DAILY REPORT ON RUSSIA

AND THE FORMER SOVIET REPUBLICS

INTERCON INTERNATIONAL USA, INC., 725 15th STREET, N.W., SUITE 908,

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Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Wednesday, June 26, 1996


Russian Federation

Politics

Visa Denied to American Banker

· Boris JORDAN, head of the investment firm Renaissance Capital Group and perhaps the best-known foreign banker in Moscow, has been denied a visa to re-enter Russia, without explanation or any indication of when he will receive new approval, reported Tuesday's Wall Street Journal. A Renaissance spokesman blamed "unscrupulous financial interests" for the revocation of JORDAN's visa as he was leaving the country from Moscow airport in May. JORDAN, a 30-year-old US citizen of Russian descent, has refused to comment. He opened CS First Boston's Moscow office in 1992, making millions for the company in the early years of economic reform and privatization, and establishing himself as a pioneer foreign investor in Russia. Last year, JORDAN left CS First Boston to form Renaissance with the backing of one of Russia's largest and most powerful banks, Oneximbank. Since 1992, JORDAN has managed some $950 million in direct-investment transactions, about $600 million with Renaissance, as well as directing some $1.6 billion in portfolio investments, $400 million of it for Renaissance. JORDAN is also credited with helping Oneximbank win share-for-loans auctions last year, including obtaining control over large stakes in metals giant Norilsk Nikel and the Novolipetsk Metallurgical Combine. According to today's Financial Times, the Novolipetsk deal is at the root of JORDAN's visa problems. When it acquired a stake in Novolipetsk and "pressed for more financial information to be disclosed and auditors to be appointed," Renaissance came into confrontation with the Soviet-era managers of the plant, said FT. JORDAN has been trying to assert the shareholder rights of investors, who own some 44 percent of the plant, said the paper. Today's Nezavisimaya Gazeta also

cited JORDAN's work with Novolipetsk as a possible reason for his visa troubles. The Russian paper suggested that he had run afoul of the powerful metallurgical lobby, whose best known representative, it noted, was former First Deputy Prime Minister Oleg Soskovets. It appears that JORDAN, despite his prestige and financial resources, stepped on the wrong toes and has, at least for now, been shut out of the Russian market. This incident illustrates the fact that the nexus between politics, economics, and business in Russia remains strong and cannot be ignored.

Judges Criticize Justice Minister

· The All-Russian Council of Judges has passed a vote of no-confidence in Justice Minister Valentin KOVALYOV, and so notified the Russian president and all judicial branch agencies, reported Moskovskiye Novosti (No. 25, 23_30 June 1996). The Council resolution points to an "emerging disruption in administering justice in the country." It noted that a number of courts have effectively stopped scheduling the hearing and consideration of cases. The state budget debt to the courts in the first quarter of 1995 was 149 billion rules, while in the first half of 1996 it exceeded 250 billion. Russia's courts received only 16.5 percent of the sum required for administrative, office, transport, and other current expenses. The community of judges insists that the function of financing and administrative support of the courts be transferred from the Justice Ministry to the Russian Supreme Court Judicial Depart

Today's News Highlights

Russia

Privatization Cttee Change

Capital Flight Spotlight

Labor Minister Speaks Out

Intercon Analysis:

Power Struggle in the Kremlin

European Republics

CEENIS Fund Launched

Foreign Investment in Ukraine

Transcaucasia & Central Asia

Offshore Oil in Georgia

Politics-Economics-Business

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Wednesday

June 26 1996

Intercon's Daily

ment. KOVALYOV, was appointed to his post in January 1995, after the former Minister quit for health reasons. A former law professor at an interior ministry institute and communist parliamentary deputy, KOVALYOV found favor with the YELTSIN administration through his unconditional support of the government's policy in Chechnya.

Personnel Change in Privatization Cttee

· Last week, Russian Prime Minister Viktor Chernomyrdin signed a directive dismissing first deputy chairman of the State Property Committee Aleksandr Ivanenko from his post "in connection with another assignment," and appointment of Farid Gazizullin, reported today's Kommersant Daily. IVANENKO, who served in the Committee since the initial stages of privatization, has reportedly been offered a position in a major Russian company. Gazizullin is the former deputy premier of Tatarstan and chairman of the Republic's property management committee.

Economy

Ruble = 5,070/$1.00 (NY rate)

Ruble = 5,083/$1.00 (CB rate)

Ruble = 5,064|5,102/$1.00 (buy|sell rates)

Labor Minister Speaks Out

· Russian Labor Minister Gennady Melikyan told reporters today that wage arrears rose by four percent in the last few months, reaching 29,600 billion rubles, reported Itar-Tass. The minister noted that debts at the federal level were almost paid out, but pointed out that the debts of local budgets amount to some five trillion rubles. He also estimated that there were 2.7 million registered unemployed in the country. However, he admitted that, if calculated by international standards, the number of unemployed would exceed eight million. In fact, he said, Russia has "a high enough level of jobless. The present-day task is not to top this level," he emphasized.

Melikyan tied the first round presidential election results to the payment of wage arrears in the regions. He cited as examples Moscow, St. Petersburg, and the Sverdlovsk Regions, where arrears were fully paid on the eve of elections. Melikyan said that, from his recent trips around the country, he had concluded "social miscalculations of reforms turned to be higher than the admissible level." He believes that the Russian people do not want to return to the old system, but that the government must improve the social situation in the country by strengthening "political will and firmness in collecting taxes to the federal budget," Melikyan also announced that he was ready to leave his government post, as part of a Cabinet reshuffling aimed at improving the implementation of social policies and YELTSIN's re-election chances. "It is expedient to replace the heads of the social bloc in the cabinet from the political point of view. Figuratively speaking, the government needs new blood," the minister noted, according to Itar-Tass.

Intercon Financial Spotlight


Melikyan tied the first round presidential election results to the payment of wage arrears in the regions. He cited as examples Moscow, St. Petersburg, and the Sverdlovsk Regions, where arrears were fully paid on the eve of elections. Melikyan said that, from his recent trips around the country, he had concluded "social miscalculations of reforms turned to be higher than the admissible level." He believes that the Russian people do not want to return to the old system, but that the government must improve the social situation in the country by strengthening "political will and firmness in collecting taxes to the federal budget," Melikyan also announced that he was ready to leave his government post, as part of a Cabinet reshuffling aimed at improving the implementation of social policies and YELTSIN's re-election chances. "It is expedient to replace the heads of the social bloc in the cabinet from the political point of view. Figuratively speaking, the government needs new blood," the minister noted, according to Itar-Tass.

Melikyan tied the first round presidential election results to the payment of wage arrears in the regions. He cited as examples Moscow, St. Petersburg, and the Sverdlovsk Regions, where arrears were fully paid on the eve of elections. Melikyan said that, from his recent trips around the country, he had concluded "social miscalculations of reforms turned to be higher than the admissible level." He believes that the Russian people do not want to return to the old system, but that the government must improve the social situation in the country by strengthening "political will and firmness in collecting taxes to the federal budget," Melikyan also announced that he was ready to leave his government post, as part of a Cabinet reshuffling aimed at improving the implementation of social policies and YELTSIN's re-election chances. "It is expedient to replace the heads of the social bloc in the cabinet from the political point of view. Figuratively speaking, the government needs new blood," the minister noted, according to Itar-Tass.

According to data released by the Russian investment firm Alliance-Menatep, the dollarization of the Russian economy has dropped significantly, reported Business Segodnya (1996, No. 22). In early 1995, hard currency deposits accounted for 33 percent of total deposits in Russian banks. By the end of 1995, that figure fell to 19 percent, and currently hard currency deposits are 17 percent of the total. However, the newspaper noted that the capital outflow is a result of Russians' attempts to minimize the effects of an unstable ruble and that the economy's further de-dollarization is possible only as the ruble continues to strengthen.

Melikyan tied the first round presidential election results to the payment of wage arrears in the regions. He cited as examples Moscow, St. Petersburg, and the Sverdlovsk Regions, where arrears were fully paid on the eve of elections. Melikyan said that, from his recent trips around the country, he had concluded "social miscalculations of reforms turned to be higher than the admissible level." He believes that the Russian people do not want to return to the old system, but that the government must improve the social situation in the country by strengthening "political will and firmness in collecting taxes to the federal budget," Melikyan also announced that he was ready to leave his government post, as part of a Cabinet reshuffling aimed at improving the implementation of social policies and YELTSIN's re-election chances. "It is expedient to replace the heads of the social bloc in the cabinet from the political point of view. Figuratively speaking, the government needs new blood," the minister noted, according to Itar-Tass.

Politics-Economics-Business

When you need to know it as it happens

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Wednesday

June 26, 1996

Intercon's Daily

Intercon Analysis:

Power Struggle in the Kremlin

Last week, a power struggle was played out between two opposing forces within the upper echelons of the Kremlin leadership. Top government figures and senior members of YELTSIN's campaign staff—CHERNOMYRDIN, CHUBAIS, FILATOV—were supported by President Boris YELTSIN and gained ascendancy over others in the government and security forces—SOSKOVETS, BARSUKOV, KORZHAKOV. It was a struggle between political cultures, one group more comfortable working to win re-election for YELTSIN by managing public opinion, and the other more comfortable working in the old Soviet style, Kremlin maneuvers who did not trust the electoral process and so turned to back room machinations, intrigues, and power plays. It was also a struggle between groups representing different capital resources and scales of influence which some found repugnant. The political approach has prevailed for now, possibly signaling a new path for the Russian leadership. However, Lebed is not of this camp, he has used the political opening created by this struggle to ascend to a position of power and influence. But to what end? Some maintain that he could prove to be an even more dangerous figure than those he has attempted to replace.

The two YELTSIN campaign officials, (LISOVSKY and YEVSTAFYEV) detained on Wednesday night, were indeed working to win the election through political savvy, prolific advertising, liberal use of the media, and all other means available to them. Chubais denied that the $500,000 found in their possession were campaign-related funds. This should not be taken at face value. However, it is not implausible that the cash, reputed to found on them, was destined for private accounts, rather than re-election purposes. One thing is clear, the public mention that funds of this magnitude were being used for the election violates one of the holy of holies of Russian politics—the disbursement of large amounts of unaccounted-for cash for the election, far exceeding campaign spending limits.

These detained men were professionals in their fields and contributed to a decisive strategy to gain the youth vote for YELTSIN. They combined for

rock concerts, presidential appearances, and a get-out-the-vote campaign which utilized the slogan, "Vote or You Lose." The slogan built on YELTSIN's main re-election theme which was that he represented a progressive Russia where opportunities exist and the Communists represented a repressive past. It exhorted the youth of Russia to turn out to vote for their future, a future with possibilities and opportunities, instead of allowing older citizens to decide the course of the country by choosing to return to a time when choices were limited. Apparently, this worked and turnout was relatively high. YELTSIN prevailed—if only by a few percentage points—over his opponent, who was heavily favored just months before the first round. However, the favorable showing in the first round was not sufficient to convince such men as KORZHAKOV that another chance should be taken with the uncertain electoral process.

The media again played a critical role in the struggle between these two forces. Its new position as watchdog in society and its power was underestimated. The two detainees telephoned powerful `friends' at the offices of LogoVAZ bank and the affair was ultimately dissolved in the light of public scrutiny. One of these `friends' was Gusinsky of Most Bank (an enemy of KORZHAKOV), who instructed his NTV independent television network to broadcast throughout the night about the arrests and their possible implications. It also appears that it was NTV that informed LEBED of the arrests and hastily arranged an interview with him at 4:30 am. CHUBAIS gave a press conference and denounced the arrests and their perpetrators, demanding release and accountability, and the firing of KORZHAKOV, et al.

Aleksandr LEBED's part in this struggle remains murky. What is known is that he seized the moment created by the split between the two camps for his own personal advantage. While he bills himself as an outsider to both groups, he attempted to intervene to have the two detained men released and admonished those who were responsible. Lebed, at the very least, skillfully put himself in a powerful position to remove the true rivals for his desired predominate power position. Cleverly, he insisted that he was merely protecting the political process, ensuring that elections would take place. Despite having accepted a top position in the

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Politics-Economics-Business

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Wednesday

June 26 1996

Intercon's Daily

YELTSIN government, he has yet to openly endorse the president for re-election. He also went ahead with a scheduled meeting with his challenger Communist ZYUGANOV. He has positioned himself to serve either candidate as his priority—to create a strong and stable Russia by any means—transcends politics, personalities, and perhaps even the norms of democratic political society and the rights of independent states.

The current losers in the struggle stepped away fairly quietly and their ultimate fate still remains an open question. Korzhakov, ever the true loyalist to the President, publicly pledged his continued support. His position has been lost, but the question of his continued influence is far from settled. Reports from the Kremlin also indicate that Yeltsin may be experiencing problems adjusting to the absence of Korzhakov and may even have lost some of his equilibrium. KORZHAKOV views himself as a true patriot and this is surely true. What is now in dispute by the President is not the intentions, but the vision and the methods to accomplish the ends. KORZHAKOV was an ineffective patriot in the new days of media campaigns and public perception management in the fledging Russian democracy.

All of this represents merely one act in a larger struggle, with more episodes to follow. It is not certain how much power LEBED will acquire or who will fill the shoes of the dismissed men. Acting chiefs have been put in charge of the FSB, SBP, and Defense Ministry and it is unclear that these places will be filled permanently before the runoff on July 3. For now, the temporary replacements represent links to the men who were replaced. Whether YAVLINSKY will be brought on board, or such men as CHUBAIS and FILATOV will be returned to Cabinet or administration posts, is yet to be seen. However, we should expect a more reformist Cabinet composition in the future and this is positive. Those represented in the LogoVAZ office the night of the White House detentions have won the election day battle, especially NTV and Most Bank's Chairman Gusinsky and LogoVAZ and ORT's (Channel 1) Berezovsky, both political opponents of KORZHAKOV. Their contacts with Lebed remain a much-speculated-upon question.

However LEBED's true colors might be better understood with his recent suggestion that his former superior Rodionov become the new Defense Minister, as well as his dramatic removals of Security Council staff members and some top army generals. In the last years of the USSR, Rodionov's activities to suppress peaceful demonstrators in Georgia and Azerbaijan led to his removal from active command by GORBACHEV and his exile to the Frunze Military Academy. This may be the most telling sign of where Lebed may seek to go. If he continues to burn and pillage his way through the Kremlin, he might fall on the slick ice of the Kremlin hallways and lose those powers which he has quickly acquired.

We may be observing a movement away from small cadres of insiders with blanket portfolios towards a more structured government, where portfolios are well-defined and officials are charged with specific, limited responsibilities, and made accountable. As the era of coalition politics enters the Kremlin, one must carefully follow the actions of Lebed, for the transition from the military to politics is not easy, especially for a former military commander in the Dnestr republic, where force was considered a more appropriate problem-solving option than the politics of Moscow with a free and open media.

Whether a former General, accustomed to issuing orders, can find himself capable of grappling with issues of corruption and crime, in many ways endemic to both the past and present systems, remains an open question. Certain problems will not be suitable to a spetsnaz response. In Russia today, the scale and magnitude of the challenges defy any military's resources. After all, the scale of the corruption incensed even KORZHAKOV himself and it may be this very magnitude which fells this new security czar, if he attempts a blitzkrieg assault without an army to support his mission. Whether he can learn from his President, or decides to trust only himself, might be the difference between enjoying a measure of success or becoming the flame which grew bright but was extinguished by is own intensity.

Paul M. Joyal

Politics-Economics-Business

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Wednesday

June 26, 1996

Intercon's Daily

European Republics

CEENIS Property Fund Launched

· Overseas Private Investment Fund (OPIC) President Ruth HARKIN signed a finance agreement today at a press conference in Washington for the CEENIS Property Fund, a $240 million fund which will invest in real estate and infrastructure projects in 23 states of the former Soviet bloc. The Fund will invest in industrial and commercial properties, such as distribution centers, light manufacturing, and retail outlets. According to Steven J. GREEN, Chairman and CEO of the Fund, the CEENIS's three main goals are: to attract US firms interested in the region, but unable to enter due to inadequate locations and insufficient capital; to assist companies established in the region who are looking to expand, but require additional working capital; and to develop large industrial parks to serve the need of all firms. GREEN stated that CEENIS aims to be "part of the development of the economies in these countries and very much wants to be part of future growth." The Fund is privately managed by Auburndale Properties of Wellesley, MA, and capitalized by private, institutional investors, including Washington, DC-based MCI and Bank of Boston. In addition to its capital investment, MCI will act as the telecommunications and technical advisor for the Fund. CEENIS has established offices in Poland and Romania, and all former Soviet republics are eligible for investment, except Azerbaijan. To date, the Fund has raised $40 million in equity investment, enabling it to draw $80 million in OPIC-guaranteed funds.

Foreign Investment in Ukraine Tops $1 Bln

· Ukrainian Deputy Trade Minister said on Tuesday that foreign investment in Ukraine has topped $1 billion for the first time since independence, reported Reuters. Speaking to a conference on private investment sponsored by the World Bank and Ukrainian government, Igor PODOLEV attributed the increase in investment to "accelerations in the process of reforming Ukraine's economy." Deputy Prime Minister Roman SHPEK said that 20 percent of the

investment came in the form of funds, and the remainder as equipment and technology. The US accounts for the highest percentage of the total, with 22.9 percent. Germany is second with 17.3 percent. Investment levels were 35 percent higher in 1995 than 1994, with 24.4 percent of the total in the buying and selling of goods and the food industry with 14.5 percent. SHPEK said that the country seeks about $40 billion in foreign investment. In a June 25 editorial in the Journal of Commerce, Vladimir KVINT pointed out that foreign investment in Ukraine has been held back by laws restricting foreign ownership of companies in some sectors to 49 percent, including the vital insurance and banking industries. However, he writes, President Leonid KUCHMA took a step forward this spring when he signed a decree giving potential foreign investors, "a direct route to the privatization process, instead of access only to the secondary markets."

Ukraine Creates Free Trade Zones

· Ukrainian Customs Commission head Leonid Derkach told reporters on Tuesday that Ukraine has decided to set up nine free trade zones, reported Xinhua. The nine zones include: Sivash, Europe-Center, Chop-Internation, Kerch-Taman, Azov, Yavorov, Zhovkva, Adzhalyk, and Dzharylgach. Derkach said the customs service has an important role to play in the establishment of these trade zones, which aim to attract foreign capital and introduce advanced technology into the country.

Transcaucasia and Central Asia

Georgian Offshore Oil Reserves

· Georgian International Oil Corp. (GIOC) president Gia CHANTURIA told local television in Tblisi today that the country has offshore oil reserves of 200 million to 300 million barrels, reported Reuters. CHANTURIA said he was quoting estimates provided by US Chevron Corp. The reserves, which lie along the Georgian coast of the Black Sea, are likely to be tendered to international oil companies for exploration and development, he said.


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

Alycia S. Draper, Rebecca Martin, Contributing Editors

Daily Report on Russia is published Monday-Friday (excluding holidays), by Intercon International, USA. Subscription price for Washington, D.C. Metro area: $895.00 per year. A discount is

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