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, September 19, 1996

arrears. The Defense Ministry now owes more than six trillion rubles (about $1.2 billion) in overdue salaries. The leader of the military trade unions told Itar-Tass that the trade unions have given Prime Minister Viktor CHERNOMYRDIN until October 1 to take the "necessary measures" or a general strike would occur. Meanwhile, workers servicing nuclear submarines at the Severodvinsk naval base in the Russian far north held a one-day warning strike and plan to stage a larger strike on Monday, reported Reuters. The financial crisis in the Defense Ministry seems to be finally bringing both military and civilian workers to a breaking point and threatening the country's security. Top officials are starting to get involved. Security Council chief Aleksandr LEBED has been lobbying the government to increase expenditures for the military in 1997 and Defense Minister Igor RODIONOV has stopped collecting his salary to show solidarity with unpaid servicemen.

Economy

Ruble = 5,400/$1.00 (NY rate)

Ruble = 5,382/$1.00 (CB rate)

Ruble = 5,362|5,402/$1.00 (buy|sell rates)

Intellectual Property Rights Case Heard

· Russia's State Anti-Monopoly Committee has held the first hearing on the violation of intellectual property rights and business reputations, said Wednesday's OMRI, citing Itar-Tass. The Committee found that Russia computer firm Bit Software guilty of spread

Russian Federation

Politics

Yeltsin to Cede Nuclear Button During Surgery

· Russian President Boris YELTSIN signed a decree today that names Prime Minister Viktor CHERNOMYRDIN as acting head of state, with authority over the country's nuclear arsenal, while the President undergoes heart surgery. When a date for the operation has been set, another decree still must be signed to formally hand over the reins to the premier.

This decree is meant to quell growing confusion over the transfer of presidential powers during YELTSIN's incapacitation. Various politicians, including Communist Party leader Gennady ZYUGANOV, have been calling for YELTSIN to cede control over the so-called "nuclear button." The press has been speculating heavily about whether CHERNOMYRDIN, presidential chief-of-staff Anatoly CHUBAIS, or Security Council chief Aleksandr LEBED is winning the struggle to govern various key policy areas. While today's decree helps to clarify the nuclear issue, it is unlikely to halt the media talk or the political maneuvering. Moreover, it does not give a specific starting date or duration for the power transfer.

Potanin Named IBRD Representative

· Russian President Boris YELTSIN today appointed First Deputy Prime Minister Vladimir POTANIN as Russia's representative to the World Bank's International Bank for Reconstruction and Development (IBRD), reported RIA Novosti. POTANIN replaces former Deputy Prime Minister Vladimir KADANNIKOV in the post.

Defense Ministry Workers Demonstrate

· More than 500 civilian workers of the Defense Ministry began a protest action in Moscow today to demand payment of several months worth of wage

Today's News Highlights

Russia

World Bank Problem Loans

Telecoms Expects $1 Billion

ARCO, Lukoil Joint Venture

Siemens in Metal Deal

European Republics

Belarus Political Struggle

Moldova Grain Harvest

Transcaucasia & Central Asia

Japanese Delegation in Baku

Consortium in Copper Tender

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Thursday

September 19, 1996

Intercon's Daily

Thursday Tidbit

Peter Pease, the task manager for the two projects, told IPS that most of the problems were of a political nature. "The three main factors that have held up these loans are the imposition of new export taxes, changes in duties on imported equipment and difficulties with transferring cash from the Ministry of Finance," he said. Some of these problems, he said, can be traced to the International Monetary Fund (IMF), which pressured Moscow to impose taxes to increase revenues. Already two oil companies—Purneftegaz and Kogalymneftegaz —have withdrawn from the World Bank program. Four others—Varyaganneftegaz, Yuganskneftegaz, Megion-neftegaz, and Tomskneftegaz—still hope to borrow from the Bank.

Telecoms to Get $1 Billion in 1996

· Russian First Deputy Communications Minister Aleksandr Krupnov said on Wednesday that Russia's telecommunications sector is likely to receive some $1 billion worth of investment in 1996, compared to $700 million in 1995, reported Itar-Tass. He also announced that the Association of Federal Cellular Communications Network Operators had begun a major cellular communications project aimed at integrating all NTM-450 networks already in place and under construction into a unified system with nationwide coverage.

Association chairman Vyacheslav Gurkin told reporters he expected the network to service one million subscribers by 2005. He said that some 60,000 Russians currently use cellular communications services. However, an article in today's Financial Times estimated that there are 100,000 cellular phone subscribers in Russia today and that the number will grow to 1.2 million by the year 2000.

Business

Lukoil/ARCO Form Joint Venture

· Los Angeles-based Atlantic Richfield Company (ARCO) announced today the signing of a summary shareholders agreement and detailed financing terms to form a joint venture with Russian oil conglomerate Lukoil, said an ARCO press release. The agreements, signed in Moscow, call for Lukoil to hold a 54 percent stake and ARCO to have 46 percent of the LUKARCO joint venture. LUKARCO was formed to invest in upstream oil and gas opportunities in Russia and other former Soviet republics. Joint

In Moscow for a

big concert this week, US music

giant Michael Jackson was received

by several important Russians. Meeting with

his "friend," the controversial former head of the

President's bodyguards Aleksandr Korzhakov,

JACKSON was presented with an antique saber which KORZHAKOV said was from his private collection and

was the type of weapon that Tsar Nicholas II gave to Russian army officers as a distinction for bravery. Thursday's Izvestia pointed out that, "Jackson is not a Russian and not an officer, while Korzhakov is not an emperor,"and quoted a Customs spokeswoman as saying that the agency will investigate how Korzhakov had obtained the antique weapon. Although JACKSON

reportedly was not allowed to bring the gift

saber out of Russia, he was seen today

walking around Warsaw in a mock

Russian army officer's

uniform.

ing false information which damaged the reputation of a competitor. The hearing creates an important legal precedent. Recently, some Russian commercial banks, in particular Inkombank, have argued that their reputations were badly hurt by incorrect reports in the Russian media.

Russia High on World Bank Problem Loan List

· A new World Bank internal task force, called the Quality Assurance Group (QAG), has identified 50 problem loans worth $13.6 billion that have been approved over the past nine years, with Brazil and Russia having the highest proportion of problem projects, according to the Inter-Press Service (IPS). Disbursements of all these loans have been slow or, in a few cases, suspended. Most of the problems relate to poor management or legal obstacles either within the Bank itself or in the borrower country, according to the QAG documents, obtained by IPS. The QAG group used 10 indicators, including financial performance, procurement progress, and management performance, to flag problem projects.

The list indicates that six loans to Russia, accounting for a third of the $6.4 billion in loans approved by the Bank for Moscow since 1990, are in trouble. Topping the list were two huge loans to Russia totaling $1.1 billion to revamp oil exploration in western Siberia. Part of the money had been earmarked to reduce environmental problems.

When you need to know it as it happens

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Thursday

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Intercon's Daily

investments could amount to $5 billion over 18 years, with ARCO providing most of the financing.

LUKARCO will begin operations with the signing of definitive agreements and upon receipt of government approvals, board of directors approval, and the fulfillment of other conditions. The new venture is expected to participate in a number of major projects, including the Caspian pipeline consortium and the development of Caspian off-shore oilfields in Azerbaijan and Kazakhstan.

"The agreement is without precedent in the practices of cooperation of Russian and foreign oil companies. It opens up broad prospects for joint work," said Lukoil president Vagit Alekperov.

"The LUKARCO joint venture passed a significant milestone today with the signing of these documents. We are very pleased that this joint venture will establish the basis for long-term association with Lukoil. LUKARCO will allow both companies to invest aggressively in areas of significant oil and gas potential. Work is already underway to identify specific investments to start the operation phase of our work," said ARCO Chairman and CEO Mike BOWLIN.

Intercon reported in September 1995 and March 1996 that ARCO purchased convertible bonds from Lukoil for $250 million and $88.8 million, respectively. On April 6, the bonds were converted into voting shares, giving ARCO a total of 8.8 percent of Lukoil's voting shares and approximately eight percent of its total equity.

Siemens in Metals

· An international consortium, led by Germany's Siemens AG, will rebuild a new rolled steel factory in the city of Stary Oskol in Russia's Belgorod region on the Ukrainian border, reported Itar-

Tass on Wednesday. The project will cost about DM 400 million (about $270 million), DM 180 million of which will be paid by Siemens. This is expected to become a key project in modernizing and developing Russia's metallurgical industry. The new investment will enable the Stary Oskol plant to produce high-quality steel, mainly for the car industry. The project will be financed by a consortium of German banks and insured by the Hermes company.

European Republics

Belarus President-Parliament Battle Rages

· The president of Belarus has apparently been showing some muscle this week in the latest moves in the continuing struggle for power between the executive and legislature. On Tuesday, Belarus President Aleksandr Lukashenko reiterated his intention of holding a referendum on which version of the constitution to adopt on November 7 instead of during the parliamentary by-elections on November 24, the date suggested by parliament and set by the central electoral commission. In addition, Finance Minister Pavel Dik told parliament that the president had banned the funding of the elections, citing him as saying that: "In accordance with the promises given by me to the Belarussian people, the elections and the referendum cannot be financed

When you need to know it as it happens

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Thursday

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Intercon's Daily

from the republican budget," said Itar-Tass. Lukashenko has repeatedly opposed the by-elections, which will fill about 60 empty seats in parliament.

In addition, the chairman of the Belarus Constitutional Court on Wednesday accused LUKASHENKO of putting wire taps on the telephones of senior officials, reported today's Financial Times. Judge Valery TIKHINIA said that he had been told his home and office telephones were bugged by a sympathetic official in the president's personal security service, it said. To date, 16 presidential decrees have been deemed unconstitutional by the Court.

US-Ukrainian Commission Established

· Ukrainian President Leonid KUCHMA and US Vice President Al GORE today issued a joint statement saying they have agreed to create the US-Ukraine Binational Commission to forge closer ties. The commission will be headed by KUCHMA and GORE, and be similar to the US-Russian (GORE-CHERNOMYRDIN) commission. The two will preside over work to be carried out by four committees—Foreign Policy, Security, Trade and Investment, and Sustainable Economic Cooperation—which will start work immediately, and meet regularly each year. Currently, Ukraine is the third leading recipient of US assistance, receiving $330 million in grants and $675 million in bilateral credits in 1996.

Moldovan Grain Harvest Dismal

· As a result of drought, Moldova's 1996 grain harvest is expected to total only 1.6-1.7 million tons, down from 2.38 million tons in 1995, reported Reuters, citing a senior Agriculture Ministry official. Ministry figures put the 1996 wheat harvest at about 750,000 tons. The country is expected to import some 100,000 tons of wheat from Kazakhstan, and more from other states, including possibly the US.

Transcaucasia and Central Asia

Japanese Delegation in Azerbaijan

· At a ceremony in Baku on Wednesday, a Japanese

National Oil Corp. delegation presented Azeri President Geidar Aliyev with an official letter from the Japanese government outlining an insurance proposal, plans for joint projects, and an offer of humanitarian aid, reported United Press International (UPI). Japan has offered a credit line to provide insurance for its companies interested in prospecting and extracting oil in Azerbaijan. The Japanese firm Itochu recently acquired a 3.921 percent stake in the international consortium developing three Azeri oilfields in the Caspian Sea.

In related news, the Japanese government has decided to extend the application of its system of state insurance for foreign trade to Ukraine and Azerbaijan, effective September 25, reported Itar-Tass. The decision is apparently based on the improving economic conditions in the two countries, as well as the growing interest in the Japanese business community in large-scale investments in these economies. The Japanese insurance system was applied only to Russia following the breakup of the Soviet Union. Japan took Kazakhstan under its "insurance umbrella" in April 1993 and Turkmenistan in February 1996, said Itar-Tass.

Swiss/US/Kazakh Group Wins Tender

· A consortium of Switzerland's Glencore AG, US Phelps Dodge Corp., and Kazkommerzbank, outbid Britain's TransWorld Group in a tender for 85 percent of Kazakhstan's Balkhashmys copper plant, announced the Kazakh government today. The consortium pledged to invest $650 million in the plant by the year 2005, raise copper output to 180,000 tons per year in 1997, and pay off the plant's $90 million debt, according to Reuters. In the past, the facility accounted for 40 percent of the copper output of Kazakhstan, which holds on the world's third largest copper reserves. It produced about 125,000 tons of copper cathode in 1995, but its August 1996 output slipped to 6,800 tons. A tender for 29 percent of Balkhashmys was won by the Swiss company Cam Finance in December, but the Kazakh government canceled the deal, saying its terms were not met.

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