DAILY REPORT ON RUSSIA

AND THE FORMER SOVIET REPUBLICS

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

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

Thursday, June 27, 1996

Russian Federation

Politics

Lebed's World: Back to the Past

· Interfax today printed excerpts of a document entitled, "A New Approach to National Security Issues," attributing it to newly-appointed Russian Security Council secretary Aleksandr Lebed. The report outlines a series of tough political and economic measures. Among other things, it called for: a larger state role in the economy, the creation of financial-industrial groups (FIGs) with close ties to the government, the imposition of strict control over foreign economic relations and price formation in the state-run sector, increased control over the export of raw materials, and taking a more cautious approach to borrowing from international financial organizations. "In addition, it is necessary to classify foreign states by their friendliness toward Russia, further toughen visa and passport controls for their citizens, and introduce a special economic and legal status for them when they stay in Russia," said the document. It also proposed that Russian intelligence activities be reoriented toward promoting economic interests. It suggested the "uninterrupted monitoring of the situation on the world markets of armaments, aviation, and space equipment," and the gathering of information on the leading international financial institutions, major transnational corporations, banks, and investment companies. It also said that the intelligence services should cooperate with Russian companies working abroad for espionage purposes.

Comment: These views represent LEBED's vision that big government is the solution to Russia's problems and that controlling foreigners and foreign companies involvement in Russia will produce positive results for the country's development. This position justifies a huge intelligence establishment by purporting that Russia's production and develop

ment problems can be solved through industrial espionage. This is a rehash of the approaches, taken by the Communist Party during the Cold War through the KGB, which failed to help the Soviets achieve economic parity with the West. Methods that limit contacts and differentiate between friends and enemies without addressing worker productivity and production efficiency will never achieve the stated goals or bring prosperity.

LEBED denied that the report, cited by Interfax, should be linked to him because it was prepared by his predecessors in the Security Council apparatus. He said that a new national security concept is still in the process of being drafted.

During an address to the second conference of the Union of Patriotic and National Organizations of Russia, LEBED stated that the activities of several religious sects in the country constituted "a direct threat to national security," reported Itar-Tass. "We have three officially recognized religions—the Orthodox Church, Islam, and Buddhism," he stressed. Lebed described sects of the Aum Shin Rikyo-type as "a nasty thing, bringing nothing but corruption to the people and ruin to the State as a whole." In his opinion, such sects must be outlawed. The Russian National Security Advisor also expressed concern about the Western cultural expansion in Russia and the dominance of Western films on Russian television. He drew attention to the fact that soap operas and scenes of violence could be seen constantly

Today's News Highlights

Russia

Zyuganov Issues Warning

Econ. Minister Speaks Out

Vneshekonombank Audit

Neste to Open Stations

Transaero-AA Codeshare

European Republics

Kuchma Wants Referendum

Transcaucasia & Central Asia

Protests Over Almaty Airport

Kazakh Caspian Oil Estimates

Politics-Economics-Business

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Thursday

June 27, 1996

Intercon's Daily

on TV. "They are mostly produced by western film companies," he said.

Zyuganov Warns of Campaign Misconduct

· Russian Communist Party leader and presidential contender Gennady ZYUGANOV has sent a letter to Russia's Central Electoral Commission and both houses of parliament accusing President Boris YELTSIN of "illegal" campaign tactics, alleging numerous violations of the election law, reported United Press International (UPI). One of his main allegations concerns a perceived government effort to ensure a high voter turnout. "Leaders of the regions of the Russian Federation have been given direct instructions to attain a victory for Boris YELTSIN in the second round of the election at any price," said ZYUGANOV, adding that "orders" had been given "to ministers and department heads and certain armed forces groups" as well, according to UPI. The letter also accused the Kremlin of forcing banks and business to contribute to YELTSIN's campaign, of buying votes with handouts of cash, and of ordering slanted coverage by the state-run and independent media. "Such illegal practices in preparation for the election and in the pre-election campaign can bring into question the very results of voting for Mr. YELTSIN," Reuters quoted the letter as saying. ZYUGANOV is apparently hinting that the Communists will not accept the results of the July 3 vote. He has already been preparing his supporters for the supposed contingency that the vote is rigged, telling them to respond by holding a nationwide strike. On June 12, Intercon outlined several possible scenarios for a Communist takeover of power, in the event of a ZYUGANOV loss, that had been circulating in Russia for some time. This letter seems to be a dangerous precursor to such a move.

Possible Fates of Korzhakov and Barsukov

· Today's Komsomolskaya Pravda reported that Aleksandr Korzhakov continues to occupy his Kremlin office, despite having been dismissed as chief of the Presidential Guard Service (SBP) six days ago. "It has become known that, in the near future, Korzhakov will possibly be given an important State post—it is not ruled out that he will become a Deputy Chief of the Presidential Administration, while his friend [former Federal Security Service head] Mikhail Barsukov is pegged for a tour of duty in far-off Brussels. Over there, he will possibly

represent Russia in NATO's military structure," said the newspaper. Former Defense Minister GRACHEV was expected to receive the NATO post.

Economy

Ruble = 5,092/$1.00 (NY rate)

Ruble = 5,097/$1.00 (CB rate)

Ruble = 5,078|5,116/$1.00 (buy|sell rates)

Economics Minister Speaks Out

· Russian Economics Minister Yevgeny Yasin told a news conference on Tuesday that the presidential election has had an unexpected impact on the economy, reported Itar-Tass. The anticipation of the Communist comeback is affecting all sectors of the economy, he said. Yasin cited increasing difficulties in tax collection, a deteriorating payment crisis, and a continuing decline in industrial production. He also said that capital flight remains a concern. "The spending on purchases of the foreign currency has abruptly increased recently, we did not expect this," he said, adding that it is hoped that all these problems will resolve themselves after the July 3 presidential runoff. The focus of the government's economic policy should be on tax collection, encouraging investment, resolution of the payment crisis, and ensuring legality, stressed YASIN.

Vneshekonombank to Undergo Audit

· The Russian Central Bank and the Finance Ministry will carry out an audit of Vneshekonombank, which is responsible for servicing Russia's foreign debt and MinFin domestic government bonds, in the next few days, reported Interfax on Wednesday. The audit, which is expected to take a month to complete, will cover the bank's activities from 1992 to 1995.

Russia to Set up Trust Account

· Before the end of the year, the Russian government will deposit another $2 billion in the trust account with the Bank of England to be distributed between London Club-member banks, which have extended credits to the former USSR, a Finance Ministry spokesman told today's Kommersant-Daily. Moscow transfers about $95 million into this account monthly and it currently holds $1.285 billion, he said. The spokesman believes that the settlement of London Club debt problems will help revive the investment process and help Russian banks get a stable source of liquid financial resources.

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Thursday

June 27, 1996

Intercon's Daily

Business

Neste to Open Gas Stations

· Finnish energy and chemicals group Neste Oy announced today that it had purchased five sites along key roads in St. Petersburg and would begin building gas stations on them in August, reported Reuters. The first three 24-hour stations are expected to be completed in December and the last two in May 1997. Neste currently has 13 Russian stations, all in the Vyborg-St. Petersburg area, as well as some 50 stations in the Baltic states.

Transaero to Codeshare with Amer. Airlines

· Russian independent airline Transaero and AMR Corp.'s American Airlines have signed a letter of intent to set up a codesharing program from April 1, 1997, reported Reuters on Wednesday. "American Airlines will place its AA designator code on Transaero transatlantic flights between Moscow and Chicago," Transaero deputy chairman Grigory GURTOVOI told Reuters. He also said that Transaero would place its code on selected American Airlines flights between Chicago and Dallas, Los Angeles, Orlando, Seattle, and Washington. The Moscow-based Transaero began service to Los Angeles last week, and plans to introduce flights from Moscow to Orlando in September.

Transcaucasia and Central Asia

Armenian Pres. Election Date Set

· The Armenian Central Electoral Commission announced on Wednesday that the country's presidential election will be held on Sunday, September 22, reported the Associated Press (AP). The current term of President Levon TER-PETROSYAN, elected in October 1991, expires November 11. TER-PETROSYAN will seek re-election, backed by the ruling Armenian National Movement.

Uzbek Vehicle Fuel Conversion JV Signed

· Uzbek President Islam KARIMOV signed two joint venture agreements on Capital Hill Wednesday, with San Antonio, TX-based ExproFuels, a division of Exploration Company, Memphis, TN-based American Engineering and Tennessee governor Don SUNDQUIST. The joint ventures will convert some 20,000 cars, trucks, and buses to run on natural gas, as well as build, own, and operate a network of 360 refueling stations and assist Uzbekistan in operating a manufacturing site to produce conversion systems for domestic use and export. "Uzbekistan will be able to rechannel its hard currency away from the purchase of leaded gasoline to other needs. The air in Tashkent will be cleaner and the country less reliant on fuel imports," Tom GOSE, President of ExproFuels was quoted in a company press release as saying.

World Bank Loan for Kazakhstan

· The World Bank on Tuesday approved a $180 million Financial Sector Adjustment Loan (FSAL) for Kazakhstan to help build a sound and efficient banking sector, said a Bank press release. The program seeks to deal with old problem loans and problem banks, and to improve the banking environment in order to reduce operating risks. It will accomplish this by strengthening the framework for secured lending, fostering the institutional development of banks, facilitating interbank payments and liquidity management, and ensuring competition on an even playing field. In 1996-97, the loan will provide an estimated seven percent of the country's total external financing needs, resulting in part from necessary reforms in the financial sector, according to the World Bank. It will build upon a $180 million Structural Adjustment Loan, approved by the Bank for Kazakhstan in 1995.

European Republics

Kuchma Calls for Referendum on Constitution

· Ukrainian President Leonid Kuchma on Wednesday ordered that a nationwide referendum be held on a draft constitution on September 25. Voters will approve or reject a draft constitution that was given preliminary approval by Parliament early this month, but now appears months or even years away from passage. Since June 4, legislators have debated the 161-article draft piece by piece, but have approved only 13 articles. Dmitro Tabachnik, Director of the Presidential Office, said the order was signed by Kuchma at the request of the National Security Council, according to Xinhua. He said the Council believed that any further delay in the adoption of the constitution threatens the nation's internal stability and democratic reform. Tabachnik accused some political forces in the parliament of having no desire to work constructively and of refusing to consider the president's proposals.

When you need to know it as it happens

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Thursday

June 27, 1996

Intercon's Daily

Protests over Lufthansa & Almaty Airport

· Workers at Kazakhstan's Almaty airport and aviation trade union activists have sent an appeal to Kazakh President Nursultan Nazarbayev, calling for the government to reverse its decision to place the Almaty airport under the control of Germany's Lufthansa, reported Itar-Tass. Prime Minister Akezhan KAZHEGELDIN signed a decree on June 4 transferring control of the state-owned Almaty airport to Lufthansa, reported the Associated Press (AP). A subsidiary of the German company was expected to manage the entire airport for a three month period, during which the airport would be privatized, with 51 percent of shares going to Lufthansa and the rest to Kazakh companies. The airport was previously under the control of the country's ailing state carrier Kazakhstan Aue Zholy. Lufthansa has agreed to pay all the airport's debts, estimated at $22.5 million, and invest $15-16 million in its reconstruction after privatization. Asea Brown Boveri has been commissioned to both rebuild the terminal at a cost of $12 million and rehabilitate the runway over a 12-month period.

However, the staff of the Almaty airport have refused to comply with the government decision to turn over management to Lufthansa and has lodged a protest against the decision, said Itar-Tass. The protest was supported by the Central Trade Union Committee of the Aviation Industry. On Wednesday, the other 27 Kazakh branch trade unions expressed full solidarity with the workers of the Almaty airport. The appeal by airport personnel and union leaders argued that Lufthansa was not in any position to run the airport, having itself incurred an estimated $131.6 million in losses during the five months of 1996 in its losing battle to compete with Britain and France's national airlines. It contended that turning over control of the airport to Lufthansa amounted to handing over its profits to foreigners. "The move is no other than an attempt made by the domestic government which is logically inexplicable in terms of law to render financial assistance to foreign airlines," said the appeal.

The Kazakh government countered this argument by pointing out that the existing runway in the Almaty airport has been in use for over 28 years, and construction on the second runway, which already involves debts worth around $12 million has been halted. Moreover, the level of services and comfort provided to passengers at the Almaty airport needs to be improved, it said. Lufthansa intends to pay off these debts, as well as fund the development of the airport over the next five years, government officials say. Nonetheless, some local observers suggested to Itar-Tass that airport personnel could gain the support of some top government bodies, because Lufthansa plans to raise prices for services, bringing them in line with world prices, which means that the cost of air tickets and cargo transportation will increase by 2-3 times. This would render travel by air inaccessible to the majority of the Kazakh people.

Kazakh Caspian Crude Estimates at 10 bln

· Kazakhstan announced on Wednesday that a seismic survey of its Caspian Sea continental shelf has discovered estimated crude reserves of 10 billion tons and two trillion cubic meters of natural gas. "These results were received in June as a result of the work of specialists in the consortium set up to drill and explore for oil and gas on the Caspian Shelf," Vice President of KazakhstanCaspiyShelf (KCS) Edgye NURKHAIDAROV was quoted by Reuters as saying. KCS is the operator of an exploration consortium composed of Italy's Agip, British Gas, British Petroleum, Norway's Statoil, US Mobil Corp. and Shell, and France's Total. The Caspian Sea Consortium was formed in 1993 to survey Kazakh offshore reserves. Early next year, the consortium will finish its work and production-sharing agreements currently under negotiation will be signed. The first drilling is expected to take place between mid-1997 and early 1998 and first production will come onstream by 2003. NURKHAIDAROV said investment of a further $20-25 billion will be required by 2003 to bring production onstream and complete a full infrastructure of oil terminals, refineries, and pipelines.

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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Daily Report on Russia is for the exclusive use of the subscriber only. Reproduction and/or distribution is not permitted without the expressed written consent of Intercon. Daily Report on Russia Ó copyright 1996, Intercon International, USA.

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