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 17, 1996

Russian Federation

Politics

A Fed Up Yeltsin Axes Lebed

· The struggle for power within the Russian government between Security Council secretary Aleksandr LEBED and Interior Minister Anatoly KULIKOV ended today with LEBED's ouster, but the Kremlin will no doubt continue to be dogged by the ex-general. One day after KULIKOV accused LEBED publicly of plotting a coup, President Boris YELTSIN went on national television and signed a decree removing him from his Security Council post. The president criticized him for not learning to work with other members of the government team, for openly seeking the presidency when elections were not scheduled until 2000, and for his alliance with former presidential guards chief Aleksandr KORZHAKOV. YELTSIN said he could no longer tolerate LEBED's actions, suggesting that he had become a divisive force in the Kremlin and felt compelled to fire him.

The President's decisions followed an urgent meeting between Prime Minister Viktor Chernomyrdin and Russia's so-called "power" ministers, as well as LEBED himself and presidential chief-of-staff Anatoly Chubais. The ministers discussed KULIKOV's allegations that LEBED was planning a "creeping coup" to take over power by force. He claimed that LEBED was setting up a special task force, called the Russian Legion for that purpose, as well as accused him of "direct collusion with [Chechen] separatists" in a bid to gain political mileage for the next presidential elections, said Itar-Tass. LEBED was given the chance to refute the allegations at the ministers' meeting. He also sent a letter to YELTSIN requesting a meeting.

The Prime Minister appeared on television following the meeting appealing for calm among the Russian

people, specifically within the armed forces, and ordered regional military commanders to ensure that troops remained calm. While CHERNOMYRDIN rejected the idea that LEBED planned to lead a coup attempt, he admitted that LEBED had expressed the desire to create a special military division. He denounced LEBED for "irresponsibility, incompetence" and possessing "more than enough Bonapartism." The premier reported to YELTSIN on the meeting.

Today in Grozny, Chechen rebel information minister Movladi Udugov described allegations that the Chechens are ready to provide Lebed with 1,500 militants to seize power in Moscow as "totally absurd," according to Itar-Tass. Nonetheless, KULIKOV significantly increased security in and around Moscow today, calling in some 2,000 Interior Ministry troops to protect the capital from "attacks by Chechen militants." In addition, just hours after the government meeting, Security Council bodyguards disarmed Interior Ministry agents they claimed were following LEBED, who accused KULIKOV of keeping Kremlin officials under illegal surveillance.

LEBED responded to his ouster by announcing on Ekho Moskvy radio that he would go on vacation and then "fully engage" in politics, but "proceed in a completely legal way."

Comment: LEBED's dismissal is likely to have serious repercussions, particularly in Chechnya. LEBED owes a large part of his success in brokering a Chechen peace

Today's News Highlights

Russia

Paratroop Commander Fired

Central Bank 1997 Forecast

Yasin on the Economy

Russia-Canada Trade

NJ Firm Found Guilty

Transcaucasia & Central Asia

New Azer Parl. Speaker Named

IFC Buys into Zervashan Gold

WWM in Tselinny Project

Updates: Chechnya

Politics-Economics-Business

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Intercon's Daily

agreement to the rebels' perception that he can be trusted. KULIKOV, on the other hand, is hated in Chechnya and widely regarded as being partially responsible for the Russian invasion. Prior to the firing of LEBED today, Chechen rebel military commander Aslan MASKHADOV, who signed the August 31 peace treaty with LEBED, told Radio Rossii that: "If they get rid of LEBED, we will have to prepare for war because you can expect anything from people like KULIKOV." The Interior Minister has stridently opposed the current peace initiative in Chechnya and it is not clear how the Russian government will proceed without LEBED to come to its defense.

Today's events are also expected to further destabilize world financial markets and deter foreign investors with their sites on Russia. "The key issue now is whether LEBED does anything precipitous in the next two or three days. And then there is the issue of the cease-fire in Chechnya," Dow Jones quoted William BROWDER, head of Hermitage Capital Management in Moscow, as saying.

It is unfortunate that YELTSIN did not fire KULIKOV along with LEBED. Such a move would certainly have helped to mollify the Chechen rebels, as well as LEBED himself as he embarks on his new role as the political opposition. Despite YELTSIN's fairly rapid response to this situation, his television appearance is not likely to reassure the Russian people. He reportedly looked extremely sick and weak today as he removed the man who polls show is the most trusted politician in Russia.

Paratroop Commander Fired

· Russian President Boris YELTSIN today dismissed Major-General Vladimir KAZANTSEV, deputy commander of Russia's airborne troops, for insubordination, reported RIA Novosti. The general defied orders by holding a press conference Wednesday to denounce Defense Minister Igor RODIONOV's plan to drastically reduce the size of the paratroops corps.

Economy

Ruble = 5,438/$1.00 (NY rate)

Ruble = 5,434/$1.00 (CB rate)

Ruble = 5,429|5,439/$1.00 (buy|sell rates)

Central Bank Forecast for 1997

· The Russian Central Bank has predicted that

the exchange rate will reach 6,200 rubles to one US dollar by the end of 1997, according to a draft document outlining 1997 financial policy submitted to the State Duma, obtained by Itar-Tass. The document also predicted that the annual rate of the ruble's decline in value will be around nine percent, which is lower than the inflation rate forecast by the government. In 1997, the Central Bank plans to continue the current methods of maintaining a flexible currency exchange rate, adjusting the rate once every quarter.

The Bank's principal policy goal in 1997 is to further stabilize the ruble, which is considered a necessary condition for the resumption of economic growth. Reducing the budget deficit is key to achieving this goal, said the policy paper. Continuing the approach of the past two years, the Bank plans direct crediting of the economy, while commercial banks' refinancing will be on a market basis. The adjustment of the rate of interest at financial markets will assume a greater importance in the future, the draft noted.

Yasin Says Economy to Rebound

· Russian Economics Minister Yevgeny Yasin told reporters on Wednesday that the Russian economy has bottomed out and should begin rebounding in the next few months. "We forecast some improvement in production through the end of the year," he is quoted by the Associated Press (AP) as saying. Gross domestic product in the first nine months of the year fell by six percent, compared to the same period last year, while industrial output fell by five percent.

"The main factors which caused the contraction have exhausted themselves," and the government expected economic growth to be one percent next year, AP cited him as saying. YASIN further predicted that Russia will reach sustainable economic growth of five percent a year by the end of the century.

Yasin outlined a draft medium-term economic program for 1997-2000 aimed at creating macroeconomic conditions that would encourage structural reform and economic growth, keep inflation at no more than 5-6 percent a year, and reduce the budget deficit to two percent of GDP. The program also calls for the reorganization of the social sector and contains measures to simplify the fiscal system, improve tax

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collection, and reduce taxes on enterprises. In addition, the government plans to increase competition in the financial sector by cutting public borrowing, drawing loans for longer periods, reducing the yields of government securities so that it would not exceed inflation by more than 2-3 percent, and lowering the average interest rate to 3-5 percent above inflation.

Yasin believes that the government will be able to stop capital flight from the country, as well as to attract $10-12 billion worth of foreign investment in Russia a year in the near future.

Business

Russia-Canada Trade Flourishing

· The second session of the Russian-Canadian Intergovernmental Economic Commission, co-chaired by Russian Deputy Prime Minister Aleksandr Zaveryukha and Canadian Trade Minister Art Eggleton, is currently underway in Moscow and will end on Friday. The Commission aims to further improve the already-flourishing trade and economic ties between the two countries, which are particularly strong in the agricultural sector.

EGGLETON will aim to boost trade by eliminating bilateral "irritants" caused by differing veterinary, equipment safety, and housing material standards, according to today's Journal of Commerce. Canadian exports to Russia grew to C$149 million (about $110.2 million) in the first six months of 1996, compared with C$189 million in the whole of 1995 and C$175 million in 1994. Canadian officials say the figure would be much larger, but it does not include goods transshipped through the US, Finland, and the Netherlands.

Foodstuff exports are an important growth area—with chicken and pork sales up this year, in part due to a conflict between the US and Russia over veterinary standards for chicken—but manufacturers of snowmobiles, and special housing and equipment for northern climates are also hoping to gain ground, said the Journal.

Zaveryukha is also optimistic, announcing today that "Russia and Canada intend to double their trade turnover by the year 2000," according to Itar-Tass.

"The Russian side wanted the Canadian business

men to be more active on the Russian market, and not only in the oil and gas sector. This desire was clearly expressed during the session. The attraction of direct private investments in the agro-industrial complex, science, modern technologies, energy, and construction were listed by the session participants among the areas of priority importance," he said. Although Russia has grown sufficient grain to meet domestic demand, it may import some wheat from Canada this year to feed the remote Far East, said ZAVERYUKHA.

NJ Firm Found Guilty in Russia Case

· Dennis Nathan, president of New Jersey-based defense contractor Electrodyne Systems Corp. pleaded guilty Wednesday to subcontracting the manufacture of sophisticated weapons components to factories in Russia and Ukraine, reported United Press International (UPI). Electrodyne violated the federal Arms Export Control Act, which bans the export of certain US technologies to former Soviet republics, according to federal prosecutors.

US Attorney Faith Hochberg said since 1986 Electrodyne contracted with the Defense Department to supply electronic components for military aircraft, warships, tanks, and satellites. The parts were required by law to be manufactured in the US, but the company instead contracted with factories in Russia and the Ukraine. Hochberg said in several cases, Electrodyne supplied the Russians with plans of sensitive weapons systems along with instructions on how to build various components. In each case, the company did not inform the Defense Department that the components were foreign made.

Among the technology illegally exported were the plans to a "diplexer," a component of a satellite communications system used on naval warships, and plans for components of an Air Force air-to-air missile system.

Under a plea agreement, Nathan and Electrodyne agreed to pay $413,000 in restitution to the Navy, Air Force, and NASA. Nathan, a native of Iran, also agreed to permanently forfeit his US security clearance, resign from Electrodyne, and sell his interest in the company. He faces a maximum five-year prison term and $250,000 fine, and Electrodyne could be fined up to $1 million.

When you need to know it as it happens

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Transcaucasia and Central Asia

Azerbaijan Names New Parliamentary Speaker

· The Azeri parliament on Wednesday today voted 102-11 to elect Murtuz Aleskerov as speaker to replace Rasul Guliyev, who resigned on September 11, reported Xinhua. He formerly worked as rector of Baku University and deputy chairman of the ruling New Azerbaijan party.

ALESKEROV told the parliament that he favors close cooperation between all branches of power and the continuation of democratic reforms. Aleskerov, who holds a doctorate in law, is a former member of the nationalist Azeri Popular Front, but he is known as a staunch supporter of President Geidar Aliyev.

IFC to Acquire Share in Zeravshan Gold

· Canada's Nelson Gold Corp. announced today that the International Finance Corporation (IFC) on October 10 approved the acquisition of a five percent interest in the Zeravshan Gold Company (ZGC) in Tajikistan for total consideration of up to $7.5 million, said a Nelson press release. Nelson, through its subsidiary Commonwealth & British Minerals Ltd., currently holds a 49 percent stake in ZGC which will be reduced to 44 percent upon completion of the IFC investment. In addition, the IFC will receive a five year option to purchase approximately four million common shares in Nelson at $1.05 each. Completion of the IFC investment is subject to negotiation of definitive documentation and fulfillment of regulatory approvals. Nelson is a gold mining and exploration company with operations in Central Asia.

A separate report quotes a Nelson official as saying that production at the Zeravshan gold venture will total 1.3 tons this year. Production was halted for two weeks by Nelson over a dispute with the Tajik government, reported Reuters. Operations were resumed based on promises from the Ministry of Finance and the Prime Minister. No details of the dispute were given.

WWM to Run Tselinny Project

· Canada's World Wide Minerals (WWM) said on Tuesday it will take over management of Kazakhstan's Tselinny uranium mining project and prepare it for production, reported Reuters. WWM said in a statement that a five-month due diligence review has shown that the mine can be a viable uranium producer, and that WWM has secured the exclusive right to manage Tselinny with an option to purchase a 90 percent interest. Tselinny's assets include several underground mines with estimated reserves of 75 million tons of ore with an average grade of 0.12 percent uranium.

WWM plans to develop a geological and mining plan to increase the grade to at least 10 million tons at a mining grade of 0.35 to 0.40 percent uranium. The Tselinny site also includes a processing mill, with a capacity of two million tons of ore per year. WWM expects initial production to start in the first quarter of 1997, with maximum production within 18 months.

Updates

Chechnya: Chechen military commander Aslan Maskhadov told Itar-Tass today that he has accepted Chechen leader Zelimkhan Yandarbiyev's offer to lead the new provisional coalition government that will rule the war-torn republic.

Russian-American Business Summit 2000

October 23, 1996

Capitol Hilton Hotel, Washington, DC

Organized by:

Russian-American Chamber of Commerce (RACC)

Corporate Sponsors: American Express,

Global One, Havens Steel Company and Pepsico

This 4th Annual Conference of the RACC will

focus on the telecommunications and gold industries.

Information and registration: Tel: 1-800-842-5583;

Fax: 303-745-0776; E-mail: russia@rmi.net

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

available for non-profit institutions.

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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