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

Tuesday, August 3, 1999

Russian Federation

Politics

Most-Man Sacked, Replaced By ORT-Man

· Russian President Boris YELTSIN today dismissed Sergei ZVEREV as deputy head of the presidential staff and issued the standard line that he is being "transferred to another job." ZVEREV was ousted because he was seen as a supporter of Vladimir GUSINSKY, head of the Media-Most empire, which has bitterly criticized the Kremlin. YELTSIN has appointed Vladislav SURKOV, a former aide to the head of the presidential administration, to replace ZVEREV. Since 1998, SURKOV was working in a leading position at ORT Television Network controlled by media tycoon Boris BEREZOVSKY. In January 1998, SURKOV was appointed first deputy director general of the ORT and then worked as secretary of the public council of observers established at the network. ZVEREV dismissal appears to be a side effect of the information war between Media-Most and ORT ahead of the parliamentary and presidential elections. In a news conference ZVEREV hit back and said that his boss, presidential chief of staff Alexander VOLOSHIN, is, "harmful to the interest of the country." He added that VOLOSHIN wants to impose controls on the Russian media and is behind a plan to cancel or postpone elections. Presidential press secretary Dmitry YAKUSHKIN immediately dismissed these allegation as unfounded. YELTSIN on Monday relieved Yuri PROSHIN of his duties as deputy foreign minister in connection with a transfer to another job. PROSHIN was in charge of economic issues and headed the main production and commercial directorate for servicing the diplomatic branch.

Communists React To Stepashin's Comments

· The Communist Party has reacted so strongly to Prime Minister Sergei STEPASHIN's comments dur

ing his trip to the US that the party is considering suing him for criminal comments. STEPASHIN said, "As a former director of the FSB [the Federal Security Service], I can open you a secret: Communists will never win in Russia, they will never return, nobody will allow that." Communist Party leader Gennady ZYUGANOV has called his statements "illegal and anti-constitutional." Today at a press conference, he said that STEPASHIN's statement was "not only tactless but contradicts the Constitution and legislation." According to a Communist Party press release STEPASHIN's statement "contains signs of crimes stipulated by the Russian criminal code." The release said STEPASHIN "calls for the violent holding of power and violent change of the constitutional order in Russia, as [his statement] deprives the Russian people of the right stipulated by the Constitution to exercise its power both directly and through organs of state authority and local self-rule." The Communist Party plans to ask the prosecutor's office to consider whether STEPASHIN's statement was within the law. The governmental information department chief Alexander MIKHAILOV said the Communist Party's actions are no more than pre-election rhetoric. He said, "To believe that restoration of Communism in Russia is possible is a dream of narrow-minded people who have lost the sense of reality," MIKHAILOV said. "Over the recent years, Russia has gone to a complex evolutional way, and returning to totalitarianism, the sixth article of the Constitution of the USSR and to organs of out-of-court reprisal in the person of party committees

Today's News Highlights

Russia

London Club Negotiations Begin

Yeltsin Supports Vyakhirev

European Republics

US-Ukraine Boost Military Ties

Estonia Charges KGB Officer

South Caucasus & Central Asia

Rus-Georgian Com. To Meet

Kazakh-Kyrgyz Reach Gas Deal

Uzbek Increases Wages

CIS Industrial Output Figures

Politics-Economics-Business

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August 3, 1999

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is impossible. The statements of Sergei STEPASHIN were directed precisely against carriers of such manners," he said.

Economy

Ruble = 24.19/$1.00 (NY rate)

Ruble = 24.22/$1.00 (CB rate)

Ruble = 25.82/1 euro (CB rate)

London Club Debt Negotiations Begin

· Following the success of earning another International Monetary Fund loan and convincing the Paris Club of creditors to roll over $8 billion of debt due over August 1999 to 2000, Russian Finance Minister Mikhail KASYANOV is negotiating today with the London Club in Frankfurt over the $38 billion debt. The meeting is being hosted by Germany's Deutsche Bank, which chairs the bank advisory committee of the London Club. The creditors are hoping to resolve the question as to who is the debtor. The Financial Times reports that the money during the Soviet-era was lent via Vneshekonombank, a subsidiary of the Russian government. They want Russia to take on the obligations for future reimbursements. KASYANOV, meanwhile, may push for a write-off of some of its Soviet-era debt. The German government and its banks, among the most heavily exposed in Russia, have strongly opposed any write-offs and criticized Russia's lack of reforms. The talks will cover $22 billion in Prins, $6 billion in Ians or interest arrears notes, and debt servicing charges, which have been unpaid since last August.

The one-day meeting is expected to be extended, as it will be difficult to reach a consensus among hundreds of individual institutions, which make up the London Club. Bank of America will join the other new members on the Bank Advisory Committee (BAC). JP Morgan decided to join earlier this year. Merrill Lynch recently turned down the offer of a position on the BAC following objections raised by their clients. The BAC is meeting with KASYANOV and the London Club. The restructuring terms of Prins requires approval from 98 percent of their holders, and 95 percent for Ians. Eric FINES of Morgan Stanley said, "I'm skeptical about predictions of a rapid settlement. It could take as long as three or four years." The Russian minister said, "we would like to believe that the talks between the Russian Federation and the London club about the

parameters of the debt restructuring would successfully end by the end of the year so that the first quarter of 2000 could be devoted to the legal registration of documents and formal completion of the negotiating process."

Business

Yeltsin Throws Support Behind Vyakhirev

· After meeting with President Boris YELTSIN today, Gazprom's chairman of the board Viktor CHERNOMYRDIN said that the President will meet with top officials of Gazprom. He did not say when the meeting will take place. The government has been seeking to increase its representation on the Gazprom board from four to five seats. Gazprom will review a government recommend list of 19 candidates at an extra session of the board scheduled for August 26th. The list does not include Fuel and Energy Minister Viktor KALYUZHNY. CHERNOMYRDIN also noted that YELTSIN supports Rem, VYAKHIREV, the head of Russia's largest company Gazprom. VYAKHIREV holds the government's 38.37 percent stake in the company in trust. Russian media have speculated of late that the Kremlin and its the influential business tycoon Boris BEREZOVSKY plan to gain control over Gazprom money as elections are approaching and want to replace VYAKHIREV by CHERNOMYRDIN. The planned extraordinary meeting of Gazprom shareholders was reportedly aimed to sack VYAKHIREV. He expects to remain in office until the summer of 2000 or 2001. "Gazprom should not be used as a bargaining chip, should not support or play for someone," CHERNOMYRDIN said. However, many speculate that CHERNOMYRDIN will use Gazprom's wealth and media influence as a political base for his run for president in 2000. Gazprom generated about one fifth of the cash-strapped government's tax revenues in 1998. The company is the world's biggest gas producer with sales equal to 6 percent of Russia's gross domestic product. It also owns a 30 percent holding the leading commercial television channel NTV, which has recently entered into the media war opposing the Kremlin.

US To Decide On Ilyushin Loan In September

· The US will make a final decision this September on $1 billion in financing for the purchase of 20 Ilyushin jets by Russian Airliner Aeroflot. Russia's envoy to the Group of Eight nations Alexander

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LIVSHITS said that US officials have made promises to Prime Minister Sergei STEPASHIN during his visit to the US last week. The US Ex-Im Bank in 1998 agreed to provide the money to finance construction of 20 IL-96 passenger and cargo jets that Aeroflot has contracted to buy from the Ilyushin Design Bureau. The bank withheld the money in the aftermath of the August financial crisis.

into a training base for troops from the countries participating in the Partnership for Peace program. KUZMUK and COHEN extended the framework agreement on general threat reduction for another six years until 2006. This program helps Ukraine dismantle its ballistic missiles and nuclear weapons infrastructure. Ukraine inherited the world's third largest nuclear arsenal in 1991. It surrendered all its nuclear warheads to Russia and had 130 SS-19 millions, 46 SS-24 missiles, and more than 40 Tu-160s and Tu-95 MC strategic bombers remained. Ukraine pledged to become nuclear free. Under this program the US has contributed more than $500 million to help Ukraine dismantle these weapons.

Estonia Sentences KGB Officer To Jail

· An Estonian court on Friday sentenced a former KGB officer to four year in prison for sending three Estonian families to Siberian exile back in 1949. The court in the Estonian city of Paernu found former KGB lieutenant Mikhail NEVEROVSKY guilty of this crime and is preparing papers for 278 people, family members of those who were labeled as bandits and nationalists by the then authorities, to be deported from Estonia. NEVEROVSKY is the first in Estonia to be sentenced to imprisonment for being involved in deportation actions after World War II. He pleaded not guilty, saying he was only executing orders and claimed the case lacked concrete details.

Ore-Dressing Complexes To Be Privatized

· The Ukrainian State Property Fund has resumed the privatization of ore-dressing complexes. The list of the complexes, to be covered by privatization, includes open stock companies, created on the basis of the Ordzhonikidze, Central, Northern, Inguletsky and Sukha Balka ore-dressing complexes. The privatization of ore-dressing complexes was suspended in October, 1998. The Fund issued an order last Tuesday, under which the sale of shares will be resumed after the end of the checkup. The privatization of ore-dressing complexes is expected to be done within the framework of the state privatization program for 1999.

South Caucasus & Central Asia

Rus-Georgian Intergov't Commission Meets

· Georgian State Minister Vazha LORDKIPANIDZE arrived in Moscow today to participate in the third

European Republics

Kinakh Appointed First Deputy Prime Minister

· Ukrainian President Leonid KUCHMA on Monday appointed Anatoly KINAKH as Ukraine's first deputy prime minister. KINAKH, who is chairman of the Union of Industrialists and Entrepreneurs, will replace Vladimir KURATCHENKO. After his speech at the July 28th government meeting, in which he called for correcting the policy of reforms and reviewing Ukraine's relations with international financial organizations, KURATCHENKO was dismissed. His comments embarrassed the government at a time of tense negotiations with the International Monetary Fund (IMF). Specifically he said Ukraine should return to a Soviet-style planned economy and reexamine its relations with the IMF. KINAKH, a former shipbuilder, served earlier as the president's industrial policy adviser and as deputy prime minister overseeing industrial policy issues in 1995 to 1996.

US-Ukraine To Boost Military Cooperation

· Ukrainian Defense Minister Alexander KUZMUK and US Defense Secretary William COHEN on Saturday solved all questions concerning Ukraine's participation in the peacekeeping operation in Kosovo. KUZMUK said Kiev is expecting NATO to specify its tasks and objectives. COHEN commended Ukrainian President Leonid KUCHMA's position on the settlement of the Kosovo crisis and stressed the importance of Ukraine's participation in the peacekeeping operation. He said America will provide the necessary assistance to the Ukrainian peacekeeping contingent. In particular the US Navy is prepared to provide one of its ships to escort a Ukrainian landing ship carrying the peacekeepers. COHEN noted that over 100 joint events have helped to boost military cooperation between Ukraine and the US. The US has rendered $3.4 million worth of assistance to the Ukrainian military. The money was used to modernize the Yavorov range in the Lvov region

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session of the Russian-Georgian intergovernmental economic commission, which will be held at the on August 4th. LORDKIPANIDZE, on the sidelines of the bilateral commission, will meet with Prime Minister Sergei STEPASHIN. During the visit, he will also confer with Federal Security Service director and Security Council secretary Vladimir PUTIN and presidential chief of staff Alexander VOLOSHIN. They will discuss issues that are critical to the vital interests of Russia and Georgia and consider of ways of solving problems which are a major concern to the two countries. LORDKIPANIDZE is expected to bring up the implementation of earlier agreements and the development of trade and economic relations.

Kazakh To Supply Gas To Kyrgyzstan

· Kazakhstan and Kyrgyzstan have reached an agreement on gas supplies for Kyrgyzstan. The agreement was signed by the joint stock company Kyrgyzgaz and Kazakhstan's Khimmontazh. Kazakh gas will cost Kyrgyzstan, "about 25 percent less than Uzbek gas and only one fourth of payments will be made in hard currency," Vladimir LIKHACHEV, deputy director of Kyrgyzgaz, told said on Monday. LIKHACHEV said his company plans to negotiate a similar deal with Turkmenistan and request larger gas supplies from Kazakhstan.

Uzbekistan Receives Wage Increases

· According to a decree signed by President Islam KARIMOV, a rise in wages for Uzbekistan became effective on August 1st. The decree also authorizes an increase in pensions and students' stipends. Social allowances have been raised by 1.4 times. The document also sets the minimum wage at 1,750 sums a month. Minimum pensions and allowances to people who are invalids since childhood have been increased to 3,340 sums. Disabled people who have not worked will get an allowance of 2,025 sums. This is the second increase in wages, pensions, allowances and stipends this year.

CIS Industrial Output Rising

· According to the CIS Interstate Statistics Committee, industrial output was up in eight of the 12

Commonwealth of Independent States (CIS) in the first six months of the year. The biggest increases were recorded in Tajikistan at 7.9 percent, Belarus with 7 percent, and Uzbekistan with 5.6 percent. Industrial output was up 2.8 percent in Armenia, 2 percent in Azerbaijan, and 3.1 percent in Russia. Ukraine posted a 0.2 percent increase, while Georgia registered a 0.6 percent rise. Industrial output fell by 4.1 percent in Kazakhstan, 10 percent in Kyrgyzstan, and 15.2 percent in Moldova. The CIS Interstate Statistics Committee released no statistics for Turkmenistan. During the same period, gross domestic product (GDP) was up 5. 6 percent in Azerbaijan, 4.9 percent in Armenia, 2 percent in Belarus, 1.7 percent in Georgia, 3.8 percent in Uzbekistan, and 0. 4 percent in Kyrgyzstan. Ukraine reported a drop of 3 percent. GDP was up 1.3 percent in Tajikistan in the January-May period. Kyrgyzstan, Moldova, and Belarus reported the highest inflation rates in June at 7.9 percent, 7.2 percent, and 7.1 percent respectively. Inflation was 4.8 percent in Kazakhstan in July, 1.9 percent in Russia, and 0.1 percent in Ukraine. Prices in Armenia remained unchanged in the month, while Azerbaijan, Georgia, and Tajikistan reported deflation of 0.8 percent, 1.4 percent, and 1.6 percent, respectively.

CIS Trade Should Continue To Grow

· Kyrgyzstan's President Askar AKAYEV said the potential of trade between the Commonwealth of Independent States (CIS) has not been fully tapped. The President during a national television broadcast on Saturday said that trade between CIS countries has been shrinking lately. For example, Kyrgyzstan's trade turnover with Russia, Kazakhstan and Uzbekistan has fallen from 80 percent to half of the republic's total volume of trade. AKAYEV believes that this is a very big drop and Kyrgyzstan, "will do everything it can to restore economic ties." He cited government forecasts which say that the national currency, som, will remain stable for the next year, which should have a positive effect on economic relations with CIS states. The President said a creation of a free trade zone could boost trade in the CIS.

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

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