There is a simple way of changing character encoding of XTerm. You have to be root and execute following:

# gconftool -s /apps/osso/xterm/encoding -t string UTF-8

In my case I wanted to replace UTF-8 with CP1251, so it looks like tis:

# gconftool -s /apps/osso/xterm/encoding -t string CP1251

You can change this way to desired encoding. To check current encoding use:

# gconftool -g /apps/osso/xterm/encoding