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

Monday, July 12, 1999

Russian Federation

Politics

OSCE Parliamentary Assembly Session Ends

· The eighth annual session of the Parliamentary Assembly of the Organization for Security and Cooperation in Europe (OSCE) ended in St. Petersburg on Saturday with the adoption of the final declaration. The document reflects recommendations worked out by the parliamentarians from 54 countries during the five-day session. Russian State Duma speaker Gennady SELEZNYOV, who spoke on behalf of Russia, thanked the participants in the session for the fruitful discussion. However, he said that the session, "cannot fully satisfy the Russian delegation." Specifically, Russia disapproved of the session's resolution on Kosovo. Russia approved its preliminary text but then the, "American delegation pushed through amendments" to which "we have serious objections," SELEZNYOV said. He noted that the adoption of decisions that reflect the views of the absolute majority, that is all 54 member countries, is "the corner stone of the OSCE." SELEZNYOV believes that another negative tendency was an attempt to establish the supremacy of the principle of expediency over the principle of lawfulness. "They are trying to justify bombings in Yugoslavia by expediency. But we do not accept this approach. We insist on the power of law, not force," he said. The ninth session of the OSCE parliamentary Assembly will be held in Bucharest in July, 2000.

Russia Behind Schedule On Y2K

· Russia has fallen behind schedule on the Y2K bug. Many Russian computers could confuse the year 2000 with 1900 when midnight strikes at the end of the year. The millennium bug problem has generated fears that anything form nuclear missiles to elevators could fail. Officials are working with limited means to write computer code to fix the problem.

Head of the state committee for telecommunications Alexander IVANOV said, "Only 30 percent of this work has been completed." Finance Minister Mikhail KASYANOV said government ministries and agencies, which had collectively requested $370 million to combat the problem, had agreed $187 million would be enough. IVANOV said that Russia should have spent 13 billion rubles ($533 million) by mid-year to fix the problem, but Russia has only spend 2 billion rubles. Government officials have estimated that the cost of fixing the millennium bug could be as high as $2 billion to $3 billion. The chairman stressed that work on the Y2K problem should be completed by November, due to support from the West. IVANOV also suggested that foreign spies might try to infiltrate state computer systems under the guise of helping Russia cope with the computer problem. He also recommended precautions such as cutting the number of commercial flights and having computer specialists on stand by.

Economy

Ruble = 24.42/$1.00 (NY rate)

Ruble = 24.4/$1.00 (CB rate)

Ruble = 24.871 euro (CB rate)

Fuel And Energy Ministry Seeks More Power

· Russian Fuel and Energy Minister Viktor KAL-YUZHNY on Friday called for increasing its power inside Russia and abroad in order to overcome the energy crisis in Russia. At the fourth annual congress

Today's News Highlights

Russia

Gazprom-UES Merger Rumor

Ford-Russia Sign Plant Deal

European Republics

Baltic Premiers Meet In Palanga

Ukraine To Use Its Own Fuel

Ukraine Bans Telecom Sell-Off

South Caucasus & Central Asia

Svanetians Kidnapp Officials

IMF Approves Tajik Payment

Kyrgyz-Uzbek Sign Agreements

Politics-Economics-Business

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Monday

July 12, 1999

Intercon's Daily

of the Union of Oil and Gas Industries, he said, "The ministry of fuel and energy must become the body which actually runs the fuel and energy complex, regulating the strategically important systems of oil, gas, coal, and electricity supply both directly and indirectly." The Minister also warned, "Unless a range of measures is taken to normalized the financial position and the creation of essential investment resources in oil production and refining...then output by 2005 could fall to around 200 million to 250 million tons per year."

Meanwhile, Prime Minister Sergei STEPASHIN called on the government today to curb fuel prices, which he believes could trigger general consumer price inflation. "It will be impossible to keep consumer prices stable, if gasoline prices start rising." The average June inflation was 0.063 percent, while fuel prices rose an average 0.4 percent. Producer prices for fuel rose between 0.9 and 1 percent. He said higher prices could lead to increased imports for some kind of fuel. Gas imports were down 600,000 tons. Russia exports between 44 and 56 percent of all oil products it produces. KALYUZHNY forecast a 15 percent to 20 percent rise in gasoline and diesel fuel prices by the end of the year from current levels.

Arctic Waters Hold Future Reserves

· Deputy Minister of Fuel and Energy Valery ZARIPOV said Russia's arctic seas hold oil and gas reserves that can be sustained through the end of the 21st century and will be worth an estimated $80 billion over the next 30 years. He said that nearly all of Russia's arctic shelf appears promising, except for the White Sea. He noted that if all development plans are realized, up to 5 million metric tons of oil and 3 billion cubic meters of gas will be extracted from the area in 2000. By 2005, extraction should increase to some 28 million metric tons of oil and roughly 35 billion cubic meters of gas. In 2030, extraction should reach up to 70 million metric tons of oil and some 140 billion cubic meters of gas. ZARIPOV said Russian national interests require, "systematic international tenders for many sectors of the shelf on a basis of the unified plan, as well as standardization of that essential process for the whole sea peripherals."

Business

Gov't Considers Rosneft Sell-Off

· The Russian government is considering selling

a major stake in state-owned oil company Rosneft, the company's president, Sergei BOGDANCHIKOV, said today. Originally, the government planned to create a national oil holding by merging three state-owned companies: Rosneft, Slavneft, and Onaco. "The idea of creating a new national oil holding is dying," BOGDANCHIKOV said. He noted that the Property Ministry and the Federal Property Fund are now discussing terms and options for the sale of a stake in Rosneft. "The decision on a sale has not been taken yet, and it is up to the government to decide," BOGDANCHIKOV said. He also said certain investment funds had shown an interest in buying a stake, but did not elaborate. Last year, the government intended to sell Rosneft, but failed to do so due to unfavorable market situation, including the domestic financial crisis and low world oil prices.

Gazprom-UES To Merge?

· The Kremlin denied rumors today that Russian gas monopoly Gazprom and United Energy Systems of Russia (UES) will merge. Prime Minister Sergei STEPASHIN said at a government session, "No one intends to merge either Gazprom or the UES with the Russian Fuel and Energy Ministry." Fuel and Energy Minister Viktor KALYUZHNY explained, at the Union of Oil Producers on Friday, that these corporations will not be merged with the ministry, but will work to coordinate policies. He added that he was perplexed by the notion of, "state politics and private politics existing at Gazprom," which he disapproves. KALYUZHNY believes that this gave rise to the mystery launched by the mass media around this problem. "Why is the minister not allowed into Gazprom now? Because I know where to look in order to find answers to all my questions," KALYUZHNY said. The Fuel and Energy Minister underlined that he had reached full mutual understanding with heads of the Russian oil companies.

Russia-Ford Sign $150M Car Plant Deal

· The Russian government and US carmaker Ford Motor Co. on Friday announced they have signed a $150 million investment agreement to build a car factory outside St. Petersburg. President of Ford Russian and CIS Alan BATTY said, "As of today [Friday] Ford Motor Company's priority in Russia is to start construction of the plant in July and to intensify the efforts with the ministry of economics to establish a globally competitive automotive supplier industry which will support our manufacturing facil

When you need to know it as it happens

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ity." The new factory, called Ford Vsevolozsk, will open in the first half of 2001 and have an initial output capacity of 25,000 vehicles a year and potential capacity of 100,000 cars. Plans for the signing were announced in June during Ford's chief executive officer's Jacques NASSER visit to Russia. Ford Vsevolozhsk will be owned jointly by Ford and Bankers House-St. Petersburg and will convert an existing facility formerly operated by engine manufacturer Russky Diesel.

US Business Center Opens In Khabarovsk

· A US business consulting center opened in Khabarovsk to promote development of small and medium-size entrepreneurship. The Foreign Economic Relations Department of the Khabarovsk regional administration said program of the consulting center is intended for a term of two years. Around 300 experts from the US will work at the center on a voluntary basis to help businessmen from the Russian Far East make business plans, establish contacts with credit and financial structures, and provide all kinds of consultations in business management. The program is financed by the US Agency for International Development, and therefore the consulting will be provided free of charge. At the opening ceremony, Sergei LOPATIN, head of the Foreign Economic Relations Department of the regional administration, handed the US partners documents for them to work in the territory.

After the official end of the meeting, the premiers of Lithuania and Latvia signed a bilateral agreement on the sea border and the economic zone boundaries on the Baltic Sea's continental shelf to put an end to their dispute, which had lasted for almost five years. The document will enter into force after being ratified by the two parliaments. Talks were complicated by the expectation of significant offshore oil reserves in a disputed area.

Ukraine Seeks To Use Its Own Fuel

· Ukrainian First Deputy Prime Minister Vladimir KURATCHENKO said Wednesday that the government plans to increase the proportion of coal and uranium in its energy sources and reduce that of natural gas, which is largely imported. Speaking at the Ukrainian Academy of Sciences, KURAT-CHENKO said that under the economic plan for the next decade, coal is to provide for 50 percent of Ukraine's energy while uranium, 40 percent, within the coming few years. At present, 43 percent of the country's power supply comes from natural gas, which is mainly imported from Russia and Central Asian countries. According to the Ministry of Coal Industry, Ukraine has 140 mines producing coal for power generation, with an annual capacity of up to 72.7 million tons. But these mines have been actually producing only half their capacity since Ukraine gained independence in 1991.

Ukrainian Deputies Ban Telecom Sell-Off

· Ukraine's parliamentary deputies on Friday unanimously banned the privatization of its telecommunications company. Deputies said during the discussion of Ukrtelekom privatization that the company paid over 700 million gryvnias to the budget in 1999. They also said that people pay telephone bills in all circumstances, crisis or not, because otherwise they will have their numbers cut off. The deputies therefore concluded that it would be, "a crime against the state" to make private such a lucrative state-owned company. They also said it would be inadvisable to concede interurban, international, and satellite communications to foreign companies.

South Caucasus & Central Asia

Svanetian Gunmen Hold Officials Hostage

· Eight masked gunmen, from the Svanetian mountain people tribe, kidnapped 17 Georgian high-

European Republics

Baltic Premiers Meet In Palanga

· Prime Ministers from the Baltic States ended a meeting in the Lithuanian resort of Palanga with the adoption of a joint resolution. The resolution notes the satisfaction of the sides by the involvement of troopers of Lithuania, Latvia and Estonia in the NATO KFOR peacemaking mission. The premiers welcomed the defense cooperation, "as a way to boost the integration of the Baltic countries with the Alliance" and called for "the further cooperation in forming a common economic space." They stressed the significance of "lifting barriers on the way to signing a tripartite agreement on free trade" and agreed to continue working for signing an agreement on the free moving of labor force and services by July 1st, 2000. The chairmanship in the Council of the Baltic Premiers was passed over from Lithuania to Estonia for one year.

When you need to know it as it happens

Politics-Economics-Business

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ranking officials and journalists Friday in Abkhazia, as their helicopter landed in the Kodori Gorge. The bandits ordered the pilot to fly the helicopter to Chkhalta village, a remote gorge. Hours later the kidnappers released Georgian Health Minister Avtandil DZHORBENADZE, Chairman of the Government of the Autonomous Republic of Abkhazia Londer TSAAV and seven journalists. After negotiations between the Svanetian kidnappers and a Georgian Presidential envoy, the remaining hostages were released. The officials were on a regular trip to the region to deliver pensions and wages to teachers, doctors and other state workers in the remote region. No money was exchanged for the release of the hostages and the helicopter was returned. The kidnappers did not issue demands. Rather the incident was a move to show the leaders of the Abkhaz-government-in-exile that the Kodori Gorge is really controlled by the Svanetian people. It was an event to flex their muscles and show that they have the real power.

IMF Approves $8.9 Million Loan Payment

· The International Monetary Fund (IMF) on July 2nd approved the second annual loan totaling $40 million for Tajikistan under the Enhanced Structural Adjustment Facility (ESAF) to support the government's 1999-2000 economic program. The payment will total $8.9 million. Tajikistan's three-year ESAF was approved in June 1998 in the amount of $128 million, and in December 1998 was augmented to $134 million. Of that sum, $54 million has already been disbursed. The ESAF is a IMF facility for assisting eligible members that are undertaking economic reform programs to strengthen balance of payments and improve their growth prospects. In 1998, the country's real gross domestic product (GDP) grew by 5.4 percent and inflation fell to 2.7 percent. The government's economic program envisages average annual real GDP growth of about 6 percent during 1999-2002, with GDP growth in 1999 projected at 5.5 percent, largely reflecting the continued rebound from low output levels during the civil

war. The IMF called on Tajikistan to speed up reforms, revitalizing the financial sector, and creating the right legal environment to help private companies. IMF deputy managing director Shigemitsu SUGISAKO said, "To realize Tajikistan's growth potential, further progress needs to be made in land reform and restructuring of the energy sector." According to an IMF statement, "Tajikistan made good progress in macro-economic stabilization and transition to a market-based economy...with growth and inflation objectives achieved despite external shocks from the Russian financial crisis and a sharp deterioration in the terms of trade."

Kyrgyz-Uzbek Sign Intergovernmental Agrmts

· Kyrgyz Prime Minister Amangeldy MURALIYEV ended his two-day official visit to Uzbekistan on Saturday by signing several intergovernmental documents. MURALIYEV had talks with Uzbek Premier Utkir SHULTANOV and President Islam KARIMOV to discuss the development of trade and economic relations between the two countries and political and cultural cooperation. The Uzbek President praised relations between the two countries and stressed that, "there are certain problems hampering the development of our cooperation. A speedy resolution of these problems will benefit both Uzbekistan and Kyrgyzstan." The territorial belonging of industrial sites in the border zone is one of the question requiring solution. The negotiations focused on the transfer to Kyrgyzstan of several oil and gas fields located in the Osh and Dzhelalabad regions. In the Soviet times, the fields belonged to Uzbekistan, which continues to develop them. A cooperation agreement was signed by the Uzbek Social Security Ministry and the Kyrgyz Labor Ministry to exchange information in social security. The two premiers discussed the restoration of motor communication and the construction of highways. They signed an agreement on joint measures to fight illegal drug trafficking and crime. Uzbek Deputy Prime Minister Rustam YUNUSOV and Kyrgyz Deputy Prime Minister Esengul OMURALIYEV signed a protocol of the intergovernmental commission.

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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