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

Friday, October 25, 1996

Russian Federation


Yeltsin Calls for End to Political Infighting

· In his weekly radio address today, Russian President Boris YELTSIN attempted to reassure the Russian public that he is taking steps to halt political infighting in the Kremlin. Sounding like a teacher instructing his pupils to stop fooling around and concentrate on their studies, he admitted that some senior officials have been spending more time jockeying for power than attending to their duties. "They are busy criticizing each other, settling scores, putting forward all sorts of accusations against each other, collecting compromising information." He obliquely denounced the public battle between Interior Minister Anatoly KULIKOV and former Security Council chief Aleksandr LEBED, saying that: "Such actions discredit the authorities and undermine people's confidence in the state." Although he pledged that those "who engage in squabbles instead of working" would "be dismissed without pity," KULIKOV remains in his government post.

He also pointed out that he was the legitimately elected leader of the country and planned to see out his four-year term. "I should like to specially remind politicians of the fact that Russia has made its choice for the coming four years. This is why it is high time to cool down after the electoral race. Stop fighting for influence, distributing posts, engaging in futile criticism and endless discussions."

Comment: The public acknowledgment that he has been unable to control his officials and they have not been doing their jobs is a further sign of YELTSIN's weakness as a ruler and does not inspire a great deal of confidence in the government. He would do better to show the Russian people that he is in charge by firing a few more officials who fail to perform because

of their preoccupation with position and power. The upcoming operation and recovery period will only further remove him from the helm of state and allow the clearly self-interested officials to continue their political games. For now, CHUBAIS and CHERNOMYRDIN are united against a common enemy—LEBED/KORZHAKOV, and have avoided the deep differences which would divide them during more tranquil times. But the IMF's refusal to extend payments due to the failure to collect taxes will soon bring CHUBAIS, the darling of the IMF, into direct conflict with Gazprom, a leading tax delinquent, and CHERNOMYRDIN who supports the major state industries which continually seek protection and subsidies.

Sunday's Regional Elections

· Polls will open in several Russian regions on Sunday to elect new administration heads. The most interesting race will be in the southern Krasnodar Krai, where incumbent governor Nikolai YEGOROV, who is also a national figure, having served as a presidential advisor, presidential chief of staff, and Nationalities Minister, is reportedly going to all lengths to retain control of the region. He was appointed governor only in July. The area has strategic importance, bordering Abkhazia and the Black and Azov seas, as well as having successful agriculture, oil, and resort industries. YEGOROV caused a stir this week when he called for President YELTSIN to step down in an interview with Komsomolskaya Pravda in an attempt to gain votes by distancing himself from the locally-unpopular president.

Today's News Highlights


Rodionov on the Military

Ruble Chart

IMF Delays October Tranche

Livshits on Taxes/Budget

Kredo Bank Taken Over

Nizhnevartovskneftegas for Sale

Surgut Oil Issues Illegal Shares

Peterstar Buys Lucent Equip.

Stella Bella in Russian Market

Knauf Invests in Russia




October 25, 1996

Intercon's Daily

Ruble = 5,448/$1.00 (NY rate)

Ruble = 5,445/$1.00 (CB rate)

Ruble = 5,435|5,455/$1.00 (buy|sell rates)

Oblast—incumbent Ravil GENIATULIN, appointed by YELTSIN in February 1996; Democrat Russia party co-chairman, newspaper editor, and State Duma deputy Viktor KUROCHKIN; another Duma deputy, Communist-backed Viktor KOLESNIKOV; Vladimir BOGATOV a member of Liberal Democratic Party faction in the State Duma; and chairman of the Chitaenergostroi company Yaroslav SHVYRIAEV. GENIATULIN is leading in the polls with KUROCHKIN and SHVYRIAEV running second and third. A second round of voting is seen as likely. Chita Oblast, located in the Transbaikal region next to Mongolia and China, has a population of about 1.3 million.

Kaluga Oblast: The Kaluga race features four candidates: incumbent governor Oleg SAVCHENKO; local parliamentary speaker Valery SUDARENKO; the assistant to a State Duma deputy Gennady PUSHKIN; and businessman Aleksandr VASILKOV.

Three ethnically-based autonomous oblasts will also elect new governors. Aga-Buryat Autonomous Oblast is located within Chita Oblast and has less than 80,000 people. Its incumbent governor is Bolot AYUSHEV. Koryak Autonomous Oblast is located in the far northeast within Kamchatka Oblast and has less than 34,000 residents. Khanty-Mansi Autonomous Oblast is an oil-rich region, located within Western Siberia's Tyumen Oblast.

Rodionov on Erosion of Armed Forces

· Russian Defense Minister Igor Rodionov warned today that if the dismal state of financing for the army does not improve, army morale and effectiveness will degrade dangerously. "Because of the chronic shortage of funds, Russia's armed forces reached the limit beyond which extremely undesirable and even uncontrollable processes may arise," he told a Moscow meeting of Russian veterans of combat in "hot spots" today, said Itar-Tass.

General Rodionov said that overall the situation in the army is now under control, but the armed forces are living through an acute crisis. Combat potential and mobilization readiness are eroded, material resources are in short supply, and equipment levels are a cause for concern. He stressed that the 1997 draft budget is no cause for optimism. "Unless the defense budget is amended, the Russian armed forces may cease to be an integral and combat-ready state structure," said the Minister.

Jun Jul Aug Sep Oct

Altogether, 10 candidates are competing in Sunday's election in Krasnodar, with the main contenders seen as YEGOROV, the communist candidate and head of the Kuban agriculture college Nikolai KONDRATENKO, and Viktor KROKHMAL, chairman of the grain enterprise Kubankhleboprodukt. A second round is expected to be necessary, but some sources say that the elections will not go that far.

A lengthy article in today's Moskovsky Komsomolets accuses YEGOROV of turning Krasnodar's capital Kuban, into "a real Sicily." It illustrates some of YEGOROV's many offenses, including running down an old woman in Krasnodar with his car and unfairly and ruthlessly restricting the campaigns of his rivals, as well as reminding readers that he was one of the hawks considered responsible for the Chechnya war. The article charges that he had other candidates' bank accounts suspended, their paid television advertisements canceled, and their press materials taken out of print. Sergei YUSHENKO, a leader of Russia's Democratic Choice, told the newspaper that YEGOROV's actions amount to "political banditry." "YEGOROV, who has come to think of himself as a mini-Fuhrer of sorts, is discrediting government authorities and violates existing legislation," he said. The article also suggests that YEGOROV has obtained permission from Moscow to postpone the gubernatorial election until spring 1997, if he loses the first round.

Chita Oblast: Five candidates are vying for the governor's seat in southeastern Siberia's Chita

When you need to know it as it happens




October 25, 1996

Intercon's Daily


IMF Delays Monthly Tranche for Russia

· The International Monetary Fund (IMF) has decided to postpone the latest $340 million disbursement of the $10.2 billion loan to Russia because of insufficient collection of budget revenues in July and August. After 10 days of talks with Russian officials, the IMF delegation announced: "The two sides have failed to come to consensus over a range of problems, which does not allow the IMF mission to prepare a final document," and left. The sides will review the remaining problems during the first half of November. This is the second delay in paying out the IMF loan, the first was in July, and a major blow to the Russian government. The decision will likely make the passage in parliament of the draft 1997 budget more difficult and negatively affect a Eurobond issue planned for later this year.

Livshits on Taxes and the Budget

· Russian Finance Minister Aleksandr Livshits said Thursday that falling revenues would leave the budget 25 percent underfinanced for 1997, despite government efforts to improve tax collection and tighten spending. "We have come to the moment of truth," Livshits said in televised remarks. "Either we will be able to collect taxes or we will not." Tax revenues fell by 71 trillion rubles ($13.2 billion) in comparison to the first nine months of last year, he said, adding that virtually all areas of the budget were underfunded.

"The main reasons for the prevailing budget situation are that the economic slump proved to be deeper and inflation lower than expected," said Livshits. "This has also affected the collection of taxes," he said, stressing that both "legislative and executive branches of government were much too slow in altering the system of taxation" to deal with the shortfall. Livshits said revenue this year totaled 172.9 trillion rubles ($32 billion), while projected spending stood at 233 trillion rubles ($43 billion), leaving a budget deficit of 61 trillion rubles ($11.3 billion) or 3.6 percent of gross national product.

Andrei Illarionov, a leading Russian economist and director of the Economic Analysis Institute, said today the situation was even worse and argued the 1997 budget deficit was, in fact, closer to 15 percent of GNP, if methods employed by the International

Monetary Fund (IMF) are used, reported Untied Press International (UPI). Illarionov said the Finance Ministry had calculated the 1996 and 1997 budget deficits without including payments made on the national debt. "If there is no change in the government's policy toward the budget, sooner or later it will all come to an end," Illarionov said, implying the government would go bankrupt. "Our experience and the experience of all other countries proves this to be true."

Kredo Bank Placed Under Control

· Russia's Central Bank will take over temporary control of Kredo-Bank because of the bank's precarious financial situation, reported RIA Novosti. Kredo is 33rd on a rating list of leading Russian banks, and 16th on a corresponding list of reliability. According to Central Bank deputy head Aleksandr TURBANOV, 225 Russian banks have been closed in 1996.


Surgutneftegaz Issues Illegal Shares

· Russian oil company Surgutneftegaz has said that it issued new stock to a Siberian investment firm last month without public disclosure, highlighting the lack of protection of shareholders' rights in the country, reported today's Wall Street Journal. The issue amounted to 10 percent of its outstanding capital, but Surgut declined to identify the investment company. The action confirms recent speculation that Surgut was courting outside investors. Surgut shares lost 10 percent of their value in Moscow.

This case is not unique in Russia. Intercon reported in February 1995 that oil firm Komineft had been accused of issuing supplementary shares, totaling 18 billion rubles ($4.5 million), to initial stockholders without informing its other investors. In December 1994, the Londonbased Transworld brought charges against Russia's leading aluminum producer Krasnoyarsk Aluminum (KrAZ) for tampering with its share register. KrAZ allegedly deleted Transworld's 20 percent share in the company from its records.

In August 1995, Russia's Federal Commission on Securities and Capital Markets issued new rules concerning share registers. The regulations defined the duties of every party involved in a securities transaction, including shareholders, nominee holders of securities, and keepers of share registers, said

When you need to know it as it happens




October 25, 1996

Intercon's Daily

a Commission statement. The rules were to go into force with the passage of a comprehensive securities law. However, President Boris YELTSIN vetoed a first version of such a bill in 1995. A second version of that bill was passed by the upper house of parliament in April 1996.

Nizhnevartovsk Oil Co. Stake for Sale

· Russia's State Property Committee will auction 861,786 preferred shares in Nizhnevartovskneftegaz oil company, located in western Siberia's Krasnoyarsk Krai, on December 2, reported Reuters on Thursday. The shares are equivalent to 4.7 percent of the company's capital, and will be sold at a cash auction. The starting price for each share with a face value of 1,000 rubles will be 20,000 rubles. Nizhnevartovskneftegaz is the main operating company of the Tyumen Oil Company, which owns 38 percent of it. Nizhnevartovskneftegaz's preferred shares are not yet traded on the Russian Trading System, according to Reuters.

Peterstar to Install Lucent Equipment

· Vladimir AKULICH, the general director of Russia's Peterstar telecommunications, said this week that his company will buy 20 switches from Lucent Technologies and lay about 100 km of fiber-optic cable to provide twice as many lines in and around St. Petersburg, reported Interfax. The price of the planned investment totals $7 million. AKULICH said that Peterstar also plans to place an ATM switch which will increase the speed of data transmissions to 6.4 gigabits per second.

Next year, the company will use Lucent equipment to provide an ISDN system to send voice mail, electronic data, and videos along a single digital line. Peterstar currently operates three rings of the integral digital network at a speed of 622 megabits per second along 700 km of fiber-optic cable covering almost all of St. Petersburg. In 1995, the company opened a new $12 million telephone exchange on Vasilievsky Island, providing 100,000 new subscriber lines. Since it was founded in 1992 by the St.

Petersburg Telephone Network, Luxembourg's Complus, and Canada's PLD Telecom, the company has invested $40 million in St. Petersburg's telecommunications infrastructure.

Stella Bella & the Russian Market

· California-based Stella Bella Corp., USA, a fast-growth food, beverage, and retail company, announced Thursday that it has obtained four additional exclusive distribution agreements to distribute a wide range of products in Russia and the former Soviet Republics, supplementing the original groups of companies announced earlier this month, said a Stella press release. Products will be funneled through Stella Bella's existing distribution network that markets gourmet coffee in the region. Stella Bella executives estimate projected Stella Bella revenues from the emerging Russian market to reach $2 billion by the year 2000.

The additional companies that Stella Bella has obtained exclusive distribution agreements for products to be distributed in Russia and the former Soviet republics include: Chem-Ex Worldwide, manufacturer of cleaning agents; Grupo Urbec, pastas and non-refrigerated fractional packs; Juanita's Foods, manufacturer of authentic Mexican foods; and Quality Trading House, manufacturers of children's products, including diapers. Two product showrooms have been established in Russia, on both the Eastern and Western Coasts by Stella Bella, with the support and cooperation of high-ranking Russian government officials.

Germany's Knauf Construction in Russia

· German construction materials firm Knauf has invested $111 million in Russia's construction industry over the past three years, reported RIA Novosti, citing Knauf board of directors member Heiner HAMM. Knauf has established 11 materials plants in joint ventures with Russian companies, which mainly produce plaster, stucco, self-leveling flooring, and insulation. The leading ventures are located in Moscow, Tula, St. Petersburg, and Nizhny Novgorod.

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.

When you need to know it as it happens