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, October 10, 1996

Drastic Drop in Durable Goods

· Russian durable goods production is expected to decrease by 24 percent in 1996, compared to 1995 levels, said the Russian government's Economic Situation Center, reported RIA Novosti. Most of the drop is attributable to a decline in production of household appliances and electronics, which face serious competition from imports. Television production is likely to be reduced by 71 percent, while output of freezers will be diminished by 65 percent and output of radio equipment will fall 54 percent. Other products will not be hit so hard. Rubber footwear, synthetic detergent, wallpaper, cigarettes, steel utensil, and match production are expected to decline by only two to 10 percent. School notebooks are the only products for which an increase is expected—it should be up three percent this year.

Russian Agricultural Development Proceeding

· Machinery problems and declining fertilizer applications per hectare remain serious problems in the Russian agriculture sector, according to a report by the US agricultural attaché in Moscow, cited by Futures World News (FWN). Problems with machinery and the situation with respect to the use of chemical fertilizers are unchanged from last year. Fertilizer applications per hectare continued to decline through 1995. The majority of large farms' stock of machinery is in poor condition, with as many as one-third of combines unfit for use in the wheat-growing regions of Siberia.

A major problem is that Russian agricultural policy is characterized

Russian Federation

Politics

Military Demoralized, but Not Dangerous

· The general situation in the Russian armed forces will continue to deteriorate in 1997, but there is little chance of a planned mutiny, said the London-based International Institute for Strategic Studies (IISS). "The decline in capability in all departments of the Russian armed forces seems set to continue" in the coming year, Xinhua cited the IISS report as saying. "There were no immediate new trends in military developments following the election of President Boris Yeltsin for a second term in June 1996." Progress in reforming the armed forces has been very limited because of the country's difficult economic situation. Also, organizational changes to develop more mobile formations suitable for operations both within Russia and outside have not been put into effect, it said.

Despite widespread speculation about the danger of a mutiny in the armed forces, IISS deputy director Rose Gottemoeller ruled out the possibility of a planned mutiny in the Russian armed forces. "The armed forces are voting with their feet and troops are selling their weapons. It is an extremely serious problem, but there is no sign that the troops will drive into the Kremlin in tanks and Russia is not facing a planned mutiny," she said. "The best the Russian armed forces can now do is to contain rebel military action, in particular to try to retain control of the larger population centers until a long-term political solution is found," the report said.

Economy

Ruble = 5,422/$1.00 (NY rate)

Ruble = 5,426/$1.00 (CB rate)

Ruble = 5,421|5,431/$1.00 (buy|sell rates)

Today's News Highlights

Russia

Russian Agricultural Dev.

USDA Credit for Russia

Shaposhnikov on Russian Jets

Concordsky; Aviakor

Coudert Opens Petersburg Off.

Transcaucasia & Central Asia

Abkhazia & Georgia/Russia

AIOC Sets Date for Oil Output

Turkmen-Iran Gas Pipeline

New Hotel in Tashkent

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Thursday

October 10, 1996

Intercon's Daily

Thursday Tidbit

provide buyers and sellers maximum flexibility in arranging the size of their transactions within the scope of the overall allocation. Sales must be registered by September 30, 1997, and exporters' contractual arrangements must call for exports no later than November 30, 1997, according to USDA.

Business

Shaposhnikov on Russian Planes

· Yevgeny Shaposhnikov, general-director of the Russia's Aeroflot airline told a session of the government Commission for Operational Issues Tuesday that most Russian-made passenger planes do not meet international standards on noise levels, pollution, and fuel consumption rates, reported Itar-Tass. Germany is currently considering imposing a ban on night flights by Russian airliners because they are too noisy, and other countries are expected to do the same, he said. Also, new safety demands by the US could restrict Russian planes' passage over the north Atlantic. In response to these toughening international demands, Russian aircraft manufacturers must equip civil aircraft with modern technology that will upgrade engines, flying and piloting control of planes, and passenger comforts. In the short-term, SHAPOSHNIKOV suggested that a leasing system for aircraft be set up to increase the competitiveness of Russian civil aviation on international air routes.

In other aviation news, Samara-based airplane producer Aviakor, which makes the Tupolev-154 passenger jet, announced Wednesday that it would lay off 2,000 workers and cut the salaries for two-thirds of its other 13,000 employees because of a lack of orders. Aviakor deputy chief executive Vladimir RYZHKOV told Reuters that the company has not sold a single plane all year, and sold only nine planes in 1995, compared to its peak of 78 planes produced in 1981. "We have 28 contracts, but customers do not pay for aircraft, he said, adding that Aviakor was completing the assembly of three Tu-154s for Czech, Ukrainian and Siberian airlines. One Tu-154 costs $13 million. Aviakor is one of three plants manufacturing Tupolev planes. The other plants are in Ulyanovsk and the Republic of Tatarstan.

Meanwhile, the US National Aeronautics and Space Administration (NASA) is collaborating with the Tupolev Design Bureau to produce an upgraded

British Prime

Minister John MAJOR amused

a Conservative Party conference on

Wednesday with an anecdote about a trip to

his local bar with Russian President Boris YELTSIN.

One Sunday in 1994, during a visit by YELTSIN and

his wife with the MAJORs at their country residence Chequers, they decided to go to the Bernard Arms pub

for a pint. MAJOR "dressed in a Val Doonican sweater" and YELTSIN in "a blue track suit and trainers" walked to the Bernard Arms with their wives and an entourage of hundreds of security men, civil servants, and photo-graphers, said PA News. Finding the pub closed,

one of YELTSIN's interpreters banged on the

door, shouting: "It's President YELTSIN

here." Unfortunately, the reply was:

"And I'm the Kaiser."

by constant changes. For example, during the last four years, the concept of federal support to agricultural producers has changed three times. Russian officials and politicians have been unable to agree on how to proceed with agricultural reform, which has been inconsistent at best and nonexistent at worst.

However, one important and general agricultural policy trend has been picking up speed in the last year, and is likely to continue to develop through the end of the decade. It is an ongoing devolution of power from the federal government to local governments. This de facto trend toward decentralization in agricultural policy is occurring, for one very practical reason—the central government is short of money. Reality has dictated that the problems which the center has proved itself unable to solve should be delegated to local officials who have, often, a better understanding of the causes of their constituents' difficulties, and therefore perhaps greater means, and certainly greater incentive to help resolve them.

USDA Extends $30 Million Credit

· The US Department of Agriculture (USDA) has authorized $30 million in (private sector) credit for sales of commodities to Russia under GSM-102, reported Futures World News (FWN) on Wednesday. Exporters may apply for guarantees on a first-come, first-served basis to cover sales of any of the a large number of various commodities and foodstuffs. The allocation does not assign dollar amounts to any of the specified commodities in order to

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Thursday

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version of the Tupolev 144-D high-speed jet, known as the Concordsky, reported the Associated Press (AP). The jet was developed in the late 1960s, but was discontinued after one crashed at the 1973 Paris Air Show. This month, a joint Russian-US program will begin a series of high-speed flight experiments with the plane, aimed at developing supersonic civil transport. The plane will make 32 flights to test stability, steering, aerodynamics, cabin noise, and engine temperature as part of the program. The refurbished Concordsky can carry up to 300 passengers and is capable of traveling at almost two-and-a-half times the speed of sound. The new Tu-144D was unveiled in March, but only four of the planes are currently in working condition.

Coudert Opens St. Petersburg Office

· The US-based international law firm Coudert Brothers announced Wednesday that it has opened an office in St. Petersburg, Russia. Coudert's office will be headed by Marian Hagler, a graduate of Georgetown University Law Center, who has been an attorney with the Russian Practice Group of Coudert Brothers for the past six years. She spent the last three years in Coudert's Moscow office.

Coudert Brothers was the first Western law firm to establish an office in Moscow, in February 1988. Since that time, it has advised on more than 700 projects in Russia and the other former Soviet republics. The Russian Practice Group includes 35 attorneys in seven Coudert offices around the world, including 13 attorneys in the Moscow office.

situation in Abkhazia has been insufficient. Russia has 3,000 peacekeepers stationed at the Georgia-Abkhazia border. The force has been repeatedly criticized by Georgian and international bodies for failing to fulfill its mandate of safely repatriating ethnic Georgian refugees to Abkhazia. Moreover, Russian mediators have not succeeded in helping bring a political settlement to the conflict, and some Georgian legislators have charged that Russian policies have served to support Abkhaz separatism.

SHEVARDNADZE reiterated that establishing strategic relations between Georgia and Russia is in the interests of both nations. However, he lamented that Russia has so far failed to define its bearings in the region, suggesting that Russia should amend its policy in the Caucasus. Further, he stressed that a restoration of Georgian unity was a precondition for the placement of Russian military bases in Georgia, implying that Russia must do more to resolve the Abkhazia situation.

Tblisi is pushing Russia to introduce sanctions against Abkhazia by closing the border along the Psou river to holders of former Soviet passports, as well as to officially acknowledge instances of genocide and ethnic purges in Abkhazia. In addition, Georgia wants Russia to denounce Abkhazian plans to hold elections as if it were a separate state, instead of a part of Georgia.

Comment: Russian policy towards Georgia/Abkhazia, and in the Caucasus region in general, has only succeeded in worsening relations between Moscow and its southern neighbors. It should make a transition from working to destabilize the region in order to keep it under its thumb to a democratic, mutually-beneficial relationship. Unlike in 1992-93, Georgia now has a stable political system, a growing economy, and strong affiliations with international institutions. Tblisi is becoming impatient with Russia's lack of cooperation on Abkhazia and has threatened to expel the peacekeepers from the region unless a good faith effort is made. It is now willing and able to use whatever leverage it has to influence Russian policy in the region and to demand that Russia keep its promises.

Russia today responded to the rumblings from Tblisi. The Russian Foreign Ministry angrily addressed the Georgian parliament's October 2 statement that

Transcaucasia and Central Asia

Abkhazia Coming Between Georgia and Russia

· On September 30, Georgia's separatist republic of Abkhazia commemorated the third anniversary of its expulsion of Georgian troops from the territory. Georgian officials in Tblisi also marked the event, discussing both the civil war and the lack of progress in resolving problems with Abkhazia, including reaching a political settlement and repatriating a quarter of a million Georgian refugees, over the last three years. Addressing the Abkhaz parliament in exile, which is based in Tblisi, Georgian President Eduard SHEVARDNADZE said that the country was not consolidated as a state at the time of the civil war. He went on to say that Russia's role in resolving the

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Intercon's Daily

Georgia may abrogate its agreements with Russia on the stationing of bases on Georgian territory unless Russia changes its attitude toward Abkhaz separatists. The Ministry denounced the statement as an attempt to "revise the whole complex of Russian-Georgian relations," said Itar-Tass. To let this anti-Russian campaign continue would mean to contribute to the drift in our relations in the negative direction, said the Ministry.

In addition, Aleksei Podberezkin, deputy chairman of the Russian State Duma international affairs committee, is in Georgia this week and discussed the recent decision by Georgia's parliament on a need for a new policy line in settling the Abkhaz conflict for two hours with Shevardnadze, reported Nezavisimaya Gazeta today. Podberezkin is reportedly convinced that many of his colleagues in the Duma will support his efforts to strengthen relations between Russia and Georgia. PODBEREZKIN believes there is a realistic possibility that "Russia may lose the Transcaucasus and the Transcaucasus may lose Russia." Moreover, Podberezkin agrees with the Georgian president in that "Russia does not have a policy with regard to the Caucasus, what exists is a policy conducted by individual officials, structures and organizations," said NG.

Early Oil Output Date Set

· Azerbaijan International Operation Company (AIOC) president Terry Adams on Wednesday officially informed Azeri President Geidar Aliyev that the 12-member consortium will begin producing "early" oil from its Caspian Sea oil development project on August 28, 1997. Adams noted that construction of an oil pipeline from Baku to the Russian Black Sea port of Novorossiisk is on schedule and will be completed by the end of the year, while a second pipeline through Georgia will not be operational until 1998.

Today in Tblisi, engineering firm Kvaerner/John Brown signed an agreement with the Georgian Oil Pipeline Corp. under which Kvaerner/John Brown

will build the Georgian route, reported United Press International (UPI). Repair of existing pipes and construction of new ones will begin early next year. The AIOC has earmarked $28 million for the pipeline in the first quarter of 1997. Kvaerner/John Brown will be head operator for the project and will have the right to choose other firms to help build the line from the Caspian to the Georgian port of Supsa, said AIOC vice-president Joh HOLLIS, according to UPI.

Initially, AIOC expects to export about 100,000 barrels per day of oil, and the consortium hopes to be producing 700,000-800,000 barrels a day by 2010. Approximately 35 million barrels of early oil will be shipped through Russia in the first year of production, with at least the same amount planned for the Georgian route.

Turkmenistan-Iran Discuss Gas Pipeline

· Iranian Oil Minister Gholamreza AqazAdeH met Wednesday with Turkmen President Saparmurat Niyazov in Ashgabat to discuss accelerating construction on the Korpedzhe (Turkmenistan)-Kurt Kui natural gas pipeline, reported Itar-Tass. The groundbreaking ceremony for the pipeline was to be held near the gas deposit in Korpedzhe on Thursday. The construction of the gas pipeline on a "turn-key" basis will be carried out by Iran's national gas company. Under an agreement signed in Tehran in July, Iran will finance 80 percent of the $190 million project. The 200-km gas pipeline, which will have an annual capacity of eight million cubic meters, is expected to be completed by the end of 1997.

Japanese Hotel Opens in Tashkent

· A new 245-room Hotel Inter-Continental Tashkent has opened in Uzbekistan's capital, reported Dow Jones today. Inter-Continental Hotels & Resorts, owned by Japan's Saison Group, will operate the hotel, which is owned by InterService, a department of the Uzbek Trade Ministry.

Daily Report on Russia and the FSU will not be published

on Monday, October 14, in observance of Columbus Day.

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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