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

Thursday, September 26, 1996

power plants, and contamination from nuclear submarines slated to be decommissioned.

According to an article in today's Moskovsky Komsomolets, LEBED "wants power, pure and simple" and any tactical means is considered good if it helps achieve this strategic goal. The paper points out that LEBED's popularity has increased during his time in the Kremlin, mainly due to his peace initiative in Chechnya. It cited the latest poll by the All-Russian Center for the Study of Public Opinion which found that LEBED topped a list of the most trusted politicians in Russia. Some 34 percent of respondents said they trusted LEBED most, while next on the list were Communist head Gennady ZYUGANOV (15 percent) and YELTSIN (12 percent). Twenty-five percent said they didn't trust any politicians. However, the paper sees as dangerous the fact that rather than having an organized public support base behind him, LEBED has only some former members of the 14th Army staff and Congress of Russian Communities "fanatics," such as the "unbalanced economist" Sergei GLAZYEV.

Chernomyrdin Takes Action for Military

· Russian Prime Minister Viktor Chernomyrdin told a government meeting today that he will sign a resolution on creating a special Cabinet commission on the issues of budget financing in 1996 and 1997, and its first task will be to address the current financing of the defense ministry. The commission will be headed by First Deputy Premier Vladimir POTANIN.

Russian Federation

Politics

Chernomyrdin Calls for Government

· Russian Prime Minister Viktor CHERNOMYRDIN today called for unity among Cabinet ministers in light of President Boris YELTSIN's absence and impending heart surgery. He stressed that he would not abide by political infighting or lobbying in parliament by ministers seeking to advance their interest in the debate over the 1997 budget. "If members of the government start playing any kind of game there, in the State Duma, I warn them that whoever they are, whatever their rank, they will not work here," Interfax quoted him as saying.

YELTSIN's operation has been postponed for 6-8 weeks, adding a two month recovery period, this means he won't be back in the Kremlin full-time until early next year. US cardiologist Michael DEBAKEY, speaking on CNN today, offered positive portrayal of YELTSIN's overall health and ability to carry out duties. "I told him as far as I can see, he could do three to four hours of work a day."

Only a few hours after CHERNOMYRDIN's announcement, Security Council secretary Aleksandr LEBED indicated that he has no intention of toning down his controversial rhetoric or his quest for more power. LEBED, who is not a member of the government but reports to the president directly, marked his first 100 days at the Security Council with a press conference. He said Russia has reached a "dangerous watershed" brought on by national crises and governmental impotence prompted by President Boris Yeltsin's illness, according to United Press International (UPI). He again warned that the army is on the brink of revolt, then noted dangers to civil order from shortages of food and fuel in several northern regions, a lack of regulation at nuclear

Today's News Highlights

Russia

FSB Names US in Spy Case

Zaveryukha Wants Import Duties

Lukoil Stations in Belarus

Russian Firms & ADRs

European Republics

New Lithuanian Oil Co.

Latvian Parliament Speaker Out

Transcaucasia & Central Asia

Riot Aftermath in Armenia

Kazakhstan Buys Deere

Politics-Economics-Business

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Thursday

September 26, 1996

Intercon's Daily

In addition, Finance Ministry spokesman Pyotr AFANASYEV told RIA Novosti today that one trillion rubles had been transferred to the Defense Ministry. The money represents only a portion of the federal budget debt to the army for July-August, but further transfers will follow in the next several days, he said.

This effort to address the army's money problems is badly-needed and also rather late. According to Wednesday's Izvestia, four fighter pilots at a regiment in far eastern Kamchatka have staged the first hunger strike in the history of the Russian air force. Two of the pilots, officers that fly MiG-31 jets, have already been taken to the hospital for exhaustion. Most Russian pilots have not been paid since May and their families are going hungry. The remote Kamchatka division is particularly suffering because it used up all its money paying for a shipment of coal in June and was left with no funds to buy food.

FSB Names US Diplomat in Spy Case

· A source at Russia's Federal Security Service (FSB) today named the American handler of a Russian who was accused of espionage and arrested over a year ago, reported Itar-Tass. Russian citizen Finkel, who formerly worked for a Navy research institute in St. Petersburg, was detained for attempting to pass to the US secret information on a new generation of nuclear submarines now being built in Russia. According to the source, Finkel wanted to emigrate to the US and had offered secret documents to the CIA in exchange for the status of a political refugee. The intelligence agent who recruited Finkel is John Satter, a member of the consular department of the US Embassy in Moscow, according to the FSB. This is the first time in the history of the Russian counterintelligence that the name of both the spy and the intelligence agent who recruited him have been made public, said Itar-Tass. State Department sources deny any John SATTER is presently assigned to the Moscow Embassy.

Comment: It is unclear why, two years after it was discovered, the FSB chose now to disclose the spy case and the names of those involved. This is another undiplomatic effort of the FSB to continue an internal propaganda campaign, reminiscent of Cold War spymania. It also again underlines the apparent operating autonomy of the special services within the Russian government.

Economy

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

Ruble = 5,394/$1.00 (CB rate)

Ruble = 5,374|5,414/$1.00 (buy|sell rates)

Zaveryukha Seeks Food Import Duties

· Russian Deputy Prime Minister in charge of agriculture Aleksandr Zaveryukha said Wednesday that he had sent a letter to Prime Minister Viktor Chernomyrdin, asking him to raise duties on imported foodstuffs, including flour, sugar, and spirits by 20 percent, reported Itar-Tass. In the same letter, Zaveryukha suggested establishing a special fund to support the agrarian and industrial sector. In addition, Zaveryukha suggested looking into the problem of reducing the value-added tax on agricultural machinery.

Business

Lukoil to Open Gas Station in Belarus

· Russian oil conglomerate Lukoil announced that it opened today a $4.5 million gas station in Belarus, reported Reuters, citing a company statement. The station will be the largest in eastern Europe, capable of servicing 72 cars simultaneously and including a service area, car wash, a parking lot and a spare parts store, said Lukoil. The station will be supplied with gas from a refinery in the Belarus town of Novopolotsk. The station is part of a six-year program aimed at increasing Lukoil's total network of gas stations by 500. On January 1, Lukoil had 712 gas stations, including 11 in Turkey. Since then, it has opened more stations in Russia, Kazakhstan, Azerbaijan, Kyrgyzstan, and Belarus.

More Russian Firms Issue ADRs

· Russia's fourth largest oil company Slavneft has become the latest major Russian company to announce plans to issue American Depository Receipts (ADR). Company vice president Andrei ZVEREV told a London conference on Russia last week that it plans to sell a 15 percent stake to foreign investors, but did not say how much will come in ADR form. He also estimated that oil output will rise to 100 million barrels in 1996 from 96.8 million in 1995.

ADR offerings are becoming an increasingly popular way for Russian companies to attract foreign investors, according to a recent article in the St. Peters

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burg Times. ADRs are certificates representing the underlying shares of stock in a company. Because ADRs can be traded on foreign exchanges, they allow investors to deal in Russian equities without the customary registration and settlement procedures and worries. Most Russian companies issue Level-One ADRs, in which shares are unlisted and traded on the over the counter market. Level-One ADRs are particularly attractive because Russian firms are exempt from financial disclosures using US accounting standards. Level-Two ADRs are listed on an exchange and require a company to meet US accounting standards, which no Russian firm has yet been able to do. Level-Three ADRs allow companies to list their shares, as well as issue new stock as a public offering. ADRs offer Russian firms exposure to international capital markets, as well as an increased investor base and more liquidity for their shares. Russian ADRs are attractive to Western investors, offering ease of resale, settlement and dividends, and increased local stock prices.

In January 1996, Lukoil the largest and most westernized of the Russian oil concerns became the first Russian firm to issue Level-One ADRs. ADRs now represent some 10 percent of Lukoil's issued shares, according to Salomon Brothers. Lukoil is considering offering Level-Three ADRs next year. Other Russian oil firms that have issued Level-One ADRs include Chernogorneft in March and Tatneft in June, while Yukos, Surgutneftegaz, andYuganskneftegaz are seeking qualification for Level-One ADRs.

However, in the telecommunications and banking sectors, ADR issues may be postponed pending approval by the Russian government. According to analysts cited by the St. Petersburg Times, telecommunications firms may be required to sign onto a central register, while the Central Bank may issue guidelines affecting the banks planning to offer ADRs. AvtoVAZbank was one of the leaders in Level-One ADRs, launching its first issue in February. A number of telecommunications firms and banks also intend to issue ADRs, including Rostelekom, Moscow City Telephone Network, Perm-based Uralsvyazinform, Menatep Bank, Inkombank, and Vozrozhdeniye Bank.

Such Russian blue-chip firms as Gazprom, Unified Energy Systems (UES) and the GUM trading house

are also in the process of issuing ADRs. Russian gas monopoly Gazprom has taken the decision to offer between one and two percent of its shares on world markets as ADRs and Global Depository Receipts (GDRs). Gazprom plans to make its first issue in early October on the London Stock Exchange and through a consortium of international investment banks, according to Reuters. The sale of depository receipts is expected to raise some $400 million. The utility giant UES has announced plans to issue ADRs, in addition to the sale of a 7.5 percent stake, currently worth $225 million, through convertible bonds aimed at foreign investors. GUM, Russia's largest retailer, already has an ADR program through the Bank of New York, worth some 15 percent of its total shares. GUM has recently announced plans to raise some $25 million through a 144a program restricted to institutional investors, according to the Financial Times. Overseas investors currently own some 40 percent of GUM, and have been given five seats on the company's 15-seat board. GUM's sales have risen from $103 million in 1992 to $199 million in 1995, with last year's profits estimated at $50 million, and expansion is planned.

Much of the optimism over and the impetus for the issue of ADRs by Russian firms stemmed from the boom in the Russian stock market following President YELTSIN's re-election. However, the stock market has recently been fluctuating on news of YELTSIN's poor health and upcoming heart operation. It remains uncertain whether Russian firms will proceed with planned ADR offerings while Russia's political future hangs in the balance.

European Republics

Lithuanian to Form New Oil Firm

· The Lithuanian parliament on Tuesday voted to form Lietuvos Nafta (Lithuanian Oil), a new national oil holding company to be formed out of the merger of the Mazheikie refinery, the planned Butinge oil terminal, the Lietuvos Kuras service station network, and the Naftotiekis pipeline, reported Reuters. The initial share capital of the company is estimated at 790 million litas (about $197 million). The establishment of the new holding company has been controversial, but the government hopes that it will help attract foreign investment. The state will hold a 51 percent stake in the company for three years.

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September 26, 1996

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Latvian Parliamentary Speaker Ousted

· The Latvian parliament today voted to remove Ilga Kreituse from her duties as chairwoman of the legislature, reported Itar-Tass. The voting, initiated by the Saimnieks faction, was held without discussion. Kreituse was elected to parliament on the Saimnieks democratic party ticket and later nominated for speaker by her faction. However, she recently quit the party after her husband, Finance Minister Aivar Kreitus, was stripped of Saimnieks membership for "deviations from the party's program." Kreituse, a university history lecturer, was the only female speaker in the parliaments of the former Soviet republics.

Transcaucasia and Central Asia

Aftermath of Riot in Armenia

· Tanks and soldiers are patrolling Yerevan today, with the center of the city cordoned off by police, after a riot erupted Wednesday evening in front of Armenia's parliament building. Thousands of demonstrators, protesting that opposition candidate Vazgen MANUKYAN, not incumbent Levon TER-PETROSYAN, was the real winner of Sunday's presidential election, stormed the parliament and were rebuffed by OMON police. Protesters threw rocks at police who met them with truncheons and fired in the air. Demonstrators pulled down an iron fence, broke into the parliament building and beat up parliamentary speaker Babken Ararktsyan and his deputy Ara Saakyan. The two men were gravely injured. Another 48 people asked for medical aid as a result and 23 were hospitalized. Reuters reported that one soldier and one protester were killed.

In a statement last night, Interior Minister Vano Siradegyan described the events as an attempted coup. The Armenian government said on the radio this morning that "every necessary measure will be taken to uphold legality and to cut short unconstitutional actions against the state." TER-PETROSYAN appeared on TV today to announce a temporary ban on all meetings, demonstrations, and processions.

The parliament held an extraordinary meeting today and, at the request of the Procurator-General, voted to strip eight opposition legislators, including MANUKYAN, of the parliamentary immunity for organizing the Wednesday riots. Seven of the legislators, all except MANUKYAN whose whereabouts are unknown, were led out of the parliament by police.

Until now, Armenia had avoided the kind of civil and political unrest seen in Azerbaijan and Georgia. TER-PETROYSAN, a former dissident and academic, has essentially been a mild-mannered leader, but was criticized last year when he banned the opposition Dashnak party from participating in parliamentary elections. The polls themselves were deemed free, but not fair, by international observers due to the ban on Dashnak, strict government control over the media, and other irregularities. The controversy over Sunday's elections has further damaged TER-PETROSYAN's popularity, creating the worst political instability in Armenia since independence.

Kazakhstan to Buy Deere Combines

· Kazakhstan's Export-Import Bank has signed a contract with US John Deere and Co. to purchase $114 million worth of Deere grain and cotton harvesters for 1997 delivery, Eximbank spokesman Isakhan AKYLBEKOV told Reuters on Wednesday. This year, Deere also signed a $187 million contract to deliver combines to Ukraine.

Azeri-Norwegian to Cooperate on Energy

· Norwegian Energy and Industry Minister Jens STOTENBERG on Wednesday handed Azeri acting Prime Minister Artur RASIZADE a letter of intent on forming a bilateral group to develop the oil and gas industry in Azerbaijan, reported United Press International (UPI). RASIZADE and STOTENBERG also signed an agreement to avoid mutual taxation. The joint group would be involved in a project to extract, utilize, and export natural gas from the Caspian Sea shelf, according to the Azeri state oil company SOCAR. Norway's Statoil owns a 8.6 percent stake in the AIOC Caspian oil development project.

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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