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

Tuesday, October 8, 1996

"So, I know that he is a rogue. But who else will supply me with information?", according to today's Nezavisimaya Gazeta. The Minister said that DROBUSH was sent to Chechnya in July to arrange preparations for LEBED's talks with Chechen rebel leaders Zelimkhan YANDARBIYEV and Aslan MASKHADOV.

The Russian Security Council responded by expressing regret that the Interior Ministry "did not timely inform the Security Council about the person whose previous actions aroused serious concern." Security Council chief of staff Dmitri Ostroushko told Itar-Tass on Monday that Drobush "offered his services in the beginning of July and said that he could exert certain influence on the establishment of contacts with Chechen separatists." The Council acepted DROBUSH's assistance, but only for a short time, after which they realized he would be a greater hindrance than a help, and cut him loose, Ostroushko said.

Kulikov on Crime, Police Corruption

· Russian Interior Minister Anatoly Kulikov told a press conference on Monday that the nearly two million crimes were reported in Russia in the first nine months of this year, with grave crimes accounting for the majority of all offenses, reported Xinhua. The number of contract murders, organized criminal groups, and terrorist organizations continues to grow, and they increasingly include young people and women in their ranks. Moreover, one-third of all crimes are committed by people on drugs.

Russian Federation

Politics

Lebed Says NATO Should Slow Expansion

· In meetings at NATO command in Brussels, Russian Security Council secretary Aleksandr Lebed reiterated objections to NATO's planned eastward expansion. However, he also left open the possibility of further talks on the issue by suggesting a postponement, rather than a cancellation, of the plan. "I proposed putting off the question of whether NATO should or should not expand to let the next generation decide," Dow Jones quoted him as saying.

Kulikov Levels Charges at Lebed

· At a press conference Monday, Russian Interior Minister Anatoly KULIKOV continued his assault on Security Council secretary Aleksandr LEBED and his peace initiative in Chechnya. He accused LEBED of appointing as his personal envoy in Chechnya, Sergei DROBUSH, who has been accused of misappropriating funds.

Kulikov said criminal proceedings had been instituted against Drobush in May 1992. "The investigation established that the chairman of the board of directors of the bank Russia-MALS, Sergei Drobush, and his accomplices used fake banking papers to misappropriate 200 million rubles in May 1992," according to the Minister. Kulikov said Drobush had been taken into custody on December 29, 1993 and subsequently released on bail of 15 million rubles by orders from Deputy Prosecutor-General Kravtsev. In October 1994, Drobush's case was brought to the Moscow municipal court and, a month later, it was transferred to Moscow's Tagansky district court where its trial has since been repeatedly postponed under various pretexts, he said. KULIKOV claimed that he went to LEBED about the charges against DROBUSH, but was told:

Today's News Highlights

Russia

Antonov Crashes in Italy

MinFins Recieve Four Ratings

Summers on Russian Eco.

Two Mutual Funds OK'd

Transcaucasia & Central Asia

Interpol Opens Georgia Office

Iran Gas for Nakhichevan

Major Kazakh Bank Fails

Kazakh Inflation Chart

Turkmenistan Supports Taliban

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Tuesday

October 8, 1996

Intercon's Daily

Tuesday Tidbit

caught fire. The plane was apparently owned by Aeroflot. There were 25 people on the plane which was carrying cars to the UAE. An investigation is being conducted into the cause of the crash.

Economy

Ruble = 5,418/$1.00 (NY rate)

Ruble = 5,424/$1.00 (CB rate)

Ruble = 5,419|5,449/$1.00 (buy|sell rates)

MinFins Receive Four Ratings

· In addition to receiving a BB- rating from Standard & Poor's on its dollar-denominated debt, Russia has received ratings from three other major credit agencies—Duff and Phelps Credit Rating Co., Moody's Investors Service Inc., and IBCA, the European Credit rating agency. The four agencies rated Russia's debt at between double-B minus and double-B plus, which is on par with US corporate junk bonds, but above Brazilian and just below Mexican sovereign risk, said today's Wall Street Journal. The relatively high rating took financial markets by surprise, said the paper. It shows that agencies believe Russia has achieved a measure of economic and political stability, despite Kremlin infighting and President Boris YELTSIN's upcoming heart surgery. The ratings are useful to foreign investors, allowing them to evaluate Russian risk and yields compared with that of other countries.

Duff & Phelps Credit Rating Co. (DCR) assigned a BB- rating with a stable outlook on the foreign currency obligations of Russia, said a DCR press release. The rating reflects Russia's difficult transition from a centralized economy to a market economy, underscoring still major structural reform challenges and declining living standards, it said. It also reflects underlying improvements, but considerable uncertainty with respect to the pace and breadth of structural reforms, medium-term macroeconomic stability and debt service payments.

Moody's Investors Service assigned a Ba2 sovereign ceiling for ratings on long-term foreign-currency bonds and notes of issuers domiciled in Russia, said a Moody's press release. In line with its view that bank deposits are generally riskier obligations than bonds, the rating agency also assigned a Ba3 sovereign ceiling for ratings of foreign currency-denominated bank deposits and Not Prime ceilings

Should US

President Bill CLINTON not

fare well in November's US presidential

election, he might consider an offer to be put

on the ballot for another position—the presidency

of Georgia's Republic of South Ossetia. A group of miners from the Caucasus mountain village of Kvaisa would like to nominate CLINTON as their candidate for the November presidential election in South Ossetia. They are worried, however, that CLINTON may not be interested because they are unable to pay him. The Kvaisa miners have telegrammed Georgian President Eduard SHEVARDNADZE to seek support for

CLINTON's candidacy, arguing that his electoral

success would serve the interests of the

entire country. They are also anxiously

awaiting CLINTON's answer

to their offer.

During January-September, 5,000 criminal groups were exposed and criminal proceedings were instituted against 14,000 crime bosses. Police solved over 40 contract murders and about 200,000 economic crimes, said Kulikov. A total of 512.4 kilograms of gold, platinum, silver, and precious stones and 4,500 weapons were confiscated. Police also arrested 24 organized crime groups, solved over 3,000 crimes committed by them, and exposed almost 235,000 people who violated the passport regime in Moscow. In addition, corruption within law enforcement agencies was significant with over 72,000 people fired in 1996 for "negative behavior" and 600 police officers facing trial for corruption.

The Minister noted that, despite "the general complex crime situation in the country," the number of premeditated murders, thefts, and robberies has decreased. This, he concluded, means that the streets of Russian cities have become safer.

Russian Plane Crashes in Italy

· A Russian-made Antonov An-124 cargo plane crashed near Turin in northwestern Italy today, and at least six people, all crew members, were killed. The Russian plane was on a charter flight from Moscow to the United Arab Emirates (UAE) with a technical stopover in Turin. While attempting to land at Turin's Cassalle airport, the plane overshot the runway and crashed into a farm building, said Itar-Tass. The cockpit was damaged and the building

When you need to know it as it happens

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for short-term obligations. Moody's said that the rating reflects Russia's strong export capacity relative to its external debt and the ongoing stabilization of political institutions. The rating takes into account the prudent fiscal and monetary policies of the current government, as well as the potential for a more reflationary and protectionist regime in the future. Moody's noted that the rating is constrained by political and economic barriers to a more competitive economy and by fiscal problems associated with Russia's federal structure.

IBCA gave Russia the highest rating, a BB+. The favorable ratings are good news for Russia's planned Eurobond issue. The government had hoped to sell $300-500 million worth of bonds, and the rating will likely motivate Russia to make the issue as large as possible, said the WSJ. Furthermore, barring unforeseen problems, Russia is practically assured that the bonds will yield about 11 to 14 percent a year, it said. This should help drive down yields on short-term domestic bonds, now at about 60 percent, reducing the government's borrowing costs.

Summers Lauds Russian Eco. Progress

· US Deputy Treasury Secretary Lawrence Summers said Monday that Russia is entering a new stage of economic progress, with growth rather than stabilization becoming the country's central priority. "In my view, there is an excellent chance that we will look back on this period as the point at which Russia consolidated its progress toward stabilization and began serious, sustainable growth," Summers is quoted by Futures World News (FWN) as saying.

The signs of this progress are several, he said. Russia's government budget deficit last year was smaller as a share of GDP (4.8 percent) than many European countries (including Spain, Italy, Sweden, and Austria), and near the EU average of 4.5 percent of GDP. Nearly 70 percent of Russian production is now in the private sector, representing the largest transfer of assets in history. Wages in dollar terms have increased fivefold in the last four years. Inflation has been less than one percent per month for the last three months. "With stabilization at hand, Russia is no longer trying to build a house in a hurricane which is what reform in a high inflationary environment means. Having reduced inflation, the central objective now must be to bring back growth," he said.

However, the Russian government has a critical role to play in bringing to life the rule of law. Legal and judicial reforms must be implemented and enforced, and the economy must be further liberalized. "Progress on this front will be key to making Russia an attractive outlet for investors—and to protect those investors from crime and corruption," he said. He cited tax reform as another area in need of work.

Two Mutual Funds Get Final OK

· Russia's Federal Securities Commission has issued its first two authorizations for the management of mutual funds. A spokesman for Pallada Asset Management announced on Thursday that his company was the first of nine licensed management companies to receive full authorization to provide this service, reported Reuters. Pallada was founded by Boston Capital Management, with Moscow utility Mosenergo as a partner.

The Boston-based Pioneer Group Inc. announced today that the Commission will register the rules and issue prospectus of Pioneer First mutual fund, to be managed by KUIF, Pioneer's Russian investment management subsidiary, said a company press release. Minimum investment in this fund, open to residents and non-residents, will be 50,000 rubles. It is an open-ended fund which will invest in GKO discount Treasury bills when it has accumulated 2.5 billion rubles. "Domestic investors have had limited access to truly transparent and liquid investment vehicles. Properly regulated unit investment funds will foster the development of Russian capital markets and ultimately mobilize domestic savings for investment in the Russian economy," Pioneer's director of financial service operations in Moscow, Timothy FROST, said in the press release. Pallada's shares will be set at $100, and it will also focus on Treasury bills for investment.

Transcaucasia and Central Asia

Interpol Opens Tblisi Office

· Interpol Secretary-General Raymond KENDALL, at the official opening of the international police organization's new Georgia office on Saturday, warned that the country could become a crossroads for organized crime, reported Reuters. "The geopolitical location of Georgia makes this country ideal not only for the transit of drugs but also weapons, stolen

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automobiles and illegal migrants," KENDALL told reporters. The government does not have control over 20 percent of its territory, which is in the hands of separatist groups, and its borders are easily penetrated. KENDALL said that Interpol will help Georgia battle "mafia-clan" infiltration of government structures. The Secretary-General also met with Georgian President Eduard SHEVARDNADZE.

Iran to Provide Gas for Azeri Region

· Iranian and Azeri officials signed a Memorandum of Understanding Monday in Tehran calling for Iran to provide natural gas to Azerbaijan's Nakhichevan region for 30 years, reported Xinhua, citing Iran's official news agency IRNA. Iran plans to provide the gas to Nakhichevan through a pipeline to be laid in the near future. Nakhichevan has been suffering from an energy shortage as it borders Armenia and Iran, rather than Azerbaijan.

License Withdrawn from Major Kazakh Bank

· The National Bank of Kazakhstan announced Friday that KRAMDS Bank, one of the country's biggest commercial banks, is insolvent, reported Xinhua. The National Bank decided on October 4 to shut down the bank and withdraw its banking license due to bad management and excessive debt. KRAMDS Bank, with capital of $7.5 million, had suffered a total loss of two billion tenge (about $29 million) by September 1, 1996 and 1.5 billion tenge (about $21.7 million) alone this year, said the report. According to Kazakhstan's regulations on bankruptcy, personal deposits will be given priority for

repayment of the bank's debts. The People's Deposit Bank of Kazakhstan will pay off KRAMDS Bank's debt as of January 1997, said the Bank.

KRAMDS Bank was founded in 1989 and was active in the country's foreign exchange and debt markets. Some 30 Kazakh commercial banks were closed down this year, but KRAMDS is one of the largest.

Turkmenistan Supports Afghan Taliban

· A spokesman at Turkmenistan's embassy in Moscow says the country differs with its Russian and Central Asian neighbors on the situation in Afghanistan, reported United Press International (UPI). The spokesman indicated Turkmenistan is in favor of Taliban control of the country because the militia group has offered security guarantees for a planned pipeline that would carry Turkmen natural gas through Afghanistan to world markets. A Russian-initiated summit on Afghanistan Friday produced a joint statement condemning the Taliban for their "savage" behavior and warning the militia not to approach the borders of the former Soviet Union. Turkmenistan "does not share the position" put forward at the summit, said the embassy spokesman. "Turkmenistan prefers to look at how to make Afghanistan a partner in various economic projects, first of all the gas pipeline project."

Under an agreement signed last year by the US Unocal, Saudi Arabia's Delta and Turkmenrosgaz, a joint venture between Turkmenistan and the Russian gas monopoly Gazprom, a 1,200 km pipeline is to be built from Turkmenistan through Afghanistan to Pakistan and the Indian Ocean. Turkmenistan has the fourth-largest proven gas reserves in the world, but its exports have been curtailed by Russian control over the area's gas pipeline system.

Correction: The October 7 edition of the Daily Report incorrectly identified Valery STRELETSKY as the chairman of the Russian National Sports Foundation. STRELETSKY was appointed Foundation head in late May, but was removed in favor of former Russia Davis Cup captain Sergei LEONYUK in late August.

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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