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, June 30, 1999

Russian Federation

Politics

Zhirinovsky Calls For NATO Membership

· Russian Liberal Democratic Party of Russia leader Vladimir ZHIRINOVSKY told senior researchers at the Moscow State University on Tuesday that NATO should, "be forced to extend its membership to Russia" and include Russians in its military command, Interfax reported. NATO "must hear the breath of Russian soldiers," he commented. ZHIRINOVSKY also proposed sending 10,000 Russian peacekeepers to Kosovo rather than the planned 3,600, arguing that "Serbia will pay for the Russian army to stay on its territory and guarantee a peaceful life to its population." Referring to next year's Russian presidential elections he said voters, "will have to choose between democracy and dictatorship, that [means] between dirt and blood."

Economy

Ruble = 24.24/$1.00 (NY rate)

Ruble = 24.21/$1.00 (CB rate)

Ruble = 25.02/1 euro (CB rate)

Bank Reforms Passes; Implementation Fails

· Under pressure from the International Monetary Fund (IMF) and other international lenders, Russia has finally taken action in restructuring and reforming banks. After dragging its feet, the Russian State Duma on Friday approved a bank insolvency law. Central Bank chairman Viktor GERASHCHENKO today announced that the Bank has removed operating licenses from four major commercial banks, including Uneximbank, Mezhkombank, Prom-stroibank, and Mosbusinessbank. The Central Bank tried to persuade the IMF officials that the banks were nearing the completion of restructuring. However, other Cabinet officials failed to support the

Central Bank's position. The decision to pull Promstroibank's license comes only two weeks after the Agency for Restructuring Credit Organizations announced that it will devote its scarce resources to restructuring the bank, the RFE/RL Newsline reported. Three other major banks Menatep, Inkombank, and Imperial have had their licenses withdrawn. Suspiciously, Imperial has since been re-licensed. It is not clear whether the radical reforms called for will be implemented to the satisfaction of international lenders. Russian banks adapting to the crisis in August have discovered new ways to reinvent themselves. Uneximbank created Rosbank as a vessel for its remaining assets. Others have followed this pattern, including Menatep, SBS-Agro, Rossiisky Kredit. A World Bank survey showed that at the end of 1998, 15 of 18 leading banks were technically insolvent. Yet, the Central Bank barely reacted to the information provided to them. Between August, 1998 and May, 1999, according to the Financial Times, the Central Bank revoked the operating license of just 110 of Russia's 1,400 registered banks. This represents 40 fewer than the same period in 1997 to 1998.

Despite the insolvent state of many of Russian's financial institutions, the Russian Statistics Agency reported the amount of deposits made by its citizens grew by 4.4 percent in May 1999 and totaled 178.2 billion rubles ($7.4 billion) as of June 1st. An increase in the amount of deposits over the period from January to May 1999 made 19.2 percent. Over 86 percent

Today's News Highlights

Russia

Gazprom Appoints Chairman

LUKoil Approves Komitek Deal

Wrigley's Opens Gum Plant

European Republics

Latvia's GDP Continues To Fall

Estonian Plant Dir. Murdered

Ukrtelekom Stake For Sale

South Caucasus & Central Asia

WB Grants Georgia $114 Million

Azeri Uncovers Terrorist Plot

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of the deposits were reported to have accumulated in Sberbank of Russia. Depositors have transferred a total of 8.5 billion rubles from Most-Bank, Mosbiznesbank, Promstroibank, Inkombank, Menatep, SBS-Agro, Rossiisky Kredit and Kuzbassprombank to the Russian Sberbank of which the bank has paid out in cash and registered into other forms of deposits a total of 8.4 billion rubles ($350 million) which amounts to 97.9 percent of all the commitments taken. Structurally, 59.6 percent of all the money deposited in Sberbank is registered as old-age pension deposits, while 28.1 percent is registered as fixed deposits and money transferred on deposit.

Business

Chernomyrdin Regains Foothold In Gazprom

· The general shareholders meeting of the Russian gas monopoly Gazprom today elected a new chairman and a new auditing commission. Former prime minister and chairman of Gazprom, was elected chairman of the board of directors, which comprises 11 persons, including Rem VYAKHIREV as chairman of the management and deputy chairman of the board of directors. While in the government, CHERNOMYRDIN helped to build the group, shield it from the loss of tax privileges, and coordinated its partial privatization. His appointment is unlikely to lead to a break up of the monopoly or the end to barter payments. Boris FYODOROV, leader of Forward Russia and regarded as another possible member of the board of directors, withdrew his name from the list of the candidates for seats on the board. CHERNOMYRDIN's appointment is seen by many analysts as a re-balancing of power within the country. Others believe the appointment could raise tensions between CHERNOMYRDIN and VYAKHIREV. James HENDERSON of MFK Renissance said, "I suspect that they will find a common position, but it will be a position where VYAKHIREV has a less dominant role, still very important, but less dominant." VYAKHIREV has stated he intends to stay on until 2001. His nomination by the state could be seen as a partial endorsement of CHERNOMYRDIN as a presidential contender. Control of Gazprom assures political influence, since the company could prove an important source for campaign financing.

The auditing commission will henceforth be elected

to a 4-year term and will consist of nine people, according to the amendment to the regulation on the company's auditing commission today. Earlier, the commission comprised seven persons elected to a 2-year term. The state holds 38.37 percent of Gazprom's stocks, Russian legal persons own 36.32 percent, Russian natural persons hold 20.83 percent of Gazprom shares, and foreign investors hold 4.48 percent of the shares (including Ruhrgas' 2.5 percent). In 1998, Gazprom produced a total of 553.7 billion cubic meters of natural gas and 9.5 million tons of gas condensate and oil. Gazprom exported some 130 billion cubic meters of natural gas worth 10.4 billion dollars to Germany, Italy, Slovakia, France, Poland, Hungary, Bulgaria, Romania, Austria, Yugoslavia, Turkey, Finland, Switzerland, the Czech republic, as well as to all CIS republics and the Baltic States. The General meeting of Gazprom shareholders on Wednesday decided not to pay out dividends for 1998, as Gazprom's after-tax losses exceeded 42.5 billion rubles in the wake of the ruble devaluation since August 17, 1998. The general meeting also decided to empower the board of directors to decide on dividend payment on a quarterly basis.

Lukoil Approves Komitek Merger

· Russian oil group, LUKoil, approved a merger on Tuesday with Komitek. The deal values Komitek at about $600 million including $200 million in debt. LUKoil shareholders agreed to offer issue 11.5 million preference share. The management will later issue 69 million ordinary shares to swap for preferred stocks held by Komitek as part of the merger agreement. LUKoil Vice President Leonid FEDUN said the government wanted the conversion to take place after it had sold a nine percent stake of its shares at a commercial tender. FEDUN said, "At yesterday's meeting between LUKoil President Vagit ALEKPEROV and Prime Minister Sergei STEPASHIN, the prime minister said he was ready to back the merger of the companies, welcomes it, but asked that the terms be fulfilled." The merger, to take at least a year, will occur in three stages. First, LUKoil will buy 75 percent of Komitek, then its joint ventures, and later it would buy Komitek's minority interest in other companies.

LUKoil on Monday said it plans to increase oil exports to 29 million tons in 1999 from 24.7 million tons in 1998. The company said in its annual 1998

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report it expected 1999 consolidated pre-tax profit to soar between 20 to 25 billion rubles ($1.03 billion) from 2.03 billion rubles in 1998. The planned increase in exports is in line with the policy of a number of Russian oil firms, taking advantage of the increased profitability of exports following last August's financial crisis and devaluation.

Sakhalin Oil Filed To Start Production

· An oil field off Russia's Sakhalin Island, developed by a consortium of Japanese, US and European companies, will start commercial output of crude oil in mid-July. Mitsubishi Corp. and Mitsui and Co. said Tuesday a inauguration ceremony will take place to mark the start of production under Sakhalin 2. It is estimated that the Piltun-Astokhskoye field will have a daily output of 30,000 to 60,000 barrels at the until the end of this year, gradually increasing to 90,000 barrels a day next year. The consortium, Sakhalin Energy Investment, based in the Bermuda Islands, was established in 1994 with a capital of about $600 million to explore undersea oil and natural gas resources off the Russian island. Marathon Oil Co. owns 37.5 percent of the consortium, followed by Royal Dutch/Shell and Mitsui with 25 percent each, and Mitsubishi with the remaining 12.5 percent. With an overall investment of about 1 trillion yen, the consortium signed a contract with Russian energy authorities in June 1994, and started construction in the oil field in July 1997.

Russia Extends Oil Export Duties

· The Russian government on Monday extended its resolution of May 22, 1999, on export duties on crude oil and raw oil products for 30 days. The resolution sets the export duty on crude oil and raw oil products obtained from bituminous minerals taken out of the Commonwealth of Independent States (CIS) at five euro per 1,000 kilograms. The Ministry for CIS Affairs has been instructed to notify the Integration Committee of Belarus, Kazakhstan, Kyrgyzstan, Russia and Tajikistan of this decision.

Wrigley Opens $70M Chewing Gum Plant

· On Friday, US chewing gum maker Wrigley officially opened a $70 million factory in St. Petersburg. Approximately 70 percent of the funds were invested in equipment, while the other 30 percent went into building construction and communication installation. The factory has a capacity to produce

15,000 tons of chewing gum annually. The factory will produce Wrigley, Orbit, and Ice White brands of chewing gum. This is the first Wrigley's production project in Russia. Wrigley's Senior Vice President for Production Martin GERAGHTY said, "The CIS (Commonwealth of Independent States) market is strategically important to us. There are over 150 million consumers of our product in Russia alone." The company will start operating at full capacity of 7,000 tons annually at the end of 1999.

European Republics

Latvia's GDP Continues To Fall

· According to the Latvian Central Statistics Department, the country's gross domestic product (GDP) fell by 2.3 percent in the first quarter of 1999. Coupled with a drop of 1.9 percent in the fourth quarter of 1998, this indicates that Latvia is technically in a recession. Attributing the drop to the Russian economic crisis and the slow redirection of some exports, the Statistics Department indicates that growth should resume for the second quarter and that GDP should rise by 2 percent this year, LETA reported. The International Monetary Fund (IMF) predicted that Latvia's GDP will rise by 4 percent in 1999 and 5 percent in 2000, while inflation will drop to 3 percent for both years.

Estonian Power Plant Director Murdered

· Anatoli PAAL, the director of Narva Power Plants, was found dead in his apartment Tuesday. Police discovered PAAL had been mortally wounded by a bullet in the back of his head. No traces of burglary have been found in the apartment. An investigation is on going. Colleagues in the power sector and local politicians all praised PAAL for his dedication and work. He also served as the chairman of the Narva City Council until recently, when he resigned to concentrate on his work in the energy sector. Narva Power Plants is the joint company that operates the two large oil shale-firing plants that provide more than 90 percent of Estonia's electricity.

Kuchma Orders Privatization Of Ukrtelecom

· Ukrainian President Leonid KUCHMA has ordered the sale of 25 percent plus one share in state telecommunications monopoly Ukrtelekom. The presidential order takes effect only after 30 days and if the parliament fails to veto it. The parliament

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opposes the privatization of Ukraine's strategic companies, including Ukrtelekom. It has vetoed prior government privatization orders, specifically Mykolaivsky Alumina Plant. According to the presidential order, the stake would be sold to the highest bidder for cash and the government would only determine the date of sale following a restructuring of the company. The government would retain a 50 percent plus one share and would used the funds from the sale to pay off wage and pension arrears. Ukrtelekom chief executive Leonid NETUDYKHATA earlier this month said that the privatization was the only way to boost development, improve services, and increase profitability.

Ukraine-Azeri To Develop Relations

· Visiting Ukrainian Foreign Minister Boris TARASYUK and his Azeri counterpart Tofik ZULFUGAROV met in Baku today to discuss the development and deepening of bilateral cooperation. According to the protocol of the visit, on July 1st, TARASYUK will be received by Azerbaijan's President Geidar ALIYEV, and is to give a news conference at the Baku International Airport prior to his departure for home. TARASYUK intends to discuss with the President plans to implement a project for the transportation of Azeri oil via Georgian ports to Odessa and then on to Europe.

South Caucasus & Central Asia

World Bank Approved New Credits For Georgia

· The World Bank on Tuesday approved new credits for Georgia totaling $114.9 million. The Third Structural Adjustment Credit for $60 million is designed support economic reform programs. The credit will help the government create an environment favorable to private sector growth, accelerate change in land ownership and develop land and real estate markets, and promote private participation in infrastructure and complete state divestiture from the enterprise sector. The Energy Adjustment Credit for $25 million will enhance financial management, increase the availability of energy on a sustainable basis, catalyze private investment, help realize

Georgia's pipeline transit potential, and upgrade environmental management. The Structural Reform Support Project with a $16.5 million credit will assist Georgia in implementing public sector and public information reforms, private sector development, and restructure hospitals. The Judicial Reform Project with a $13.4 million credit will support the development of an independent, professional and equitable judiciary in Georgia. All four credits will be disbursed on standard IDA terms, with a maturity of 35 years, including a 10-year grace period. Since Georgia joined the World Bank in 1992, commitments total approximately $507 million for 21 projects.

Azeri Security Ministry Uncovers Terrorist Plot

· The Azeri Security Ministry released a statement on Monday claiming that it has uncovered a terrorist plot directed against President Geidar ALIYEV and other leading officials. The ministry accuses former parliamentary speaker Rasul GULIYEV of conducting, "secret communications with certain circles in Iran to get political support and help with the aim of taking power in Azerbaijan." GULIYEV is seen by some political parties as a potential successor to ALIYEV. He said, "It's completely absurd. I never planned any terrorist acts and don't plan on doing anything of the sort." According to the statement, GULIYEV had secret meetings in Canada and Istanbul with officials from Tehran's foreign and security ministry to organize a trip to Iran, where he would prepare, "terrorist acts against the president and a number of government and political figures." GULIYEV's business partner Sheri SHAHNAVAZ is also accused of setting up meetings in Iran. Reuters quoted on diplomat saying, "There's been an ongoing campaign against GULIYEV. He's the chief opposition candidate and those in power are obviously frightened of him." GULIYEV, who moved to the US, is a wanted man in Azerbaijan. There is a warrant out for his arrest for alleged corruption when he ran the country's oil industry. Friction between Iran and Azerbaijan has increased, since the Azeri Security Ministry accused Iran of stepping up espionage activities against Azerbaijan in attempt to weaken the state.

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

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