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, July 7, 1999

Russian Federation

Politics

Kremlin Tightens Grip On Mass Media

· Russian President Boris YELTSIN on Tuesday signed a decree establishing a Ministry for Press, Television and Radio Broadcasting, and Mass Communications, which is to absorb the State Press Committee and the Federal Service for Television and Radio Broadcasting. The new ministry will be headed by Mikhail LESIN, who until now was the first deputy chairman of the All-Russian State Television and Radio Company and worked on the YELTSIN presidential campaign in 1996. According to the decree, the ministry will be responsible for the development and implementation of state policy on the mass media, mass communications, and advertising as well as control over the use of broadcast frequencies and upgrading technology. Prime Minister Sergei STEPASHIN quickly noted that, "I would not say that we want to create a propaganda ministry....But we are starting to create a federal strategy that would consolidate all of the state's capabilities in—pardon the old-fashioned word—ideological work," RFE\RL Newsline reported. Presidential press secretary Dmitri YAKUSHKIN, meanwhile, denied that the new ministry has anything to do with the upcoming campaigns for the elections to the Russian State Duma and the presidency. He said that the new mass media ministry was created so that the Kremlin can keep up with technological developments. Both STEPASHIN and YAKUSHKIN seemed quick to deny that the new ministry would be used for a propaganda campaign or state censorship. However, the grip of the Kremlin appears to be constricting the freedom of the press by imposing the state policy through various media outlets.

Russia-Iraq To Cooperate In Oil Sector

· Russia and Iraq have agreed to cooperate

"actively" in the oil sector as well as other economic areas. The Russian Foreign Ministry said this cooperation will be carried out within the UN oil-for-aid deal, while keeping in mind the prospects of economic cooperation after the UN sanctions against Iraq are lifted. Foreign Minister Igor IVANOV and Iraq's First Deputy Prime Minister Tariq AZIZ held talks on Tuesday. According to the Foreign Ministry, Russia wants a "new system of international monitoring" to be created in Iraq, but gave no details. Russia, China and France have submitted to the UN Security Council a draft resolution on Iraq, which provides for a new system of the international monitoring and a simultaneous lift of the economic sanctions. IVANOV said Russia is concerned over the continuing tension around Iraq and wants the situation to be settled politically. Specifically, he believes the systematic bombing of Iraq runs counter resolutions of the UN Security Council and international legal norms and must be immediately stopped. Later this week, AZIZ is expected to meet with Russia's oil major LUKoil to discuss the development of the West Qurna oil field in Iraq.

Russia To Work With Chechnya After Strikes

· After launching a preemptive strike against Chechen gangs Tuesday morning, Russian Interior Minister Vladimir RUSHAILO will meet senior officials from the Chechen ministry of shariah security, who arrived in Moscow today. Russian Interior Ministry spokesman Oleg AKSYONOV said in an interview with the ORT Television Company, they are going to discuss

Today's News Highlights

Russia

Gazprom Makes Business List

Runicom Sells Sibneft Shares

European Republics

Gov't Survives Confidence Vote

Rus-Belarus Union Treaty

South Caucasus & Central Asia

Schussel Visits Georgia, Azeri

Turkey-Kyrgyz Sign Accords

Kyrgyz-KazakhTo Clear Debts

Rus Troops To Leave Turkmen

Politics-Economics-Business

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Wednesday

July 7, 1999

Intercon's Daily

"problems of cooperation, including in the struggle against gangs on the territory of the Chechen Republic." On Tuesday evening, an Interior Ministry troop was attacked by militants from the direction of Chechnya near Grebensky bridge in Baba-Yurt district of Daghestan. Four servicemen were wounded during the fighting. On Sunday, RUSHAILO threatened to take "tough measures" against Chechen gangs. Russian State Duma Deputy Speaker Mikhail GUTSERIEV said that the Duma on Monday approved these "tough measures." Meanwhile, Nationalities Minister Vyacheslav MIKHAILOV said he wants to work together with the Chechen leadership to "clean up" Chechnya, but reserves the right to act unilaterally if such cooperation proves ineffective. MIKHAILOV also stressed that Moscow continues to regard Aslan MASKHADOV as Chechnya's legitimate president, and must therefore create conditions to enable him to bring the situation in Chechnya under his control. Federal Security Service Director Vladimir PUTIN said that Russia will in future react to Chechen incursions, but not launch further preemptive strikes. PUTIN added that it may prove necessary to strengthen security measures along the border between the self-proclaimed Chechen Republic Ichkeria and the rest of the Russian Federation, RFE\RL Newsline reported.

Economy

Ruble = 24.48/$1.00 (NY rate)

Ruble = 24.46/$1.00 (CB rate)

Ruble = 25.06/1 euro (CB rate)

Foreigners Slowly Enter Retail Banking Sector

· Michinoku Bank in Moscow, a unit of Japan's Michinoku Bank, began operations in Moscow today. It is the first wholly owned subsidiary of a Japanese bank established in Russia. The Moscow unit of Michinoku Bank, provides retail accounts, lending and foreign exchange services. The Japanese Embassy in Moscow became the subsidiary's first customer, opening an account there. The Moscow branch, with charter capital of $12 million, obtained a banking license from the Russian Central Bank in April. On Tuesday, Bank Austria announced plans to expand into retail banking in Russia. Its main competitor Raiffeisenbank last week said it planned to target 20,000 clients in Russia this year alone, by opening up three Moscow branch offices and expand into the regions next year. Michel PERHIRIN,

head of Raiffeisenbank's Moscow office describes the trend best when he says, "There's quite a market opening up." But Raiffeisenbank is far from the first retail bank. The Turkish-owned Garanti Bank has been offering accounts to individuals since 1996, when it became one of the first foreign institutions to be granted a general banking license by the Central bank. According to the Financial Times, it now operates 2,700 foreign currency and 2,000 ruble accounts. Head of Garanti Bank's Moscow office Murat AGABEYOGLU said, "It is inevitable that foreign banks will play a role. We bring know-how and ethics." The financial crisis in August which burned many Russian citizens has created a new class of Russians who are willing to trust their savings to foreign banks only. PERHIRIN says, "Our clients have been very insistent. They say that no Russian bank is really reliable." But he concedes, "We can't only take the good niches, we have to offer everything [every kind of service]." He also admits that retail banking is likely to be unprofitable in Russia, given space requirements, back office facilities, and time spent with individual clients. AGABEYOGLU also said that his clients keep only small sums in their accounts and use it for making payments abroad, which generates limited commissions. Chief executive of Alfa Bank Alex KNASTER believes retail branches remains a low priority. He said, "Our focus is on corporate clients. They are much more reliable."

CB To Issue 10 Billion Ruble Worth Of Bonds

· The Federation Council on Friday endorsed a federal law authorizing the Central Bank of Russia to issue bonds that will be placed and circulated among crediting organizations exclusively. The Central Bank will issue bonds up to 10 billion rubles to mature in three months. Central Bank chairman Viktor GERASHCHENKO told the upper house that with the introduction of the new law the Bank hopes to absorb extra funds that could be channeled for buying foreign currency. He said that in 1998 the Central Bank issued three billion ruble worth of such bonds. GERASHCHENKO assured district chiefs that the Central Bank will meet its obligations. He also said the Central Bank will be helping to promote channeling bank capital into the real sector by maintaining liquidity and registration of securities of commercial banks in the Central Bank of Russia. First deputy premier Viktor KHRISTENKO told the

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meeting that the law sets rigid limits to the Central Bank's operations in this market which will help avoid building another financial pyramid. He noted particularly that the bonds will serve as a yardstick for interest rates of commercial banks.

Business

Gazprom Ranked 3rd On Leading Co. List

· The Russian gas monopoly Gazprom placed third on the list of the world's hundred leading companies with developing markets, compiled by the Morgan Stanley Capital International firm and published in the latest issue of Business Week magazine. According to the magazine, Gazprom's market capitalization totals $24.502 billion. Other Russian companies on the list are LUKoil which placed 33rd and Surgutneftegaz, 74th. It notes that the Russia, economy is regaining the confidence of investors. However, Business Week points out that last year the list contained seven Russian companies, but due to the economic crisis their positions had slipped. Gazprom slipped to the third place from the first and LUKoil to the 33rd from the 25th. Meanwhile, Surgutneftegaz improved its rating, getting into the top hundred, while it was placed 106th last year.

Runicom Sells Sibneft Shares

· Russian company Runicom Ltd., owner of 10 percent of Sibneft oil company, has sold approximately one percent of Sibneft stock to a group of European investors, which may include Deutsche Bank, Mercury Asset Management, and Foreign and Colonial. Runicom was founded and controlled by Roman ABRAMOVICH, the largest shareholder in Sibneft. The sale, arranged by Renaissance Capital, raises the percentage of shares owned by investors other than Sibneft management or companies associated with Sibneft to approximately 11 percent, Reuters reported. The terms of the sale were not disclosed. A Sibneft spokesman said the aim of the sale was to increase liquidity in Sibneft shares, following the launch of Level I ADR program in April, with a view to the eventual issue of a Level III ADRs in the future. Sibneft president Eugene SHVIDLER said, "In itself this is quite a small transaction, but nevertheless very significant. This is not just a one-off sale, but rather part of the new, coherent strategy to increase the Sibneft free float over the next few months."

European Republics

Ukraine's Gov't Survives No Confidence Vote

· Ukraine's government, led by Prime Minister Valery PUSTOVOITENKO, survived a no confidence vote on Tuesday. A total of 182 deputies voted for the government's removal and 136 voted against. A small majority of 226 deputies in the 450-seat chamber was needed to remove the government. Before the vote Communist party leader Petro SYMONENKO told deputies, "Implementing the demands of the International Monetary Fund, the government has completely destroyed the economy of the country, its monetary and financial systems," Reuters reported. PUSTOVOITENKO promised the economy would rebound with two percent growth next year.

Union Treaty Ready In Less Than One Month

· Russia and Belarus are moving closer toward a political and economic union. Russian Prime Minister Sergei STEPASHIN vowed to have the final draft of the treaty ready within a month. President Boris YELTSIN order the Prime Minister to lead negotiations with Belarus. STEPASHIN and Belarus Alexander LUKASHENKO discussed ways to speed up integration over the telephone. A full union would force Russia to rewrite its constitution, thereby delaying the electoral process and preserving YELTSIN's power. However, the new elections could pit YELTSIN against LUKASHENKO. Last week, the Belarus President accused Russia of dragging its feet and urged it to move faster. He threatened that continued delays might prompt Belarus to re-orient its foreign policy away from Russia towards the European Union, the Financial Times reported. STEPASHIN countered that Russia would welcome those actions saying that a Rus-Belarus Union should not be an obstacle in relation to creating a unified Europe.

Today STEPASHIN chaired a session of the Union Executive Committee. He said, "Russia and Belarus are strategic allies, and we shall not deviate from this line." According to STEPASHIN, Russia and Belarus, "have no differences in principle about the structure and content of the treaty." He proposed working in parallel on the treaty and a program of actions designed to translate its provisions into life, specifying stages and time frame or their realization. He expressed concern over the shrinking trade

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Intercon's Daily

turnover between Russia and Belarus. STEPASHIN said the formation of a single customs space remains a topical issue along with some other problems. Russian nationalists have accused YELTSIN of delaying unification on purpose because of Belarus' Soviet style economy. Belarus would adopt the Russian ruble as its currency, if the union treaty comes into force.

South Caucasus & Central Asia

Schussel On Two-Day Visit To Georgia

· Wolfgang SCHUSSEL, Austrian Vice-Chancellor and Foreign Minister, is scheduled to arrive from Armenia to Tbilisi today for a two-day official visit. He will meet with Georgian President Eduard SHEVARDNADZE, Foreign Minister Irakly MENAGARISHVILI, Deputy Speaker of the Georgian Parliament Eldar SHENGELAYA, and other officials. He will then attend a ceremony to open Austria's honorary consulate in Tbilisi. Following his trip to Georgia, SCHUSSEL will continue his South Caucasus tour and visit Baku. According to SCHUSSEL, this tour will be an important step for the preparation of Austria's rotating chairmanship in the Organization for Security and Cooperation in Europe (OSCE) in the year 2000. He said the tour will help him gain a better understanding of Nagorno-Karabakh, South Ossetia and Abkhazia. This is Austria's first official visit to the South Caucasus since the republics gained independence in 1991. SCHUSSEL will also meet with OSCE and European Union representatives working in the region.

Turkey-Kyrgyzstan Sign Four Agreements

· Turkish President Suleyman DEMIREL said that Turkey and Kyrgyzstan play an important role in bringing about peace and stability in the region. The President made his remarks at a welcoming ceremony for Kyrgyzstan President Askar AKAYEV, who arrived in Ankara last week. Turkey and Kyrgyzstan have great geographic importance, DEMIREL added, noting the multi-dimensional cooperation between the two countries. AKAYEV said

that following its independence from the former Soviet Union eight years ago, the bilateral relations between his country and Turkey have reached a peak. "For us Turkey is a model country on which to base democracy and a market economy for our country," AKAYEV said. During AKAYEV's visit, the two countries signed four agreements and a joint declaration. The agreements include commitments to prevent double taxing and a protocol for cooperation between Turkey and Kyrgyzstan.

Kazakh, Kyrgyzstan To Write Off Mutual Debts

· After meeting in Almaty on Friday, Kazakh and Kyrgyz Trade Ministers stated that the two countries will soon sign an agreement offsetting mutual debts. Kazakhstan owes Kyrgyzstan some $22.5 million for electricity and irrigation water, while Kyrgyzstan owes $12 million. Kazakhstan will also abolish the 200 percent duty it imposed in March on imports of butter, soft drinks and some other goods imported from Kyrgyzstan. Kyrgyzstan National Bank board member Azamat TOKBAYEV also said that Bishkek hopes to restructure part of its $132.8 million debt to Russia, $17 million of which is due in 1999. Kyrgyzstan's total foreign debt amounts to $1.53 billion. The state debt is currently equal to 59 percent of gross domestic product (GDP).

Totsky-Niyazov Agree On Troops Withdrawal

· Turkmen President Saparmurat NIYAZOV and Russian Federal Border Service Director Colonel-General Konstantin TOTSKY reached an agreement on the withdrawal of Russian troops from Turkmenistan after talks on Tuesday. TOTSKY said that it is impossible to withdraw the Russian border guard contingent from Turkmenistan before the November 19th deadline. Ashgabat said that it would not extend the treaty. TOTSKY and NIYAZOV agreed to set up an inter-government commission to work out details related to the withdrawal of Russian troops. TOTSKY said, "Turkmenistan's state border service has formed as an integral system, capable of carrying out on its own all tactical and strategic objectives on border protection."

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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