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

Friday, June 7, 1996

Russian Federation

Politics

Luzhkov Running Mate Hit by Bomb Blast

· At about 8:00am this morning Moscow time, Valery Shantsev, the Prefect of Moscow's Southern district was wounded in a bomb blast as he walked out the door of his Olympiisky Prospekt apartment, reported Itar-Tass. SHANTSEV, his wife, an aide, and a woman walking her dog near the entrance to the building were injured in the blast. Shantsev is running as deputy mayor on the ticket with incumbent Yuri Luzhkov in the June 16 Moscow mayoral elections, being held simultaneously with the presidential poll. Russia Interior Ministry sources told Itar-Tass that the radio-controlled explosion must have been an assassination attempt against Shantsev. Interfax cited Moscow Mayor Yuri LUZHKOV as describing the attack as "clearly" political. City officials told Reuters that the bombing was an attempt to sabotage Moscow's election, which LUZHKOV is widely expected to win.

Economy

Central Bank Protests Payment Order

· The Russian government has provoked anger within the Central Bank and concern among Western economists by ordering the Bank to transfer five trillion rubles (about $1 billion) of its 1994 profits to the federal budget. A law on the transfer was passed on Wednesday, approved by the State Duma and Federation Council and signed by President Boris YELTSIN all in one day. The law says the transfer must be made by June 10. The funds will be used to cover allocations promised to regional and local budgets and to pay teachers' wages and defense enterprises. Central Bank officials opposed the law as reportedly did the Duma finance committee. Central Bank first deputy chairman Sergei

ALEKSASHENKO said that the law is unconstitutional, contradicting the Law on the Central Bank, which grants it independence from the president and parliament. Bank officials will discuss on Saturday whether to challenge the law in court. Furthermore, ALEKSASHENKO said the law would require the Bank to print more money and is, therefore, inflationary. "This money does not in fact exist," he is quoted in today's New York Times as saying. Presidential economic advisor Aleksandr Livshits rejected Central Bank assertions that the transfer would boost inflation, but admitted that there will be a slight emission amounting to about one percent of the federal budget expenditures, said Itar-Tass. However, experts interviewed by Reuters in Moscow said the measure evidences the struggle between the government's budgetary needs in an election year and Bank's tough anti-inflationary policies. Western economists told the NYT that the move is likely to "encourage inflation, undermine the autonomy of the Central Bank and erode Russia's credibilty with the [international] monetary fund."

Yasin Laments Elections Affect on Budget

· Russian Economics Minister Yevgeny Yasin held a press conference Wednesday, outlining the key negative consequences "caused by macro-economic stabilization," reported Thursday's Nezavisimaya Gazeta. Among them he mentioned "the difficult situation with regard to wages and non-payments." According to the minister, the economic decline is continuing in the country (over the first four

Today's News Highlights

Russia

Study on Regional Disparities

Gazprom Buys Stake in NTV

Tender for Disposal Facility

Kearney Expands Moscow Off.

European Republics

Ukraine Lowers Discount Rate

Transcaucasia & Central Asia

Major Kazakh Aluminum Project

Teck Wins Kazakh Gold Tender

Loans for Kyrgyzstan

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June 7, 1996

Intercon's Daily

Ruble = 5,053/$1.00 (NY rate)

Ruble = 5,046/$1.00 (CB rate)

Ruble = 5,027|5,065/$1.00 (buy|sell rates)

the idea of regional reforms, rather than a focus on a single Russian reform plan, said the paper. The results of the study are based on the materials of the Russian State Statistics Committee, the Russian Government's Economic Situation Analysis Center, the Finance Ministry, the Central Bank, the Association of Russian Banks, territorial statistical agencies, and public opinion polls. Its authors concentrated for the most part on regional differences in "living standards" (using not only figures reflecting the population's nominal and real incomes, but also the subsistence minimum and income disparities).

It concluded that Russia has three distinctly different types of regions. (1) "Capital city" regions (Moscow, St. Petersburg, Murmansk, and Tyumen Oblasts, Tatarstan, Krasnoyarsk Krai, and others) that have a formidable financial sector and high nominal incomes. (2) Regions that have attained "economic sovereignty;" they have a relatively low level of incomes, compensated for by low prices (Kostroma, Smolensk, Nizhny Novgorod Oblasts, and others). (3) Economically underdeveloped regions with below average prices and low per capita incomes (Yaroslavl, Tambov, Perm Oblasts).

The survey also looked at regional disparities in terms of the development of financial systems, arguing that this indicator was just as important as disparities in living standards. They found that, essentially, only Moscow can be listed as a "dynamic" region characterized by extremely fast growth in the numbers of new banks. In most other regions, the number of banks has lately remained unchanged, while in a few others, the number of commercial banks is actually decreasing.

Finally, the study outlines three groups according to financial support from the federal budget: regions with a high degree of support (Kostroma, Orel, Kemerovo); regions with medium support (Moscow, Leningrad, Bryansk, and Rostov); and regions with little support (Kursk, Volgograd, and Orenburg).

The study concludes that regional economic disparities are growing rapidly in Russia and this growth will continue at least the year 2000. Furthermore, the study predicts that this process will be increasingly dependent on the attributes of a given region with eight types noted: "capital city" type, export-ori

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months of 1996 GDP has fallen by three percent). Investment plunged by 10 percent. Yasin said that the main macroeconomic problems facing the country at this stage are the budget situation and the collection of taxes. In his words, tax arrears since the beginning of this year have reached 60 trillion rubles. This extremely high figure indicates the seriousness of crisis of the Russian tax system, and a situation where, given the widespread political uncertainty before the June 16 election, Russian enterprises are reluctant to give up funds to the government. The presidential elections have caused serious adjustments to the budget policy. According to Yasin, 50 percent of this year's budget revenue has been spent to pay wages, pensions, and benefits, while last year these budget items accounted for 27 percent of overall spending. "This year the influence of politics on the economy turned out to be much greater than expected," which has manifested itself in enterprises' reluctance "to pay taxes before the election," NG cited the Minister as saying.

Study Shows Regional Disparities

· A survey, conducted by the independent Russian Expert Institute and the Center for Russian and East European Studies of Birmingham University as part of the EU's TACIS program, examining economic disparities between Russian regions, was released on Wednesday, reported Kommersant-Daily on Thursday. The study not only found that disparities among regions are wide and widening, but indicated a new preoccupation in the West with

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ented, rich in natural resources, actively carrying out reform, pursuing policy of "soft" transition to a market, crisis-hit (or depressive), dependent on the federal budget, remote northern or eastern region.

Business

Gazprom Buys Stake in NTV

· Russian gas monopoly Gazprom signed a contract with Moscow's Most Group on Thursday to purchase a stake in the NTV television network, reported Itar-Tass. The size of the stake and terms of the deal were not disclosed. The NTV press service told Itar-Tass that the purpose of the sale was to finance a project, known as NTV Plus, to create five-channel satellite television. NTV chose Gazprom after considering various investment bids, including some from Western companies.

Tender for Chemical Weapons Disposal Project

· At the end of June, US companies will be invited to participate in a tender for the drawing up of a project and construction of a chemical weapons disposal facility in Russia, reported Itar-Tass on Thursday, citing the Defense News. The project, estimated to cost $400 million, will be financed from funds allocated under the NUNN-LUGAR program. After a US firm is chosen as a general contractor, it will conclude agreements with subcontractors in Russia to build an environmentally-sound disposal facility in the Southern Urals.

Kearney Acquires Cannon Assoc.

· Global management consulting firm A.T. Kearney on Thursday announced that it acquired the consulting staff of Cannon Associates, a management firm based in Moscow and Washington, DC, in an effort to increase Kearney's presence in the emerging markets of the NIS, said a Kearney press release. Since its founding in Washington in 1990, Cannon has been providing assistance to large global corporations seeking international strategy development, especially their trade and investment in Russia and other former Soviet republics. It has worked extensively with major multinational corporations to develop a presence and expertise in those markets. Cannon will serve as head of Kearney's newly-formed market development and client service group, related to work in emerging countries. Combined with Cannon, Kearney will have a staff of 45 in Moscow, the largest of its type in Russia today.

European Republics

Ukraine Discount Rate Down

· Ukraine's central bank reduced its discount rate to 50 percent from 63 percent, effective today, reported Reuters, citing bank spokesman Dmytro RIKBERG. Monthly inflation fell to 0.7 percent in May, the lowest monthly increase since 1991. The Ukrainian government has forecast annual inflation at 34-40 percent in 1996, from 181 percent in 1995.

New Ukrainian Currency Seen by Year-End

· Ukrainian central bank chairman Viktor Yushchenko said on Thursday the introduction of a permanent national currency will become possible in the second half of this year, reported today's Nezavisimaya Gazeta. However, certain economic and budgetary problems must be addressed first. "There are three options for the introduction of new money in Ukraine. The easiest one is the purely technical revaluation of the nominal currency unit," such as was undertaken in Poland, he said, according to the paper. The second option is confiscatory monetary reform, or the exchange of two-thirds of the cash and non-cash money supply. The third option is non-confiscatory reform, which envisions the denomination and launch of a new currency unit. Yushchenko said the last option is preferable, but that it will require drastic changes in budget policy. The karbovanets was introduced in 1992 as an interim currency. Ukraine has long planned to introduce a permanent currency, the hryvnia, but has been sitting on the new banknotes for two years because the country lacks the financial and economic stability to carry out the monetary reform.

Transcaucasia and Central Asia

Major Kazakh Aluminum Project Planned

· The Window for Investments in Kazakhstan

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international conference, organized by the Adam Smith Institute, was held in London this week. The conference brought together several Kazakh government ministers with representatives from many large international companies and financial institutions. Kazakh Prime Minister Akezhan Kazhegeldin signed agreements in London Thursday for a $1.2 billion project aimed at reviving the Kazakh aluminum industry, reported today's Financial Times. The UK-based Trans-World Group is leading the project, which is also expected to include the participation of US aluminum group Reynolds Metals, Kazakhstan's Yermak power plant, Trans-World's Russian subsidiary Intec Engineering Corp., Swiss-Swedish ABB group, and Germany's Krupp, said the report. The project calls for the construction of a new $750 million aluminum smelter and for the expansion of annual capacity at the Pavlodar aluminum complex from 1.1 million to two million tons at a cost of $450 million.

Teck Consortium Wins Kazakh Gold Tender

· The Kazakhstan government has conditionally granted the right to develop the Vasilkovskoye gold deposit in northern Kazakhstan to a mining consortium composed of Canada's Teck Corp., the London-listed Bakyrchik Gold Plc, and Canada's First Dynasty Mines (UK) Ltd, according to a Princess Resources Ltd. press release. Princess, together with the UK's Lonrho, was a participant in the tender for the development rights. The Teck group has until July 1, 1996 to finalize negotiations on the Vasilkovskoye license, or the Kazakh government reserves the right to recommence negotiations with other tender participants, said the release. The Teck consortium will pay $89 million in staged payment, if its bid is finally accepted, according to today's Financial Times. The Vasilkovskoye deposit has estimated reserves of nearly 14 million ounces of gold, which is worth about $5 billion at today's prices.

ADB and OECF Loans for Kyrgyzstan

· The Manila-based Asian Development Bank (ADB) on Thursday approved a $30 million

concessional loan to partly fund a project to rehabilitate and upgrade the electricity and heating infrastructure of Kyrgyzstan, reported Xinhua. The project calls for retro-fitting a co-generation plant, rehabilitation of district heating systems, and improving power transmission and distribution facilities. Attention will also be given to gradually correcting the pricing of electricity and to setting up a social safety net for vulnerable groups. The $72 million project will be co-financed by the International Development Association ($20 million), the Danish International Development Agency ($8.6 million), the Nordic Development Fund ($6.8 million), and the Swiss government ($4.5 million).

Japan's Overseas Economic Cooperation Fund (OECF) has signed an agreement in Bishkek on extending a 5.5 billion yen ($50 million) credit to Kyrgyzstan to finance the modernization of the country's main airport, reported Itar-Tass on Thursday. The 30-year loan, repayable after a grace period of 10 years, has an annual interest rate of 2.7 percent. The money will be used to renovate the Manas Airport, located about 30 km from Bishkek.

Updates

Chechnya: Three days of Russian-Chechen peace talks ended unsuccessfully on Thursday in Ingushetia's capital of Nazran. The two sides were trying to build on an agreement signed in Moscow by Russian Prime Minister Viktor Chernomyrdin and Chechen separatist leader Zelimkhan Yandarbiyev on May 27, but failed to make progress on several key issues, including the withdrawal of Russian troops from Chechnya and the disarming of Chechen rebels, the holding of Chechen parliamentary elections on June 16, and the political status of the separatist republic. The sides did agree, however, to resume negotiations on Monday and for a limited exchange of prisoners. Under the May 27 agreement, a cease-fire was to go into effect on June 1, but sporadic fighting has persisted with both sides blaming the other for attacks.

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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