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

Monday, June 28, 1999

Russian Federation

Politics

Russia-Kazakh Talks Strengthen Relations

· A delegation from the Kazakh government led by Deputy Prime Minister and Foreign Minister Kasymzhomart TOKAYEV has arrived in Moscow today for high level talks aimed at the further development of cooperation between the two countries in the political, trade and economic fields, and in the spheres of energy and the metals industry. Russian Foreign Minister Igor IVANOV and his counterpart are meeting today in the Foreign Ministry's mansion. IVANOV expressed that his talks with TOKAYEV are "important." Their talks will also touch on international issues, including the situation in the Balkans. TOKAYEV is scheduled to meet with First Deputy Prime minister Viktor KHRISTENKO, Minister DRACHEVSKY and KALYUZHNY, and Board Chairman of the Unified Energy Systems of Russia Corporation Anatoly CHUBAIS. According to the press service of the Kazakh Foreign Ministry, the meetings in Moscow will also deal with implementation of a number of oil projects and the joint use of the military testing grounds and the Baikonur Space Center. The parties will also exchange views on prospects for cooperation within the framework of the Commonwealth of Independent States (CIS) and the Customs Union. A number of bilateral documents are expected to be signed as a result of the talks.

Yeltsin Appoints Livshits G-8 Envoy

· Russian President Boris YELTSIN today appointed former economic policy adviser Alexander LIVSHITS to the post of presidential representative to the Group of Eight (G-8). LIVSHITS in previous Russian governments served as finance minister and deputy prime minister and then joined the presidential administration. YELTSIN called on LIVSHITS to improve relations with G-8 members, which in

cludes the US, Canada, France, Germany, Italy, the UK, Japan, and Russia.

Two Officers Released, Three Guards Kidnapped

· Another two Russian servicemen were released today from Chechen captivity, policemen from the Hasavyurt interior department in Russia's republic of Daghestan said. Three Russian majors in the border guard and their driver were attacked on their way back to headquarters in the town of Nazran. Igor SALNIKOV, Valery NEFEDYEV, Arkady FEDOSEYEV and driver Vyacheslav SOKOLOV were disarmed by the attackers, ordered to change into civilian clothes and taken into Chechnya. On the way, presumably to the village of Yalkhoroi, the criminals driving the stolen service vehicles managed to pass unstopped two police checkpoints. Near the village of Alkun, the abducted border guards attempted to escape. Major Igor SALNIKOV was wounded, but Vyacheslav SOKOLOV escaped. Two Mi-8 military helicopters with commandos were sent in pursuit of the abductors from the Beslan airfield, and the pursuit was crowned with the seizure of one of the kidnappers who had not left the VAZ 2106 car with weapons in it. Officers of the Federal Security Service and the Ingush Interior Ministry are working together to search for the hostages and abductors.

Vladimir ZORIN, Chairman of the Nationalities Policy Committee of the Russian State Duma, told the Echo of Moscow radio in a live broadcast on Sunday that "kidnapping people has become a

Today's News Highlights

Russia

Oil Merger On Back Burner

GM-Opel Plant Begin Production

VAZ Assembles Off-Road Niva

European Republics

Northern Presidents Meet

South Caucasus & Central Asia

No Agreements On Abkhazia

EU To Grant Georgia Loan

US Multi-Pipeline Strategy

Kyrgyz Privatization Program

Politics-Economics-Business

Page

Monday

June 28 1999

Intercon's Daily

trade in the North Caucasus, particularly in Chechnya." According to him, the number of those kidnapped in Chechnya this year is about 700, with approximately 200 of them being residents of the Chechnya. He believes this problem must be tackled, "by quick, energetic and concerted actions of the Federal center and the Federation's constituent regions and republics and must be coordinated every day at a serious level, not just in the interim between kidnappings." ZORIN called for the setting up of a State Commission, in which all the main branches of power would be represented and would be headed by an authoritative person who has prestige in the country.

Economy

Ruble = 24.33/$1.00 (NY rate)

Ruble = 24.22/$1.00 (CB rate)

Ruble = 25.21/1 euro (CB rate)

Russia To Issue New Gov't Securities

· First Deputy Prime Minister Viktor KHRISTENKO said Russia needs to issue new ruble-denominated government securities. At a Saratov University lecture, he explained, "There must be state securities, but they on no account should repeat the fate of the GKOs." He said Russia is facing a threat of a "financial canopy," or free resources of commercial banks that cannot find use. He said such a financial instrument was needed to, "tie the free money mass, but without orientation toward investment in calculated growth points. The problem of achieving sustainable economic growth cannot be solved only with financial instruments." KHRISTENKO said Russia's annual inflation can reach 85 percent, and the exchange rate could go above 30 rubles to the dollar unless Russia solves its debt problem in 1999. He cited as the government's key task its work with investors. If the debt problem is successfully solved, there will be two scenarios of the Russian economy's development, he said. One is production growth of 3.5 percent by the end of this year and the other is a higher figure. KHRISTENKO said industrial production growth over five months of this year has been 1.5 percent and "now the economic situation in Russia is fairly stable."

Waiting Results Of New York Debt Negotiations

· The managing committee of the London Club of creditors is awaiting the results of debt negotiations

between Russian Finance Minister Mikhail KASYANOV and the American investor association of the Russian London Club Portfolio Managers. The committee leads the London Club's negotiations with Russia on its debts. The portfolio was originally made up of ten fund holders of 15 percent of bonds on Soviet-period principal commercial debt, or PRIN, to which Russia is successor, and of 25 percent of bonds on accrued interest. In a statement, KASYANOV said managed to largely reassure investors at the New York consultations. The Russian Finance Ministry sees the current gains of Russia's debt bonds as a factor in the softening of creditors' stand. The greater demand for Russia's Soviet debt, according to deputy chairman of Russia's Vneshekonombank Andrei KOSTIN, is the massive buying of bonds by the association, gains of Russia's Eurobonds, and the flow of capital into cheaper financial instruments. Positive trends in the Russian economy led the international rating agency Fitch to forecast on Friday that 50 to 90 percent of total investment in interest bonds can be recovered in prospect. Plans are being developed for regular meetings in New York between representatives of the Russian government and the American creditors for almost every month. "The meetings, which we have had, and the information with which we have furnished them," the Finance Minister stressed, "gave them a chance to correctly assess the situation and the intentions of the Russian government, and allowed the beginning of constructive and effective work with the investors in order to achieve mutually acceptable decisions. We have not put forward any proposals today, because this is somewhat premature." The next stage of Russia's consultations with private creditors on a rescheduling of Soviet debts is to be held in London in the second half of July, KASYANOV announced Thursday. He said that at July meetings in London, "we shall start to move ahead to work out schemes for a settlement of the debt of the former Soviet Union."

Business

Merger of Oil Companies Deemed Harmful

· First vice-premier Nikolai AKSENENKO on Sunday said, "The proposed merger of the oil companies Rosneft, Slavneft and Onako into a single enlarged state holding company will bring with it more trouble than benefit." He made these comments after meeting with Belarus shareholders of Slavneft shares.

When you need to know it as it happens

Politics-Economics-Business

Page

Monday

June 28, 1999

Intercon's Daily

They objected to the proposed merger for fear that the establishment of a holding could cut supplies of Russian energy resources to Belarus. AKSENENKO convinced Belarus officials that there would be no disruption of deliveries. According to AKSENENKO, "Work will continue on the establishment of a stronger state-owned oil company," although "the establishment of the holding is not a priority task for the government as the country has other, more urgent and burning issues of the day."

GM-Opel Plant Begins Production

· General Motors-owned Adam Opel is beginning the assembly of its Opel Vectra cars at Russia's Yelabuga auto plant, in the republic of Tatarstan. The first 48 sets of car parts arrived at Yelabuga last week from a GM plant in Germany and officials noted that for now the 2-liter-engine car will be assembled using exclusively German-made parts. Eventually, Russia will produce up to 70 percent of the components of the Opel, which replaces Yelabuga's discontinued assembly line for Chevrolet Blazers. General Motors hopes the small Opel will capture a significant market share and compete favorably in quality and price. Other Western auto manufacturers are setting up Russian assembly operations following the imposition by Russia of prohibitive protectionist duties on auto imports. Last Tuesday, Ford Motor Co. announced plans to resume auto manufacturing in Russia after a 64-year hiatus. Ford said it will spend $150 million to convert a former engine factory near St. Petersburg into an auto plant that can assemble up to 100,000 Ford Focus cars annually for the Russian market. Renault has also entered the market with its Megane model, manufactured jointly with Moscow's AZLK, and Fiat is in the final stages of negotiating an assembly arrangement in Nizhny Novgorod. German carmaker BMW is set to open an assembly line in the city of Kaliningrad.

VAZ Begins Assembly New Off-Road Vehicle

· VAZ, one of Russia's biggest automakers, has begun assembling a new kind of Niva off-road vehicle. As many as 500 cars will be made by the year's end, and their full production will be launched next winter. Several Niva-2123 prototypes have been made only for exhibitions. Test drivers have commented that it is highly maneuverable and easy to steer. The five-door hatchback is equipped with power-steering, new shock-absorbers, and an improved suspension system which enhances comfort

on bumpy roads. Due to its powerful engine fitted with an electronic fuel-injection system, the car can gain velocity quickly and move at a speed of 150 kilometers (100 miles) per hour on out-of-town motorways. VAZ says it is still premature to speak about a price, but rough estimates say it can cost about $10,000. The new car has every chance of appearing on the foreign market.

European Republics

Northern Presidents Gather In Riga

· The presidents of Lithuania, Estonia and Poland will arrive to the Latvian capital, Riga today. Together with their Latvian counterpart, Guntis ULMANIS, these leaders will discuss international and domestic matters and outline development plans for further cooperation in the Baltic region. The Baltic leaders will also meet Latvia's new president Vaira VIKE-FREIBERGA. ULMANIS' six-year tenure ends July 7th. Estonian President Lennart MERI and Lithuanian President Valdas ADAMKUS plan to hold consultations on the sidelines of the visit.

South Caucasus & Central Asia

Agreements Failed To Be Reached

· Agreements failed to be reached and proposals rejected during two meetings in Georgia on the Georgia and Abkhazia conflict. On Friday, Georgian Minister of State Vazha LORDKIPANIDZE rejected a proposal by Abkhaz presidential adviser Anri DZERGENIA for a meeting between Georgian President Eduard SHEVARDNADZE and Abkhaz leader Vladislav ARDZINBA in order to give new impetus to the peace process. The Coordinating Council, created under UN auspices in November 1997, failed to reach agreement on ensuring the security of Georgian displaced persons who return to Abkhazia, creating Russian-Abkhaz-Georgian patrols to combat terrorism in southern Abkhazia, and an exchange of prisoners. Meanwhile, a group of some 100 Georgians who are blocking motor traffic across the Inguri bridge, which divides Abkhazia with the rest of Georgia, have begun a hunger strike to demand the release of relatives sentenced to prison terms in Abkhazia, the RFE\RL Newsline reported.

EU To Grant Georgia Agricultural Loan

· Georgian President Eduard SHEVARDNADZE

When you need to know it as it happens

Politics-Economics-Business

Page

Monday

June 28, 1999

Intercon's Daily

announced in his national radio address today that the European Union (EU) is prepared to grant Georgia a loan of 13 million euros for agricultural development and for providing the population with agricultural products. The grant will be added to a loan for 4 million euros, which the EU has already allocated to Georgia for agricultural needs. The EU has also decided to earmark 7 million euros for financing the jobs for the fiber-optic communications line in the South Caucasus. SHEVARDNADZE said that work on that system will be completed in at most three years. The fiber-optic cable will connect Georgia, Armenia, and Azerbaijan and will become a part of a single Eurasian system. Under the project, the cable will extend from Georgia's Black Sea port of Poti to Tbilisi, and then to the Azeri capital of Baku and Armenia's capital, Yerevan.

US Moves Ahead With Multi-Pipeline Strategy

· The US government this month has pushed forward its pipeline strategy to have multiple routes for Caspian Sea oil to reach western markets. Frustrating its ally Turkey, the US government announced that the US Trade and Development Agency has awarded a $588,000 grant to Bulgaria to carry out a feasibility study for a pipeline across the Balkans. Under the proposed plan, Caspian oil would be shipped by tanker from the Black Sea ports of Novorossiisk in Russia and from Supsa in former Soviet Georgia and then pumped by overland pipeline across Bulgaria, Macedonia and Albania to waiting European consumers. The decision, made shortly before NATO and Russia reached agreement on forces in Kosovo, has raised speculation among regional experts that it may be part of a larger economic development plan envisioned by the CLINTON administration to stabilize the southern Balkans after the Serbian repression and NATO airstrikes.

Paul Michael WIHBEY, an analyst at the Institute for Advanced Strategic and Political Studies, points out that the new strategic importance of the trans-Balkans region to US policymakers could justify its designation as a Main Export Pipeline for Caspian

oil. But that could undermine any chance Turkey had to build its own much-heralded and expensive pipeline from Baku to Ceyhan. Turkey last week demanded an increase to the already expensive price tag of $2.4 billion by $300 million. The trans-Balkan pipeline is much cheaper, with the approximate cost of between $800 million to $1 billion. The prospect that the US would guarantee security and provide financial guarantees may make the Balkan route more attractive. However, all these factors may spur Azerbaijan and Turkey to reach an agreement or it may force them to reconsider the second Baku-Supsa pipeline planned to boost capacity.

Kyrgyz Plans Major Sell-Off

· Kyrgyz Prime Minister Amangeldy MURALIYEV chaired a Cabinet meeting Saturday, at which Finance Minister Marat SULTANOV characterized the current economic and social situation as, "very serious." SULTANOV said the government will be able to pay wage and pension arrears only after it receives new loans or grants from abroad. Kyrgyzstan's internal debt is currently about 500 million soms (some $12 million). MURALIYEV urged the government to speed up privatization of the three largest state-owned companies: Kyrgyztelekom, the Kyrgyz national airline, and the Kyrgyzenergo energy company. A special government commission has been formed to liquidate 120 bankrupt state enterprises. MURALIYEV said, "We expect to receive about 250 million soms ($6 million) from privatizations in 1999." He noted that the government will soon announce the winner of the international tender for telecommunications company Kyrgyztelekom. Kyrgyzstan was hit by the aftermath of the Russian economic crisis. After a 10 percent rise in 1997, the economy grew just 1.8 percent in 1998, and a fall of 1 percent is expected for this year. The Prime Minister noted that Russia accounts for 40 percent of Kyrgyz trade. "Most of our failures are linked to the Russian crisis and we need to diversify our trade partners," MURALIYEV said. He added that Kyrgyzstan will expand its links with other Central Asian nations.

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

available for non-profit institutions.

Daily Report on Russia is for the exclusive use of the subscriber only. Reproduction and/or distribution is not permitted without the expressed written consent of Intercon. Daily Report on Russia Ó copyright 1999, Intercon International, USA.

When you need to know it as it happens

Politics-Economics-Business

Page