appeal last month by the three co-chairmen of the OSCE Minsk Group to observe the cease-fire agreement of May 1994. He stressed the need to continue negotiations based on the Minsk Group's proposals.

New Armenian Cabinet Formed

· Armenian President Robert KOCHARYAN announced the line-up of the new Cabinet on Tuesday. Nine ministers from the previous Cabinet retained their posts, including Foreign Minister Vartan OSKANYAN. Former prime minister Armen DARPINYAN was appointed Economics Minister, while the Interior and National Security Ministry was split into two component parts, with Serzh SARKISYAN retaining responsibility only for Internal Affairs. Yerevan Mayor Suren ABRAHAMYAN was named national Security Minister. Lieutenant-General Vagharshak ARUTYUNYAN, who formerly served at the Armenian embassy in Moscow, succeeds Vazgen

SARKISYAN as Defense Minister. The People's Party of Armenia, one of the two partners in the majority Miasnutyun bloc, acquired only one minor ministerial post (Postal Services and Telecommunications). The Armenian Revolutionary Federation, or Dashnaktsutiun, lost one of its two ministerial posts, retaining only the Culture Ministry.

WB To Grant Tajikistan $15 Million

· The World Bank is prepared to grant Tajikistan $15 million for a project to combat poverty in Tajikistan. Mustafa RUIS, the World Bank's permanent representative in Tajikistan, said that a similar project worth $12 million has already been implemented. The World Bank's Board of Directors will meet on Thursday to consider the granting of a $6.7 million credit to Tajikistan to carry out the Institutional Construction and Technological Assistance project. This loan would be added to an existing $50 million loan earmarked for structural reforms. A third credit of $5 million is being considered for educational programs. If approved, the project will bring to $38.4 million the total number of credits granted to Tajikistan in May-June 1999. RUIS noted that all the received credits were interest free and had been granted for 40 years with a 10-year grace period. Tajikistan has heavily relied on foreign credits to finance restructuring programs.

Kazakhstan Halts Gas Supplies To Kyrgyzstan

· The Kyrgyz government confirmed on Monday that Kazakhstan has halted gas supplies to Kyrgyzstan because of a $3 million debt for gas transportation. Kazakhstan's Intergaz, the supplier of gas to Kyrgyzstan and other countries, informed the Kyrgyz government on Sunday about this step in a facsimile message. Earlier, Kyrgyzstan interrupted the supply of water for irrigation to Kazakhstan because of Kazakhstan's debt worth $22 million. A government source said that recent talks of Kazakh and Kyrgyz deputy prime ministers ended in an agreement on "inadmissibility of extreme measures towards each other in the future. Unfortunately, the agreement remained formal."

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

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