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 3, 1996

Russian Federation

Politics

Yeltsin Defends Fitness in Radio Address

· Russian President Boris Yeltsin gave a national radio address today in an attempt to quiet fears that his illness has left Russia without a leader. YELTSIN spoke firmly and clearly for six minutes, expected to be the first in a series of regular radio addresses to the Russian people. The president touched on many of the most pressing issues in the country and, in response to calls for him to step down, said: "I said before the election and repeat now—don't rush to change the portraits, the country has a president and an active president at that."

YELTSIN also said that he was "very worried about the situation in the armed forces," and promised to pay special attention to the problem. He said that the passage of the 1997 budget was the priority task for the government in the next few months.

The President also for the first time endorsed the Chechen peace initiative of Security Council chief Aleksandr LEBED. "My aide, Aleksandr Ivanovich [LEBED] carried out my instructions and stopped the military conflict. The most important thing is he succeeded in halting the bloodshed." This statement came a day after LEBED was sharply criticized in the parliament for his peace efforts and hours before the president's first meeting with him in over two months.

Kulikov Attacks Lebed in Parliament

· In an address to the opening session of the Russian State Duma on Wednesday, Interior Minister Anatoly Kulikov sharply criticized the accords signed by Security Council chief Aleksandr Lebed and Chechen rebel military commander Aslan Maskhadov on August 31. The accords are seen in the Russian army as "another spiral of national

treason," Kulikov is quoted by Itar-Tass as saying. "The Chechen blaze is surging, each concession to militants entails scores of new claims" on their part. "It is the question of capitulation to the forces that are striving to destroy the Russian state," said Kulikov. He called on the parliament to "give a rebuff to the strategy of capitulationism and aggression."

LEBED was met with boos, jeers, and shouts of "shame" and "traitor" during this address to the Duma on the situation in Chechnya. He defended his peace initiative saying, "Russia is not leaving Chechnya and should not leave it. We have put an end on something that could bring shame [on Russia] for many long years to come," according to Reuters. He added that 80,000-100,000 people had been killed in the conflict. He further warned his opponents that he will not take their criticism lying down. "I am ready to crush all those political and personal stupidities which have been uttered here today."

Economy

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

Ruble = 5,417/$1.00 (CB rate)

Ruble = 5,411|5,423/$1.00 (buy|sell rates)

September Inflation at 0.3 Percent

· Monthly inflation in Russia was 0.3 percent in September, following a reduction in prices by 0.2 percent in August, reported Itar-Tass today, citing the State Statistics Committee. Food prices fell by 0.5 percent

Today's News Highlights

Russia

Regions Seek For. Investment

IFC Loan for Troika Dialog

IFC Director to Moscow

Tupolev Plane Upgrade Planned

Transcaucasia & Central Asia

OSCE on Armenia Elections

KazMinCo. to Acquire Firm

Texaco in Karachaganak Deal

Newmont/Mitsui in Uzbekistan

Uzbek Communications Min.

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Regions Seek Foreign Investment

· Russian Financial Corp. president Andrei NECHAYEV said on Tuesday that Russia's regions currently have the greatest potential for attracting foreign investment to the country, reported RIA Novosti. Speaking at an international conference in Moscow, NECHAYEV noted that a number of Russian regional authorities are creating favorable conditions for outside investment by offering tax breaks and other incentives, many of which are not available from the central government in Moscow. He pointed to the Leningrad and Yaroslavl Oblasts and the Republic of Tatarstan as areas where considerable foreign funds have already been invested. According to NECHAYEV, the basic flow of Western investment will be channeled in the coming years into those regions which provide investment incentives.

Over the next four months, regional and local elections are being held in a number of regions; 52 are electing new administration heads, 26 major cities are electing mayors, and nearly 20 are electing local legislatures. The outcome of these elections will help determine the economic policies and approach to foreign investment of these areas. The election of Communists to head some regions may result in a less favorable stance toward outside investors.

Business

IFC Loan to Troika Dialog

· The World Bank Group's International Finance Corporation (IFC) on Wednesday signed agreements to provide $10 million in loans and equity finance to Troika Dialog, one of Russia's leading securities companies, said an IFC press release. Troika Dialog will use the financing to expand its brokerage and market-making activities. Foreign investor interest in Russian equities has increased sharply in the last year as a result of rising confidence in Russia's economic stability. The increase in demand for equities has given rise to increased working capital finance requirements at most Russian securities companies. "IFC's investment in Troika Dialog will serve to broaden and institutionalize the firm's sources of funding in order to meet an increasing demand for brokerage and market-making services and, in the longer-term, develop into a leading provider of retail financial services," said Edward Nassim, Director of IFC's Europe Department. "IFC

in September, while prices for non-food products rose by 1.2 percent and prices for services increased by 1.6 percent.

Russia to Lighten Load of Businesses

· The Russian government is hoping to breath life into the country's economy by means of a "rather radical" reform package aimed at giving struggling companies some relief, Russian Economics Minister Yevgeny YASIN said in an interview with Dow Jones at the International Monetary Fund (IMF)/World Bank annual meetings in Washington. The first part of the program includes lightening the tax burden, shifting costly social programs from companies to local government, and providing incentives to improve accounting and management. These reform measures had been laid out in the IMF $10 billion loan program, but a lack of political will before the elections delayed their being carried out. The first steps in the program are now expected to be approved within the next few weeks.

"If we want to reach our goal of finally increasing output, we must, first of all, free enterprises from these excessive burdens," said YASIN. He admitted that Russia is now paying a price for re-electing President Boris YELTSIN, a price which has included instability in the markets, a plunge in tax revenues, and consequent spending cuts. Government troubles have caused huge delays in wage payments. While also admitting that "there are some reasons for alarm" at the current situation, the Minister said that the government's effort to lower interest rates is working to make credit affordable for companies. "On the whole, I think a positive trend is quite clear, but of course the market responds to statements by government officials, the president's illness, other factors," YASIN told Dow Jones.

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regards Troika as a model which can serve to lead the development of the securities industry and improve liquidity, efficiency, and market practices." Troika, founded in 1991, is an active trader in government and corporate securities and provides clients with financial advisory services on mergers and acquisitions, the issuance of equity and debt, and structured investment. Troika has been among the most active dealers in Russian equities and has been rated the first among other market participants by AK&M, an independent Russian rating agency.

IFC Increases Presence in Russia

· The International Finance Corp. (IFC) announced on Wednesday that Edward NASSIM, currently Director of IFC's Europe Department, will relocate to Moscow to serve as Resident Director with operations authority to develop and carry out IFC's program in Russia, Ukraine, Armenia, Belarus, and Georgia, said an IFC press release. NASSIM's move marks the first time in the IFC's forty-year history that a Director will be stationed outside of Washington.

The IFC has been active in the region since 1991 and has about 430 staff on the ground in several major Russian, Ukrainian and Belarussian cities. Most of them are assisting enterprise and land privatization efforts. NASSIM will focus on accelerating current activities and expanding IFC's initiatives in Armenia, Belarus, and Georgia.

Tupolev Planes to be Upgraded

· Russian financial-industrial group Rosavia-konsortsium announced Monday that it will refurbish and use seven Tu-204 airliners on international commercial air routes, and supply 16 of the same planes to Bulgaria, reported RIA Novosti. The first seven planes, with Russian-built PS-90 engines, are now used by Vnukovo Airlines. The aircraft were manufactured from 1992-94, and will be upgraded at a cost of 120 billion rubles—funding which will be supplied through loans from Russian banks. The Bulgarian agreement consists of the supply of the 16 planes, along with the Russian ability to export aviation and maintenance equipment for the Bulgarian airport facilities, as well as training for air and ground personnel. The Bulgarians, for their part, are offering traditional Bulgarian exports—tobacco, brandy, wines, and canned fruit and vegetables—in exchange for the Russian equipment.

Transcaucasia and Central Asia

OSCE Criticizes Armenian Pres. Elections

· The Organization for Security and Cooperation in Europe (OSCE) election observer team released its report today on the recent presidential elections in Armenia, reported Itar-Tass today. The observers noted a number of irregularities during the counting of ballots, the verification process, and the aggregation of results. Although they are not characteristic of the entire elections, the established irregularities call into question the elections' fairness, said the report.

Specifically, the team believes that there was a considerable discrepancy, up to 22,000, between the number of voters and the number of the officially registered ballots. The bulk of this discrepancy applies to Yerevan, where opposition candidate Vazgen MANUKYAN was the main vote-getter. The OSCE said it was disturbed by the fact that Levon Ter-Petrosyan only surpassed the 50 percent barrier to win outright in the first round of elections by 21,900 votes, said the report.

OSCE mission said it would submit a final report shortly, but declared that the law on elections should be reviewed and amendments made to prevent future irregularities, according to Itar-Tass.

TER-PETROSYAN's office responded by charging that the OSCE's report had "mathematical inaccuracies" and its conclusions were faulty due to addition based on incorrect figures, reported Reuters.

Meanwhile, MANUKYAN's wife told reporters on Wednesday that the US Embassy in Armenia and the UN mission in Yerevan have expressed their willingness to provide a refuge to MANUKYAN, reported RIA Novosti. MANUKYAN went underground following a riot over the election results on September 25.

KazMinCo to Acquire Almaty Exploration

· UK-Kazakh joint venture Kazakhstan Minerals Corp. (KazMinCo.), said it will acquire 100 percent of the common shares of Almaty Exploration Ltd., a private exploration company operating in Kazakhstan, reported Dow Jones. The deal is to close on October 31, but is still subject to due diligence and regulatory approval. KazMinCo will hand over 100,000 common shares and a cash payment of

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$235,000, in addition to paying Almaty's sunk costs plus 10 percent (capped at $110,000), in exchange for ownership of the company.

Through the deal, KazMinCo will acquire a 67 percent interest in two exploration and production license areas to add to the company's seven operations already up and running in Kazakhstan. The original seven are all advanced gold/copper exploration projects, and the company currently has 16 drilling rigs working in the country. The two licenses to be acquired with Almaty are for precious and base metals, covering five years of exploration and 20 years of development, with the right to extend the license terms. The licenses cover a 11,700 sq. km. area northwest of Balkhash, and a 15,400 sq. km. area in the Dzhezkazagan region.

Texaco to Buy into Karachaganak Deal

· US Texaco will acquire a stake in a major natural gas development project in northwestern Kazakhstan from British Gas and Italy's Agip, reported Reuters, citing a senior source at an international oil and gas conference in Almaty. Intercon reported last month British Gas is seeking to sell a portion of its 42.5 percent stake in the $8 billion Karachaganak gas field project. The other partners in the consortium developing Karachaganak are Italy's Agip, with 42.5 percent, and Russia's Gazprom, with 15 percent. The field is believed to have 566 billion cubic meters of natural gas reserves, but the project has been plagued with bureaucratic and political difficulties. A formal production-sharing agreement for the project has yet to be signed.

In addition, Russian oil conglomerate Lukoil has confirmed that it will acquire Gazprom's 15 percent stake in the project, and said that British Gas and Agip had already agreed to the acquisition, said Reuters, citing Lukoil vice president Viktor DEMIDOV.

Newmont/Mitsui in Uzbek Gold Venture

· Denver, CO-based Newmont Gold Company announced on Wednesday the signing of a joint

venture agreement with Japan's Mitsui & Co., Ltd. and the government of Uzbekistan to develop four gold deposits in the Angren region of Uzbekistan, said a company press release. The Angren region, located approximately 100 km. south of Tashkent, contains an operating underground gold mine and mill, as well as four known gold deposits. The deposits have estimated combined reserves of 240 tons, and the venture plans to produce 10 tons of gold annually from them, reported Dow Jones.

Under the terms of the agreement, partners will expand operations of the existing mine, further delineate the known deposits, and conduct exploration in the surrounding known deposits. Newmont, with a 40 percent interest, will lead the daily management of operations. The Uzbek parties—the State Committee on Geology and Mineral Resources and the Association of Diamond Processing and Gold Mining Enterprises—will provide exploration and other services. Mitsui will provide procurement during construction and operations, as well as marketing of the gold. Following the completion of feasibility studies, the venture is expected to start mining gold ore in late 1999 or early 2000. The three parties are expected to invest $200 million in the project.

Newmont also said Wednesday that its Zarafshan-Newmont joint venture in Uzbekistan is steadily improving, with production reaching nearly 90,000 ounces in the third quarter. Newmont holds a 50 percent interest in the Zarafshan venture.

New Uzbek Communications Minister Named

· Uzbek President Islam KARIMOV has appointed Abduvokhid DZHURABAYEV as Minister of Communications, said a presidential decree issued today. Former Communications Minister Tahir RAKHIMOV was named Trade Minister in mid-July. First Deputy Communications Minister Vladimir KRAVCHENKO served as acting Minister until September 24, when he was murdered. Uzbekistan is in the process of a major, multi-million-dollar effort to overhaul the country's outdated telecommunications systems.

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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