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

Friday, July 9, 1999

Russian Federation

Politics

Russian-Chechen Interior Ministries Meet

· Russian Interior Minister Colonel-General Vladimir RUSHAILO and a Chechen delegation, which included First deputy Minister, head of the investigation department Colonel of Justice Khasan KHATSIYEV, deputy minister in charge of personnel Lieutenant-Colonel of the interior service Abu UTSIYEV and Envoy of the Chechen Interior Ministry to Russia Lieutenant-Colonel of police Khusein BERZUKAYEV, met on Wednesday. During the meeting the sides signed additional protocols to acting agreements: on interaction between the Investigation Committee on the Russian Interior Ministry and the investigation department of the Interior Ministry of Chechnya, and on interaction between the main department for personnel and cadre policy of the Russian Interior Ministry and the personnel department of the Interior Ministry of the Chechen Republic. The sides also discussed with joint actions for strengthening law and order in the area of the administrative border of Chechnya. RUSHAILO expressed concern over armed gangs, which terrorize Russian citizens, attack Russian enforcement units, and lay claim to border areas. He stressed that only by joint efforts will it be possible to put an end to acts of terrorism, unpunished attacks of gangsters on police special-duty squads and interior units.

Russia To Enter Energy Crisis In 2005

· The fourth congress of Russian industrialists working in the oil-and-gas spheres opened in Moscow today. Delegates are discussing ways to overcome the energy crisis, consolidate corporate unity, and participation in the upcoming parliamentary and presidential elections. Energy Minister Viktor KALYUZHNY said, "If the current macro-economic conditions remain, the energy supply to the country

could be placed under threat and export deliveries will have to be sharply cut." He added that, "Unless a range of measures is take to normalize 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. In 1998, Russia produced 303.3 million tons of crude oil and gas condensate. KALYUZHNY said that gas output of 571 billion cubic meters in 1997 was the lowest in 10 years. He said that the position of the gas sector remains unstable. He noted that, "Massive non-payment has led to a reduction of capital investment in the sector by more than half." Many vital projects, including compressor stations and trunk pipelines, have collapsed due to lack of cash. He said that if priority were given to supplying the domestic market, "then it would be necessary to stop practically all exports of gas and 25 percent of the country's hard currency reserves would be lost, not to mention the loss of the foreign market for Russian gas in the future." Prime Minister Sergei STEPASHIN said that the government will hold a special meeting in August to review the functioning of the fuel-and-energy complex. "We must look four or five years ahead."

Economy

Russian Economy On The Rebound

· Foreign investors, specifically hedge funds, are once again enthusiastically buying Russian sovereign bonds. As a result of this demand Russian in

Today's News Highlights

Russia

CB To Strip More Bank Licenses

New Kommersant Shareholder

Swiss Police Tract Money

BMW Production In Kaliningrad

European Republics

Lithuanian Bank Merger

Ukraine-ING Negotiations

South Caucasus & Central Asia

Georgia Nears IMF Credits

Oil Leakage In Batumi

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Friday

July 9, 1999

Intercon's Daily

ternational bonds have more than tripled to over 50 percent of the face value. Russia's $16 billion worth of intentional bond debt has recovered the losses it sustained when the government defaulted on its domestic bonds last August. Predictions of a further collapse of the ruble and hyper-inflation have now turned to a more optimistic outlook that Russia is capable of servicing its foreign liabilities. The attraction and change in outlook is due to a combination of factors. International oil prices have had a strong impact on the nation's trade balance and tax revenues. As a result of the rise in the oil price to $18.61 and the switch from domestic to foreign sales, Russia is earning more than $40 million a day, the Financial Times reported. Central Bank chairman Viktor GERASHCHENKO has resisted the urge to print more money. This tight rein on monetary policy has limited inflation and preserved the ruble within a stable trading range. Russia's tax collection targets so far for 1999 have almost all been surpassed. Exports of oil, timber, metals, and chemicals have improved, providing a cash and profit boost to many of Russia's struggling industrial groups. The portion of imports in retail sales have fallen from 49 to 30 percent, since more domestic products have replaced expensive imports. Topping off Russia's gains is the prospect for further International Monetary Fund (IMF) lending. The IMF executive board will meet later this month to vote on $4.5 billion in credits for Russia. Their positive support for Russia's economic program for 1999 earlier this week, showed that new lending is likely. IMF lending could trigger additional aid from the World Bank, the Japanese, and other international lenders, as well as improve debt rescheduling negotiations. However, one foreign banker in Moscow warns that real reform is still necessary. The Financial Times quoted the broker saying, "This is scary. The country has had a shot of adrenaline thanks to higher oil prices and the liquidity in global markets. But everything on the structural side is still a disaster."

CB Warns Of Stripping More Bank Licenses

· Central Bank chairman Viktor GERASHCHENKO warned that as many as 130 Russian banks may be stripped of their banking licenses in the near future. He said there is nothing wrong with removing banks, which are incapable of operating on the market. He added that the 130 banks are mostly "small banks." GERASHCHENKO said that 1000 to 1,500 banks

can operate without any state assistance. After talks with the International Monetary Fund, it was decided that the Central Bank could provide budget money for compensation to private clients of bankrupt banks. He noted that bankruptcy, "was often not their fault, but the fault of the state as well. The Finance ministry is now working on the amount." The compensation will be determined by the average amount of deposits. The decision on compensations will be passed by September, he said.

Meanwhile, the Central Bank said it has plans to extend a credit worth 2.5 billion rubles to the SBS-Agro bank, on the condition that the SBS-Agro will direct one billion rubles of this sum to the fund of preferential crediting for agricultural producers. Prime Minister Sergei STEPASHIN said SBS-Agro bank must hand over to the state 75 percent of its shares so that the government can control this bank. He added, "it is very important to receive real money of farmers in this bank." But the problem is "where we will find this money."

Ruble = 24.44/$1.00 (NY rate)

Ruble = 24.42/$1.00 (CB rate)

Ruble = 24.97/1 euro (CB rate)

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Business

New Shareholder For Kommersant Daily

· The Moscow Times on Wednesday reported that the new majority shareholder of the Kommersant Publishing company is an obscure US investment fund called American Capital. Kia JOORABCHIAN and Reza IRANI-KERMANI, the fund's two execu

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tives, said they have bought an 85 percent stake in the company, which publishes Kommersant Daily, with the "sole purpose of making money" by re-selling it in several years after restructuring. They insisted that they have no political connections in Russia and will maintain the newspaper's independence. Kommersant director Vladimir YAKOVLEV said he chose American Capital because he wants to keep control over the newspaper free of "Russian political interests," especially in the run up to the elections. Controversial business tycoon Boris BEREZOVSKY has acquired the remaining 15 percent stake. The Moscow Times said BEREZOVSKY hopes to use that stake to win a seat on Kommersant Publishing's board of directors.

Swiss Police Try To Uncover Russian Money

· Swiss police have raided several companies in Laussane suspected of being involved in Russian money laundering and the embezzlement of public funds. The Swiss authorities refused to name the companies and individuals involved. However, Le Temps reported on Thursday that the raids had involved Andava and Forus Services, companies linked to Russian financier Boris BEREZOVSKY. In January, then Russian prosecutor general Yuri SKURATOV launched an investigation into the business activities of BEREZOVSKY and Nikolai GLUSHKOV, former deputy director general of Aeroflot. They were accused of using Andava to accumulate offshore receipts from the Russian airline to avoid Russian currency laws. In April 1998, Russia and Switzerland signed a memorandum of understanding to cooperate in combating money laundering and organized crime. Swiss prosecutor general Carla DEL PONTE believes that more than $40 billion has been funneled into Swiss bank accounts and property.

Avtodor Plant To Start Producing BMWs

· The Avtodor Plant in Kaliningrad is planning to start producing BMW cars in two months. According to Avtodor director general Valery SOKOLOV the plant aims to assemble about 150 vehicles in September. He said that German specialists agree that preparations for production are going according to the schedule. The plant's 40 employees have been trained in Germany. Avtodor will assemble up to 1,200 BMW 523-i and BMW 528-i in 1999. It is also planning to launch the production of Land-Rover

Defenders. Investments in this project will amount to about 50 million marks. BMW will also invest 75 million marks in marketing. The Avtodor Plant also makes Korean KIA cars.

EBRD-KamAZ Talks To Continue

· The European Bank for Reconstruction and Development (EBRD) is continuing talks on the restructuring of the debt of the KamAZ automobile works, however, the date and venue of the next round of talks on the KamAZ debt have not been made public. It is optimistic about prospects of reaching a final agreement on the issue, an EBRD spokesman said after the visit of EBRD First Vice President Charles FRANK to the city of Naberezhnye Chelny. FRANK returned to London after holding talks with Russian Economics Minister Andrei SHAPOVALYANTS, senior officials of Tatarstan, and KamAZ managers last week. According to the existing information, perceptible progress was achieved during the latest round of talks. Nevertheless, some differences remain to be settled. EBRD granted to KamAZ a $10 million credit. KamAZ put part of its equipment at the disposal of the bank as a collateral. The essence of the bank's claim is that KamAZ proved unable to pay the debt. KamAZ did not take measures to restructure the debt, which could help resolve the problem of finding money both for the payment of the debt and for the modernization of the factory.

European Republics

Vilniaus-Hermis Complicates Privatization Plans

· The Vilniaus Bank and Hermis Bank merger, creating the biggest bank in Lithuania and the second biggest in the Baltic States with assets of $1.1 billion, will complicate the government's efforts to sell state holdings in two large banks: Savings Bank and Agricultural Bank. Vilniaus Bank has been working to forge a deal with Hermis Bank for over a year. Vilniaus Bank, partly owned by Sweden's Skandinaviska Enskilda Banken, is in a loose alliance with Uhispank of Estonia and Unibanka of Latvia. The merger is still contingent on an audit of Hermis Bank's books. The Central Bank also has to approve the deal, which it has rejected in the past. According to Augustas STANIULIS an analyst with Hansabank Markets, "The general opinion is that the Central Bank is becoming less reluctant towards

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this merger, because it understands that if Hermis cannot find a white knight from the West, a merger with Vilniaus would still be better." Interest in Lithuanian banks have been low. The government now fears that the presence of a large private bank could scare off buyers who would have been interested in Savings Bank and Agricultural Bank stakes.

Ukraine-ING Barring Negotiations To Continue

· Ukraine is likely to avoid defaulting on a $155 million ING Baring bonds as negotiations are expected to continue past Friday's deadline. Talks have already been extended three times beyond the bond's June 9th maturity date. If this is a default it could trigger unprecedented cross-default on Ukraine's sovereign euro bonds. Ukraine, like Russia and Romania, is struggling to make debt payments and avoid becoming the first rated sovereign borrower to default on its euro bonds. Reuters reported that Finance Minister Igor MITYUKOV said the ministry was discussing with ING Baring the possibility of refinancing 80 percent of the bond, which totals $163 million with interest. The International Monetary Fund (IMF) wants Ukraine to involve the private sector in the debt restructuring talks. However, Ukraine must not repay the bond from its reserves because this would defy commitments made to the IMF. Head of the Finance Ministry's foreign debt department Vitaliy LESOVENKO today said, "There is some progress." ING Baring bought $155 million worth of Ukrainian T-bills yielding 17.5 percent in US dollars on August 6th, 1998 and later issued derivative securities which it sold to a limited number of Western investors. Regent Pacific of the UK is said to be the largest holder of the debt, holding more than $100 million, while ING Baring is also said to have kept about $20 million worth.

South Caucasus & Central Asia

Georgia To Cut Budget Expenses By $8M

· Georgian President Eduard SHEVARDNADZE told the government on Thursday that Georgia is cutting its budget expenses by $8 million according

to the demands of the International Monetary Fund (IMF). He said that the amount "was rather symbolic compared to the expected one". The President stressed that in return the IMF would agree this month to provide another tranche of its credit for economic restructuring which will trigger credits from other institutions, particularly the World Bank. Presidential advisor Temur BASILIYA said, "Recent decisions by the Georgian President and the government as well as the improvement in tax collections brings us nearer to getting IMF credits." The 1999 budget calls for spending of 1.23 billion lari, with revenues projected at 922.5 million lari.

Foreign Minister Irakly MENAGARISHVILI announced that Georgia is organizing an international seminar in Tbilisi to focus on the role of international organizations in the settlement of conflicts in the Caucasus within the framework of the Organization for Security and Cooperation in Europe (OSCE). MENAGARISHVILI met Austrian Vice Chancellor Wolfgang SCHUESSEL, who is currently in Tbilisi on a visit. The Georgian minister noted that his country proposes to hold the seminar in the summer of 2000 and asked Austria to assist it in convening this forum because it will preside in the OSCE.

Refinery Leakage Threatens Black Sea

· A breakdown at the oil refinery in the western Georgian city of Batumi has caused a leakage of 320 liters of oil into the Bartskhana River which empties into the Black Sea, several Georgian TV channels reported on Wednesday. This information was later confirmed by competent police sources in Batumi, who did not exclude that the breakdown had been caused by terrorists. Georgian police have already detained three persons suspected of having caused the leak, according to Itar-Tass. An investigation is ongoing. Emergency specialists have managed to pump out 240 liters of oil from the sea using special equipment. Clean-up work is still in progress and city authorities have requested assistance from the environment and natural resources ministries. There has been no estimate on economic damage.

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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