DAILY REPORT ON RUSSIA

AND THE FORMER SOVIET REPUBLICS

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Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Friday, June 14, 1996

Intercon Special Report:

Presidential Election Preview

On Sunday, June 16, some 105 million eligible voters in Russia will have the chance to cast their vote for one of 10 candidates in the first post-Soviet Russian presidential elections. Approximately 97,000 polling places across Russia's 11 time zones will be open, and stations will also be set up in cities in some former Soviet republics and elsewhere to allow Russian citizens living abroad to vote.

One candidate must receive over 50 percent of the vote in order to be elected outright, or a runoff election will be held, which is considered likely. The second round of voting will be held within two weeks after Russia's Central Electoral Commission (CEC) announces the official results of the first round, which it has two weeks to determine. The second round is expected to take place on either July 7 or July 14 (although there have also been calls for a weekday vote on July 3) and will feature the two top vote-getters from the first round. The candidate who gains the most votes in the runoff wins the presidency, but voters can also cast their ballot against both candidates. In the case that neither candidate wins, the elections will be held again at a later date.

Incumbent Boris YELTSIN was elected in June 1991, before the breakup of the Soviet Union, to head the Soviet Russian Republic with 57.3 percent of the vote, promising democratic and market reforms. However, after five years of difficult economic transition, which has left a large percentage of the population impoverished, especially the elderly, and witnessed soaring crime rates and declining production, many Russians have lost the stomach for reform. The war in Chechnya has also affected the attitude of many voters. This presidential election has shaped up into a battle between the continuation of the current reform course under YELTSIN or a

return to some of the old socialist policies and a slowing down of reforms (or perhaps a complete scrapping of them) under Russian Communist Party head Gennady ZYUGANOV.

The Main Contenders

YELTSIN, 65, a populist reformer saw his popularity plummet in the last few years, particularly following the December 1994 Russian invasion of Chechnya. Until about six months ago, he was practically an absent ruler. Two bouts of heart trouble put him in the hospital for long periods in 1995 and his public appearances were so infrequent as to raise speculation that he was not himself running the country. In 1996, however, he came out fighting and has shown some of his old political savvy and energy. He has made considerable efforts toward settling the Chechnya conflict and spectacular promises to Russia's downtrodden populations and industries. His ratings in the polls have risen from a low of eight percent to nearly 40 percent, in some cases, rivaling his closest challenger ZYUGANOV. He has pointed to ZYUGANOV as an old-style Communist who intends to return the country to state ownership, central economic planning, and the one-party totalitarianism of the past, representing himself as the only hope for continued reform and democracy.

ZYUGANOV, 51, a lackluster former Soviet Communist party functionary, has risen on a wave of popular discontent with falling living standards, rising crime, and lost national self-esteem. He has

Today's News Highlights

Russia

Intercon Special Report:

Presidential Election Preview

Ruble Chart

Grachev and NATO

World Bank Loan for Law

Government Bonds Scandal

Transcaucasia & Central Asia

Azerbaijan Protests US Aid

Kazakhstan Joins IDB

Japanese Loan for Uzbekistan

Politics-Economics-Business

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Friday

June 14, 1996

Intercon's Daily

made attempts to distance the new Russian Communists from the party's Soviet past. He has managed to unite most of the Communist forces in the country, and some of the nationalists, behind him and has been buoyed by his parties dominant position in the Russian parliament. ZYUGANOV has taken pains to portray himself as a new-style Communist, who will retain some of the features of the emerging market economy, while reintroducing some social welfare policies and restoring Soviet-era stability and security to Russia. He does not, however, seem to have a clear program for Russia's future, the economic manifesto forwarded only last month offers vague plans and few specifics. He proposes a refocusing away from the West and its economic and political ideas and more emphasis on traditional Soviet allies and former Soviet republics. This image has been tarnished, in part, by the statements of some of his staff and others in his party, as well as his cooperation with more hard-line Communists. These colleagues advocate the renationalization of industry, the elimination of political enemies, the end of private property, and other ideas, which often contradict ZYUGANOV's official campaign platform.

Other Candidates

The flamboyant ultranationalist Vladimir ZHIRINOVSKY, 50, won some seven million votes in the 1991 Russian presidential elections, when he was a relative unknown, and is expected to place third in Sunday's vote. Since that time, his Liberal Democratic Party (LDP) has surprised analysts and defied opinion poll results in the 1993 and 1995 parliamentary elections, winning 22 and 11 percent of the vote, respectively. Recent opinion polls put him with 5-10 percent of electoral support, but these numbers could be deceiving, as he has a tendency to pull in support through strong TV campaigning in the last weeks before the election. ZHIRINOVSKY seems determined to win a position in the government from this election, one way or another. He has already attempted to make deals with the two front-runners, YELTSIN and ZYUGANOV, promising to tell his backers to vote for them in return for a ministerial post. The offers were rejected, but negotiations are likely to begin anew after the first round, and a good showing for ZHIRINOVSKY will strengthen his bargaining position.

Grigory YAVLINSKY, 44, an economist and liberal reformer has seen his Yabloko party's support among Russian voters drop in the last few year; in the 1995 State Duma elections, the party received less than seven percent of the party list vote compared to nearly eight percent in 1993. Polls show he could receive 5-10 percent of the presidential vote.

Maverick General Aleksandr LEBED, 46, an Afghan war veteran and the popular former commander of Russia's 14th Army in Moldova's separatist Dnestr region, is expected to take third or fourth place on Sunday. His electoral platform is entitled "Ideology of Common Sense" and his main electoral slogan is "Truth and Order." "I shall put things in order both in the economy and in the country in general," promises Lebed, stressing at the same time, that his main goal is "to create order out of the chaos, existing in Russia today." However, the gruff general has no experience in politics and has scared some with his open admiration of Chilean dictator PINOCHET.

World-renown ophthalmologist Svyatoslav FYODOROV, 69, has presented himself in this election as a businessman, who has been able to adapt to the emerging market economy in an honest, hard-working manner. FYODOROV is popular with young people, who believe his successful managerial and entrepreneurial skills would be well applied to a government post. In 1995, he founded the Workers' Self-Government Party and was elected to the State Duma. He is expected to receive some three percent of the vote.

YAVLINSKY, LEBED, and FYODOROV made an unsuccessful attempt to unite into a "third force" and consolidate their support in the election under one candidate, but none would agree to step aside for the others and the effort fizzled. All have been courted by both YELTSIN and ZYUGANOV, offered ministerial posts in exchange for backing and all refused, but the bargaining and maneuvering is expected to resume between the first and second election rounds.

The other four contenders—former Soviet President Mikhail GORBACHEV, pharmaceuticals magnate Vladimir BRYNTSALOV, obscure economist Martin SHAKKUM, and world famous weightlifter Yuri VLASOV—do not have significant support and are not expected to be a factor in the elections.

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Intercon's Daily

Ruble = 5,037/$1.00 (NY rate)

Ruble = 5,053/$1.00 (CB exch. rate)

Ruble = 5,034|5,072/$1.00 (CB buy|sell rates)

registered at the factory and are believed to have been stolen, according to police documents. Nonetheless, the bonds were traded freely with some being bought by Salomon Brothers, CS First Boston, and Citibank. The owners of the bonds were informed by Vneshtorgbank, the custodian of Russian government bonds, that some of their bonds were stolen property and had been frozen, pending an Interior Ministry investigation. The foreign banks say they have not received an adequate explanation of what is occurring or the potential consequences. Salomon Brothers, which has already sold over $700 million of the MinFin bonds internationally, has halted sales, and Deutsche Morgan Grenfell and Bank of America have ceased quoting prices in the bonds. In addition, Russian officials are reportedly looking into other possible bond thefts. The news has threatened the credibility and undermined the security of Russian government securities, causing panic among Russian officials. MinFin bonds were issued to compensate Russian organizations for hard-currency deposits seized by the government. But Western investors entered the market and bought up some $2 billion of $9 billion in bonds issued.

World Bank Legal Reform Loan

· The World Bank on Thursday approved a $58 million loan for an $89.4 million project to improve the performance of Russia's legal system in areas key to the functioning of a market economy, according to a Bank press release. The project consists of five technical assistance components to support the following activities: drafting economic laws, decrees, and regulations at the federal level and on a pilot basis in Sverdlovsk and Orel Oblasts; development of legislative classification and codification guidelines; finance of grants for equipment and improvement of programs at up to five law schools; training of judges of general jurisdiction and commercial courts; and other high priority projects such as the development of future programs. The project will be implemented over a four-year period. The World Bank will finance 65 percent of the cost, with the Russian government contributing $28.4 million (32 percent), and the Russian Foundation for Legal Reform, regional administrations, and other project beneficiaries contributing $1 million each.

Russia Seeks Telecom Investment

· A Russian delegation, attending the Americas'

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Russian Federation

Politics

Grachev Meets with NATO Chiefs

· Russian Defense Minister Pavel Grachev attended a meeting in Brussels today with NATO defense ministers to discuss cooperation between Russia and NATO. In a sign of the warming relations between Russia and NATO, GRACHEV agreed to a permanent exchange of officers that will allow NATO military officials to hold permanent positions on Russia's general staff, according to United Press International (UPI). Grachev told the defense chiefs that Moscow is ready for "deeper and closer contacts" with NATO, but remains opposed to the alliance's planned eastward expansion.

Economy

Russian Debt Market Hit by Bond Theft

· Russia's debt market was thrown into confusion this week, following news that many government bonds in circulation were stolen, reported the Financial Times today. Some $100 million in Russian Ministry of Finance bonds were suspended this week because of uncertainty over ownership, and major Western investment banks and their clients could face significant losses. The action stems from the discovery that, in June 1994, at least $1.29 million worth of Russian government bonds were sold to a person, purporting to be an agent for the Grozny Chemical Factory, but the bonds were never

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Telecom forum in Rio de Janeiro this week, said that Russia is seeking at least $40 billion worth of investment to improve its telecommunications industry, reported Xinhua on Thursday. Russia may manage to raise $27 billion dollars from the international financial market, officials said. The Russian delegation includes deputy Communications Minister Yuri Tolmachev and 15 top business executives.

regional targets in the Zeravshan valley, and two other exploration joint ventures in Kyrgyzstan are estimated to be in the area of 14.4 million ounces.

Kazakhstan Joins IDB

· On Thursday, Kazakh Prime Minister Akezhan Kazhegeldin and Islamic Development Bank (IDB) President Ahmed Muhammed Ali signed a memorandum of understanding on Kazakhstan's membership in the IDB, reported Itar-Tass. Under another agreement, the IDB granted Kazakhstan technical assistance in the form of a $298,000 credit for the construction of a Karaganda-Akmola highway. Ali told reporters in Almaty that the IDB has three priorities in financing assistance to Kazakhstan: development of the infrastructure of Kazakhstan's future capital, Akmola; export-import operations between Kazakhstan and other IDB member-states; and promotion of training of personnel for the newly-independent state.

Japanese Loans for Uzbekistan

· Japan's Overseas Economic Cooperation Fund (OECF) will extend a 6.102 billion yen (about $56 million) credit to the government of Uzbekistan to create a company to upgrade the country's railways and passenger trains, reported Itar-Tass and Reuters today. Last year, the OECF granted a 12.7 billion yen credit to Uzbekistan for the development of telecommunications services.

Updates

Chechnya: Polls opened in war-torn Chechnya today to allow the republic's 470,000 eligible voters to cast ballots for a Russian president and a regional parliament. Chechen rebel and Russian negotiators agreed earlier this week that parliamentary elections should be postponed until after the withdrawal of Russian troops, but the Chechen government insisted that elections go ahead. The Russian government said it would not interfere with the Chechen leadership's wishes, but rebels were angry and vowed to disrupt the voting.

Transcaucasia and Central Asia

Azerbaijan Protests US Aid Restrictions

· Azeri President Geidar Aliyev called US Ambassador to Baku Richard Kauzlarich to his office on Thursday to protest a congressional condition on US aid to Azerbaijan, reported United Press International (UPI). Existing US legislation, passed during the seven-year war between Azerbaijan and Armenia over the ethnic Armenian enclave of Nagorno-Karabakh, prohibits direct US government aid to Baku. An amendment to the US foreign policy law, adopted this week by the House of Representatives, would allow the resumption of aid to Azerbaijan, but require it to distribute a portion of the aid to Nagorno-Karabakh. ALIYEV warned the CLINTON Administration that the congressional move, if adopted, would damage US-Azeri relations.

Nelson Sale to Finance Central Asian Ventures

· Canada's Nelson Gold Corp., Ltd. announced on Thursday a private share placement aimed at raising C$11.5 million (about $8.4 million) to finance its gold mining operations in Tajikistan and Kyrgyzstan, said a company press release. Nelson Gold has a 49 percent joint venture interest in, and is manager and operator of, a developed mining and milling complex and an approximate 3,000 square kilometer exploration area in the Zeravshan valley in Tajikistan. The Jilau and Taror gold deposits which are under development by Nelson have a combined total resource of 6.7 million ounces. Production from the Jilau deposit commenced in the first quarter of 1996 and total production for the year is forecast to be 47,000 ounces. A total resource base including

Paul M. Joyal, President, Editor in Chief Clifton F. von Kann, Publisher Ellen Shapiro, Principal Editor

Alycia S. Draper, Rebecca Martin, Contributing Editors

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